“This transaction really does draw a line in the sand. In the past, whenever you talked about Capital & Regional, it was always about restructuring. Hopefully, we can now, once and for all, finally put that behind us ?and say it is all about growth from now on.”
This is C&R chief executive Hugh Scott-Barrett’s take on the 35-year-old company’s newly announced plan to take full control of the £705.2m Mall Fund shopping centre vehicle and swiftly convert to ?a REIT.
After a gruelling six-year turnaround period under the leadership of the former ABN AMRO chief financial officer, during which time plunging property values and soaring debt levels forced C&R to undertake a rigorous regime of asset sales and debt restructuring, the company is, as Scott-Barrett says, finally putting its co-investing asset management days behind it.
In the boardroom of the firm’s Grosvenor Gardens headquarters, Scott-Barrett, executive directors Ken Ford and Mark Bourgeois and group finance director Charles Staveley discuss – with occasional gallows humour – the dark days of the downturn, the recent steadying of C&R’s fortunes and how the crucial Mall Fund transaction – which is seen as a significant milestone – came about.
Gearing for growth
By bringing the Mall Fund’s six assets onto its balance sheet, the firm will have an eight-strong portfolio from which it plans to become the UK’s dominant community shopping centre owner – and growth is firmly on the agenda.
But before Ford and Bourgeois share their views about the community shopping centre sector and open their glossy presentation on C&R’s soon-to-be wholly owned assets, Scott-Barrett and Staveley reflect on the path that took the company from a pre-crisis share price of £16 and a £6.5bn portfolio of property under management to the present £1.2bn portfolio and a recovering 47p share price.
Scott-Barrett says the evolving strategy shift was crystallised by the entry of South African shopping centre owner and asset manager Parkdev, which currently owns 29% of C&R’s shares, as part of a £70m capital raise in 2009.
“Entering a relationship with Parkdev triggered a debate around the strategic direction of the business in order to secure the best valuation rating for the shares,” he says. “The three key outcomes of that board-level discussion over the course of 2009 were simplifying the business, deleveraging the business, and a focus on direct ownership.”
Scott-Barrett points out that the execution of that “blindingly obvious” strategy can be seen in all the firm’s activity from that point on. The disposal of its interests in the £570m X-Leisure vehicle bought by Land Securities in December 2012, the sale of the £267m Junction Fund to Hammerson for £254m in October 2012, and the sale of group balance sheet assets are all examples of this shift.
But will shareholders look back and ask whether they could have got better returns if C&R had chosen to sell the Mall Fund and keep the X-Leisure and Junction funds instead? Not in the case of the X-Leisure sale, which achieved “a very good price”, leaving Scott-Barrett with no reservations about the trade.
However, the wholesale disposal of the Junction Fund is clearly not how C&R would have proceeded had it been in control. But it was the inevitable result of the vehicle’s shared ownership between Hermes, C&R and what is now Ares. “At the time of the £65m capital raise in 2009, which bought in Ares, C&R would have liked to invest more, but at that stage we just didn’t have the financial resources to do so,” says Scott-Barrett.
“In my mind, that whole experience – which was a good one – was quite helpful in shaping our views around the Mall. You can get on terribly well with people and have a good relationship but, ultimately, you need control over your strategic destiny and that, clearly, is what we have been looking to achieve.”
Brushed-up balance sheet
Alongside the well-documented shedding of assets, C&R has also cleaned up its balance sheet, bringing see-through net LTV ratios down from an eye-watering 87% to a more prudent 52%, reaching the point where it was able to propose the £213m Mall Fund buy-out last month.
This included a restructuring of the vehicle’s £1.1bn CMBS in 2010 and a five-year life extension to 2017 – to be revisited in 2016.
More recent, but just as crucial, was last month’s closing of a £350m refinancing from Morgan Stanley to enable repayment of investors in the significantly reduced securitisation.
Finance director Staveley says: “Alongside the assets and the platform, what we think we also have is a very efficient capital structure and the refinancings are a very important part of that.”
The deal to buy Aviva’s 52.04% stake and Karoo’s 10.52% stake in the vehicle, which will give C&R a 91.8% holding, is being funded by available cash and a share offer to raise gross proceeds of about £165m – which Scott-Barrett says was almost unthinkable even a year ago.
“Everyone was aware that the 2016 continuation vote was there as a milestone, and in the latter part of last year, we realised that a clear majority of voters were probably minded to vote in favour of an orderly wind-down,” he says.
Scott-Barrett says this paved the way for C&R to begin to look at how it could acquire its co-investors’ interests and particularly the Aviva interest.
After considering and dismissing bringing in a partner to mount the buyout – one of the “various of our friends” that approached C&R over the past 12 months – the firm decided to go it alone. As the company’s share price climbed, the current cash and capital raise-funded buyout became possible and was agreed, and shareholder approval followed on 9 July.
Road to REIT
The team is excited about what the future holds for the new-look C&R, which will begin life as a REIT at the turn of its financial year on 31 September.
Scott-Barrett points out that, throughout the downturn, the firm’s operational skill set survived as key team members remained largely in place. And far from selling off its crown jewels, it has kept hold of the most attractive and resilient of its assets – those that offer the greatest potential to create value, such as the 428,000 sq ft and the 250,000 sq ft Mall Walthamstow.
But how much value can C&R drive from assets it has already owned for what might be considered the normal lifecycle of rival retail investors? Plenty, according ?to Bourgeois, who brandishes ?a sizeable presentation detailing the upgrades to each of the firm’s eight centres, of which he discusses four in detail (see panel, below).
Scott-Barrett is clear that this transaction does not deliver C&R’s goal to become the UK’s dominant community shopping centre owner in what is a hugely fragmented market.
“We see the prospect of consolidation as an opportunity to exploit,” he says. “It is sufficiently fragmented to allow for growth and we will pursue that in parallel with asset management.”
Scott-Barrett says the business could add three or four more schemes without having to “hugely add” to its platform, but it does not want to “be exposed to a bidding frenzy”. Instead it plans to target institutional or private owners with two or three assets.
Any suggestion that Scott-Barrett could seek a new challenge now his job as turnaround maestro has been concluded is dismissed. “I have no plans to do anything else,” he says. “This is a stepping stone, not the end of the story. It is the deal I expected to do rather sooner in my life at Capital & Regional than I was able. It has just taken a little bit longer, for well-documented reasons.”
He adds: “We can now start focusing on growth, which was the basis on which I was invited to become chief executive of C&R. We are going to make up for some lost time and I want to be part of that.”
C&R’s portfolio: Driving returns
C&R has no intention of being a passive rent collector on its journey to become the UK’s dominant community shopping centre owner. The firm’s minimum £76m capital expenditure programme and the introduction of residential at some of its London schemes is set to drive performance from its eight-strong portfolio. Executive director Mark Bourgeois talks through plans for four of the key schemes:
• The Mall, Wood Green: plans to develop an additional 40,000 sq ft supermarket on a former filling station site adjoining the 428,000 sq ft asset, possibly with residential above;
• Waterside, Lincoln (pictured): the 118,000 sq ft mall, which C&R bought in a jv with Karoo in 2011, will be repositioned as institutional stock and sold on after works to upgrade the entrance and reconfigure the space to include two new 20,000 sq ft shops (now let to Next and H&M) is complete;
• The Mall, Walthamstow: a design-led refurbishment to add tenants and drive rental growth; longer-term plans to extend the scheme’s 25-year-old entrance and include resi;
• The Mall, Camberley: opportunity for significant development at the 401,000 sq ft mall in a 29,000 sq ft extension.
bridget.oconnell@estatesgazette.com
