Shaftesbury Capital PLC (SHC) Earnings Call Transcript & Summary

Morning, everyone. Welcome to the presentation of our annual results. It's wonderful to be here with you in person today, following two years of presentations held virtually. Many thanks for being with us. Today's agenda is pretty straightforward. I'll begin with a short introduction and an overview. After that, Sid will take you through the financial review, and Michelle will bring you an update on Covent Garden. Following that, I'll wrap up with a summary and an outlook, and then we'll open things up for questions from the room as well as from those on the phone. As a quick reminder, Capital ranks among Central London's largest REITs, holding a portfolio of unique investments with a value of GBP 2.4 billion. Our strategy is centred on opportunities for value creation, aiming to deliver superior long-term returns by investing in prime Central London real estate. Our principal asset is the landmark Covent Garden estate, which accounts for over 70% of our total portfolio. Beyond that, Capco holds a 25% interest in Shaftesbury PLC, the owner of a mixed-use portfolio comprising over 600 buildings, a great many of which sit adjacent to the Covent Garden portfolio. Through the pandemic, Capco's actions, commitment, and creativity have put the company in a strong position for recovery and are now producing positive results. Proactive backing of our strong customer line-up meant occupancy stayed high right through the COVID period.

During last summer, we said we believed the pandemic's worst phase was behind us. I'm happy to say Covent Garden delivered a solid second half of 2021. Even with the Omicron variant in the background, shoppers kept being drawn to the estate in the weeks leading up to Christmas. Footfall and spending were robust, and customer sales in that second half came close to pre-pandemic levels, which shows how Covent Garden keeps drawing people as a top-tier destination. Premium and luxury, among our targeted categories, are some of the strongest performers, and thanks to a leasing strategy that worked well plus promotional efforts, Covent Garden stands as the West End's most vibrant destination. Strong fundamentals and appeal at Covent Garden have produced excellent leasing activity, which drove valuation growth in the second half of the year. With our strong balance sheet and a creative, experienced management team behind us, we have confidence in the long-term growth prospects of our West End investments. Now to the results. Covent Garden's valuation rose 4.6% like for like in the second half of the year, reaching GBP 1.7 billion. Total property value across the portfolio dipped slightly over the year, to GBP 1.8 billion. The chief drivers of Covent Garden's improvement were ERV growth, inward yield movement, and the near-term income assumption loss falling to nil.

Since we acquired Shaftesbury, the value of our stake has risen by GBP 95 million — roughly 19%. EPRA NTA held steady across the year at 212 pence per share, and our balance sheet remains strong, with gearing low and liquidity high. Underlying net rental income grew 20%, while administration costs came down 20%. Consequently, underlying earnings stand at 0.5 pence per share, and I'm happy to report that the directors are proposing a final dividend of 1 penny a share, which makes a total dividend of 1.5 pence per share for the year. We published our detailed pathway to reach net zero carbon by 2030 during the year, setting out clear actions and timelines for getting there. Our investment strategy centres on incremental refurbishment work, through which we keep raising energy efficiency and, in turn, EPC ratings across our properties. At present, two-thirds of our units carry an EPC rating of A to C, and we'll keep improving efficiency as properties come forward for refurbishment. Fostering a dynamic, inclusive, and diverse corporate culture matters greatly to us, and over the year we completed an employee survey, with results we're pleased about that showed positive employee engagement.

Our commitment to responsible stewardship continues, with investment going into a high-quality public realm, better air quality in the area, and support for the broader Covent Garden community. Entering 2022, the market is stabilizing, which opens up several growth opportunities. Our focus is on generating sustained rental income and value growth, and we follow a consistent strategy of bringing in high-quality brands with a focus on productivity. The benefits of our leasing strategy are visible, since overall customer sales are nearing 2019 levels, with premium and luxury performing best. Based on what we've seen, successful omnichannel retail in prime locations tends to draw the highest sales density, and that in turn can support the highest rents. The estate is building momentum with target audiences, and we've achieved this during a period of limited international travel, which a significant rise in domestic tourists and Londoners has offset. This domestic demand, along with the anticipated return of international footfall, gives us confidence in further rental growth. We have plenty of opportunities to invest in our estate, and we're on site with several asset management initiatives that will accelerate growth. Beyond that, we're tracking potential acquisitions in the area to expand our footprint.

We feel really good about what we've put into Shaftesbury — it has delivered substantial returns so far. Our aim will be to extract the fullest economic and strategic worth from that investment, which in our view was entered at an appealing point. With sustainability becoming ever more important to consumers, that factor, alongside our creative approach to asset management, is set to be a key focus for us in building competitive advantage over the coming years. I'll pass things to Situl now for the financial review.

Thanks, Ian, and good morning to everyone. I'll walk you through 2021's financial highlights, beginning with the income statement and then covering the balance sheet, cash movements, and our capital structure. Underlying net rental income is up 20%, supported by better operating conditions for our customers. Rent collection improved from 69% in the first half to over 80% in the second half, and it stands at more than 90% for the current quarter. Other items that significantly affected reported NRI during the pandemic have eased in 2021 — specifically, expected credit losses and the non-cash cost of COVID support. Administration costs have been substantially rebased as the group has been simplified, including a 20% reduction in 2021. Inflation, especially in people costs, will put upward pressure on the cost base in 2022. The evolution of finance costs reflects a higher level of gross debt following the Shaftesbury investment, along with high levels of liquidity over the last two years. The cash components of the income statement charge come to approximately GBP 26 million, and initiatives to reduce interest costs are underway and will remain an area of focus.

So, all in all, underlying profit came to GBP 4.1 million for the year. We're putting forward a final dividend of 1p per share, and half of that is going to be paid as a PID. On this chart, you can see gross income over on the left, moving through to the contracted position and then the estimated rental value on the right. Each of the bars there reflects market movements, portfolio changes, and asset management initiatives. Broadly speaking, you'd expect ERV to come through as income across a typical lease cycle of five years. Gross income is down from GBP 61.8 million in June to GBP 57.4 million, mostly because of disposals and tenant movements. The leasing activity we did in the second half shows up in the rent free and step rents bar. Most of that will flow into gross income during 2022. Contracted income, which takes in units under offer, rose to GBP 72.4 million. Year-end NAV stands at GBP 76 million, compared with GBP 101 million at the close of 2019 once you adjust for asset sales. Moving to the balance sheet, revaluation combined with other movements has kept NTA stable across the year, and it went up by 13 pence per share in the second half.

At year-end, EPRA net assets came to GBP 1.8 billion, which is 212 pence per share. Covent Garden's valuation rose 4.6% in the second half, whereas Lillie Square fell another 5%. Net debt came down to GBP 599 million, bringing group leverage to 24%, and Covent Garden's loan to value stood at 15%. On a like-for-like basis, Covent Garden's valuation was broadly flat across the year. The 3% ERV uplift since the half year mirrors better sentiment and leasing activity. The equivalent yield shifted in slightly, reflecting a more positive investment market. With market conditions normalizing, the valuer has taken out the assumption regarding loss of near-term income. Our Shaftesbury investment was acquired at an average price of 517 pence per share and is held at the year-end price of 615 pence, up 8% over the year. Dividend income of GBP 2.3 million was received in July 2021, and a further GBP 3.9 million has come in post year-end. As a reminder, we have two financings tied to the investment. First, a GBP 275 million exchangeable bond, which carries a conversion price for parts of our holding at 723.5 pence per share. The bond matures in 2026 and lets the company satisfy any exchange through Shaftesbury shares, cash, or a combination of the two.

Then, a secured loan of GBP 125 million comes due in December 2023. This chart sums up the year's primary cash movements. Disposal proceeds came to GBP 133 million via asset sales at Covent Garden, completions at Lillie Square, and receipt of the final payments for Earls Court. Financing activity involved repayments of the Covent Garden and Lillie Square bank facilities. After factoring in other movements, including CapEx and operating items, access to cash and undrawn facilities stood at over GBP 650 million. Throughout the period we kept significant financial flexibility, with limited capital commitments and ample liquidity available. Activity in 2021 included an early refinancing of the Covent Garden RCF, which has been cut to GBP 300 million. Given heightened volatility and uncertainty over the last two years, we have operated a defensive balance sheet holding a high level of cash and thus increased gross debt. As market conditions normalize, we will keep our capital structure positioning under close review. We have decided to prepay certain private placement notes at an estimated cost of GBP 81 million. Those notes mature in 2024 and 2026 and carry a relatively high coupon.

Combined with the RCF refinancing, this produces yearly interest cost savings exceeding GBP 3.5 million. Thanks to how our debt is structured along with our hedging arrangements, interest costs are well shielded from rate movements. In summary, with operating metrics still improving and through our leasing and asset management efforts, rental income is positioned to recover and grow over time. Our focus will remain on capital management and cost efficiency. Taken together, these levers will allow the dividend profile to be moved forward in step with growth in underlying earnings. After a stretch of considerable adjustment across 2020 and the early portion of 2021, the second half marked a turning point in valuation metrics. By the year-end, ERV had fallen substantially and yields stood higher than they were before the pandemic. We will keep a strong balance sheet, cutting gross debt and financing costs in the near term while positioning the group to act on opportunities for growth and investment. I will now pass things over to Michelle.

Thanks, Situl, and good morning, everyone. Here at Covent Garden, our focus has been on getting the portfolio positioned for recovery and growth. Market and trading conditions have certainly been disrupted by the pandemic, but active asset management across our estate, together with our hands-on approach to leasing, has produced strong activity levels and a destination that is vibrant and thriving overall. We completed 60 leasing transactions, representing GBP 11 million of contracted income. Rents for the second half of the year came in 0.6% ahead of ERV, which has delivered a valuation uplift for H2. We are starting a number of refurbishments that will unlock value, and we are tracking a number of potential acquisitions. During the period, we disposed of GBP 95 million of non-strategic properties. Vacancy has stayed consistent at around 3%, and new store openings have been a strong feature over the year. Working closely with stakeholders, we have secured enhanced pedestrianization on target streets and al fresco covers across the estate. Footfall and spend continue to improve, nearing 2019 levels. As we recover from the pandemic, retail and F&B demand continues to polarize towards the best locations. Through strong curation and brand positioning, we've aimed to maximize the attractiveness of Covent Garden, which underline tenant performance.

More and more, features such as pedestrianization and al fresco dining—things that improve the whole trading environment—have become requirements for occupiers who are taking space. Owning your customer matters more and more. Places that can show they have a consumer audience of scale that they can speak to directly, influence, and analyze hold an advantage over the long term. Capco was an early adopter of digital, investing across its major digital channels and speaking directly to our target consumers. We look at productivity by store and by brand, which has given us trading data for the majority of our customers. That provides invaluable insights into consumer trends and performance. All of this works together to inform our leasing and investment decision-making. Brands want locations that give them options for growing their presence, adapting their concepts, and altering uses as appropriate. Our scale, concentrated ownership, and collaborative approach enable flexibility, letting businesses upsize and evolve on the estate. Operating as sustainably as possible is no longer a nice to have, and brands are choosing landlords that share their environmental values. Green leases are now standard in our business, and we are working with our customers on how we can support them in improving their carbon footprint on our estate by influencing behaviors.

Contained within these lease agreements are commitments to work together on energy efficiency and environmental performance, plus sharing of data. Together with our own greening efforts, air quality programs, and investment in heritage assets, we remain dedicated to our net zero carbon targets. Rents have fallen by 26% since before the pandemic and are now recovering, with 3% growth in the second half. Every street has a vision and every asset has a plan, and as we advance new leasing and asset management initiatives, those will drive rental and income growth over time. Leasing has been active this year, with 60 transactions representing GBP 11 million of income, completing 5% below the December 2020 ERV. Second-half deals came in 0.6% ahead of the June 2021 ERV and in line with 2019 passing rent. We have entered the year with a healthy pipeline of GBP 3.8 million under offer, which on average is currently tracking slightly ahead of the December 2021 ERV. Our retail and F&B strategy centers on being able to shop and dine at every level, London firsts, and unique experiences. We are clear about which categories and brands we want to introduce — luxury, differentiated F&B, digitally native and sustainable, to name a few.

Our customer mix is something we feel good about: retail accounts for roughly 50% and F&B 25% of the portfolio at ERV. This slide shows that even with retail and F&B markets proving difficult, the tenant roster at Covent Garden keeps improving. Among the signings are luxury labels TAG and Tudor, and Uniqlo has agreed terms — we'll merge Carriage Hall on Floral Street with two units on Long Acre to create their new London flagship. After Glossier's pop-up, that digitally native beauty concept has opened its first London flagship store. Reformation, another digital brand focused on sustainability, has come on board as well and is fitting out at present. Ave Mario, 3 Henrietta Street, and Mrs Riot have launched new restaurants on the estate. London-first concepts keep being drawn to Covent Garden, among them Rails, Lisa Eldridge, and Ghlam. The Gentlemen Baristas and Kick Game joined the estate in 2020 on shorter term arrangements and have since moved to longer-term leases. Experimental Group has grown and is due to launch a new late-night concept on The Piazza. Several projects on site are moving forward well, among them office refurbishments at 35 King Street, where leasing has begun, and 5 to 6 Henrietta Street, which will be brought to market later this year.

We've also got design and planning underway on several new schemes. Among them are 2 office-to-F&B conversions, a flagship F&B townhouse, and an office refurbishment. Across these capital projects, we're looking at 70,000 sq ft and roughly GBP 30 million of CapEx spread over the coming 2 years. Through these select investments, we'll unlock value while making our buildings better, adapting them to shifting requirements, and boosting their environmental performance. Beyond that, we keep reviewing other larger repositioning opportunities throughout the estate. Following an assessment of forward returns, several non-strategic assets were sold, generating GBP 95 million in proceeds in total; the latest of these was a long-let hotel on Bedford Street, which went at 5% above its June 2021 valuation. With our strong balance sheet, we're well placed to move on investment opportunities when they come up. We're watching the investment market closely and seeing more assets come to market, and where it makes sense, we'll look to acquire. To sum up, we feel confident about our plans and priorities for the year ahead as we concentrate on delivering our asset and investment strategy, converting our pipeline, and positioning the Covent Garden estate so it maximizes value potential for all stakeholders. I'll now pass you back to Ian.

I appreciate that.

Thanks a lot, Michelle. As I look forward and assess where we stand, the steps we took early on, in my view, have put the business in a strong position to gain from the recovery now underway. Our leasing, public realm, and marketing programs, which we implemented successfully, have created this growth opportunity, and we're quite happy with how much leasing activity we're seeing and with the market indicators that are improving, which helped produce the valuation increase in the second half. Given our strong lineup of customers and rising demand for the best locations, Covent Garden is well set for additional rental growth. Although economic headwinds persist, activity patterns are starting to normalize, and that will fuel growth in the West End economy. Capco has substantial liquidity available, and we'll be seeking to seize investment opportunities as they come up. As long-term responsible owners of the Covent Garden estate, we're dedicated to carrying out our ESG strategy, in particular reaching net zero carbon by 2030. I believe that our long-term vision, entrepreneurial culture, and strong balance sheet put the business in position for recovery and growth. We look forward with confidence to continued progress in 2022, generating long-term returns for shareholders from our unique portfolio of West End investments.

That wraps up the formal presentation. Thank you very much for your attention. We'll now move to questions from the room. For those of you that are on the wires, please let the operator know if you'd like to ask a question, and we'll come to you in due course. Who'd like to go first? Good morning.

Morning. Max Nimmo here from Numis. I have just two quick questions, if that's all right. You mentioned possible acquisitions and additional stock that could be coming onto the market. I was rather curious to hear your perspective on what's really driving that. Is it EPC-related? Or does it have something to do with the post-pandemic situation, in terms of sellers arriving on the market? My second question concerns Lillie Square. We've clearly witnessed something of a rebound across the remainder of the portfolio. Lillie Square, clearly, is still experiencing a certain amount of value decline. I'd just like a bit more detail on that, and on how you expect that to develop. Thanks.

Sure. So, at Lillie Square, we actually sold a fair number of units last year, and at pretty good prices. There's still some inventory remaining there, and it mostly relates to one block of properties that hasn't really been fully released for sale as yet. We'll get to that with the JV partner over the course of this year. As for properties that are available or might come onto the market in the Covent Garden area, you know, that's a very tightly held market there. Historically, we've bought from generally private companies in recent years, and we've always held the view that by buying those properties, we could change the nature of the tenancy in there and push rents, perhaps beyond where others might see them going. Normally, I think when you've had an inflection like the one we've had over the last two years, people inevitably change their thinking and change their strategy. You know, we're maintaining our strategy because we think that will create the best value for our shareholders over time. We can see that now translating into rents and ERVs. I think there will be a number of properties that, well, we're certainly running the rule over a few at the moment, which, you know, some have been target properties for many years.

I can't say whether they'll come to market. There is movement. Another factor in Covent Garden—somewhat different, I think, from prior years when we've had money invested there, and it's now almost 15 years since we made that first investment—is that other parties are putting capital into the area, so quite a lot of development is underway. Be it office space, hotel space, or occupiers. You'll have seen the Guinness investment in Old Brewers' Yard. So a great deal is happening there, which makes it a vibrant market, and I think that will create opportunities for us. The immediate deployment of capital, though, is probably into our existing buildings. Several properties haven't had their refurbishment actioned by us during COVID, and we'll get to that this year. We'll come to you next, Oz.

Thanks, and good morning. Matthew Saperia here from Peel Hunt. I have a couple of questions too. The first concerns slide 11, that ERV bridge — I saw that you included the 2019 ERV, which was around GBP 100 and something million, on it.

Yeah.

Do you have a figure in mind that you're aiming for as far as where you believe you can bring it back to, and if that's the case, what does the path there look like?

Yeah. Well, look, I don't see any reason we can't get back to that level. The evidence from the sales densities we're seeing across the estate in aggregate would certainly support those kinds of rents. If you recall, back in 2019 we were actually aiming to grow rents at that time. And the introduction of the higher value categories is clearly showing that the potential is there. I think the adjusted number for sales would be roughly GBP 100 million, something along those lines. At the moment we're about 25% below that on ERV. There's still a long way to go simply by, you know, doing what we've done successfully over the last 10 years or so. I think it'll speed up thanks to these new categories Michelle mentioned, because they're trading very well.

Thanks. About pedestrianization and al fresco — you've clearly done very well on making pedestrianization permanent and, of course, on bringing in the 1,000 al fresco dining spaces. Is there more opportunity across the estate to extend that further? Thinking more broadly about the West End, others haven't done so well when it comes to getting those dining spaces put in permanently. Do you now see that as a competitive advantage for the estate?

Would you like to handle that one?

Sure. Thanks, Matt. You're right. Look, being able to spill out beyond what's already there has been a very valuable capability for us and a strong feature of the recovery. I think, you know, one theme I mentioned is that when people now think about the sort of space they want, they're considering the environment more holistically, and things like pedestrianization and al fresco really feed into their thinking, whether you're a hospitality brand or a retailer. We're really positive about what's been achieved. As for whether we can do more, I think you've got to get the balance right with all of these things. There are a few areas of the estate where we certainly see opportunities to maybe incrementally add more, but really, overall, the benefit for the estate has been very positive.

Os, the mic is coming over to you.

Thanks. Osman Malik from UBS. The question about ERV guidance has just been answered. My other one was whether you could give us a sense of competitive tension on any particular units, just so we get a feel for, say, now versus pre-pandemic, how many parties are bidding against one another, to give us a bit more color on the potential for rental growth, essentially.

What I'd say is, Michelle can provide the detail on that. What we're attempting to do from a strategic standpoint is ensure our vacancy stayed limited. In places where we've had vacancies, we've concentrated heavily on securing the right brands. The brands we're bringing in, you'll see, align with that long-term approach of high-value retailers and quality restaurateurs in the categories Michelle described earlier. That has certainly delivered benefits, since really only a handful of units remain right now. There's a pipeline of things coming through. There's genuine competitive tension, not on every unit, but definitely on the prime ones. I'd say at the moment they're well sought after.

Yes, I believe that's correct. You've captured it. Throughout the year, leasing activity has been distributed fairly evenly. As we moved toward the second half, it became apparent that pricing demand was tightening, and broadly, some of those market dynamics were beginning to calm. The deals completed during the second half demonstrated this — we're tracking slightly ahead of ERV on those. There's competitive tension across essentially all of our units, though our approach is that you also need to be quite targeted at the same time. As you know, there are a few examples I've mentioned, such as Glossier and Reformation. Those are target brands for which we've sought to unlock opportunities.