Shaftesbury PLC

Trading update

Covid-19 measures continue to affect consumer confidence, West End footfall and trading; first stages of recovery now evident

Shaftesbury PLC, the Real Estate Investment Trust that owns a 16-acre portfolio in the heart of London's West End, today announces a trading update for the period 1 April 2020 to 24 September 2020.

Summary

·   Widespread and unprecedented measures to address the Covid-19 pandemic continue to have a significant impact on traditional patterns of travel, business activity and consumer spending.

·    Since the relaxation of Government restrictions began to take effect from late June:

-     The West End has seen a gradual recovery in footfall with the return of local and domestic leisure visitors and its office-based workforce.
 

-   After an extended period of closure, most of our 611 restaurants, cafés, pubs and shops have now reopened. Bespoke packages of rental and other measures to support their recovery in place and being extended to the end of 2020. 

-    However, responding to the recent sharp rise in UK Covid-19 infection rates, the Government is now re-introducing national and localised restrictions, with a risk that further measures may be implemented until the situation is brought under control. 

·    41% of rents due for the six months to 30 September 2020 collected, 10% are expected to be subject to deferred collection arrangements, 23% are being waived and 26% remain outstanding at 11 September 2020.
 

·  EPRA vacancy at 31 August 2020: 9.7% of ERV (31.3.2020: 4.8%); residential accounted for 46% of the increase, as occupiers from overseas returned to their countries of origin and demand from long-stay international business and leisure travellers halted.

·    Enquiries for commercial space continue but at a considerably lower volume than we would normally expect at this time of year.

·    Acquisitions:
 

-     Acquired three strategically important buildings in Carnaby and Berwick Street at a total cost of £13.3 million.
 

-     More properties which have a long-term strategic interest for us are now coming to the market.

·   In view of current conditions and uncertain near-term outlook, the Board has decided not to declare a final dividend in respect of the year ending 30 September 2020, but intends to resume dividend payments as soon as it considers prudent.

·  Where required, interest cover covenant waivers for periods of nine to twelve months from April 2020 completed; constructive discussions now underway to extend their duration.

Brian Bickell, Chief Executive, commented:

"The course of the pandemic in the short and medium term will continue to dictate the extent of restrictions imposed by the UK and other governments to contain the spread of the Covid-19 virus, with implications for the global economy and the pace of recovery. As an international destination, local trading conditions in the West End will inevitably be affected by these macro uncertainties.

Longer term, the exceptional qualities and features of London and the West End provide firm foundations for recovery as pandemic disruption recedes. Their long history of embracing change, dynamism, creativity and their enduring global appeal will be their most important strengths in a post-pandemic world of new priorities, expectations and patterns of activity.

Against this backdrop, and with the benefit of our experienced, entrepreneurial and innovative management team, we remain confident in the long-term prospects for our exceptional portfolio and business."  

25 September 2020

For further information:

Shaftesbury PLC LEI: 213800N7LHKFNTDKAT98

This announcement includes inside information.

The person responsible for arranging the release of this announcement is Desna Martin, Company Secretary.

Background

Widespread and unprecedented measures to address the Covid-19 pandemic continue to have a significant impact on traditional patterns of travel, business activity and consumer spending, not only in the UK, but across the world.

In the UK, Government restrictions which resulted in the closure of all non-essential shops, and all restaurants and leisure businesses, were eased during the Summer. In late June, non-essential shops were permitted to re-open, followed in July by restaurants, cafés, and pubs. However, various social distancing measures have continued and large public gatherings remained prohibited, preventing the re-opening of live entertainment venues, clubs and events spaces. From August, Government advice to work from home wherever possible was modified to encourage a return to offices where suitable measures were in place to ensure it was safe to do so.

In response to the recent sharp rise in UK infection rates, the Government is now reintroducing restrictions including localised lockdowns, extending quarantine requirements for arrivals from abroad, a limit on social gatherings, a 10pm curfew for F&B businesses, and a reversal of their "return to the office" advice. Until the situation is brought under control, there is a risk that further measures may be implemented.   

Covid-19 measures: first stages of West End recovery but recently announced restrictions causing renewed uncertainty

With over 200 million visits annually, the West End's economy has traditionally benefited from London's reputation as a leading international destination, with a diverse economy spanning a broad range of business sectors, along with world-class education and research facilities, and cultural and leisure attractions. This exceptional daily footfall has traditionally provided a prosperous, seven-days-a-week trading environment for the leisure and retail business which have chosen to locate here.

The effective closure of the West End, starting in February, had an immediate and very challenging impact on all consumer-facing, footfall-reliant businesses, which are inevitably cash-flow sensitive. Since the relaxation of Government restrictions began to take effect, the West End has seen a gradual recovery in footfall, particularly noticeable in the vicinity of Oxford Street and Regent Street, its major shopping streets, and Soho and Leicester Square, its major dining and leisure destinations. In Seven Dials, after a slower start, footfall patterns are now in line with these locations.   

The improvement since July was initially due to a return of local and domestic day visitors, and has been supplemented by the recent gradual return of the local office-based workforce. Daily visits to the West End, which are currently approaching 50% of normal pre-pandemic volumes on the busiest days, are concentrated in the lunchtime to early evening period. It is too early to assess the impact of recently announced restrictions on the progress we have seen to date.

At present, the UK's international business and leisure visitor numbers are not expected to recover to pre-pandemic levels until 2024¹, due to their greater reliance on long-haul markets.

The course of the pandemic in the short and medium term will continue to dictate the extent of restrictions imposed by the UK and other governments to contain the spread of the Covid-19 virus, with implications for the global economy and the pace of recovery. As an international destination, local trading conditions in the West End will inevitably be affected by these macro uncertainties.

Longer term, the exceptional qualities and features of London and the West End provide firm foundations for recovery as pandemic disruption recedes. Their long history of embracing change, dynamism, creativity and their enduring global appeal will be their most important strengths in a post-pandemic world of new priorities, expectations and patterns of activity. Against this backdrop, and with the benefit of our experienced, entrepreneurial and innovative management team, we remain confident in the long-term prospects for our exceptional portfolio and business.  

Support for our occupiers

Our focus since the beginning of the pandemic and lockdown has been to help our occupiers through this challenging period by providing financial and other practical support, alongside the UK Government's various initiatives such as  provision of financial support, business rate relief, employee furloughing and the "Eat Out to Help Out" scheme. Maintaining occupancy across our portfolio, wherever possible, will position our business for sustained recovery over the medium and long-term, as recovery progresses.

F&B, leisure and retail (69% of ERV²)

After an extended period of closure, most of our 611 restaurants, cafés, pubs and shops have now reopened. They have adapted their operations to ensure effective social distancing measures are in place, and many have adopted revised trading hours to reflect current footfall patterns. F&B businesses have benefited from the use of outdoor seating, especially in our permanently pedestrianised streets and courtyards in Carnaby and Chinatown. Westminster City Council is currently consulting on its future plans for temporary street closures and time-limited permissions to use external seating. The temporary closure by Camden Council of streets around Seven Dials outside servicing hours has presented the opportunity to trial a traffic-reduction scheme.

Despite the improvement in footfall, many of our occupiers, particularly retailers, are reporting considerably lower turnover than in normal conditions, and it is likely the return to the healthy trading volumes across the West End will be gradual. We have continued our dialogue with them to agree bespoke packages of rental and other measures to support their recovery, including rent payment plans, waivers, deferrals, lease restructuring, service charge reductions and marketing initiatives.

In view of growing uncertainty surrounding the timing of the return to more-normal footfall and trading conditions in the West End, and the impact of restrictions now being re-introduced by the Government, we are extending our support arrangements by a further three months to the end of December 2020. A decision on the extent of further action which may be required will be made in light of trading in the important period leading up to Christmas and the New Year, as well as the prospects for the early months of 2021 and beyond.     

Offices (19% of ERV²)

We have over 225 office occupiers, many of which are SMEs operating in the media, creative, fashion and technology sectors, and which often have direct or indirect exposure to businesses which themselves have been affected significantly by the pandemic measures, such as those in retail, F&B, and the performing arts. Despite this, rent collections have been relatively good, with limited concessions granted on a case-by-case basis.

Residential (12% of ERV²)     

Typically, our 622 apartments are occupied by those seeking a base in the West End for either work or study, and are particularly popular with younger people from overseas. Understandably, as a result of the lockdown restrictions, many chose to return to their country of origin, leaving flats unoccupied. With the continuing uncertainty, many of these overseas tenants have chosen not to return to the UK for the time being and have vacated permanently. In these circumstances, we waived any commitments under their tenancy agreements. Where appropriate, we are offering support to residential tenants to assist them in meeting their rental commitments.

Collection of rents falling due in the period 25 March 2020 to 11 September 2020

Support for our occupiers continues to be our priority through the period of pandemic disruption. In order to provide certainty for those businesses, our discussions and agreements with them to date have focused on a six month period to the end of September 2020. As noted in our Half Year results, we anticipated that up to 50% of contracted rent for the second half of the current financial year could be collected over the extended period covered by these new arrangements.

The table below summarises the collection of rents from 25 March to 11 September 2020:

The eventual recovery of amounts deferred and outstanding will depend on tenants' ability to meet these commitments. The future viability of their businesses will be influenced by pandemic-related factors including the re-introduction of lockdown and other measures and the implications of a protracted recovery period. 

From 1 October 2020, we will be varying our leases to provide the option for commercial lessees to pay rent and service charges monthly rather than quarterly in advance, in order to align our revenue collection with the cash flows of our occupiers.

In the Longmartin joint venture, 76% of rent for the two quarters to 28 September 2020 has been collected, 6% has been waived and 18% remains outstanding. The higher relative collection rate, compared with that for the wholly-owned portfolio, mainly reflects the higher proportion of office rental income from its portfolio.

Occupancy and occupier demand

Inevitably, the uncertain outlook for the national economy and consumer spending is having a significant impact on business confidence and investment, which is unlikely to improve materially until pandemic concerns abate.  Retailers, particularly those exposed to structural changes in shopping habits nationally and internationally, which were clearly evident before the onset of the pandemic, are accelerating their review of space requirements, both in terms of locations and size of shops. Similarly, over-extended F&B chains are retrenching their operations to focus only on the most profitable locations and sites.

EPRA vacancy at 31 August 2020

Although the West End has a long-term availability/demand imbalance, over this unprecedented period we have seen a decline in portfolio occupancy, particularly in retail and residential uses. Compared with a 10-year average EPRA vacancy of 3.2% of ERV, and a vacancy rate of 4.8% at 31 March 2020, by 31 August, this had risen to 9.7% of ERV. 

The increase in EPRA vacancy over the period reflects an exceptional increase in vacant apartments (ERV: £3.3 million), completion of refurbishment schemes (ERV: £1.6 million), space handed back by commercial tenants, and the continuing significant reduction in letting activity over the five months to 31 August 2020. Lettings and lease renewals during this period amounted to £3.8 million, compared with £8.9 million in the same period last year, and followed a material slowdown in activity in the preceding two months as pandemic concerns grew.

Tenant insolvencies during the period have accounted for less than 2% of ERV. The trend in the months ahead will depend on whether recent improvements in footfall, trading and the local economy are sustained.

Available-to-let commercial vacancy at 31 August 2020 comprised:

·      12 restaurants and cafes (24,000 sq. ft.); total ERV £2.1 million;

·      29 shops (38,000 sq. ft.); total ERV £4.4 million;

-    11 larger shops (ERV > £150,000) shops account for £3.2 million of ERV

-    18 smaller shops account for £1.2 million of ERV

·      29 office suites (30,000 sq. ft.); total ERV £1.9 million.

Enquiries for commercial space continue but at a considerably lower volume than we would normally expect at this time of year. Generally, occupiers in all sectors are looking for greater flexibility when entering to new leasing commitments and, in particular, rent suspension in the event of further lockdowns. In the case of shops and F&B premises, a higher specification of landlords' basic fit out, rather than taking space in shell condition, is becoming market standard practice. We are now providing fully fitted out space in some of our office schemes.   

Residential vacancy, which until the pandemic has historically been minimal, was unusually high at 136 apartments with a total ERV of £4.2 million. This rapid increase was mainly due to occupiers from overseas returning to their countries of origin when government restrictions were introduced, and the collapse in demand from long-stay international business and leisure travellers.

Across the West End, many landlords who would usually let out their flats short-term or let to serviced apartment operators, are now attempting to find long-term tenants. This has resulted in a near-term over-supply of apartments to let, causing some downward pressure on rents.

Despite challenging market conditions, we have seen improved levels of activity over the last two months, completing 47 lettings and renewals, with particularly good interest for our newer studios and one-bedroom apartments. Demand for larger two-and three-bedroom properties, which would normally attract interest from overseas corporates, is much reduced and may not improve significantly in the near term.  

In the Longmartin joint venture our share of ERV from available to let space was £0.9 million (31.3.20: £1.1 million).

UK Government announcement on tax-free shopping

On 11 September 2020, the UK Government announced its decision to end tax-free shopping arrangements, which currently apply to overseas visitors to the UK other than those from the EU, with effect from 31 December 2020. The UK will then be the only country that does not offer this, putting the UK's tourism, retail and hospitality sectors at significant disadvantage to competing destinations, particularly other European cities. We are supporting the lobbying by many trade bodies and businesses to have the decision reconsidered.

Tax-free shopping is not a major of driver of spending in our mid-market locations, but the risk to the West End of a decline in international tourism will potentially affect a wide number of other sectors including F&B, hotels, theatres and cultural attractions.     

Schemes

72 Broadwick Street (ERV £6.0 million; 4.0% of ERV)

Site activity was suspended in March and April, due to lockdown restrictions, although these were relaxed subject to additional site safety measures. Assuming no further Covid-19 related delays, we anticipate completion in phases during 2021.

Of the re-purposed and up-graded accommodation, 77% of the commercial space by ERV, is now pre-let or under offer. As previously announced, we have agreed to let 33,000 sq. ft. to Equinox, an American fitness and lifestyle brand, while 17,350 sq. ft. of office accommodation is under offer.

Other schemes (ERV: £10.1 million; 6.7% of ERV)

At 31 August 2020, we had other schemes underway, with an ERV of £10.1 million, which comprised:

-     9 restaurants (27,000 sq. ft.); ERV £2.1 million;

-     16 shops (19,000 sq. ft. ); ERV £2.4 million;

-     72,000 sq. ft. of offices; ERV £4.8 million; and

-     30 apartments; ERV £0.8 million.

Of these schemes, £0.6m was under offer. As they complete over the coming fifteen months, they will increase short-term EPRA vacancy levels.

At 31 August 2020, our 50% of the ERV of space under refurbishment in the Longmartin joint venture was £0.1 million (31.3.20: £0.6 million).

Adding to our portfolio

Long-term owners in our locations, typically private rather than institutional investors, are usually reluctant to dispose of their ownerships, which have a long history of providing security and growing income. However, currently some are faced with near-term occupancy challenges and the need to invest in their buildings to secure tenants, and we are already seeing more properties which have a long-term strategic interest for us coming to the market.

Whilst our continuing strategy is to preserve liquidity, we have completed the purchase of three strategically important buildings at a combined cost of £13.3 million. One has frontages to Kingly Street and Kingly Court, unlocking a scheme involving two adjoining buildings already in our ownership. The other two buildings are in Berwick Street, adding to our ownership in this important Soho location.

90/104 Berwick Street

We forward-purchased this development in August 2017 but completion of the vendor's scheme has been delayed by almost two years, and two contractual longstop dates have now been missed. We are continuing our discussions with the vendor.

2020 Final dividend

The Board has a policy of long-term, progressive growth in dividends which reflects both current and future income progression but always ensures the financing requirements of the business are prioritised.  

In view of current trading conditions, the uncertainty surrounding the risk of further pandemic restrictions in the coming months, and the importance of maintaining the Group's financial resilience, the Board has decided that it would not declare a final dividend in respect of the year ending 30 September 2020.  

The Board intends to resume dividend payments as soon as it considers prudent, maintaining its policy of sustainable dividend growth over the long term.

Finance

We have agreed interest cover waivers with our banks and term loan providers, covering periods from nine to twelve months from April 2020. We maintain a constructive dialogue with these lenders and, in view of the short-term outlook, are currently discussing extensions to the duration of the waivers. We continue to comply with the interest cover covenants in our two public bonds.

In the Longmartin joint venture, we agreed an interest cover covenant waiver until April 2021 and are monitoring the position ahead of possible further discussions with the lender regarding an extension.

1 Source: Tourism Economics. City Tourism Outlook and Ranking: Coronavirus Impacts and Recovery

2 As at 31 March 2020

Notes for Editors

Shaftesbury is a Real Estate Investment Trust which invests exclusively in the liveliest parts of London's West End. Focused on food, beverage, retail and leisure, our portfolio is clustered mainly in Carnaby, Seven Dials and Chinatown, but also includes substantial ownerships in East and West Covent Garden, Soho and Fitzrovia.

Extending to 16 acres, the portfolio comprises over 600 restaurants, cafés, pubs and shops, extending to 1.1 million sq. ft., 0.4 million sq. ft. of offices and 622 apartments. All our properties are close to the main West End Underground stations, and within ten minutes' walk of the two West End transport hubs for the Elizabeth Line, at Tottenham Court Road and Bond Street.

In addition, we have a 50% interest in the Longmartin joint venture, which has a long leasehold interest, extending to 1.9 acres, in St Martin's Courtyard in Covent Garden.

Our purpose

Our purpose is to curate vibrant and thriving villages in the heart of London's West End. Our proven management strategy is to create and foster distinctive, attractive and prosperous locations. We have an experienced management team focused on delivering our long-term strategic objectives, ultimately to deliver a positive, long-lasting contribution to the West End.

Our values

We have five core values that are fundamental to our behaviour, decision making and the delivery both of our purpose and strategic objectives: being human in how we operate, original in how we nurture talent and think, community minded in our approach to the West End, being responsible and long term in our approach to everything.

Since 2015, we have supported the UN Global Compact principles of sustainability and, in 2019, we integrated the UN Sustainable Development Goals into our sustainability strategy. We have long been committed to operating in a sustainable way. At the core of our sustainability strategy is reusing and improving, rather than redeveloping buildings. In doing so, we extend the useful economic lives of these buildings while preserving the West End's rich heritage for future generations.

Forward-looking statements

This document, the latest Annual Report and Shaftesbury's website may contain certain "forward-looking statements" with respect to Shaftesbury PLC (the Company) and the Group's financial condition, results of its operations and business, and certain plans, strategy, objectives, goals and expectations with respect to these items and the economies and markets in which the Group operates. Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as "anticipates", "aims", "due", "could", "may", "should", "expects", "believes", "intends", "plans", "targets", "goal" or "estimates" or, in each case, their negative or other variations or comparable terminology.

Forward-looking statements are not guarantees of future performance. By their very nature forward-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Many of these assumptions, risks and uncertainties relate to factors that are beyond the Group's ability to control or estimate precisely. There are a number of such factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements.

Any forward-looking statements made by, or on behalf of, Shaftesbury PLC speak only as of the date they are made and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. Except as required by its legal or statutory obligations, Shaftesbury PLC does not undertake to update forward-looking statements to reflect any changes in its expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.

Information contained in this document relating to Shaftesbury PLC or its share price, or the yield on its shares, should not be relied upon as an indicator of future performance. Nothing contained in this document, the latest Annual Report or Shaftesbury's website should be construed as a profit forecast or an invitation to deal in the securities of the Company.

End