Shaftesbury Capital PLC (SHC) Earnings Call Transcript & Summary

All right, everyone — thanks for hanging on. Good morning, and many thanks for being here. Welcome to the interim results presentation. With us today are our ExCo colleagues Situl, Michelle, and Andrew. As usual, I'll begin with a quick overview. After that, Situl will take everyone through the financial review, then I'll cover the portfolio, and we'll wrap up with a summary and, hopefully, some questions. We're delighted to report that the business has performed strongly. With clear priorities in place, our strategy is being delivered. For a while now, conditions in both the occupational and investment markets of the West End have been getting better, and you can see that in steadier yields, while valuations are growing again. Our leasing is running well ahead of ERV, which is driving rental growth and lifting valuations. Across our West End portfolio, footfall is robust, occupancy is high, and customers tell us their sales keep growing. We're turning the portfolio's reversionary potential into contracted income, we've sold properties above valuation, and we've put that capital back into target acquisitions, which raises portfolio quality. With the market backdrop improving, we have confidence in hitting our medium-term growth targets and we're well placed to capitalise on opportunities in the market. Shaftesbury Capital owns a portfolio that cannot be replicated.

This sits in several of London's most iconic West End spots — Covent Garden, Carnaby, Soho, and Chinatown. The GBP 4.8 billion portfolio is made up of 2.7 million sq ft of lettable space spanning 640 buildings that are predominantly freehold, with roughly 2,000 individual units. By value the portfolio is well-balanced: 34% retail, 34% hospitality, and 32% in the upper floors, which offer high-quality office and residential uses. Our properties sit at the heart of the West End's entertainment and cultural attractions and are now benefiting from the Elizabeth line, which has improved connectivity for visitors, shoppers, workers, and tourists. The West End offers an unrivaled variety of cultural attractions, drawing approximately 200 million domestic and international visitors each 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. Valuations rose by 1.4% like-for-like to GBP 4.8 billion, driven by ERV growth. NTA increased by 1.6% to GBP 1.934 per share, and the total accounting return for the period was 2.5%. Cash rents increased by 3.9%. We've made continued progress on cost efficiencies, and we have a strong balance sheet and access to significant liquidity.

For the period, underlying earnings came in at 1.9 pence per share, and an interim dividend of 1.7 pence per share has been declared by the board. What the period's performance shows is the exceptional qualities of the portfolio, delivering growth in cash rents, dividends, ERV, and valuation. Situl will now take us through the financial review.

Thanks, Ian, and good morning to everyone. As you've already heard, we delivered strong performance and made solid progress during the first half. Beginning with the income statement — just to remind you, the first half of 2023 reflects completion of the merger during that period. Gross rents for the first half came in at GBP 98.8 million, which reflects the impact of disposals along with strong letting and asset management activity. Taken together, commercial lettings and renewals came in 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 stood at GBP 20.1 million, showing good progress against the second half of last year. The EPRA cost ratio is 38%, compared 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 rose to GBP 34.2 million, which works out to GBP 0.019 per share. Given how cash generation and underlying earnings have progressed, we've raised the first half dividend to GBP 0.017 per share, versus GBP 0.015 per share in the same period a year ago. On rents, the key points — as this slide shows — are that contracted income is higher, there's meaningful income growth still to come, ERV has gone up, and we're letting above ERV. In terms of the detail, annualized income has risen to GBP 196.5 million, an increase of 3.9% across the first half, which shows continued strong momentum. ERV was 3.2% higher like for like during the period. Across more than 200 leasing transactions, pricing came in at a 7% premium to ERV. We have a high degree of visibility on income growth from the rent freeze dropping into running income over the months ahead, from units under offer, and from pre-letting of space that's currently under refurbishment. So moving to the balance sheet, the wholly owned portfolio was valued at GBP 4.8 billion, up 1.4% like for like. Net debt was broadly flat at GBP 1.5 billion, giving a loan-to-value of 30%. EPRA NTA went from 190 to 193 pence per share, mainly as a result of the valuation movement.

Property valuations rose primarily because ERV grew 3.2%. The equivalent yield ticked up a little, to 4.4%, which works out to 4.6% across the commercial portfolio once residential is excluded. Leasing activity has pushed ERV higher still, and customer sales have grown steadily. Even so, ERV as a whole is still under where it stood before the pandemic — retail ERVs in particular sit 15% lower. Across the portfolio, average ERV comes to GBP 88 per sq ft, so rents stay affordable for our customers when set against sales productivity, especially given how attractive and immune our highly sought-after locations are. At GBP 1,764 per sq ft, valuations remain appealing versus historic benchmarks, above all with new space in limited supply. Our balance sheet stays strong, with access to substantial liquidity, modest capital commitments, funding from diversified sources, and robust credit metrics — all of which income growth will strengthen further. The running average cash cost of debt is 4%, or 3.3% once interest income and hedging are taken into account. Finance costs are well shielded from interest rate movements, since caps and collars were put in place in 2020, 2024, and 2025. With 30% loan-to-value and 2.9x interest cover, we have considerable headroom against debt covenants.

Continuing from the refinancing work done last year, the initial extension on the GBP 350 million loan has now been finalized, which pushes its maturity out to December 2027. Beyond that, a fresh unsecured facility of GBP 75 million has been arranged, running for five years. Group liquidity will be used to repay GBP 95 million of debt that comes due in the second half. A range of capital sources remains available to us, and our capital structure will keep developing as medium-term maturities get refinanced. Operating items, the full year dividend payment, net investment inflows, plus financing and other items were the primary drivers of cash movements over the period. Significant liquidity stays within reach via cash and undrawn facilities amounting to GBP 484 million, net of debt repayments. To sum up, the first half has seen solid progress across the board, and our priorities will remain the focus going forward. First, meaningful rental growth, with a medium-term target of 5%-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. Five, maintaining balance sheet strength and flexibility.

Having said that, I'll pass things over to Ian at this point.

Thanks, Situl. Out in the West End, the occupational market keeps getting better. Michelle's team has enjoyed a lot of leasing success right across the portfolio, and ERVs have carried on growing over the last 18 months. On this slide you can see a few of the new brands we've brought in, and they run from independent names all the way to global concepts. What draws them is the footfall and trading environment that comes with being open seven days a week. All told, during the period we completed 217 new leasing transactions, which works out to GBP 28 million of contracted rent. That came in 7% above the December 2023 ERV and roughly 16% above previous passing rents. We're really pleased with what we've done, and it's now feeding through into rental growth and, happily, into valuation growth too. Portfolio vacancy is low — only 2.7% is available to let. There's positive momentum as we head into the second half, and strong tenant demand is what's underpinning it. Across retail we're seeing a very strong leasing market, along with positive trading conditions throughout the portfolio. Our focus is on highly productive categories, and we're getting good performance in premium concepts, health and wellness, and performance wear. With the portfolio now bigger and deeper, customers have opportunities to expand and to move around. In fact, more than 20 customers have upsized or taken additional units across the portfolio, and among them are Charlotte Tilbury, Arc'teryx, Axel Arigato, and Finisterre, along with many others.

So as we carry out our plan to bring the Covent Garden district together, we are already seeing gains from treating Seven Dials and the Opera Quarter as a single destination across leasing, asset management, and marketing. In Seven Dials we have managed to make substantial changes quickly, and that is strengthening shopper interest across the broader Covent Garden area, which helped us deliver ERV growth of 4% in the period. We are building on the strong brand lineup in Soho and starting to reshape what Carnaby Street offers, with several new retail brands either signed or under offer. As this slide shows, our Zone A rents span a wide range, from GBP 200 to GBP 1,000 per sq ft Zone A, and they appeal to many kinds of occupiers. We go after brands across the price spectrum and market our locations to lift sales densities and improve the overall consumer offer. Average Zone A rents rose by 4% to GBP 480 per sq ft during the period, and the portfolio is well placed to deliver sustainable rental growth over the longer term, since weighted average rents sit more than 50% below the prime central London average. You will find more detail on this in the appendix. Demand is good from casual through to premium hospitality concepts for dining, and we continue to keep occupancy high, with less than 1% of the portfolio available to let.

In the course of this period, we brought several new concepts into Covent Garden, and at Kingly Court we keep advancing the tenant mix, where two flagship units have been redeveloped into a single space spanning two floors, which creates a bigger opportunity for destination dining. We are glad to have brought al fresco dining to Carnaby Street right at the entrance to Kingly Court, and we expect this to lift overall dwell times. In Chinatown, by taking an active approach, we have added greater variety to the area, growing the Pan Asian selection across a range of price points, and that is producing rental growth. The vibrancy of our locations is drawing strong office leasing interest. Carnaby and Covent Garden are seizing that demand. They provide high amenity value along with excellent environmental credentials. We are presently on site with several refurbishments, among them The Floral and 22 Ganton Street, which are due for delivery later this year. Roughly 50% of the office refurbishments are pre-let or under offer, at average rents above GBP 100 per sq ft. The residential portfolio keeps performing well, with interest coming from a wide range of customers. Over the first half, demand has grown stronger, with competitive bidding and minimal voids. As of today, 118 leasing transactions have taken place, with rents achieved 7% ahead of previous passing.

We are actively putting money into our three main areas — Covent Garden, Carnaby, Soho, and Chinatown — and we have quite a few asset management and refurbishment projects both underway and in the pipeline. For a while now, the investment market we work in has been busy, and deals show there's demand for prime central London real estate of high quality. On capital recycling, we've made good progress: GBP 216 million of proceeds has been realized at a premium to valuation, and GBP 86 million has been reinvested into target acquisitions, which raises the quality of our exceptional portfolio. With the market backdrop improving, we're examining opportunities to expand, and those will add to our growth prospects. Our sustainability strategy is built to minimize the environmental impact of the business. Our goal is 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 zero by 2030, and we keep reusing, renewing, and improving our properties to strengthen energy performance credentials. EPC ratings of A or B now apply to 65% of the portfolio, up 9 percentage points in the period. We're also committed to supporting the communities in the West End, and we've recently begun a review of our community investment strategy so we can understand stakeholder needs more closely, in order to support the vibrant communities and make our places thrive.

To sum up, the year has gotten off to a really strong start. Our strategy is clear, and it's delivering growth in both rental income and value. Footfall is high, customer sales keep growing, and vacancy remains limited. Activity levels are excellent, our leasing pipeline is strong, and quite a few customers are upsizing across the portfolio. We anticipate ongoing performance in rents and valuations, both of which are well underpinned. Our goal is to provide excellent service to customers while moving toward an effective and efficient cost base, and through strategic investment we'll keep improving the quality of our exceptional portfolio and are exploring opportunities to expand, which adds to growth prospects. Our results reaffirm our confidence in our targets of 5%-7% rental growth and 8%-10% total accounting return over the medium term. With a knowledgeable and ambitious team, Shaftesbury Capital is positioned to grow rents, values, earnings, and dividends, and to realize the long-term potential of our real estate as the leading central London mixed-use REIT. That brings the formal presentation to a close. 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.

Could you please state your name and the company you're with? Thanks so much. James? It looks like I've got the table with the leg in it.

Good morning, this is James Carswell calling from Peel Hunt. Yeah, the rental growth is really strong. I suppose, if we consider the sort of medium-term returns you laid out on the last slide during the capital markets day, the one element that's absent is that yields kind of keep moving outward, so you haven't quite reached the search property return. I'm just wondering, what's your thinking going forward? I mean, when you look at your yield, I appreciate there are plenty of uncertainties, interest rates not least among them, but sitting here today, does it feel as though the yield is roughly right? Do you think it's moved too far, or do you think there's further to go outward?

Honestly, I'd say they sit toward the broader end of what the West End has traditionally shown. When you check the equivalent yield on the commercial portion of the portfolio, it currently stands at 4.6%. So, as I see it, our job is simply to supply the evidence to the independent valuers — meaning the real driver here is rent growth. Still, my expectation would be that should rents keep rising the way we're witnessing right now, that ought to feed through into valuation growth.

Appreciate it.

Miranda Cockburn from Berenberg here. Would you mind giving us a brief update on Lillie Square — really just what your plans are for that remaining investment? And then, I don't know, you probably can't say anything more on Longmartin, but is there any update there?

I mean, Lillie is a modest piece of the portfolio, but the different phases we've finished are either sold or have been let. So a bit more land will come forward over time, yet the project has in effect been received very well, so now it's just a matter of running it through to a conclusion. Do you want to talk about Longmartin?

Okay, Longmartin — so again, this is a fairly small piece of what we hold overall, but as you know, our joint venture partner in that case had a right to trigger a change of control, and they've chosen to look into that, and right now we're still in the middle of negotiations and talks with them.

Max Nimmo here from Deutsche Bank — just a quick question. Regarding that 5-year unsecured term loan, could you share a little more detail on some of the terms involved? And clearly, you've done a pretty solid job of smoothing out the maturity profile. What do you see as the next hurdles, and what are you aiming to do? Thanks.

Thanks, Max. Yeah, we're really pleased to have completed that five-year unsecured loan on basically the same terms as the three-year facility we announced at the end of last year. So it was done with a single bank, with a similar covenant package, and a spread inside 200 basis points. But the key point is that it's a five-year maturity with extension options. As for the rest of the maturity profile, we've also pushed out the initial maturity on that GBP 350 million loan. So that has moved from December 2026 to December 2027. So our weighted average is now around five years. Next up, really when it comes to refinancing activity, is the 2026 and beyond maturities, so, you know, we have time for those. We also have liquidity, remember, of around GBP 500 million. So I think now it's really about carefully shaping the capital structure for the next number of years and making sure that we kind of maintain balance sheet strength and flexibility. But you know, the encouraging thing, just one 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 stakes.

That's really encouraging.