Shaftesbury Capital PLC (SHC) Earnings Call Transcript & Summary

Good morning, everyone. It's a pleasure to welcome you to the Annual Results Presentation for Shaftesbury Capital. With us today are the Executive Committee — Situl, Michelle, and Andrew. Several other senior colleagues are also here in the room, and I'm confident they'll be glad to take questions afterward, among them our Chairman, Jonathan Nicholls, and our Senior Independent Director, Richard Akers. I'm looking forward to speaking with you once the formal presentation wraps up. Today's agenda is pretty simple. I'll begin with a brief overview. Situl will follow with the financial review. After that, I'll bring you up to date on the portfolio as a whole, and we'll close with a summary of the outlook plus some questions. Many of you joined us at our inaugural investor event at the Royal Opera House late last year. There we laid out our purpose, a clear strategy, and a number of the priorities we're pursuing, and I must say, the pace and the performance in our first year have left us delighted. Rents are rising. Leasing transactions are running well ahead of ERVs, and cost savings have exceeded our initial ambitions. Footfall across the West End portfolio is strong, occupancy levels are high, and customer sales are up 10% year on year.

I'll just advance the slides a bit. Valuations were largely flat. We've closed sales on quite a few properties. Those came in above valuation, and a number of other assets have offers on them. Over the year, we finished refinancing GBP 550 million of debt, which further bolstered our financial position. Naturally, carrying out our strategy and priorities wouldn't be achievable without our skilled and seasoned team. So I want to use this moment to thank each of our people for their dedication during what's been a stretch of considerable change, and we're now realizing the advantages of collaborating in the merger via our improved operating platform and the results we're showing today. So on the whole, integration is quite far along, and we've refreshed our purpose, which is to invest to create thriving destinations in London's West End, where people enjoy visiting, working and living. We also established some clear company priorities so we can hit our medium-term targets of an annualized total property return of 7% to 9% and a total accounting return of 8% to 10%. So our strategy is really simple. We aim to deliver long-term income and value growth. We put the customer at the center of our business to deliver best-in-class service.

We aim to be creative and take a hands-on approach with our portfolio, putting money into these exceptional destinations and revitalizing what we offer via a holistic, dynamic marketing strategy along with upgrades to our properties and the public realm. Our stance on financial leverage is prudent, and we stay sharply focused on keeping cost and capital discipline. On the whole, though, we believe in responsible stewardship of the places we are responsible for, and by partnering with the broader community and stakeholders in the West End, we seek to contribute positively to the West End's long-term success as a whole. Just to give you a brief reminder about the portfolio. We own what is a portfolio of properties that cannot be replicated. It sits in some of the most iconic destinations throughout central London's West End. You'll know all of these well, the Covent Garden area, Carnaby Street, including our investments in Soho and Chinatown. It's a GBP 4.8 billion portfolio. It's roughly 2.9 million square feet of lettable space, it is around 600 or so, predominantly freehold properties and some 2,000 or so individual units available to let. It's a well-balanced portfolio, 34% retail, 34% hospitality and the remaining 32% is in the upper floors of the buildings, which comprise high-quality office accommodation and good quality residential, around 700 individual residential apartments.

Within that portfolio, we provide occupiers with a highly diverse selection of accommodation. Our income streams are widely varied, and we offer units across a broad span of sizes, which draws a number of distinct occupier groups. As a result, rental tone varies widely across the portfolio as a whole. Taking a somewhat closer look: Covent Garden accounts for slightly more than half of the portfolio. It is now firmly established as a retail and dining destination of world-class standing. In our view, this location offers the most immediate area of opportunity, as we quickly improve the adjacencies among Covent Garden's various component parts, forging stronger links both physically and via marketing, treating the area as one single district. Carnaby and Soho, as you know, is a highly vibrant mixed-use area. It features some iconic shopping, and there is a very strong restaurant offering that runs from day into night. That said, we see an opportunity to evolve the mix here and to improve what is offered to the consumer across the years ahead. Europe's premier Chinatown sits right in the middle of the West End's entertainment district. It has sustained very high occupancy. It delivers very strong, resilient cash flows, and those cash flows are growing.

Just a bit on London. You've heard me discuss this for many years, but without question, London ranks among the world's leading cities. Its economic outlook is positive. For instance, it's the top European destination for foreign direct investment. We're also witnessing very strong growth in international visitors, and numerous observers project that to continue going forward. As I said, our properties sit right in the middle of the West End's entertainment and cultural offerings. Excellent connectivity works in our favor, with very close proximity to the major underground stations and other transport hubs like the Elizabeth Line, which I believe has carried over 250 million passenger journeys since opening and has truly had a major impact, certainly on the West End, but also on our portfolio. Our mixed-use portfolio is adaptable. It has a long record of sustained demand. In most cases, that demand outstrips supply, and this supports the long-term outlook for rental growth. Obviously, interest rates have been higher over the last couple of years. As you all know, that has affected valuations and the broader real estate investment market. However, in prime West End, where we operate, investment yields there—which mainly involve smaller lot sizes and generally freehold properties—have stayed resilient.

And you're seeing that reflected not only in the deals we've closed but in the valuations across most of the portfolio. There's also a wide range of investors out there. Central London real estate draws them in, especially in the core of the West End, and that's what we've seen with the sales we've recently announced and some of the assets we're currently in negotiations to sell. So let me move on briefly to the financial highlights. It's been a strong year. We've made progress in every area where we wanted to make progress this year. ERV is up 7% like-for-like, to GBP 237 million. The equivalent yield has softened slightly, by 26 basis points, over the year to 4.34%, and a bit more in the second half, 16 basis points in the second half. That mix of ERV growth and modest yield softening has produced a fairly stable valuation. It's down slightly, by 0.8%, at GBP 4.8 billion. Because of that, our net tangible assets rose by 8p to 190p per share. And that's mainly due now to the merger having completed, which has been offset by some of those marginal valuation shifts in the second half.

Cash rents have risen quite nicely — they're up 10% across the year, which is very pleasing. Synergies are progressing well too, and today we're raising guidance to an annualized recurring cost saving of roughly GBP 16 million. The balance sheet remains strong, and significant liquidity is available to us. Underlying earnings came in at 3.7p per share for the year, and the Board has proposed a final dividend of 1.65p per share, taking the total dividend for the year to 3.15p per share. Overall, I'd say this resilient performance shows the exceptional qualities of the portfolio and the speed of integration, and it's now delivering growth in cash rents, dividends, ERV, and a stable valuation. That covers the introduction. I'll now hand over to Situl for the financial review.

Thank you, Ian. Good morning, everyone. As you've heard, 2023 brought meaningful progress across a number of areas. Our priorities are clear and in line with our November presentation, which focuses on rental growth and cash conversion, cost control and capital discipline, and keeping a strong balance sheet. So let me begin with the income statement. As a reminder, this reflects the premerger position up to the 6th of March and the combined group from that date. We've included a column showing H2 earnings as a reference point for performance post merger. Gross rents rose 13% like-for-like, reflecting strong letting and asset management activity. In aggregate, commercial lettings and renewals came in 13% ahead of previous passing rents, and residential deals were 12% ahead. Underlying net rental income grew to GBP 147 million for the year. Underlying admin costs were GBP 39.3 million, reflecting cost inflation and progress on efficiencies. We've raised our expectation of total annualized cost synergies to over GBP 16 million, well ahead of our initial guidance. Finance costs of GBP 51.9 million reflect the evolving capital structure, including the effect of refinancing as well as interest rate hedging activity. As we've indicated previously, we will focus on managing the absolute level of finance costs to ensure efficient conversion of income to earnings.

Underlying earnings came to GBP 60.4 million, which works out at 3.7p for each share, and factoring in how underlying earnings and cash generation have progressed, we put forward a final dividend of 1.65p per share, bringing the year's total to 3.15p. On a like-for-like basis, annualized income has risen by GBP 18 million, which shows real momentum and solid cash conversion. ERV went up 6.9% over the year, and we've kept letting space above ERV — 10% on average, across more than 500 transactions. Given the current ERV value of GBP 237 million, an opportunity exists to add over GBP 40 million in income. Of that figure, GBP 17 million is contracted, and the bulk of rent freeze and step rents ought to be part of running income by year end. A further GBP 6 million sits under offer, which leaves available-to-let vacancy at 2%. Once refurbishment projects finish and the space is let, that will add further to contracted income. Several of these schemes are due to complete this year, and occupational interest is very good. Alongside growing the top line, we're aiming for improved net to gross income capture as time goes on, as we chase chances to run the portfolio with greater efficiency.

Aligning how we manage our assets more completely is going to remain a recurring focus for us. We talk about making headway on cost synergies, and there will be a persistent shift toward an organizational structure that is more effective and efficient. Our aim is to push the EPRA cost ratio down further, toward 30%. Moving on to the balance sheet now. The wholly-owned portfolio was valued at GBP 4.8 billion, a slight decline, 0.8% like-for-like, as rental growth was offset by outward movement in the equivalent yield. JV and associate property accounts for an extra GBP 224 million on our share. Net debt came to GBP 1.5 billion, giving an EPRA loan-to-value ratio of 31%. EPRA NTA rose to 190p per share from 182p in 2023, which includes the impact of completing the merger. Property valuations edged down in the second half of the year. The key factor behind that was yield movement, with equivalent yields expanding by 26 basis points across the year to 4.34%. Excluding residential, the equivalent yield on the commercial portfolio now stands at 4.6%. ERV growth was 6.9%, with momentum carrying through the second half, in line with strong trading performance for our customers. Growth came across all sectors, with hospitality and leisure more than 8% higher and retail up nearly 7%.

Covent Garden and Chinatown both made especially strong contributions, with ERVs rising 8.7% and 7.6%, respectively. Our balance sheet remains strong, with diversified funding sources, substantial covenant headroom, available liquidity, limited capital commitments and solid credit metrics — all of which will improve as income grows. We have finished refinancing the loan that was drawn down as part of the merger to repay the Shaftesbury bonds. That was achieved via a combination of a long-term secured loan of GBP 200 million and a medium-term bank facility of GBP 300 million initially, later upsized to GBP 350 million. We have shielded finance costs from interest rate movements by putting caps and collars in place on SONIA exposure of GBP 350 million for this year and GBP 250 million in 2025. A number of different capital sources are available to us. Our next area of focus will be refinancing the 2026 debt maturities as we evolve the capital structure. We retain access to liquidity through cash and undrawn facilities totaling GBP 486 million at the 31st of December. Cash movements were mainly transaction-related, with operating items and the net investment inflow offset by dividend distributions, non-recurring costs and the use of some liquidity to reduce debt.

All in all, 2023 has seen solid advancement, and we've established several distinct priorities that align with the return targets we've set for the medium term. The key components include substantial rental growth across the years ahead, savings on property and overhead expenses, ongoing capital rotation along with investment in the portfolio, and keeping a robust balance sheet with available liquidity. With that said, I'll now return the floor to Ian.

Thank you. I'd like to offer some additional context around those figures now — what has produced what we see as really robust operational results. The main driver is the outstanding work of our colleagues in securing leases throughout the portfolio during the past 12 months. Ours is a highly proactive approach, shaped by the insight we possess regarding the West End, which I believe no one else has. That mix of proactive effort and insight leaves the business well placed to achieve rental growth, and our focus is on turning the portfolio's reversionary potential into income, cash flows and dividends. As I said before, we achieved ERV growth of roughly 7% over the year. That reflects an enormous volume of leasing — 526 leasing transactions involving all user types. Those deals were in fact signed at 10% above the 22% ERV. That gives us confidence in future growth. This slide simply shows several of the new brands we have brought into the portfolio. They span from independents all the way to major Global Concepts. Yet I think there is consistency in what they offer, and the reason they are drawn to our portfolio is the West End's 7 days a week trading environment together with strong, continuous footfall, which has kept improving quarter-on-quarter now for almost 2 years.

We’re running very low vacancy—roughly 2% is available to let. And I’m sure all of you have questions; Michelle and Andrew will respond and tell you we have a really solid pipeline of demand for space—space that’s available now and that we also plan to bring to market over the next few months. A little on retail: very strong leasing—strong demand for retail leasing. We now have competitive tension across every part of the portfolio and across a broad range of unit sizes. As I said, the team is using data drawn from the combination of the 2 companies to support cross-marketing initiatives, and that’s paying off now, with a number of tenants opening in multiple locations across the portfolio. Altogether, there are about 84 retail transactions, 9.3% ahead of December ERV. Covent Garden had a particularly strong year, with a significant amount of activity. And we’re seeing that combination of the Covent Garden Piazza with Seven Dials and the Opera quarter. Managed as one area, it really creates a compelling proposition for our customers and consumers, and we’re seeing that show up in excellent performance on the ground.

We had a number of new signings that produced 9% ERV growth, a pretty broad set of public realm projects either in the planning stage or already on site, plus some terrific marketing across the year — all of which adds to the buzz around the area. I'm happy to report that the momentum has carried into this year. In the first quarter we signed Nespresso for a new flagship, along with Dolce & Gabbana and Trudon. So there's broad-based interest in the area. At Carnaby as well, we've brought in several new concepts. These include Hollister and OG Kicks, who have both taken space on Foubert's Place. And we've recently added Oakley and also Jott on Carnaby Street itself. As I said, we see a genuinely interesting opportunity to build on the heritage and the brand lineup of Carnaby Street and to evolve the offer — targeting, perhaps, categories with higher store productivity over the years ahead, and drawing inspiration from the energy of the wider Soho environment in the neighboring streets. This is a somewhat new slide for you. What we've tried to show here is really the spread of rents across the portfolio. And we believe that by targeting and bringing in concepts and brands across the price spectrum, we aim to lift customer sales densities and the overall consumer offer.

You can see that wide range of rents right here. So we really do attract an extremely broad spectrum of occupiers. Overall, average rents are in fact significantly lower than in other areas of prime Central London, and in our view that means we offer something that is generally affordable. With customer sales improving, our rents stay affordable and there is room to grow them further. But the whole thing is about nurturing these places, marketing them, and building an environment in which our customers thrive and their sales rise — and all of that underpins rental growth over the long term. Yes, much the same applies to hospitality throughout the business. We have slightly more than 400 units. Demand is strong from casual through to premium, and occupancy is very high. Right now we truly have nothing available to let, and wherever we are introducing new concepts, there are names lined up for them. That really speaks to how strong the trading prospects are for this category. We keep evolving the offer. Covent Garden has seen 13 new concepts open, among them some terrific new restaurants such as Story Cellar. That one is in Seven Dials, along with Gaucho, which sits on James Street leading up to the Piazza, and Notto, a lovely Pasta Bar on Henrietta Street.

Like I said, there are several new concepts we're on site with, among them a significant pre-let to ERGON House in a property that anchors the end of King Street and New Roy. At the investor event, we spoke a bit about Kingly Court. Kingly Court has now been a dining destination for a decade. We're evolving the lineup there, and that has recently included several openings. There's a new Filipino restaurant named Donia, which is excellent. A number of our customers are also upsizing, including Imad's, a Syrian restaurant. So these are a few spots I'd encourage you to visit, though there are many, many more. Interestingly, Chinatown's popularity has risen significantly over roughly the last 12 months. That has led to several debut restaurants as well as very strong renewal rates, and it has produced ERV growth of 7.6% just at Chinatown. Some places you might want to try that have opened recently include restaurants such as Uchi and a Japanese concept named High Yaki, which is located on Newport Place. Just a little on the office market: we're seeing strong demand for our places, and I think that comes as a result of the vibrancy of the offer we provide right in the heart of the West End.