When Liberty International demerged its business in 2010, it wanted to give REIT investors the choice of exposure to development risk or stable income streams.
Those that opted for the “riskier” option of Capital & Counties’ Covent Garden revamp and its Earls Court development received mixed news in February’s full-year results.
For some, the numbers even raised the question as to whether the developer might be looking to bring in fresh equity to push forward its ambitious Earls Court project.
There can be no dispute that the headline figures were impressive: net asset value has surged by 22% to 249p a share on the back of a 20% rise in property values, and the firm delivered a total shareholder return of 37% in 2013.
At its largest asset, the 912,000 sq ft Covent Garden estate, the group recorded an 11% hike in like-for-like estimated rental values, while the equivalent yield fell from 5.12% to 4.7%, giving capital growth of 19.2%. The estate is now valued at £1.2bn.
Targeting rental increase
CapCo, led by chief executive Ian Hawksworth, is targeting a 29% rise in rents in Covent Garden over the three years to the end of 2016. It will achieve this by continuing its strategy of weeding out old retailers and restaurateurs and installing ritzy new brands in reconfigured space.
Last year it added Dior Beauty, Burberry Beauty Box and US burger joint Shake Shack to its role call of increasingly international tenants. Plus it is set to bring forward 90,000 sq ft of new space in its first major scheme on the WC2 estate.
The plans take its average zone A retail rents from the current equivalent £400 per sq ft to £517 per sq ft – moving it closer to Regent Street at £650 than Carnaby Street at £445.
However, analyst Martin Allen from Deutsche Bank questioned how much scope there is for further falls to a current equivalent yield of 4.7%, reflecting an initial yield of only 3%.
Operationally too, some observers found reasons to raise an eyebrow. The group reported a 44% fall in underlying earnings per share to 1p a share, largely owing to £8.3m for equity-related management compensation, which led to a 30% increase in administration expenses to £33.8m.
While CapCo’s finance director Soumen Das said this specific charge related to one-off share-based awards “that will normalise going forward”, he confirmed that because of headcount expansion this higher level of operating charges is here to stay. As a result, CapCo is expecting a similar level of underlying earnings per share again this year.
This might not please all investors – which include BlackRock with 14%, Coronation Asset Management with 9.9%, Norges Bank with 7.7% and Public Investment Corporation with 4.9% – according to Deutsche Bank’s Allen.
“With a maintained dividend per share of 1.5p, the group is effectively committing itself to paying a dividend that is uncovered by underlying EPS for two years in a row,” he said. “While I have no doubt that the group can finance this, I suspect that this approach will not be to the taste of all investors.”
Das responded: “It is fair to note the dividend is uncovered but we are very clearly a total return company and while earnings are important they are a small proportion of this.”
Covent Garden credit facility
With an operating profit of £31m shrinking to a £10m pretax profit and capital commitments of £105m coming up at its 10.1m sq ft Earls Court scheme, CapCo replenished its borrowings with a new £665m unsecured revolving credit facility on Covent Garden.
Separately, it is also in the process of negotiating a £130m facility to bring forward its 1m sq ft Lillie Square residential joint venture with the Kwoks at Earls Court. However, with group interest cover falling from 172% to 148% in the period, those looking closely have suggested it might be necessary to bring a second equity partner on board to prevent further pressure on this covenant.
Not so, according to Das, who explained that because there is no borrowing at the group level, this interest cover ratio is not really a pertinent measure. He added that the new Covent Garden facility agreed after the year end – which can be used for investment across the group – reflects cover of “more like 2.5 or 3x interest at that level”.
With liquidity in the debt markets filtering through to construction finance, it seems that CapCo is sticking with the status quo – at least for now.
bridget.o’connell@estatesgazette.com
