Capital & Regional Regulatory News (CAL)

10 August 2023

Capital & Regional plc

("Capital & Regional" or "C&R" or "the Company" or "the Group")

Dividend growth underpinned by improved profitability and robust operational performance

Capital & Regional (LSE: CAL), the UK convenience and community focused shopping centre REIT announces its half year results to 30 June 2023 which show continued strong operational performance.

The Company has also separately announced today that it has entered into an agreement to acquire the Gyle Shopping Centre in Edinburgh for a consideration of £40 million, to be part-funded by a fully underwritten £25 million Open Offer.

Lawrence Hutchings, Chief Executive, comments:

"Our community strategy's focus on value orientated, non-discretionary and needs based retail and services has driven another period of robust operational performance for the Company, against an uncertain and inflationary economic backdrop. Our footfall recovery, rent collection, occupancy and leasing metrics continue to benefit from our ongoing investment into repositioning and remerchandising our centres, coupled with our continued focus on operations. Snozone also enjoyed its first peak trading period unimpacted by Covid since 2019. Combined, these factors have allowed us to deliver increases in Adjusted Profit and, in turn, dividend.

"Furthermore, valuations have continued to stabilise alongside income which, together with a maturing of the structural changes that have impacted physical retailing over the past five years, have reinforced our confidence in our portfolio, platform and UK community centres.

"This confidence has not just informed our decision to increase the dividend. It is also reflected in our announcement this morning of the acquisition of The Gyle Shopping Centre in Edinburgh, which marks the first step towards rescaling our business and fully leveraging our proven skills and management expertise. Through this acquisition we are able to capitalise on an opportunity to add an established dual supermarket anchored community centre in Scotland's capital city to our portfolio, in a transaction that will be part-funded by a £25 million equity raise available to all existing shareholders and fully underwritten by our majority shareholder, Growthpoint.

"The centre will be accretive to income from day one, with the agreed price representing a significant discount to the replacement cost and providing us with a highly attractive entry point from which we can create value. In addition, we have arranged terms with Morgan Stanley to staple debt to the acquisition at a 40% LTV capped at a cost of 6.5%.

"The Gyle Shopping Centre presents us with a number of asset management opportunities including refining the tenant mix, a renewed focus on leasing to improve occupancy and income, whilst enhancing the centre's appeal to the growing and affluent catchment in south western Edinburgh. 

"I would like to take this opportunity to thank our team for their commitment and hard work over the first half in delivering these robust results, especially in the delivery of the two new flagship food catering environments, Crate in Walthamstow and The Bridge in Wood Green, which opened recently and are performing well."

Continuing operational resilience

Improved profitability underpinning dividend growth

Long term secure debt position

Notes

1 Adjusted Profit, Adjusted Earnings per share, Net Rental Income, Net Debt and the Snozone EBITDA metric are as defined in the Glossary. Adjusted Profit incorporates profits from operating activities and excludes revaluation of properties and financial instruments, gains or losses on disposal, and other non-operational items. A reconciliation to the equivalent EPRA and statutory measures is provided in Note 6 to the condensed financial statements. 

2 For lettings and renewals (excluding development deals and CVA variations) with a term of 5 years or longer which do not include turnover rent or service charge restrictions.

3 Includes dividends declared post period end but related to the period in question.

4 Weighted average, debt maturity assumes exercise of extension options.

5 June 2022 comparative figures have been restated, in line with the adjustment made in the Group's results for the year ending 30 December 2022, for a prior year adjustment to the treatment of rent concessions due to an IASB IFRS interpretation issued in October 2022, further detail is provided in Note 2 to the condensed financial statements.

Use of Alternative Performance Measures (APMs)

Throughout the results statement we use a range of financial and non-financial measures to assess our performance. A number of the financial measures, including Net Rental Income, Adjusted Profit, Adjusted Earnings per share, Net Debt and the industry best practice EPRA (European Public Real Estate Association) performance measures are not defined under IFRS, so they are termed APMs. APMs are not considered superior to the relevant IFRS measures, rather Management use them alongside IFRS measures to monitor the Group's financial performance because they help illustrate the trading performance and position of the Group. All APMs are defined in the Glossary and further detail on their use is provided within the Financial Review.

For further information:

Notes to editors:

About Capital & Regional

Capital & Regional is a UK focused retail property REIT specialising in shopping centres that dominate their catchment, serving the non-discretionary and value orientated needs of the local communities. It has a track record of delivering value enhancing retail and leisure asset management opportunities across a portfolio of tailored in-town community shopping centres. 

Using its in-house expert property and asset management platform Capital & Regional owns and/or manages shopping centres in Hemel Hempstead, Ilford, Maidstone, Redditch, Walthamstow and Wood Green.

Capital & Regional is listed on the main market of the London Stock Exchange (LSE) and has a secondary listing on the Johannesburg Stock Exchange (JSE).

For further information see www.capreg.com.

South African secondary listing

At 30 June 2023, 7,286,097 of the Company's total 173,545,054 shares were held on the South African register representing 4.20% of the total issued share capital. Java Capital acts as JSE Sponsor for the Group.

Forward looking statements

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

Operating review

New lettings, renewals and rent reviews

We saw continued momentum in leasing in the first half of the year, completing 42 new lettings and renewals, at a combined annual rent of £1.5 million, representing an average premium to previous rent of 5.7%1 (30 June 20222 - 37 new lettings and renewals for a combined annual rent of £2.0 million). 

At Wood Green we secured lettings on four catering units at the new 'Bridge' development, as well as letting c. 7,000 sq ft of vacant office space while at Ilford we agreed a new lease to Addax. Renewals agreed during the period include Savers at Hemel Hempstead, Waterstones at Walthamstow and Claire's Accessories at Ilford. Since 30 June 2023 we have secured renewals with H&M at Ilford and Superdrug at Wood Green.

1 For lettings and renewals (excluding development deals and CVA variations) with a term of 5 years or longer which do not include turnover rent or service charge restrictions.

2 Includes transactions for Hemel Hempstead, Ilford, Maidstone, Walthamstow and Wood Green. Prior period comparative restated on like for like basis. 

We have also opened two new flagship food catering facilities in the year to date. At Wood Green we have developed a new dining area by converting space on the bridge linking the two sides of the high street. This new Bridge development opened at the end of May 2023 providing six new street eats style food and beverage kiosks and a new dining area over. In July 2023 we then opened the new Crate food and events hall in Walthamstow. Operating on a mezzanine level across 16,000 sq ft. Crate provides seven grab and go food kiosks, a bar, indoor golf and events space.

Rental income and occupancy

Occupancy has continued its positive recovering trend, increasing by 0.4% to 94.5% since 30 December 2022 and by 0.7% since 30 June 2022.

Contracted and Passing rent have both increased from December 2022 by £0.1 million and £0.2 million respectively. The 30 June 2023 balances exclude c. £0.8 million of rent related to deals that are committed but remain subject to planning or other conditions.

CVA or administration activity impacting the Group was limited in the first six months of the year, though Wilko filed a notice of intention to appoint an administrator on 3 August 2023. Wilko represents approximately £0.65 million or 2.5% of the Group's Contracted Rent at 30 June 2023. Whilst there has been no immediate impact to the Group resulting from Wilko's notice of intention to appoint an administrator, were it to go into administration, CVA or to cease trading, this income would be at risk of being reduced or lost and in the event units became vacant and not relet the Group may face incurring some or all of the occupational costs, which total approximately £0.9 million.   

Operational performance

In total there were 19.3 million shopper visits across the five assets in the first half of 2023, 5.1% ahead of 2022 and representing 86.7% of the equivalent period for 2019, (or 90.4% of the equivalent period for 2019 excluding Walthamstow where footfall is impacted by one of the entrances being closed due to the residential development).

Car park income in the first six months of the year was £2.6 million, an increase of 9.7% on the same period for 2022 and representing approximately 79% of the equivalent for 2019. 

Rent collection

Rent collection for the first six months of the year is currently 98.4% as detailed in the table below:

Amounts include VAT, amounts billed for Q3 2023 are up to end of July 2023.

Rent collection for the 2022 financial year has now improved to 98.9% (up from 97.6% at the time of the Group's year end results announcement in March 2023).

Capital expenditure

In total a net £7.0 million was invested in the first six months of the year, this was primarily across the following projects and is expected to produce a yield on cost in line with the Company's target of 8% to 9%:

· Ilford

o  £2.6 million on the new 35,000 sq ft TK Maxx anchor unit that is due to open in Q4 2023.

o  £1.9 million for the ongoing works for the new 20,000 sq ft NHS community healthcare facility that is due to open in the first half of 2024.

o  £0.9 million on other related centre improvements.

· Wood Green

o  £0.6 million to create the new Bridge catering units which opened in June 2023.

o  £0.4 million on remerchandising of the former WH Smiths unit.

The major projects undertaken have the additional benefit of helping to improve the ESG credentials of the relevant centres by replacing aged infrastructure and enabling the reduction or elimination of the use of gas. 

Spend on the Walthamstow Crate facility in the period has been covered by a contribution from Walthamstow Council as the head lease holder, who recognise the valuable contribution our centre makes to both the local community and economy. We anticipate capital expenditure in the second half of the year to be at a similar level driven primarily by the completion of the TK Maxx and NHS projects.

Walthamstow residential

Construction work remains ongoing on the first phase of the residential development at Walthamstow which will see Long Harbour create 495 Build to Rent residential apartments in two residential towers adding further to the centre's local customer base. Completion is scheduled for 2025. The Group previously completed the sale of land for residential development to Long Harbour for £21.6 million. The planning consent covers a residential-led, mixed use development, incorporating a new Victoria Line tube station entrance and new public space including a new park.

Shopping Centre ESG

For our shopping centres, we have developed a robust pathway aligned with the BBP Climate Commitment and the UK Green Building Council's (UKGBC) definition of net zero. Our commitment covers embodied carbon associated with refurbishments and fit-outs and operational carbon from landlord and occupier energy consumption, along with measured emission sources. We continue to make progress on driving forward our net zero carbon pathways aligned with industry best practice and guidelines which represents a significant milestone in our decarbonisation journey. Having established our net zero governance along with the roll-out of employee training, we will continue to prioritise energy efficiencies on the ground across all aspects of our operations and evolve crucial tools such as our data accuracy and net zero standards. We have made significant strides on our environmental targets increasing our energy efficiency, reducing Scope 1 natural gas consumption by 78% and Scope 2 electricity consumption by 29%, against 2019. All of the shopping centres electricity is 100% renewable and Renewable Energy Guarantees of Origin certified.

Our centres' Scope 3 emissions, which relate to occupier energy consumption, make up an estimated 83% of our total emissions (based on our baseline year of 2019) and therefore the management of these is central to achieving our net zero carbon commitment. With occupier emissions falling outside of our direct management or ownership, tackling them proves a challenge for C&R and across the industry. To address this, we have created an enhanced occupier engagement strategy to promote collaboration and have collated 68% of all occupiers' energy usage from 2022 through our Net Zero Carbon Committee which is established at each centre. With the regulations around EPC ratings tightening, we have established an EPC Management Dashboard to help improve performance covering all units across the centres to increase focus and highlighting areas where ratings need to be improved as well as providing occupiers with the tools to help improve their performance. 

Our Community Wheels of Support continue to play a critical role in encouraging engagement and helping our shopping centre teams to prioritise areas of impact. As community hubs we know our community support is crucial, particularly with the cost-of-living crisis. We are very proud of our efforts in this space and have partnered with over 75 charities, hosted over 70 events, and spent more than 400 hours engaging with local community groups.

As part of succession planning in respect of the Board's Independent Non-Executive Directors it is planned that Katie Wadey will take over as Chair of the ESG Committee from Laura Whyte as of 1 October 2023. Laura Whyte will also step down as a member of the ESG Committee from that date.

Snozone

Snozone has had a strong six months enjoying its first peak Q1 trading quarter unimpacted by Covid since 2019. EBITDA1 was £1.6 million (June 2022: £0.8 million) reflecting a significantly improved performance from the UK operations and a contribution of £0.4 million from Snozone Madrid (June 2022: Loss of £0.1 million). 

Revenue and EBITDA for the UK operations at £5.6 million and £1.3 million for the first half of 2023, respectively were 20% and 53% higher than 2022. This reflected a dramatically improved performance and the fact that that the early part of 2022 was still impacted by the Covid-Omicron variant. Revenue and EBITDA for the UK operations have also shown an improvement on the pre-pandemic base year of 2019, up 4% and 8% respectively, despite some revenue streams such as corporate activities and food and beverage usage having not yet returned to pre-pandemic levels due to changing consumer habits. The UK business has also benefited from being on a fixed price energy tariff over the past three years which comes to an end in September 2023. While prices have significantly reduced from the peaks seen over the last 12 months this is still expected to see an increase in total utility costs of c £0.3 million per year.

Snozone Madrid's revenue of £2 million was 20% higher than 2022 (+7% on 2019) and it delivered a positive contribution to Snozone's total EBITDA of £0.4 million (June 2022: loss of £0.2 million). These metrics reflect the actions undertaken to significantly improve profitability since acquisition of the operations in February 2021. The impact of large increases in government-controlled electricity prices has been largely mitigated in 2023 from the installation of solar panels in November 2022.

Snozone's IFRS profit for the period was £0.6 million (June 2022: £0.1 million). 

Snozone ESG

Snozone's pathway to net zero strategy is underpinned by a cyclical four-year plan for capital investment into new plant and machinery which we are now halfway through. Nine units of blast coolers have been replaced at the Milton Keynes venue which will save 214,000 kWh per year. In addition, a voltage optimiser unit was purchased for our Yorkshire venue which both regularises and controls consumption flow to our main plant and machinery. In Madrid, given the significant increase in government-controlled electricity pricing faced in 2022, solar panels were fitted to the roof of our venue and were fully operational as of November 2022. The venues have also undergone a significant de-lamping programme to further reduce electricity usage.

At the half year, the sum of these initiatives has delivered a 10% reduction in electricity utility consumption compared to the prior year and a reduction of 5% versus the 2019 base year. There has also been a significant reduction in gas usage of 32% v 2022 and 21% v the 2019 base. Water usage similarly has decreased by 30% v 2022 and 35% v 2019. All of Snozone's electricity is 100% renewable and is sourced from wind and solar power.

Furthermore, supplier visitation to Snozone's premises has been reduced due to strong operational controls and robust planned preventative maintenance programmes which has reduced scope 3 emissions by 19% v 2022.

1 Snozone EBITDA is defined in the use of Alternative Performance Measures section below.

FINANCIAL REVIEW

1 Adjusted Profit is as defined in the Glossary. A reconciliation to the statutory result is provided further below. EPRA figures and a reconciliation to EPRA EPS are shown in Note 6 to the Financial Statements. The calculation of EPRA cost ratio is provided in the EPRA performance measures section.

2 Represents dividends declared post period end but related to the period in question.

3 Assuming exercise of all extension options.

4 June 2022 comparative figures have been restated, in line with the adjustment made in the Group's results for the year ending 30 December 2022, for a prior year adjustment to the treatment of rent concessions due to an IASB IFRS interpretation issued in October 2022, further detail is provided in Note 2 to the condensed financial statements.

Use of Alternative Performance Measures (APMs)

Throughout the results statement we use a range of financial and non-financial measures to assess our performance. The significant measures are as follows:

Profitability

Components of Adjusted Profit and reconciliation to IFRS Profit

1 EPRA figures and a reconciliation to EPRA EPS are shown in Note 6 to the condensed Financial Statements.

2 June 2022 comparative figures have been restated for a prior year adjustment to the treatment of rent concessions as explained in note 2.

Adjusted Profit - 30 June 2023: £7.0 million (30 June 2022: £5.9 million)1

Net Rental Income (NRI) decreased to £11.7 million (30 June 2022 - £12.3 million) due to the sale of Blackburn in August 2022 which contributed £2.0 million to NRI in the first half of 2022. Adjusting for this and a full period of Hemel Hempstead (as it was reclassified from Held for Sale in May 2022) NRI increased by 13% on a like for like basis. The biggest driver for this is increased occupancy, which during the period increased from 94.1% to 94.5% occupied (30 June 2022 - period started at 92.9% and ended at 93.8%) and a £0.2 million improvement in Car Park income.

Interest payable has fallen from the prior year reflecting the repayment of £60 million of debt in The Mall loan facility during 2022 that was skewed towards the second half of the year. Interest payable is expected to increase in 2024 as the swap on the £39 million Ilford loan expires at the original maturity in March 2024.

Snozone EBITDA at £1.6 million (30 June 2022 - £0.8 million) as noted has benefited from its first peak Q1 trading period unimpacted by Covid since 2019.

External Management Fees of £1.2 million break down between Asset and Property Management fees on external properties (Redditch and Luton) of £0.7 million and Property Management fees on the Group's Investment Assets of £0.5 million (as these are charged to the Service Charge). The Group's involvement in Luton ceased following the sale in March 2023. The Group's involvement in Redditch is expected to cease before the end of the third quarter of 2023 when the asset changes ownership.

Central operating costs £3.3 million (30 June 2022 - £3.5 million) and Variable overheads £0.7 million (30 June 2022 - £0.7 million). Central costs are lower than the prior year reflecting cost saving initiatives implemented which deliver approximately 10% savings on an annualised basis after inflation. These include utilising technology to drive operational efficiencies and the selective use of outsourcing. Further initiatives are in progress or planned to deliver a similar saving in 2024. We anticipate the combination of further cost savings and the benefit of additional income from capital expenditure projects and improving occupancy to drive further improvements in our EPRA cost ratio which has reduced to 35.6% from 37.8% at 30 June 2022. 

Adjusted earnings per share for the period were 4.1 pence on a diluted basis (30 June 2022: 3.5 pence) reflecting the improvement in Adjusted Profit.

IFRS profit for the period - 30 June 2023: £6.1 million (30 June 2022: Profit of £26.8 million)

Aside from the Adjusted Profit of £7.0 million the other items impacting the result in the period were:

· Property revaluation loss of £0.3 million (June 2022 - profit of £1.1 million)1 representing the marginal difference between the Capex invested of £7.0 million, valuation increases and movement on tenant incentives and IFRS adjustments.

· £0.6 million of transaction costs in respect of the proposed acquisition of The Gyle and a small true up of profit on disposal in respect of the Group's sale of Blackburn in 2022.

· £0.7 million of adjustments relating to Snozone reconciling between the EBITDA measure used for Adjusted Profit and IFRS Profit for the year. As noted above, we used EBITDA as this removes the profiling element of IFRS 16 and therefore provides a measure of Snozone's trading performance excluding this.

· A loss of £0.3 million on financial instruments being the movement from the revaluation of the Ilford interest rate swap (June 2022 - gain of £1.0 million).

· A net release of £1.2 million of provision for tax in lieu of paying dividends which is no longer required following the resumption of dividend payments and expectation of the firm having met its minimum PID requirement for prior years.

· £0.4 million relating to share based payments being the non-cash element of the Group Combined Incentive Plan for executives and LTIP retention awards for staff members.

The prior year included the one-off gains of £12.3 million and £6.8 million from the discounted purchase of the Hemel Hempstead debt facility and deconsolidation of Luton, respectively.

The profit for the period has resulted in NAV of £183.2 million and EPRA Net Tangible Assets of £181.7 million and improvements of 2.3% and 2.4% compared to December 2022 amounts of £179.1 million and £177.4 million, respectively. Basic NAV per share and EPRA NTA per share were 106p and 102p respectively (December 2022: 106p and 103p respectively).

Property portfolio valuation

The valuation of the portfolio at 30 June 2023 was £329.7 million, representing an increase in headline valuation of £6.95 million or 2.1% from December 2022. This reflects the net impact of a 2.1% increase in net valued rent partially offset by an expansion in Net Initial Yield of 15 basis points.

Disposal of The Mall, Luton

The Company completed the sale of its interest in The Mall, Luton shopping centre on 16 March 2023. The disposal followed a sale process undertaken with the consent of the secured lender on the related loan facility. The Group had previously deconsolidated its interest in The Mall, Luton meaning that the transaction did not result in any profit or loss on disposal to the Group. 

Financing

The Group's debt position as at 30 June 2023 is summarised in the table below:

1 Excluding unamortised issue costs.

2 Excluding cash beneficially owned by tenants.

3 Debt and net debt divided by investment property at valuation.

The Group's Net Loan to Value ratio increased marginally during the period from 41% to 42% as a result of the investment of cash in to capital expenditure.  

The Mall

Following the £60 million of repayments made during the prior year the Mall facility now consists of a single £140 million fixed rate loan at 3.45%, held with TIAA. The loan matures in January 2027 but has a one-year conditional extension option. 

As part of the November 2021 restructuring of the facility TIAA provided a waiver of all financial covenants for two years until November 2023. The facility is currently compliant with all covenants.

Hemel Hempstead

The Group has a £4 million facility with BC Invest, a subsidiary of the Group's strategic residential partner, Far East Consortium. The debt matures in July 2025 and is at a margin of 5.95% over SONIA. It is secured on the Marlowes Centre on a non-recourse basis. 

Ilford

The Group has a £39 million facility secured on the Ilford Exchange shopping centre with Dekabank Deutsche Girozentrale that is due to mature in March 2024. 

In May 2022, the Group signed a package of amendments to facilitate the investment of more than £10 million for the creation of the new NHS community healthcare centre and anchor unit for TK Maxx. The amendment provides an 18-month conditional extension option that can be triggered at the end of 2023 to extend the loan maturity from March 2024 until September 2025 subject to meeting a debt yield and net loan to value covenant test. The cost of debt is hedged until the date of original maturity (March 2024) via an interest rate swap.

The amendments also provided improvements to existing covenant terms that applied from January 2023 until the end of 2024.   The all-in cost of the current loan is 3.51%. 

Going Concern

Under the UK Corporate Governance Code the Board needs to report whether the business is a going concern. In making its assessment of Going Concern, the Group has considered the general risk environment and the specific risks that relate to the Group and its sector. This has incorporated considering the current macro-economic inflationary pressures, the ongoing impacts and speed of recovery from Covid-19, as well as the structural trends that were already under way in the retail industry.

At 30 June 2023, the Group had total cash at bank on balance sheet of £49.1 million. Of which £24.3 million was held centrally outside of secured loan arrangements. This provides a significant cash contingency to cover any reasonable disruption to operations in both the base and downside scenarios that have been modelled for at least the period of the next 18 months that is considered for going concern purposes.

As part of the restructure of The Mall debt facility that completed in November 2021, the lender provided covenant waivers that run until November 2023. The Group is currently compliant with all covenant tests on the facility and hence not reliant on the waivers or modifications. On the Ilford facility, as noted, the Group had covenant waivers that ran until January 2023 and has improved covenant terms that extend beyond the end of 2024. The Mall loan facility matures in January 2027 with a one-year conditional extension option. The Ilford loan matures in March 2024 with an 18-month conditional extension option dependent upon meeting a debt yield and net loan to value covenant test in Q4 of 2023. 

On Hemel Hempstead, the Group drew down a £4 million loan facility in July 2022. The Group's forecasts demonstrate a reasonable level of covenant headroom on the Loan to Value and Projected Interest Cover Ratio tests that are relevant to the agreement.

All of the Group's asset backed loan facilities are ring-fenced within their own SPV structures with no recourse to Capital & Regional plc and no cross-default provisions. 

In making its assessment of Going Concern, the Group has run updated forecasts on both a base case and downside basis. In the latter, the Group has sensitised rent collection to 90% collection, reduced car park and ancillary income by 10% and removed any contribution from Snozone to reflect how a downturn in expected trading, such as might be caused by a further wave of Government restrictions, could impact cashflows. The Group has also considered a 15% reduction in property valuations. The Group's headroom on The Mall and Hemel Hempstead is sufficient to withstand this level of decline from the 30 June 2023 valuations. 

On Ilford, such a decline would breach the LTV covenant level however the cash earmarked for capital expenditure investment into the asset would be sufficient to theoretically cure although in such a scenario the Group would seek to agree with the lender to invest the funds to develop the asset. The same position applies in respect of the LTV condition that is required in order to trigger the 18-month extension to the loan's maturity. Ultimately given the ring-fenced nature of the loan facility if the Group decided not to cure any breach and could not agree a compromise with the lender it could, in extremis, effectively surrender the asset and not face any recourse to the Group. The Group's cashflow forecasts over the period considered for Going Concern purposes assume it is a net investor into Ilford to fund the masterplan initiatives and hence such a scenario would not reduce the amount of cash available to the Group.

In coming to its Going Concern conclusion, the Group has also considered, but not relied upon, other options available to generate or conserve additional cash, to reduce debt levels and to fund value accretive capital expenditure and letting initiatives. These include but are not limited to: the potential disposal of assets either in whole or part; the opportunity to reduce or suspend dividend payments (or offer a Scrip alternative); and the potential raising of additional funds.

Having due regard to all of the above matters and after making appropriate enquiries, the Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. Therefore, the Board continues to adopt the Going Concern basis in preparing the financial statements.

Dividend

The Directors recommend an interim dividend of 2.75 pence per share (June 2022: 2.5 pence per share). The dividend will be paid entirely as a Property Income Distribution (PID) and a Scrip dividend option will be offered. Across the full financial year, the Group expects to pay a dividend of at least 90% of the Group's EPRA profits, in line with its dividend policy. We expect to pay a final dividend of at least the same level to the Interim Dividend. 

The key dates proposed in relation to the payment of the dividend are:

South African shareholders are advised that the dividend will be regarded as a foreign dividend. Further details relating to Withholding Tax for shareholders on the South African register will be provided within the announcement detailing the currency conversion rate on 22 August 2023. Share certificates on the South African register may not be dematerialised or rematerialised between 30 August 2023 and 1 September 2023, both dates inclusive. Transfers between the UK and South African registers may not take place between 22 August 2023 and 1 September 2023, both dates inclusive.

Outlook

We are confident that the strong operational performance and defensive nature of our assets, allied to the actions taken over the last two years to reposition the Company and its balance sheet, leave us well placed to continue to perform, despite some of the current broader economic uncertainties. 

We will also continue to explore selective opportunities such as The Gyle to grow the business and further utilise our leading management expertise in delivering our tried and tested community centre strategy.

Principal risks and uncertainties

There are a number of risks and uncertainties which could have a significant impact on future performance and could cause actual results to differ materially from expected or historical results. The Group carries out a regular review of the major risks it faces and monitors the controls that have been put in place to mitigate them.

A detailed explanation of the principal risks and uncertainties was included on pages 44 to 51 of the Group's 2022 Annual Report. A further review was carried out for the 30 June 2023 half year taking into consideration the next six months to 30 December 2023. Amongst the main factors considered were the impact of the continuing inflationary pressures being experienced by consumers within the UK and the expectation of higher interest rates for longer than previously envisaged. The review concluded that while as a result of these combined factors the profile of some risks, including economic environment, property investment market risks and Treasury risks had changed, the ultimate nature of them had not and therefore the principal risks to the Group remain those disclosed in the 2022 Annual Report. These have been summarised below.

The risks noted above do not comprise all those potentially faced by the Group and are not intended to be presented in any order of priority. Additional risks and uncertainties currently unknown to the Group, or which the Group currently deems immaterial, may also have an adverse effect on the financial condition or business of the Group in the future. These issues are kept under constant review to allow the Group to react in an appropriate and timely manner to help mitigate the impact of such risks.

Responsibility statement

The directors confirm that to the best of their knowledge:

By order of the Board 

Lawrence Hutchings Stuart Wetherly

Chief Executive Group Finance Director

9 August 2023 9 August 2023

INDEPENDENT REVIEW REPORT TO CAPITAL & REGIONAL PLC

Conclusion

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 which comprises the condensed consolidated income statement, the condensed consolidated balance sheet, the condensed consolidated statement of changes in equity, the condensed consolidated cash flow statement, and related notes 1 to 16.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 is not prepared, in all material respects, in accordance with United Kingdom adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Basis for Conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 2, the annual financial statements of the group will be prepared in accordance with United Kingdom adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with United Kingdom adopted International Accounting Standard 34, "Interim Financial Reporting".

Conclusion Relating to Going Concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for Conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with this ISRE (UK), however future events or conditions may cause the entity to cease to continue as a going concern.

Responsibilities of the directors

The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

In preparing the half-yearly financial report, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditor's Responsibilities for the review of the financial information

In reviewing the half-yearly financial report, we are responsible for expressing to the group a conclusion on the condensed set of financial statement in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our report

This report is made solely to the company in accordance with International Standard on Review Engagements (UK) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Mazars LLP

Statutory Auditor

London, United Kingdom

9 August 2023

Condensed consolidated income statement

For the six months to 30 June 2023

Condensed consolidated statement of comprehensive income

For the six months to 30 June 2023

The results for the current and preceding periods are fully attributable to equity shareholders.

The EPRA alternative performance measures used throughout this report are industry best practice performance measures established by the European Public Real Estate Association (EPRA). They are defined in the Glossary to the Financial Statements. EPRA Earnings and EPRA EPS are shown in Note 6 to these condensed financial statements. EPRA net reinstatement value (NRV), net tangible assets (NTA) and net disposal value (NDV) are shown in Note 13 to these condensed financial statements. We consider EPRA NTA to be the most relevant measure for our business.

1 June 2022 comparative figures have been restated for a prior year adjustment to the treatment of rent concessions as explained in note 2.

Condensed consolidated balance sheet

At 30 June 2023

For the six months to 30 June 2023

Notes:

1 These reserves are not distributable.

2 The merger reserve of £60.3 million arose on the Group's capital raising in 2009 which was structured so as to allow the Company to claim merger relief under section 612 of the Companies Act 2006 on the issue of ordinary shares. The merger reserve is available for distribution to shareholders.

3 Own shares relate to shares purchased out of distributable profits and therefore reduce reserves available for distribution.

4 In June 2022 a capital reduction was completed transferring the remaining reserves from share premium and the capital redemption reserve to retained earnings. 

Condensed consolidated cash flow statement

For the six months to 30 June 2023

Notes to the condensed financial statements

For the six months to 30 June 2023

1 General information

The comparative information included for the year ended 30 December 2022 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor has reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The Group's financial performance is not materially impacted by seasonal fluctuations.

2 Accounting policies

Basis of preparation

The annual financial statements of Capital & Regional plc are prepared in accordance with IFRS as adopted by the United Kingdom. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the United Kingdom. The financial statements are prepared in GBP being the functional currency of the Group.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these financial statements is determined on such basis, except for share-based payments that are within the scope of IFRS 2, leasing transactions that are within the scope of IFRS 16, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36.

In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

· Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

· Level 2 inputs are inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

· Level 3 inputs are unobservable inputs for the asset or liability.

The Half-Year Report was approved by the Board on 9 August 2023.

Prior year restatement

In October 2022, the IASB finalised the agenda decision approved by the IFRS Interpretation Committee (IFRS IC) on 'Lessor Forgiveness of Lease Payments (IFRS 9 and IFRS 16)'. The agenda decision addresses the accounting from the perspective of the lessor, and whether to apply the derecognition requirements in IFRS 9 or the lease modification requirements in IFRS 16 when accounting for the rent concession.

When the lease payments are forgiven, the Committee concluded that the lessor should apply the derecognition requirements in IFRS 9 to the operating lease receivables and apply the lease modification requirements in IFRS 16 to future lease payments, including accrued lease payments, as discussed further below.

In applying the requirements in IFRS 9, the lessor should derecognise the operating lease receivable, including any associated ECL allowance.

In adopting the above treatment the Group has restated the June 2022 results for a prior year adjustment. This restatement derecognises the rent free debtor amortisation associated with rent concessions granted specifically relating to Covid 19, which has an associated knock-on impact on the investment properties revaluation, given valuations are adjusted for such amounts. The Group's Adjusted Profit for 2022 is £0.1 million higher than it would have been without these adjustments.

The following table summarises the impact of the change on the financial statements of the Group. The total impact on net assets and basic and diluted earnings per share is £nil. 

2 Accounting policies (continued)

Key judgements and sources of estimation uncertainty

The preparation of financial statements requires the Directors to make estimates that may affect the reported amounts of assets and liabilities, income and expenses. The key sources of estimation uncertainty are as reported in the annual audited financial statements for the year ended 30 December 2022. With the exception of those below, there are no key judgements impacting the financial statements.

Property valuation

The valuation of the Group's property portfolio is inherently subjective due to, among other factors, the individual nature of each property, its location and the expected future rental revenues from that particular property. As a result, the valuations the Group places on its property portfolio are subject to a degree of uncertainty and are made on the basis of assumptions which may not prove to be accurate. We are now in a phase of the valuation cycle where there is persistent negative sentiment and low transactional evidence as such greater judgement has been applied.

The investment property valuation contains a number of assumptions upon which the valuation of the Group's properties as at 30 June 2023 was based. The assumptions on which the property valuation reports have been based include, but are not limited to, matters such as the tenure and tenancy details for the properties, the condition of the properties, prevailing market yields and comparable market transactions. These assumptions are market standard and accord with the Royal Institution of Chartered Surveyors (RICS) Valuation - Professional Standards UK 2014 (revised January 2022).

If the assumptions upon which the valuation was based prove to be inaccurate, this may have an impact on the value of the Group's investment properties, which could in turn have an effect on the Group's financial position and results. Estimated rental values and equivalent yields are considered key assumptions. Note 7c provides sensitivity analysis estimating the impact that changes in the estimated rental values or equivalent yields would have on the Group's property valuations. Valuations are discussed further in note 7.

Increase in credit risk

When measuring expected credit loss the Group uses reasonable and supportable forward looking information, which is based on assumptions for the future movement of different economic drivers and how these drivers will affect each other. In assessing whether the credit risk of an asset has significantly increased the Group takes into account qualitative and quantitative reasonable and supportable forward looking information. Probability of default constitutes a key input in measuring expected credit losses (ECL). Probability of default is an estimate of the likelihood of default over a given time horizon, the calculation of which includes historical data, assumptions and expectations of future conditions. Receivables are discussed in note 9.

Going concern

Under the UK Corporate Governance Code the Board needs to report whether the business is a going concern. In making its assessment of Going Concern, the Group has considered the general risk environment and the specific risks that relate to the Group and its sector. This has incorporated considering the current macro-economic inflationary pressures as well as the ongoing impacts and speed of recovery from Covid-19 as well as the structural trends that were already under way in the retail industry.

At 30 June 2023, the Group had total cash at bank on balance sheet of £49.1 million. Of which £24.3 million was held centrally outside of secured loan arrangements. This provides a significant cash contingency to cover any reasonable disruption to operations in both the base and downside case scenarios that have been modelled for at least the period of the next 18 months that is considered for going concern purposes.

As part of the restructure of The Mall debt facility that completed in November 2021, the lender provided covenant waivers that run until November 2023. The Group is currently compliant with all covenant tests on the facility and hence not reliant on the waivers or modifications. On the Ilford facility, as noted, the Group had covenant waivers that ran until January 2023 and has improved covenant terms that extend beyond the end of 2024. The Mall loan facility matures in January 2027 with a one-year conditional extension option. The Ilford loan matures in March 2024 with an 18-month conditional extension option dependent upon meeting a debt yield and net loan to value covenant test in Q4 of 2023. On Hemel Hempstead, the Group drew down on a new £4 million loan facility in July 2022. The Group's forecasts demonstrate a reasonable level of covenant headroom on the Loan to Value and Projected Interest Cover Ratio tests that are relevant to the new agreement. 

All of the Group's asset backed loan facilities are ring-fenced within their own SPV structures with no recourse to Capital & Regional plc and no cross-default provisions. 

In making its assessment of Going Concern, the Group has run updated forecasts on both a base case and downside basis. In the latter, the Group has sensitised rent collection to 90% collection, reduced car park and ancillary income by 10% and removed any contribution from Snozone to reflect how a downturn in expected trading, such as might be caused by a further wave of Government restrictions, could impact cashflows. The Group has also considered a 15% reduction in property valuations. The Group's headroom on The Mall and Hemel Hempstead is sufficient to withstand this level of decline from the 30 June 2023 valuations. 

On Ilford, such a decline would breach the LTV covenant level however the cash earmarked for capital expenditure investment into the asset would be sufficient to theoretically cure although in such a scenario the Group would seek to agree with the lender to invest the funds to develop the asset. The same position applies in respect of the LTV condition that is required in order to trigger the 18-month extension to the loan's maturity. Ultimately given the ring-fenced nature of the loan facility if the Group decided not to cure any breach and could not agree a compromise with the lender it could, in extremis, effectively surrender the asset and not face any recourse to the Group. The Group's cashflow forecasts over the period considered for Going Concern purposes assume it is a net investor into Ilford to fund the masterplan initiatives and hence such a scenario would not reduce the amount of cash available to the Group.

In coming to its Going Concern conclusion, the Group has also considered, but not relied upon, other options available to generate or conserve additional cash, to reduce debt levels and to fund value accretive capital expenditure and letting initiatives. These include but are not limited to: the potential disposal of assets either in whole or part; the opportunity to reduce or suspend dividend payments (or offer a Scrip alternative); and the potential raising of additional funds.

Having due regard to all of the above matters and after making appropriate enquiries, the Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. Therefore, the Board continues to adopt the Going Concern basis in preparing the financial statements.

Change in accounting policies

The condensed consolidated interim financial information has been prepared on the basis of the accounting policies, significant judgements, key assumptions and estimates as set out in the notes to the Group's annual financial statements for the year ended 30 December 2022. Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings. The June 2022 results have been restated as a result of a change in accounting policies relating to rent concessions, as discussed above.

2 Accounting policies (continued)

New and revised standards issued but not yet effective

At the date of authorisation of these financial statements, the Group has not applied the following new and revised IFRS Standards that have been issued but are not yet effective:

IFRS 17 Insurance Contracts including Amendments to IFRS 17

Amendments to IAS 16-Leases on sale and leaseback

Amendments to IAS 1-Classification of Liabilities as Current or Non-current including Classification of Liabilities as Current or Non-current

Amendments to IAS 12-Deferred Tax related to Assets and Liabilities arising from a Single Transaction

Amendments to IAS 1 and IFRS Practice Statement 2-Disclosure of Accounting Policies

Amendments to IAS 8-Definition of Accounting Estimates

Amendment to IAS 12 - International tax reform - pillar two model rules

Amendments to IAS 7 and IFRS 7 on Supplier finance arrangements

None of these standards are anticipated to have a material impact upon the Group's results.

3 Operating segments

3a Operating segment performance

Following the reclassification of Hemel Hempstead and Luton as 'Held for Sale' as at 30 December 2021 the segment of Shopping Centres - Managed Assets that included those assets in the prior year is no longer relevant. As a consequence the Group's operating segments are Shopping Centres, Snozone and Group/Central. Shopping Centres includes the results of the Group's centres at Ilford and Hemel Hempstead (from 11 April 2022 being the date an agreement to buy back its loan was reached) and those centres within The Mall loan facility, namely Blackburn (in 2022 until it was sold on 9 August 2022), Maidstone, Walthamstow and Wood Green. The Group deconsolidated its interest in Luton on 20 May 2022 reflecting changes that took place on that date to constitution of the Luton entities including the appointment of an independent director with specific rights regarding the proposed sale process for the asset. 

Group/Central includes management fee income, Group overheads incurred by Capital & Regional plc, Capital & Regional Property Management and other subsidiaries.

The Shopping Centres segments derive their revenue from the rental of investment properties. The Snozone and Group/Central segments derive their revenue from the operation of indoor ski slopes and the management of property funds or schemes respectively. The split of revenue between these classifications satisfies the requirement of IFRS 8 to report revenues from different products and services. Depreciation and charges in respect of share-based payments represent the only significant non-cash expenses. Prior period comparatives have also been restated as a result.

1Includes expected credit loss.

2 Asset management fees of £1.1 million charged from the Group's Capital & Regional Property Management entity to the Group's Shopping Centres have been excluded from the table above.

3 Operating segments (continued)

3a Operating segment performance

1Includes expected credit loss.

2 Asset management fees of £1.3 million charged from the Group's Capital & Regional Property Management entity to the Group's Shopping Centres have been excluded from the table above.

3 Other gains and losses of £11.7 million per the income statement includes £12.3 million gain on debt repurchase in Hemel Hempstead as described in the Financial Review, £(0.2) million of group/central one off costs and £(0.4) million loss on disposal.

4 June 2022 comparative figures have been restated for a prior year adjustment to the treatment of rent concessions as explained in note 2.

3 Operating segments (continued)

3a Operating segments