Shaftesbury Capital PLC (SHC) Earnings Call Transcript & Summary

Okay. Good morning, everybody. We're just getting ourselves mic-ed up. UBS has given us an upgrade in the room this year, so it's nice to see some sunshine. So I think everybody is sort of beginning to arrive at the -- is the conference staying on? Yes. Okay. So we'll just let Michelle get mic-ed up. Okay, great. We'll get started. So good morning. Welcome. Thank you very much for joining us for the annual results presentation. Firstly, I'd like to introduce you to Michelle McGrath, a very warm welcome to her. She joins the Board today as an Executive Director. I think you -- many of you know Michelle from her various roles in the company over the years, and most recently, as Director of Covent Garden. Before that, she was actually working for UBS. So congratulations, Michelle, and welcome. Also with us today is a number of other colleagues. I'm sure you have seen a few familiar faces, including our Chairman, Henry Staunton, who's sitting in the front row to make sure I give a good presentation but welcome, everybody, who are around afterwards if you'd like to talk about anything. But I know you've all got a busy day, so I suggest we crack on. This is the agenda. I'm going to give a few opening remarks about the overall performance during the course of the year. Situl is then going to go through the financial review. And Michelle is going to update on Covent Garden. We'll then take a few questions at the end after I've given a summary and outlook. So Capco entered 2020, looking forward to our next phase of growth from a position of financial strength and with a strategic focus on the West End and the iconic Covent Garden estate. Against the backdrop of political and economic uncertainty, Capco completed the strategic objective of separating our 2 London estates through the disposal of Earls Court in 2019. This action allows us to commence a new chapter of activity to realize the full potential of Covent Garden with Capco's refreshed status as a strongly capitalized REIT. The simplification of the group will deliver reduced operating cost, which, together with a rising net income and access to significant liquidity for investment, positions the business for growth as we target the delivery of superior long-term returns for our shareholders. At the end of last year, the sale of Earls Court completed for GBP 425 million. This sale is consistent with Capco's long-term strategy of monetizing investments and reinvesting proceeds in Covent Garden. The disposal strengthens Capco's financial flexibility with access now to GBP 900 million of liquidity before receipt of the deferred consideration. The remaining Lillie Square joint venture continues to progress well, with over 80% of Phase 2 now presold and handover of units due to commence shortly, which will generate proceeds of around about GBP 100 million this year. Our Covent Garden is a world-class estate. It's in the heart of London's West End. It's a global destination. It has an exciting and differentiated offer and provides a unique environment for over 40 million visitors a year. Covent Garden's scale and concentrated ownership, which would be incredibly difficult to replicate, makes it a scarce and valuable real estate investment in the heart of the world's greatest city. Whilst the U.K. continues to face well-documented macroeconomic uncertainty, London, and particularly the West End, has demonstrated resilience. Trading on the estate in 2019 was generally positive, supported by continued improvements in the brand mix and targeted marketing initiatives. Covent Garden makes a great contribution to the Capital and the ongoing success of the West End. We have a number of long-standing initiatives and commitments to reduce the environmental impact of our operations whilst also delivering social value to our many stakeholders. Initiatives include: reducing our carbon emissions through efficient lighting, improving air quality through pedestrianization and an extensive biodiverse greening program across the whole estate. We integrated sustainable practices into projects and their developments and are very proud that Floral Court has been BREEAM certified and shortlisted for a global environmental award. And as responsible owners, we continue to support and preserve the rich heritage of the estate and collaborate with the local community, whilst harnessing the creative passion that we will share for Covent Garden. Now our track record of creative asset management has repositioned the Covent Garden portfolio, which now comprises 81 properties into higher-value uses and help create a vibrant place to shop, to eat, to live and to work. And over the past 10 years, we've created GBP 1.2 billion of value at Covent Garden, generating ERV growth of around 8% per annum, over that period. And we see plenty of opportunities for further growth over time and are confident that our experience can be deployed effectively on the estate and in new acquisitions. Our investment strategy will focus on value-creation opportunities to generate long-term superior returns from investing in Central London. We've positioned the company to deploy capital in a number of areas, investing in our existing owned assets, development and repositioning opportunities as well as new acquisitions. We've also identified a number of very interesting investment opportunities in the broader district. In 2019, we completed the sale of Floral Court Residential, and we invested GBP 70 million through a number of acquisitions on the estate, all of which provide opportunities to create value in the future. Now as part of our investment strategy, we're also pleased to announce today the return of up to GBP 100 million to shareholders in the form of a share buyback program for 2020. So just returning to results. It's been a very active year for Capco, separated our 2 London estates, and we're now focused on Covent Garden. Overall, total property value decreased 1.8% like-for-like to GBP 2.8 billion, and Covent Garden decreased in value by 1.4% like-for-like to GBP 2.6 billion. The generally positive performance across most of the estate was offset by negative adjustments on James Street and Long Acre. Lillie Square reduced by 5.4% like-for-like to GBP 177 million. Overall NAV declined 10% to 293p per share. And the total return for the year was, therefore, negative 9.6%, driven primarily by Earls Court. Underlying earnings were 1p a share, and the directors proposed a final dividend of 1p per share, giving a total for the year of 1.5p per share. The total return for shareholders for the year was 14%. Despite the challenging national economic and retailing backdrop, Covent Garden continues to deliver net rental income growth. Net rental income increased by 7%, 1.8% like-for-like against the December 2018 number. Occupational demand across all uses resulted in 92 new leases and renewals, completing in the year at 1.3% above the December 2018 ERV. ERV remained steady at GBP 108 million. 2019 was a very active year for openings across the estate. We welcomed high-quality brands such as Polo by Ralph Lauren, Glossier, Dominique Ansel and Lacoste. We were delighted with the completion of the successful sales program of all 29 apartments at Floral Court at better-than-anticipated prices, representing cumulative proceeds of over GBP 100 million. An enhanced planning consent for The Wellington block was also secured and an investment decision will be made this year. So in summary, in 2019, we positioned the company for growth. Our strong balance sheet, creative management and a proven track record, along with positive operating fundamentals at Covent Garden, give us confidence in the long-term prospects for the business. I'll now hand over to Situl for the financial review.

Thank you, Ian, and good morning, everyone. I'll take you through the financial highlights for the year, starting with the income statement and the balance sheet, followed by a summary of our debt position and cash movements. 2019 was an active year for the company, and our focus is very much on numbers on a continuing basis. As you can see, net rental income increased to GBP 61.2 million, up 7%. This is a like-for-like increase of 1.8% and reflects our letting and asset management initiatives, but also proactive tenant management. CVAs and tenant failures haven't been a material feature at Covent Garden. However, as you would expect, there have been a small number of tenancies which we have addressed during the year. We will continue to monitor tenants' performance closely and proactively engage with customers. Underlying admin costs were GBP 32.9 million and additional costs were incurred in connection with the proposed demerger and related activities. As a REIT and with a simpler organizational structure, we are targeting a reduction in underlying admin costs of GBP 20 million for 2021. Following a head count adjustments, we are looking at a number of other areas, including consolidation of office space. Finance costs were GBP 20.9 million with the main elements being interest on the private placement notes and commitment fees on the revolving credit facility. During the year, we maintained a prudent approach to cash in view of market uncertainties. These movements, taken together, resulted in underlying earnings of GBP 9.5 million or 1.1p per share on a continuing basis, and we are proposing a final dividend of 1p per share. This slide shows the key elements of reversion capture from contracted income of GBP 84 million to current ERV of GBP 108 million. Vacancy is 3% overall with a small number of units available for letting, mainly in retail. The development components of GBP 8.8 million will be captured on a phased basis. Almost half of this relates to The Wellington block, for where further progress has been made on planning and an investment decision will be made this year. Reversion, currently GBP 12.2 million, will be realized over time through new lettings, renewals and rent reviews. Moving on to the balance sheet. The total market value of property assets declined by 1.7% to GBP 2.8 billion, adjusted for the Earls Court sale. The like-for-like valuation movement at Covent Garden, adjusting for disposals, acquisitions and CapEx, was 1.4%. This was driven by broadly stable ERV overall and a 6 basis point increase in the cap rate of 3.65%. The initial yield is now 2.5% and the topped-up yield, 2.9%. And there was a 5% reduction in the valuation of Lillie Square as a result of changes in valuers' assumptions. Net debt has been reduced to GBP 442 million with loan-to-value now standing at 16%. This is before taking account of GBP 210 million of deferred consideration on the Earls Court sale to be received in 2 installments in 2020 and 2021. EPRA net assets were GBP 2.5 billion or 293p per share, down 10% over the year. As well as triple net asset value, we have included for reference the new EPRA metric, NRV, which at the year-end was 313p per share. The main adjustment here relates to purchasers' costs, which are deducted within the valuation. Also, as a reminder on the valuation, each property is assessed individually with no reflection of any premium which may be achievable in respect of parts of or the entire portfolio. The main driver of the NAV movements was Earls Court, which contributed 22p or GBP 191 million in total through valuation movements and the loss on sale. The valuation movement at Covent Garden accounted for 5p per share. And together with a number of smaller items, these movements resulted in a year-end NAV of 293p per share. Our actions in 2019 have positioned the balance sheet strongly. Loan-to-value was 16% and is set to be enhanced as the remaining cash consideration on Earls Court is received. There is significant headroom against all debt covenants, and we have limited capital commitments. We have access to substantial liquidity, almost GBP 900 million at the year-end with a low marginal cost of funding. This chart summarizes the main areas of cash movement over the year, in particular, net proceeds from disposals of GBP 245 million, primarily Earls Court and residential sales at Floral Court, investments of GBP 127 million, mainly acquisitions at Covent Garden and construction activity at Lillie Square, and movements in debt, operating and other items totaling a net GBP 2 million. Year-end cash was GBP 170 million with revolving credit facility being fully undrawn. We will target continued growth in net rental income and underlying admin costs of GBP 20 million for the financial year 2021, which we believe is an ambitious but achievable target. These levers, together with a focus on capital efficiency, will enable the dividend profile to be progressed in line with underlying earnings growth. So we would expect the first REIT distribution to be made later this year. The balance sheet has been strengthened through our actions, providing the company with significant financial flexibility. This is aligned with a disciplined approach to capital allocation and focus on shareholder value. All of this enables Capco to pursue investment opportunities, both within our existing assets and through acquisitions and to return surplus capital to shareholders through the share buyback program this year. And with that, I will now hand over to Michelle.

Thank you, Situl, and good morning, everyone. As a recognized brand in its own right, Covent Garden's unique propositions positions it competitively on the world stage. It benefits from brand curation, a heritage setting and high-quality footfall with over 40 million visits per annum across a diverse consumer base. This all takes place within a managed estate cognizant of public realm, the environment and our community, important characteristics, respected by brands, consumers and our stakeholders. It's been a productive year at Covent Garden. We continue to implement our strategy as we capture a version within our portfolio, acquired target assets in key locations and position the estate as a leading contemporary retail and dining destination. As Ian mentioned, occupational demand was solid across all uses, resulting in 92 leasing transactions, securing GBP 17.4 million of income, 1.3% ahead of December '18 ERV. Net rental income increased by 7%, up 1.8%, like-for-like, against December '18, and ERVs were broadly stable at GBP 108 million. Occupancy remains high at 97%. We now collate or have sight of approximately 2/3 of our retail and dining turnover data. While store sales present only part of the picture in terms of retailer success, they're an important metric and we're pleased to see continued growth in both tenant sales and footfall. Our proactive leasing strategy is focused on attracting the latest and best brands that meet consumer demand to fit with our vision for Covent Garden. Retailers are increasingly selective when choosing store locations, in many cases, opening fewer but better quality stores globally. Thriving cities such as London remain in the top 3 locations, with high-profile mixed-use destinations underpinned by footfall, consumer spend and brand affinity well placed to succeed. Continuing to differentiate our offer remains a core component of our active approach. We focus on successful growth categories, which include cosmetics, jewelry and leisure as well as digitally-native concepts looking for their first physical presence in London. These aim to combine store productivity and drive high margins, generating rental income growth over time. We adopt early screening and targeting of such categories, often building relationships before they are even considering a store. So how does this translate into activity in our retail portfolio? We're seeing good demand in the market building following signings by Strathberry L'Occitane and Hawkers. Repositioning of Floral Street is well progressed with the introduction of 4 new signings: A.P.C., American Vintage, Glossier and Ganni. Polo and Lulu Guinness have joined King Street, while Pandora and Lacoste have opened stores on James Street. We continue to see a trend of existing occupiers investing and growing their presence on the estate. And examples include Bucherer's expansion, Apple's refurbishment and lease extension as well as ECC's additional hotel space. This slide demonstrates the Zone A rental values by street. We've continued to record modest growth on most of our key streets. The board distribution of rents means the estate is capable of meeting a range of demand at various price points, and the average Zone A remains significantly below other prime areas of Central London. On Long Acre and James Street, these streets have recorded high levels of growth over recent years. And the valuer has taken into account market evidence of adjacent properties, relatively larger store sizes and absolute rents, resulting in a reduction of zone As to GBP 600 and GBP 1,400 a square foot, respectively. At the end of the year, vacancy on these estates is broadly concentrated to these streets, representing some 3% overall or 5 retail units at approximately 200 shops and restaurants in our portfolio. Covent Garden continues to transform into one of London's best foodie destinations. A significant number of new openings have contributed to enhanced footfall, which compared to 2 years ago, is up 20% after 8 p.m. We're encouraged by this growth, which presents an opportunity to enhance the evening economy by extending trading hours for our retailers across the estate. This year, 5 new dining concepts have been introduced, including Dominique Ansel, VyTA, Santa Nata and Wahlburgers. Works are also underway to combine 2 significant units for Big Mamma Group, which will create dual frontage on Henrietta Street and Maiden Lane, and the new restaurant is expected to open later this year. This slide demonstrates the momentum across the estate with a strong brand lineup, which saw 12 new concepts introduced in Covent Garden this year. In addition, 26 brand activations were hosted, which presents a growing revenue opportunity for the group. Moving on to offices. We're seeing good demand for our office portfolio, driven by excellent connectivity, limited supply and a strong immunity value of the district. Our varied portfolio appeals to a range of occupiers from tech to financial services and creative industries. Recent signings include WeWork on Long Acre and Peloton, who've taken office space on Floral Street. We continue to see high occupancy and rates of renewal in our residential portfolio. The period saw a completion of our recent sales program at Floral Court. Having originally allowed 2 to 3 years to fully complete sales, we're delighted to have sold all 29 apartments, including the penthouse within 15 months, crystallizing over GBP 100 million of cumulative proceeds. These sales averaged GBP 2,500 a square foot and achieved a new high of GBP 3,600 a square foot. We continue to be active investors in Covent Garden and remain disciplined in our approach. Our expansion plans have progressed well, investing over GBP 70 million in 3 principal assets. These well-located buildings present accretive repositioning opportunities over time. Following the acquisition of 5-6 Henrietta Street, the ground floor is well let to Din Tai Fung and we expect to be on-site refurbishing the offices shortly, bringing the space to market over the summer. Refurbishment plans are also underway at 39 Bedford Street, an important corner building at an entry point to the estate. At 36-39 Maiden Lane, we will be on-site, enhancing some of the apartments shortly, and are looking at our asset management options in respect of the lower parts. We've also identified a number of adjacent real estate opportunities in the district. At The Wellington, proposals are currently being considered in respect of both an office or hotel scheme. We've taken the opportunity to enhance the existing hotel planning consent, refining the scheme and increasing the number of keys to 146, with an investment decision expected later this year. In summary, Covent Garden continues to move forward as we execute our strategy, building a differentiated place in London's West End, which attracts consumer demand, captures reversion and supports continued disciplined investment in our portfolio. I will now hand you back to Ian. Thank you.

Thanks, Michelle. So just looking ahead, Capco has grown significantly over the last 10 years. And as a result of our actions in 2019, Capco is a strong and resilient company positioned for future growth from the iconic Covent Garden estate and from new investments in the heart of London. Whilst there'll be broader market challenges, not least as the U.K. exits the EU and the potential impact of coronavirus, we firmly believe that London remains a destination of choice for capital, talent and tourism. Our investment strategy aims to generate superior long-term returns from investing in Central London, with a focus on the continued progression of value and income at Covent Garden, a reduced cost base, investments in existing and new properties and the return of surplus capital to shareholders. Our strong balance sheet and access to significant liquidity provides both resilience and a platform for expansion. So that's the formal piece of the morning. We're going to open it up for questions. [Operator Instructions] Anybody from the room, if you like to ask a question, if you could just state your name for the purposes of the recording and we'll answer it. So who would like to go first? We're in.

John Cahill from Stifel. You've got GBP 900 million of investment firepower, considerable firepower to deploy there. And I noticed that you've been very careful to describe yourselves as a Central London REIT rather than a Covent Garden specialist. Just wonder if you could maybe give a bit of detail on how far that Central London net is cast in your minds, both geographically but also the mix of tenants. Would you look to maybe increase office exposure, for example?

Well, look, we do see the balance sheet as a competitive advantage going into the next few years, and we've obviously got significant firepower. The priority is to extract as much value as possible out of our existing assets at Covent Garden. There's lots of opportunities on the estate and around the estate for creating value in the medium term. We've got some investment decisions to make around The Wellington, which we referred to earlier. And some of the new buildings that we bought last year, with some active asset management plans for that, there's numerous active asset management opportunities on the estate. We're tracking quite a number of new acquisitions. They tend to be in the immediate district, so that would probably be the next use of capital. We do like the office market in and around Covent Garden. I think the response from the occupier to the changes in the nature of Covent Garden over the last 5 years have been quite profound. It's a great place to operate from. So I think we would like to see an increase in our office portfolio. But I think really, the concentration is in Covent Garden and the immediate district. We'll always be looking at opportunities to create value for shareholders. But we think in the medium term, that's probably best done by focusing on Covent Garden and the broader district. We've got more than one microphone today.

It's Sander Bunck from Barclays. Two from my side, please. First one is on the like-for-like, which came in quite a bit lower for the full year compared to the half year. I think it was around 7% in the half year and 1.7%for the full, implying a significant slowdown in the second half. Can you just elaborate a bit on that?

Yes. I'll ask Situl to just go through the numbers. Only from my perspective, I feel we had a good year. I think as the year went on, demand remained pretty firm across the estate in all sectors. So I think the performance overall was very good there. If you look back at the history of Covent Garden, it's sort of -- the performance in any particular period relates to the transactions that were available in that period. So I wouldn't read too much into it. We feel it's been a good year. And we've entered 2019 positively as well with transactions and activity on the estate. But maybe you could just take that specific point on how the numbers were?

No, I think you've covered it. I think we -- the like-for-like at the half year is 7 and we had a higher number. And actually, if you look over the last 2 or 3 years, we talk about the ERV bridge and closing the gap between NRI and ERV. I think if you take the percentage of contracted versus ERV on a 3-year view, that gap has closed by about 10 percentage points. That never goes in a straight line. So the things that we look at are really kind of over the medium term, what's the underlying NRI growth rate, and you'll get periods where it spikes and where it slows down. So there's nothing that we've seen that we'd be particularly concerned about. In terms of some of the indicators that we're seeing on the ground in terms of tenant sales, footfall, transactional activity, brands we're introducing, all of those are giving us signs of encouragement about the medium and longer term. But you're quite right on, I think, factoring on numbers. But I think the important thing to remember is that these things don't go in a straight line, and you can't ignore what's going on in the broader market as well, right, in terms of the way that you've talked to tenants and negotiate terms with them.

Okay. Can you just remind me what the reversionary potential is within the estate on a like-for-like basis? And how much, on average, over the last 5 years, you kind of churned as less of tenants?

Yes. I mean, the reversion has a number of different elements, as you've seen in the bridge, including vacancy, which is a relatively small part of the overall mix around 3%. Developments are around GBP 8.8 million. So that will be captured as we bring that product to market. Half of that is at Wellington. And then pure under-rented element, if you like, is GBP 12.2 million, and you'd expect to capture that on a typical 5-year cycle. But also, you want to be creating more inventory in each of those as well as growing NRI.