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Edited Transcript of CAL.L earnings conference call or presentation 5-Mar-20 10:00am GMT

Full Year 2019 Capital & Regional PLC Earnings Call

London Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Capital & Regional PLC earnings conference call or presentation Thursday, March 5, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* James Ryman

Capital & Regional Plc - Investment Director

* Lawrence Francis Hutchings

Capital & Regional Plc - CEO & Director

* Stuart Andrew Wetherly

Capital & Regional Plc - Group Finance Director, Company Secretary & Executive Director

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Conference Call Participants

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* Erik Salz

JP Morgan Chase & Co, Research Division - Analyst

* Kieran Adrian Lee

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Kundayi Munzara;Sesfikile Capital;Director;Portfolio Manager

* Miranda Sarah Cockburn

Panmure Gordon (UK) Limited, Research Division - Analyst

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Presentation

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Lawrence Francis Hutchings, Capital & Regional Plc - CEO & Director [1]

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Good morning, everybody, and welcome to our 2019 results presentation. It's great to see so many familiar faces in the audience. And this morning, we've got both dial-in and webcast. So welcome to those who are dialing in and are watching through our webcast. A special welcome to our new Board members: George Muchanya and Norbert Sasse from Growthpoint. They've dialed in this morning from South Africa. We had a very successful Board Away Day on Monday and George and Norbert were there, along with the rest of our Board. More on that later. In addition, Hugh Scott-Barrett, our Chairman, it's his last set of results. Unfortunately, he couldn't be here today, but he's dialed in. Good morning, Hugh, and thank you. And then we have our Chairman designate, David Hunter, in the audience this morning. Good morning, and welcome, David. Thank you.

I'd like to introduce our team this morning. So the home team, James Ryman, our Investor Director; and sitting next to James is Brooke Rowlings, who's our special projects manager. Brooke has been heavily involved in our CapEx projects in places like Hemel and places like Ilford. And Brooke stepped in and has been enormously helpful putting this presentation together today. So thank you, Brooke. We appreciate it. And then of course, to my left, our Finance Director, Stuart Wetherly, who's co-presenter today.

So it's been another year of structural change, particularly in the retail space and globally, importantly. We've been managing these changes. And from our standpoint, it's been a critical year of progress for the business, which we'll talk about during this presentation. We've had the recapitalization with Growthpoint. We've been delivering results that are 100% aligned to the strategy that we launched in 2017, and focusing on what we call controlling the controllables: cost and income. We have a rigorous focus on efficiencies and income generation in our business and we'll be talking about that more today. We believe this focus is continuing to drive strong relative performance across our business and reinforcing our belief in the correctness of our strategy to focus on community shopping centers and, of course, the quality of our management team, where we also continue to invest.

Prior to handing over to Stuart, who'd provide a very quick set of headlines on our 2019 results, obviously, the Growthpoint transaction, which recapitalized our business last year. We moved LTV as a consequence from 48% at the start of the year to 46% at the close, or from 52% at our interims to 46% for the full year. We revised our CapEx spending during the course of last year down, reflecting the uncertainty whilst we're undertaking the Growthpoint transaction. However, I'm pleased to say that post recapitalization, we'll be returning to our GBP 15 million to GBP 20 million a year run rate. More on our CapEx and investment program later.

We've maintained momentum on footfall, which we believe is one of the key success criteria of creating what we call vibrant trading places. I'll be talking about that in the operational section of this presentation. We believe that this footfall has allowed us to -- this strong footfall performance has allowed us to generate a very positive leasing -- set of leasing metrics. We've undertaken 66 leasing transactions during the year, which equated to GBP 4.5 million in annualized rent and leading -- also leading to high occupancy at 97.2%, which is stable. This high level of leasing activity has allowed us to generate an NRI for 2019 of GBP 49.3 million, which we believe is respectable relative performance, given the headwinds that we encountered during the year.

I'd like to hand over to Stuart to take you through the financials in more detail. Thank you.

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Stuart Andrew Wetherly, Capital & Regional Plc - Group Finance Director, Company Secretary & Executive Director [2]

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Thank you, Lawrence, and good morning, everybody. Before we go into the detail, just 3 reflections from me on our financial position. Firstly, the relative resilience of our performance. We don't stand here and celebrate when some of our key metrics are going backwards, but we do reflect that in the current environment and benchmarking against other industry standards, this is a resilient performance overall. Secondly, we've got a recapitalized balance sheet, underpinned by investment from Growthpoint, a highly respected international real estate investor. And thirdly, long-term diversified debt structure with substantial cash flexibility.

NRI, as Lawrence said, GBP 49.3 million, we view as a robust performance given the impact of CVAs and administrations during the period. Valuations have come down 15%, reflecting the industry-wide pressures on retail property. We've seen a continued disconnect between London and regional values, though, with our London weighting have helped mitigate the impact on our portfolio. The valuation and the impact of the new equity raise driven the reduction in NAV per share but also the improvement in leverage from 48% to 46% but worth 10 percentage points in isolation. On adjusted profit as noted, NRI has been impacted by CVAs, which I'll touch on, on the next slide. Without that, we'd see a GBP 0.4 million improvement.

Interest has been flat year-on-year. We'll see savings accrue in the next year as we deploy GBP 50 million of the proceeds from the equity raise into repaying debt, an annualized saving of ultimately GBP 1.5 million. As flagged last year, we no longer equity account for Redditch following the restructuring of the joint venture that completed in early 2019, but we remain actively involved as property and asset manager, accruing fees that offset some of our group costs.

Snozone's growth is hidden in the roundings that have grown year-on-year, representing a robust performance in a competitive active leisure market. And net group costs have held flat with efficiencies offsetting inflation. I'd like to take a moment just to reflect on the progress we've made in reducing our group overhead, taking more than GBP 2 million out of this since 2016. And I'll give you a little bit more color on this on the slide -- in a couple of slides' time.

On retailer restructuring, we've had 34 units across our portfolio impacted by CVAs or administrations during 2019. Over 6 of these are either still trading or have been subsequently relet. The total impact of 2019 events was GBP 1.3 million, rolling up to GBP 3 million, if you incorporate the full year impact of the 2018 events. There will be a GBP 1.5 million drag in 2020 due to the full year impact of the 2019 restructurings.

In terms of our portfolio, the activity has been almost exclusively focused on the department store in mid-market fashion categories that are most vulnerable to online and changing customer habits. These pressures no doubt, persist, and there is risk of further activity and, certainly, challenging renewal discussions, but this really underpins our strategy of remerchandising our centers away from such categories into day-to-day nondiscretionary needs-focused goods and services. And Lawrence will touch later on the strong progress we've made on the leasing side in developing this, particularly of late. So on central costs, we've reduced these by more than GBP 2 million since 2016, a saving of 2 point -- over 25%, exceeding the 20% target we set ourselves 2 years ago.

Just a bit of color on how we've achieved that. One is operating a much flatter structure, most obviously in going from 4 Executive Directors to 2, but also as well as saving costs we've refocused resource, taking costs out of what I think I can turn back-office functions like finance, given I'm part of it, moving it more into the frontline of operations from leasing and commercial activity. I think this is a trend that will only continue as we invest more in bringing these functions in-house as we serve a wider market of tenants as we remerchandise our centers and really acting as a truly operational business.

Industry pressures have seen a 15% decline in our property valuations across the 12 months. As noted, there's a disconnect between London and regional assets, where our London assets have performed much more robustly. This reflects a stronger operational performance and also many more options in terms of complementary and alternative uses. This is most prominent in terms of our asset at Walthamstow, where the progress in the residential development has seen the asset value increase over the 12 months.

As noted, the Growthpoint proceeds from the equity raise recapitalized our balance sheet and brought our leverage down to 46%. Of the GBP 50 million that we earmarked for repayment of debt, we've utilized GBP 5 million so far and are in active discussions with some of our banks, some of whom are here today, in terms of deploying the majority of the rest of those proceeds. The GBP 45 million enables us to withstand at least a further 20% fall in valuations without facing any cash trap or default restrictions. And residential receipts, including the GBP 5 million from Wood Green that we received post year-end, so it's not in these numbers, and the value we're looking to crystallize from Walthamstow will help offset any further pressures from valuations going forward.

Just to touch briefly on our diversified debt structure. We have a weighted average of 5.4 years to maturity and no near-term refinancing events.

And finally, I'm pleased to confirm final dividend for the year of 11p per share. This meets both our REIT requirements and the guidance we set out in the prospectus in November.

Thank you for your time. Very happy to take questions at the end. But for now, will hand back to Lawrence.

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Lawrence Francis Hutchings, Capital & Regional Plc - CEO & Director [3]

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Thank you, Stuart. I'm not sure about the back office. Stuart sits about 3 feet away from me. So if that's the case, we're both in the back office. And I'm wondering who's in the front office, Stuart. I'd like to take the next few slides to reflect on the journey we set out in 2017 when we launched our new strategy. And then look at some case studies as to how we believe that strategy is driving our results for 2019 and then into future years.

Firstly, allow me to remind you of the strategy. We set out with the 3 pillars that we presented at our Capital Markets Day in December 2017. One at the time was to redefine the community shopping center; secondly, to, we call it, reposition our centers; and thirdly, to refocus our management team. And if we deliver this, we would enhance stakeholder value. We've removed the re, and we're now define, position and focus as we've made significant progress over these last 2.5 years. But defining was really about educating the U.K. market about the difference between super -- what we call superregional flagship malls and then community shopping centers and what sat in between effectively, squeezed middle, as we called it at the time.

We're pleased to say that Revo adopted the categorization that we suggested in December '17. Revo is our industry body, formerly British Council of Shopping Centres. But importantly, we've also over the last 2.5 years, developed a much clearer understanding of the critical success ingredients that go to creating a very strong community shopping center.

As we've said previously, and Stuart's mentioned, very much focused around nondiscretionary needs-based and grocery anchored. But importantly, its proximity to transport. The population characteristics of the trade areas that we sit in, we prefer what we call urban bias, so some of our London assets, for example. And in addition, we've learned about a lot about the operating key areas of focus that are important, and we call it taking the friction out of daily life for our customers, our daily needs effectively or their daily needs.

Positioning, we're going to focus in more detail, but falls fundamentally into operations, marketing, leasing and investment. More detail on that in the following slides.

And then our management team, which is really about being data focused, agile. We believe our size is one of our virtues, allows us to be dynamic in a world of rapidly changing structural changes in the retail industry. And of course, our decentralized structure that we launched at the time, which we're now well into and we believe we continue to enhance value as a consequence.

Turning to our positioning. We believe we create vibrant trading places that attract customers. We have a deep understanding of our communities. As I mentioned, that's increasingly data driven. We understand that parent with pram is our largest customer group and that we need to focus very, very heavily on making sure that we are the preferred destination for needs-based shopping.

On leasing, it's -- the focus there is really about driving income and remerchandising. Remerchandising from categories that are most challenged from structural change like fashion, across into categories like grocery where online penetration is almost flatlining at 7% to 8%. We are actively reducing our exposure to these retail formats that we believe are under great pressure from structural change, and we've seen that in the U.K., probably more than any other market in the world. We're adapting our retail footprint, and that's these remerchandising and this adaption is allowing us to grow income effectively and to produce great leasing performance. And on investment, it's all about maximizing the value of our real estate. But let's look at these in more detail.

Turning to operational KPIs. We've generated 74.3 million visits, as we mentioned earlier. That's 1.7% up on the national index. We've maintained our high frequency of visit, which is about 1.1x a week, 62-minute dwell time, importantly, GBP 42 average spend. They're all strong characteristics, we believe, of community shopping centers.

Our Click & Collect business, importantly, is up 21%. We provide a service to our local communities where they can return and collect parcels from our customer service desk. We get paid for the privilege, but that business is up 21%. Once again, that's part of us removing the friction from our guest's daily lives. And all of this has enabled us to maintain occupancy stable at 97.2%. More on leasing later.

Delving into operational management in a little more detail. We believe we have a highly specialized management team. We're adding specialization and competency to that group constantly, and we believe is a key USP for the business. We don't believe that there are many operators of community shopping centers that benefit from an internalized management structure that's seen this sort of investment that we've been providing over the last couple of years. Yet, we maintain our focus, as Stuart mentioned, on efficiency through investment in improved processes and systems.

Stuart talked earlier about the GBP 2 million saving in central cost since we launched the strategy, and that's only part of the story. Our continued investment in leasing, we believe, is allowing us to access new retailers, fundamentally, especially in the independent, these young entrepreneurs that you're seeing as well as dealing with some of the national chains, and that's resulting in strong leasing performances and positive leasing spreads.

Our decentralized structure that I mentioned earlier is improving our knowledge of the local trade areas that we operate in. Quite simply, our center teams have more of a voice, especially around some of the key decisions that we need to take on these assets. And that's helping us tailor these customer propositions into these local communities. The characteristics of our trade area, for example, in Maidstone, is very different to Blackburn and different to Luton. So how do we understand that, and how do we play back to those audiences. However, I'm conscious that operations today is more than just data and decentralization. We take a very active role in these communities, and it's very important to us, and has been for a very long period of time, that we're a responsible neighbor.

Our net zero carbon commitment is in place. And I'm pleased to say, on community, which has always been one of our strong areas, that we support over 163 community groups across -- and charity groups across our centers. In 2019 alone, we hosted 167 community events, and we donated just under 4,000 hours voluntarily in supporting the local communities that's something we're very proud of. On the environment, an increased area of focus from us but over -- since 2008, we've reduced our energy intensity by 36%. In the last year alone, we've managed a 6% reduction, and we have a pathway for further improvements as part of our net 0 carbon commitment.

Turning now to leasing. I'm pleased to say it's not all gloom and doom. We're very fortunate to be working with retailers that are looking to expand their physical footprints, and that's typically in the nondiscretionary categories. We're fond of saying internally that we are a leasing-driven business. Even I get involved from time to time, much to the chagrin of our leasing team. I'm fond to calling myself a partially reformed leasing executive. The remerchandising income generation, and ultimately, growth is central to what we do. It's pleasing that all of the focus in investments since we launched our strategy in '17, despite the market backdrop, continues to support the decision and the continued investments in this area.

The graph to the right demonstrates our performance over the last 3 years. And as you can see, we've maintained very strong leasing volumes and very consistent leasing volumes and very consistent leasing values. But I'm particularly proud of the fact that we've maintained positive leasing spreads throughout the entire period.

Noting the political and economic uncertainty in H2 '19, we did see a slight falloff in leasing activity during the second half and notably around the end of the third quarter into the start of the fourth quarter. However, I'm pleased to say that we now -- we look at that as opportunity deferred, not opportunity lost. Sitting here today, we have a pipeline of 30 transactions that are either in solicitors' hands effectively or we have deals signed, and we have a multiple of that where we're in active discussions with retailers about leasing opportunities. So we feel positive about the leasing outlook.

But what does all this leasing mean to our business? We mentioned remerchandising. This table shows the effect of our leasing over the last couple of years, not just in generating income, but importantly, in repositioning our portfolio into the community model, lessening our exposure to these categories that are most affected by structural change, notably online. We've increased our exposure as we set out -- as we said we would to supermarkets, health and beauty, express food and leisure, as this demonstrates, whilst reducing our exposure to challenged categories such as fashion and department stores, and we will continue to do this. We're excited. We have more to do on remerchandising across the portfolio. And our ability, importantly, to do this accretively of our rebased rents of GBP 12 to GBP 15 a square foot, differentiates us from our peer group.

Let's turn to some examples of projects that we've delivered during 2019. The Tesco lease renewal at Luton was an important deal. Tesco spent just on GBP 1 million refurbishing the stores. It's a strong performing store for them, signed an 8-year lease commitment. There'll be more on grocery in Luton in the next couple of slides. Then changing gear, we did a deal with Tinies, who many of you might have heard of, but Tinies operate the crèches in IKEA stores. They've never before ventured outside the IKEA environment. We've identified the parent with pram as our major market, providing some relief for that parent, whilst they're shopping, we believe, was something that was worth trialing. We've been working with the Tinies team.

We opened the first Tinies crèche in Hemel Hempstead. I'm pleased to report early days, but we've got a 25% increase in average spend for people who are using the crèche, and we've increased our average dwell time as well. We're looking forward to doing more business with Tinies moving forward.

And then across to the gym at Hemel Hempstead, first floor, very much segregated space in the center where Argos were located. We've done a great deal with Pure Gym. I remember the excitement, Stuart, across the floor. We actually had 2 people bidding on this -- 2 gym operators bidding on this. And we've managed to secure very good commercial terms. I'm pleased to say they opened in December and they're ahead of their targets in terms of membership sign up already. And as a consequence of Tinies and the gym, we've seen growth in footfall in Hemel during the start of this year.

And then what's in the pipeline? I could talk for days about this, but I'm not. I'm going to focus on 4 deals that we believe have a catalytic impact on 2 of our centers. The first one is in Luton and I'm pleased to say all these deals are in very advanced stages. In fact, 3 of them are signed. In Luton, you'll recall that we leased the Arndale House office building, 1 of 2 formerly vacant office buildings that sat on the top of the center. We leased that to a combination of NHS and the local magistrates court. And they're, I'm pleased to say, open and functioning and bringing increased footfall into Luton. That gave us confidence to look at a building called Finser House that had been vacant for 14 years and derated.

We've secured a lease, in fact, signed yesterday, lease with a council. They will occupy that. They're relocating their council offices on a 10-year lease into the building, which -- including their service centers, which will generate more traffic. So that's important for Luton. We are -- we have leases in circulation with a discount supermarket operator in Luton. They will occupy the ground floor of what was previously Marks & Spencer. And I'm pleased to say that's directly adjacent to the Tesco store I mentioned in the previous slide. And the combination of Tesco and the discount supermarket will provide a grocery anchor to the center that then gives us opportunities to remerchandise the specialty space around it accretively. So we're excited about that.

And then moving across to Maidstone, this was the last. If you recall, we had 4 BHS stores. We're very successful in converting 3 of them accretively. We moved across to Maidstone. We've leased 2 of the 3 floors of the M&S, which we're very pleased about. Pure Gym on the back of Hemel and the success we've had there, have committed to the upper floor that doesn't have pedestrian access. That deal is now signed. And on every day apparel, we've leased to Matalan one of the floors in the BHS space. Importantly, Matalan is located in Maidstone out in a retail park on the edge of town. And this is something that we're seeing more of, and we'll talk more of at our interims a little bit later this year. But we are seeing a shift from some of these out-of-town operators looking at coming back into the town center, especially in and around London, but also here in Maidstone.

So turning now to investment and our CapEx pipeline. Walthamstow has been a project that we've talked a lot about over the last 12 months. As you recall, we secured a planning consent for 450 apartments on the roof of the existing center. This is at the heart of the -- part of our strategy that we launched in '17, which is really about maximizing the value of our real estate. This urban bias that we have provides real opportunities for density and value creation. We're very pleased with the progress on this project. We made a decision to effectively establish a partner who could take the project forward. It's about a GBP 200 million residential project. We had 7 shortlisted bids that James oversaw to find a potential partner.

And we're very comfortable that we've selected a very high-quality partner. We're in legal documentation with that group now. We anticipate a revised planning application to convert the existing consent from develop to sell to develop to rent or PRS. And we're expecting a capital receipt towards the end of this year, consistent with previous guidance.

What I can also add is, encouragingly, that Transport for London have committed to a planning application for a second tube access in the Walthamstow's, I think, the 23rd busiest station in the network, have about 260 stations. It currently has 1 access to the tube station. They're looking to establish a second access, which will come up directly underneath our center and will create opportunities for further traffic and income growth as that progresses.

And then turning to Wood Green, where we've unlocked value. The highlighted area in green was a vacant site that we control for a considerable period of time. We've made a decision last year to sell that piece of land through a competitive process. A GBP 5 million capital receipt arrived in our accounts last month, in February. And we have a respected residential developer, the Aitch Group, who undertake similar scale projects in North and East London. They plan to build 100 apartments, including affordable houses. So effectively here, we've unlocked value from an adjacent vacant site.

Turning now to some of the repositioning projects that we have within the portfolio. Hemel is an important project for us. I mentioned earlier the excellent progress that we're making with Pure Gym, with Tinies, and it was only last night that I was texting with a retailer. I said I'm a partial reform leasing person. We relocated them 5 meters from an in-line shop into a kiosk. And it just shows the importance of what we call merchandising curation by moving that retail of 5 meters from an in-line shop into a kiosk, as part of this family zone, directly adjacent to kids play area we've created, directly adjacent to the Tinies crèche, about 50 meters away from the gym. He told me last night his business for February was up 50%. So it just shows you we secured the rental outcome and commercial outcomes we wanted from that cafe retailer, and he's very keen to do more business with us. In fact, we're in the process of finalizing a deal in Ilford as we speak.

But then turning to the cinema. Community cinema, we believe, is a growth sector. We just need to see the expansion of chains like Everyman and chains like Curzon, and of course, our own Empire, where we have an agreement for lease signed for 9 screens here in Hemel. And that will be of a gold-class standard. You have ticket prices which are consistent with the large multiplexes. So in essence, providing a better experience. Importantly, from our perspective, this provides support for our casual dining and grab-and-go food offers that are targeted at the family market. We plan to start on-site in Hemel in Q2 this year, and it supports part of the wider reposition I mentioned earlier, which has been very positive for footfall.

And then on Walthamstow, we're fond of calling the food and beverage opportunity at Walthamstow the silver lining from the fire that we had in summer last year. The -- we had a 1980s food court. We had a decision to make. Replace the 1980s food court or look to what's happening in Central London around food halls, I'm sure you've seen them, and tap into a really rich vein of entrepreneurial spirit and food retailing that's happening elsewhere in Walthamstow at the moment. Interestingly, we've been working closely with the council who own most of the buildings where some of the existing operators are located, about 250 yards from where the center is. And we organized a preliminary or introductory meeting with some of those operators. We invited them.

I think we believe we've got 6 to 8 food kiosk opportunities in this new food hall. We had 14 turn up to the introductory meeting. So we feel confident about what we can create here, and we feel very excited about the read-through for some of our other centers. We're already starting to work on plans for Wood Green.

So all of that leads to our CapEx pipeline. We've committed to GBP 13.7 million worth of projects, as you can see on the slide here, and we have a strong pipeline of what we call near-term opportunities totaling GBP 28.8 million. Central -- these are central to our repositioning, and they have an income target yield on cost of 8%. We believe, importantly, these CapEx projects are not long cycle, multiyear, high-risk projects. We focus on short-cycle, accretive opportunities that are consistent with us delivering our overarching asset repositioning master plans. We have confidence, following the Growthpoint transaction, our recapitalization, to progress with these projects with vigor.

And then turning to Growthpoint. We believe the decision that Growthpoint made last year to invest our business is an endorsement of our strategy and represents an enormous amount of confidence in our management team. I first met Norbert's staff in September 2018 for coffee after an introduction in the west end of London. And during 2019, Norbert's team undertook an extensive amount of due diligence, not just on our assets, but on our strategy. I'm not just speaking to us, a canvas to wider market undertook research, et cetera. So it's very pleasing to have a company of a caliber of Growthpoint investing GBP 150 million in our business, becoming a 51% shareholder. And of that GBP 150 million, almost GBP 78 million came in as new equity, combination of reducing leverage in the business and importantly, recognizing the value and importance of the CapEx program to continuing our further income trajectory. We've developed a very strong working relationship with the Growthpoint team, and it's great that they've joined us on the phone today.

So in summary, I believe we operate in a critical, fast-moving and dynamic business, one where our strategy is proving real value. Our focus and investment on leasing and income generation is allowing us to deliver what we believe is resilient, relative performance. Our rigorous management focus and our operational expertise and efficiency makes me very, very proud of our team and of their contribution last year and rising to the challenge, working collaboratively and living our values. But I'm equally proud to have Growthpoint as a 51% shareholder. And I believe their experience, operating globally and supporting platforms like ours in other markets and their knowledge of real estate, their endorsement and support and expertise is very welcome into our business and puts us in a very strong position to deliver on our strategy, and importantly, positions us for future growth.

Thank you very much for your time. I'm happy to go the floor for questions.

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Questions and Answers

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Lawrence Francis Hutchings, Capital & Regional Plc - CEO & Director [1]

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We might have a microphone somewhere, do we? Here we go. Just down the front row. It's Erik, and coughing, that's not good.

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Erik Salz, JP Morgan Chase & Co, Research Division - Analyst [2]

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Erik Salz, JPMorgan. So 2 questions, if I may. One on residential. Is there a potential in the other parts of the portfolio to also add residential or other opportunities?

And second question is around valuations. Are you seeing in the market evidence which would support current valuation levels?

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Lawrence Francis Hutchings, Capital & Regional Plc - CEO & Director [3]

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Interesting. So in terms of residential, we do see other opportunities in the portfolio. We think there are potentially other opportunities in Wood Green, the more infill nature -- more infill style residential opportunities. And then in Ilford, we see an opportunity, which is of similar scale to Walthamstow. And we're at early stages there in terms of looking at how we would deliver that, what that would mean for the rest of the retail asset. And we've got a lot of support from council. We have an existing consent in Ilford, as you may know. We acquired it with the center for about 200 apartments, sits on the roof of the existing car park. We're unlikely to pursue that scheme. We'll look at something larger and potentially based on -- with some form of attachment to the ground.

In relation to valuations, I think we are seeing some evidence, to be honest with you, Erik. I think Hammerson obviously undertook the deal with Orion on the retail parks. And then of course, IKEA acquired the Hammersmith mall and its constituent parts. We know -- we understand they plan to create a store there. We've been in a dialogue with IKEA ourselves. I think the IKEA story is fascinating. Once again, another retailer looking at coming from out-of-town locations into town center locations. I think they see that shift with urbanization. Our understanding is that the retail on that deal equated to about 4%. So that's not the headline that's been printed, but we understand when you remove some of the other elements, that the retail element equates to 4%. So -- and then there's an asset in Edgware, which James, you've been tracking, but we understand that there's very strong interest in that asset. It's been put in the market, James. I think there's...

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James Ryman, Capital & Regional Plc - Investment Director [4]

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Yes. That's GBP 60 million, 5.7%. I'm clearly looking for development value on top of that. And interestingly, that's an asset we used to own 8, 9 years ago.

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Lawrence Francis Hutchings, Capital & Regional Plc - CEO & Director [5]

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So I think there's -- there are some early signs, Erik, of some valuation evidence coming through.

Miranda?

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Miranda Sarah Cockburn, Panmure Gordon (UK) Limited, Research Division - Analyst [6]

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Miranda Cockburn from Panmure. Just 2 questions. One, you're obviously reducing exposure to department stores and fashion. What do they comprise at the moment in terms of sort of percentage of income? I don't know if you've got the detail on that.

And then the second question was just again, in terms of leasing, all looks relatively positive. You've mentioned that, obviously, that doesn't include the short leases. Can you just give a bit more color on how many short leases you've put in place, turnover and what kind of rents versus ERVs, et cetera, on those?

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Lawrence Francis Hutchings, Capital & Regional Plc - CEO & Director [7]

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So I think, Stuart, you and I can probably help answer this. In terms of fashion, in 2017, we started -- just need to clarify them, it was around 32% of our income was exposed. Stuart, I think, today, we're in the low 20s?

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Stuart Andrew Wetherly, Capital & Regional Plc - Group Finance Director, Company Secretary & Executive Director [8]

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Yes. Around sort of mid- to low 20s.

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Lawrence Francis Hutchings, Capital & Regional Plc - CEO & Director [9]

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Mid-24%, I think. Miranda, I can come back to you and clarify the numbers, around 24%, 25%. So we reduced that significantly already. And we have a pathway to get to the sort of high teens.

We -- by the way, we don't believe all fashion is an issue for us. We've got a very, very strong Primark business, for example. So we call it everyday apparel effectively. Speaking -- Primark's a very good business for us. Matalan, we think, is capable. Sort of value, fashion basics or apparel basics is where we really see that market settling. It will be a component of what we do. We've got some very strong H&M stores. The offered next door, for example, is a very strong trading store but it's just going to be less of what we do moving forward fundamentally.

And then the other question in relation to temporary leasing. Stuart, do you want to respond to that?

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Stuart Andrew Wetherly, Capital & Regional Plc - Group Finance Director, Company Secretary & Executive Director [10]

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Yes. I mean in terms of volume of transactions, probably sort of similar volume, but a lot -- obviously, a lot shorter term. I mean the -- we don't do the spreads on those as a matter of course. But I mean there's a whole variety of outcomes within those. They typically would be at weaker spreads than the headline deals because sometimes we're only signing up for very short term, just to keep the lights on and cover the occupancy costs.

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Lawrence Francis Hutchings, Capital & Regional Plc - CEO & Director [11]

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We haven't seen a dramatic increase in temporary letting activity. It's been pretty consistent, hasn't it, Stuart? And the numbers that we report here are of -- don't include temporary lets. So the 66 leasing transactions are for minimum terms, greater than a year. So there's nothing embedded inside our leasing numbers that includes those temporary stores. If you could appreciate with the master plans that we have in the centers, that there are times where, from a strategic standpoint, we'll say to ourselves, there's no point renewing that lease because that's in an area that's subject of a CapEx project in 12 months' time or 18 months' time. So that's the beauty of having these master plans, is it creates a road map for us.

And it's very unfortunate when we go and agree a lease with someone, find out 2 years later that we need to gain vacant position because they're often challenging discussions, as you would appreciate, from a negotiating leverage standpoint. So we're very pragmatic about it. But just generally, shorter leases don't worry us greatly. Interestingly, one of the areas of the business that performed very strongly last year was what we call casual mall leasing, which is the group that effectively used to do the common area kiosks, but increasingly is doing the kiosks and also some of the temporary lets and we see as a real opportunity to bring some of these new retailers, these entrepreneurs into our centers. It's a very different way of working, but we're very excited. We brought people into that team with no real estate background, people with a sales background who can get out and find these great new retail concepts and bring them into the centers. So we see that as a real opportunity.

Kundayi, welcome.

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Kundayi Munzara;Sesfikile Capital;Director;Portfolio Manager, [12]

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Kundayi from Sesfikile Capital. Just 2 questions. The 21% re-leasing spreads, obviously, indicate your tenants can afford it, the space. Do you have any comments looking forward on maybe as you see the next year or 2, what that may look like from a re-leasing spread's perspective?

And second is, could you comment on the OCRs for this period?

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Lawrence Francis Hutchings, Capital & Regional Plc - CEO & Director [13]

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Yes. So the leasing spreads, I don't have a statistic in front of me. We've signed off on a business plan over the next 3 years. There are leasing volumes embedded in that. I'd need to come back to you on the exact forecast spreads. As you appreciate, forecasting spreads is a...

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Kundayi Munzara;Sesfikile Capital;Director;Portfolio Manager, [14]

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It's a sense, yes.

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Lawrence Francis Hutchings, Capital & Regional Plc - CEO & Director [15]

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It's a difficult business, but we certainly don't see those spreads moving dramatically. I think the thing to say about the 20% is when you're dealing with small sample sizes, I even found this when I was working in a larger organization name that remain nameless, that single transactions can have a large bearing on a small sample. So we tend to look at it and say, "Can we continue to lease full space accretively? And what gives us confidence as we're running off rebased base rents at GBP 12 to GBP 15 a square foot?" So we certainly see the ability to continue to remerchandise accretively and undertake leasing transactions accretively, Kundayi. So whether it'll be at 20% or back closer to the 3-year average, which is probably closer to 5% or 6%, effectively really depends on the nature of the deals that we're doing.

I think the other thing that influences is what sort of space do we get back because in some cases, we're planning to do leasing transactions, but something might change. Someone may decide to leave, and that creates an opportunity, which may be often historic rent, which is even lower, that provides a scope for greater spreads. But we feel comfortable in our rents, I think that's the bottom line and the key message. And comfortable that at this level, we can continue to lease accretively.

In terms of occupancy cost ratios, we collect 30% to 40% of sales data. So Stuart and I are fond of saying, it's not the most reliable sample. We don't publish it as a consequence. We want to feel very confident about the numbers we're putting forward. Our center teams do an excellent job of speaking to individual retailers, engaging performance, store managers, et cetera. So we get a good feel. We have had external research companies undertake detailed pieces of work. The last piece was Javelin, about 18 months ago, part of Accenture, and they estimate occupancy costs at about 12.5%, 13%, which would indicate there's some scope for growth. I appreciate that there is a relationship between trading density and total trading volume and propensity to pay rent or other fixed costs. But we feel comfortable about our levels of rent.

I will say in relation to accessing sales data, on all new leases, we request it. But I will say that retailers are getting tougher and tougher in terms of their willingness to share that type of data with us. And that's -- I'm going to be really frank with you, I'm not losing a lot of sleep about that, Kundayi, because I think what's happening is the store is increasingly becoming central to many retailers, last-mile logistics networks. And the role of the store increasingly from speaking to retailers is more than just a transactional point. It's how does that aid last mile. So I think Nick's released some numbers with their annual report. I think from memory, and I'll get this wrong, but it was a staggering percentage of return, 70% or 80%, go back to the store, and the Click & Collect was in the 50s or 60% mark. So that's where they see all the growth.

Retailers are trying to drive that, as you would appreciate, because it's more cost-effective for them. Typically, they don't make a lot of money out of their online businesses because of the cost of last-mile logistics. So using the store and that logistics network is incredibly important. So at what point are those sales recognized or the returns recognized and the role that store plays in that, I think, is clouding the traditional approach, which is what's the occupancy cost ratio, i.e., store-based sales over rent when the retailer is looking at the role of the store in a much wider context.

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Kieran Adrian Lee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [16]

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Kieran Lee from Berenberg. Just a couple from me. You mentioned in the presentation that you're looking to continue monetizing residential from existing sites. Given you've now got the backing of your major shareholder with a pretty big balance sheet behind you, do you see scope to change this going forward to say, look, hang on, we will shift towards more of a mixed-use model? Or is it very much a case of sticking to remitting?

And the second one is actually just on the ultra-low emission zone, which is due to be introduced next year across London. I was just going to see if you've got any data on the number of visits by car versus public transport. And looking at footfall, which was down slightly, any forecast of what that may do to your footfall numbers looking forward?

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Lawrence Francis Hutchings, Capital & Regional Plc - CEO & Director [17]

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Interesting. They're 2 very good questions. Maybe we'll start with the ULEZ effectively. So 2 of our centers are within the ultra-low emission zone, ULEZ, which -- and that's the wider ULEZ I'm talking about. So that's the North-South Circular ring, which I think comes into effect in April -- early April. I don't know how aware you are of those parts of London, but if you drive on some of those arterial roads today, there are cameras with screens up and it will take a photo of your number plate as you're approaching it and it will warn you that as of the ULEZ date, that journey will cost you GBP 12 or GBP 15 effectively based on the age of your vehicle, and therefore, its emissions.

I've got to be frank with you, given our proximity to transport nodes, we think this is a real opportunity for our London assets, if I'm really honest. We've had a trend where car park patronage has been reasonably flat, if I'm honest with you, to maybe slightly down. I think there's been this modal shift in London going on for quite a few years now away from the vehicle. I live in Zone 1. I've got a car, I must admit, it doesn't move very often because there's next to nowhere I can go faster in that vehicle than I could get on public transport. And then you roll -- the hassles of parking it. So I see that modal shift firsthand from me and that has changed in the last 3 or 4 years.

The reason we think it's exciting is, I think it's going to put pressure on the retail parks around London, if I'm frank with you. And we're already hearing that from retailers. So retailer like Next, who's located with us in Ilford, has cited that this has been going on for quite a while, the restriction in car movements around London. The challenges in loading, getting delivery vehicles into some of those locations, I think, has been working to our benefit. So we're excited by that.

I think the other opportunity for us is those car parks are always about GBP 3 a square foot. So we talk about our low base rents of GBP 12 to GBP 15, and we're already in discussion with people about how we could start to repurpose parts of these car parks. Are they dark kitchen opportunities? Are they -- is there a contract parking opportunity? Is there other things that we can do? In Walthamstow, a couple of years ago, we converted part of the car park into a 2-level TK Maxx store, which has been hugely successful. That was an accretive project for us. In Wood Green, about 2 years ago, we converted an entire level of car park to an 80-room Travelodge hotel. That delivered a 9% yield on cost of that project, and Travelodge have come back to us and now want to do another 80 rooms and take another level. So I think thinking really laterally around how we can use this car park and the space, I think, it's just very interesting from our perspective. We're excited by the changes and potential uses.

Some of these car parks have a logistics role with last mile? And I don't know if you've noticed, these last-mile vehicles are getting smaller and smaller. We're in Pimlico, DHL are running a trial there, where they've got a bike with a little trailer attached to it, where they, by bike, are delivering parcels around Pimlico. So we think that area is going to change dramatically, but they all need some way to base themselves. And we think combination of our loading bays and our car parks could be really interesting.

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Kieran Adrian Lee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [18]

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Then it was just on the residential and the monetization.

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Lawrence Francis Hutchings, Capital & Regional Plc - CEO & Director [19]

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And that's, as I mentioned, another good question. Obviously, we started the Walthamstow journey about 12 months ago. It was one of the things -- as I mentioned, we had a Board Away Day on Monday. It's one of the things that we discussed. I think we do see ourselves as being confident in mixed use, if I'm frank with you. The office projects that I've mentioned to you, office leasing deals, the hotel that we've done at Wood Green that we still own. I think residential, at this stage, we see ourselves partnering with others, especially around the PRS and the large-scale residential. But we're very open-minded as to what the future could look like, Kieran, on something like an Ilford, for example, is that something that we look to take more active role in some shape or form.

But we very much see ourselves -- from speaking to residential operators, as we have had the opportunity to the Walthamstow open market process, they all acknowledge how important creating place on a ground floor plane is and how that drives value up into these vertical elements and whether that's office operators, whether that's PRS, whether that's developed to sell, whether that's hotels. The Travelodge guys we're speaking to the other day about the expansion, and I was saying how valuable they felt the grab-and-go food offer that we provide in Wood Green is and how that's appealing to their guests and is driving higher occupancy. So we do think there's a very strong relationship about the quality of what we create in the ground floor planning and how we drive -- how that drives value into these other parts. And we think we're very well positioned to assist in that process and be involved.

Any further questions? Anything from the telephone lines? No? I'm hearing no. Fantastic. Well, I want to thank you on behalf of Stuart, myself and our entire team, for your time this morning, for your questions, for your interest, and we look forward to seeing you again soon. Thank you very much.