12 AUGUST 2020     

CAPITAL & COUNTIES PROPERTIES PLC ("CAPCO" OR "THE COMPANY")

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2020

Confident in the long-term prospects for prime central London, in particular the West End

Ian Hawksworth, Chief Executive of Capco, commented:

"Covent Garden is a major central London destination offering a pedestrianised open air environment. Our strong financial position has enabled us to take early action to support our customers through this extraordinary period and take advantage of market opportunities.

Capco is focused on making sure our customers reopen successfully and are provided the setting which offers the best opportunity to gradually build back towards previous levels of trade. The majority of our retail and hospitality customers have reopened with encouraging early indicators.

There remain many challenges and an unpredictable economic environment however Capco is confident in the long-term prospects of the West End and the value of its unique investments."

Key financials

-       Equity attributable to owners of the Parent of £2.0 billion (Dec 2019: £2.5 billion)

-       EPRA NTA declined by 18 per cent to 241 pence per share (Dec 2019: 293 pence per share)

-       Total property value of £2.3 billion, a decrease of 16.3 per cent (like-for-like) (Dec 2019: £2.8 billion)

-       The Directors have deferred the dividend decision until the end of the year (Jun 2019: 0.5 pence per share)

Covent Garden, a landmark globally-recognised estate

-       Covent Garden total property value of £2.2 billion, a decrease of 17 per cent (like-for-like) since 31 December 2019

-       Net rental income down 41 per cent to £18 million against June 2019

-       ERV decreased by 12 per cent (like-for-like) to £96 million (Dec 2019: £108 million)

-       Capco has provided support to retail and hospitality customers experiencing cash flow pressures, with rental agreements being adjusted on a case-by-case basis to include deferrals and turnover-linked arrangements where appropriate

-       Strong leasing pipeline before the impact of COVID-19; 22 new leases and renewals were agreed during the period

-       Continuing to attract high quality brands including Vashi and Neuhaus

-       As a pedestrianised open air environment, Covent Garden is well-positioned as lock down measures are eased and consumers return to central London

-       Additional streets around the Piazza have been pedestrianised, allowing for greater freedom of movement and increased al fresco dining across the estate

-       As a responsible, long-term owner of the estate, Capco has been working closely with local communities and continues to provide assistance to charity partners in the West End

Acquisition of 26.3% stake in Shaftesbury PLC

-       Unique opportunity to acquire a significant stake in an exceptional mixed-use real estate portfolio

-       Represents an attractive investment and entry point at an implied value of £1,200 per square foot relative to current valuation of £1,800 per square foot

-       Consistent with Capco's strategy to invest in complementary opportunities on or near Covent Garden

Strong liquidity and balance sheet position

-       Group loan to value ratio of 32 per cent (Dec 2019: 16 per cent)

-       Group net debt to gross assets of 26 per cent (Dec 2019: 15 per cent), taking into account the value of the investment in Shaftesbury shares, as at 30 June 2020 

-       Group undrawn facilities and cash of £616 million (Dec 2019: £895 million)

-       Group net debt of £721 million (31 December 2019: £442 million)

-       Capital commitments of £93 million (includes £88 million in respect of second tranche of Shaftesbury shares) (Dec 2019: £14 million)

-       Weighted average debt maturity of 4.4 years (Dec 2019: 4.9 years)

-       Weighted average cost of debt of 2.6 per cent (Dec 2019: 3.0 per cent)

-       £90 million of deferred consideration from the Earls Court sale received in March 2020, with a further £105 million expected to be received later this year and £15 million due in 2021

-       There is significant headroom against the LTV covenant position, and interest cover covenant waivers in respect of the current financial year have been agreed to address interruption to near-term income

Lillie Square

-       The Lillie Square property valuation declined by 5 per cent (like-for-like) to £138 million (Dec 2019: £177 million)

-       Completion of Phase 2 continues to progress with 66 units handed over in the first half of this year, representing £81 million of cash proceeds (£40 million Capco share)

-       A further 120 units remain in Phase 2, of which 93 have been pre-sold representing approximately £120 million of further proceeds (£60 million Capco share)

FINANCIAL HIGHLIGHTS

1. From continuing and discontinued operations. Refer to note 11 "Earnings per share and Net Assets Per Share" on page 41.

2. On a Group share basis. Refer to Property Data on page 56 for the Group's percentage ownership of property.

3. On a Group share basis. Refer to note 2 "Segmental Reporting" on page 32.

4. From continuing and discontinued operations. Refer to Consolidated Underlying Profit Statement on page 58.

ENQUIRIES

Capital & Counties Properties PLC:

Media enquiries:

A presentation to analysts and investors will take place today at 08.30am through a webcast on the Group's website www.capitalandcounties.com followed by an invited analyst Q&A.

A copy of this announcement is available for download from our website at www.capitalandcounties.com and hard copies can be requested via the website or by contacting the Company (feedback@capitalandcounties.com or telephone +44 (0)20 3214 9170).
 

OPERATING REVIEW

Valuations

The total property value of the Group decreased by 16.3 per cent (like-for-like) in the period to 30 June 2020 to £2.3 billion.

As at 30 June 2020, Covent Garden total property value was £2,165 million, representing a 17 per cent like-for-like decrease (31 December 2019: £2,596 million). Substantially all of the valuation movement relates to the retail, leisure and F&B portfolio which represents 75 per cent of total property value. The main contributors were a 12 per cent (like-for-like) decline in ERV to £95.5 million, yield expansion of 17 basis points to 3.82 per cent (equivalent basis) and the valuer's assumption on loss of near-term income (£31 million). 

As required by the provisions of Royal Institution of Chartered Surveyors ("RICS") guidelines, the valuer has evaluated each Covent Garden property on an individual basis, rather than valuing the portfolio as a whole or in combinations of parts. The total valuation of the estate is £2.2 billion and represents the aggregated value of the individual properties, with no reflection of any additional estate premium which potential investors may ascribe to the concentrated and comprehensive nature of ownership within the estate. The predominantly freehold nature, concentrated ownership and scale of the estate as well as the portfolio mix may lead prospective purchasers to regard certain parts of the portfolio, for example by street, to have a greater value than the aggregate of the individual property values.

The property valuation of the Lillie Square joint venture as at 30 June 2020 was £138 million (Capco share), a 5 per cent decline (like-for-like) against the 31 December 2019 valuation of £177 million.

1. Valuation change takes account of amortisation of tenant lease incentives, capital expenditure, fixed head leases and unrecognised trading surplus.

2. Represents the Group's interest in Lillie Square Joint Venture and certain related other assets held by Capco.

3. A reconciliation of the carrying value of investment, development and trading property to the market value is shown in note 12 'Property Portfolio'.

COVENT GARDEN  

A world-class destination  

The Covent Garden estate represents a carefully assembled portfolio in the heart of London's West End, comprising retail, dining, leisure and cultural space complemented by high quality offices and residential apartments. Through creative asset management and disciplined investment, Covent Garden has been established as an exceptional mixed-use portfolio of approximately 1.2 million square feet of lettable space, across 81 buildings and 548 units.

Supporting the reopening of retail and hospitality tenants

Capco began the year with a strong leasing pipeline and growth in tenant sales and footfall, however activity levels were significantly affected by the pandemic. By 23 March 2020 the majority of retail and F&B (food and beverage) tenants closed across the estate. Throughout this period of COVID-19 uncertainty, Capco's priority has been the health and safety of its people, customers and visitors.

As a long-term investor in the estate, Capco took early action ensuring the safety and security of Covent Garden whilst also providing support on a case-by-case basis to customers experiencing cash flow challenges as a result of COVID-19. These measures support the reopening of stores during this period of significant disruption, ensuring the business is well-positioned to benefit from a recovery and prosper over time. Bespoke solutions have been agreed which include rent deferrals, rent-free periods and other arrangements reflecting the position of each customer. For certain tenants who are experiencing short-term cash flow issues, rental agreements will be linked to turnover for the second half of the year in exchange for other provisions including lease extensions and greater landlord flexibility.

Capco's reopening strategy has a clear objective to provide its customers the confidence to reopen and encourage visitors to return, whilst protecting the estate and ensuring its prosperity over time. Covent Garden offers a pedestrianised open air environment and is well-positioned to recover as lock down measures are eased. Capco is implementing a number of marketing initiatives and collaborating with stakeholders to promote Covent Garden and the West End, encouraging a return of footfall to normal levels over time. The majority of retail and hospitality customers on the estate have now reopened. Whilst initial indicators are encouraging, the trading environment remains challenging and it is too early to predict when trading will return to previous levels whilst physical office occupancy remains significantly reduced, and with the ongoing travel restrictions and fragile consumer sentiment.

Operational performance

Since March 2020, four new brands have been signed. Jewellery brand Vashi signed on James Street for a new London flagship store. In the Market Building, Belgian chocolatier Neuhaus has agreed terms for its first London store as well as the signing of Bubblewrap. Al fresco Garden bar NaNas has opened from the Market Building and is operating on the East Piazza. Luxury retail operator Bucherer has proceeded with plans for expansion in the Royal Opera House Arcade and its opening is expected later this year. Ganni has opened its new flagship on Floral Street and will be joined by American Vintage later in the year. Fitness technology company Peloton continues the fit out of its European flagship training studio and retail store over four floors, and will live-stream classes to members worldwide.

Structural retail trends may be accelerated as a result of COVID-19, therefore high quality global locations remain key to retailers and F&B concepts when choosing locations around the world. Capco has transformed Covent Garden into a global destination having curated one of the strongest retail and dining line ups in the world in a heritage setting, positioning Covent Garden competitively as a global brand.

22 leasing transactions completed in the first half with a rental value of £2.7 million (H1 2019: £13.0 million). Underlying net rental income was £25.3 million for the first half of the year, down 22 per cent (like-for-like) compared to June 2019.

During this challenging period a small number of tenants have entered into administration representing £3.0 million of passing rent. EPRA vacancy has increased by 0.9 percentage points to 4.1 per cent (Dec 2019: 3.2 per cent). Approximately 12 per cent of ERV is in or is held for development or refurbishment (Dec 2019: 8 per cent).

Overall 71 per cent of rent has been collected in the first six months of the year compared to 99 per cent for the equivalent period in 2019. 98 per cent of Q1 2020 rents were collected. Rent collection for the March (Q2) and June (Q3) quarter rent dates has been significantly lower than normal levels with 44 per cent collected for the second quarter and 30 per cent to date for the third quarter.

The valuation of the estate decreased by 17 per cent like-for-like to £2.2 billion. Substantially all of the valuation movement relates to the retail, leisure and F&B portfolio which represents 75 per cent of total property value. The main contributors were a 12 per cent (like-for-like) decline in ERV to £95.5 million, yield expansion of 17 basis points to 3.82 per cent (equivalent basis) and the valuer's assumption on loss of near-term income (£31 million).

Capco remains confident in its tenant mix, continuing to focus on concepts with strong financial covenants, differentiated offerings, successful multi-channel programmes, close customer relationships and brands that recognise the value of high-profile locations with a complementary leisure and dining offering.

Stakeholder engagement and environment

Capco acts as a responsible owner of the estate. As the principal landowner of a globally recognised destination in London's West End, Capco works closely with a wide range of stakeholders. The heritage of Covent Garden is incredibly important to the West End, Capco therefore took early action to ensure the safety and security of the estate when government lockdown measures were announced with additional security presence deployed across the estate.

In preparation for the reopening in June an extensive cleaning and security regime was implemented. Retailers and restaurant owners optimised their units in line with government guidelines including marked queuing systems, social distancing signage and hand sanitiser stations.

Capco promotes a collaborative approach to working with local communities to ensure understanding and support of the business initiatives on the estate and provides support for selected charity partners. Capco has been working closely with local communities and continues to provide assistance to local charity partners in the West End. Financial aid has been provided to COVID-19 funds supporting homelessness, food banks, the elderly as well as hospitality and retail foundations. Capco has not furloughed any of its employees, nor has it taken up any other government support measures.

One of Covent Garden's key differentiators is its largely pedestrianised nature. In partnership with Westminster City Council, Capco has made enhancements to the public realm by introducing additional pedestrianised streets in the Covent Garden area to allow for greater freedom of movement and use of outdoor space. Newly pedestrianised streets include Henrietta Street, Floral Street, Maiden Lane and Tavistock Street alongside extended car-free hours for the Piazza and King Street. Further to this, there are additional outdoor seating areas across these streets for our restaurants, providing over 500 incremental outdoor covers across over 20 al fresco dining spots. 

Capco aims to minimise the impact of operations on the environment by employing an active approach to air quality, congestion, environmental and sustainability issues, and implementing initiatives which improve the quality of the environment for the district, such as pedestrianisation and increasing greenery. In early 2020, environmental charity Hubbub had an interactive 'Pollution Pavilion' in Covent Garden to raise public awareness of air quality issues and encourage conversation about air pollution. The unique installation displayed large balloons that changed colour reflecting annual nitrogen dioxide data drawn from five different locations across London to help visitors visualise air pollution levels. As the pedestrianised heart of the capital, Covent Garden enjoys some of the best air quality in central London.  Capco welcomes the new measures on pedestrianisation of additional streets which will further improve air quality and will help work towards a cleaner, greener capital.

Consumer engagement

Capco's strategic marketing approach places emphasis on the consumer and directly promotes the estate. Capco continued to engage directly with the consumer during the lockdown period with a digital outreach programme centred around 'Covent Garden at Home' content, bringing the best of the estate home to consumers.

 A number of initiatives are being delivered to support the reopening of the estate including floating a rainbow above the Market Building, suspending 'Thank You NHS' flags on King Street and an art installation by British graphic artist Anthony Burrill entitled 'Love Hope & Joy'. Covent Garden now hosts a new al fresco, socially distanced dining area on the Piazza. With many of the area's restaurants open for take away, it provides the opportunity for visitors to dine outside in the heart of the West End. These initiatives have been well received by consumers with encouraging early indicators on footfall returning to the estate. 

Capco continues to work closely with retail and dining brands as well as cultural partners to introduce engaging consumer pop ups. This includes a pop up concept operated by Oystermen on the West Piazza offering champagne and oysters. 

Disciplined investment activity

Capco's ownership of the estate has expanded over time through disciplined capital allocation. Capco has a strong balance sheet and access to significant liquidity. Capco's extensive knowledge of the district, close network of contacts and proven track record mean Capco is often the best positioned to acquire properties, frequently off-market. There are a number of properties on or around the estate being actively tracked for acquisition and repositioning opportunities. There are also active asset management and refurbishment initiatives across the estate. These activities were interrupted during the lockdown period but have now resumed. 3 Henrietta Street is being transformed into an F&B townhouse and is now under offer. Following the acquisition of 5-6 Henrietta Street late last year, Capco is onsite refurbishing the office space. In addition vacant possession has been achieved of the lower parts of 36-39 Maiden Lane, another recent acquisition and are progressing asset management plans.

Capco continues to review proposals for the Wellington block, a scarce island site in central London, with various planning consents in place across multiple uses including offices on the upper floors with retail and restaurants on ground floor as well as consent for a hotel. Capco has secured an enhanced hotel planning consent extending the key count to 146.

OTHER INVESTMENTS

Acquisition of shareholding in Shaftesbury PLC

As announced on 30 May 2020, Capco agreed to acquire a 26.3 per cent shareholding in Shaftesbury across two tranches ("the Investment") for total consideration of £436 million, at a price of 540 pence per Shaftesbury share.

The Investment comprises the acquisition of 64.4 million shares for £347.7 million in cash, representing 20.94 per cent of Shaftesbury's shares, which completed on 3 June 2020 (the "First Tranche") and the acquisition of a subsequent tranche of approximately 16.3 million shares for £88.2 million in cash, representing 5.31 per cent of Shaftesbury's shares (the "Second Tranche").

Capco published a shareholder circular on 21 July in respect of the acquisition of the Second Tranche, which when aggregated with the First Tranche, constitutes a Class 1 transaction for the purposes of the Listing Rules and was therefore conditional on approval by shareholders at the General Meeting held on 10 August 2020. Shareholder approval was granted on 10 August 2020. The expected closing date of the Second Tranche is 13 August 2020.

The Shaftesbury Investment is a unique opportunity to acquire a significant stake in an exceptional mixed-use real estate portfolio, adjacent to Capco's world-class Covent Garden estate. It represents an attractive investment and entry price with an implied value of approximately £1,200 per square foot which the Directors believe will generate long-term value for Capco shareholders. The Investment is consistent with Capco's strategy to invest in complementary opportunities on or near the Covent Garden estate.

Earls Court deferred proceeds

£90 million of deferred consideration from the Earls Court sale was received in March 2020. In addition, a further £105 million of deferred consideration is expected to be received later this year with the balance of £15 million due in 2021.

Lillie Square 

Capco owns 50 per cent of Lillie Square, a one million square foot (GEA) residential development located in West London. The development can deliver a total of over 600 private homes plus 200 affordable homes across three phases. Development of Lillie Square is well-progressed. Handover of Phase 1 sold units is complete, with a small number of units available.

The completion of Phase 2 continues with 66 units handed over in the first half of this year, representing £81 million of cash proceeds (£40 million Capco share).

A further 120 units remain in Phase 2, of which 93 have been pre-sold representing approximately £120 million of further proceeds (£60 million Capco share) which includes the previously announced bulk sale of 49 units representing £66 million (£33 million Capco share). The property valuation as at 30 June 2020 was £138 million (Capco share), a 5 per cent decline (like-for-like) against the 31 December 2019 valuation of £177 million. In addition, Capco owns £2 million of other related assets adjacent to the Lillie Square estate.   

BOARD CHANGES

On 26 February 2020, Michelle McGrath joined the Board as an Executive Director of the Company.

Both Andrew Strang and Gerry Murphy did not seek re-election at the Company's AGM on 1 May 2020 and retired from the Board on that date.

OUTLOOK

It has been an extraordinary first six months of the year with significant market uncertainty and challenging trading conditions. Our financial position and experienced management have enabled Capco to take a proactive approach across the Covent Garden estate to protect long-term value and take advantage of market opportunities. Our decisive actions position the estate to benefit from a recovery and prosper over time. We are pleased with the determination and resilience shown by customers, staff and business partners through this challenging period.

Capco will continue to innovate on the estate and rebuild trade as restrictions are lifted and the West End gets back to business with the immediate priority focused on making sure our customers who have enjoyed excellent trade over the past few years reopen successfully and are provided with the setting which offers the best opportunity to gradually build back towards these levels. Capco will continue to seek efficiencies across the business and remain disciplined in the allocation of capital. There remain many challenges and an unpredictable economic environment resulting from COVID-19 and as the UK adjusts to Brexit but Capco is confident in the long-term prospects of the West End and the value of its unique investments.

FINANCIAL REVIEW

The COVID-19 pandemic has had a material impact on the financial results of the Group in the period, as evidenced by the 16.9 per cent like-for-like decline in the independent property valuation of the Covent Garden portfolio and a 41.3 per cent reduction in the Group's net rental income. Levels of cash collection have reduced significantly with rent collection for the March (Q2) and June (Q3) quarter rent dates being significantly lower than normal levels with 44 per cent collected for the second quarter and 30 per cent for the third quarter. Overall 71 per cent of rent has been collected in the first six months of the year compared to 99 per cent for the equivalent period in 2019.

In view of disruption to tenant revenues, bespoke support has been provided on a case-by-case basis which includes rent deferrals, rent-free periods and other arrangements reflecting the position of each customer. For certain tenants experiencing short-term cash flow issues, rental agreements will be linked to turnover for the second half of the year in exchange for other provisions such as lease extensions. The accounting treatment for the tenant support, which results in some divergence between net rental income on a reported and cash flow basis, is as follows:

·      In relation to rent deferrals, the rental income is recognised as normal with the deferred rent receivable balance remaining in trade receivables until settled. The balance is assessed for impairment at each balance sheet reporting date.

·      Rent-free periods are generally considered to constitute a lease modification under IFRS 16 with the cost deferred over the remaining lease term, in line with current accounting for tenant lease incentives. The balance will be assessed for impairment at each reporting date. On entering into a lease modification any initial direct costs associated with the lease, including surrender premia previously paid, are derecognised.

·      Turnover-linked rents are recorded in the period in which they are earned.

This has resulted in a £12.8 million reduction compared to June 2019 in net rental income driven by £1.4 million derecognition of initial direct costs associated with entering into lease modifications, £5.7 million impairment of tenant lease incentives and £5.8 million bad debt expense. The amount of initial direct costs derecognised is expected to be higher in the second half of the year as the legal documentation of additional support is completed. If the level of tenant failures is higher than expected, impairment of tenant incentives and bad debt expense would also be expected to increase.

Despite the impact of COVID-19, the Group is well-positioned with a clear focus to grow its property investment business centred around the West End, supported by a strong balance sheet. With loan to value of 32 per cent, net debt to gross assets of 26 per cent and cash and undrawn facilities of £616 million, the Group has the ability to withstand market volatility, capitalise on investment opportunities and deliver long-term shareholder value.

This was highlighted in the period with the acquisition of a significant stake in Shaftesbury PLC. The first tranche of this investment in relation to a 20.94 per cent shareholding completed on 3 June 2020 for total consideration of £347.7 million. A second tranche of 5.31 per cent, for £88.2 million, is scheduled to complete on 13 August 2020.

Covent Garden accounts for 94 per cent of the property value as measured by the Group's share of total investment, development and trading property. The property valuation of the Covent Garden estate has decreased by 16.9 per cent (like for like) to £2,165 million as a result of a 11.9 per cent decline in ERV to £95.5 million, yield expansion of 17 basis points to 3.82 per cent (equivalent basis) including the valuer's assumption on loss of near-term income of £31 million.

Phase 2 of Lillie Square completed with 66 units handed over during the first half generating proceeds of £40 million (Group share). A further 93 of the remaining 120 apartments in phase 2 have been pre-sold, representing further proceeds of £60 million (Capco share); this includes the previously announced bulk sale of 49 apartments.

In March 2020, £89.7 million of deferred consideration was received in relation to the sale of Earls Court. £105.0 million is due by the end of 2020 and £15.3 million by the end of 2021.

Overall EPRA NTA (net tangible assets) per share decreased by 17.9 per cent during the period, from 292.9 pence at 31 December 2019 to 240.5 pence. Combined with the 1.0 pence dividend paid to shareholders during the period, the total return for the period is -17.5 per cent. Total shareholder return for the period, reflecting movement in the share price together with the value of dividends, was -43.8 per cent.

Underlying earnings from continuing activities were £2.5 million compared to £4.5 million for 30 June 2019, reflecting the reduction in net rental income referred to above. A decision on dividend payments for 2020 has been deferred until the year end.

Basis of preparation

As required by IFRS 11 'Joint Arrangements' the Group presents its joint ventures under the equity method in the condensed consolidated financial statements. The Group's interest in joint ventures is disclosed as a single line item in both the consolidated balance sheet and consolidated income statement rather than proportionally consolidating the Group's share of assets, liabilities, income and expenses on a line by line basis.

The Group uses Alternative Performance Measures ("APMs"), financial measures which are not specified under IFRS, to monitor the performance of the business. These include a number of the Financial Highlights shown on page 2. Many of the APMs included are based on the EPRA Best Practice Recommendations reporting framework which aims to improve the transparency, comparability and relevance of published results of public real estate companies in Europe. Effective from 1 January 2020 EPRA net asset value ("EPRA NAV") and EPRA triple net asset value ("EPRA NNNAV") have been replaced by three new net asset valuation metrics, being EPRA Net Reinstatement Value ("EPRA NRV"), EPRA Net Tangible Assets ("EPRA NTA") and EPRA Net Disposal Value ("EPRA NDV"). EPRA NTA is considered to be the most relevant measure for the Group's operating activity and is the primary measure of net asset value replacing the metric EPRA NAV previously reported. These measures have been adopted with the comparator period shown in note 11.

Another key performance measure the Group uses is underlying earnings which provides useful supplementary information as it removes unrealised and certain other items and therefore represents the recurring, underlying performance of the business. Items that are excluded are net valuation gains/losses (including profits/losses on disposals), fair value changes, impairment charges, net refinancing charges, costs of termination of derivative financial instruments and other non-recurring costs and income. Due to the impact of COVID-19 the APM has been reviewed and it has been determined to remove impairment of tenant incentives and derecognition of initial direct costs of entering into lease modifications from underlying earnings for the six months ended 30 June 2020 and subsequent reporting periods. These relate to non-cash items within rental expenses. Underlying earnings is reported on a Group share basis.                     

A summary of EPRA performance measures and key Group measures included within these financial statements is shown on pages 59 and 60.

Internally the Board focuses on and reviews information and reports prepared on a Group share basis, which includes the Group's share of joint ventures, as this represents the economic value attributable to the Company's shareholders. In order to align with the way the Group is managed this financial review presents the financial position, performance and cash flow analysis on a Group share basis.

Discontinued operation

On 29 November 2019, the Group completed the sale of its interests in Earls Court, excluding Lillie Square, to APG and Delancey (on behalf of its client fund) for £425 million. As Earls Court Properties represented a major line of business, its results and cash flows have been reported in the comparator period 1 January 2019 to 29 November 2019 as having arisen from a discontinued operation. Further information on the disposal of the Earls Court Properties business is set out in note 9 'Discontinued Operation'.

FINANCIAL POSITION

At 30 June 2020 the Group's EPRA NTA was £2.1 billion (31 December 2019: £2.5 billion) representing 240.5 pence per share (31 December 2019: 292.9 pence).

SUMMARY ADJUSTED BALANCE SHEET

1. Primarily Lillie Square.

2. IFRS includes amounts receivable from joint ventures which eliminate on a Group share basis.

3. Adjusted, diluted number of shares in issue at 30 June 2020 was 853.1 million.

1. Primarily Lillie Square.

2. IFRS includes amounts receivable from joint ventures which eliminate on a Group share basis.

3. Adjusted, diluted number of shares in issue at 31 December 2019 was 855.5 million.

Investment, development and trading property        

The Group share of investment, development and trading property carrying value has decreased from £2,706.8 million at 31 December 2019 to £2,248.7 million. This movement comprises capital expenditure and acquisitions of £13.4 million offset by disposals at Lillie Square of £38.8 million, a revaluation loss of £431.9 million and write down of trading property of £0.8 million. Capital expenditure of £6.9 million at Covent Garden relates to a number of smaller projects and the Lillie Square spend of £5.5 million was in relation to final construction and fit out of phase 2 of the development which completed during the period. 

The IFRS loss on revaluation of investment and development property was £431.6 million which relates predominantly to the Covent Garden portfolio. The portfolio valuation reduced by 16.9 per cent like for like with substantially all the valuation movement relating to the retail, leisure and F&B portfolio which represents 75 per cent of total property value. The main drivers for the valuation loss were an 11.9 per cent (like-for-like) decline in ERV to £95.5 million, yield expansion of 17 basis points to 3.82 per cent (equivalent basis) and the valuer's assumption on loss of near-term income of £31 million.

The unrecognised surplus on trading property declined by £5.5 million, and together with the revaluation on investment and development property the total revaluation loss was £438.9 million representing a 16.3 per cent decrease in value, which compares with the MSCI Capital Return for the equivalent period of a 6.2 per cent loss.

Total property return for the period was -15.3 per cent. The MSCI Total Return Index recorded a 3.7 per cent loss for the corresponding period.

Trading property is carried on the consolidated balance sheet at the lower of cost and net realisable value, therefore valuation surpluses on trading property are not recorded. Any unrecognised surplus is however reflected within the EPRA net tangible assets value measure. At 30 June 2020, the unrecognised surplus on trading property was £10.4 million (31 December 2019: £15.9 million) which arises solely on the Group's share of trading property at Lillie Square.  

Financial assets at fair value through profit or loss                              

During the period the Group acquired 64.4 million shares representing a 20.94 per cent shareholding in Shaftesbury PLC ("the Investment") for £347.7 million reflecting an acquisition share price of 540 pence per share. The acquisition was funded fully through a drawdown of the Covent Garden revolving credit facility. The change in fair value of listed equity investment of a loss of £8.0 million reflects the movement in the investment share price from acquisition to the reporting date.

The Group has entered into an agreement to acquire a further 16.3 million shares representing a 5.31 per cent shareholding for £88.2 million which, when aggregated with the first tranche of 20.94 per cent, constitutes a Class 1 transaction for the purpose of the FCA Listing Rules. The shareholder approval condition was satisfied on 10 August 2020 and the acquisition is expected to complete on 13 August 2020.

Debt and gearing

The Group maintains a strong balance sheet targeting diversified sources of funding, an appropriate level of leverage, headroom against debt covenants, access to substantial liquidity, limited capital commitments, a balanced debt maturity profile and appropriate hedging against movements in interest rates.

The Group's cash and undrawn committed facilities at 30 June 2020 were £616.3 million (31 December 2019: £895.2 million). A reconciliation between IFRS and Group share is shown below:

1. Primarily Lillie Square.

Net debt increased by £278.7 million to £720.5 million, principally as a result of receipt of £89.7 million deferred consideration on the Earls Court sale, £40 million sales proceeds on the handover of 66 flats at Lillie Square offset by drawdown of £450 million on the Covent Garden revolving credit facility in order to facilitate the acquisition of the Investment in Shaftesbury PLC.

The gearing measure most widely used in the industry is loan to value ("LTV"). LTV is calculated on the basis of net debt divided by the carrying value of the Group's property portfolio. The LTV of 32.0 per cent remains comfortably within the Group's limit of no more than 40 per cent.

In order to address the fact that LTV does not take into account the value of the shareholding in Shaftesbury PLC, an additional measure of net debt to gross assets has also been included. As at 30 June 2020, this ratio stood at 25.5 per cent.

The Group's policy is to eliminate substantially the medium and long-term risk arising from interest rate volatility. The Group's banking facilities are arranged on a floating rate basis but are generally swapped to fixed rate or capped using derivative contracts. At 30 June 2020 the proportion of gross debt with interest rate protection was 92 per cent (31 December 2019: 91 per cent) and £255 million of the revolving credit facility was undrawn.

The Group remains compliant with all of its debt covenants, details of which are set out on page 59. The principal financial covenants within the Covent Garden debt are to maintain a loan to value ratio of not more than 60 per cent and an interest cover ratio of at least 120 per cent.

Due to the anticipated impact on net rental income of COVID-19, a waiver of the Covent Garden Group interest cover covenant has been agreed with the Covent Garden lenders in relation to the period up to and including 31 December 2020. Due to the potential impact of future Government restrictions (for example additional periods of lock down during the going concern period), the Group will monitor the situation closely and taking into account other possible mitigating actions, will seek interest cover covenant waivers in relation to future periods if required. Further details on the going concern assessment are included in note 1 "Principal accounting policies".

At 30 June 2020 the Group had capital commitments of £93.0 million (£13.6 million at 31 December 2019). Capital commitments consist of £3.4 million for Covent Garden, £1.4 million for Lillie Square and £88.2m for the second tranche of the Shaftesbury shares.

1. Primarily Lillie Square.

CASH FLOW

A summary of the Group's cash flow for the period ended 30 June 2020 is presented below:

SUMMARY CASH FLOW

1. Primarily Lillie Square.

1. The comparative period has been re-presented to present the discontinued operation separately from continuing operations. Details of the discontinued operation are disclosed within note 9 'Discontinued operation'.

2. Primarily Lillie Square.

Operating cash outflows of £31.9 million are as a result of net working capital requirements impacted by the reduced cash collections in the period leading to increased rent receivable balance as well as a reduction in payables due to the payment of transaction-related costs for the sale of Earls Court accrued at year end.

During the year, £6.7 million was invested at Covent Garden for capital expenditure on a number of small projects. At Lillie Square, £5.8 million was incurred for the construction and fit-out of Phase 2.

The handover of 66 apartments of phase 2 and one apartment of phase 1 at Lillie Square generated £41.4 million (Group share) of net sales proceeds from property. Funds were used partly to repay £22.5 million (Group share) of the Lillie Square debt.

£89.7 million of deferred consideration from the Earls Court sale was received in March 2020 on an accelerated basis based on certain contractual triggers.

£347.7 million cash outflow was incurred on the purchase of the 20.94 per cent shareholding in Shaftesbury PLC. This was funded by a £450 million drawdown of the Covent Garden revolving credit facility, which provides sufficient liquidity to complete the 20.94 per cent acquisition as well as the subsequent 5.31 per cent purchase for £88.2 million.

As announced on 26 February 2020 the Group undertook a share buyback programme with the intention of returning up to £100 million to shareholders. £11.8 million was returned to shareholders before the decision was made to suspend the programme in March 2020 due to the uncertainty of COVID-19 and then not to complete the programme due to the acquisition of the shareholding in Shaftesbury PLC.

Dividends paid of £4.6 million reflect the final dividend payment made in respect of the 2019 financial year. This was lower than the previous year due to a higher level of take-up of the scrip dividend alternative, 46 per cent versus 12 per cent for the dividends in 2019.

IFRS cash and cash equivalents increased by £141.9 million to £295.0 million.

FINANCIAL PERFORMANCE

The Group presents underlying earnings and underlying earnings per share in addition to the amounts reported on a Group share basis. The Group considers this presentation to provide useful information as it removes unrealised and certain other items and therefore represents the recurring, underlying performance of the business.

SUMMARY INCOME STATEMENT

1. Lillie Square and Innova Investment.

2. Includes write-back of other receivables, profit on sale of trading property and other finance income.

3. Further details regarding the EPRA and Company specific adjustments are disclosed within note 11 'Earnings Per Share and Net Assets Per Share'.

1. The comparative period has been re-presented to present the discontinued operation separately from continuing operations. Details of the discontinued operation are disclosed within note 9 'Discontinued operation'.

2. Lillie Square and Innova Investment.

3. Includes impairment of other receivables and other finance income.

4. Further details regarding the EPRA and Company specific adjustments are disclosed within note 11 'Earnings Per Share and Net Assets Per Share'.

Net rental income

Net rental income has decreased by £12.8 million to £18.2 million, driven by significantly higher rental expenses during this period of disruption caused by COVID-19. Rental expenses during the period includes a £1.4 million derecognition of initial direct costs associated with entering into lease modifications, a £5.7 million impairment of tenant lease incentives and £5.8 million of bad debt expense. The increased impairment of tenant lease incentives and bad debt expense reflects an increase in tenant failures and challenging market conditions. During the period a small number of tenants entered into administration representing £3.0 million of passing rent. The full impact of the loss of income will be reflected in the full year results.

£0.4 million of additional costs have been incurred in the period for increased security, cleaning and protective equipment for the Estate.

Loss on revaluation and sale of investment and development property

The loss on revaluation of the Group's investment and development property was £431.8 million. The loss is predominantly as a result of 11.9 per cent (like for like) decline in ERV, an outward yield movement of 17 basis points, resulting in an equivalent yield of 3.82 per cent, and other movements including the valuer's assumption on loss of near-term income of £31 million.  

Administration expenses

Administration expenses have decreased by £1.4 million from £18.0 million to £16.6 million. Underlying administration costs were £12.2 million, excluding the impact of £4.4 million of transaction-related costs incurred in the period. In the prior period £3.9 million of costs associated with the potential demerger were incurred.

The Group is targeting underlying administration costs of £20 million for the 2021 financial year, and notwithstanding disruption to business activity caused by COVID-19, progress towards this has been made through the first six months of the year. Further rationalisation of office locations and consolidation of Group activities are expected during the second half.

Net finance costs

Net finance costs increased by £0.1 million to £10.5 million, due to additional interest expense on the revolving credit facility due to the drawdown of £450 million in May 2020. The increased interest payable has been offset in part by additional interest receivable due to higher levels of cash on deposit. 
 

Taxation

The Group's tax policy, which has been approved by the Board and has been disclosed to HM Revenue & Customs, is aligned with the business strategy. The Group seeks to protect shareholder value by structuring operations in a tax efficient manner, with external advice as appropriate, which complies with all relevant tax law and regulations and does not adversely impact our reputation as a responsible taxpayer. As a Group, we are committed to acting in an open and transparent manner.

As a UK REIT, the Group is exempt from UK corporation tax on income and gains from qualifying activities. As a minimum, 90 per cent of the income arising from qualifying activities is required to be distributed as a Property Income Distribution ("PID") to the shareholders of the Group. Non-REIT activities, such as disposals of trading property, are subject to UK corporation tax in the normal way. A tax charge can arise for the Group at 19 per cent if the minimum PID requirement is not met within 12 months of the end of the period. If the Group does not pay a PID in 2020 in relation to income arising on qualifying activities during the 23 day period from 9 December 2019 to 31 December 2019, a £0.1 million tax charge is expected to arise.

The UK REIT provisions also require a group to satisfy interest cover and balance of business tests to avoid a tax charge or the loss of REIT status. Due solely to the impact of COVID-19 on the Group, it is possible that the interest cover test and the balance of business income test may not be met for the year to 31 December 2020. HMRC has indicated that it is not within the intention of the REIT regime to issue a tax charge or a termination notice where it can be established that COVID-19 is the reason for the breach. As this would be the case for the period to 31 December 2020, the Group does not anticipate a tax charge arising, or for there to be a material risk to the Group's REIT status, due to these tests not being met. The Group is confident that all other REIT requirements will continue to be met through 2020.

Consistent with the Group's policy of complying with relevant tax obligations and its goal in respect of its stakeholders, the Group maintains a constructive and open working relationship with HMRC which regularly includes obtaining advance clearance on key transactions where the tax treatment may be uncertain. The Group maintains a low risk rating from HMRC.

Tax on underlying profits of the Group was a charge of £0.4 million which arose mainly due to deferred tax movements in relation to share based payments. The main rate of corporation tax remained unchanged at 19 per cent throughout the period. The UK corporation tax rate had been due to fall to 17 per cent with effect from 1 April 2020, however following the Budget held on 11 March 2020, the UK corporation tax rate remained at 19 per cent.

A disposal of the Group's trading properties at their market value, before the utilisation of carried forward available losses, would result in a UK corporation tax charge to the Group of £2.0 million (19 per cent of £10.4 million).

The provisions of IAS 12 provide for the recognition of a deferred tax asset where it is probable there will be future taxable profit against which a deductible temporary difference can be utilised. As a result of the application of this provision, the Group has not recognised the deferred tax asset on certain losses carried forward.                                                 

Dividends

Given current market conditions and the significant uncertainties due to COVID-19, the Board has taken the decision to not declare an interim dividend. It is intended that the Company will recommence dividend payments as soon as it is considered appropriate, maintaining the target of a progressive dividend policy in line with growth in underlying earnings over time.
 

PRINCIPAL RISKS AND UNCERTAINTIES

Risk Management

The Board has overall responsibility for Group risk management. It determines its risk appetite and reviews principal risks and uncertainties regularly, together with the actions taken to mitigate them. The Board has delegated responsibility for the review of the adequacy and effectiveness of the Group's internal control framework to the Audit Committee.

Risk is a standing agenda item at management meetings. This gives rise to a more risk aware culture and consistency in decision making across the organisation in line with the corporate strategy and risk appetite. All corporate decision making takes risk into account, in a measured way, while continuing to drive an entrepreneurial culture.

The Executive Directors are responsible for the day-to-day operational and commercial activity across the Group and are therefore responsible for the management of business risk. The Executive Risk Committee, comprising the Executive Directors, the Group Legal Director and the Group Financial Controller, is the executive level management forum for the review and discussion of risks, controls and mitigation measures. The corporate and business division risks are reviewed on a quarterly basis by the Executive Risk Committee so that trends and emerging risks can be identified and reported to the Board.

Senior management from each part of the business identify and manage the risks for their division or function and complete and maintain a risk register. The severity of each risk is assessed through a combination of each risk's likelihood of an adverse outcome and its impact. In assessing impact, consideration is given to financial, reputational and regulatory factors, and risk mitigation plans are established. A full risk review is undertaken annually in which the risk registers are aggregated and reviewed by the Executive Risk Committee. The Directors confirm that they have completed a robust assessment of the principal risks faced by the business, assisted by the work performed by the Executive Risk Committee.

The Group's principal risks and uncertainties, which are set out on the following pages, are reflective of where the Board has invested time during the period. These principal risks are not exhaustive. The Group monitors a number of additional risks and adjusts those considered 'principal' as the risk profile of the business changes. See also the risks inherent in the compilation of financial information, as disclosed within the Annual Report & Accounts 2019 and note 1 'Principal Accounting Policies', within 'Critical accounting judgements and key sources of estimation and uncertainty'.

In recent years the UK has experienced heightened economic and political uncertainty. The UK is now in a transition period after leaving the EU on 31 January 2020 with discussions around trade and other arrangements expected to continue throughout the year. Uncertainty remains as to the outcome of those discussions, in particular in relation to international trade arrangements and the overall impact on the UK economy. As a result there may be continued volatility in consumer, occupier and broader corporate behaviour and decision-making. The risk of a disorderly outcome remains and will continue to be a relevant consideration for decision-making.

Whilst the impact on the Group's business and the market remains uncertain, the Board continues to monitor this carefully and has assessed risks to the business that may result from the UK leaving the EU. The main areas that may affect the Group directly are:

-       the impact on the London and UK economy, including exchange rate volatility and potential disruption in the financial markets

-       the impact on current and prospective tenants, whether it be on management of their inventory, workforce labour, tariffs or other barriers, and the impact on consumer demand (for example due to travel disruption) leading to reduced rents and capital values

The COVID-19 pandemic is a global crisis that has brought about unprecedented challenges and disruption to our tenants and business. Understanding the effects of the crisis and the impact on the Group's business and the market remains critical and the Board continues to monitor this carefully.

COVID-19 has resulted in a significant reduction in levels of footfall and activity across the Covent Garden estate, due primarily to Government restrictions, significantly lower levels of local and international travel, and changing tenant and consumer behaviour. The significant reduction in visitor numbers and store revenues for our tenants has led to a large number of them experiencing cash flow pressures and, in turn, reduced rental collection rates. Challenging occupier and investment market conditions have had a negative impact on property valuations and rental values.

The long term impact of COVID-19 on future demand for and use of lettable space, evolution of consumer behaviour (including an acceleration of trends in online shopping) and travel patterns could have further implications for the real estate market and our portfolio. In view of the unpredictable nature of the pandemic, further policy measures and Government guidance will be monitored closely together with the impact of related emerging risks. The Company has a strong balance sheet and access to cash and undrawn facilities of £616 million as at 30 June 2020 and has performed a severe but plausible downside forecast as part of its going concern assessment. In a downside scenario, and before taking into account mitigating factors, there is limited headroom on the interest cover ratio covenant during the going concern period. The possibility of a covenant breach in the event for instance that there is a further period of severe and prolonged disruption caused by COVID-19 during the going concern period, represents a material uncertainty which may cast a significant doubt on the Group's ability to continue as a going concern. The financial statements have been prepared on a going concern basis and further details on the Directors' assessment of going concern is set out in note 1 "Principal Accounting Policies'.

Our response to COVID-19 has been to prioritise the health and safety of our people, customers and visitors, while working co-operatively and in a co-ordinated manner with our stakeholders to protect and promote Covent Garden and the West End, encouraging a return of footfall to more normalised levels over time.

A COVID committee was established in March 2020 to help co-ordinate the Company's response to the pandemic. The committee, led by the Chief Executive and comprising senior management and those responsible for key areas of operational activity, meets regularly to discuss issues around COVID-19, to assess the impact on the business, and approve decisions and actions promptly. In addition the leadership team across the business has discussed relevant matters as a group several times each week during the crisis. The Board receives weekly updates and has met a number of times, in order to provide appropriate oversight and governance. In recent weeks the committee has been focused on plans for an easing of lockdown restrictions, reopening of the Covent Garden estate in a safe manner and ensuring that the business is positioned to support tenants and other stakeholders during this transition.

As a result of the Company's internal risk assessment process, it has been determined that COVID-19 should not be viewed as a separate principal risk but rather an overarching set of circumstances which have a significant impact on all of our principal risks. Across the business we have seen an intensification in our principal risks as a result of COVID-19 and our focus has been on implementing appropriate measures on a timely basis to mitigate this impact.

During the period, the Group acquired a 20.94 per cent shareholding ("first tranche") in Shaftesbury PLC ("the Investment") with an additional 5.31 per cent shareholding ("second tranche") to be acquired subject to shareholder approval. Shareholder approval was granted on 10 August 2020. The expected closing date of the second tranche is 13 August 2020.

Due to the listed nature of the investment, the market price of Shaftesbury PLC shares may be volatile and subject to wide fluctuations as a result of a variety of factors, including, but not limited to, Shaftesbury PLC operating results, financial position, performance or prospects.

Although the Group owns a minority interest, the investment represents a material proportion of the Group's value. The terms of the Investment do not provide us with the ability to influence the strategic direction of Shaftesbury PLC, or its financial or operating performance, as our influence is limited to the extent of our voting rights in respect of matters requiring approval of Shaftesbury PLC's shareholders. The interests of other shareholders in Shaftesbury PLC may not always be aligned with those of the Group.

The operational and business risks faced by Shaftesbury PLC are similar to those faced by the Group which are set out in the tables below, but the steps taken to address and respond to any such risks by Shaftesbury PLC may be different and are outside of the control of the Group.

A summary of the impact on our principal risks as well as the measures we have put in place to mitigate this impact is set out in the tables below. 

Emerging risks

The Group monitors its emerging risks and considers mitigating actions which the Group currently deploys and could deploy with regards to these emerging risks. Emerging risks include the impact of climate change, the longer term implications of COVID-19 including on consumer behaviour and changes to the way in which real estate will be used in the future, as well as changes to tax and economic policy impacting real estate (including capital gains, VAT and other sales taxes, stamp duty and business rates).

CORPORATE

PROPERTY

DIRECTORS' RESPONSIBILITIES

Statement of Directors' responsibilities

The Directors confirm that these condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by Disclosure and Transparency Rules (DTR) 4.2.7 and 4.2.8, namely:

·      an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

·      material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

The Directors of Capital & Counties Properties PLC are listed in the Capital & Counties Properties PLC Annual Report for 31 December 2019. A list of current Directors is maintained on the Capital & Counties Properties PLC website: www.capitalandcounties.com.