Last checked at 13 Nov 2008 07:00
13 November 2008
Capital & Regional plc
Interim Management Statement
Capital & Regional plc, the co-investing property asset manager, today presents its interim management statement for Quarter 3 2008.
Hugh Scott-Barrett, Chief Executive, said:
"Quarter on quarter trends in footfall, occupancy and collections underpin a sound operating performance in the quarter to 30 September across the funds where Capital & Regional acts as property asset manager. Although we expect to see increased stress in tenant markets in the months ahead, I believe that it is precisely in these difficult conditions that the hands-on operating skills of the Capital & Regional teams can be shown to be most effective.
Management's attention has been focused on improving the Group's financial resilience. Actions taken in the second and third quarters have created significant additional flexibility and provided time to address the remaining challenges in stabilising the balance sheet. We are focused on making further progress prior to the announcement of the year end results. This is important given that we expect the very challenging investment market conditions to persist well into 2009".
Highlights
The key events since 30 June are:
On 2 July the Mall completed the disposal of three shopping centres to Carlyle for £286m at an initial yield of 6.0%. As a consequence of these sales and the earlier open offer the Mall Fund is now in a robust financial position with no effective LTV covenant.
On 19 August we announced the sale of a 50% interest in our German portfolio to Apollo for €65.6m at an implied initial yield of 6.3%. The sale received shareholder approval on 19 September and completed on 6 October. Cash proceeds of £43.9m were used to reduce drawings on the Group's central debt facility.
On 22 August the Junction exchanged contracts for the sale of the Templars Retail Park in Oxford for £57m at an initial yield of 5.68%. The sale completed on 29 August.
On 27 August we finalised the renegotiation of our financial covenants with our principal lending bank which provided significantly greater covenant headroom within our Group facilities. On balance sheet debt has been reduced from £516m at 30 June to £250m at the end of October.
On 3 October we announced that the 60% LTV covenant on the Junction's banking facility had been relaxed to 70% for a period of 12 months.
The X-Leisure Fund has agreement in principle from the banks providing its central facility to add the currently uncharged Norwich property to the security pool. Depending upon the final value agreed with the banks, this would reduce the LTV on this facility to around 62% at 31 October against the covenant of 70%.
Operating and financial review
Tenant markets
In a difficult trading environment, the Group's underlying investments have continued to produce a solid operating performance, with rental increases and good occupancy levels and collection rates despite concerns about the impact of a consumer downturn on the wider economy. This is demonstrated by:
Passing rent, calculated for the funds on a weighted average like-for-like basis, was 2.7% higher in September 2008 than September 2007. Growth has ranged from 1.9% for X-Leisure to 3.8% for the Junction. Even in the challenging conditions of Q3, passing rent was broadly flat on the same like-for-like basis over the previous quarter. In addition, rent reviews and new lettings continued to be settled close to June 2008 ERV.
Occupancy as at 30 September 2008 across the three funds has increased to 94.8% from 94.5% at 30 June 2008 (as adjusted for sales) and was only marginally down from the 94.9% figure in September 2007.
Rent collection rates (based on contractual terms) have slightly improved with 94.1% of rent paid within 30 days of the September quarter day compared to 93.2% in June. This reflects the efforts of our credit controllers to proactively manage tenant difficulties.
Footfall/car count was broadly flat for the funds for the first nine months of 2008 compared to the same period in 2007. Over this period there was a rise of 0.7% in the Mall against a fall of 1.2% in the national index.
Tenants in 27 units, representing passing rent of £1.7m or 0.7% of the funds' total, became insolvent in the third quarter. This compared to 32 units (passing rent of £3.2m or 1.1% of the funds' total) in the second quarter. The Mall has seen tenants occupying 76 units with passing rent of £6.5m become insolvent in the first three quarters of this year, out of a total of 2,200 lettable units in the overall fund.
The part of the leisure sector in which we operate has to date remained reasonably strong. The cinema market has been buoyant with the continued release of blockbusters and the bowling market had a better than anticipated summer trading period due to the poor weather. The restaurants in our facilities, which tend to offer good family value, have also seen business remain strong.
In Germany, the existing tenant base has continued to perform well and certain sectors, notably food stores and discount-oriented tenants, are still looking for extra trading space. Occupancy remains high at 98.1% and insolvencies have remained low throughout the year.
Provisions for bad debts across the funds increased by £0.7m to £1.5m in the third quarter. Bad debts in Germany remain immaterial.
Property investment markets
The recent turmoil in the financial markets and the continuing lack of available bank finance has had a significant impact on valuations in the third quarter and this is likely to continue well into 2009. Whilst the reduction in UK base rate to 3%, the fall in the 5 year swap rate from over 6% in June to its current rate of just over 4%, and the narrowing of the spread in the inter-bank borrowing rate are positive developments, these have yet to translate into improved sentiment.
Table 1 in the appendix shows fund returns in 2008 compared to their benchmark. Across the funds on a weighted average basis, property level returns in the first nine months of the year have been -14.6% while geared returns over the same period were -32.8%. These figures reflect the significant falls in property values in the year.
The valuation falls have been predominantly caused by adverse yield shift rather than deterioration in tenant markets. Table 2 in the appendix shows the yield movements experienced since June 2008.
Debt and bank covenants
Our focus continues to be on ensuring that we have a stable financial structure going forward. We actively monitor our Group and fund banking covenants to ensure that we maintain sufficient headroom and take action where necessary to maintain maximum financial flexibility for the future. The amount of on balance sheet debt was reduced from £516m at 30 June to £250m at 31 October, after the Apollo transaction which took £120m of debt off balance sheet into joint ventures. October's figure includes a further £134m of German debt where there is no recourse to the Group.
The £125.5m revolving credit facility was £70m drawn down at 30 September 2008 but following receipt of the proceeds of the Apollo transaction this was reduced to £31m at 31 October 2008. We therefore have a further £94m available for future drawdowns. The facility has three main financial covenants:
| a. | Asset cover - this covenant requires that the value of the Group's units in the three funds exceeds borrowings by more than 2:1. At 30 September it stood at 5:1 and at 31 October at 10:1. |
| b. | Interest cover - this is calculated by dividing recurring profits from the Group's fund investments in the Mall, Junction and X-Leisure, as well as those profits arising from SNO!zone and the property management business, by interest paid on this facility. This covenant, which requires interest cover to be more than 150%, is currently comfortably met. |
| c. | Gearing - this covenant is now calculated by dividing recourse debt by the Group's net asset value after deducting goodwill. The covenant, which requires gearing to be less than 200%, is currently also comfortably met. |
The covenant position of the funds as at 30 September is shown in Table 3 in the appendix. The key points are as follows:
The Mall - following the open offer and the sale of properties to Carlyle the fund is in a strong financial position. Whilst the partnership agreement has a 60% LTV restriction, this is measured on an incurrence basis and the fund is financed by hedged bond funding (at a rate of around 5.1%) which does not need to be refinanced until 2012. The LTVs for the Mall at 30 September and 31 October 2008 were 55% and 56% respectively. The historic ICR of 169% at 30 September was comfortably above the covenant but was adversely affected by the requirement to wait until the next interest payment date on 22 October to repay bonds using the Carlyle sale proceeds.
The Junction - the fund used the £57m proceeds from the sale of Templars Retail Park, Oxford to pay down debt. Our key objective is to stabilise the capital structure of the fund in order to provide it with a viable future. Although we have an asset currently under offer we recognise that asset disposals alone are only part of the solution and we are therefore looking at all options which may well lead to a restructuring of the fund. The extension of the LTV covenant provides us with valuable time to find such a structural solution. LTVs for the Junction at 30 September and 31 October 2008 were 58% and 60% respectively.
X-Leisure - the fund has three property level banking facilities and a £415m central facility. LTVs for this facility at 30 September and 31 October 2008 were 64% and 67% respectively against a covenant of 70%. The fund has agreement in principle from the banks providing this facility to add the currently uncharged Norwich property to the security pool. The value of this property at 31 October was £45m and at this figure the LTV for this facility would be reduced to 62% at 31 October. The fund is exploring a combination of asset disposals and negotiations with its banks to ensure that it has sufficient flexibility to stay within its banking covenants as values fall. The ICR test for the central facility is comfortably met at the end of September.
Unlike the funds, we do not have regular property valuations in our joint ventures (which now include Germany) and wholly owned properties, and do not therefore report on the relevant LTVs in this statement, but note that we can inject further equity if necessary, funded by drawing down on the Group's central facility. There is no recourse to the Group for the German debt and the funding in respect of the MEN joint venture.
Current Trading and Outlook
October Fund valuations
The valuation and unit price data for 31 October is set out below and the underlying property yields are shown in Table 2 in the Appendix. The trend of falling property valuations continued during October when values decreased by a further 6% on a weighted average basis, with all three funds seeing significant falls. The most marked decline was in the Mall which was in large part due to alignment by the valuers with transactional evidence in the market.
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| Valuation of | Unit value | Unit value | Underlying valuation | Change in unit value | Units | C&R | |
| properties | at 31 Oct | at 30 Sept | change in | (geared) in | owned by | holding | |
| £m | 2008 | 2008 | month1 | month2 | C&R | in fund | |
| Mall Fund | 1,992.8 | £0.9139 | £1.1151 | -8.7% | -18.0% | 157,742,057 | 16.7% |
| Junction Fund | 889.2 | £1.1616 | £1.2660 | -3.6% | -8.2% | 85,000,000 | 27.3% |
| X-Leisure Fund | 793.5 | £1.0665 | £1.1812 | -3.8% | -9.7% | 51,899,578 | 19.4% |
1 The underlying valuation change shows the increase/(decrease) in the value of the portfolio in the month as a percentage of the value of the portfolio at the beginning of the month.
2 The change in unit value reflects the movement in the capital value (excluding the impact of debt mark to market adjustments) of the fund in the month. Investors separately benefit from quarterly distributions of net income and periodic capital distributions.
Until the banks re-enter the lending market we do not expect to have a clear picture of where the bottom of the cycle will be. Market commentators are forecasting further significant adverse yield shift in the remainder of 2008 and throughout 2009 and we consider these assumptions in our financial planning.
Tenant markets
There is increasing evidence of recession in the UK economy although the impact on our business at this time is mixed. In October the Mall saw footfall fall 1.7% compared to October 2007, although this was better than the national index which decreased by 2.3% in the month. In contrast, X-Leisure had a strong month with footfall increasing 6.9% compared to October 2007.
Tenants in a further 10 units, representing passing rent of £1.4m or 0.5% of the funds' total, have become insolvent since the end of the third quarter.
Strategy
Our immediate focus remains the stabilisation of the balance sheet. We will discuss our wider strategic plans when we announce our annual results in March.
For further information:
| Capital & Regional: | |
| Hugh Scott-Barrett, Chief Executive | Tel: 020 7932 8000 |
| Charles Staveley, Group Finance Director | Tel: 020 7932 8000 |
| Maitland | |
| Martin Leeburn / Emma Burdett | Tel: 020 7379 5151 |
Notes to editors:
About Capital & Regional plc
Capital & Regional is the co-investing asset manager which specialises in town centre shopping centres, out of town retail parks, and urban entertainment complexes.
Capital & Regional founded the Mall and Junction Funds in conjunction with Morley Fund Management. It also founded the X-Leisure fund with Hermes Investment Management Limited, and has a number of other joint ventures and developments. Its shares are quoted on the London Stock Exchange. For further information see www.capreg.com
Forward Looking Statements
This document (including the Appendix) 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 Capital & Regional's ability to control or estimate precisely, such as future market conditions, currency fluctuations, the behaviour of other market participants, the actions of governmental regulators and other risk factors such as the Company's ability to continue to obtain financing to meet its liquidity needs, changes in the political, social and regulatory framework in which the Company 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. Capital & Regional 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 Company should not be relied upon as a guide to future performance.
Appendix
Table 1 Fund performance - nine months to 30 September 2008 (IRR)
| Mall | |
| Property level returns | (16.0)% |
| Geared returns | (35.3)% |
| IPD shopping centre index | (15.4)%* |
| Junction | |
| Property level returns | (13.0)% |
| Geared returns | (29.7)% |
| IPD retail parks index | (12.1)%* |
| X-Leisure | |
| Property level returns | (12.0)% |
| Geared returns | (28.3)% |
| * | total return rather than IRR |
Table 2 Yield shift since 30 June 2008
| June 2008 | Sept | October | Yield shift | ||
| 2008 | 2008 | June to | |||
| October | |||||
| Nominal equivalent yields | |||||
| Mall | 6.63%* | 6.90% | 7.38% | 0.75% | |
| Junction | 5.85%* | 6.21% | 6.39% | 0.54% | |
| X-Leisure | 6.17% | 6.66% | 6.93% | 0.76% | |
| True equivalent yields | |||||
| Mall | 6.91%* | 7.21% | 7.72% | 0.81% | |
| Junction | 6.07%* | 6.46% | 6.66% | 0.59% | |
| X-Leisure | 6.42% | 6.94% | 7.25% | 0.83% | |
| Initial yields | |||||
| Mall | 5.58%* | 5.79% | 6.21% | 0.63% | |
| Junction | 4.95%* | 5.33% | 5.55% | 0.60% | |
| X-Leisure | 5.38% | 5.81% | 6.06% | 0.68% | |
| Gross top-up initial yields** | |||||
| Mall | 6.09%* | 6.35% | 6.87% | 0.78% | |
| Junction | 5.32%* | 5.73% | 5.93% | 0.61% | |
| X-Leisure | 5.92% | 6.35% | 6.61% | 0.69% | |
| * | adjusted from previously reported figures to exclude properties sold since June 2008 |
| ** | net current rent adjusted for rent free periods and contracted fixed uplifts (Mall: adjusted for rent free periods only) divided by net property values |
Table 3 Debt covenants - funds
| Mall | Junction | X-Leisure3 | |
| LTV covenant | 60%1 | 70%2 | 70% |
| LTV September | 55% | 58% | 64% |
| LTV October | 56% | 60% | 67%4 |
| ICR covenant | 130% | 127.5% | 130% |
| Historic ICR September | 169% | 149% | 164% |
| 1 | this is a partnership test and tested on an incurrence basis only |
| 2 | increased from 60% until October 2009 |
| 3 | central fund facility only |
| 4 | if the Norwich property is added to the security pool at its October valuation this would reduce to 62%. |