Shaftesbury Capital PLC (SHC) Earnings Call Transcript & Summary

All right. Good morning, everyone. We’re just getting our mics set up. UBS has upgraded us in the room this year, so it’s nice to see a bit of sunshine. So I think everyone is kind of starting to arrive at the — is the conference staying on? Yes. Okay. So we’ll just let Michelle get her mic set up. Okay, great. We’ll get started. So good morning. Welcome. Thank you very much for joining us for the annual results presentation. First, I’d like to introduce you to Michelle McGrath, and a very warm welcome to her. She joins the Board today as an Executive Director. I think 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 is 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.

Here's the agenda. I'll start with a few opening comments on how we performed across the year. After that, Situl will walk everyone through the financial review. Michelle will then bring us up to date on Covent Garden. Once I've wrapped up with a summary and outlook, we'll open the floor for a few questions. Capco went into 2020 anticipating its next stage of growth, doing so from a place of financial strength and with a strategy centered on the West End and the iconic Covent Garden estate. Amid political and economic uncertainty, Capco achieved its strategic goal of splitting our 2 London estates by disposing of Earls Court in 2019. That step lets us begin a fresh chapter of work aimed at unlocking Covent Garden's full potential, with Capco now positioned as a strongly capitalized REIT. Streamlining the group will bring lower operating cost, and that, alongside rising net income and access to substantial liquidity for investment, puts the business in position to grow as we pursue delivery of superior long-term returns for our shareholders. Late last year, the Earls Court sale closed for GBP 425 million.

The deal aligns with Capco’s strategy over the long term: monetize investments and put the proceeds back into Covent Garden. With access now to GBP 900 million in liquidity before the deferred consideration is received, this disposal bolsters Capco’s financial flexibility. The Lillie Square joint venture that remains is doing well, with more than 80% of Phase 2 presold at this point and unit handovers set to begin soon, generating roughly GBP 100 million in proceeds this year. Our Covent Garden is a world-class estate. It sits in the heart of London’s West End. It is a destination with global reach. Its offer is exciting and differentiated, and it gives a unique setting to more than 40 million visitors annually. Covent Garden’s scale and concentrated ownership — which would be extremely hard to replicate — make it a scarce and valuable real estate investment in the heart of the world’s greatest city. Although the U.K. still confronts well-documented macroeconomic uncertainty, London, and the West End especially, has shown resilience. Trading on the estate in 2019 was broadly positive, helped by ongoing improvements in the brand mix and targeted marketing initiatives. Covent Garden contributes a great deal to the Capital and to the continued success of the West End.

We’ve got quite a few long-running programs and pledges aimed at lowering the environmental footprint of how we operate, while also creating social value for the many stakeholders we serve. Those efforts include cutting our carbon emissions via efficient lighting, and enhancing air quality through pedestrianization plus a broad biodiverse greening scheme spanning the entire estate. We’ve built sustainable practices into projects and their developments, and we take real pride in the fact that Floral Court has received BREEAM certification and has been shortlisted for a global environmental award. And as responsible owners, we keep supporting and safeguarding the estate’s rich heritage and work alongside the local community, while channeling the creative passion that we will share for Covent Garden. Now our record of creative asset management has repositioned the Covent Garden portfolio, which today consists of 81 properties, into higher-value uses and helped make it a vibrant place for shopping, dining, living and working. And across the last 10 years, we have created GBP 1.2 billion of value at Covent Garden, producing ERV growth of roughly 8% per annum during that span. And we see ample opportunities for additional growth over time and are confident that our experience can be applied effectively across the estate and in new acquisitions.

Our investment strategy is going to center on opportunities for value creation so that we can produce superior long-term returns by investing in Central London. We have put the company in a position to deploy capital across a number of areas — investing in assets we already own, in development and repositioning opportunities, and in new acquisitions as well. We have also spotted several very interesting investment opportunities across the wider district. During 2019, we finished the sale of Floral Court Residential, and we put GBP 70 million to work through a series of acquisitions on the estate, each of which offers chances to create value going forward. Now, as part of that investment strategy, we are also happy to announce today that up to GBP 100 million will be returned to shareholders through a share buyback program for 2020. So, coming back to the results. It has been a very active year for Capco; we separated our 2 London estates, and we are now focused on Covent Garden. On the whole, total property value fell 1.8% like-for-like to GBP 2.8 billion, while Covent Garden's value dropped 1.4% like-for-like to GBP 2.6 billion. The broadly positive performance across most of the estate was offset by negative adjustments on James Street and Long Acre. Lillie Square was down 5.4% like-for-like to GBP 177 million.

On the whole, NAV fell 10% to 293p per share. The year's total return was consequently negative 9.6%, with Earls Court the main driver. Underlying earnings came in at 1p a share, and the directors have proposed a final dividend of 1p per share, which makes a total of 1.5p per share for the year. Shareholders saw a total return of 14% for the year. Even with the tough national economic and retailing backdrop, Covent Garden keeps delivering growth in net rental income. Net rental income rose 7%, which is 1.8% like-for-like versus the December 2018 number. Occupational demand across all uses produced 92 new leases and renewals, completed during the year at 1.3% above the December 2018 ERV. ERV held steady at GBP 108 million. Across the estate, 2019 was a very active year for openings. We welcomed high-quality brands including Polo by Ralph Lauren, Glossier, Dominique Ansel and Lacoste. We were delighted to complete the successful sales program of all 29 apartments at Floral Court at prices better than anticipated, 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 taken this year. So to sum up, in 2019 we positioned the company for growth.

With a robust balance sheet, imaginative leadership and a demonstrated history of results, plus favorable operating fundamentals at Covent Garden, we feel confident about the business's long-term prospects. Now I'll pass things over to Situl for the financial review.

Thanks, Ian, and good morning, everyone. I'll walk you through the year's financial highlights, beginning with the income statement and the balance sheet, then 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 rose to GBP 61.2 million, up 7%. That's a like-for-like increase of 1.8%, reflecting our letting and asset management initiatives, as well as proactive tenant management. CVAs and tenant failures haven't been a material feature at Covent Garden. However, as you would expect, a small number of tenancies have been addressed during the year. We will keep monitoring tenants' performance closely and engage with customers proactively. 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 head count adjustments, we are looking at a number of other areas, including consolidation of office space.

Finance costs came to GBP 20.9 million, driven mainly by interest on the private placement notes and commitment fees related to the revolving credit facility. Throughout the year, we kept a prudent stance on cash given the uncertainties in the market. Taken together, those movements produced 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 sets out the key elements of reversion capture, from contracted income of GBP 84 million to a current ERV of GBP 108 million. Overall vacancy stands at 3%, with a small number of units available to let, primarily in retail. The development components totaling GBP 8.8 million will be captured on a phased basis. Nearly half of that relates to The Wellington block, where planning has progressed further and an investment decision is due this year. Reversion, presently GBP 12.2 million, will be realized over time through new lettings, renewals and rent reviews. Turning to the balance sheet: the total market value of property assets fell by 1.7% to GBP 2.8 billion, adjusted for the Earls Court sale. The like-for-like valuation movement at Covent Garden, after adjusting for disposals, acquisitions and CapEx, was 1.4%.

The overall ERV was broadly stable, and that was the main factor here, along with a 6 basis point rise in the cap rate to 3.65%. The initial yield now stands at 2.5%, while the topped-up yield is 2.9%. Valuation of Lillie Square fell 5% because valuers changed their assumptions. Net debt is down to GBP 442 million, and loan-to-value now sits at 16%. That figure comes before accounting for GBP 210 million of deferred consideration from the Earls Court sale, which will be received in 2 installments, in 2020 and 2021. EPRA net assets came to GBP 2.5 billion, or 293p per share, a decline of 10% over the year. Alongside triple net asset value, we have shown, for reference, the new EPRA metric, NRV, which stood at 313p per share at year-end. The key adjustment there concerns purchasers' costs, which get deducted inside the valuation. And as a reminder on valuation, every property is assessed on its own, with no account taken of any premium that might be achievable for parts of the portfolio or for the whole of it. The biggest factor behind the NAV movements was Earls Court, which added 22p, or GBP 191 million in total, through valuation movements and the loss on sale.

Valuation shifts at Covent Garden contributed 5p per share. Along with several smaller items, those changes brought us to a year-end NAV of 293p per share. The steps we took in 2019 have put the balance sheet in a strong position. Loan-to-value stood at 16% and will be strengthened further once the remaining cash consideration on Earls Court comes in. We have considerable headroom against every debt covenant, and our capital commitments are limited. Substantial liquidity is available to us — almost GBP 900 million at year-end — with a low marginal cost of funding. This chart lays out the principal areas of cash movement during the year: net proceeds from disposals of GBP 245 million, chiefly 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 amounting to a net GBP 2 million. Cash at year-end was GBP 170 million, with the revolving credit facility fully undrawn. For the financial year 2021, we will aim for continued growth in net rental income and underlying admin costs of GBP 20 million — a target we consider ambitious but achievable. These levers, combined with a focus on capital efficiency, will allow the dividend profile to be progressed in line with underlying earnings growth.

Therefore, we anticipate that the initial REIT distribution will occur later this year. Our actions have reinforced the balance sheet, giving the company considerable financial flexibility. That fits with a disciplined stance on capital allocation and an emphasis on shareholder value. All of this lets Capco go after investment opportunities, both inside our current assets and via acquisitions, and return surplus capital to shareholders through the share buyback program this year. With that, I will now pass things over to Michelle.

Thanks, Situl, and good morning to everyone. Covent Garden stands as a recognized brand in its own right, and its distinctive offerings give it a competitive position on the world stage. It gains from brand curation, a heritage setting, and high-quality footfall, with more than 40 million visits each year across a diverse consumer base. All of this happens inside a managed estate that is mindful of the public realm, the environment, and our community — important characteristics that brands, consumers, and our stakeholders respect. It has been a productive year at Covent Garden. We keep implementing our strategy as we capture a version within our portfolio, acquire 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, producing 92 leasing transactions and securing GBP 17.4 million of income, 1.3% ahead of December '18 ERV. Net rental income rose 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 are an important metric, and we are pleased to see continued growth in both tenant sales and footfall.

Our proactive approach to leasing centers on bringing in the newest and strongest brands—ones that match what consumers want and align with what we envision for Covent Garden. When picking store locations, retailers are being more and more selective, and in many cases they're opening fewer stores globally but of higher quality. Cities that are thriving, London among them, still rank in the top 3 locations, and high-profile mixed-use destinations backed by footfall, consumer spend and brand affinity are well positioned to succeed. Keeping our offer differentiated stays a core part of how we work actively. We concentrate on growth categories that are performing well, including cosmetics, jewelry and leisure, plus digitally-native concepts seeking their first physical presence in London. The goal for these is to pair store productivity with driving high margins, producing rental income growth over time. We screen and target such categories early, frequently building relationships before they are even considering a store. So how does that show up in activity across our retail portfolio? We're seeing good demand building in the market following signings by Strathberry L'Occitane and Hawkers. Repositioning of Floral Street is well progressed, with 4 new signings introduced: 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 keep seeing a pattern where occupiers already on the estate put money in and expand their footprint. Examples would be Bucherer growing, Apple doing refurbishment plus a lease extension, and ECC adding more hotel space. This slide shows Zone A rental values street by street. On most of our key streets we've kept posting modest growth. Because rents are spread across the board, the estate can serve a range of demand at different price points, and the average Zone A is still well under other prime Central London areas. Long Acre and James Street have seen high growth in recent years. The valuer factored in market evidence from adjacent properties, comparatively bigger store sizes and absolute rents, which brought the Zone As down to GBP 600 and GBP 1,400 per square foot, respectively. At year end, vacancy across these estates is largely concentrated on those streets — roughly 3% overall, or 5 retail units out of approximately 200 shops and restaurants in our portfolio. Covent Garden keeps transforming into one of London's top foodie destinations. A significant number of new openings have helped lift footfall, which is up 20% after 8 p.m. compared with 2 years ago.

This growth is encouraging, and it gives us a chance to strengthen the evening economy by letting our retailers across the estate trade for longer hours. 5 new dining concepts have been brought in this year, among them Dominique Ansel, VyTA, Santa Nata and Wahlburgers. Work is also underway to merge 2 significant units for Big Mamma Group, which will produce dual frontage on Henrietta Street and Maiden Lane, and that new restaurant should open later this year. This slide shows the momentum across the estate, with a strong brand lineup, and 12 new concepts were introduced in Covent Garden this year. On top of that, 26 brand activations were hosted, which represents a growing revenue opportunity for the group. Turning to offices. We're seeing good demand for our office portfolio, thanks to 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.

We had initially expected it would take 2 to 3 years to complete sales in full, so we're very pleased that all 29 apartments, including the penthouse, have sold within 15 months, generating more than GBP 100 million in cumulative proceeds. Those sales averaged GBP 2,500 a square foot and hit a new high of GBP 3,600 a square foot. We're still active investors in Covent Garden and stay disciplined in how we approach it. Our expansion plans are moving along well, with over GBP 70 million invested across 3 principal assets. These well-located buildings offer accretive repositioning opportunities over time. After 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 that 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'll be on-site shortly enhancing some of the apartments, and we're looking at our asset management options for 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 for either an office or hotel scheme.

We used this chance to improve the hotel planning permission already in place, fine-tuning the design and raising the room count to 146, and we expect to make an investment decision later this year. To sum up, Covent Garden keeps advancing as we carry out our strategy, creating a distinctive location in London's West End that draws consumer demand, captures reversion and backs ongoing disciplined investment across our portfolio. I'll now return the call to Ian. Thank you.

Thanks, Michelle. Looking forward, then: over the past 10 years, Capco has expanded considerably. And because of what we did in 2019, Capco is a strong, resilient business set up for growth ahead — growth from the iconic Covent Garden estate and from fresh investment in the heart of London. There will be wider market difficulties, particularly with the U.K. leaving the EU and the possible effects of coronavirus, yet we strongly believe London stays a destination of choice for capital, talent and tourism. Our investment strategy is designed to deliver superior long-term returns by investing in Central London, concentrating on continued value and income progression at Covent Garden, a lower cost base, investment in existing and new properties, and returning surplus capital to shareholders. A strong balance sheet and access to substantial liquidity give us both resilience and a platform for expansion. So that's the formal part of the morning. We'll now open it up for questions. <<operator_script>> Anyone in the room who would like to ask a question, please just give your name for the recording and we'll answer it. So who wants to go first?

We are in.