Shaftesbury Capital PLC (SHC) Earnings Call Transcript & Summary

Good morning, and thank you very much for being with us today as we present Capco's final results. What we're focusing on mainly today is the 2022 annual results presentation. There will be two parts to it. I'll begin with an overview, and after that I'll give a brief update on Shaftesbury Capital. As you'll appreciate, a prospectus is live at the moment. We remain in an offer period. We've been through the CMA review process, and last week we received clearance. So there are some limits on what we can say about Shaftesbury Capital and the transaction — we're confined to what's already in the public domain. The court meeting for the Shaftesbury scheme of arrangement is in fact scheduled for tomorrow. We look forward to completion and to the merger on Monday, March the sixth. Just a little on the West End. London, as you know, is a leading global city, and it keeps drawing talent and investment from all over the world. The West End sits at the heart of the capital. It's a world-class, high footfall retail, hospitality, and leisure destination, and it's home to an unrivaled concentration of entertainment and cultural attractions. In footfall and in trading conditions, Covent Garden and the West End have shown remarkable resilience and a strong recovery post-pandemic.

International tourism is helping drive solid trading results. Plus, factors such as the Elizabeth line coming on stream have significantly enhanced access to the West End for millions of people. As I believe the results show, Covent Garden has positive momentum, with robust demand, high occupancy, and rent collection restored to where it stood before the pandemic. Our proactive strategy has produced rent growth across every use category. Customer sales are running roughly 7.5% above 2019, even though rents remain 19% lower than they were previously. I'm happy to report that the healthy leasing pipeline we recorded last year has carried over into 2023. Operational performance was strong in 2022. Overall property valuation was largely stable at GBP 1.8 billion. Covent Garden delivered a 6% ERV gain, though valuations were unchanged over the year because yields shifted outward during the second half. Total property return came in at 2.8%. NTA fell to GBP 1.82 per share, which mirrored the Shaftesbury share price at year-end. Underlying net rental income grew 23%, producing underlying earnings of GBP 0.022 per share. The directors have declared a boosted dividend of two and a half pence per share, reflecting the Shaftesbury dividend income we got in February.

As you can appreciate, our balance sheet is strong, gearing is low, and we have substantial access to liquidity. We're very pleased that during the year we made good progress against some of our sustainability targets, in particular becoming Net Zero Carbon by 2030. Over the course of the year, we joined the UN Race to Zero, and we were recognized as a climate leader in the Financial Times survey, which pleases us very much. We keep improving energy efficiency and, as a result, EPC ratings across the properties through incremental refurbishment activities. We take part in a number of sustainability indices, and we remain focused on investing in high-quality public realm, improving air quality, mainly in the Covent Garden area, and also supporting the community in which we invest in Covent Garden. Overall, you know, it's been a very busy year. I'm very pleased with performance on a number of levels, and it wouldn't have happened without the really hard work of our team. Throughout the year they've been incredibly professional and incredibly committed, and we'd really like to show our appreciation to them. It's genuinely contributed to the strong performance on the ground at Covent Garden and in other aspects of the business. On that note, Going the wrong way.

I'll now pass things over to Situl, who will walk us through the financial review.

Thanks, Ian, and good morning to all of you. I'll walk you through the 2022 financial highlights, beginning with the income statement. Underlying net rent income rose substantially, reaching GBP 57.2 million, helped by leasing activity and a better trading environment for our customers. That figure includes a reversal in Expected Credit Loss, versus a charge recorded in 2021. Rent collection came in at 99% for the year. Prior year numbers have been restated as a result of the IFRIC agenda decision issued in October 2022. Specifically, certain rent concessions given during the pandemic are now accounted for as forgiveness under IFRS 9 instead of lease modifications under IFRS 16. With the lower balance of tenant lease incentives, we should see reduced non-cash charges in the years ahead. On an accounting basis, that is anticipated to add roughly GBP 2.5 million to net rental income in 2023. As you would expect, admin costs have faced considerable upward pressure. That reflects more normalized activity levels as well as higher people costs, mainly the variable element, including share option charges. Beyond that, GBP 14.6 million of non-underlying costs have been incurred related to the merger. Finance costs dropped considerably in the second half, thanks to debt repayments made during the year.

On cash deposits and interest rate collars, we generated finance income of GBP 2.6 million. Along with higher dividend income, those items helped push underlying earnings up to GBP 18.6 million. The second interim dividend of 1.7 pence — which includes the Shaftesbury dividend received after the year-end — takes the total for the year to 2.5 pence per share. This chart shows the chance to capture an extra GBP 19 million of cash income, which is the present gap between gross income on the left and the ERV on the right. Gross income rose 8% over the year, reflecting strong leasing activity ahead of ERV. Rental growth has picked up pace at 6%, lifting ERV to GBP 81 million, which sits well below pre-pandemic levels. Moving to the balance sheet, the Covent Garden valuation was broadly flat overall, as rental growth was offset by a cap rate widening of 19 basis points. The Shaftesbury investment reflects the share price of 368 pence, representing the single largest area of movements over the year. Net debt of GBP 622 million gave overall leverage of 28%, and loans value at Covent Garden was 21%. At the year-end, EPRA net assets stood at 182 pence per share.

For most of the year, the new year movement in NTA per share is explained by the 28 pence contribution from the Shaftesbury investment. That reflects movement in the share price rather than underlying asset values. Once the merger completes, after accounting for consolidation of Shaftesbury and other adjustments, the pro forma NTA of Shaftesbury Capital comes to 192 pence per share. This chart sums up the principal cash movements over the year. Operating items, dividends, and CapEx together were broadly neutral in effect. Cash falling to GBP 123 million is largely a result of debt repayments and non-underlying expenses, including the make-whole cost on the private placements. The group had GBP 423 million of liquidity available. Throughout the period we have kept significant client financial flexibility, with low leverage and ample liquidity access. 2022 activity included extending the RCF by a year to September 2025, prepaying GBP 200 million of debt, and arranging the standby loan facility connected with the merger. Thanks to all drawn debt being fixed, combined with our cash deposits and hedging arrangements, finance costs at present are well protected from interest rate movements.

So to wrap up: operating metrics are carrying good momentum, and thanks to what we're doing in asset management, rental income sits in a strong spot to grow. Capital management and cost efficiency will stay our focus. Taken together, those levers should let underlying earnings rise and dividends keep moving higher over time. Our balance sheet will remain strong, which puts the Group in position to pursue growth and investment opportunities. With that, I'll pass things over to Michelle.

Thank you, Situl, and good morning to all of you. We've seen robust momentum throughout the Covent Garden portfolio. Over the course of the year, rents have risen alongside healthy leasing activity in every use, and ERVs are 6% higher. Occupational demand has remained powerful, with 71 leasing transactions bringing in GBP 10 million of income — 13% above the December 2021 ERV and comfortably beyond prior passing rents. An outward yield shift of 25 basis points, to 4.07%, during the second half left the valuation unchanged for the year. Gross income rose 8%, reaching GBP 62 million. We keep vacancy tight and manage the portfolio actively, which brought 14 new brands onto the estate. Our hospitality and retail customers enjoyed a successful Christmas, and the year has started positively for us. On a like-for-like basis, 2022 sales stood 7.5% above 2019 levels, which shows the worth of fine-tuning category selection and customer mix. ERVs have increased portfolio-wide, and rental growth has gathered pace since last year. Overall ERVs are still 19% under pre-pandemic levels, leaving considerable room to recover that ground and grow past it. Capco's retail and F&B strategy centers on drawing highly productive brands and concepts that matter to consumers in targeted categories.

This slide shows how retail leasing activity was distributed across our streets, and we also achieved 8% ERV growth within the F&B portfolio, which reflects how strong demand and trading performance are in our restaurants. A variety of price points lets us draw in brands at different life cycle stages, which keeps our mix both varied and relevant. Excellent demand is coming through in our office portfolio, and we're glad to have established new rental tones from refurbishments completed recently, while the resi portfolio has full occupancy. Demand keeps polarizing toward the best locations, which this year's strength of activity demonstrates. 40 new brands have signed, and 60 new openings have taken place. The data and insights we keep building from our customers give us a rounded view and inform the leasing and investment decisions we make. From a customer sales perspective, our targeted categories of luxury, premium, and jewelry rank among the best performing. Demand has been generated by the proven success of premium retail concepts, with openings from Tudor and Tag, along with recent signings from Girard-Perregaux, Messika, and Hublot. Our F&B offer keeps flourishing, with Gaucho having recently signed on James Street and the Experimental Group opening their new concept STEREO on the Piazza, which enhances the district's nighttime economy.

We have a bunch of openings coming up soon — Mejuri, Creed, HOKA, and UNIQLO is set to open its flagship store in the spring. We're progressing a solid pipeline from a variety of occupiers, with another GBP 3 million in active negotiations. Those deals are coming in above ERV, and we're confident about turning them into cash income over the next few months. Our ongoing focus is on building a destination that flourishes and on how various uses, brands, and location combine to make an appealing environment. Our nimble approach to leasing and choosing brands centers on building brand value, grasping consumer behavior and trends, and, critically, how those interact with experience, culture, and heritage — all inside a sustainable vision for our estate. Brands benefit from one another's success. We keep curating a world-class customer lineup to maximize our customers' share of wallet. We think these capabilities and priorities produce lasting destinations that the occupier of the future values over the long term. Through creative asset management initiatives, we've invested in our portfolio to unlock value while upgrading our buildings and boosting their environmental performance. After starting the refurbishment of 35 King Street and 5/6 Henrietta Street last year, both schemes are now finished.

They're at full occupancy sooner than planned and have established a fresh rental benchmark of GBP 100 per foot across the office portfolio. We currently have crews working on several capital projects, among them schemes at Maiden Lane and Bedford Street, a flagship F&B townhouse located on King Street, and an office refurbishment at Long Acre. Taken together, those amount to roughly GBP 25 million of CapEx across the coming 18 to 24 months. Within the district, properties continue to be tightly held. Our approach is to invest actively in the buildings we already own, and we're glad to have picked up the remaining 5% stake in the Royal Opera House Arcade for GBP 12.9 million. That deal brings our ownership together and takes in the last unit in the arcade that wasn't yet part of our portfolio. Momentum across the business pleases us. With robust demand, a solid pipeline of deals, focused investment activity, and holistic management of our estate, we're in good shape for the year ahead to grow income and ERVs and to create value. Over the months to come, we're very much looking forward to touring the estate with you. I'll now pass you back to Ian. Thank you.

Now on to part two of the presentation. From everything we've said up to this point, you've really heard that Covent Garden has strong operational momentum, and that momentum will carry forward as we look toward closing the merger of Capco and Shaftesbury, which will create the leading Central London mixed-use REIT. At the heart of one of the world's greatest cities, the West End has clearly shown its resilience and its enduring appeal. By bringing together some fabulous properties — highly complementary ones — the merger creates a portfolio that is impossible to replicate, in some of the most iconic destinations across London's West End. Our focus is primarily on the Covent Garden area, the Carnaby-Soho area, and Chinatown. On this slide you can see some of the metrics available in the public disclosures we've made so far. GBP 4.9 billion of property, comprising 2.9 million sq ft of lettable space across 670 predominantly freehold buildings with 2,000 individual units. The portfolio is well-balanced. It's split broadly equally between retail, hospitality, and the upper floors offer quality office accommodation and residential uses. It provides a diversified customer mix and income stream with a broad range of unit sizes and rental tones. We feel that appeals to a wide range of occupiers.

Our top priority is delivering on what we committed to in the prospectus. By bringing together the strengths, cultures, and values of both companies, we intend to take a best-of-both approach. Employees at both companies share a passion for the West End. They are absolutely central to our future success. There's a wonderful opportunity here to blend the best of both teams and, with greater scale, offer enhanced opportunities for individuals. As you know, we aim to foster an inclusive, innovative, and entrepreneurial culture where people can thrive and develop, and that will be a very important focus for the combined management team starting Monday. The combination will produce benefits both near-term and longer-term, including greater efficiencies and synergies, and a stronger operational platform of scale. Shaftesbury Capital will be financially strong, with modest leverage and significant revenue growth potential, as shown here by the gap between annualized gross income of GBP 178 million and the ERV of GBP 227 million, which itself is actually, well, below the pre-pandemic level. The combination offers greater opportunity to create value through enhanced adjacencies by forging better linkages between the individual properties and ownerships, such as the combined Covent Garden portfolio.

Our leasing strategy will stay flexible, going after complementary brands that perform well along with distinctive experiences, so these locations keep evolving as time passes. Through the combination, we can draw on insights from our extensive data to guide investment and leasing choices, supported by knowledge that is both broader and deeper. A holistic marketing plan will be put in place as well, and we'll capitalize on certain cross-locational marketing opportunities. Everyone involved shares a commitment to achieving positive environmental and social results via long-term, responsible stewardship of these wonderful places. Working collaboratively, we'll back the communities where we operate and make sure we keep building close ties with our occupiers. Our confidence in the West End's long-term prospects is strong, and our focus is on delivering sustained growth in income and dividends while handling debt and cost appropriately. In the listed real estate sector, Shaftesbury Capital truly represents a rare chance to invest in an exceptional portfolio of this scale, and we greatly anticipate sharing further detail over the coming months through a series of analyst investor events running across the year. That brings the formal presentation to a close. We'll now take questions. May I please remind everyone of the restrictions I mentioned at the start of the presentation that we are operating under?

We will make every effort to respond to each of your questions. If you are joining by phone, kindly inform the operator that you would like to pose a question, and we will get to you. That said, maybe we can take a question from those present in the room. A microphone is available.

Morning, and congratulations on getting the merger done—I'm sure it's a relief to have that approval in hand now. Thanks for walking us through the results. I've got a couple of questions; this is Hemant Kotecha from M&G Investments. On slide 11, I believe, the one showing the NTA movement—just mechanically, what happens with the Shaftesbury? Right now there's that large 28 pence downward move driven by the share price. Mechanically, what occurs on the 6th of March, even though you clearly won't be reporting on the 6th of March, and what impact might that have on the NTA, please?

Absolutely. Thanks, Hemant. You're correct. Most of the year-on-year change in NTA came from the drop in the Shaftesbury share price. At the close of 2021 it stood at GBP 6.15, I believe, and at the close of 2022 it was GBP 3.68. Of the GBP 0.31 decline in NAV, that accounts for GBP 0.28. That's roughly last year. Going forward, we've factored in a pro forma NTA of GBP 1.92 per share, and that largely reflects all the deal adjustments, chiefly the consolidation of the Shaftesbury assets, valuation and transaction costs and other adjustments. You're correct. In a sense, it's somewhat of a temporary effect, and then you subsequently recognize the investment valuation. That NTA movement, and that specific component of it, reflects the share price movement rather than changes in underlying asset values.

Thanks. On ERV specifically — sure, it sits under where it was before the pandemic, and clearly we've seen a great deal of inflation across that stretch. When you look at how luxury retailers' share prices have moved, they've climbed enormously. So how do you view the level of your ERVs, and what opportunity could lie ahead, please?

As I mentioned during the presentation, the momentum is there. The valuation ERV — supplied by the third party regarding their view of the portfolio's market value — rose 6% over the year. The actual transaction levels Michelle's team has delivered, including some excellent brands, sit 13% above where we started the year. That shows us, in our view, that there's meaningful momentum in place. That has, hasn't it, been carried into the new year as well? Yes. Look, we've got to keep completing these strong deals and making sure Covent Garden remains a fantastic destination for visitors. In my view that momentum is real, and I believe it's reinforced by the return of international tourism. That is very evident to us. As you walk around the estate during half term, for example, it was extremely busy. So far, so good, I'd say.

Thanks a lot. Appreciate it.

Someone had a question — no, wait.

Thanks. I'll come in here. Max Nimmo from Numis. Yeah, perhaps just to build on that ERV question. When you talk with the buyers, how conscious are they of that roughly 20% gap between where things stood in 2019 and where they sit today? Do they actually think about it? Or is that merely anchoring to the past, and you simply move forward, since that isn't where we are now? That's the first question — just how aware are they of it? Second, I realize you may not be in a position to answer this, but if you can: you mentioned being on a combined entity and spoke about having modest leverage. On a pro forma basis, I believe you said you're at 31% there, combined. Should we take from that that this is a level where you feel quite comfortable with the combined leverage of the business? Thanks.