Interim Management Statement

RNS Number : 1480M

Capital & Regional plc

19 May 2010

 

19 May 2010

Capital & Regional plc

Interim Management Statement

For the period from 31 December 2009 to 19 May 2010

Capital & Regional plc, the co-investing property asset manager, today announces its interim management statement for the period from 31 December 2009 to 19 May 2010.

Highlights

The key highlights are:

·     Completion of two property sales at group level for £12 million and six property sales in the funds and joint ventures for £233 million;

·     Conditional exchange of contracts for the sale of The Mall's Ilford shopping centre for £71 million at a net initial yield of 7.80%;

·     Exchange of contracts for the sale of the Manchester Evening News Arena, in which the Group holds a 30% interest, for £62 million at a net initial yield of 7.15%;

·     Refinancing of Xscape Braehead, in which the Group holds a 50% interest;

·     Further recovery in fund property values, underpinned by the April X-Leisure valuation and other transactional evidence;

·     Encouraging letting activity in The Mall during Q2 and Best Buy open their first UK store at Junction Thurrock

Hugh Scott-Barrett, Chief Executive, commented:

"Strength in the investment markets has enabled both the Group and the funds to deleverage further whilst freeing up capital for future growth.  So far this year, disposals of £245 million have been completed and contracts have been exchanged on a further £133 million of transactions.  Increased interest in space from retailers is reflected in a number of long term lettings across the funds, which has enabled us to begin the transition from income protection to income growth.  Actions taken so far this year position the Group to take advantage of an expected increase in the flow of investment opportunities later in the year."

Operating and financial review

Tenant markets

There are signs of further stabilisation in tenant markets, with levels of occupancy broadly stable or increasing and significantly lower levels of new administrations in the period compared to the same period in 2009.

The key performance indicators on a like for like basis were as follows:

Occupancy	The Mall	The Junction	X-Leisure	Germany
30 December 2009	94.6%	93.7%	94.5%	98.1%
31 March 2010	94.1%	94.3%	94.7%	98.1%

Administrations	The Mall		The Junction		X-Leisure		Germany
	Units	Rent *	Units	Rent *	Units	Rent *	Units	Rent *
Q1 2009	73	£5.0m	5	£1.5m	5	£0.4m	2	£0.1m
	(3.4%)		(3.2%)		(0.7%)		(0.2%)
Q1 2010	32	£1.5m	-	-	5	£0.3m	-	-
	(1.3%)		-		(0.8%)		-

* figures in brackets show the percentage of rent roll entering administration

Passing rent	The Mall	The Junction	X-Leisure	Germany
30 December 2009	£117.0m	£39.0m	£42.7m	€44.3m
31 March 2010	£114.8m	£39.5m	£42.6m	€44.3m

·      Occupancy across the three funds decreased from 94.4% at 30 December 2009 to 94.2% at 31 March 2010, as a result of a fall in The Mall which reflected the expiry of seasonal temporary lets and a number of administrations.  Occupancy increased slightly in both The Junction and X-Leisure, and remained unchanged in the German portfolio which continues to show very low vacancy rates.

·      There were relatively low levels of new administrations in the three UK funds in the quarter compared to Q1 2009, particularly in The Junction, which saw no administrations in the quarter, and The Mall.  This trend has continued so far in Q2 (as at 14 May 2010), with seven administrations in The Mall at passing rent of £0.2 million, two administrations in The Junction at passing rent of £0.2 million and no administrations in X-Leisure.  There have been no administrations in the German portfolio so far in 2010.

·      Passing rent, calculated for the three UK funds on a weighted average like-for-like basis, has fallen by 0.9% since 30 December 2009.  This was largely driven by The Mall, which saw a fall from £117.0 million to £114.8 million.  The expiry of seasonal temporary lets and the administrations mentioned above reduced rent by £4.4 million, which was only partially offset by £2.2 million of additional rent from new lettings and rent reviews.  Passing rent in X-Leisure and the German portfolio was virtually unchanged over the quarter, while The Junction saw an increase from £39.0 million to £39.5 million.

Across the three UK funds in Q1, rent reviews were settled in 65 units for new passing rent of £10.9 million at 5.3% above ERV; new lettings were agreed in 27 units for passing rent of £1.6 million at 14.5% above ERV; and lease renewals were agreed in 6 units for passing rent of £0.2 million at 14.2% below ERV once tenant incentives have expired.

Since 31 March 2010, there has been encouraging letting activity in The Mall, with the agreement of 16 long term leases (generally ten years with five year breaks) for 65,000 sq feet which will deliver passing rent of over £1.6 million per annum after incentives expire.  Notable signings include a Next relocation in Blackburn, two Poundland stores in what had previously been long-term vacancies in Luton and Romford, and a Barclays branch/regional office in Middlesbrough (subject to planning) in a dilapidated accommodation block that the fund will renovate.

·      the number of temporary lettings fell from 202 units to 186 units in Q1, largely reflecting the expiry of short-term Christmas and New Year tenancies in The Mall. 

·      Rent collection rates (adjusted for monthly payment plans and tenants in administration) continue to be strong, with 96.7% of rent being paid within 30 days of the March quarter day compared to 96.8% in December.

The May bank holiday weekend saw the very successful opening of the UK's first Best Buy store, a 50,000 sq feet unit in The Junction's Thurrock Shopping Park.

The same weekend, there was a significant fire at the Homebase unit in The Junction's retail park in Maidstone.  Although it occurred during trading hours on a bank holiday weekend, the emergency procedures worked efficiently and there were no casualties or injuries.  The other retailers on the site were able to continue trading the following day and there is not expected to be any adverse impact on the net assets or profit of the Group as any losses will be met by the insurers.

Property investment markets

We announced the March fund valuations on 15 April 2010 as follows:

	Value of properties £000	Underlying valuation change in quarter	Change in unit price (geared) in quarter	Net initial yield	Unit value at 31 March 2010	Unit value at 31 December 2009	C&R share of fund
The Mall	1,201,250	0.9%	1.9%	7.46%	£0.3002	£0.2947	16.7%
The Junction	602,190	4.7%	14.3%	6.15%	£0.3683	£0.3221	13.4%
X-Leisure	525,600	7.9%	24.0%	7.32%	£0.2694	£0.2172	11.9%

The valuations in each fund, which had begun to recover in the last half of 2009, saw further increases in the first quarter of 2010, particularly in The Junction and X-Leisure.  The valuation increases reflected inward yield shift as shown by the like for like net initial yields in the following table:

	The Mall	The Junction	X-Leisure	UK *
December 2009	7.79%	6.43%	7.92%	7.50%
March 2010	7.46%	6.15%	7.32%	7.13%

* weighted average.  The German portfolio is not valued in Q1.

Despite this yield shift, a fall in valued income in The Mall (as a result of the usual seasonal expiry of temporary lettings, a number of administrations, and certain valuer assumptions) meant the valuation in the fund increased by only 0.9% in the quarter.

Valued income represents gross contracted rent less head rent payable and any occupational costs that are not recoverable from tenants (such as rates and service charges on vacant units), with assumptions about the likely settlement of outstanding rent reviews.  It is also affected by judgements made by the valuer around the treatment of lease expiries, which in the current trading environment often assume a vacant or rent-free period until the terms of renewal are certain.

Of the valued income movement in the quarter, half arose from units becoming void of which a third related to seasonal tenancies.  Temporary lettings are an important tool in both generating income and mitigating void costs but they have a limited effect on valuations as the units are assumed to vacate after the short term expiry date of the leases.  Most of the remaining fall in valued income reflected lease expiry assumptions.  In all cases, these assumptions applied to tenants who are continuing to trade and we therefore expect renewal terms to be agreed which will allow valued income to recover.

Given the advanced stage of a number of the Q2 letting negotiations mentioned above as at 31 March 2010, the valuers reflected approximately half the future income flows in the valuation as at the date, with the remainder to be incorporated in valued income in future.  In general, full value for the lettings will only be achieved close to the rent start dates, though there is an immediate positive benefit as exposure to void costs is removed.

The X-Leisure fund, which carries out monthly valuations, reported the following figures at 30 April 2010:

	Value of properties £000	Underlying valuation change in month	Change in unit price (geared) in month	Net initial yield	Unit value at 30 April 2010
X-Leisure	534,600	1.7%	4.6%	7.21%	£0.2819

This movement was largely a result of the further inward yield shift of 11 basis points but there was also a small increase in valued income.

In addition, as discussed further below, evidence of yield compression from completed and prospective disposals in other funds since the quarter end give us increasing confidence that Q2 will see further valuation increases across the three UK funds.  In Germany, increasing levels of transactions in 2010 indicate that valuations have now stabilised.

Property disposals

On 29 April 2010, contracts were exchanged for the sale of the Manchester Evening News Arena, in which the Group holds a 30% joint venture interest, with completion expected to occur before 30 June 2010.  The debt secured on the asset currently amounts to £47.8 million. The transaction was structured as a sale of the companies holding the property interests.  The sale price represents consideration for the property of £62.2 million at a net initial yield of 7.15%.  This was a small premium above the December 2009 valuation, which saw a higher uplift than the comparable leisure properties in the X-Leisure fund at year end because it reflected the level of bids received for the asset.  As a result, the percentage uplift in the MEN Arena valuation since year end reflected in the sales price has been lower than the assets within the fund.

In March 2010, the Group completed the sales of its wholly-owned 10 Lower Grosvenor Place and Beeston Place properties.  The net proceeds from the two transactions were £12.4 million, which was used to pay down the debt of £7.4 million on 10 Lower Grosvenor Place.  The Group continues to explore opportunities for the sales of its wholly owned Great Northern Warehouse and Hemel Hempstead properties, which would result in the repayment of all the Group's remaining on-balance sheet debt.

Within the funds and joint ventures, a number of disposals have taken place since the year end:

·     In February 2010, The Mall completed the sale of its Aberdeen property for £47.4 million at a net initial yield of 7.9%.  This represents a small premium to its year end valuation of £46.0 million

·     In March 2010, The Mall completed the sale of its Preston property for £87.0 million at a net initial yield of 7.6%, compared to its year end valuation of £84.5 million

·     In March 2010, the X-Leisure fund completed on the sale of its Croydon property for £32.5 million at a net initial yield of 7.6%, compared to its year end valuation of £31.7 million

·     In April 2010, The Junction sold its Aylesbury retail park for £60.4 million at a net initial yield of 6.04%, compared to its year end valuation of £52.9 million and its 31 March 2010 valuation of £58.8 million.

·     As well as these sales which have already been announced, The Mall has conditionally exchanged on its Ilford shopping centre for £70.6 million at a net initial yield of 7.80%, compared to its year end valuation of £68.0 million and its 31 March 2010 valuation of £69.5 million.

·     The German joint venture has sold two properties since the start of 2010.  The sales were undertaken for strategic reasons with property specific issues, resulting in proceeds of £6.0 million (at the year end exchange rate) being below the year end valuations of £7.5 million.

The funds continue to consider opportunities for disposals, either where the current value that can be realised is attractive or where further deleveraging is desirable.

Debt and bank covenants

With the exception of the Braehead facility all of the group, fund and joint venture loan facilities were in compliance with their covenants at 31 March 2010.  The Braehead facility is now covenant compliant following the refinancing described below.

There has been no drawdown on the central facility so far this year and as at 31 March 2010, following the sales of the wholly-owned properties discussed above, Group debt had fallen to £72.4 million.  At the same date the Group held cash of £12.4 million in its central bank accounts.

Our primary focus is now on The Mall's bond financing.  In addition to the sales that have already been announced and the fund's policy of retaining cash, discussions are under way with bondholders regarding the options for refinancing the bonds, with the objective of reaching agreement well in advance of the continuation vote in 2011.

The debt position in the funds has been further improved since the year end by the disposals set out above.  The Junction repaid debt of £34.4 million out of the proceeds of the sale of Aylesbury, while X-Leisure repaid debt of £30.0 million out of the proceeds of the sale of Croydon, and Mall bonds totalling £169.0 million have been repaid with the proceeds of the sales of Bexleyheath, Aberdeen and Preston.

As also mentioned above, the Group has completed the refinancing of its Braehead joint venture which had breached its LTV covenant in January 2010.  In exchange for a two-year LTV holiday, the Group and its joint venture partner have injected funds into the Braehead Partnership which, together with cash already held, have enabled it to pay off £3.4 million of its bank loan.  The refinancing also involved changes to the SNO!zone lease, including revised rental terms.  Whilst these will have an adverse impact on the valuation of the property, the overall impact on Group net asset value is expected to be small and there will be a positive impact on future recurring profitability.

In January 2010, the Group paid £1.1 million into FIX UK as its proportional contribution of new equity to facilitate the refinancing of the portfolio.  At present this additional equity has been written down in value to £nil but the Group expects to see a positive return on it as valuations improve.

Strategy

Although we continue to analyse opportunities for investment, we feel that we are likely to see more attractive pricing later in the year.  The actions that we have taken both at Group and fund level mean we now have financial resources to invest in such new opportunities, and partners with whom we can co-invest to support the further development of the Group as a co-investing property asset manager.  The key to creating value for our shareholders continues to be to retain maximum strategic flexibility to take advantage of opportunities as they arise.

For further information:

Capital & Regional:
Hugh Scott-Barrett, Chief Executive	Tel:  [phone]
Charles Staveley, Group Finance Director	Tel:  [phone]
Maitland
Martin Leeburn / Emma Burdett	Tel:  [phone]

Notes to editors:

About Capital & Regional plc

Capital & Regional is the co-investing asset manager which specialises in town centre shopping centres, out of town retail parks, and urban entertainment complexes.  Capital & Regional founded The Mall and The Junction funds in conjunction with Aviva Fund Management.  It also founded the X-Leisure fund with Hermes Investment Management Limited, and has a number of other joint ventures and wholly owned properties.  Its shares are quoted on the London Stock Exchange.

For further information see www.capreg.com

Forward Looking Statements

This document contains certain statements that are neither reported financial results nor other historical information.  These statements are forward-looking in nature and are subject to risks and uncertainties.  Actual future results may differ materially from those expressed in or implied by these statements.  Many of these risks and uncertainties relate to factors that are beyond Capital & Regional's ability to control or estimate precisely, such as future market conditions, currency fluctuations, the behaviour of other market participants, the actions of governmental regulators and other risk factors such as the Group's ability to continue to obtain financing to meet its liquidity needs, changes in the political, social and regulatory framework in which the Group operates or in economic or technological trends or conditions, including inflation and consumer confidence, on a global, regional or national basis.  Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this document.  Capital & Regional does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this document.  Information contained in this document relating to the Group should not be relied upon as a guide to future performance.

 

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