CAPC.L Regulatory News (CAPC)

1 MARCH 2023

CAPITAL & COUNTIES PROPERTIES PLC ("CAPCO")

AUDITED PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022

Ian Hawksworth, Chief Executive, commented:

"There is positive momentum across the Covent Garden estate with strong demand, high occupancy levels and rental growth across all uses which has continued into 2023. Despite the macroeconomic backdrop, the West End has clearly demonstrated its resilience and enduring appeal with strong recovery in footfall and customer sales ahead of pre-pandemic levels. We therefore look ahead with confidence to completing the merger of Capco and Shaftesbury on 6 March to create the leading central London mixed-use REIT, Shaftesbury Capital PLC. The combination creates an impossible to replicate £4.9 billion portfolio located within some of the most iconic destinations of the West End. Backed by a strong balance sheet, we aim to deliver long-term economic and social value for our stakeholders." 

Key financials

- Underlying net rental income increased to £57.2 million (2021 restated: £48.9 million)

- Underlying earnings per share 2.2 pence (2021 restated: 0.1 pence per share)

- Loss for the year of £211.8 million (2021 restated: £34.8 million profit)

- 2022 dividend of 2.5 pence per share (2021: 1.5 pence per share)

- Total property value of £1.8 billion (2021: £1.8 billion) and total portfolio value of £2.2 billion (2021: £2.4 billion)

- Total property return of 2.8 per cent (2021 restated: 1.9 per cent)

- Group net debt to gross assets ratio of 28 per cent (2021: 24 per cent)

- Total equity of £1.6 billion (2021: £1.8 billion)

- EPRA NTA 182.1 pence per share (2021 restated: 213.0 pence per share)

Portfolio valuation

- The independent property valuation of Covent Garden was £1.7 billion, unchanged over the year like-for-like (2021: £1.7 billion) (H1 valuation:+5 per cent; H2 valuation: -5 per cent)

- ERV growth of 6 per cent (like-for-like) over the year (H1: +4 per cent; H2: +2 per cent)

- Equivalent yield widened by 19 basis points to 4.07 per cent (H1: -6bps; H2: +25bps) 

- Investment in Shaftesbury PLC valued at £357 million (2021: £596 million) based on 31 December share price of 368 pence; dividend income of £13.5 million received in 2022 and a further £2.6 million since year-end

- Lillie Square property value of £79 million, a decrease of 6 per cent (like-for-like) since December 2021. £35 million cash distribution from the joint venture (£17.5 million Capco share).

Strong leasing momentum delivering continued rental growth

- 71 new leases and renewals representing £10.0 million of contracted income signed 13 per cent ahead of 31 December 2021 ERV and well ahead of previous passing rent

- 46 leasing transactions in H2 2022 representing £6.1 million income, 5 per cent ahead of 30 June 2022 ERV 

- Positive start to 2023 with £3.3 million of income under offer

- Strong leasing momentum in our categories including new signings from Hublot, Messika, Gaucho, Hoka, Creed

- Creative asset management unlocking value and enhancing energy performance

- EPRA vacancy of 2.5 per cent (2021: 2.6 per cent)

- 16 new openings across the estate including Reformation, Stereo, Vuori, TAG Heuer

- Overall customer sales 7.5 per cent ahead of 2019 levels, with premium and luxury continuing to outperform

- 99 per cent of 2022 rents collected and 98 per cent to date collected in respect of Q1 2023

- Innovative cultural programme; digital growth and engagement, public art installations and global brand partnerships driving footfall and spend

Strong balance sheet with access to significant liquidity

- Covent Garden net debt of £366 million (2021: £254 million) and loan to value ratio of 21 per cent (2021: 15 per cent)

- Group net debt of £622 million (2021: £599 million) and net debt to gross assets of 28 per cent (2021: 24 per cent)

- Cash and undrawn facilities of £423 million (2021: £642 million)

- Repayment of £200 million drawn debt during the year, comprising £75 million of private placement loan notes and the £125 million loan secured against shares in Shaftesbury

- Extension of £300 million unsecured revolving credit facility by one year to September 2025

- Weighted average maturity on drawn debt of 4.5 years (2021: 4.9 years) and average cost of drawn debt of 2.7 per cent (2021: 2.8 per cent)

- Standby loan facility in place to cover potential repayment of £575 million of Shaftesbury bonds following merger completion

Delivering environmental and social value

- Joined the UN Race to Zero supporting commitment to becoming Net Zero Carbon by 2030

- Improving EPC ratings across the estate through incremental refurbishment

- Recognised as a Climate Leader in the 2022 Financial Times for compound annual emissions intensity reduction

- Initiated first Carbon Risk Real Estate Monitor ("CRREM") analysis on six properties

- 18 per cent of the retail and hospitality portfolio now signed up to green leases

- Commitment to enhancing air quality with continued pedestrianisation of streets and enhanced air quality monitoring around the Piazza

- Partnership with the Wild West End, a not-for-profit partnership which aims to enhance biodiversity across the West End through delivery of quality green space

Update on proposed merger with Shaftesbury PLC

- Clearance from the Competition and Markets Authority was received on 22 February 2023

- Court meeting in relation to Shaftesbury scheme of arrangement scheduled for 2 March 2023

- The merger is expected to complete on 6 March 2023

KEY FINANCIALS

1. On a Group share basis. Refer to Property Data on page 68 for the Group's percentage ownership of property.

2. On a Group share basis. Refer to note 2 "Segmental Reporting" on page 40.

3. Refer to note 10 "Earnings Per Share and Net Assets Per Share" on page 49.

4. Refer to note 3 'Underlying Earnings' on page 43.

ENQUIRIES

Capital & Counties Properties PLC:

Media enquiries:

A presentation to analysts and investors will take place today at 8:30am at the offices of Peel Hunt, 100 Liverpool St, London EC2M 2AT. The presentation will also be available to analysts and investors through a live audio call and webcast and after the event on the Group's website at www.capitalandcounties.com

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

Chief Executive's review

Overview

Covent Garden and the West End have demonstrated remarkable resilience with a strong recovery in footfall and consistent growth in customer sales following the disruption caused by the pandemic. Our creative approach has generated excellent leasing demand across all uses and delivered rental growth, however broader macroeconomic factors adversely affected investment market sentiment particularly in the second half of the year. The strong trading performance and resilience across the West End are in contrast with the weaker consumer sentiment being reported more widely and this underpins our confidence in the long-term prospects for our exceptional portfolio. 

In June 2022, Capco and Shaftesbury PLC ("Shaftesbury") announced the terms of a recommended all-share merger to form Shaftesbury Capital PLC. We were pleased to receive shareholder support for the proposed merger and very much look forward to bringing the two companies together to create the leading central London mixed-use REIT.

It has been a very busy year, the team has worked incredibly hard and we very much appreciate the professionalism and commitment shown which has delivered strong performance.

Proposed merger with Shaftesbury PLC

Capco acquired a 25 per cent interest in Shaftesbury in 2020 which represented a unique opportunity to own a significant stake in a high quality real estate portfolio, adjacent to Capco's world-class Covent Garden estate. Capco has a strong track record of accretive investment and aggregation of ownership in the Covent Garden area, and the investment in Shaftesbury was consistent with our strategy of pursuing opportunities to expand our ownership to grow the business.

On 16 June 2022, Capco and Shaftesbury announced a recommended all-share merger. Both Boards were pleased that shareholders recognised the benefits of the merger by voting overwhelmingly in favour of the transaction. Completion of the merger was subject to clearance by the Competition and Markets Authority ("CMA"), which was received on 22 February 2023. The merger is expected to complete on 6 March 2023.

We now look forward to combining the two companies to create an impossible to replicate portfolio and the leading central London mixed-use REIT. By combining both companies' strengths, cultures and values, we will take a 'best of both' approach to operations with the aim of delivering long-term economic and social value for all stakeholders. The combination will generate both immediate and long-term benefits including greater efficiencies and synergies, a more diverse portfolio with a stronger operational platform of scale and enhanced access to capital. There is significant revenue growth potential to be captured across the combined portfolio through the difference between annualised gross income and ERV, together with ERV growth over time. 

With cost and operational synergies, a strong corporate governance framework, increased scale, enhanced access to capital and greater equity market liquidity, the combination provides a firm foundation to ensure a sustainable and prosperous future for our destinations, the communities they serve and our wider stakeholders.

Strong leasing demand delivering rental growth

There is strong momentum across Covent Garden. Since early summer there have been growing numbers of international visitors contributing to increased footfall and positive trading performance across the estate. The Elizabeth Line opened during 2022 and has further improved the West End's connectivity and accessibility, adding to central London's rail network capacity. The changing travel and footfall patterns are expected to benefit Covent Garden and create valuable medium-term asset management opportunities. Public transport disruption around the festive period had a short-term impact on visitor numbers, nevertheless our hospitality and retail customers reported a successful trading period. Our targeted categories including F&B, luxury and premium were amongst the highest performing.

Capco continues to evolve the customer mix through its creative asset management and leasing strategy. Converting demand into new leasing transactions continues to capture income and strengthen the customer line-up. Capco introduced a number of new retail and hospitality brands to the estate across a range of unit sizes with broad appeal to consumers.

Covent Garden continues to attract target brands in key categories providing confidence in our leasing strategy for further rental growth. The retail and hospitality pipeline is encouraging with current leasing discussions ahead of prevailing ERV. Rental income collection has reverted to pre-pandemic levels. Covent Garden rents remain 19 per cent below 2019 levels, with aggregate customer sales ahead of pre-pandemic levels. From April 2023, there will be a reduction in business rates which is generally expected to reduce occupancy costs for our customers. Leases have reverted to conventional, pre-pandemic terms with turnover rental top-ups in place for certain customers, providing the opportunity for both Capco and the customer to benefit from increased sales.

There is continued leasing momentum in targeted categories with leasing activity overall in 2022 being 13 per cent ahead of December 2021 ERV and high occupancy levels. Following the success of its existing stores in Covent Garden, Bucherer agreed terms in December to further expand its presence in the Royal Opera House Arcade taking additional units for Messika, Girard-Perregaux and Hublot. The proven success of premium retail concepts on the estate has generated further demand from the sector with Tudor and TAG Heuer joining luxury brand Tiffany & Co. amongst others. 

The Experimental Group, operator of the Henrietta Hotel, has expanded its operations by opening a new late night live music and dining concept on the Piazza. Argentinian restaurant Gaucho has signed on James Street adding to the high quality dining offer of Covent Garden.

Upcoming openings include jewellery brand Mejuri, artisanal fragrance house Creed and premium sportswear brand Hoka. Global apparel brand Uniqlo will open its new flagship store with dual frontage on Long Acre and Floral Street in spring 2023.

Recent office refurbishments attracted strong demand and are now fully let setting a new rental tone of £100 per square foot for the office portfolio. The main themes driving demand are amenity value and overall quality of offer, heritage architecture and the managed environment providing Covent Garden with a competitive advantage. The residential portfolio is fully occupied.

We continue to implement our market-leading estate marketing strategy. This is enhanced by our advanced digital channels, partnering with retail and dining brands as well as cultural partners and a programme of activity to promote both Covent Garden and the West End. The team successfully implemented our marketing strategy to capture the increased levels of international visitors and hosted an extensive calendar of activities throughout the year alongside strategic partnerships including Dolce&Gabbana, American Express, Disney and Jaeger-LeCoultre.

Investment activity

The Group has a strategic focus on Covent Garden and the West End, and seeks to invest in complementary opportunities on or near the Covent Garden estate. Having assembled the portfolio since 2006 and established Covent Garden as a world-class estate, its scale and comprehensive ownership would be incredibly difficult to replicate making the portfolio a scarce and valuable real estate investment.

Although macroeconomic headwinds have impacted the broader investment market with increased debt costs reducing investment volumes particularly in larger lot sizes, the resilience of West End assets as well as sterling weakness continue to attract interest from international investors. Acquisition opportunities which meet our strict criteria to deliver long-term rental growth have remained limited during the year, with assets in the area tightly held.

Active asset management and refurbishment initiatives continue to accelerate value and enhance environmental performance across the estate. Capco completed a number of schemes during the year including the refurbishment of several offices which have been let significantly ahead of ERV. A number of refurbishment projects are being brought forward, which are expected to result in capital expenditure of approximately £25 million over the next two years.

Valuation of investments

Total property return for the year was 2.8 per cent versus the MSCI Total Return Index which recorded -10.1 per cent. The Covent Garden valuation was unchanged over the year at £1.7 billion. The 5 per cent increase in the first half was offset by the second half decrease driven by widening of the equivalent yield by 25 basis points to 4.07 per cent as a result of a macroeconomic environment characterised by higher interest rates and inflationary pressures.

There has been continued ERV growth over the last 12 months, up 6 per cent on a like-for-like basis to £81 million, reflecting the positive leasing activity and high occupancy levels across the estate. Over the same period, there was a 19 basis point expansion in the equivalent yield to 4.07 per cent. The total valuation remains 27 per cent below the 31 December 2019 valuation on a like-for-like basis. Total ERV remains 19 per cent below 31 December 2019 ERV.

CBRE has undertaken an independent valuation of the Covent Garden estate. The total valuation of the estate is £1.7 billion and represents the aggregated value of the individual properties, with no reflection of any additional estate premium which potential investors may ascribe to the comprehensive nature of ownership within the estate. The predominantly freehold nature, concentrated ownership and scale of the estate as well as the portfolio mix may lead prospective purchasers to regard certain parts of the portfolio, for example by street, to have a greater value than the aggregate of the individual property values.

Capco's investment in Shaftesbury shares was valued at £357 million based on a share price of 368 pence per share on 31 December 2022 (2021: £596 million based on a share price of 615 pence on 31 December 2021). This reflects the movement in the Shaftesbury share price rather than underlying asset values.

Capco's investment at Lillie Square decreased in value by 6 per cent (like-for-like) to £79 million at 31 December 2022. The Lillie Square joint venture continues to progress with the sale of 5 units completed during the year representing £6.6 million. The joint venture is in a cash position of £11.8 million (£5.9 million Capco share) having distributed £35 million to the partners during the year (£17.5 million Capco share). 

Property valuations

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

2. Includes Capco's interest in the Lillie Square joint venture and Lillie Square Holdings Group.

3. A reconciliation of carrying value of investment, development and trading property to the market value is shown in note 11 'Property Portfolio'.

Financial performance and position

Capco's total shareholder return for the year, which comprises share price performance plus dividends paid during the year, was -35.9 per cent, and total return for the year, which represents the change in net assets plus the dividends paid during the year, was -13.6 per cent.

Covent Garden net rental income increased by 22.7 per cent like-for-like compared with December 2021. 71 new leases and renewals representing £10 million of rental income completed in the year. EPRA vacancy was 2.5 per cent (2021: 2.6 per cent). Properties representing an additional 6.2 per cent of ERV are under, or held for, refurbishment or development.

Underlying administration costs for the year were £26 million compared with £20 million in 2021. There are a number of items contributing to the increase including more normalised activity levels post-COVID, inflationary pressures and increased people costs, primarily variable and share option charges. Non-underlying costs incurred in connection with the proposed merger with Shaftesbury amount to £14.6 million.

Capco has a strong balance sheet. Group net debt of £622 million resulted in a net debt to gross assets ratio of 28 per cent, whilst Covent Garden's loan to value ratio was 21 per cent and net debt was £366 million. The Board has set an upper limit on balance sheet leverage of up to 40 per cent, represented by the net debt to gross assets ratio. The interest cover ratio in relation to the Covent Garden debt for 2022 was 3.9 times, comfortably ahead of the covenant level of 1.2 times. 

During the year, Capco exercised a one-year extension option on its £300 million unsecured revolving credit facility for Covent Garden, taking the maturity to September 2025. The facility is undrawn and has an additional one-year extension option, subject to lender consent. In combination with cash deposits, the Group has access to significant liquidity.

Dividend

Our objective is to deliver long-term sustainable total returns to shareholders, including growing dividend distributions. Dividend payments will be determined having regard to growth trends in both underlying and cash earnings, which are expected to be delivered through income growth and cost discipline. 

Capco declared a dividend in respect of the year to 31 December 2022 of 2.5 pence per share compared to 1.5 pence in 2021. This includes £2.6 million (0.3 pence per Capco share) of dividend income received post-year end from our investment in Shaftesbury.

Our people

Our people are key to our business. We promote a culture of creative passion for Covent Garden and the West End to allow employees to reach their potential whilst creating value for our stakeholders.

Our people conduct their day-to-day activities guided by a core set of Company values which are to be:

- collegiate, supportive and inclusive;

- environmentally and socially responsible;

- high performance and entrepreneurial;

- innovative and creative; and

- professional, acting with integrity and hold ourselves to the highest standards. 

We have introduced a number of initiatives to support our employees during the year through regular Company-wide meetings, business updates and seminars focusing on well-being, financial planning, equality and inclusion.

Sustainability and environment

Our purpose is to invest in and create world-class places, focusing on central London. Using our vision, long-term approach and responsible stewardship, we deliver sustainable economic and social value and generate benefits for our stakeholders.

During the year, we made good progress implementing our extensive ESC agenda overseen by the Board Committee. Capco joined the UN Race to Zero supporting our commitment to becoming Net Zero by 2030 by securing Science-based Targets Initiative ("SBTi") validation of our targets. We take a holistic approach to responsible stewardship and tackling climate change through promotion of heritage preservation and energy efficiency initiatives and were pleased that Capco was recognised as a Climate Leader in the 2022 Financial Times survey, recognising the progress made in reducing our energy emission intensity.

Key sustainability activities include continued investment in our buildings, delivery of enhanced pedestrianisation and an extensive greening programme. Currently 68 per cent of our units have an EPC grade of C or above and we continue to make energy performance enhancements to meet energy performance standards and customers' expectations. All of our refurbishment projects achieved an EPC rating of at least B during the year. Capco has initiated its first Carbon Risk Real Estate Monitor ("CRREM") analysis on a number of properties which supports the development of science-based carbon reduction pathways at an individual building level.

We are focused on promoting a cleaner, greener estate through enhanced air quality, biodiversity, energy efficiency and waste management initiatives. During the year we installed new air quality monitors across the estate. We will continue to work closely with our stakeholders in the years ahead to help deliver our shared sustainability goals.

Community and stakeholders

As a responsible, long-term investor, community engagement and collaboration are integral to delivering our strategy.

Our stakeholders include local authorities, neighbouring owners and business improvement districts, industry groups, residents, and charitable organisations. Our active engagement helps progress the ambitions and shared goals of our stakeholders. We continue to work with local authorities and residents to make public realm enhancements, including extending pedestrianisation, street scape improvements, providing outdoor seating and improving air quality through reducing traffic congestion and pollution. These are important aspects of our long-term sustainability strategy and demonstrate how collaboration can leverage our experience to produce positive social outcomes for our stakeholders.

Being a good neighbour is important to us. Our community programme prioritises initiatives and charity partners in Covent Garden. This includes the provision of financial aid supporting homelessness, food banks and the elderly as well as hospitality, cultural and retail foundations.

Outlook

There is strong momentum building as we look ahead to completing the merger of Capco and Shaftesbury to create the leading central London mixed-use REIT with an impossible to replicate portfolio. Although the West End is not immune from the current macroeconomic challenges, it has clearly demonstrated its resilience and enduring appeal with a strong recovery post pandemic in footfall and trading conditions. Our creative approach is generating rental growth across all uses and our positive leasing pipeline has continued into 2023.

In combining both companies' strengths, cultures and values, we will take a 'best of both' approach with the aim of delivering long-term economic and social value for all stakeholders. Both companies' employees have a shared passion for the West End and are key to our future. We have a wonderful opportunity to blend the talented teams and with greater scale provide enhanced opportunities for individuals.

The combination will generate a number of benefits including greater efficiencies and synergies, and a more diverse portfolio with a stronger operational platform of considerable scale, bringing together ownership and management across adjacent portfolios to unlock opportunities. There is significant revenue growth potential to be captured over time through the difference between annualised gross income and ERV while continuing to generate rental growth.

Shaftesbury Capital will be financially strong with a resilient and flexible capital structure, significant liquidity and will benefit from enhanced access to capital over time. We look ahead with confidence as we aim to create the leading central London mixed-use REIT and deliver long-term economic and social value for our stakeholders.

Ian Hawksworth

Chief Executive

28 February 2023

Strategic Report

COVENT GARDEN

A world-class destination

The Covent Garden estate represents a carefully assembled portfolio in the heart of London's West End, comprising retail, dining, leisure and cultural space complemented by high quality offices and residential apartments. Through creative asset management and disciplined investment, Capco has established Covent Garden as an exceptional mixed-use portfolio of approximately 1.1 million square feet, across 70 buildings and 504 units. Covent Garden provides a broad range of unit sizes, ensuring it attracts a wide spectrum of retail and hospitality customers. Capco has transformed Covent Garden into a global destination having curated a strong retail and dining line-up within a heritage setting.

Performance

The Covent Garden portfolio was valued at £1.7 billion at 31 December 2022 and was unchanged for the year. The total valuation remains 27 per cent (like-for-like) lower than 31 December 2019, comprising a 19 per cent ERV decline and 43 basis point outward yield movement.

The 5 per cent property value increase in the first half was offset by the second half decrease driven by widening of yields as a result of a macroeconomic environment characterised by higher interest rates and inflationary pressures. Over the full year, there has been continued ERV growth, increasing by 6 per cent on a like-for-like basis to £81 million, reflecting the positive leasing activity and high occupancy levels across the estate. There was a 19 basis point expansion in the equivalent yield to 4.07 per cent.

71 leasing transactions representing £10 million contracted income were completed 13 per cent ahead of December 2021 ERV. In the first half, 25 leasing transactions took place 9 per cent ahead of 31 December 2021 ERV and 46 transactions took place in the second half, 5 per cent ahead of 30 June 2022 ERV. Covent Garden continues to attract high quality brands and operators. At 31 December 2022, EPRA vacancy was 2.5 per cent (2021: 2.6 per cent). 6.2 per cent of ERV is in or is held for development or refurbishment (2021: 5.8 per cent).

Covent Garden underlying net rental income was £57.3 million for the year, compared with £48.7 million for 2021. Capco continues to bill quarterly in advance for substantially all commercial leases. Rent collection has reverted to pre-pandemic patterns with 99 per cent of 2022 rents having been collected and to date, and 98 per cent of rents in respect of the first quarter of 2023.

Retail

Capco's emphasis on the consumer is essential to ensuring that the estate is positioned as a leading destination for visitors. During the year, Covent Garden was named Europe's most popular shopping destination by the Retail Times. There has been continued improvement in trading over the year with aggregate retail sales 7.5 per cent ahead of 2019 levels, with premium and luxury categories significantly outperforming.

Retail represents 48 per cent of the portfolio by value. Capco's retail strategy is to closely monitor trends in both customer and consumer demand, whilst attracting brands and concepts relevant to the consumer in targeted categories with a strong omni-channel presence. Our retail strategy draws on the best of global, independent and British brands focusing on targeted categories including luxury, digital, jewellery, gifting, cosmetics, accessories, contemporary fashion, beauty, lifestyle and sports.

Luxury brand Tudor Watches opened in partnership with Bucherer. Following the success of its existing store portfolio in Covent Garden, Bucherer has agreed terms to further expand its presence in the Royal Opera House Arcade taking an additional c.3,000 square feet of space for Messika, Girard-Perregaux and Hublot. Swiss watch brand TAG Heuer has opened a new store on James Street. The boutique offers a selection of TAG Heuer's iconic heritage timepieces as well as the brand's more modern styles.

Brands with strong sustainability credentials are increasingly important to the consumer and this is a key factor in our customer selection process with many examples during the year. Sustainable, digitally native fashion brand Reformation opened its new London flagship store on King Street offering contemporary designs with sustainable practices. Performance brand Vuori opened its first European flagship store on Long Acre, offering active wear, whilst pursuing its climate neutral certification.

Covent Garden's well-established beauty offer has been further strengthened by the addition of two luxury fragrance houses Creed and Parfums de Marly. Creed, a heritage, luxury perfume house will open on King Street offering artisan fragrances made from the finest perfume ingredients and Parfums de Marly has opened in the Market Building offering signature perfume collections alongside scented candles and gifts.

There have been a number of openings in the Market Building including premium jewellery boutique Sacred Gold, contemporary jewellery brand e&e and eyewear concept Izipizi. N.Peal and Miller Harris have relocated into new stores within the Market Building.

Fine jewellery brand Mejuri has signed on King Street. Sportswear brand Hoka will open on James Street and Peloton has taken additional space alongside its studio on Floral Street further strengthening the performance wear offering on the estate. Global apparel brand Uniqlo is expected to open its new flagship store in spring 2023, as it continues the fit out of the combination of Carriage Hall and two Long Acre units spanning 22,000 square feet. Los Angeles-based lifestyle brand Rails opened its first London store on Floral Street while jewellery brand PD Paola has opened retailing timeless signature pieces.

Successful retailers continue to need physical stores to build brand awareness, customer capture and loyalty. Retailers are increasingly focused on fewer stores, placing greater emphasis on global location, customer experience, service and flagship retailing with better digital engagement. The estate resonates with target audiences, providing digital brands with the opportunity to showcase products and service and build brand recognition and loyalty through a deeper connection with consumers.

Shorter term pop-ups generate publicity and footfall with a halo effect on adjacent stores and productivity. During the year, innovative concept Beauty Pie opened its first pop up on James Street while jewellery brand Missoma opened in the Market Building and Lounge Underwear on James Street. Raye the store opened on Floral Street which is a limited edition experiential store showcasing a selection of emerging food, drink and wellness brands focussing on sustainable and transparent business practices.

Over the Christmas trading period, Dolce&Gabbana launched a Piazza pop-up shop, installing a Christmas Market, offering exclusive merchandise and Jaeger-LeCoultre created an exhibition space displaying its iconic watches, an art exhibition and cafe.

At 31 December 2022, three retail units, representing 4,100 square feet in total, were available to let (ERV: £0.8 million).

Dining

Covent Garden offers a diverse range of high quality innovative food concepts, from casual to premium, and is one of London's best dining destinations. F&B represents 26 per cent of the portfolio by value. Covent Garden continues to introduce high quality innovative food concepts which have been central to the dining strategy. 

Demand for hospitality space has been strong throughout the year. With limited vacancy across the estate, the F&B accommodation has attracted multiple potential occupiers. Argentinian restaurant Gaucho will open on James Street later this year in a contemporary setting, inspired by modern Argentina and all of its global influences.

Stereo, a new late night live music and dining venue by international hospitality brand Experimental Group opened at The Piazza. Stereo offers a mix of music, an American inspired menu by restaurateur Andrew Clarke and an extensive drinks menu. The group, which already operates the Henrietta Hotel, has expanded its footprint, a positive endorsement for the trading prospects of the estate.

Chestnut Bakery has opened on Floral Street offering all day dining options while Watchhouse Coffee will open on Southampton Street in the coming months.

The Covent Garden estate offers an open-air pedestrianised environment with a successful al fresco dining scheme offering 1,000 outdoor dining seats, across 55 restaurants and spanning six pedestrianised streets as well as the Piazza. The al fresco dining scheme delivers direct benefits to Capco's customers, visitors and the local community and continues to be popular with consumers. This offer emphasises Covent Garden's position as London's leading outdoor dining destination.

At 31 December 2021, there were three restaurants available to let, over 8,150 square feet and with an ERV of £0.6 million.

Office

Covent Garden has a contemporary office portfolio offering both multi-tenanted and single occupancy workspace. The portfolio attracts financial services, technology, creative industries and SMEs. Office accommodation represents 16 per cent of the portfolio by value.

Demands of consumers of workspaces are becoming more refined. The flight to quality within the office market remains, with a preference for fully fitted space, with strong amenities and low-density use, provided on flexible lease terms. Consequently, Capco's office product continues to be well received, achieving strong levels of pricing within the district, with more recent transactions setting a new rental tone of £100 per square foot.

At 31 December 2022, there were two units available to let, representing 7,500 square feet in total and with an ERV of £0.5 million.

Residential

The central London residential letting market has been particularly strong this year, with interest from a broad range of customers. Covent Garden is established as a premium residential address and continues to generate competitive demand. There was limited vacancy during the year with units generally let within days. Residential accommodation represents 7 per cent of the portfolio by value and is fully occupied.

Accelerating value creation through investment and active asset management

Active asset management and refurbishment initiatives continue to accelerate value and enhance environmental performance across the estate. These initiatives unlock value and enhance our portfolio's long-term income prospects.

Capco completed a number of schemes this year including the refurbishment of 35 King Street with a number of the floors let significantly ahead of ERV. The refurbishment of office space at 5-6 Henrietta Street attracted significant demand, setting new rental tone for the office portfolio.

A number of capital initiatives have commenced which include two office to F&B conversions on Maiden Lane and Bedford Street, a flagship F&B townhouse on King Street and an office refurbishment on Long Acre. These new initiatives are targeting high BREEAM certification and a minimum EPC rating of B. They are expected to complete over the next two years at a cost of approximately £25 million.

At 31 December 2022, space held for, or under, refurbishment represented 6.2 per cent of total ERV. Total capital commitments across the Covent Garden estate were £1.7 million.

Acquisition opportunities have remained limited with assets in the area tightly held. In February 2023, Capco acquired the remaining interest in the Royal Opera House Arcade for £12.9 million. This purchase consolidates Capco's ownership to include the final unit in the arcade not owned by Capco.

Capco has a strong balance sheet and access to significant liquidity enabling it to take advantage of such opportunities should they arise. There are a number of properties on or around the estate being actively tracked for repositioning opportunities. Capco's extensive knowledge of the district, close network of contacts and proven track record mean Capco is often the best positioned to acquire properties.

Positioning a world-class estate through consumer engagement

Capco offers a unique customer experience, utilising the historic Piazza, through events and cultural installations to increase estate recognition and brand engagement. There was an extensive programme of activities including a brand partnership with Disney on Stage to bring family fun to the Piazza over the summer with the launch of 'Something Magical in Covent Garden'. Other events across the Piazza included the Rosé Garden Party with a selection of pop-up bars and terraces, the Great Piazza Party in celebration of the Queen's Platinum Jubilee as well as daily screenings of the Wimbledon Tennis Championships. Covent Garden also hosted the Harry Potter Photographic Exhibition.

Over the summer months, Covent Garden partnered with multi award-winning food influencer Clerkenwell Boy to launch its summer Good Food Festival on the Piazza, with a range of international flavours. In celebration of the 50th anniversary of Pride marches, the bollards on Floral Street were rainbow painted for a limited time. In addition, Covent Garden was the home of British Beauty Week and London Cocktail Week offering immersive experiences.

Covent Garden launched its extensive Christmas programme of activities for the important trading period, offering unique customer experiences and an extensive programme of activities. These included a brand partnership with Dolce&Gabbana, on the Piazza with an Italian food market and exclusive products and Jaeger-LeCoultre showcasing watches, as well as creating a café and art exhibition. There were live performances from the cast of Elf the musical and the London International Gospel Choir. Festive late night shopping was introduced over the period, boosting the night time economy with spend-driving incentives from many stores open until 9pm.

The Covent Garden estate offers an open-air pedestrianised environment with a successful al fresco dining scheme offering 1,000 outdoor dining seats, across 55 restaurants and spanning six pedestrianised streets as well as the Piazza. Capco is currently in consultation with Westminster City Council on streetscape design enhancements to Henrietta Street and Southampton Street to provide a more inviting environment for the consumer.

Capco continues to engage directly with the consumer with 630,000 followers across its ten social media channels. The digital audience across social channels continues to increase as a result of an engaging campaign calendar with brand partnerships which resonate with the consumer. The Covent Garden website continues to see increasing numbers of repeat visits which is a consistent theme when compared to the footfall demographics with increased repeat visits from Londoners in particular. 

Committed to sustainability and minimising our environmental impact

During the year, Capco joined the UN Race to Zero supporting its commitment to becoming Net Zero Carbon by 2030, securing Science-Based Target validation of our targets in the process. As a long-term steward of the Covent Garden estate, Capco aims to make Covent Garden a UK leader in sustainability by delivering positive environmental and social outcomes that enhance value for stakeholders while protecting the unique character and heritage of the estate. Capco's approach recognises that its heritage buildings represent a long-term store of carbon.

Capco was recognised as a Climate Leader in the 2022 Financial Times survey. The survey recognises the top 400 companies in Europe for emissions intensity reduction over 6 years.

Capco has a strong track record of supporting its stakeholders and positioning the estate sustainably. A number of initiatives were implemented across the estate. All diesel estate cleaning equipment has been replaced with electric equipment. Capco implemented rainwater harvesting at Floral Court which combined with the improved water efficiency of the new cleaning equipment is expected to reduce our water requirement by approximately 50 per cent. In 2022, Capco enhanced its internal and external air quality monitoring through the addition of three new outdoor air quality monitors across the estate and indoor air quality trials in Capco's Head Office at Regal House.

Capco has initiated its first Carbon Risk Real Estate Monitor ("CRREM") analysis on a number of properties which supports the development of science-based carbon reduction pathways at an individual building level.

Capco's long-term management of its properties' EPC performance means it is well-placed to meet targets ahead of statutory regulation timelines. All commercial EPC certificates across the estate are D or above, with 68 per cent C or above, the minimum level by April 2027. There has been a 5 per cent year on year increase in the volume of units rated C or above.

All of Capco's units now meet the Minimum Energy Efficiency Standards ("MEES") regulations commencing April 2023 (rating of D or above). Capco continues to set targets to meet the requirements ahead of time with approximately 21 per cent of units already meeting the April 2030 regulations. Capco continues to improve its EPC performance whenever refurbishment works are undertaken on assets and the costs are incorporated into capital expenditure budgets. These are not disaggregated given the Capco design process incorporates both high MEES standards and its Net Zero Carbon Pathway. Capco is targeting a minimum EPC rating of B on all refurbishment projects.

Capco is committed to transparent reporting through recognised indices. For the fourth consecutive year Capco has been awarded EPRA sBPR Gold. Capco also improved its GRESB score by 5 per cent, two green star ratings, and we have maintained our CDP B rating, indicating the coordinated action we are taking on climate issues. In addition, our co-ordinated work across our ESC strategy resulted in an improved S&P Global CSA benchmark score, an uplift to our MSCI Index to AA and Capco continues to hold a Prime rating from the ISS ESG Rating. Capco continues to report under FTSE4Good. 38 commercial green leases representing 18 per cent of the portfolio are now in place.

Capco is a partner of Wild West End, a not-for-profit partnership which aims to enhance biodiversity across the West End through the quality of green space and the local environment for people and wildlife across Westminster. The results of the first ecological survey of the Covent Garden estate, undertaken in partnership with the London Wildlife Trust, were received with a number of priority conservation species identified which will be incorporated into Capco's biodiversity plan for the estate. In this regard, 2023 will see the second estate ecological surveys and the evolution of Capco's biodiversity action plans.

Broad community engagement

Capco continues to support local charities and community foundations including the Young Westminster Foundation "Brighter Futures" programme including supporting young carers, young LGBT+ people, refugees and addressing youth violence. Capco is a corporate sponsor of the Mousetrap Theatre Project, which provides a range of subsidised theatre programmes and creative learning projects accessible to young people, low-income families and those with additional needs.

We continue to focus on our community programme prioritising initiatives and charity partners in Covent Garden. During the year, Capco supported the local community's Platinum Jubilee street party and partnered with Square Mile Farms to launch an Urban Farm pop-up. The pop-up farm is an interactive way for local schools, offices and community groups to enjoy sustainably grown produce and for visitors to learn more about sustainable urban farming.

Capco employees took part in several volunteering days including gardening at Penfold community hub in Westminster, attending the local Westminister dementia centre, as well as participating in the Lord Mayor's Cup, a fundraiser football tournament with neighbouring property companies to kick off the World Cup.

In September, Capco hosted a charity pop-up shop in partnership with Smart Works, to empower women to return to the workplace. The pop-up brought together items donated from over 30 fashion brands, including customers, for sale with 100 per cent of profits being donated to the charity. 

Capco has also donated towards Covent Garden Dragon Hall Trust foodbank to help local residents affected by the cost of living crisis. During November 2022, in partnership with charity Only A Pavement Away which works alongside Crisis, Capco ran its third charity auction with prizes from shops and restaurants from across the Covent Garden estate.

Capco became a sponsor for the Single Homeless Project, a charity which supports over 10,000 people each year offering a range of services including hostels, supported housing and community support services. The sponsorship focuses on the Kean Street hostel which is located in Covent Garden. Capco's community contribution totalled £0.5 million made up of donations and time committed by employees.

Our people

Our people are key to our business, we promote a culture of creative passion for Covent Garden and the West End to allow employees to reach their potential whilst creating value for our stakeholders. We have introduced a number of initiatives to support our employees through regular Company-wide meetings, business updates and seminars focusing on well-being, diversity, equality and inclusion.

Following an employee survey, employee working groups were set up to focus on the following areas: New Ways of Working; Office & Facilities; People, Team and Collaboration; and Business Processes. These groups presented their recommendations for implementation to the Company with many areas having been implemented.

During the year, Capco conducted an employee well-being survey, which received a very high overall well-being score and a response rate of over 87 per cent.

Other investments

Investment in Shaftesbury shares

Capco has a 25.2 per cent shareholding in Shaftesbury, comprising 96.97 million shares. At 31 December 2022, the share price of Shaftesbury shares was 368 pence, resulting in Capco's investment being valued at £357 million (31 December 2021: £596 million). During the year, Capco received £13.5 million dividend income and a further £2.6 million dividend income post year-end.

On 16 June 2022, Capco announced its intention to merge with Shaftesbury and the shareholder approval conditions were satisfied on 29 July 2022. The merger received clearance from the Competition and Markets Authority on 22 February 2023, and it is expected to complete on 6 March 2023. The merger represents a major corporate transaction for the business and was an area of significant activity during the year.

The merger unites two complementary real estate businesses to create an impossible to replicate portfolio in some of the most iconic destinations across London's West End primarily focused on three locations: Covent Garden including Seven Dials, the Opera Quarter and Coliseum; Carnaby including Soho; and Chinatown. The portfolio comprises 2.9 million square feet of lettable space across approximately 670 predominantly freehold buildings with approximately 2,000 individual units. As at 31 December 2022, the combined portfolio was valued at £4.9 billion. In addition, the Combined Group will have 50 per cent interests in the Longmartin joint venture and Lillie Square.

By combining both companies' strengths, cultures and values, a 'best of both' approach will be taken to deliver long-term economic and social value for all stakeholders. The combination will generate both near-term and longer term benefits including greater efficiencies and synergies, a more diverse portfolio with a stronger operational platform of scale and efficiency as well as enhanced access to capital.

The merger is expected to unlock the opportunity to enhance the connectivity of Capco's and Shaftesbury's complementary portfolios. The combination will enable the Combined Group to leverage insights from rich data to inform investment and leasing decisions through broader and deeper knowledge. A holistic marketing strategy will also be implemented to take advantage of cross locational marketing opportunities. The Combined Group will be well-positioned to deliver long-term growth in income, value and dividends through comprehensive, long-term management of its exceptional portfolio.

Lillie Square

Capco owns 50 per cent of the Lillie Square joint venture, a residential development located in West London. The property valuation as at 31 December 2022 was £77 million (Capco share), a 6 per cent decline (like-for-like) against the 31 December 2021 valuation of £84 million. In addition, Capco owns £2 million of other related assets adjacent to the Lillie Square estate.

In total, 351 Phase 1 and 2 units have been handed over, with 69 units available. The sale of 5 units completed during the year representing £6.6 million (Capco share: £3.3 million). The joint venture is in a cash position of £11.8 million (£5.9 million Capco share). During the year, £17.5 million of cash was distributed from the joint venture to Capco.

FINANCIAL REVIEW

The Group has strong prospects for earnings growth and long-term value creation, with a well-positioned portfolio and improving operating performance, backed by a resilient and flexible capital structure.

2022 has been characterised by continued operational momentum in the Covent Garden estate, with rental income collection returning to pre-pandemic levels, strong leasing demand across all uses resulting in high occupancy and rental growth, and sustained footfall recovery resulting in growth in sales for our retail and hospitality customers. This performance reflects the appeal of Covent Garden and London's West End. Broader macroeconomic factors will have an impact on future performance, however the West End has demonstrated remarkable resilience and we are encouraged to see strong demand continuing to deliver rental growth in our portfolio.

Underlying earnings improved from £0.7 million in 2021 to £18.6 million (2.2 pence per share) in 2022, driven by increased net rental income, additional dividend income and lower finance costs, offset in part by higher administration expenses. The Company has declared total dividends in respect of the year of 2.5 pence per share, reflecting improved underlying and cash earnings and the additional dividend received in relation to Q4 2022 from the investment in Shaftesbury shares post-year end.

2021 comparative information has been restated to reflect a change in accounting policy following an IFRIC (IFRS Interpretations Committee) agenda decision in relation to the accounting for rent concessions, which in the Company's case were provided during the COVID-19 period. Any forgiveness of rent after the point at which it was due is now accounted for as an expected credit loss and not as a rent free asset (with the impact amortised over the remaining life of the lease). Due to the resulting restatement, there has been a reduction in 2021 net rental income by £6.2 million to £40.2 million. On an underlying basis, 2021 net rental income has reduced by £3.4 million from £52.3 million to £48.9 million. Due to improving trading conditions, and completion of historical COVID-19 concessions, underlying net rental income increased by 17.0 per cent to £57.2 million in the year. On an IFRS reported basis net rental income increased by 43.3 per cent to £57.3 million. The financial statements also reflect a further adjustment resulting from the requirement to include tenant deposits (£13.4 million at the end of 2022) within cash and cash equivalents rather than trade receivables.

The Group's investments are concentrated on real estate in London's West End with the Covent Garden estate and the investment in Shaftesbury shares representing over 95 per cent of total portfolio value. The independent property valuation of Covent Garden remained broadly unchanged over the year on a like-for-like basis, at £1,741.6 million. The increase of 6.3 per cent in ERV on a like-for-like basis was offset by an increase in the equivalent yield by 19 basis points to 4.07 per cent. The ERV growth is reflective of positive asset management and leasing activity, and high occupancy levels across the estate. Total property return for the year was 2.8 per cent. The Group's 25.2 per cent investment in Shaftesbury has decreased in value by £239.5 million to £356.9 million reflecting the share price of 368 pence as at 31 December 2022 (2021: 615 pence per share). Dividends received from this investment during the year were £13.5 million and after the year end, the Group received a further dividend of £2.6 million on 15 February 2023.

Capco owns 50 per cent of the Lillie Square joint venture. The property valuation as at 31 December 2022 was £77.0 million, a 6 per cent decline (like-for-like) against the 31 December 2021 valuation of £84.1 million. In total, 351 Phase 1 and 2 units have been handed over, with 69 units available. The sale of five units completed during the year representing £6.6 million (£3.3 million Capco share) and five units have been leased in the near-term. The joint venture is in a cash position of £5.9 million (Capco share) as at 31 December 2022. During the year, £35.0 million of cash was distributed from the joint venture to the partners (£17.5 million Capco share). In addition, Capco owns £2.1 million of other related assets adjacent to the Lillie Square estate.

As a result primarily of the lower Shaftesbury share price, overall EPRA NTA (net tangible assets) per share decreased by 14.5 per cent during the year, from 213.0 pence at 31 December 2021 to 182.1 pence. Combined with the 1.8 pence per share dividend paid to shareholders during the year, the total return for the period is -13.6 per cent. Total shareholder return for the year, reflecting the movement in the share price from 168 pence to 107 pence, together with dividends, was -35.9 per cent.

The Group maintains a strong capital structure with low financial leverage, access to significant liquidity, substantial headroom against debt financial covenants and a modest capital commitment profile. During the year, £200 million of borrowings were repaid early with closing net debt as at 31 December 2022 of £621.8 million (31 December: £599.3 million). Cash and cash equivalents, excluding tenant deposits, were £122.6 million as at 31 December 2022 (31 December 2021: £341.7 million) and when combined with undrawn committed facilities, liquidity was £422.6 million (31 December 2021: £641.7 million). The maturity date of the £300 million revolving credit facility, which is currently undrawn, was extended by one year to September 2025. Through a combination of all drawn debt being at fixed rates, cash deposits held and interest rate collars being in place, the Company's finance costs are currently well-protected against interest rate movements.

On 16 June 2022, Capco announced its intention to merge with Shaftesbury PLC and the shareholder approval conditions were satisfied on 29 July 2022. The merger received clearance from the Competition and Markets Authority on 22 February 2023, and it is expected to complete on 6 March 2023. During the year, the Group incurred costs of £14.6 million associated with the merger, which have been accounted for as non-underlying administration costs. In connection with the merger, a standby loan facility was put in place in order to enable the Group to fund in full the repayment of Shaftesbury bonds of up to £575 million if holders of the bonds exercise their put rights following the change of control of Shaftesbury.

Basis of preparation

Group share and alternative performance measures

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

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

The Group uses Alternative Performance Measures ("APMs"), financial measures which are not specified under IFRS, to monitor the performance of the business. These include a number of the financial highlights shown on page 2. Many of the APMs included are based on the EPRA Best Practice Recommendations reporting framework, which aims to improve the transparency, comparability and relevance of published results of public real estate companies in Europe.

One of the key performance measures the Group uses is underlying earnings. The Group considers the presentation of underlying earnings to be useful supplementary information as it removes unrealised gains and certain other items and therefore represents the recurring, underlying performance of the business. Items that are excluded are net valuation gains/losses (including profits/losses on disposals), fair value changes, impairment charges, net refinancing charges, costs of termination of derivative financial instruments and other non-recurring costs and income. Net rental income as a component of underlying earnings remains an important alternative performance measure for the Group.

Lease modification expenses comprised directly attributable lease costs previously held on balance sheet and amortised in accordance with IFRS 16. These non-cash costs were incurred as a result of the Group providing rental support to its tenants during the COVID-19 pandemic and were written off in accordance with the Group's accounting policy. During 2021 tenant lease incentives were impaired in respect of tenants which had entered administration or experienced significant disruptions to cash flows during the pandemic. Accordingly these items were excluded from underlying earnings during 2020 and 2021. Tenant support measures implemented during the pandemic have now been concluded and as such impairment of tenant incentives have been included in underlying earnings with effect from 2022.

A summary of EPRA performance measures and key Group measures included within these financial statements is shown in EPRA measures on pages 63 to 67.

Change in accounting policy

During 2022, the IFRS Interpretations Committee ("IFRIC") finalised an agenda decision in relation to how a lessor should account for the forgiveness of lease payments under IFRS 9 "Financial Instruments" and IFRS 16 "Leases". The decision concluded that for any rent receivable past its due date which was subsequently forgiven, the lessor should apply the expected credit loss model under IFRS 9 and account for the forgiveness as an impairment to the income statement. Alongside this, any forgiveness of future rent would be deemed to meet the definition of a lease modification under IFRS 16, with the resulting impact accounted for by spreading the concession over the remaining lease term in accordance with IFRS 16. On entering into a lease modification, any directly attributable costs associated with the lease are derecognised. The Group had previously concluded that under IFRS there had been a policy choice to account for any rent forgiveness for rent receivable after its due date under either IFRS 9 or IFRS 16. Accordingly the Group had elected to account for all relevant rent concessions as a lease modification under IFRS 16, and in addition the directly attributable costs associated with the leases were derecognised as non-underlying costs. The Group had applied this treatment during the pandemic period in 2020 and 2021. Due to the IFRIC agenda decision, the Group has retrospectively applied the change in accounting policy with the 2021 comparative information being restated as a result. In summary, the adjustment has had the following impact:

- Cumulative expected credit loss of £20.5 million has been recorded through net rental income during 2020 and 2021;

- Reversal of recognition of £13.3 million rent-free assets and write-back of £3.0 million of directly attributable costs. This has led to an overall reduction in tenant lease incentives, including letting fees, of £10.3 million as at 31 December 2021 to a total balance sheet value of £35.2 million; and

- Reduction in IFRS net rental income of £6.2 million to £40.0 million and underlying earnings from £4.1 million to £0.7 million for the year ended 31 December 2021 (31 December 2020: Reduction in IFRS net rental income of £4.5 million to £11.4 million and underlying loss from £6.2 million loss to £18.7 million loss).

The reduced balance of tenant lease incentives will result in a lower charge against rental income on an accounting basis over the coming years, including an estimated positive impact of £2.5 million in 2023.

All COVID-19 concessions have been finalised with no further adjustments expected. Further details on the adjustment and impact on prior year comparative information are set out in note 1 to the financial statements.

FINANCIAL PERFORMANCE

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

SUMMARY INCOME STATEMENT

1. Lillie Square and Innova Investment.

2. Administration expenses include £14.6 million of non-underlying costs primarily related to the proposed merger with Shaftesbury PLC which are considered non-recurring in nature.

3. Excludes other finance income and costs and change in fair value of derivative financial instruments.

4. Includes other costs, impairment of other receivables and other finance income including change in fair value of derivatives.

5. Further details regarding the EPRA and Company specific adjustments are disclosed within EPRA measures on page 62.

1. Lillie Square and Innova Investment.

2. Net rental income includes £8.7 million of non-underlying costs in relation to lease modification and impairment of tenant incentives. Underlying net rental income, excluding these items, is £48.7 million.

3. Administration expenses includes £2.8 million of non-underlying costs primarily related to the assignment of the Group's previous head office lease totalling £1.8 million and other transaction related costs which are all considered non-recurring in nature.

4. Excludes other finance income and costs and change in fair value of derivative financial instruments.

5. Includes other costs, impairment of other receivables and other finance income.

6. Further details regarding the EPRA and Company specific adjustments are disclosed within EPRA measures on page 62.

Net rental income

1. Lillie Square.

Rent receivable has increased by 1.8 per cent, adjusting for 2021 disposals of £2.1 million. This reflects new letting and increased contracted income as a result of improving trading conditions.

Straight lining of tenant lease incentives, reflecting the non-cash rent free adjustment, has increased by £1.8 million to £6.3 million due to new leases and renewals signed in the year. The movement reflects the change in accounting policy and reduction in rent free amortisation for COVID-19 concessions which have now been accounted for through expected credit loss.

With improving trading conditions, including cash collections for the year at 99 per cent, the expected credit loss has been a reversal of £1.6 million during 2022. The adjustment is calculated as the reduction in the balance sheet provision of £7.4 million offset by £5.8 million of bad debt write-offs in the year for rent forgiveness for historical COVID-19 concessions and tenants which vacated or went into administration. The provision for expected credit loss in 2021 reflects the rent forgiveness for COVID-19 concessions provided in relation to rent past its due date.

As at 31 December 2022 the balance sheet provision is £4.0 million reflecting 33.3 per cent of the rent receivable balance. As at 31 December 2021 the provision was £11.4 million reflecting 53.3 per cent of the rent receivable balance. The reduction in the absolute and relative provision reflects positive trading conditions.

Property costs have reduced by £0.2 million to £10.5 million mainly due to £0.5 million of COVID-19 related security, cleaning and equipment costs incurred in 2021 offset in part by cost inflation in 2022.

During the course of 2020 and 2021 the impact of COVID-19 was in large part removed from underlying earnings through the exclusion of lease modification expenses and incentive impairments as non-recurring charges. Tenant support measures implemented during the pandemic period have now concluded and as such any further impairment of tenant incentives from 2022 onwards are included in underlying earnings. During the course of 2022, this has resulted in an impairment of £1.9 million.

Loss on revaluation of investment and development property

The loss on revaluation of the Group's investment and development property was £0.8 million. The property valuation of the Covent Garden estate has remained broadly unchanged on a like-for-like basis at £1,741.6 million, as a result of a 6.3 per cent like-for-like increase in ERV to £81.0 million and outward movement in the equivalent yield of 19 basis points to 4.07 per cent.  

Dividend income

Dividend income of £13.5 million has been received from the Shaftesbury investment during the year. An additional £2.6 million dividend was received on 15 February 2023 in relation to the final quarter of 2022.

Administration expenses

1. Lillie Square.

Underlying administration expenses have increased by £6.2 million to £26.1 million for the year ended 31 December 2022. This increase reflects a number of factors including more normalised levels of activity post-COVID-19, inflationary pressures and increased people costs and share option charges.

Non-underlying administration costs, which are considered non-recurring, of £14.6 million have been incurred, substantially in connection with the proposed merger with Shaftesbury.

Net finance costs

Net finance costs have been reduced by £6.8 million to £24.6 million. The decrease is due to a lower average level of gross debt following the prepayment of £75 million of private placement loan notes on 28 February 2022 and the £125 million secured loan on 20 June 2022.

Finance income increased by £2.1 million to £2.6 million during the year, comprising £1.4 million for cash on deposit and £1.2 million in relation to interest rate hedging arrangements. Based on market forecasts of interest rates, expected liquidity levels and the Group's in-place hedging arrangements, there should be a further increase in interest income during 2023.

Taxation

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

Consistent with the Group's policy of complying with relevant tax obligations, the Group maintains a constructive and open working relationship with HMRC which regularly includes obtaining advance clearance on key transactions where the tax treatment may be uncertain. The Group maintains a low risk rating from HMRC, which has been confirmed following a detailed business risk review during 2022

As a UK REIT, the Group is exempt from UK corporation tax on income and gains from qualifying activities. As a minimum, 90 per cent of the income arising from qualifying activities and 100 per cent of the UK REIT investment profits are required to be distributed as Property Income Distribution ("PID") to the shareholders of the Group. Non-REIT activities, such as disposals of trading property, are subject to UK corporation tax. A tax charge can arise for the Group (currently at 19 per cent) if the minimum PID requirement is not met within 12 months of the end of the relevant year. The Group expects to meet the PID requirements for the year ended December 2022 and for the current year within the allowed timelines.

The UK REIT provisions also require a group to satisfy certain tests to maintain its REIT status. The Group satisfied all requirements needed to maintain REIT status throughout 2022. The UK REIT provisions can impose a UK tax charge on the Group if certain interest cover tests are not met. HMRC has indicated that it is not within the intention of the REIT regime to issue a tax charge in relation to these interest cover tests, where it can be established that COVID-19 is the reason for a breach. As a result of accounting adjustments resulting from the treatment of rental concessions during the pandemic period, the Group did not meet the interest cover test for the year ended December 2022, however as this relates to the COVID-19 period, HMRC has confirmed that this will not result in a tax charge.

The tax charge of £6.0 million in the income statement comprises a deferred tax charge of £1.3 million in relation to share-based payments and capital allowances, and a deferred tax charge of £4.7 million to unwind the remainder of the deferred tax asset recognised for the trading losses carried forward. IAS 12 provides for the recognition of a deferred tax asset where it is probable there will be future taxable profit against which a deductible temporary difference can be utilised. As a result of the application of this provision, the Group has not recognised a deferred tax asset on certain losses carried forward.

The main rate of corporation tax remained unchanged at 19 per cent throughout the year. The increase in the main corporation tax rate from 19 to 25 per cent with effect from 1 April 2023 has been substantively enacted on 24 May 2021 and therefore is reflected in the Group's deferred tax balances where applicable.

Whilst the Group is a REIT, it is subject to a number of taxes and certain charges in the same way as non-REIT companies. The Group is committed to paying its fair share of taxes to HMRC and local authorities including other taxes such as VAT, business rates, stamp duty land tax, employment taxes, corporation tax on non-REIT income and withholding tax on PIDs. During the year, the total amount borne and collected in respect of these areas amounted to £16.6 million (2021: £12.5 million).

Dividends

On 30 January 2023, the Board declared a second interim dividend of 1.7 pence per share bringing the total dividend for the year to 2.5 pence per share (2021: 1.5 pence). The dividend is to be paid 0.7 pence as a PID and 1.0 pence as a non-PID, and is expected to be paid on 20 March 2023 to shareholders on the register at 3 March 2023. This payment takes into account dividend income in relation to Q4 2022 from Shaftesbury PLC received on 15 February 2023.

FINANCIAL POSITION

At 31 December 2022 the Group's EPRA NTA was £1.6 billion (31 December 2021: £1.8 billion) representing 182.1 pence per share (31 December 2021: 213.0 pence).

SUMMARY ADJUSTED BALANCE SHEET

1. Primarily Lillie Square.

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

3. Adjusted, diluted number of shares in issue at 31 December 2022 was 852.3 million.

1. Primarily Lillie Square.

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

3. Adjusted, diluted number of shares in issue at 31 December 2021 was 851.9 million.

Investment, development and trading property

The Group share of investment, development and trading property carrying value has decreased by £4.6 million from £1,789.6 million to £1,785.0 million. This movement primarily comprises a revaluation loss of £0.8 million on the Covent Garden portfolio, write-down of trading property at Lillie Square of £12.4 million, gain on transfer from trading to investment property of £0.3 million on Lillie Square, capital expenditure of £11.0 million and disposals of £2.7 million of Lillie Square properties.

The independent property valuation of Covent Garden for the year remained broadly unchanged on a like-for-like basis, at £1,741.6 million (2021: £1,728.5 million). The increase of 6.3 per cent in ERV on a like-for-like basis was offset by an increase in the equivalent yield by 19 basis points to 4.07 per cent. The Lillie Square independent property valuation decreased in value by 6 per cent (like-for-like) to £79.1 million at 31 December 2022 (2021: £86.2 million).

The revaluation on Group investment and development property together with movements on trading property resulted in a total revaluation loss of £5.8 million, representing a 0.3 per cent decrease in value, which compares with the MSCI Capital Return for the equivalent period of a 14.2 per cent reduction.

Total property return for the year was 2.8 per cent. The MSCI Total Return Index recorded a 10.1 per cent reduction for the corresponding period.

Trading property is carried at the lower of cost and net realisable value, therefore valuation surpluses on trading property are not recorded. Any unrecognised surplus is however reflected within the EPRA net tangible assets measure. At 31 December 2022, the unrecognised surplus on trading property was £7.1 million (31 December 2021: £0.1 million) which arises solely on the Group's share of trading property at Lillie Square. The increase in the unrealised surplus is due to change in valuation methodology.

Financial assets at fair value through profit or loss

The value of the Group's 25.2 per cent shareholding in Shaftesbury as at 31 December 2022 based on the closing share price of 368 pence was £356.9 million (2021: £596.4 million based on share price of 615 pence) resulting in a fair value loss of £239.5 million during the year.

Debt and gearing

The Group maintains a strong financial position, diversified sources of funding, headroom against debt covenants, access to significant liquidity, modest capital commitments, a balanced debt maturity profile and protection against interest rate movements.

The Group's cash and undrawn committed facilities at 31 December 2022 were £422.6 million (31 December 2021: £641.7 million). A reconciliation between IFRS and Group share is shown below:

1. Primarily Lillie Square.

2. Excludes tenant deposits of £13.4 million (2021: £12.1 million)

Net debt increased by £22.5 million to £621.8 million in the year, consisting of £21.9 million cash outflows and £0.6 million non-cash amortisation of debt issue costs. Net debt on an IFRS basis has increased by £5.9 million with the majority of the difference to Group share resulting from a £17.5 million part repayment of loan received from the Lillie Square joint venture.

The gearing measure most widely used in the industry is loan to value ("LTV"), however in order to address the fact that LTV does not take into account the value of the shareholding in Shaftesbury, the Group focuses on the ratio of net debt to gross assets which stood at 27.9 per cent at 31 December 2022. This is comfortably within the Group's limit of no more than 40 per cent. EPRA LTV was 28.0 per cent.

1. The 2021 covenants have been recalculated due to the Changes in accounting policies as discussed in note 1.

2. Excludes the £576 million loan facility agreement

The Group's policy is to eliminate substantially the medium and long-term risk arising from interest rate volatility. The Group's banking facilities are arranged on a floating rate basis but are generally swapped to fixed rate, capped or collared using derivative contracts. At 31 December 2022, all of the Group's drawn debt (comprising £475 million of private placement loan notes and £275 million of exchangeable bonds) was at fixed rates. Interest rate collars are currently in place for £200 million of notional value through to December 2024, capped at 1.23 per cent.

The £300 million revolving credit facility was undrawn at the year end. During the year, the first of two 1-year extension options was exercised to extend the maturity date to September 2025.

On 16 June 2022, the Group completed a £576 million loan facility agreement in connection with the proposed merger with Shaftesbury. Shaftesbury has two secured mortgage bonds totalling £575 million, each of which contain change of control provisions which will be triggered by the merger. In order to provide funding certainty in the event that the Shaftesbury mortgage bond holders exercise their redemption right in respect of their Shaftesbury mortgage bonds following completion of the merger the Group has entered into the new facility. The £576 million loan facility matures in June 2024, with the ability to extend for a further six months at the option of Capco subject to the satisfaction of the extension requirements as outlined in the facility. There is subsequently a further six month extension option available subject to lender consent.

On 28 February 2022, the Group repaid £75 million of private placement loan notes, incurring a make-whole cost of £5.0 million. On 20 June 2022, the Group repaid the £125 million secured loan, which was secured on Shaftesbury shares. 

The principal financial covenants within the Covent Garden debt are to maintain a loan to value ratio of not more than 60 per cent and an interest cover ratio of at least 120 per cent. Based on the current level of net debt of £366 million the loan to value ratio is 21.0 per cent, resulting in substantial headroom with the ability for property valuations to fall by 65 per cent. The interest cover ratio for the year in relation to the Covent Garden debt was 395 per cent, comfortably ahead of the covenant level of 120 per cent.

As at 31 December 2022, the Group had capital commitments of £2.5 million (£5.4 million at 31 December 2021), comprising £1.7 million for Covent Garden and £0.8 million for Lillie Square. At Covent Garden, there are a number of targeted capital initiatives which are expected to be brought forward in 2023, with estimated capital expenditure of £25 million over the next two years, including the office to F&B conversions on Maiden Lane and Bedford Street, F&B townhouse on King Street and office refurbishment on Long Acre.

1. Lillie Square.

CASH FLOW

A summary of the Group's cash flow for the year ended 31 December 2022 is presented below:

SUMMARY CASH FLOW

1. Primarily Lillie Square.

2. Net cash flow is based on unrestricted cash and cash equivalents. The movement in Lillie Square deposits on a Group share basis of £0.2 million is therefore not included.

1. Primarily Lillie Square.

2. Net cash flow is based on unrestricted cash and cash equivalents. The movement in Lillie Square deposits on a Group share basis of £5.3 million is therefore not included.

IFRS cash and cash equivalents, which includes tenant deposits, decreased by £201.2 million to £129.9 million.

Operating cash inflows have increased by £5.6 million to £5.7 million for the year ended 31 December 2022 due mainly to an increase in rental collections. Dividend income of £13.5 million has been received from the Shaftesbury investment in the year. This is offset by higher administrative costs and £20.4 million of non-recurring administrative expenses, comprising merger-related costs, the make-whole cost on the private placement loan notes and loan facility arrangement fees.

During the year, £11.1 million was invested at Covent Garden for capital expenditure on a number of projects with £0.9 million incurred at Lillie Square.

The sale of five units at Lillie Square generated £3.3 million (Group share) of net proceeds.

Financing cash outflows relate to the repayment of the £75 million of private placement loan notes and the repayment of the £125 million secured loan.

Going concern

Further information on the going concern assessment is set out in note 1 to the financial statements.

The Company has a strong balance sheet with net debt to gross assets of 27.9 per cent and access to cash and undrawn facilities of £422.6 million as at 31 December 2022. The Covent Garden group had net debt of £366.1 million and a loan to value ratio of 21.0 per cent, which compares with a debt covenant level of 60 per cent. The interest cover ratio for the year ended 31 December 2022 in relation to the Covent Garden debt was 395 per cent, comfortably ahead of the covenant level of 120 per cent. There remains sufficient liquidity and debt covenant headroom even in a downside "severe but plausible" scenario. Similarly base case and downside scenarios have been analysed on the basis that the merger with Shaftesbury is completed.

On the basis of both the standalone and combined analyses, there continues to be a reasonable expectation that the Group will have adequate resources to meet both ongoing and future commitments for at least 12 months from the date of signing these financial statements. Accordingly, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing the 2022 Annual Report.

Situl JobanputraChief Financial Officer

28 February 2023

PRINCIPAL RISKS AND UNCERTAINTIES

Risk Management

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

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

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

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

Risk Appetite Statement

The Board has set the Group's risk appetite statement to provide guiding principles to support decision-making at both a Board and Senior Management level. The Group's risk appetite statement is reviewed and updated by the Board at appropriate intervals and in any event on an annual basis. The Group's risk appetite statement has been communicated to Senior Management who are responsible for incorporating the identified principles in decision-making. The Group's risk appetite statement is as follows:

"We use our expertise in property investment and development and our commitment to a strong balance sheet to take commercial risks in a measured way so that we are able to deliver sustainable growth and long-term market leading returns for our shareholders.

We are risk averse in relation to the impact of our business on the environment and on the health and safety of our people and the public and it is a key priority for us that our business operates in compliance with laws, regulations and our contractual commitments."

Risk outlook

Management actions have positioned the business to emerge strongly as markets recover. During 2022 there has been strong operational momentum at Covent Garden, with excellent leasing demand across all uses, high occupancy levels and rent collection normalising to pre-pandemic levels. The long-term impact of the pandemic alongside broader macroeconomic factors, in particular inflationary pressures and increasing interest rates, on the future demand for and use of lettable space, evolution of consumer behaviour and travel patterns remains a consideration and the Board continues to monitor this.

Whilst the challenges and disruption caused by COVID-19 have reduced as restrictions were lifted and customer trade conditions reverted to pre-pandemic levels, the mitigating actions imposed by the UK government and internationally, together with other factors, had a material adverse effect on the retail and hospitality industry and any reinstatement of restrictive measures as a result of a new strain of COVID-19 or any other infectious disease may have an impact on consumer confidence and visitor numbers, including international visitors, impacting the operations and viability of customers of the Group's properties.

Despite the recovery in the operating environment and trading conditions, risk remains heightened as the current macroeconomic backdrop is characterised by higher energy costs, inflation and higher interest rates which have potential impact on valuations, funding, customers and consumer behaviour.

If current global or UK macroeconomic conditions continue to deteriorate, or there is an increase in geopolitical uncertainty, this could impact UK real estate markets, resulting in downward pressure on the value of the Group's properties and net rental income. The risks and challenges are further exacerbated by the economic and geopolitical consequences of Russia's invasion of Ukraine.

Many of the Group's customers are exposed to the changes and challenges facing the retail and hospitality sectors, including macroeconomic factors, such as availability and cost of credit for customers and their businesses, the potential for the level of consumer spending to be impacted by the increase in the cost of living, business and consumer confidence, inflation rates, rising energy costs, supply chain disruption, labour shortages and other operational costs.

In recent years the UK has also experienced heightened economic and political uncertainty after voting to leave the EU. Uncertainty remains in relation to long-term international trade arrangements and the overall impact on the UK economy.

The Group's operations may be adversely affected if it fails to comply with climate and environmental regulation or its own environmental, social or governance standards. Operations may also be adversely affected by climate and environment related risks, which could lead to significant costs to mitigate environmental impacts.

Investment in Shaftesbury PLC and proposed merger

As at 31 December 2022, the Group's portfolio included a 25.2 per cent shareholding in Shaftesbury PLC ("the Investment"). Due to the listed nature of the Investment, the market price of Shaftesbury PLC shares may be volatile and subject to wide fluctuations as a result of a variety of factors, including, but not limited to, Shaftesbury's operating results, financial position, performance or prospects.

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

The operational and business risks faced by Shaftesbury are similar to those faced by the Group which are set out in the principal risks table, but the steps taken to address and respond to any such risks by Shaftesbury are outside of the control of the Group.

On 16 June 2022, Capco announced its intention to merge with Shaftesbury and the shareholder approval conditions were satisfied on 29 July 2022. The merger received clearance by the CMA on 22 February 2023, and is subject to court approval, and it is expected to complete on 6 March 2023.

The prospectus dated 7 July 2022 issued in connection with the proposed merger, as supplemented by the supplementary prospectus dated 29 November 2022, sets out a detailed description of the material risk factors of the merger and the combined group.

On completion of the proposed merger, the combined group's success will be dependent upon its ability to integrate the two companies to deliver the full benefits and synergies as well as harmonising the business cultures. Dedicated integration working groups have been established, in line with restrictions imposed by Competition laws, comprising employees across both companies to discuss day one integration requirements. A steering committee has been created to oversee and co-ordinate this process, review the outputs of the working groups and to provide direction.

Emerging risks

The Group monitors its emerging risks and considers mitigating actions which the Group currently deploys and could deploy with regards to these emerging risks. Emerging risks include the economic and geopolitical consequences of Russia's invasion of Ukraine, UK political uncertainty, the longer-term implications of COVID-19 including on consumer behaviour and changes to the way in which real estate will be used in the future, how lease arrangements are structured, as well as changes to tax and economic policy impacting real estate (including landlord and tenant legislation, residential rent control, capital gains, VAT and other sales taxes, stamp duty and business rates).

Principal risks and uncertainties

The Group's principal risks and uncertainties, which are set out on the following pages, are reflective of where the Board has invested time during the year. Following a detailed review of the 2021 principal risks certain risks have been consolidated in the current year as reflected below. These principal risks are not exhaustive. The Group monitors a number of additional risks and adjusts those considered 'principal' as the risk profile of the business changes. See also the risks inherent in the compilation of financial information, as disclosed in note 1 'Principal Accounting Policies' within 'Critical accounting judgements and key sources of estimation and uncertainty'.

DIRECTORS' RESPONSIBILITIES

Statement of Directors' responsibilities

The statement of Directors' responsibilities has been prepared in relation to the Group's full Annual Report for the year ended 31 December 2022. Certain parts of the Annual Report are not included within this announcement.

The Directors consider that the annual report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and Company's position and performance, business model and strategy.

We confirm to the best of our knowledge:

- the Group consolidated condensed financial statements, which have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and accordance with UK-adopted international financial reporting standards, give a true and fair view of the assets, liabilities, financial position and loss of the Group; and

- the Strategic Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

Signed on behalf of the Board on 28 February 2023:

Ian Hawksworth

Chief Executive

28 February 2023

Situl Jobanputra

Chief Financial Officer

28 February 2023

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2022

1. Prior year comparatives have been restated to reflect a change in accounting policy following clarification by the IFRS Interpretations Committee ("IFRIC") during 2022 of how a lessor should account for the forgiveness of lease payments and a change in accounting policy relating to the presentation of interest and fair value adjustments on interest rate derivatives. Details of the restatements and impact on prior year comparatives are set out in note 1 'Changes in accounting policies'.

2. Included in costs is a £1.6 million reversal (2021: £7.6 million provision) of expected credit loss in relation to rent receivables.

CONSOLIDATED Balance sheet

As at 31 December 2022

1. Prior year comparatives have been restated to reflect a change in accounting policy following clarification by IFRIC during 2022 of how a lessor should account for the forgiveness of lease payments. In addition cash and cash equivalents have been restated following clarification by IFRIC on classification of funds with externally imposed restrictions. Details of the restatement and impact on prior year comparatives are set out in note 1 'Changes in accounting policies'.

CONSOLIDATED STATEMENT OF changes in equity

For the year ended 31 December 2022

1. Represents non-qualifying consideration received by the Group following the share placing in May 2014 and previous share placements. The amounts taken to the merger reserve do not currently meet the criteria for qualifying consideration and therefore will not form part of distributable reserves as they form part of linked transactions. Realised merger reserve relates to disposal of Southampton Street properties during the prior year as these properties were originally acquired using proceeds from the share placement.

2. Prior year comparatives have been restated to reflect a changes in accounting policy following clarification by IFRIC during 2022 of how a lessor should account for the forgiveness of lease payments. Details of the restatement and impact on prior year comparatives are set out in note 1 'Changes in accounting policies'.

CONSOLIDATED STATEMENT OF cash flowS

For the year ended 31 December 2022

1. Prior year comparatives have been restated following clarification by IFRIC on classification of funds with externally imposed restrictions. Details of the restatement and its impact on prior year comparatives is set out in note 1 'Changes in accounting policies'.

2. Sale of discontinued operation in 2021 relates to the receipt of deferred consideration in relation to the sale of Earls Court during 2019.

Notes to the accounts

1 PRINCIPAL ACCOUNTING POLICIES

The financial information set out in this announcement has been extracted from the Company's consolidated financial statements for the year ended 31 December 2022, and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. 

The consolidated financial statements and this announcement were approved by the Board of Directors on 28 February 2023. The auditors have reported on the consolidated financial statements for the year ended 31 December 2022 under section 495 of the Companies Act 2006. The auditors' report is unqualified and does not contain a statement under section 498(2) or (3) of the Companies Act 2006. The Company's statutory financial statements for the year ended 31 December 2021 have been filed with the Registrar of Companies and those for the year ended 31 December 2022 will be filed following the Company's Annual General Meeting.

The Group's consolidated financial statements are prepared in accordance with United Kingdom-adopted international financial accounting standards ('UK-adopted IFRS' or 'IFRS'), and the applicable legal requirements of the Companies Act 2006. While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of IAS in conformity with the requirements of the Companies Act 2006 and UK-adopted IFRS and complies with the disclosure requirements of the Listing Rules of the UK Financial Conduct Authority, this announcement does not itself contain sufficient information to comply with IASs and IFRSs. The Group expects to publish full financial statements that comply with IFRS in March 2023.

The consolidated financial statements have been prepared on a going concern basis under the historical cost convention as modified for the revaluation of property, derivative financial instruments and equity investments held at fair value through profit or loss.

The sub heading net rental income, as a component of underlying earnings and required for the Group's presentation of net rental growth, remains an important alternative performance measure for the Group. Therefore net rental income continues to be disclosed within note 3 'Underlying Earnings' and the 'Analysis of Property Portfolio'. The breakdown of revenue and costs has been included in note 4 'Gross Profit'.

The accounting policies used by the Group in these consolidated financial statements are consistent with those applied in the Group's financial statements for the year to 31 December 2021, as amended to reflect the adoption of new standards, amendments and interpretations which became effective in the year.

In the current year, the Group has applied the below amendments to IFRS Standards and Interpretations issued by the International Accounting Standards Board that are effective for annual periods that begin on or after 1 January 2022. Their adoption has not had any material impact on the disclosures or on the amounts reported in these consolidated financial statements.

Amendments to References to the Conceptual Framework in IFRS Standards:

- IFRS 3 'Business Combinations' (amendment) (Reference to the Conceptual Framework)

- IAS 16 'Property, Plant and Equipment' (amendment) (Proceeds before intended use)

- IAS 37 'Provisions, Contingent Liabilities and Contingent Assets' (amendment) (Onerous Contracts - Cost of Fulfilling a Contract)

- Amendments to IFRS (Annual improvements cycle 2018-2020)

At the date of approval of the consolidated financial statements the following standards and interpretations which have not been applied in these consolidated financial statements were in issue but not effective, and in some cases have not been adopted for use under UK-adopted international accounting standards:

- IAS 1 'Presentation of Financial Statements' (amendment) (Classification of Liabilities as Current and Non-Current)

- IAS 1 'Presentation of Financial Statements' and IFRS Practice Statement 2 (amendment) (Disclosure of Accounting Policies)

- IAS 8 'Accounting Policies, Changes in Accounting Estimates, and Errors' (amendment) (Definition of Accounting Estimates)

- IAS 12 'Income Taxes' (amendment) (Deferred Tax related to Assets and Liabilities arising from a Single Transaction)

The Group has assessed the impact of these new standards and interpretations and does not anticipate any material impact on the consolidated financial statements.

Changes in accounting policies

Rent concessions

During 2022, IFRIC finalised an agenda decision in regards to how a lessor should account for the forgiveness of lease payments under IFRS 9 'Financial Instruments' ("IFRS 9") and IFRS 16 'Leases' ("IFRS 16").

The decision concluded that for any forgiveness of past due rent receivables, the lessor should apply the expected credit loss model under IFRS 9 and account for the forgiveness as an impairment in the consolidated statement of comprehensive income. Any directly attributable costs, including surrender premia and letting fees previously paid, continue to be held on balance sheet and are amortised over the life of the lease.

On the other hand, any forgiveness of future rent receivables met the definition of a lease modification under IFRS 16, with the resulting impact accounted for by straight-lining the forgiveness over the remaining lease term in accordance with IFRS 16. On entering into a lease modification any directly attributable costs were derecognised.

The Group had previously concluded that under IFRS there had been a policy choice to account for rent forgiveness of past due rent receivables either under IFRS 9 or IFRS 16. The Group elected to account for rent forgiveness of past due rent receivables as a lease modification under IFRS 16 and in addition the directly attributable costs associated with the leases were derecognised as non-underlying costs. The Group had applied this treatment since 2020 on the commencement of COVID-19 support measures.

The agenda decision issued by IFRIC has required the Group to retrospectively reverse the accounting treatment followed under IFRS 16 and adopt the accounting treatment required under IFRS 9. This change in accounting policy has been applied retrospectively and comparative information, including the opening retained earnings to reflect the impact of the 2020 rent forgiveness granted, has been restated.

Overall impact of the restatement

Gross profit has reduced by £6.2 million in 2021. This included an additional £7.6 million of expected credit loss, representing £7.1 million rent forgiveness provided during the year as well as an additional £0.5 million expected credit loss on the 31 December 2021 rent receivable balance.

Retained earnings have increased by £0.4 million as at 31 December 2021 based on the additional £5.1 million loss in 2020 and £5.5 million profit in 2021.

For the year ended 31 December 2021, underlying earnings have been reduced by £3.4 million (0.4 pence per share), to £0.7 million (0.1 pence per share). The adjustment for lease modification expenses, impairment of tenant lease incentives and (loss)/gain on revaluation and sale of investment and development property are excluded from the underlying earnings calculation. Further details of the underlying earnings calculation is shown in note 3 'Underlying Earnings'.

As at 31 December 2021 tenant lease incentives, accounted for through prepayments and accrued income, have reduced by £10.3 million cumulatively. The carrying value of investment property and the loss on revaluation of investment and development property as a result of the adjustment to tenant lease incentives, excluding letting fees, has been increased by £11.1 million as at 31 December 2021.

The impact on the consolidated balance sheet has been reflected on page 30 where the 31 December 2021 and 1 January 2021 restated position has been shown. The restated EPRA NTA as at 31 December 2021 is £1,814.5 million (213.0 pence per share).

The restatement adjustments are all non-cash and therefore there is no impact on the consolidated statement of cash flows.

Impact on profit or loss

Due to the materiality of the restatement in 2020 and 2021, reflecting the period during which COVID-19 concessions were provided, the impact of the restatement on the consolidated statement of comprehensive income for each of the years ended 31 December 2020 and 2021 has been presented below:

The gross profit note has been provided to further show the impact of the change in accounting policy:

1. The adjustment to straight-lining of tenant lease incentives of £2.6 million includes a reversal of the 2021 lease incentive income recorded for lease modifications, offset by an unwind of the 2020 lease modification incentives that have been reversed.

2. A reversal of the rent forgiveness accounted for as lease modifications by reversing the income and asset position and accounting for the forgiveness as an expected credit loss in costs. This resulted in an additional expected credit loss for 2020 and 2021 of £20.5 million.

3. For transactions where a modification has no longer occurred, a cumulative reversal of £4.6 million of lease modification expenses to the balance sheet to be amortised over the remaining life of the lease.

4. Where tenant lease incentives related to lease modifications as a result of rent forgiveness had been impaired, a reversal of the impairment and subsequent adjustment to expected credit loss of £1.0 million was recognised in costs during 2021.

Impact on balance sheet

The below summary of trade and other receivables show the main impact on the consolidated balance sheet resulting from the adjustment to the expect credit loss provision and tenant lease incentives.

Tenant lease incentives are included within non-current and current prepayments and accrued income. As at 31 December 2021 tenant lease incentives have reduced by £10.3 million which reflects the cumulative reduction in rent free assets of £13.3 million, offset by the write back of £3.0 million of surrender premia and letting fees. The write back of surrender premia and letting fees reflect the directly attributable costs adjusted for when a lease modification has not occurred. The reduction in the tenant lease incentives balance is reflective of the reduction in lease incentive adjustments to revenue and the increased expected credit loss.

Tenant deposit adjustment

The above summary also includes an adjustment to other receivables to reclassify tenant deposits totalling £12.1 million in 2021 (2020: £13.4 million) from other receivables to cash and cash equivalents. The Group previously disclosed tenant deposits as other receivables in the consolidated financial statements. Following the IFRIC agenda decision regarding Demand Deposits with Restrictions on Use arising from a Contract with a Third Party in April 2022, the Group has adopted the treatment set out in the IFRIC agenda decision, which concluded that the contractual restrictions on the use of the amounts held in the demand deposit do not change the nature of the deposit and that the Group can access those amounts on demand, therefore, the demand deposit should be included as a component of 'cash and cash equivalents' in its statement of cash flows. This change in accounting treatment has been applied retrospectively and comparative information has been restated in the consolidated balance sheet and consolidated statement of cash flows. From an alternative performance measure perspective tenant deposits have been excluded from cash and available facilities and net debt calculations as it does not represent liquidity of the Group.

Changes in fair value of derivative financial instruments

Changes in the fair value of interest rate derivatives are split into interest (calculated as the accrued and realised cash flows) and other changes in fair value.

Previously the Group's policy had been to present both the interest and the fair value components as change in fair value of derivative financial instruments under net finance income or costs in the consolidated statement of changes in comprehensive income.

During the year the Group reviewed this presentation and in order to better reflect the Group's rationale for entering into interest rate hedging arrangements in accordance with the Group's risk management strategy, a change in accounting policy was made to re-present the interest from change in fair value of derivative financial instruments to finance costs and income.

As a result of the change in accounting policy comparative information has been re-presented and interest costs of £3.4 million in the prior year were re-presented from change in fair value of derivative financial instruments to other finance costs.

These costs were excluded from EPRA and underlying earnings in the prior year as they related to an early close out of interest rate derivatives during the COVID-19 pandemic.

Going concern

The Directors have considered the appropriateness of adopting the going concern basis in preparing the Company and consolidated financial statements. The Group's going concern assessment covers the period to 30 June 2024 (the "going concern period"), being at least 12 months from the date of authorisation of these consolidated financial statements.

During 2022, there has been continued improvement in operational activity at Covent Garden. Trading remains resilient with strong recovery in footfall and customer sales in aggregate being ahead of 2019 levels. There is strong leasing demand across all uses delivering rental growth, vacancy remains low and rent collection patterns have normalised.

There are, however, significant macroeconomic and political headwinds including the rising interest rate and inflationary environment, domestic political uncertainty, geopolitical risks, supply chain and labour market disruption. The West End and our unique portfolio of prime investments are not completely insulated, however they have demonstrated remarkable resilience.