Chief Executive's Statement
Strong Operational Performance
This is another strong endorsement of the successful repositioning of the Company over the past few years as well as the expertise and ability of our property and asset management team to create value.
Occupancy was very strong at 97.1%, an uplift of 1.0% compared to 96.1% at 30 December 2014.
Retailer sales, as measured by our in-house “C&R Trade Index”, were up 1.7% year-on-year compared to the average 2015 figure for the British Retail Consortium index (which includes online sales) of 0.9%.
New lettings and lease renewals increased from £5.3 million in 2014 to £7.8 million in 2015, an increase of almost 50%. Lettings and renewals (for leases with a term of five years or more and no turnover element) were agreed at an average increase of 18.5% above ERV.
Like-for-like rental income within our wholly owned portfolio increased by 7.3%, reflecting cost savings and an increase in gross income in H2. This strong performance reflects both the strength of the underlying assets and the very positive impact of the asset management programme.
Accelerating Momentum in Asset Management
Lettings to leisure operators were a dominant theme in 2015, as we sought to address the fact that our portfolio has been traditionally underweight to this increasingly important element of the tenant mix, which is seen as a key driver of footfall and dwell time, as well as an anchor for other tenants. In line with this, lettings to leisure operators (including gyms, restaurants, cinemas and hotels) accounted for £2.2 million or 40% of new lettings in 2015, and 8.3% of the ERV of our Mall and Redditch schemes as at 30 December 2015, as operators responded positively to the investment we are making to create attractive space.
The Travelodge at Wood Green is a case in point. Originally planned as a 35 room hotel for which planning consent was achieved in October 2015, we have now agreed a lease and obtained planning for an increase in the size of the hotel to 78 rooms. This gives economies of scale to Travelodge, but is more attractive for Capital & Regional given higher per room rents for a larger hotel. This letting also highlights the dynamic approach to the management of initiatives within the Capex programme.
Capex has been prioritised to support the increase in size of the hotel given the very attractive returns, helping to ensure that we outperform our 10% income return target for the programme as a whole.
Operationally, this has been an important year for Capital & Regional. We have consolidated and grown our portfolio through progress on the delivery of the Capex programme, and our entrepreneurial approach to acquisitions has enabled us to further showcase the depth of our asset management capabilities.
Entrepreneurial Approach to Acquisitions
One of the most significant and successful asset management initiatives falls outside of the £65 million Capex programme. The Buttermarket Centre, Ipswich was acquired for £9.25 million in a joint venture with Drum Property in March 2015 and since then rapid progress has been made.
The introduction of a 12-screen Empire cinema has been a catalyst for the transformation of a tired shopping centre to a vibrant leisure and retail destination. We expect the scheme to be fully let by Practical Completion later this year, with an attractive mix of restaurant offers alongside the cinema, a gym and a reconfigured TK Maxx and New Look.
At year end, the Buttermarket Centre was valued at £27.9 million, reflecting a gain of £10.8 million since acquisition over and above the £7.9 million of Capex spent and illustrating the true impact of the repositioning of the scheme. On completion, while this asset would make a welcome addition to our portfolio, we believe that this is an asset which will also have appeal to UK institutional buyers. This is reflected in the unsolicited offers we have received for the asset to date, which gives us the potential to realise, should we so choose, the significant returns in the short term.
The acquisition of The Marlowes, Hemel Hempstead, completed in February 2016, offers a different type of opportunity. Acquired for £35.5 million, The Marlowes is the principal retail offer in an attractive south east catchment and, given the fragmented ownership structure across the town centre, it provides the opportunity not only to execute an attractive asset management plan, but also, in the future, to consolidate the retail offer in the town centre.
This is highlighted by the further acquisitions that we subsequently announced of the adjacent Edmonds Parade and Fareham House properties for a combined £18.3 million, which will be integrated into the main scheme.
Optimisation of Balance Sheet
The restructuring of the Group’s Revolving Credit Facility has been an important step in ensuring that Capital & Regional has flexibility in the execution of tactical acquisitions as well as in the management of the Capex programme. This new £30 million facility matures in May 2019.
The Group has taken advantage of very attractive long-term rates to lock in a seven year fixed rate cost of funds to finance the acquisition of the Marlowes, Hemel Hempstead. The underlying five year facility has options to extend it to a total of seven years and was structured to fund the additional acquisitions as well as the Marlowes. Total cost of funds is around 3.3%.
The Group has begun to review options for the refinancing of the core £380 million debt facility, which comprises six wholly owned assets and matures in May 2019.
It is likely that this facility will be either restructured or refinanced during thencourse of 2016.
There are good reasons to be optimistic about the prospects for Capital & Regional. Retailers trade profitably in our shopping centres and the investments we are making are leading to strong interest from leisure operators and retailers wanting to come into our schemes, whilst incumbents are also upsizing. Indeed, the momentum in letting activity has picked up since the beginning of 2016 despite some continuing challenges in the operating environment. Altogether, this serves to reinforce our belief that we can deliver the promised returns in terms of both income and capital uplift from our Capex programme.
The slowdown in transactional activity in the early part of this year means that there is currently limited guidance for the future direction of property valuations. Having said that, our plans will create value irrespective of market conditions. Management’s focus is not only to deliver the previously announced asset management programme, but also to look to take advantage of opportunities adjacent to our existing schemes, which will enable us to consolidate our market position in the towns we have a presence in. We will also maintain our entrepreneurial approach to acquisitions and actively seek opportunity to recycle capital where this will crystallise attractive returns and allow a reallocation to more accretive investments. This gives us confidence that the growth prospects for the business go well beyond delivery of the £65 million Capex programme.