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Edited Transcript of UAI.L earnings conference call or presentation 20-Nov-19 9:00am GMT

Half Year 2020 U and I Group PLC Earnings Call

London Jan 7, 2020 (Thomson StreetEvents) -- Edited Transcript of U and I Group PLC earnings conference call or presentation Wednesday, November 20, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Marcus Owen Shepherd

U and I Group PLC - Chief Financial & Operating Officer and Director

* Matthew S. Weiner

U and I Group PLC - CEO & Executive Director

* Richard Upton

U and I Group PLC - Chief Development Officer & Director

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Conference Call Participants

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* Tom Musson

Liberum Capital Limited, Research Division - Research Analyst

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Presentation

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Matthew S. Weiner, U and I Group PLC - CEO & Executive Director [1]

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Good morning, and welcome to U+ I's interim results presentation. I'm Matthew Weiner, the group's Chief Executive Officer. And as usual, I'm joined on the call by Richard Upton, Chief Development Officer; and Marcus Shepherd, Chief Financial Officer, who, from today takes over additional responsibilities on the operations side of the business under the new title of Chief Financial and Operating Officer.

I'll start with the results summary and then I'll pass you over to Marcus for the financials and Richard will follow with the major projects update. I'll then close with an update on our investment portfolio and the outlook for the second half. We'll then take any questions.

Slide 2 outlines the most relevant matters from the first half. We said at our last results that we will be very second half weighted this year. And this remains the case. In the first 6 months, we delivered GBP 3.6 million of development and trading gains, and we still expect to deliver the balance of our full year target of GBP 35 million to GBP 45 million later in the second half.

As was likely in the current environment, the investment portfolio saw a 3.2% decline in capital value, including our share of joint ventures. This reflects the impact of the weak retail market. However, as I will explain later, the investment portfolio is in transition. And I'm encouraged by the progress we are making. In terms of the interim dividend, it remains unchanged at 2.4p per share, in line with our stated policy.

For those of you who were able to attend our Capital Markets Day in October, you'll be aware that we're making significant strategic progress towards delivering consistent double-digit returns. At the core of this is moving to delivery from the substantial PPP and trading pipeline that we have built up. This delivery of major projects alone could generate over GBP 150 million worth of gains for the company.

And we're at key moments in these projects, as Richard will explain. But at a high level, in the remainder of the year, we expect to receive 5 planning consents on projects with a GDV of circa GBP 2.7 billion. It remains that planning consent and land preparation are where significant value and opportunity are created. Getting these projects to site will secure approximately GBP 6.5 million per annum in development management fees in full year '22, up from GBP 2.5 million at full year '19 and GBP 0.7 million from when U+ I was formed.

We also continue to evolve our investment portfolio, reducing our exposure to retail, as demonstrated by 2 non-core retail assets being under offer post H1 whilst increasingly transferring assets on practical completion from our development and trading activities. This will generate superior rental and capital growth.

Our business optimization program is well underway. And to drive this program, as mentioned at the start of the call, we have today appointed Marcus as Chief Financial and Operating Officer or CFOO. By combining these roles, we can give single-point accountability for delivery of our optimization objectives. And specifically, we are targeting circa GBP 4 million of annualized savings by full year '22. And so far, in the first half of 2020, we have delivered an annualized overhead saving of circa GBP 1 million, representing 5% of our cost base.

So what does all this mean? Well, it means that we're not only confident of delivering our near-term full year '20 guidance but also delivering our longer-term strategy. We believe in our long-term growth prospects based on having secured some of the U.K.'s most exciting regeneration projects in our 3 core markets, the London City Region, Manchester and Dublin, and the value that these projects will deliver for our shareholders.

Like many businesses, we continue to experience these challenges as a result of political and economic uncertainties. So on Slide 4, we thought it would be helpful to highlight some of the biggest challenges we face as a company and how we are navigating these. This gives context around the delivery of this year's guidance and in the current unprecedented environment with the general election being the latest bump in the road.

Statistics out in August this year showed that only 1/3 of planning application in England for projects of 10 or more housing units have been decided within the 13-week statutory period for their determination with the worst-performing local authorities in the southeast of England the area most in need of new homes. These authorities are in the heart of our London City Region geography.

And the position is further impacted by an estimated 40% decrease in local authority planning staff numbers between 2006 and 2018, driven by a reduction in government funding to local authorities. One example of where we're seeing the combined effects of these issues is at our Landmark Court project, where Southwark Council has canceled all of its planning meetings for the rest of this year. This means that we will now go to committee in early 2020 rather than in the -- at the end of 2019.

And to help us combat these challenges, we've worked tirelessly since U+ I was formed, and going back even before then, to build strong relationships with local councils and to ensure that our schemes are designed with the community at their heart. This is best demonstrated by repeat business, such as in Ashford, where we're currently working on our fourth development, Newtown Works, which we acquired last year. Here, in H1, we submitted for planning and are targeting a development and trading gain this financial year.

As we all know, the uncertain political backdrop is affecting activity levels and confidence across a number of sectors including real estate. It's a time where politics are dominating economics in driving markets. Now we have no control over the outcome of the general election or the timing and impact of a departure from the EU. However, we can control our approach as a business. The business remains apolitical, and we have developed strong cross-party relationships. And one thing that all parties agree on is the urgent need for regeneration, and they have all placed this high on their political agendas. There's a structural undersupply of good homes and places to work, and that's not going to change in the short term.

However, against this backdrop, we're having to be more proactive than ever. Even if some of our projects are delayed for reasons out of our control, as demonstrated in previous years, we believe that we have sufficient flexibility within the portfolio to manage our gains to meet our guidance without discounting the anticipated value of any projects. An example of this flexibility is at Harwell, our joint venture innovation and science cluster in Oxfordshire, where we've been in partnership since 2013. We've added this project to our guidance for the full year as we believe this to be the optimum time to recapitalize this asset to drive the next phase of growth, which requires a more significant capital partner.

And I'll now hand you over to Marcus to talk you through the financials.

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Marcus Owen Shepherd, U and I Group PLC - Chief Financial & Operating Officer and Director [2]

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Thank you, Matthew. Slide 6 shows the financial performance for the first half of the year.

The loss for the first half is influenced by 3 key items: firstly, gains of GBP 3.6 million in H1 compared to GBP 12.8 million at the same point last year; secondly, an investment portfolio valuation decline of GBP 5.8 million, and Matthew will talk in more detail about the investment portfolio later; thirdly, an impairment of GBP 6.5 million in respect of a development asset. This impairment is in relation to a forward-funded development in London, where construction has been completed and is now in the process of being sold.

The group anticipates recovering these costs, and the recovery will be treated as a reversal of that impairment when received. Cost overruns and final account settlements typically occur in respect of large-scale developments, especially those that are forward-funded and are usually eventually settled with all parties' agreement. As expected, our net gearing has increased to the upper end of our target range as we have brought our major schemes through to planning and which Richard will talk about later. And we have also built out the Plus X building in Brighton. This will reduce during H2 as we monetize projects in line with our business plans.

What I will do in the next few slides is focus on the key value drivers in our business, notably development and trading gains, debt finance and operating efficiency. Slide 7 is a familiar slide and shows the targeted development and trading gains in FY '20.

In the first half, as Matthew mentioned, we delivered GBP 3.6 million of gains. These were made up of profits across 3 projects, including gains at Circus Street following the sale of the student accommodation and planning overage at Preston Barracks in Brighton. This is very much in line with our expected progress as the bulk of our targeted gains for the year was always forecast for later in H2. We remain confident of achieving our target gains of GBP 35 million to GBP 45 million for the full year. While we may suffer unexpected delays that are out of our control, there are other projects that we believe we may be able to realize ahead of schedule to mitigate these delays and still achieve full value.

As Matthew mentioned, we added Harwell to our development and trading guidance in H2. The real estate market for science and research-led facilities is strong and Harwell Campus is already well-established internationally for numerous firsts across space, energy, life sciences and many other sectors. Spread over more than 700 acres in prime locations in the Oxford-Cambridge corridor, it is an attractive proposition, offering circa 5 million square feet of new development potential.

By recapitalizing the joint venture when demand is so strong, this provides us with an opportunity to realize gains ahead of our previously planned schedule whilst also supporting the next stage of the campus' growth through a more significant capital partner, who can accelerate this growth beyond our own capacity. This addition helps us to offset the slightly revised guidance to the Arts Building, which has been reduced by GBP 2 million to reflect market conditions, especially where smaller tenants are delaying and/or scaling back the requirements until more certainty returns to the economic environment.

On Slide 8, you can see that our gearing has increased over the period towards the upper end of our target range of 40% to 50% as we have continued to invest in our major projects to reach planning stage. This will decrease during H2 as we monetize our projects in line with our business plans. On a look-through basis, the debt-funded office refurbishment program in our joint venture in Dublin has now completed. And we are in the midst of our letting program prior to monetization. In addition, the build-out of the presold residential joint venture at Circus Street is advancing well and will be completed in the first 3 to 6 months of 2020. As a consequence, the look-through gearing will also reduce during H2.

Turning to Slide 9. Our short-term debt maturity relates to the Bromley development, where we are now in full flow with the residential sales program. During the period-to-date, we have already repaid GBP 17.4 million from sales proceeds and are forecast to have repaid the remaining loans by March 2020.

Turning now to Slide 10 on operating efficiencies. Some of you will be familiar with the details in the slide from the Capital Markets Day we held in October. We performed an extensive review of our cost base from top to bottom to see where we could make improvements as a business. Based on our findings, we have undertaken several initiatives, which have included GBP 0.5 million of redundancy costs in the first 6 months of this year, which are already starting to reduce our overhead. We have implemented new finance and back-office systems and processes. This has enabled us to streamline how we work and also embed rigor and consistency in how we interact with all of our stakeholders.

As a result of these actions, in the first 6 months of this financial year, we've implemented changes that would deliver circa GBP 1 million of annualized savings, which represents approximately 5% of our total cost base. Of course, we still have work to do. We continue to phase out small legacy projects and focus on fewer larger projects, which also drives efficiencies across all aspects of administration within the business.

We're reviewing all of our external appointments, both corporate and across projects, to ensure they deliver the best value for money. This program will be ongoing and cover every decision we make. And that is part of the reason why I've taken on my new role of CFOO. We'll continue to update you on our progress in realizing these planned savings in future results announcements. And specifically, we're forecasting an annualized total saving of approximately GBP 4 million by March 2022.

I'll now pass you over to Richard.

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Richard Upton, U and I Group PLC - Chief Development Officer & Director [3]

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Thank you, Marcus. In the next few slides, I'll update you on progress with our portfolio of projects.

We first presented this slide, Slide 12, at our recent Capital Markets Day. It illustrates where we are on our journey, having secured a valuable pipeline of projects and now having visibility of gains from that pipeline to 2034. We now move into Phase 2 of our business plan and are right on the cusp of planning decisions for over GBP 2 billion in gross development value of projects.

Slide 13 illustrates the milestones to monetization on a sample of our major projects. There is some GBP 150 million of potential profit here and around GBP 60 million of development management fees, of which circa 50% drops directly to the P&L. As you can see, there are a number of green and blue dots on the graph, being planning submission and determination events.

Now turning to Slide 14. We're making very good progress across some of the milestones highlighted on the previous slide. At Mayfield in Manchester, we have submitted for detailed planning consent. And that increased the overall gross development value from GBP 1.2 billion in full year '19 to GBP 1.4 billion today, with increased mass and increased efficiency. Mayfield is one of our largest projects. It's 24 acres, adjacent to Piccadilly station, right in the heart of the city, includes a huge historic railway depot, which has been derelict for 30-odd years and steeped in history.

We proposed 3.5 million square feet of beautifully designed development, the King's Cross of the north, if you like. Our detailed planning submissions, including designs for new public park, the first in Manchester city center for over 100 years, an 8-storey office building by tp bennett, a multistorey car park by SEW and a reveal of the River Medlock, together with a 12-storey, 230,000-square feet office building, which is the one in the middle of the picture on that slide, designed by Morris+ Company and designed to meet increasingly strong occupier demand.

On Slide 15, we're making good progress with securing funding at Mayfield, and we expect planning consents in January and February, moving to construction in mid-2020. We're also targeting major leasing activity next year. Mayfield will deliver 10 years of development management fees with GBP 40 million to GBP 60 million of profit expected across the lifespan of the project.

Furthermore, Mayfield, like every other U+ I major project, is a beacon of sustainable, inclusive regeneration. As we move into delivery of our major projects, we commit to market-leading sustainability, ecological and cultural gain and positive approaches to climate emergency through concerted mitigation and adaptive capacity. This will all drive exceptional ESG performance at U+ I, where we aim to be best-in-class within 2 years.

Including Mayfield, we are moving into the festive period of New Year with 3 major planning submissions for the gross development value of GBP 1 billion and 5 major planning decisions with a combined gross development value of over GBP 2.7 billion, as Matthew said. The planning decisions are through our partnership with the London Fire Brigade at 8 Albert Embankment; our partnership with Transport for London at Landmark Court and Borough Market just near London Bridge; Kensington Church Street, where the inquiry has just completed; and for a Green Belt site at the edge of Tunbridge Wells in Kent with committee dates for these schemes set in December and January.

These projects then move to capitalization and development management fees in early 2020. Our schemes have had strong expressions of interest from capital partners seeking best-in-class projects and best-in-class assets of the future.

Turning to Slide 16. There's been huge work in H1 on many planning fronts, including submission for 1,000 new homes at Broke Hill in Sevenoaks, the golf course we acquired in July 2017. A decision at Broke Hill is due in 2020, mid-2020.

And for Morden Wharf pictured on this slide, 19 acres of Thameside land on the Greenwich Peninsula, we proposed an GBP 840 million gross development value scheme with 1,500 homes, 35% of which are affordable as well as 200,000 square feet of creative industry and employment space, creating well over 800 new jobs. During H1, we overcame enormous obstacles on the project. And we target a submission in early 2020 with an approval in autumn 2020.

Morden Wharf will incorporate a 4-acre green park that's got vertical greening of buildings, heating and hot water delivered by a centralized system with air-sourced heat pumps. It's hugely sustainable, world-class project and has 500 meters of riverside shoreline. Further east in Charlton, we have prepared our GBP 250 million scheme at Westminster Industrial Estate for submission next month, 500 homes, an innovation hub, quite an innovative 3-storey industrial building that's in partnership with Royal London Insurance.

So a considerable activity in H1 on the planning front, which is a key component in driving value from U+ I's business plan. These submissions will drive the next phase of our business, and we anticipate a period of strong growth as we execute our business plan.

I'll now hand over to Matthew, who will talk you through the progress we're making with our investment portfolio.

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Matthew S. Weiner, U and I Group PLC - CEO & Executive Director [4]

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Thank you, Richard. On Slide 18, I'll run you through an investment portfolio summary for H1 before turning to our plan to transition the portfolio to deliver a consistent 10% per annum total return.

In the first half, we experienced a decline in capital value of 3.2%, including our share of joint ventures, versus a decline of 2.6% in H1 last year. We largely expected this decline, given the indiscriminate market decline in retail sector property values that is currently taking place and where the functionality of asset is being ignored in assessing value. High yields previously reflected the perception of an asset's quality. But we believe this relationship is broken down and centers that trade well are being valued on the same basis as those which are not suited to their catchment. Contracted rent across the portfolio has marginally increased to GBP 11.7 million per annum. And our initial yield across the core portfolio is now 7% with a good level of income sustainability.

While the overall performance of the investment portfolio was disappointing, it's worth noting that around 80% of the portfolio delivered flat capital value performance. This reflects the convenience nature of our portfolio, where demand remains steady as consumer spend is less discretionary and rents remain affordable. Across our shopping centers, rents average less than 10% of retailer turnover with an average rent of GBP 13.05 per square foot and a diversified tenant base with less than 5% exposure to any one occupier. The combination of low affordable rents and high yields result in low capital values per square foot and optionality to increase -- to introduce alternative uses.

The decline in portfolio value was primarily due to 4 non-core retail assets, where we are less in control in part of a wider and fragmented retail offer. 2 of these assets are under offer post period-end and the remaining 2 are part of our disposals program as we seek to reshape the portfolio to focus on U+ I developed projects. As outlined at the Capital Markets Day, we believe this shift will deliver superior returns whilst reducing our retail exposure. And occupancy across our entire portfolio remains resilient at 91.5%, which includes 96.8% occupancy across our shopping centers. Significantly, we didn't experience any CVAs in H1.

Turning now to Slide 19. In the first half, we secured planning permission at our scheme in Swanley for mixed-use extension, including over 300 new homes, 45,000 square feet of additional retail, commercial and community space, alongside a multistorey car park. This regeneration will certainly enhance the value of our existing shopping center assets, both by increasing the quantum and quality of the scheme catchment and the range of customer offer by increasing the quality of the experience.

This project best demonstrates our integrated approach, where we can leverage both our investment and development expertise. And the residential component of the consent is now in the market and will add to the investment portfolio performance in the second half.

Since half year-end, we're also under offer to sell 3 assets for a total of circa GBP 24 million at an overall premium to September valuations. This includes the 2 legacy retail assets already mentioned, which are outside our core geographies as well as a third leisure asset in North London. Here, we are under offer on a 30-year lease on a subject to planning basis and with a tenant option to purchase the asset before 2024. This letting would remove the largest single void from the portfolio, improving overall occupancy to 93.6%.

And turning to Slide 20. We have a strategy to improve our investment portfolio performance. This strategy is to change the dynamic to deliver superior returns through a focus on regeneration in our high-growth geographies. This will involve retaining the assets at the very heart of the mixed-use places that we create. We've identified up to GBP 175 million worth of regeneration assets for transition and believe these have the potential to deliver better rental and capital growth. In the short term, this could mean the transfer of circa GBP 50 million of development assets to the investment portfolio over the next 2 years.

And as part of this program, we're targeting a reduction in the number of assets in the portfolio from 18 now to 13 assets in the next 5 years. The 13 assets projected at that time will be in high-demand sectors, such as industrials or innovation workspace or assets which appeal to experiential-led retail and leisure concepts, such as markets and food halls. Our goal is to deliver a transformed portfolio comprising assets from our best regeneration projects. We'll also continue to manage our assets to maximize further returns and pursue a clear disposal strategy when the forecast return drops below our 10% benchmark. And we see substantial potential for this part of the business once transitioned.

And so to sum up in Slide 22. Our plan to deliver significant value from our business is compelling with a clear purpose, strategy and timetable to deliver financial targets. We delivered GBP 3.6 million of development and trading gains, and we still expect to deliver the balance of our full year target of GBP 35 million to GBP 45 million later in the second half. As discussed, the investment portfolio is in transition, and I'm encouraged by the progress we've made to date. We're becoming even more efficient in everything we do, as you've seen from the GBP 1 million worth of annualized savings we've already made in H1 against our target of GBP 4 million over the next 3 years.

But above all, we'll deliver world-class regeneration, generating huge socioeconomic benefit and best-in-class ESG performance. These developments will be aligned to the growth trends of urbanization and the need for affordable, convenient and inspiring places. The land is there, the demand is there and the capital is there. All it needs is a catalyst. And as a partner of choice for the public sector, we have the team and the expertise to bring these together to create places now and for the future.

Thank you. And now we'd be delighted to open up the call to any questions. Please give your name and company before you start the question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have no questions at this time. (Operator Instructions) And we have one question queued up at this time, and we'll now take our first question from Tom Musson from Liberum.

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Tom Musson, Liberum Capital Limited, Research Division - Research Analyst [2]

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Forgive me just if you've covered this, my line was quite bad, I had trouble hearing at times. But just two questions, if I can. Firstly, in relation to the impairment charge, my understanding is you expect to materially recover the cost. But is there a chance the charge gets worse before it gets better? Or is GBP 6.5 million the full amount? And secondly, regarding the partnership in North London with Barnet Council, can you say what size you think that scheme could be in GDV terms and if it goes ahead and (inaudible)?

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Marcus Owen Shepherd, U and I Group PLC - Chief Financial & Operating Officer and Director [3]

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Okay. Thanks, Tom. Marcus here. I'll answer the first question on the impairment. The way we have to look at these things is to consider the worst it could be. And that's what we have to impair. And so as far as we're concerned, that's the worst it could be. There is -- there shouldn't be any danger of it getting worse than that. And we would hope to recover the vast majority of it in the normal course of business.

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Matthew S. Weiner, U and I Group PLC - CEO & Executive Director [4]

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In respect of the North Finchley project, I mean there's various sites that we're working through across and up and down the high street. The principal one, which is a surface car park that would have a GDV probably of a couple of hundred million. And then there'll be some add-on pieces. So I'd say GBP 300 million is a sort of number in our mind as to the scale and the size of the opportunity but over a couple of phases.

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Operator [5]

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(Operator Instructions) As there are no further questions on the phone at this time, I would like now to hand the call back over to the speakers for any additional or closing remarks.

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Matthew S. Weiner, U and I Group PLC - CEO & Executive Director [6]

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None. If there are no more calls, it just remains for me to thank you for joining our half year results call this morning. And we look forward to seeing some of you over the next -- course of the next couple of weeks. Thank you.