Shaftesbury Capital PLC (SHC) Earnings Call Transcript & Summary

Okay, everybody, thanks for waiting. Good morning. Thank you very much for coming. Welcome to our Interim Results Presentation. Joined today by our ExCo Situl, Michelle, and Andrew. Usual format, I'm going to start with a brief overview. Situl will then go through the financial review, and then I'll talk through the portfolio and we'll finish with a summary and hopefully some questions. So we're very pleased to report strong performance across the business. Having set clear priorities, we are delivering on strategy. Conditions across the West End's occupational and investment markets have been improving for some time now, and this is reflected in more stable yields and valuations have returned to growth. We're leasing well ahead of ERV, delivering rental growth and enhanced valuations. Footfall across our West End portfolio is strong, with high occupancy levels and customers reporting continued sales growth. We're converting the portfolio's reversionary potential into contracted income and have completed the sale of properties ahead of valuation and reinvested in target acquisitions, enhancing the quality of the portfolio. Against an improving market backdrop, we're confident that we can deliver our medium-term growth targets and are well positioned to take advantage of market opportunities. Shaftesbury Capital owns an impossible to replicate portfolio. It's located in some of the most iconic destinations across London's West End, Covent Garden, Carnaby/Soho and Chinatown. The GBP 4.8 billion portfolio comprises 2.7 million square feet of lettable space across 640 predominantly freehold buildings, with approximately 2,000 individual units. The portfolio is well balanced by value with 34% retail, 34% hospitality, and 32% in the upper floors offering high-quality office and residential uses. Our properties are located in the heart of the West End's entertainment and cultural attractions are now benefiting from the Elizabeth Line, which has enhanced connectivity for visitors, shoppers, workers, and tourists. The West End has an unrivalled variety of cultural attractions, attracting approximately 200 million domestic and international visitors every year. The portfolio is now benefiting from strong international tourism numbers this summer and you'll have noticed that Heathrow Airport recently reported its busiest day ever for passenger numbers. Just turning to results, ERV is up 3.2% like-for-like to GBP 241 million. The valuations increased by 1.4% like-for-like to GBP 4.8 billion driven by ERV growth. NTA increased by 1.6% to 193.4p per share and the total accounting return for the period was 2.5%. Cash rents increased by 3.9%. There has been continued progress on cost efficiencies and we have a strong balance sheet and access to significant liquidity. Underlying earnings for the period were 1.9p per share and the Board has declared an interim dividend of 1.7p per share. So the performance over the period demonstrates the exceptional qualities of the portfolio delivering growth in cash rents, dividends, ERV, and valuation. Situl will now present the financial review.

Thanks, Ian. Good morning, everyone. As you've heard, there has been strong performance and progress in the first half. So, starting with the income statement. As a reminder, the first half of 2023 reflects completion of the merger during that period. Gross rents in the first half were GBP 98.8 million, reflecting the impact of disposals and strong letting and asset management activity. In aggregate, commercial lettings and renewals were 8% ahead of ERV and 18% ahead of previous passing rents. Residential deals were 7% ahead. Underlying net rental income of GBP 80.7 million includes the effect of net disposals during the period, as well as the full effect of asset sales in H2. Administration costs were GBP 20.1 million, showing good progress against the second half of last year. The EPRA cost ratio is 38%, which compares with over 50% at the time of the merger. We continue to work towards reducing this to 30%, which will be achieved through income growth and further efficiencies. Finance costs were reduced to GBP 27.9 million, reflecting the effect of investment, refinancing and hedging. We will focus on managing the absolute level of finance costs to ensure efficient conversion of income to earnings. Underlying earnings increased to GBP 34.2 million, equivalent to 1.9p per share. Taking into account, progression in cash generation and underlying earnings, we've increased the first half dividend to 1.7p per share, compared with 1.5p in the first half of last year. The main points on rents, as you can see on this slide, are that contracted income is up. There is significant income growth to come. ERV has increased and we are letting ahead of ERV. In terms of the detail, annualized income has increased to GBP 196.5 million, up 3.9% over the first half, demonstrating continued strong momentum. ERV was up 3.2% like-for-like over the period. Pricing across over 200 leasing transactions was at a 7% premium to ERV. There is a high degree of visibility on growing income through rent freeze falling into running income over the coming months, units under offer and pre-letting of space currently under refurbishment. So turning to the balance sheet. The valuation of the wholly-owned portfolio at GBP 4.8 billion was up 1.4% like-for-like. Net debt was broadly unchanged at GBP 1.5 billion, resulting in loan to value of 30%. EPRA NTA increased from 190 to 193p per share, driven primarily by the valuation movement. The main driver for the increase in property valuations was ERV growth of 3.2%. The equivalent yield moved up slightly to 4.4%, which equates to 4.6% on the commercial portfolio, excluding residential. Our leasing activity has driven further growth in ERV and we've seen consistent sales growth for our customers. However, ERV overall remains below pre-pandemic levels. Notably, retail ERVs are 15% lower. Overall, average ERV for the portfolio is GBP 88 per square foot, making the tone of rents affordable for our customers relative to sales productivity and given the attractiveness and amenity value of our highly sought after locations. Valuations at GBP 1,764 per square foot remain attractive against historic benchmarks, particularly given limited supply of new space. We maintain a strong balance sheet with access to significant liquidity, limited capital commitments, diversified source of funding and robust credit metrics which will be enhanced with income growth. The running average cash cost of debt is 4% or 3.3% taking into account interest income and hedging. Finance costs are well protected against interest rate movements with caps and collars in place for 2024 and '25. With 30% loan to value and 2.9x interest cover, there is significant headroom against debt covenants. Building on the refinancing activity last year, we have completed the first extension on the GBP 350 million loan, taking its maturity to December '27. In addition, we have put in place a new unsecured loan of GBP 75 million for 5 years. GBP 95 million of debt maturing in the second half will be repaid with group liquidity. We have access to a number of different sources of capital and we will continue to evolve the capital structure as we refinance medium-term debt maturities. The main movements in cash during the period were driven by operating items, the full year dividend payment, net investment inflows and financing and other items. We maintain access to significant liquidity through cash and undrawn facilities, totaling GBP 484 million net of debt repayments. So to summarize, there has been good progress overall in the first half and we will continue to focus on our priorities. Firstly, meaningful rental growth with a medium-term target of 5% to 7%. Second, efficiencies in property and overhead costs working towards an EPRA cost ratio of 30%. Third, progression in underlying earnings and dividend distributions. Four, investing in and further enhancing the portfolio. And 5, maintaining balance sheet strength and flexibility. And with that, I will now hand over to Ian.

Thanks, Situl. The occupational market in the West End continues to improve. Michelle's team has had a great deal of leasing success across the portfolio with continued ERV growth over the past 18 months. This slide shows some of the new brands introduced and these range from independent to global concepts. These are attracted by the 7 days a week footfall and trading environment. Overall, in the period, 217 new leasing transactions completed, which represents GBP 28 million of contracted rent. This was actually 7% ahead of December '23 ERV and approximately 16% ahead of previous passing rents. We're very pleased with our activity and it's translating now into rental and pleasingly valuation growth. Portfolio vacancy is low with just 2.7% available to let. There is positive momentum going into the second half and this is underpinned by strong tenant demand. We're seeing very strong leasing market for retail and positive trading conditions across the portfolio. Our focus is on highly productive categories and we're seeing good performance within premium concepts, health and wellness, and performance wear. The increased scale and depth of the portfolio now provides opportunities for customers to expand and to move around. In fact, over 20 customers have upsized or taken additional units across the portfolio. These include Charlotte Tilbury, Arc'teryx, Axel Arigato and Finisterre, among many others. As we implement strategy to unify the Covent Garden district, we're seeing the benefit of incorporating Seven Dials and the Opera Quarter as part of 1 destination through leasing, asset management and marketing. We've been able to make significant changes in Seven Dials at pace, which is reinforcing consumer interest in the wider Covent Garden area and contributed to delivering ERV growth of 4% in the period. We're building on the strong brand line-up in Soho and beginning to evolve the offer on Carnaby Street with several new retail brands signed or under offer. As you can see here, we have a wide range of rents in terms of Zone A from GBP 200 to GBP 1,000 square foot Zone A, and they appeal to multiple types of occupiers. We target brands across the price spectrum and market our locations to enhance sales densities and the overall consumer offer. Average Zone A rents increased by 4% to GBP 480 per square foot during the period, and the portfolio is well positioned to deliver longer-term sustainable rental growth with the weighted average rents more than 50% below the prime central London average. You'll find further information on this in the appendix. It's good demand from casual to premium hospitality concepts for dining. We continue to maintain high occupancy with less than 1% of the portfolio available to let. During the period, we introduced a number of new concepts to Covent Garden and we continue to progress the line-up at Kingly Court, where we've redeveloped 2 flagship units into 1 across 2 floors, creating a larger destination or dining opportunity. We're pleased to have introduced al fresco dining to Carnaby Street at the gateway to Kingly Court, which we anticipate will improve overall dwell times. In Chinatown, through an active approach, we've introduced more variety to the area, increasing the Pan Asian offering at a range of price points, which is delivering rental growth. The vibrancy of our locations is generating strong office leasing interest. Carnaby and Covent Garden are capturing this demand. They offer high amenity value and excellent environmental credentials. We're currently on site with a number of refurbishments, including the Floral and 22 Ganton Street, which will be delivered later this year. Approximately 50% of the office refurbishments are pre-let or under offer at average rents in excess of GBP 100 per square foot. The residential portfolio continues to perform well with interest from a broad range of customers. During the first half, demand has strengthened with competitive bidding and minimal voids. To date, 118 leasing transactions have occurred with rents achieved 7% ahead of previous passing. We're actively investing in our 3 core locations, Covent Garden, Carnaby/Soho and Chinatown, and there are a number of asset management and refurbishment initiatives underway and in the pipeline. The investment market in which we operate has been active now for some time with transactions demonstrating demand for high-quality prime central London real estate. We are well progressed on capital recycling activity with proceeds of GBP 216 million realized at a premium to valuation and GBP 86 million pounds reinvested in target acquisitions enhancing the quality of our exceptional portfolio, and against an improving market backdrop, we're looking at opportunities to expand, which will add to our growth prospects. Our sustainability strategy is designed to minimize the environmental impact of the business. We aim to future proof our largely heritage properties, creating sustainable and vibrant places where people enjoy visiting, working and living. We're committed to becoming net 0 by 2030 and we continue to reuse, renew and improve our properties to enhance energy performance credentials. 65% of the portfolio now has EPC ratings of A or B, an increase of 9 percentage points in the period. We're also committed to supporting the communities in the West End and we've recently embarked on a review of our community investment strategy to closer understand stakeholder needs in order to support the vibrant communities and make our places thrive. So, in summary, we've made an excellent start to the year. Our clear strategy is delivering rental income and value growth. Footfall is high, with continued customer sales growth and there's limited vacancy. There are excellent levels of activity, a strong leasing pipeline and a number of customers upsizing across the portfolio. We expect continued performance with rents and valuation, which are well underpinned. We aim to deliver excellent service to our customers whilst progressing towards an effective and efficient cost base. And through strategic investment, we'll continue to enhance the quality of our exceptional portfolio and are looking at opportunities to expand, adding to growth prospects. Our performance reaffirms our confidence in our targets of 5% to 7% rental growth and 8% to 10% total accounting return over the medium-term. And with a knowledgeable and ambitious team, Shaftesbury Capital is positioned to grow rents, values, earnings and dividends and realize the long-term potential of our real estate as the leading central London mixed use REIT. So that concludes the formal presentation. We'll now move to Q&A. For those of you that are on the wires, if you let the operators know and they'll come to us. Perhaps we start with questions from the floor though. It'd be grateful if you could just mention your name and also the company you represent. Thank you very much. James? I seem to have the table with the leg in it.

It's James Carswell from Peel Hunt. Yes, really strong rental growth. I guess, when we look at the kind of medium-term returns you set out on the last slide at the Capital Markets Day, the 1 piece that's missing, yields kind of continue to move out. So you haven't quite met the total property return. I'm just wondering, what are your thoughts looking ahead. I mean, when you look at your yield, I'm pretty sure there's lots of uncertainty. There's not lease interest rates. But sat here today, does it feel like the yield is about right? Do you think it's gone too far? Or do you think it's got further to go out?

Look, I think they're at the wider range that one would have seen historically in the West End. If you look at the equivalent yield on the commercial element of the portfolio, it's now at 4.6%. And so, all we can do is deliver the evidence for the independent valuers. So it's really about growing rents. But I would hope that if rents do continue to grow in the way that we're seeing at the moment, that should translate into valuation growth.

Miranda Cockburn from Berenberg. Could you just give us a little bit of an update on Lillie Square? Just really what your sort of plans are for that remaining investment? And then also, I don't know, you probably can't add anything on Longmartin, just whether or not there's any update there?

Yes, I mean, Lillie is a small part of the portfolio, but the various phases that we've completed are either sold or they've been let, so there's little bit more land to come forward over time. But effectively the project's actually been received very well. So it's now a question of just running it through to a conclusion. Do you want to talk about Longmartin?

Yes. Longmartin, look, again, it's a relatively small part of our portfolio, but as you'll be aware, the -- our JV partner there had the ability to exercise a change of control, which they've elected to consider, and we're in ongoing negotiations and discussions with them at the moment.

Max Nimmo at Deutsche Numis. Just a quick one. On the 5-year unsecured term loan, could you give a bit more color on that in terms of some of the terms there? And, obviously, you've done quite a good job in terms of smoothing out the maturity profile. What's the kind of next hurdles that you see and what you're looking to do?

Thanks, Max. Yes. The -- very pleased to have got the 5-year unsecured loan done on essentially the same terms as the 3-year loan that we announced at the end of last year. So that was done with 1 bank with similar covenant package and a spread inside 200 basis points. But the important thing is, it's 5-year maturity with extension options. In terms of the rest of the maturity profile, we have extended out the initial maturity on that GBP 350 million loan as well. So that's gone from December '26 to December '27. So our weighted average now is around 5 years. Next on the agenda really in terms of refinancing activity is the 2026 and beyond maturities. So we have time for those. We also have liquidity, remember, of around GBP 500 million. So I think now it's really kind of carefully shaping the capital structure for the next number of years and making sure that we kind of maintain balance sheet strength and flexibility. The encouraging thing, just 1 point to add, is that, all of those markets that we're in and that we talk to, whether it's the unsecured or the secured bank market, the insurance market, PP market, they are all receptive towards lending to this asset class and to our estates. So that's very encouraging.

Any more questions from the room? Yes, James, you have a follow-up?

Ask another one. Just on the rental term, and you highlighted across the portfolio, you've got a pretty big range of kind of rental tones from GBP 1,000 per square foot down to pretty affordable for the West End. And just in terms of rental growth, are you seeing any kind of -- any parts in terms of that tone performing particularly strongly or potentially weekly? Or is it pretty uniform in terms of growth across the price points?

Thanks, James. You're right, there is quite a broad spread across the entire portfolio. I think one of the things I'd highlight, which has actually probably been a feature in particular for the last 12 months is just how well spread the rental growth has been and it has been across all of our portfolios, but also at every single sort of use level. So -- and again, if we look at the pipeline, which is really what we're focused on, what the forward pipeline looks like, that also backs that up as well. So we feel pretty well set for the second half and beyond.