Shaftesbury Capital PLC (SHC) Earnings Call Transcript & Summary

The folks at the back of the room have given us the thumbs up, so that means the telephone lines are live. I believe we can get started. Good morning, and thank you all for attending. I realize your day is extremely busy, since we're kind of launching the interim results season for our sector. So, welcome. The agenda today is the usual one. We're very happy with how the business performed during the first half, and it's a pleasure to walk you through a solid set of results. I'll start with a brief overview. After that, Situl will guide you through the financial review. Then I'll provide a bit more detail on what's happening in the portfolio, and we'll wrap up with a summary and the outlook. Andrea and Michelle will be here for Q&A. It was a highly successful first half. We achieved strong performance, with rents, values, income, and dividends all rising, while also reinforcing our financial position and generating meaningful opportunity for the group. You're all aware that macroeconomic challenges keep affecting the economy, and those are well documented. That said, I'm glad to say that conditions in the West End's occupational market are still very active indeed. We keep seeing favorable trends in footfall and sales across our Prime West End portfolio, and the team has successfully leased space well ahead of ERV, with excellent activity levels, limited vacancy, and a robust pipeline.

For the period, we’re pleased to have formed a long-term partnership on Covent Garden worth £2.7 billion with the Norwegian Sovereign Wealth Fund, NBIM — something that underscores the fundamental value and attractiveness of our portfolio. We kept growing the portfolio through £55 million of acquisitions in the period, and a number of properties are currently under review. With stronger liquidity, we’re well placed to seize market opportunities as they come up. The West End remains the leading destination for culture, retail, dining, leisure, and entertainment, drawing roughly 200 million visitors each year. Shaftesbury Capital’s irreplaceable portfolio of properties situated in the heart of the West End offers the prospect of high occupancy, low capital requirements, and dependable, growing long-term cash flows. Thanks to our deep customer relationships and creative approach, we’re able to create value in must-have locations throughout the West End. Now, turning to a few highlights of the results: valuation rose 3% like-for-like to £5.2 billion, driven by a 2.9% increase in ERV with stable valuation yields. NTA was up 3.3%, giving a total accounting return of 4.2% for the period, which is in line with our medium-term targets. Rental income grew by 8%, and underlying earnings were up 16% for the half year.

An interim dividend of £1.9 per share has been declared by the board. Our balance sheet is strong, and we can reach substantial liquidity, with leverage remaining low. In my view, what we achieved during the period shows the exceptional qualities of our portfolio, with growth delivered in cash rents, dividends, ERV, and valuation. I'll pass things to Situl so he can walk you through the specifics of the financial review.

Thank you, Ian, and good morning to all of you. As you've already heard, the business has made substantial progress on many fronts. Financial performance in H1 was positive, with rental income, earnings, dividends, valuations, and net tangible assets all growing. We bolstered the balance sheet and improved the group's financial flexibility. After selling a 25% stake in Covent Garden to Norges Bank Investment Management, we're showing these figures on a proportionately consolidated basis. Because that deal closed halfway through the period, Covent Garden is effectively counted at 75% from Q2 onward. The IFRS figures in the results announcement fully consolidate Covent Garden, with a one-line adjustment for the non-controlling 25% interest. Over the period, the group saw a gross cash inflow of £574 million. Turning to the income statement, gross rents rose to £98.7 million, an 8.2% like-for-like increase, which shows a strong stretch of leasing and asset management. Overall, commercial lettings and renewals came in 10% above ERV and 24% above prior passing rents. Management fee income relating to the 25% of Covent Garden held by our partner accounts for most of the other income of £1.1 million. Administration costs came to £20.4 million, reflecting ongoing efficiencies along with a higher share option charge, which rose £2.5 million versus H1 last year.

Additional income growth and operational efficiencies are being targeted for H2 and later periods. Finance costs are down to £23.7 million thanks to interest income on cash and lower net debt. Underlying earnings rose 16% to £40.6 million, which works out at £2.2 per share. The interim dividend has been raised to £1.9. Leasing and asset management activity helped lift ERV by 2.9% over the period to £260.8 million. As the chart shows, there's scope to grow passing rents significantly. Our portfolio carries embedded reversion, and we have good visibility on the income growth potential at each of our locations. In particular, £18.7 million of income is contracted or tied to rent-free periods, most of which will convert into running income over the months ahead. Moving to the balance sheet, the market value of the portfolio under management rose 3.1% like for like to £5.2 billion. Net debt has come down from £1.4 billion to £0.8 billion on a group share basis, giving loan-to-value of 17%. NTA per share climbed 3.3% over the period to £2.07, driven mainly by the valuation movement. Rental growth was the primary factor behind the rise in property valuations.

ERV rose in every sector and across each of our estates. The equivalent yield holds steady at 4.5% overall, and at 4.6% for commercial assets. Portfolio average ERV stands at £95 per square foot, while overall valuations have reached £1,893 per square foot. We believe customer sales are roughly 30% above 2019 levels in nominal terms, which is well ahead of ERVs. That highlights how relatively affordable and appealing our estates are. Our balance sheet remains strong, with low leverage and substantial access to liquidity. Alongside cutting loan-to-value, we have improved net debt to EBITDA, which now sits at a multiple of 6, compared with 11 times before. Leverage is comfortably inside the range we have indicated, giving us flexibility to put proceeds toward growing the business by investing in existing assets and new opportunities, both in Covent Garden and throughout Chinatown, Soho, and Carnaby. In the period, we repaid a portion of the Canada Life term loan, and we are positioned to repay £275 million of exchangeable bonds when they come due in 2026. We will keep reviewing financing opportunities and capitalize on the group's attractive credit profile. In summary, the first half brought strong financial performance, and we have increased our flexibility.

Our attention will stay on the areas we've prioritized. First, growing rents and finding additional efficiencies, which will produce greater earnings and dividends. Second, putting capital to work in ways that add value. And third, keeping the balance sheet strong and flexible. At this point I'll return the call to Ian.

Thanks, Situl. Let me give you a quick recap of the portfolio. As you know, our collection of properties is impossible to replicate. These rank among the most iconic destinations in London's West End. The focus is on Covent Garden, Carnaby, Soho, and Chinatown. Under management, that portfolio stands at £5.2 billion. It takes in roughly 2.7 million square feet of lettable space spread over about 640 buildings, mainly freehold, and there are some 1,900 individual tenancies. Broadly speaking, the portfolio splits one-third retail, one-third F&B, and the balance sits in the upper floors, which provide office and residential accommodation. Our occupier mix is diverse, so we have a wide range of income streams as well as a wide range of unit sizes and rental tones. As I said, leasing activity has been especially positive, with strong occupational demand. What we're seeing is that tenants tend to prioritize the best locations, and we've had leasing success right across the portfolio alongside continued ERV growth. This slide highlights some of the new brands the team has brought in, and they range from independent to global concepts. Generally, what draws them is the seven days a week footfall and trading environment that we offer. All told, some 193 new leasing transactions were completed, £19.2 million of contracted rent, roughly 9% ahead of the December 2024 ERV, and pleasingly 16% ahead of previous passing rents.

The portfolio's vacancy rate sits at a low 2.5%. Our team operates in a highly proactive and imaginative way, guided by extensive insight into activity across the West End, and that does put the company in a position to achieve rental growth by turning the portfolio's embedded reversionary potential into contracted income. A few words on the subsectors. The retail market is very strong. We've seen particularly robust demand spanning the range of activities, with trading conditions generally positive. We've observed very good performance in some of the more productive categories, including premium, lifestyle, and accessories. Over recent months, we've brought a number of new brands to Carnaby Street, which pleases us in particular as we enhance and evolve the offer there. Charlotte Tilbury is set to open a new flagship on Carnaby Street later this year, following their recent upsizing to a new flagship on the corner of the Piazza at Covent Garden. Covent Garden, for its part, keeps drawing high-quality brands, among them Nespresso and Tula, to name just a couple. These were brought in during the first half of the year. All of this has helped drive a 4% improvement in retail ERV across the portfolio. We are home to roughly 391 individual food and beverage outlets.

Operators, I believe, are drawn to our lively sites, the walkable settings we offer, and that sense of a managed estate they get from being one of our customers. We've had quite a few signings around Covent Garden. Among them is Harry's Restaurant and Bar, set to launch on a flagship site at the Piazza. Demand in Soho remains robust, with plenty of new signings completed during the period. Over in Chinatown, we've brought in greater variety. We've expanded the Pan-Asian offering across a range of price points. Portfolio-wide, roughly 21 new lettings in all, plus renewals inked around 18.8% above the December 2024 ERV. It's those lively sites, together with the standard of accommodation and management, that keeps drawing office leasing demand. Carnaby and Covent Garden deliver high amenity value and excellent environmental credentials, and we're still leasing above £100 a square foot with demand holding positive. Over the period, we also completed 100 new residential transactions, achieved at rents roughly 3% above prior passing levels. We have a solid pipeline of asset management opportunities and refurbishment initiatives throughout the portfolio. Around 4.5% of ERV is presently under refurbishment, and those properties are expected to be delivered over the next 12 to 18 months.

We keep rotating assets both within the portfolio and out of it as we go on improving the quality of the portfolio overall. During this year, we sold assets worth roughly £12 million, and we invested about £55 million in target acquisitions in Soho and Covent Garden. As I said earlier, a number of properties are presently being reviewed. As you're aware, in the period we brought sovereign capital into the Covent Garden portfolio, and working with NBIM draws on our operational expertise and our property portfolio as we strengthen investment and expansion opportunities in the years ahead. To sum up, the first half of the year has been successful, and positive momentum continues into the second half. Despite those macroeconomic challenges, the West End keeps performing strongly, with high footfall and low vacancy. Activity levels are excellent and the leasing pipeline is strong. Through our partnership with NBIM, two long-term investors come together who share confidence in Covent Garden's growth and ambitions for it. Shaftesbury Capital's irreplaceable portfolio is expected to deliver sustainable income and value growth. Our active approach, together with the positive market fundamentals of the West End, gives us confidence in our medium-term targets of 5%-7% rental growth.

Assuming yields stay steady, we expect this to produce accounting returns in the 8%-10% range. With that improved liquidity, we'll look for accretive chances to invest and to expand assets under management. With a strong balance sheet behind us, we're well placed to grow the business and seize market opportunities in the West End. That wraps up the formal remarks. Thanks for listening. For those of you on the lines, if you have a question you'd like to ask, just let the operator know, and they'll pass it along to us, and we'll come to you. If anyone in the room has a burning question, we'd be happy to answer it. Who wants to go first? Stunned silence. Matt?

Good morning. Matthew Saperia here, from Peel Hunt LLP. I have one brief question. Ian, you mentioned bringing Charlotte Tilbury into Carnaby. There is clearly already some momentum when it comes to re-energizing and some re-tenancing happening at that location. How significant might that addition to Carnaby be, I suppose, in driving the next stage of re-tenancing at Carnaby? Because, I mean, ERV growth has obviously been very strong during the second half. My guess is that there is solid momentum beyond that.

Look, honestly, we're quite happy with how things are going. The reaction we've gotten from customers—from our tenants—to what we're trying to do has been genuinely favorable, and that's about bringing in forward-looking brands in categories that will drive higher sales densities. Charlotte Tilbury is a great illustration of that. We're especially glad that this is an upsizing from within the wider portfolio. That's a pattern we're seeing at all three of our locations, where quite a few tenants are taking second or third sites or bringing in more brands from their stable. Alongside Charlotte Tilbury, four or five brands have opened at the southern end of Carnaby. I'm sure you're a regular shopper at Farm Rio, and you'll be a big fan of Pure Soul, a really cool K-beauty brand. I'm sure that's just your thing, Matt. We're genuinely excited about it. As you can see, consumers now have far more choice. On top of that, some existing customers like MAC are opening new concepts too. I think once you see the changes at Kingly Court and, over the medium to longer term, the improvements the team has planned for the streetscape, it'll be a truly exciting destination.

We genuinely can't wait to see solid rental growth across the coming 3 to 5 years. Zach?

Sure, thank you.

Just go ahead and talk.

Thanks. Good morning, everyone. Zachary Gauge here from UBS. I have a couple of questions. Regarding like-for-like rental growth, retail came in slightly negative. That's obviously a bit of a surprise. Could you just walk us through what some of the moving parts were within that like-for-like figure? On the debt side, obviously you're planning to repay the exchangeable bond using cash. You still have the PPN, £163 million, at 2.7%, which matures next year. Could you just touch on what the plans are for that, and what interest rate you'd expect if you do refinance it or repay it with cash? Also, given the substantial cash balance, if you could touch on what your interest rate is — should we just assume something like base rate minus a small margin on that going forward? Thanks.

Let me take the simple part. The retail market is really strong, and I wouldn't overanalyze those minor technical details. It really comes down to what happens in a given period. I'd say—and I'm sure Michelle would agree—this is likely the strongest retail market we've seen so far. That's been the case for the past 18 months, and it keeps driving very strong demand across our three locations. Right now we're especially focused on the new brand lineup we're expecting, or rather the additions we're expecting at Carnaby Street.

Sure — on the balance sheet side, it’s a great spot for us to be in, since that gives us plenty of flexibility and plenty of optionality. And at the same time, we can tap a number of different markets, which is very encouraging too. Spreads appear to be tightening, and that’s a good sign. As for the exchangeable bond specifics, our assumption — or our base case — is that we’ll repay it next year. For now, it’s a solid piece of financing. It carries a 2% cash coupon. On the private placements, keep in mind they sit inside the Covent Garden business, which we now own 75% of. That market is very much open. Whether it’s the bank market, the PP market, or other markets for Covent Garden, we believe that’s absolutely accessible. You should expect to hear more about that over the coming months. We think Covent Garden has very low leverage, so it will be a very attractive credit for any lender. When it comes to the cash, we generate interest income marginally below the base rate.