Shaftesbury Capital PLC (SHC) Earnings Call Transcript & Summary

Good morning again. Thanks so much for joining us today at our interim results presentation. We're delighted to report strong results for the first half, delivering growth across all key metrics. This is the agenda for this morning. I'll start with an overview. Situl will then take you through the financial review. And I'll then provide an update on the portfolio activity, and we'll finish with a summary and outlook. So it's been a successful period, delivering strong performance with an increase in rents, values, income and dividend. And despite the well-documented uncertain geopolitical and macroeconomic environment, I'm pleased to say that the West End continues to demonstrate its strength and our portfolio is well positioned to outperform. We continue to see positive trends in footfall and customer sales growth across our prime portfolio. And the team, many of whom are here today, is successfully achieving significant leasing spreads with excellent levels of activity, limited vacancy and a strong pipeline of transactions. We continue to invest in our portfolio through capital expenditure and acquisitions and also disposed of noncore asset, Lillie Square, during the period. We have a strong balance sheet with access to substantial liquidity and are well positioned to take advantage of market opportunities. So just turning to the headline results for the first half of the year. Total property value increased 3.4% like-for-like to GBP 5.6 billion. That was supported by a 3.8% increase in ERV. EPRA NTA increased 3.9% to 223p per share. That provided a total property return, which was 5% which is significant above the MSCI index of 2.6%. The total accounting return was 4.9%. We continue to deliver rental growth and operational efficiencies whilst aiming to enhance customer service. Underlying earnings overall increased by 8%, and the Board has declared an interim dividend of 2.2p per share, which is up 16%. And I think the performance demonstrates the exceptional qualities of the portfolio, delivering growth in rents dividends, ERV and valuation. As one of the largest owners of property in London's West End, we play an important role in shaping the areas that we operate in and their long-term future. Visitors continue to be drawn to the West End's exceptional cultural retail and entertainment offering. Approximately 70% of footfall is driven by domestic U.K. visitors. Londoners account for around 45%, visitors from elsewhere in the U.K. a further 25% and international visitors into the capital contribute the remaining approximately 30%, creating a diverse, very resilient customer base that supports consistent trading performance. We've noticed that spend, basket sizes and overall trading productivity continued to improve. And this is supported by more frequent and longer visits reflecting the strength of engagement across our destinations. Rental growth prospects are underpinned by strong fundamentals. Occupancy remains very high with the supply of new space limited, and this is creating continued scarcity value. The West End market has delivered quite predictable growth over the long term with annualized rental growth of approximately 4% per annum. Our portfolio has delivered ERV growth of nearly 7% per annum since 2010. And West End retail yields have also been remarkably consistent, averaging approximately 4% over many cycles, again, demonstrating its attractiveness and also its long-term defensive qualities. So as I say, despite that backdrop, investment yields across our portfolio, which predominantly comprise a small lot size freehold properties remain very resilient. And there continues to be a broad pool of domestic and international investors attracted to the West End real estate market, particularly for those smaller lot sizes which is a very active component of the marketplace. So with that, I'll just hand over to Situl, to take you through the financial review.

Thanks, Ian, and good morning, all. As you've seen, there's been continued progress in the first half towards our medium-term targets and further growth in earnings, valuations and net tangible assets. Our strong balance sheet positions us well for investment expansion and growth. So starting with the income statement. Top line growth reflects a successful period of leasing and asset management. Gross rents of GBP 97.3 million are effectively up 4%, adjusting for the establishment of the Covent Garden partnership in April 2025. In aggregate, commercial lettings and renewals were 5% ahead of ERV and 25% ahead of previous passing rents. Property costs reflect some inflation and a small increase in the expected credit loss, offset by operational efficiencies. Administration costs of GBP 20.8 million include the effect of an increased share option charge and ongoing savings. Continued income growth and operational efficiencies are targeted over future periods. Net finance costs have been reduced to GBP 17.5 million, reflecting lower levels of drawn debt. All of these movements taken together resulted in an 8% increase in underlying earnings to GBP 44 million or 2.4p per share, and we've increased the interim dividend to 2.2p. There's been further growth in passing and market rents with embedded reversion in the portfolio and good visibility on income growth. ERVs were up across the portfolio, resulting in a 3.8% increase since December to over GBP 280 million. Retail and Covent Garden were the largest contributors to growth in passing rent during the period. Vacancy remains low with under 3% of the portfolio being available to let. As illustrated in the chart, there's the opportunity to grow rental income significantly, whilst also continuing to grow ERV. This will be through a combination of contracted income and rent-frees converting to running income, refurbishments being completed and ERV capture through the normal leasing cycle. So turning now to the balance sheet. The main driver for NTA growth was increased property valuations. The market value of the portfolio is up 3.4% to GBP 5.6 billion or GBP 4.9 billion on a group share basis. Total property return for the period was 5%, outperforming the MSCI U.K. property index. Net debt is slightly under GBP 800 million with loan-to-value of 16%. NTA per share has increased by 3.9% since December to 223p and NRV per share is up to 241p. Rental values are up across the portfolio with retail and F&B, which account for some being the standout contributors. The equivalent yield was stable at 4.6% for the commercial portfolio. Our estates continue to be highly attractive to our customers and with average rental tones of around GBP 100 per square foot demonstrate good levels of affordability and leave plenty of room for growth. The balance sheet is in a strong position with low leverage, access to significant liquidity and substantial headroom against covenants with loan-to-value at 16% and net debt to EBITDA of under 6.5x, there is significant flexibility to deploy capital. Most of our drawn debt is at fixed rates. The interest rate protection we have in place will be topped up with further hedging for future years. Other points on debt. Firstly, we have reduced gross debt using cash to repay the exchangeable bonds and the Lillie Square proceeds to pay down bank facilities. Secondly, we've extended the maturity profile, most recently on the Covent Garden RCF. And three, debt margins have continued to improve with our most recent facility being completed at 90 basis points for and in the short term of 5 years. Post repayment of the private placement loan notes maturing later this year, the group will have access to over GBP 800 million of liquidity. We are very well placed to invest in our portfolio, and we'll continue to review financing opportunities, taking advantage of the attractive credit profile of the group. So to summarize, there's been strong financial performance in the first half, and we have enhanced flexibility. The total accounting return in H1 was 4.9%, driven by rental growth and disciplined cost and capital management. We will continue to focus on our priority areas, progression in earnings and dividends, deploying capital accretively and maintaining balance sheet strength and flexibility. And with that, I will now hand back to Ian.

Thanks, Situl. So a little bit about the portfolio, just a recap. I think you know what we own, but it's an impossible to replicate portfolio. It's located in some of the most iconic destinations across the West End. Obviously, Covent Garden, Carnaby, Soho and Chinatown is GBP 5.6 billion of value that we have under management today comprises 2.8 million square feet of lettable space. That sits across 640 predominantly freehold buildings. Within that, there are approximately 1,900 individual units. The portfolio is broadly 1/3 retail, 1/3 food and beverage with the balance in the upper floors, which offer office and residential accommodation. And overall, the portfolio offers a very diverse occupier mix, a range of income streams and a range of unit sizes and rental tones. As you'll have seen, occupational demand continues to be strong, and it prioritizes the best locations, not just in London but elsewhere in the world. Availability on many of our streets is now at near record lows and that's supporting competitive pricing. Portfolio vacancy was 2.6% at the midyear, and there's obviously been progress since that date. With this slide showing some of the new brands and renewals that occurred during the period. Overall, 226 leasing transactions completed. That represents GBP 23 million of contracted rent about 5% ahead of December '25 ERV and roughly 18% ahead of previous passing rents. I think the long-term benefits of our active approach to asset management and our leasing strategy are becoming increasingly evident. Careful customer selection and the introduction of high-quality brands has driven higher sales densities, stronger customer performance and continued rental growth. And since the merger, we've welcomed over 180 new brands across the portfolio. And many of those new entrants are trading at significantly higher levels than the previous occupiers, which supports future sustained rental growth. The team take a very active and creative approach. This is informed by a really deep knowledge of the West End. And I think that positions the company to continue to outperform that long-term trend. So a little bit about retail. London is definitely a priority market for retailers. It's perceived as a global gateway city. It has strong leasing demand, which manifests itself throughout the West End, but particularly in our locations. Carnaby Street, delighted to say it's attracting some leading international brands some to note are, Edikted, KOOKAI, K-Way and they've chosen the destination for their U.K. debuts and also Sephora opened this week with queues around the block for their first West End store. Covent Garden, Tiffany, an important customer for us. They've recommitted to the estate and while Matiere Premiere, launched their first U.K. store and that strengthened our offering in beauty and premium fragrance. Chinatown welcomed POP MART, which opened its largest London store. And together, these leasing successes have supported retail valuation growth of 5.4% and across the portfolio. There continues to be a very active demand for our high-quality food and beverage locations. Leasing activity, it's largely been focused on founder-led restaurants and international operators that are making their U.K. debuts as well as established operators often within the portfolio that are expanding selectively. There is a broader shift in consumer preference towards high-quality experience-led dining. And our portfolio is very well positioned to benefit from this trend. Across Covent Garden and Soho, there have been a number of new openings, including Buvette, Bao Borough, Padella and Vagabond Wines to name a few, and we're very pleased with the way they've been received by the consumer. I think it's the vibrancy of our destinations that continue to attract strong customer and consumer demand supporting that very resilient level of leasing activity. Overall, 12 new concepts opened during the period, and our available space -- any available space has been relet very quickly, often with multiple bidders. And that just leaves about 0.2% of the portfolio currently available for Let. 27 new lettings and renewals were signed, 9% ahead of December 2025 ERV again, supporting valuation growth, which for the F&B component was around 4%. The vibrancy of our locations, I think, does continue to attract office occupiers. It's that vibrancy of location as well as the quality of service and accommodation that we offer, and that continues to generate sustained leasing demand. Carnaby and Covent Garden portfolios offer very high amenity value. And for our smaller period properties, we continue to offer fully furnished flexible leasing packages which seems to be meeting consumer demand. Residential portfolio is letting very well. During the period, 116 leasing transactions were completed at rents of around 2% to 4% ahead of previous passing. Now the scale of our portfolio allows us to shape not just the individual buildings, but also the spaces around our properties. And the pipeline of asset management and refurbishment activities that we're currently undertaking represents around 5% of ERV, which will be delivered over the next 12 months or so. In addition, we're working with local stakeholders to enhance the public well across various destinations, making them more enjoyable for everyone. For instance, Covent Garden's, Henrietta Street public realm is currently being transformed, and we're also undertaking significant improvements to Carnaby Street and Kingly Court to enhance the visitor experience. We also continue to rotate capital where appropriate. This year, we completed the disposal of noncore asset, Lillie Square and invested GBP 31 million in target acquisitions and capital expenditure. And indeed, we're bidding on a number of properties at the moment. As Situl mentioned, we have substantial liquidity or access to substantial liquidity to take advantage of those market opportunities when they arise. So just in conclusion, we delivered a strong first half with leasing momentum and operational performance continuing into the second half of the year. The operating platform that we have and the experienced team does differentiate Shaftesbury Capital. And that's translating active asset management and leasing into earnings and value progression. The West End is a highly attractive market with strong customer demand, high footfall sales growth, limited vacancy and a strong leasing pipeline. And we have significant growth potential across the portfolio and continue to deliver on our medium-term rental growth targets. And supported by that strong balance sheet, we're well positioned to pursue selective expansion opportunities and capitalize on those market opportunities as they arise. So that's the conclusion of the formal presentation. I think we'd like to go to Q&A. So if you're on the phone, if you could let the operator know you like to ask a question, we'll come to you. If we can start perhaps with the room, useful if you could just say your name if you have a question. And we'll try and answer it.

It's Thomas from Berenberg. Just a question on leasing spreads. Last year, you were leasing 10% ahead of ERV. So far in 2026, it's 5% ahead. Is the competitive tension still as strong today as in the recent past that you're seeing? I appreciate you're also pointing to some higher credit loss provisions, too. Any color you can give on where you're seeing those would be helpful as well.

Yes, I feel strong. Every period of 6 months is different to the last period of 6 months. So a lot depends on the nature of the real estate that's actually coming due in that period. So we tend to look at it over the sort of medium term. In fact, so you've got our leasing director sitting behind you. So he and his team do all the deals, and he's quite happy at the moment. And so what we're seeing does support the forward look on those 5% to 7% rental growth targets that we've got out there.

And on ECLs, there was a small tick up over the period, which was really a function of 1 or 2 unexpected failures. One office tenant in Carnaby, we've taken the opportunity there to take the property back, we'll refurbish it and aim to relet that at higher rents. And second element is we've taken a slightly more conservative approach on our other customers, just a kind of macro level. But, as I said, relatively small numbers, nothing material to signal.

Cool. And maybe just second one, I think on Page 33 in the appendix, the Carnaby and Soho, like-for-like annualized gross income fell 1.1%. But ERVs there still moving up almost 4%. Just wonder if you can help explain that.

Yes. I mean Carnaby Street is doing really well, actually. I mean we're particularly pleased with the section to the southern end of the estate where we've got a whole bunch of new brands in 4 I mentioned, have opened up, opposite Edikted. So they're trading very well. And at the upper end of the street, Will and the team put in KOOKAI and various other brands. So we're well on the way to transforming the street. That should be enhanced with the streetscape improvements that you'll see rolled out at Kingly and along the street this coming year. So it's well on its way. So I do expect good rental growth over the coming years. This year, you've had a couple of failures, mainly on the office side that we didn't really expect. So that's had an impact on those numbers. But I think the trend is very, very positive for Carnaby Street.

It's James Carswell from Peel Hunt. And you talked a little bit about the acquisition and kind of the growth opportunities you're seeing. Could you give a little bit more color to what you're seeing? Are there kind of more standard bolt-on acquisitions? Are you seeing anything more meaningful? Are there particular parts of the estate that you particularly like to grow?

Look, I mean it's a very tight market in the West End and very actively traded. We've got a new valuer this year, and they've done a great job. But the comparable information that they've produced shows that certainly for lot sizes below GBP 20 million and up to GBP 50 million, it's really competitive. So where we are bidding, we are seeing multiple competitors. So I think our competitive advantage is often we can see where the rental growth will come. But you're generally competing at yields that are tighter than the valuation yields. So it's all about what my colleagues can actually do with these places over time. So priority of capital is always our existing properties. So Chris has got a number of refurbishments on at the moment. which I think will go very well. They're mainly offices actually, a couple of pubs and some retail, but they'll lease very well. The next focus is buying adjacencies, so they're expanding the portfolio. So we bought properties around the southern end of Carnaby Street, for instance, bought a couple of things in Golden Square, which we're quite interested in. And we're bidding on something in Covent Garden at the moment. But we don't seek to buy everything. We generally want to find things that we feel we can make a difference to and that they're going to be accretive within a reasonably short period. But very, very competitive. I think when you get to the bigger lot sizes, they don't really come available that often. But when they do, we're well positioned to participate.

Ashnaa Vyas, Deutsche Numis. On Slide 10, you show that you have sort of 28% income reversion. I was just wondering if you could talk a bit more about the time frame you expect to capture this? And secondly, are there certain parts of the estate where you think you can drive rents harder.

Yes, I think -- I'll deal with the first one, maybe Situl can talk you through the bridge slide, which sort of explains it. But I think what's really noticeable is where we've had the opportunity to retenant they are trading at significantly higher levels than previous tenants, often well over 100%. So that gives us confidence that the rental growth will be sustained at above trend. So that's really very important, particularly noticeable around Seven Dials where we put, I think, 30 or 40 new brands in. Over the last sort of 12 to 18 months, they're doing well. And then Carnaby Street, I mean, it really is night and day on some of these trading densities. So that should be captured when they come up to revert, which is probably outside of the period where we'll capture GBP 25 million or GBP 28 million whatever it is. So this is about longer-term growth as well. And that's really comforting. Do you want to go through the bridge ?

Yes, of course. Look, the 3 main elements are contracted, refurbishment and the under-rented element, if you like. On the contracted, that's a combination of what we signed up and what's currently in rent-free. Those periods tend to be quite short. So the majority -- and there are some step rents in there as well as a third element. So the vast majority of that will come into running income over the next 12 months or so, and that's just a cycle that's just a function cycle of activity. On refurbishments, there's GBP 13 million, GBP 14 million within that. Again, most of these are smaller schemes. In fact, they're all smaller schemes. Some of them are pre-let. And on the others, we have a high conviction about ability to let those. And as Ian mentioned, when we retenant we typically see a big tick up in productivity and hopefully, rents. And then the third element, the under-rented element, that's really a function of the leasing cycle. So it's kind of velocity of pace of transactions. And remember, we're trying to do at the same time as increasing ERVs. So that metric around consistently beating ERV on our transactions and passing rents is very important contributor to kind of growing income line.

I think you had a question, Zach.