Shaftesbury Capital PLC (SHC.JO) Earnings Call Transcript & Summary

Good morning. Thank you all for coming. I know you've got a very busy day today as we sort of kick off the interim results season in our sector but welcome. Normal agenda for today. We are really pleased with performance in the first half and delighted to present a good set of results to you all. I'm going to begin with a little bit of an overview. Situl will then take you through the financial review. I'll give you a little bit more detail about what's going on in the portfolio, and then we'll finish with a summary and outlook. And then Andrew and Michelle will join for Q&A. So a very successful first half. We've delivered strong performance with an increase in rents, values, income and dividends, while strengthening our financial position and creating significant opportunity for the group. You will all be aware that macroeconomic issues continue to impact the economy, and these are well documented. However, I'm pleased to report that conditions across the West End's occupational market remain very active indeed and we continue to see positive trends in footfall and sales across our Prime West End portfolio, with the team successfully leasing well ahead of ERV, with excellent levels of activity limited vacancy and a strong pipeline. And during the period, we're pleased to have formed a GBP 2.7 billion long-term partnership on Covent Garden with the Norwegian Sovereign Wealth Fund, NBIN which highlights the fundamental value and attractiveness of our portfolio. And we continue to expand the portfolio with GBP 55 million of acquisitions during the period, and we have a number of properties currently under review. With enhanced liquidity, we're well positioned to take advantage of market opportunities as they arise. So the West End continues to thrive as the premier destination for culture, retail, dining, leisure and entertainment, attracting some 200 million visitors a year. Shaftesbury capital is irreplaceable portfolio of properties located at the heart of the West End, provides the prospects of high occupancy, low capital requirements and reliable growing long-term cash flows. Our deep customer relationships and creative approach enable us to achieve value creation in must-have locations across the West End. So just turning to some of the highlights of the results. Valuation increased 3% like-for-like to GBP 5.2 billion, and this was led by a 2.9% increase in ERV with stable valuation yields. NTA increased 3.3%, resulting in total accounting return of 4.2% for the period, which is in line with our medium-term targets. Rental income increased by 8% with underlying earnings up 16% for the half year. The Board has declared an interim dividend of 1.9p per share. We have a strong balance sheet and access to significant liquidity with low leverage. And I think the performance over the period demonstrates the exceptional qualities of our portfolio, delivering growth in cash rents, dividends, ERV and valuation. So I'll hand over to Situl just to take you through the detail of the financial review.

Thank you, Ian. Good morning, everyone. As you've heard, there has significant progress across the business. H1 financial performance was positive with growth in rental income, earnings, dividends, valuations and net tangible assets. We strengthened our balance sheet and enhanced the group's financial flexibility. Following the sale of a 25% interest in Covent Garden to Norges Bank, we present the numbers here on a proportionately consolidated basis. As a transaction completed midway through the period, Covent Garden is effectively included at 75% from Q2 onwards. The IFRS number set out in the results announcement consolidate Covent Garden full with a one-line adjustment for the noncontrolling 25% interest. During the period, there was a gross cash inflow to the group of GBP 574 million. So starting with the income statement. Gross rents increased to GBP 98.7 million, up 8.2% like-for-like, reflecting a successful period of leasing and asset management. In aggregate, commercial lettings and renewals were 10% ahead of ERV and 24% ahead of previous passing rents. Management fee income in respect of the 25% of Covent Garden owned by our partner, forms most of the other income of GBP 1.1 million. Administration costs of GBP 20.4 million reflects the effect of ongoing efficiencies and an increased share option charge, which was up GBP 2.5 million compared with H1 last year. Further income growth and operational efficiencies are targeted for H2 and future periods. Finance costs have been reduced to GBP 23.7 million as a result of interest income on cash and lower net debt. Underlying earnings increased by 16% to GBP 40.6 million, equivalent to 2.2p per share. We have increased the interim dividend to 1.9p. Our leasing and asset management activity contributed to an increase in ERV of 2.9% over the period to GBP 260.8 million. As illustrated in the chart, there's the opportunity to grow passing rents significantly. There is embedded reversion in our portfolio and good visibility on the income growth potential in each of our locations. In particular, GBP 18.7 million of income is contracted or relates to rent-free periods, the majority of which will convert to running income over the coming months. Turning to the balance sheet. The market value of the portfolio under management was up 3.1% like-for-like to GBP 5.2 billion. Net debt has been taken down from GBP 1.4 billion to GBP 0.8 billion on a group share basis and results in loan-to-value at 17%. NTA per share was up 3.3% over the period to 207p driven primarily by the valuation movement. The main driver for the increase in property valuations was rental growth, ERV was up across all sectors, and in all of our states. The equivalent yield is unchanged at 4.5% overall and 4.6% for commercial assets. Average ERV for the portfolio is GBP 95 per square foot and overall valuations are now at GBP 1,893 per square foot. We estimate that customer sales are some 30% higher in nominal terms than 2019 levels, significantly outstripping ERVs. This underlines the relative affordability and attractiveness of our estates. The balance sheet is in a strong position with low leverage and access to significant liquidity as well as reducing loan to value, net debt to EBITDA has been enhanced now at a multiple of 6 versus 11x previously. With leverage well within our indicated range, this provides flexibility to deploy proceeds towards growing our business through investment in existing assets and new opportunities, both in Covent Garden and across Chinatown, Soho and Carnaby. During the period, we repaid part of the Canada Life term loan and are positioned in due course for the repayment of GBP 275 million of exchangeable bonds, which mature in 2026. We will continue to review financing opportunities, taking advantage of the attractive credit profile of the group. So to summarize, there has been strong financial performance in the first half, and we have enhanced flexibility. We will continue to focus on our priority areas. One, rental growth and further efficiencies, resulting in higher earnings and dividends; two, deploying capital accretively and three, maintaining balance sheet strength and flexibility. And with that, I will now hand back to Ian.

Thanks, Situl. A little bit of a recap on the on the portfolio. As you know, we've got an impossible to replicate portfolio of properties. These are some of the most iconic destinations in London's West End. And they're focused on Covent Garden, Canopy Soho and Chinatown. It's a GBP 5.2 billion portfolio under management. It comprises of approximately 2.7 million square feet of lettable space across around 640 mainly freehold buildings, and there's some 1,900 individual tenancies. The portfolio is broadly 1/3 retail, 1/3 F&B and the balance is in the upper floors, which offer office and residential accommodation. We have a diverse occupier mix and therefore, have a wide range of income streams and a wide range of unit sizes and rental tones. As I mentioned, leasing activity has been particularly positive with strong occupational demand. We're noticing that tenants tend to prioritize the best locations, and we've achieved leasing success right throughout the portfolio with continued ERV growth. This slide shows some of the new brands that the team has introduced and they range from independent to global concepts. They're generally attracted by the 7 days a week footfall and trading environment that we offer. So in total, some 193 new leasing transactions completed GBP 19.2 million of contracted rent, about 9% ahead of the December '24 ERV, pleasingly 16% ahead of previous passing rents. Portfolio vacancy is low at 2.5%. The team has -- takes a very active and creative approach, which is informed by a very deep knowledge of what's going on in the West End and it does position the company to deliver rental growth through converting the portfolio's embedded reversionary potential into contracted income. A little bit about the subsectors, very strong retail market. We've recorded particularly strong demand across the range of activities with generally positive trading conditions. We've noticed very good performance from some of the more productive categories such as premium, lifestyle and accessories. And in recent months, we welcomed a number of new brands to Carnaby Street, which particularly pleased about as we enhance and evolve the offer there. Charlotte Tilbury will open a new flagship on Conoby Street later this year, and this follows their recent upsizing to a new flagship on the corner of the Piazza at Covent Garden. Covent Garden in turn, continues to attract high-quality brands, including Nespresso Tula to name but a couple and these were introduced during the first half of the year. And all of this contributed to a 4% improvement in retail ERV across the portfolio. We're home to around about 391 individual food and beverage outlets. I think operators are attracted by the vibrant locations, the pedestrian-friendly environment that we provide and the managed estate feeling that they have by being one of our customers. I've been a number of signings across Covent Garden. These include Harry's restaurant and bar, which will open on the flagship site of the Piazza and there continues to be strong demand in Soho, many new signings through the period. And in Chinatown, we've introduced more variety to the area. We've increased the Pan Asian offer at a range of different price points. So across the portfolio, about 21 new lettings in total and renewals signed about 18.8% ahead of December 2024 ERV. It's those vibrant locations and the quality of accommodation and management that continues to generate demand for office leasing. Carnaby and Covent Garden offer high amenity value, excellent environmental credentials, and we're continuing to lease in excess of GBP 100 a square foot with positive demand. During the period, we also entered into 100 new residential transactions, and these were achieved at rents about 3% ahead of previous passing levels. We've got a strong pipeline of asset management opportunities, refurbishment initiatives across the portfolio. About 4.5% of ERV is currently under refurbishment, and it's expected that these properties will be delivered in the coming 12 to 18 months. We also continue to rotate assets within and out of the portfolio as we continue to enhance the quality of the overall portfolio. And this year, we disposed of around about GBP 12 million worth of assets, whilst investing approximately GBP 55 million in target acquisitions in Soho and Covent Garden. As I mentioned earlier, we've got a number of properties currently under review. As you know, during the period, we did introduce sovereign capital to the Covent Garden portfolio and partnering with NBIM. Leverage is our operational expertise and our property portfolio as we enhance investment and expansion opportunities in years to come. So in summary, we've had a successful first half of the year and positive momentum has been carried into the second half, notwithstanding those macroeconomic challenges the West End continues to perform strongly with high footfall and low vacancy. There are excellent levels of activity and a strong leasing pipeline. Our partnership with NBIN brings together 2 long-term investors with shared confidence in and ambitions for growth -- for the growth of Covent Garden. Shaftesbury Capital's irreplaceable portfolio is anticipated to deliver sustainable income and value growth and our active approach and the positive market fundamentals of the West End give us confidence in our medium-term targets of 5% to 7% rental growth. And with stable yields, we anticipate that this should deliver accounting returns of 8% to 10%. With that enhanced liquidity, we will pursue accretive opportunities for investment and expansion of assets under management. And backed by a strong balance sheet, we're well positioned to grow the business and take advantage of market opportunities in the West End. So that concludes the formal remarks. Thank you for listening. For those of you that are on the lines, if you'd like to ask a question, please let the operator know, and they'll let us know, and we'll come to you. But if anybody has a burning question from the room, we'd be delighted to answer it. Who'd like to go first?

It's Matt Saperia from Peel Hunt. One quick 1 from me. You talked about introducing Charlotte Tilbury to Carnaby. Clearly, there's already some momentum in terms of sort of reenergizing and some sort of retenanting going on there. Just how important could that addition to Carnaby to sort of, I guess, push on the next phase of the retenanting of Carnaby I mean the ERV growth has obviously been very strong in the second half. I'm guessing there is good momentum beyond that.

Yes. Look, we're really pleased with progress safer. I mean the response from the customer from our tenants has been really positive to what we're trying to achieve, which is to introduce forward-looking brands in categories that are going to generate higher sales densities and Charlotte Tilbury is a great example of that. We're particularly pleased that that's an upsizing from within the overall portfolio. And that is a theme that we're seeing across the -- all 3 of our locations where a number of tenants are taking second or third locations or introducing additional brands and they're stable. But in addition to [indiscernible], we've had 4 or 5 brands opened up on the south southern end of Carnaby. I'm sure you shop at Farm Rio quite regularly, and you'll be a major user of Pure cell. We're a really cool K-Beauty brand. I'm sure it's right out of your street, Matt. But we're really excited about that. And you can see that the consumers have got much more choice now and also some of the existing customers like Mac, they're opening new concepts as well. And I think when you see the changes at Kingly Court and over the medium to longer term, the improvements that the team have got planned for the streetscape, I think it will be a really exciting destination, and we're really, really looking forward to good rental growth over the next 3 to 5 years.

A couple of questions. On the like-for-like rental growth, you saw retail was marginally negative. I was a bit of surprised if you could just touch on what some of the moving parts were in the like-for-like number. And then on the debt side, obviously, you're expecting to pay the exchangeable bond with cash. You've still got the PPA and GBP 163 million at 2.7% expiring. Next year. If you could just touch on what the plans are for that and what you expect the interest rate might be if you do refinance that or pay it down with cash? And also with a substantial cash balance, if you could touch on what your sort of interest rate is, do we just assume sort of base rate minus a little bit of margin for that going forward?

I'll answer the easy bit. I mean the retail market is very strong. So I wouldn't read too much into the small technicalities of that. It's really a function of what goes on in a particular period. But I would say that I'm sure Michelle agree that it's probably the strongest retail market we've seen now, and that's been a feature for the last 18 months, and that continues to generate very strong demand for our 3 locations, been particularly interesting at the moment in the new brand lineup that we're anticipating or the additions were anticipated in the Carnaby Street.

Yes. On the balance sheet, great to be in a position we're in gives us a lot of flexibility and a lot of optionality. And at the same time, we have access to a number of different markets, which is very encouraging as well and spreads seem to be coming in, which is a good indicator. So in terms of the specifics on the exchangeable bond, our assumption is or our base case is that we will repay that next year. In the meantime, it's a good piece of financing. It's 2% cash coupon. On the private placements, remember, they sit within the Covent Garden business, which we now own 75%. That market is very much open. So whether it's the bank market, PP market, other markets for Covent Garden, we think that's absolutely accessible. So I expect to hit more on that over the coming months. But we think Covent Garden has very low leverage. So it will be a very attractive credit for any lender. And as far as the cash is concerned, we generate an interest income marginally below the base rate.

One person on the telephone. So I'd like to hand over to Saskia.

[Operator Instructions] And we do have a question from Rob Jones from BNB Pariba.

I had 3. One was on -- do you want to go with three or you want a time?

Gave through all 3 and then give us time to think about them, Rob.