Capital & Regional (C&R)

At 30 June 2020, C&R had total cash on balance sheet of GBP81m which is equivalent to more than one year's gross revenue.

Capital & Regional is a UK-focused specialist property REIT that invests in, manages and enhances retail property by creating dynamic environments tailored to local communities. It has a GBP611m portfolio of in-town dominant community shopping centres comprising seven assets, with almost equal weighting in value between London and regional retail. As a specialist owner and manager of shopping centres, it invests in the retail assets in its portfolio to unlock their full value. Its cost-effective, efficiently run centres meet the needs of its shoppers and retailers and provide shareholder value through income growth.

A significant milestone for C&R in FY20 was the investment of GBP77.9m by Growthpoint, which was completed in December 2019.

It had considered other investors in the market but Growthpoint proved to be the best fit. The two companies' values are strongly aligned and consistent, and they have a similar approach to business. C&R is committed to responsible business. It is socially responsible through positive impacts on its shoppers, retailers and broader communities and it works to minimise its environmental impact. It strives to adhere to the highest standards of corporate governance. The Growthpoint investment enabled C&R to reduce leverage and at the same time introduced a partner that can add value to the company.

Performance

C&R started 2020 from a position of strength and, having closed the Growthpoint transaction, it was ready to focus on the continued roll-out of its strategy to reinforce its platform of needs-based, non-discretionary, urban community retail for future growth.

Its balance sheet was in a robust position to counter the headwinds from a combination of economic uncertainty and the ongoing structural changes taking place in retail. Its portfolio had benefited from the more than 20 targeted projects undertaken in 2019 which had a positive effect on performance and laid the foundations for further improvements.

The structural shift in the retail landscape continued to accelerate and economic conditions in the UK remained uncertain. High street retail faced considerable pressure as a result, with increasing market share taken by online shopping. The UK shopping centre market was rapidly evolving with increasing polarisation between needs- and wants-focused centres.

In 2017, C&R adopted a strategy to redefine the community shopping centre segment in the UK, consistent with global best practice, and nothing since has undermined this plan, although retail is shifting at a faster pace. The strategy is designed to enable the business to evolve, adapt and grow in tune with the rapidly changing retail landscape. As the biggest operator of community centres in the UK, it has identified opportunities to apply its skills and relationships to drive growth in income and value, and the potential to unlock value, by adding a mix of uses to its assets.

Despite the strained economic and structural backdrop, C&R's portfolio was proving to be relatively resilient at the start of 2020 in terms of shopper attraction and retail occupancy levels. The business was well placed to weather and even capitalise on the market changes through its focus on high footfall centres characterised by affordable rents and anchored by non-discretionary spend (needs-based) grocery outlets and professional and personal services, including health and beauty stores.

However, from early March Covid-19 dominated headlines in the UK, moving from a distant crisis to a local one. In the final weeks of March, restrictions were enacted daily, and it became evident that Covid-19 would significantly impact C&R, as a pure retail REIT. The retail downturn was faster and more profound, and the recovery is taking longer than initially expected.

Covid-19 response

The government restricted retail to essential services on 27 March and all shops closed except a core component of grocers, supermarkets and pharmacies. All C&R shopping centres remained open to provide essential services to their communities. However, their capacity to do this was significantly reduced, with only 23% of its occupiers by contracted rent, or 68 stores out of 631, able to trade from early in the lockdown until mid June.

C&R's overriding priority remained the health, safety and protection of its employees, guests and customers, and it followed the latest official government guidelines and advice across its portfolio.

The lifting of restrictions, which enabled non-essential retailers to open again from 15 June, saw a significant increase in the number of tenants trading, with about 500 stores, or 74% of units, trading and another 10% set to open. In fact by the end of June, only 5% of stores in the portfolio were not authorised to open and 599 stores were trading. C&R continued to work closely with the remaining retailers to help them re-open as soon as possible.

Shopper numbers increased 97% from the final week of restricted retail to the last full week of June when footfalls were 55% of the amount recorded in the comparative week of 2019. Retailers also reported that average transaction values were higher than the comparable period of last year, with shoppers making focused, purpose-led visits.

The lockdown proved an unexpected, yet valuable, test of the community centre strategy. Some portfolio statistics outperformed those of peers as a result of the high proportion of non-discretionary retail and services offered at our centres. There was an increase in local shopping, out of necessity, and C&R's shopping centres are geared to cater to customers from close-by catchment areas. The way its shopping centres are used – weekly or more, with mostly weekday visits from local shoppers – is different from regional centres, where people tend to shop monthly or every alternative month.

There was a noticeable change in shopper demographics at C&R's centres during the lockdown. With shopping becoming local and essentials driven, and with fewer people commuting to city offices, the portfolio enjoyed more visits from the younger adult demographic than usual. While it incurred additional direct costs for PPE and sanitising because of Covid-19, these were small relative to the value of making customers feeling safe.

That said, there were three months of significant disruption to shopping centres, which led to a substantial downturn in rent payment as a result of shops not trading. Some government legislation had unintended and unhelpful consequences for the property sector. With a moratorium on the action available to recover debt, some retailers chose not to pay. The government moratorium is due to lapse at the end of September 2020 and, until then, the C&R team will work hard to improve the situation with active tenant engagement and dialogue.

In total, the business has collected roughly 50% of all rents due from 25 March to the end of June. Almost half of the balance of rent outstanding is due from major, well-capitalised retailers which have the capacity, and a clear contractual obligation, to pay. The company remains in active discussions with retailers on the outstanding rent. Likewise, it continues to engage with its smaller independent retailers as to how it can best offer support.

In line with government guidelines Snozone, the biggest indoor ski slope operator in the UK, which is fully owned by C&R, closed its two indoor ski-slope sites on 20 March 2020 and re-opened post-year end from 7 August with 45% reduced capacity and operational restrictions, including to its restaurant, and reduced hours. Its re-opening means that it should be able to operate during the months when it has historically proved to be most popular.

C&R expected property valuations in the market to come under some pressure during 2020 but the fall in valuations has been more profound than could have been anticipated. The UK is one of the most evolved omnichannel retail markets globally, and Covid-19 is amplifying this, with more businesses than usual being placed in administration and having to take insolvency action. Unexpected names are entering company voluntary agreements, including Travelodge, which is a portfolio tenant.

Market valuations in the UK tumbled 25% on average, with C&R faring better at 16%, with its assets outperforming the market and those in London being particularly robust. That said, there were few transactions in the market in the six months to end June and it remains to be seen how more market activity will influence valuations. C&R's centres are experiencing strong demand, with the potential to strengthen this further by including alternative-use opportunities such as medical, leisure and residential components.

To protect its balance sheet and liquidity, C&R suspended all non-committed capital expenditure projects at the start of the lockdown. A significant portion of the capital raised from the Growthpoint transaction was earmarked to pay down its debt and when Covid-19 broke out, it carefully considered how best to do this to protect its balance sheet and meet its strategic goals.

At 30 June 2020, C&R had total cash on balance sheet of GBP81m, which is equivalent to more than one year's gross revenue. It also had an undrawn revolving credit facility of GBP15m available until January 2022. The earliest maturity on any of its other loan facilities is February 2023. It had signed waivers for all income covenants with quarterly test dates in July and October 2020 on its three biggest asset-backed loan facilities. These represent over 93% of its outstanding debt. Discussions with banks are ongoing.

Prospects

It remains too early to quantify the ongoing effects of Covid-19 on C&R's operations. While it is clear that the pandemic is rapidly accelerating several structural trends that were already under way in the retail industry, we remain confident that the focus on local community centres providing non-discretionary and essential goods and services provides the business with a sound base during the uncertainty and will continue to do so when conditions allow a return to a more normal trading environment. We have also identified food services as increasing in importance in retail mixes as a result of more people wanting to work in regional offices closer to home.

C&R is adopting a considered and cautious approach to its next steps and seeking to maintain flexibility at a corporate level to assist it in navigating the risks of further falls in valuations – and the potential impact should there be further local or UK-wide lockdowns in the event of rising Covid-19 infection numbers during a "second wave" of the pandemic.

In the interim the Group remains focused on maintaining occupancy and income, together with delivering the remerchandising and repositioning of the Group's centres in the community centre model. This will require changing retail mixes to add more needs-based non-discretionary retailing, supplemented with more services including medical centres. It will also seek to unlock value through mixed-use residential development opportunities above its existing assets.

This approach is seen as the most prudent given the uncertain outlook due to Covid-19 to protect the Group and shareholder equity.

C&R top 10 tenants by gross rental contributions (100%)

  Tenants   GLA m2
1 A.S. Watson (Health & Beauty) Ltd   4 746
2 Alliance Boots Ltd   16 358
3 Primark Stores Ltd   13 372
4 NBC Apparel Ltd   11 862
5 H & M Hennes & Mauritz UK Ltd   6 414
6 Sports World International Ltd   8 552
7 Wilkinson Hardware Stores Ltd   16 133
8 Debenhams Properties Ltd   31 983
9 Maidstone Borough Council   4 697
10 John David Sports Ltd   2 781
Sub-total   116 898
Balance of C&R   193 548
Total for C&R (excluding vacancies)   310 446