Helical plc (HLCL) Earnings Call Transcript & Summary

Good morning, everyone. I'm delighted to welcome all of you, whether you are in the room or are joining us virtually on the webcast facility to the presentation of Helical's full year results to 31 March 2022. As well as reporting on our results, we are also proud to unveil the new Helical brand, which you may just have spotted on this title page, and as you will see throughout the presentation. Our rebranding incorporates a changed and much improved website, which will enhance the user experience and fully promote the Helical ethos and values. Please let me set out the agenda for today. I will take you through the highlights from the results, discuss the market and set out the case for London offices as well as Helical's response to all of this. Tim will explain the numbers and Matthew will report on sustainability and the portfolio highlights. After this, I will sum up, and we will then be delighted to answer any questions any of you may have. We are pleased to report profit after tax of GBP 88.9 million. Our EPRA net tangible asset value has increased 7.3% from 533p 12 months ago to 572p. This reflects a valuation increase across the portfolio of GBP 51.7 million. The main contributors are The Bower, Kaleidoscope and 33 Charterhouse Street. I would also like to highlight our total accounting return of 15%, which shows a strong improvement on the previous year's 3.3%. Over the last 3 years, we have achieved an average of 8.4%. We are proposing a total dividend per share of 11.15p, which is a 10.4% increase from last year. I would like to share with you our key achievements over the last 12 months. We were excited to acquire 100 New Bridge Street, which I will describe shortly. We became a REIT on 1st April and we have published this morning our net 0 carbon pathway, which Matthew will explain. We have sold Trinity Manchester and have exchanged contracts to sell 55 Bartholomew. We have let 54,118 square feet at a 1.8% premium to the ERV at March last year, and we have achieved rental uplifts of GBP 1 million at rent reviews mainly at The Bower and lease renewals. 50% of our rental income is at least 5 years' term certain. I will now provide a brief update on the market. Looking at the TFL data on the top chart, bus travel remains about 15% below pre-COVID levels and tube is circa 25% down. This data is obviously accurate, and I cast out on some of the office occupation stats as I'm not sure many had an accurate pre-COVID baseline. I will, therefore, extrapolate office occupation to being around 20% to 25% down. Central London take-up at 2.6 million square feet is below the 10-year average of 3 million square feet, but it is in line with the first quarter average over the last 10 years. Under offer space at 3.9 million square feet is encouragingly well ahead of the 10-year average of 3.3 million square feet. On the middle chart, I would highlight the limited future supply identified by CBRE over the next 3 years. If you look at the bottom chart, vacancy is still higher at 26 million square feet, 9% in total, but this is the result of a near doubling of secondhand space as occupiers focus their attention on the best-in-class sustainable new space, as highlighted by the statistic that about 60% of take-up is for BREEAM Outstanding or excellent space. The investment market enjoyed the strongest first quarter on record at GBP 5.5 billion, rather more than the GBP 3.9 billion in the first half of last year. Over GBP 5 billion is currently under offer. As the market has settled down post-COVID, I'm going to restate the case for offices in general. And I thought this comment from JLL summed that up well and London, in particular. First, London remains undiminished as World City post-Brexit. The mass exodus predicted by some in the summer of 2016 in an outpouring of doom and gloom has not happened. Indeed, London continues to reinvent itself as old-style banking and finance jobs disappear. Many more are employed in fintech, which is growing rapidly. We have examples in our own portfolio such as Stripe, OpenPayd and Hey Habito. London is a tech center of Europe, witnessed the headquarters of Amazon, Apple and Google. They may potentially be joined by Microsoft, who have a search out for around 0.5 million square feet as they wish to move into London from Reading. The new sector on the block is life sciences, which is growing strongly in Cambridge, Oxford and in London, particularly around the Francis Crick Institute and the major teaching hospitals. I think this demand is very much locationally driven within London and life sciences is not necessarily the panacea for every building across Central London as some agents suggest. I believe the opening of the Elizabeth line is going to be a game changer, with an additional 1.5 million people within 45 minutes of Central London. All our buildings are within a 12-minute walk of a nearby Elizabeth line station. As changing working patterns were accelerated by the pandemic, will there be the same demand for London offices if more continue to work from home? Certainly, occupiers see a best-in-class office with plenty of social and collaboration space and rich in amenity as key in the war for talent. My strong view remains that working from home on more than the odd occasion is less efficient. And I fear the unique DNA of each organization will suffer if employees are remote from each other for much of the time. Networks, connections and serendipity all have an important part to play in creativity. How can the inexperienced learn from the experienced and the old learn from the young. How our new joiners onboarded successfully. You are now all familiar with the bifurcation argument, and this continues to play out as demand polarizes for the best-in-class green office space and diminishes or even disappears for the old brand buildings, which are becoming stranded assets. There is limited supply of this best-in-class space, and I see 2 reasons for this. First, unlike in the booms and busts of the mid-1970s, late 1980s, early '90s and the GFC, there are not acres of available land surrounding the central business district. As the population of London has grown rapidly over the last 20 years, this previously unused land has been taken up for other uses such as residential, student accommodation, hotels and so on. This has significantly reduced the amount of land available for office development. Second, it is going to take 10 to 20 years to upgrade the London office stock from brown to green. As tenants can escape their old buildings when leases end, they will go to the best-in-class green space, and this brown space will then be redeveloped or refurbished to turn it green. As I said, this will take time. And during this period, demand will exceed supply, which will lead to rental growth. What are we doing at Helical to position ourselves in this market? We are concentrating on Central London. We prefer Ireland or edge of block rather than mid-terrace locations. We want good public realm, whether we control or borrow this, and we're looking for larger floor plates. The reason for this is we believe the market for smaller floor plates, many of whose occupiers want furnished space or standard is overcrowded and it is difficult to achieve the additional returns required to cover the extra services provided. While we will still do ground-up new development, where the amount of space on a site could be much increased or where the bones of the existing building are so poor that refurbishment is not viable, we believe there will be a far greater emphasis on refurbishment going forward. This has the advantages of considerable savings in carbon, less planning and construction risk and greater speed back to market. Let's call it a carbon-friendly new building. Any building should be net 0 carbon, BREEAM Outstanding, NABERS 5 star plus and EPC A. Going forward, I believe there will be far greater emphasis on the NABERS energy and use than the EPC rating. Over the last few months, because of the combination of the awful events in Ukraine and the cost of living crisis, the shorter-term focus might be on resolving these issues rather than pursuing the ESG agenda. In response to this, I would say that we can all make our buildings sustainable by effort and creative thought and without significant additional expenditure. However, we are seeing the return of strong inflation. What impact will this have? We will continue to work closely with our loyal supply chain to minimize any effect. As building costs are circa 50% of the total cost of a project, rental growth need only be half that of the building cost growth to put a development back in the same position. In our buildings, we will maximize tenant amenity with high-quality end-of-trip facilities, the latest technology and wellness. In short, we are only interested in situations where we can create best-in-class buildings. This is where the demand is and will continue to be. This is exemplified by our latest acquisition at 100 New Bridge Street. We acquired this building in December. It was completed in 1992 and is currently let to Baker McKenzie until December 2023 at a rent of GBP 7 million. The building occupies a prominent and well-located island site surrounded by public realm, which we will enhance to include a pocket park. The bones of the existing building are good, so we will retain the structure and the core with everything else new. This will help us meet our ambitious targets for cutting embodied carbon, as set out in our net 0 carbon pathway. So we will create a best-in-class carbon-friendly newbuilding aiming for BREEAM Outstanding, NABERS 5 star and EPC A. As well as the normal amenity, there will be an extensive roof terrace with great views of St Paul's. We aim to start on site next year with completion in 2025. As normal, we are looking for a profit on cost of circa 20%. This slide shows that our portfolio is new and will be added to by 33 Charterhouse Street and 100 New Bridge Street when completed. Our assets are mainly multi-let, and we work hard to ensure our building management is to the highest standards and that our buildings are maintained as new. Over the last 12 months, we have let 54,118 square feet in 12 units, delivering GBP 3 million of contracted rent. We have let 4,944 square feet since the 31st of March and a further 11,452 square feet being the empty units at The Bower and 25 Charterhouse Square are under offer. The vacancy across the portfolio is 6.7% or 8.4% on a like-for-like basis, down from 10.5%. This excludes 33 Charterhouse Street, which we will start actively marketing post completion in September. As you know, we do tend to hold our buildings back until they are finished as we believe this enables us to achieve higher rents as occupiers can then see the quality of the product. Our passing rent today is GBP 36.4 million, and the chart shows how this rent almost doubles to GBP 67.1 million with contracted rent uplift of GBP 10 million, rent from letting the current available space of GBP 2.9 million, a development pipeline of GBP 16.2 million of additional rent and reversions of GBP 1.6 million. The other in orange being Trinity has now been sold. This slide sets out the future upside we see in the portfolio based entirely on current rents so it does not factor in any rental growth that may occur. Interestingly, both 12 and 6 months ago, we were showing upside of circa GBP 80 million. We took GBP 52 million of this upside in the year. We are now looking at upside on the same assets of GBP 61 million, with the main contributors being 33 Charterhouse Street and The Bower. We already have GBP 2 million in the bag at Trinity. We also have an additional GBP 50 million of upside on our new acquisition at 100 New Bridge Street, which we hope to achieve over the next 3 years. That makes a total of GBP 111 million. On that positive note, I will now hand over to Tim.

Thank you, Gerald, and good morning, everyone. And what a morning it is, having traveled here on the Elizabeth line on its first day of operation. Despite the delays and the cost, it is an amazing feat of engineering, and it will transform access into London for anyone close to one of its stations. Gerald has briefly mentioned the highlights of the year, but I want to take you through some of our key financial performance indicators. Before looking at the buildup of our EPRA earnings and our EPRA NTA per share and then we'll take a look at the gearing levels and debt profile, and finally, ending on a summary of our current financial position. Starting at Slide 15, it is notable that not only have we had a very good year this year, we were consistently growing the company through valuation and development surpluses throughout the 2 years of the pandemic, increasing our EPRA NTA by a compound annual growth of 5% over the last 3 years, which when the dividends are added back, converts into an EPRA total accounting return over 3 years of just under 8% per annum. Where has this come from? Well, partially from EPRA earnings, but as you know, these can be variable at Helical. Predominantly, it's come from capital growth as evidenced by our total property return as measured by MSCI, where 5.9% of the average 9.1% total return in the last 3 years is from capital growth. This compares to a 0.1% capital return on the Central London Office's Capital Growth Index over the last 3-year period. We've also produced over 3 years an average TSR of just over 10%. Turning to Slide 16 and looking at our EPRA and IFRS profit. Net rental income of GBP 31.2 million is 25% higher than last year, mainly reflecting a full year of rent on Kaleidoscope and a contribution from our latest acquisition is 100 New Bridge Street. We made a development profit of GBP 6.6 million from development management fees at 33 Charterhouse Street and the write-back of prior year provisions as well as a profit on the sale of legacy retail schemes. Our recurring administration costs of GBP 9.9 million were marginally higher than last year and with performance-related costs reflecting the substantially improved performance, increased total administration costs amounted to GBP 17.1 million. Net finance costs, after capitalized interest, decreased from GBP 14.8 million to GBP 13.8 million. And overall, on an EPRA basis, we generated earnings of GBP 6.4 million or 5.2p per share compared to a loss last year of 1.8p. The portfolio generated a revaluation gain of GBP 51.7 million or 7% on a like-for-like basis. There was a gain from the valuation of our financial instruments of GBP 18 million, reflecting the rise in medium- and long-term interest rates compared to our swap rates. Set against these gains was the expense of rationalizing our debt, which had a GBP 6 million impact on our profits. Overall, we made a net profit before tax of GBP 72.9 million, up from GBP 20.5 million last year. As you all know, we've elected to become a REIT and this has allowed us to write back the provisions for deferred tax previously recognized in our accounts. This has boosted profits by GBP 16 million, taking IFRS profit after tax to GBP 89 million, a significant increase on last year's GBP 18 million. These results have encouraged the Board to increase the final dividend by 11.5% from 7.4p last year to 8.25p this year and with a total dividend of 11.15p per share, up 10.4% on last year. This final dividend will be paid out of distributable reserves generated before our election to become a REIT. There's no paid element to this final dividend. Turning to Slide 17. The EPRA earnings per share of 5.2p plus investment gains of 41.5p boosted also by the write-back of deferred tax were offset by the cost of canceling loans and by dividends paid in the year, leaving an EPRA NTA per share at 31st of March of 572p, up 7.3%. And while we're on the balance sheet, it's worth noting the total accounting return of 15% on an IFRS basis and 10.2% on an EPRA basis. Turning to Slide 18 and looking at our LTV and gearing. The major property event of the year, of course, was the acquisition of 100 New Bridge Street, which was bought for GBP 160 million completing in March. This one acquisition took our LTV up over 36%. However, following the recent sales of Trinity Manchester, 55 Bartholomew -- and 55 Bartholomew, and also reflecting the outstanding commitments at 33 Charterhouse Street, our pro forma LTV reduces to 34.7%. Turning to Slide 19. Our total debt facilities reduced as we canceled 3 facilities during the year and secured all our assets, other than those in joint venture, into our GBP 400 million revolving credit facility. I'll summarize our financial position on the last slide, but just to mention that although we've got GBP 70 million of facilities with less than a year to maturity, we haven't drawn down on those facilities. So there's nothing currently to repay for over 2 years and with an average overall maturity after the exercise of options to extend our main loan facility of 3.7 years. Turning to Slide 20. And in a period of rapidly rising inflation and increasing interest rates, all of our borrowings are protected by a combination of interest rate swaps and caps. And this interest rate protection covers all of our debt for the next 2 years and provides protection against interest rate rises thereafter for the majority of the debt to the current debt repayment dates. Finally, and looking at a summary of our financial position on Slide 21. With a net asset value of approaching GBP 700 million and a net debt level of around GBP 400 million, we've had an LTV of 36.4% at the year-end. And as I mentioned, that's come down a little following the recent sales. We had GBP 132 million of cash and undrawn facility and that -- facilities and that's been boosted by over GBP 40 million from the recent sales, with a weighted average cost of debt of 3.2%. And as we saw on the last slide, all of which is protected through financial instruments. So we've got a strong and growing balance sheet. We have protection against future interest rate rises and capacity to acquire new assets. And with that, I'll hand you over to Matthew.

Thank you, Tim, and good morning, everyone. I would like to provide you with an update on the sustainability initiatives and also progress on our property portfolio. Sustainability is now at the forefront of occupiers' minds in terms of providing a healthy and productive workplace environment, reduced energy use through smart technologies, whilst also furthering an organization's CSR commitments and improving its corporate image towards its employees, customers, shareholders and stakeholders. Investors in real estate are similarly focused on credible, sustainable assets, which in London are very limited in supply, much in demand from occupiers and will offer improved cash flows and resilience. Today, we have published our net 0 carbon pathway, where we have committed to achieve net 0 by 2030. We have set ambitious targets for our embodied and operational carbon. And through our use of a carbon champion on all new schemes using the 10-step process in our designing for net 0 guide, we will ensure that opportunities to minimize embodied carbon are taken wherever possible. It is our intention to deliver all future new schemes as net 0 buildings, and this will include 33 Charterhouse Street and 100 New Bridge Street. Within the existing portfolio, we have recently integrated an enhanced building management system at The Bower and made significant savings in energy use. We will continue to look at how we manage our portfolio in order to reduce operational carbon emissions, including potential connections to district networks and ensuring that we procure the highest quality renewable energy tariffs where on-site renewables are not possible. For any unavoidable carbon emissions, we will endeavor to align with the Oxford Principles of Net Zero Aligned Carbon Offsetting such that any offsets are verifiable, have no negative unintended consequences with a focus on long-term carbon removal and ensuring that we are transparent about how we use them as part of our net 0 carbon strategy. With this in mind, we have committed to the Better Building Partnerships Climate Commitment, and we will report on our progress as we move towards net 0 across our portfolio and deliver the most sustainable best-in-class buildings in London, future-proofed for a changing climate. We continue to submit to a number of sustainability benchmarks, and I'm pleased to say we have performed well over the year. Our GRESB rating increased from 3 star to 4 star, and we were also awarded a gold award from the EPRA Sustainability Best Practice Recommendations for our ESG reporting. Our commitment to transparent reporting is further endorsed by our continued inclusion in the FTSE4Good Index series and a AAA rating from MSCI. Our score in the Carbon Disclosure Project unfortunately reduced at the end of last year, as it did with a number of other companies, but we are now well placed to improve against their revised scoring criteria. As we have mentioned, our portfolio of assets are all recently redeveloped or refurbished, and hence, energy efficient with 99% by value already compliant with the proposed legislation for a minimum EPC rating of B by 2030. Current market research suggests only 23% of commercial assets are currently compliant, with significant capital outlay likely required to take noncompliant buildings up to the minimum EPC standards. This graph excludes our more recent acquisition of 100 New Bridge Street, where our intervention, once vacant at the end of next year, will allow us to transform this asset to a net 0 building targeting EPC A, BREEAM Outstanding and NABERS 5 star. Turning to the portfolio highlights. At The Bower, we have now completed the cycle of rent reviews, achieving a 13.2% uplift in rents during the year. The top floor was let following the demise of Finablr to security specialists, Verkada, at GBP 85 per square foot, and the fitted 12th floor is now under offer following the Infosys break. The former Enoteca restaurant unit has been let to 28 Well Hung, a restaurant based on regenerative agriculture. TikTok have now completed their fit-out at Kaleidoscope and are due to move in over the next week or so. As Tim mentioned, we had great pleasure in arriving at Farringdon East cross-rail station this morning on the Elizabeth line, and now everyone will be able to witness and appreciate the significant benefits that this will bring to this building, and indeed, the rest of our portfolio. At 25 Charterhouse Square, the first and part ground floor had been let to Entain, one of the world's largest sports betting and gaming groups as their global innovation hub with a focus on interactive and immersive gaming experiences. The remaining ground floor unit is under offer to a natural stone retailer, and we expect completion imminently. At The Loom, we have achieved further lettings on just over 8,500 square feet, maintaining rent levels and seeing occupation and interest levels increase. On Friday of last week, we completed on the sale of Trinity, our last building in Manchester, to clients of Mayfair Capital for GBP 34.55 million, reflecting a net initial yield of 5% and a GBP 2 million premium to the book value at the 31st of March 2022 and realizing a 33% capital profit on cost. On the same day, we exchanged contracts to sell 55 Bartholomew Close to a private European investor for GBP 16.5 million, our share being GBP 7.6 million, which reflected a net initial yield of 4.5% and a 3% premium to the 31st of March '22 book value. With respect to the residential at Barts Square, we sold 14 residential units in the period. And since the year-end, we have put 2 under offer and sold 1, leaving only 11 units to sell of the 236 built. We were pleased to recently receive an RIBA London Award for Barts Square, where the judge has commented that the overall appearance of the finely tuned urban intervention is one of quality at every turn. It is the care and attention to detail at both the macro and micro scale that sets this huge project apart and makes it a worthy award winner. 33 Charterhouse Street. It's now been renamed the JJ Mack Building after the grocery store which previously stood on the site and is pictured here in 1921. The new JJ Mack Building is due for completion in September of this year, and it is a major step forward from the schemes we have delivered before, both in terms of sustainability credentials and the smart building technology adopted to enhance the user experience and well-being of the occupants. There has been a significant focus on reducing the embodied carbon to a currently targeted figure of 840 kilograms of CO2 per meter square, which is over 40% below the RIBA newbuilding benchmark, and it is the U.K.'s first commercial building to be assessed as BREEAM Outstanding at design stage under the 2018 regulations. It incorporates a biodiverse green roof, PV panels to power the common parts and intelligent and dynamic water management and recycling system and sensors to provide real-time feedback on air quality and occupancy data to enable the efficient operation and management of the building. A smart building app provides occupiers with individual controls for lighting, heating, cooling, access control and, in due course, desk and meeting room booking, if required. The app also links to a number of external sources, providing up-to-date travel information, weather and links to local amenities. We very much look forward to showing the building's capabilities to the market when we launch it on completion. I will now hand back to Gerald to summarize.

Thank you, Matthew. We have plenty to do going forward. We will continue to asset manage the portfolio to advance performance, and we will pursue every opportunity to green our existing buildings. We will recycle capital, witness the sales of Trinity and 55 Bartholomew. We look forward to completing and letting the JJ Mack Building at 33 Charterhouse Street. We are working hard to maximize the opportunity we have at 100 New Bridge Street. The Helical portfolio is new and sustainable, and we will add to this with new acquisitions that we can turn into best-in-class buildings. Our ambition to double net assets over the next 5 years remains undiminished. Thank you. Now before I ask for questions, we came across this short video the other day, which we rather liked. So if I can get the technology to work. [Presentation]

A happy customer. Good to have that.

So any questions from anybody? Miranda.

Miranda from Panmure. Two questions for me. One, Kaleidoscope, there was talk about you selling that earlier about last year, I think. Any news on that, if that's likely to be sold? And then secondly, just ERV growth in London. Just looking at the numbers, it looks as if it was flat over the last 12 months, which I was a bit surprised about, because I thought given the quality of your assets that it might be more positive. And I just wonder if there's a range in that number or if everything was pretty flat.

Right. Matthew, perhaps answer on Kaleidoscope.

Yes. I mean we did have a couple of conversations with people at the beginning of the year, but we decided to pause that on the basis that the building was actually being fitted out by TikTok at the time. So it was a bit of a construction site. And also cross-rail wasn't open, so I think we may revisit that in due course.

And on the ERVs? Sorry, you were saying?

It's just that they were flat, which I was just a bit surprised at given the quality of your assets. I just wondered if there was a range in there or is there some plus 5, others minus 5 or...

I think they were all about the same. But I think we see continued growth going forward. I mean, others have put a number on it, but we haven't got that far. But I mean, we see those assets performing well because of what people want. And indeed, I think the under offer at The Bower will show some rental growth.

Kieran Lee at Berenberg. Just a quick one on LTV and acquisition capacity. You mentioned, Tim, that you had some capacity to make some acquisitions. Where would you be happy to see the leverage tick up towards in light of everything that we're seeing in the market now?

Yes, I think we've got capacity to spend GBP 100 million, GBP 120 million in terms of cash and the unutilized facility that we currently have. I think we're comfortable operating in the 30% to 40% LTV range. Anything beyond that, we would be looking to bring it back down again. But in the short term, we'd go maybe marginally above that, but with the intention of coming back down. I think we're comfortable where we're at in the mid-30s. As the capital growth drop, you have to be invested in the market. And because we are looking to create capital profits, you need that investment. So yes, probably a little bit between, as I said, between 30% and 40%.

And then the second question is actually quite related. If we're looking at what we're seeing across the market with construction, cost inflation and potential redevelopment opportunities, how are you finding competition, but more importantly, pricing on potential acquisitions given increased construction costs?

Good question, Kieran. Obviously, building costs are going up quite strongly at the moment. I'm not sure that there's been any sort of what I call value-add transactions done in the last couple of months. It's mostly been the GBP 5.5 billion was mostly sort of upper net investments without any short-term expenditure potential. But obviously, if the building costs have gone up, then land price potentially won't go up as much.

It's Matt Saperia from Peel Hunt. A quick question on 33 Charterhouse Street. Is the strategy still to pursue multi-let versus a single let leasing program?

We -- thank you, Matt. We will see what the market wants to do. So we're entirely flexible.

And given, I think, you reported nearly 4 million square feet of under offer and active requirements continue to grow. I mean where is the competition for the building when you're thinking about occupier demand?

Well, we've got a schedule of the competing buildings that we go through with our agents on a regular basis, and there isn't a huge amount of competition. But as I said, we believe that finished building shows very much better than a building under construction. And we do tend to hold our buildings until people really can get into them and see the quality. So -- and we've already begun. We launched the market with the name -- the building into the market last week with the name. So we've got a few inquiries to the building up. Any other questions?

Sorry, I may just ask a follow-up, actually. We saw the business convert to a REIT and there are a number of assets which look to be held for longer periods versus your history. How will you look at administration costs and sort of central business costs? And how are they in the context of the wider group and your ambition when it comes to margins?

Yes, I think it's understood that our central costs are probably higher than it would be for a company of our size. But clearly, we are a development company that carries a higher overhead than a pure investment company. We will continue to look for opportunities to grow the business. Our business plan, as Gerald said, is to try and double the net assets and we need a certain amount of overhead to be able to do that. But overheads are an area of focus within the business and have been for a couple of years. So we will continue to concentrate on trying to contain them and ensure that they fit for the size of business that we operate at.

Good. No -- any more questions? And are there any questions online? Good. Well, thank you very much for attending, and thank you for those on the webinar for listening in, and you're all in good time to go to the next session. And I think it stopped raining, the sun's come out, so there we are. Thanks, everyone.