Shaftesbury Capital PLC (SHC) Earnings Call Transcript & Summary

Hi everybody, and thanks for joining the Capco Interim Results Presentation. I'm Victoria, and I'll be your operator for today's call. <<operator_script>> At this point, I'll hand things over to Ian Hawksworth, your host, to get us started. Please go ahead.

Good morning, everyone. Welcome to Capco's Interim Results Presentation. Here's the agenda. I'll begin with an introduction and give you an update on the proposed merger with Shaftesbury. Situl will take you through the financial review, and Michelle will provide an update on Covent Garden. After that, I'll wrap up with a summary and outlook, and then we'll take questions. Capco is a Central London REIT whose portfolio of unique investments is valued at GBP 2.4 billion. Our strategy is centered on value creation opportunities that generate long-term returns, along with investing in prime Central London real estate. The landmark Covent Garden Estate is our principal asset and accounts for more than 3/4 of our total portfolio. Capco holds a 25% interest in Shaftesbury PLC, which owns a mixed-use portfolio of over 600 buildings, many of them adjacent to Covent Garden. As you know, we recently announced a recommended all-share merger of Capco and Shaftesbury plc that would create Shaftesbury Capital PLC. We're delighted that, at the general meeting held on the 29th of July, shareholders approved the transaction, recognizing the benefits of the merger. Subject to completion of the CMA process, we look forward to completion by the end of this year. The merger of Shaftesbury and Capco brings together 2 complementary real estate portfolios under single ownership, creating a GBP 5 billion portfolio that comprises 2.9 million square feet of <<inaudible>> space across 670 predominantly freehold buildings with 2,000 individual units.

At scale, the merged entity is going to provide a more varied portfolio with improved efficiency. Drawing on the strengths of both businesses — their people, know-how, relationships and networks — we will create an operating platform that is even more robust. We face the future with confidence, intending to carry forward what our 2 companies have built as we establish a leading Central London REIT and pursue lasting income growth together with a progressive dividend policy. Since summer 2021 the West End has recovered in impressive fashion, with that recovery holding steady, which has brought steady gains in footfall and spending along with lower vacancy levels. The first half has been very busy at Covent Garden. Footfall keeps rising, and international visitors have been coming back in recent months. Customer sales in our figures exceed where they stood in 2019. Occupancy throughout the estate is high, leasing activity is excellent, and rent collection is returning to normal. Demand proved strong across every user group, with first-half leasing deals coming in 9% above the December '21 ERV, which produced a 5% uplift in valuation. With the Elizabeth Line now open, access to the West End is further improved. Now to the results. Activity and performance throughout the estate have pleased us greatly and created substantial operational momentum.

For Covent Garden, the valuation rose 5% on a like-for-like basis, reaching GBP 1.8 billion, and the main driver there was ERV growth. Total property value across the portfolio was up 4.5% during the period, to GBP 1.9 million. Group NTA has received a 9p boost from the Covent Garden valuation. That gain, though, was offset by a smaller investment in Shaftesbury, which leaves EPRA NTA at 209p per share. Our balance sheet stays strong, with low gearing and plenty of liquidity. Underlying earnings come in at 0.5p per share, and the interim dividend for the period is 0.8p per share. We are continuing to roll out our environmental and sustainability agenda, and we're happy with how that is progressing. In the 2022 Financial Times survey, Capco was recognized as a Climate Leader, and the company has joined the UN Race to Zero. Responsible stewardship remains our focus as we invest in a high-quality realm -- public realm, work on improving air quality in the area and give support to the wider Covent Garden community. I will now pass things to Situl for the financial review.

Thanks, Ian, and good morning, everyone. I'll walk you through the financial summary, beginning with the income statement and then moving on to the balance sheet along with our cash and debt positions. As you can see, underlying net rental income came in at GBP 28 million, a significant increase compared with the first half of last year. That reflects the recovery in trading conditions, including the continued normalization of income collection. More than 95% of rent has been collected for the first half, and that trend has carried on into Q3. This also includes a GBP 1.7 billion write-back of the bad debt provision thanks to collection of historic arrears. Other income relates to receipt of the full year dividend from Shaftesbury in February; a further distribution of GBP 4.7 million was received in July, and that, together with any additional dividend income in the second half, is being included in full year earnings. The rise in underlying administration costs reflects the upward pressures highlighted earlier in the year across a number of areas, including higher payroll and share option costs. Net finance costs have fallen to GBP 14.3 million, driven by lower gross debt following repayments of GBP 200 million during the first half.

All of those shifts combined brought underlying earnings to GBP 4.3 million before the dividend income from our Shaftesbury investment, which came after the period end. We're happy to report a dividend of 0.8p per share, paid as a PID, which reflects better cash earnings and matches the level we flagged when the merger was announced. On this chart you can see the bridge from gross of GBP 58.6 million across to ERV of GBP 79.2 million on the right, which underlines the revenue growth potential over time. Income has seen several movements, with solid leasing activity offset by some properties going into refurbishment. On top of that, certain units were vacated and are now under offer, and that fed into the 4% ERV uplift for the period. New leasing activity shows up in the rent free and stepped rent bar. A large share of that amount will convert into gross income later in the year. The contracted and under offer position stood at GBP 72.6 million, and EPRA vacancy stayed low at 2%. Turning to the balance sheet. Total market value of property assets rose 4% to GBP 1.9 billion. The like-for-like movement at Covent Garden was 5%, mostly driven by rental growth.

The equivalent yield tightened a touch to 3.82%. Lillie Square's valuation fell 2%, taking it to GBP 84 million. The Shaftesbury shares sit at the 30th of June share price of 522p. That compares against a share price at year-end of 615p, plus Shaftesbury's pre-March NTA of 679p per share. Net debt held steady at GBP 605 million, with group leverage at 25%, while Covent Garden loan-to-value has stayed at a low level of 20%. EPRA net assets came in at GBP 1.8 billion, or 209p per share. The main cash movements are tied to the operating cash inflow of GBP 7 million for the period — matching the interim dividend amount of 0.8p per share — and the debt repayment of GBP 200 million. Group cash stood at GBP 139 million. Alongside the ongoing RCF, that gives access to liquidity of GBP 439 million. Our capital and liquidity position is strong, and capital commitments are modest. On the whole, group leverage and the loan-to-value position at Covent Garden have both stayed at low levels. The cash interest cost of debt has come down and currently consists of these key elements: the Covent Garden private placement notes of 2.8%, the exchangeable bonds at 2%, and commitment fees on undrawn facilities.

Regarding the proposed merger with Shaftesbury, we’ve arranged a standby loan facility so we can fund any redemptions of the secured mortgage bonds. Our ongoing aim is a resilient and flexible balance sheet, with suitable covenant headroom, a mix of sources and maturities for debt, and access to substantial liquidity. To sum up, our focus will be on growing revenue and turning that into distributable income, consistent with our progressive dividend policy. We’ll also keep a strong balance sheet and a disciplined approach to capital management. I’ll now pass things over to Michelle.

Thanks, Situl, and good morning, everyone. The first half has been quite active at Covent Garden. Footfall keeps getting better as overseas visitors return, and customer sales are running ahead of 2019. Operational demand has been strong, with possible leases, producing 25 leasing transactions that secured GBP 3.9 million of income, 9% ahead of December '21 ERV. Net rental income rose 14% like-for-like, and ERVs are up 4% to GBP 79.2 million. A 5% valuation loss occurred in the first half, driven by ERV growth and 6 basis points per year contraction. Vacancy sits low at 2%, and we have had 11 new store openings since the start of the year. The financial <<inaudible>> environment and our <<inaudible>> team is performing very well, supporting Covent Garden's position as London's leading outdoor dining destination. We keep engaging directly with the consumer and on early adopters of digital, our investments in these channels are proving fruitful. We have begun a number of targeted capital initiatives, which will improve value and enhance environmental performance. This slide demonstrates the retail-only rental values across the estate. We have a plan for each of our buildings and the broader curation strategy for every street.

We think James Street, King Street, and Royal Opera House Arcade can draw premium brands of high quality, and that's what these areas have been focused on. Along with the Market Building, there are 6 other streets, and together they let us carry out our strategy of offering a wide range of brands plus high-quality food and beverage, so that combined with all of this, our customers can shop and dine on every level with a wealth of choice. Growth in the first half of the year has come mainly from retail leasing activity on King Street, the Market Building, and James Street, and from almost 5% ERV growth in the F&B portfolio, which reflects how strongly our restaurants are trading. Leasing momentum continues across Covent Garden. Since inception, Capco has issued more than 250 new retail and hospitality concepts, refreshing the customer lineup, which, as you can see, keeps getting better and better. Demand keeps polarizing toward the best locations, as the activity in the first half of the year shows, and we're pleased to have secured demand in target categories, including sustainable, luxury, and digitally native, to name a few. Luxury brand Tudor will open in the Royal Opera House Arcade, joining watch brand TAG on James Street.

Parfums de Marly, <<inaudible>> has reached an agreement on terms and will launch in the months ahead next to WatchHouse Coffee, adding to the lively lineup at Covent Garden. Recently, 11 new brands have opened their doors, among them Rails, The Chestnut Bakery, Empresa, e&e Jewelry and Sacred Gold. Reformation — a sustainable and digital brand — has now launched its London flagship; refurbishment to allow the combining of <<inaudible>> and 2 Long Acre units, the unit closed new flagship is still making good progress. A solid pipeline of leasing activity exists, with a further GBP 3 million presently in negotiation, and we are confident of converting this over the months to come. We have always recognised the worth of knowing our customer and what our business expects. As an early adopter of digital marketing and a producer of high-quality content, we are pleased by the strong engagement levels and sustained growth across our channels, as well as the interest in conversion from our website. This lets us speak directly to our consumers amid <<inaudible>> key trends, giving us confidence that our strategy fits our target market. Together with footfall and the sales data we capture, which covers over 80% of our customers, this will help give a rounded picture to inform our asset plan.

On the strategic public <<inaudible>> side, we're generating value from our assets and doing a better job of linking the consumer to our estate. That has meant more schemes like al fresco dining and pedestrianization, plus concrete sustainability upgrades — all of them reinforcing pillars for building a world-class estate that can draw the most exciting brands and concepts and connect with today's consumers. We keep investing in Covent Garden. We've now kicked off a set of targeted cash initiatives, among them an F&B scheme for Maiden Lane and Bedford Street, a flagship as a retail house on King Street, and an offer to refurbish in Long Acre. Taken together, those come to roughly 50,000 square feet and somewhere around GBP 25 million to GBP 30 million of CapEx across the coming 18 to 24 months. These additional investments will unlock value while also improving the environmental performance of our buildings. And on every one of these initiatives, we expect to hit a minimum EPC rating of B. On top of that, the recent office refurbishments at 35 King Street and 5-6 Henrietta Street have now been completed, with a number of <<inaudible>>, achieving a new office rental term of GBP 95 per square foot. As for acquisitions, we're watching the investor market closely, with a number of opportunities currently under review, and where it makes sense we'll look to acquire.

To wrap up, the momentum we're seeing throughout the portfolio makes us happy. We have confidence in the holistic approach to managing assets, which covers leasing, investment, and target public marketing, along with staying close to our customers so we can deliver rental and income growth and maximize Covent Garden's potential for all our stakeholders. At this point I'll hand you back to Ian. Thank you.

Turning to what lies ahead, Covent Garden shows considerable operational momentum, with demand present across every use. Taken together, customer sales sit above where they stood in 2019, and footfall keeps getting better, which adds to our confidence in the leasing approach we're pursuing for additional rental growth. Central London isn't fully shielded from the macroeconomic and political headwinds currently prevailing. That said, the West End, along with our collection of remarkable properties, has shown considerable resilience. We're pleased that shareholders saw the merits of the merger with Shaftesbury and gave the transaction their approval last week. We now look forward to uniting our 2 companies as Shaftesbury Capital, once the CMA process wraps up. Capco's merger with Shaftesbury represents a compelling strategic fit, producing a property portfolio in the West End that is close to irreplaceable. The combination will deliver benefits in both the short and long term, among them greater efficiencies and synergies, a more diversified portfolio backed by a stronger operational platform, considerable scale, and unified ownership of management across neighboring portfolios so that opportunities can be unlocked. There's meaningful revenue growth potential to be captured over time via the gap between annualized growth income and ERV. Shaftesbury Capital will be financially robust, with a flexible capital structure and significant liquidity, and it will gain from improved access to capital.

As we look to the future, we're confident in our goal of building a top Central London REIT, delivering cost savings, steady earnings growth, and progressive dividends, while taking a holistic environmental approach as stewards of these extraordinary areas of London. That brings the formal presentation to a close. We'll now take questions from analysts. If you'd like to ask a question, please let the operator know.

<<operator_script>> We'll take our first question from Osmaan Malik with UBS.

So I suppose the question really centers on tenants. I suppose you're not seeing much evidence of recession, but I suppose, more broadly, plenty of people are having a hard time at the moment. So I'm just wondering, how far are your tenants able to pass this inflation through? How are they doing? Do you have anyone on the watch list? Are margins getting squeezed because, I suppose, you're saying you're a bit ahead of 2019 sales, yet quite a lot of inflation has built up since then. So just a little more color on how your tenants are performing, please.