9 March 2017

Capital & Regional plc

("Capital & Regional", the "Group" or the "Company")

Full Year Results to 30 December 2016

Capital & Regional plc (LSE: CAL), the UK focused specialist REIT with a portfolio of dominant in-town community shopping centres, today announces its full year results to 30 December 2016.

Asset management strategy driving strong income growth and underpinning dividend

·      6.7% increase in Net Rental Income to £52.6 million (2015: £49.3 million)

·      Adjusted Profits¹ up 11.7% to £26.8 million (2015: £24.0 million)

·      8.7% increase in total dividend to 3.39p per share for 2016, ahead of guidance

 

Successful recycling of capital continuing into 2017

·      Acquisition of The Exchange Centre, Ilford completed on 8 March 2017 for £78.0 million, reflecting NIY of 6.70%

·      Disposal of Ipswich joint venture in February 2017 delivering IRR of over 40%

·      Disposal of The Mall, Camberley for £86.0 million at NIY of 5.9% in November 2016

·      Acquisition of The Marlowes, Hemel Hempstead and adjacent properties in February/March 2016 for £53.8 million at NIY of 7.0%

 

Delivery of asset management initiatives supported by strong occupier demand

·      Capex investment of £21.2 million on Wholly-owned assets in 2016 including:

o  £6.2 million at Maidstone  - refurbishment and TJ Hughes reconfiguration

o  £4.2 million at Wood Green - new Travelodge and extended Easygym

o  £2.9 million at Blackburn - new Ainsworth Mall entrance and units at Blackburn

·      New lettings and renewals at an average 18%² premium to previous passing rent and combined 2.1%² premium to ERV

 

Enhanced balance sheet strength and flexibility

·      £372.5 million long-term refinancing completed on 4 January 2017 locking in historically low interest rates and providing flexibility for asset recycling

·      Weighted average debt maturity, including new Ilford debt, increased from 3.6 to 7.8 years^3,4,6

·      Basic and EPRA NAV per share resilient, at 68p (2015: 72p and 71p respectively), reflecting a 1.6p reduction attributable to implementing the new long term debt package and a further 1.2p from the 1% increase in stamp duty

·      Average cost of debt after Mall refinancing and Ilford acquisition reduced to 3.26% from 3.51%⁶

 

	2016		2015	Change
See-through Net Rental Income		£52.6m	£49.3m	+6.7%
Adjusted Profit1		£26.8m	£24.0m	+11.7%
Adjusted Earnings per share		3.8p	3.4p	+11.7%
IFRS (Loss)/Profit for the period		£(4.4)m	£100.0m
Total dividend per share		3.39p	3.12p	+8.7%
Net Asset Value (NAV) per share		68p	72p	-4p
EPRA NAV per share		68p	71p	-3p
Proforma group net debt3		£328.6m	£338.1m	-£9.5m
Proforma see-through net debt to property value3,5		42%	41%	+1 p.p.
See-through net debt to property value at date of results3,4,5		46%	45%6	+1 p.p.

¹ Adjusted Profit is as defined in the Glossary and Note 1 to the Financial Statements.  It incorporates profits from operating activities and excludes revaluation of properties and financial instruments, gains or losses on disposal, exceptional items and other defined terms. We previously used 'Operating

Profit' but have amended the term to clarify that it is an adjusted measure. The only change to the definition is to incorporate tax charges or credits relating to operating activities. A reconciliation to the statutory result is provided in the Financial Review. EPRA figures and a reconciliation to EPRA EPS are shown in Note 5 to the Financial Statements.

² Wholly-owned portfolio excluding The Mall, Camberley given its disposal in November 2016.

³ Reflecting refinancing of Mall assets completed on 4 January 2017, debt maturity is assuming exercise of extension options.

⁴ Further adjusted for the Ipswich disposal completed on 17 February 2017 and Ilford acquisition completed on 8 March 2017. 

⁵ See-through net debt divided by property valuation.

⁶ 2015 reflects the Hemel Hempstead acquisitions completed in February/March 2016.

 

Commenting on the results, John Clare, Chairman said:

 

"I am pleased to report that Adjusted Profit has grown by 11.7% to £26.8 million.  This represents another strong performance in a year where the focus has shifted decisively towards boosting income from delivery of the asset management and development initiatives across the portfolio.

 

"The results have supported an increase in the dividend for the year of 8.7%, ahead of previous guidance.  Reflecting our confidence in the growth prospects of the business, underpinned by our ongoing Capex investment, the Board is reaffirming its commitment to a target of annual dividend growth in the range of      5-8% in the medium-term."

 

Hugh Scott-Barrett, CEO added:

 

"Whilst the business environment may be challenging, the prospects for Capital & Regional are exciting. Our assets have proven to be very resilient and Capex investment over the last two years has provided a strong platform for future income growth.  This, supported by the high demand we continue to see from occupiers for the attractive and affordable space in our vibrant centres, provides us with confidence in our ability to maintain and grow the dividend.

 

"We expect to benefit from the average 13.5% reduction in rateable values when they are applied next month and our portfolio of asset management initiatives continues to grow with leisure reconfigurations providing an opportunity to reposition both the Hemel Hempstead and Ilford schemes.  In addition we are looking for planning consent for the extension and residential development to be granted at Walthamstow during the year whilst the development of master plans in Luton and Wood Green are likely to be transformational for both the town centre and our shopping centres which sit at the heart of each community.

 

"Looking forward, there is no shortage of accretive opportunities both within our existing portfolio and beyond.  This underpins our confidence in the growth prospects of the business by enabling us to focus on those initiatives which generate the best returns."

 

For further information:

Capital & Regional:
Hugh Scott-Barrett, Chief Executive	Tel:  020 7932 8000
Charles Staveley, Group Finance Director
FTI Consulting:
Richard Sunderland Claire Turvey	Tel: 020 3727 1000 Email: Capreg@fticonsulting.com

Notes to editors:

About Capital & Regional plc

Capital & Regional is a UK focused specialist retail REIT with a strong track record of delivering value enhancing retail and leisure asset management opportunities across a c. £1 billion portfolio of in-town dominant community shopping centres.  Capital & Regional is listed on the main market of the London Stock Exchange and has a secondary listing on the Johannesburg Stock Exchange.   

Capital & Regional owns seven shopping centres in Blackburn, Hemel Hempstead, Ilford, Luton, Maidstone, Walthamstow and Wood Green. It also has a 20% joint venture interest in the Kingfisher Centre in Redditch.  Capital & Regional manages these assets, which comprise approximately 820 retail units and attract c. 1.7 million shopping visits each week, through its in-house expert property and asset management platform.  For further information see www.capreg.com.

Forward looking statements

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

 

Chairman's statement

Performance Overview

 

Capital & Regional's strong performance in 2016, against a background of increased economic uncertainty, has demonstrated the resilience of the business model.  This has led to an 8.7% increase in dividend to 3.39p for the full year, delivering an attractive dividend yield to shareholders.   

 

I am pleased to report that Adjusted Profit increased by 11.7% to £26.8 million.  This is an excellent result in a year where, building on the solid foundations we have successfully created over the last few years, our focus shifted decisively towards boosting income from delivery of the asset management and development initiatives across the portfolio.  The performance is all the more creditable as, during the course of the year, the BHS administration, while providing a medium term opportunity to create value and improve the tenant mix, did inevitably result in a short term loss of income.

 

NAV per share as at 30 December 2016 was 68p compared to 72p at the beginning of the year.  This reflects the impact of one-off costs associated with the successful long-term refinancing of the group's core banking arrangements, the impact of stamp duty increases as well as the modest fall in valuations since the EU referendum in June 2016. Whilst the EU referendum vote did slow investment activity, the core portfolio has proven to be very resilient with valuations adjusted for capex down only 2%, supported by a steady volume of transactional evidence for assets in London and the South East.

 

IFRS profit for the period fell from £100 million to a loss of £4.4 million.  This reflected a non-cash revaluation loss, for the reasons noted above, partially reversing the strong unrealised valuation gain recognised in 2015, together with the £11 million charge in relation to implementing the new long-term debt structure.

 

Strategy

 

Capital & Regional creates value for shareholders through a focus on increasing income and capital growth from entrepreneurial asset management initiatives on its portfolio of shopping centres.  As we have successfully demonstrated, once assets have been repositioned we seek opportunities to recycle them if we believe capital can be more effectively employed on new investments or other asset management initiatives. Our portfolio offers both resilience and significant opportunities for growth.  Our centres combine the scale and dominance of prime shopping centres with the convenience and affordability of town centres.  The portfolio is increasingly weighted to London and the South East where the demographics are strong and we see healthy demand from both retailers and leisure operators for affordable space and opportunities for alternative use remain attractive.  The uplift in rents that has been achieved from the re-let BHS space in Walthamstow and Blackburn highlights the income potential that can be unlocked from this portfolio, as well as the strong occupier demand for space within it.

 

Following a very successful investment in Lincoln, which was sold in 2014, the Company has again demonstrated its ability to generate capital gains through the redevelopment and repositioning of assets, with the sale of its Ipswich joint venture which completed in February 2017.  The centre was acquired in March 2015 and through significant investment and imaginative asset management repositioned as a vibrant leisure and retail destination, delivering an IRR of over 40% on exit.  The progress the Company is making in Hemel Hempstead on plans to transform the town centre provides another opportunity to grow both income and create attractive capital gains as does Ilford, following the acquisition of The Exchange centre in March 2017. 

 

We believe that the key characteristics of the underlying assets within the whole portfolio leave us well positioned to sustainably grow earnings further.

 

Responsible Business

 

We have reduced our energy consumption by 5% over the course of this year and our continuous year-on-year improvement has been recognised by the award of Best in Carbon Management at the Carbon Trust Awards, ranking Capital & Regional first amongst 150 companies in the UK.  Our expertise not only helps reduce our environmental impact but also enables us to deliver measurable savings to our occupiers through a very competitive service charge.

 

We have also intensified the training of our operational teams to ensure staff are prepared for any potential threat.  Our centre teams have implemented scenario planning and conducted exercises in conjunction with local emergency services.

The award of a 10^th consecutive ROSPA Gold award underlines our continued focus on health and occupational safety standards across the shopping centres.

 

Dividend

 

For 2016, the Board is proposing a final dividend of 1.77 pence per share taking the full-year dividend to 3.39 pence per share, representing an increase on 2015 of 8.7%.  This is ahead of guidance, which targets annual dividend growth in the range of 5-8% in the medium-term.  The Board is reaffirming its commitment to this guidance reflecting its confidence in the income growth prospects for the business underpinned by our asset management programme.

 

People

 

As in previous years, I would like to thank all who work at Capital & Regional for their hard work during the year.  I would, in particular, like to celebrate the efforts of those in the shopping centres who have become Customer Hosts and who have done so much to welcome our visitors and who have selflessly acted to improve the quality of the service we provide to our shoppers.  I would also like to congratulate all Snozone staff whose efforts in promoting customer service led to being shortlisted alongside Manchester United and Twickenham Stadium for the School Travel Award.

 

The Board

 

I am delighted to welcome Guillaume Poitrinal who joined the Board on 1 November 2016.  Guillaume is one of the most well regarded figures in European real estate and brings with him a wealth of highly relevant experience and knowledge of the shopping centre sector which will be of great value to the company. 

 

Mark Bourgeois stepped down from the Board on 1 November 2016 after 18 years at Capital & Regional.  On behalf of the Board, I would like to thank Mark for his hard work and significant contribution to the Group's recent success and we wish him well for the future.

 

The Board has focused much attention on senior management succession planning during the course of the year, seeking to balance the introduction of new talent with continuity.  Both Hugh Scott-Barrett and I have indicated a desire to step down from our current roles in 2017 after, respectively, nine and seven years of service.  I am therefore delighted that Lawrence Hutchings, who is a highly experienced and well regarded retail real estate professional, will join in June 2017 as Chief Executive and Hugh Scott-Barrett will take up the role of Non-Executive Chairman, at which point I will retire.

 

I would like to thank my Board colleagues for all their support and guidance over the last seven years.  I am pleased to leave the Company in such a strong position; it has been a privilege to have been Chairman of Capital & Regional during a time of such significant progress.

 

 

 

John Clare CBE

Chairman

 

Chief Executive's Statement

 

Income Growth Drives Operational Performance

 

Net Rental Income (NRI) within the wholly-owned portfolio grew by 6.6%, from £47.3 million to £50.4 million.  Stripping out the impact of the Hemel acquisitions, and the disposal of Camberley, underlying growth in wholly-owned NRI was 1.2%.  Adjusted for the impact of the BHS administration, NRI grew by approximately 2.4%.  This, combined with tight control over administrative expenses, underpins the strong improvement in Adjusted Profit of 11.7%.  While this partially reflects the return from the Capex spend to date the full benefit of the investment to date is not likely to be seen until 2017 and 2018.

 

Leasing activity has been robust during the course of the year.  New lettings and lease renewals within the wholly-owned portfolio excluding Camberley aggregated £5.6 million and were agreed at rents 2.1% ahead of ERV.  Critically, they were also ahead of previous passing rent by approximately 18%.

 

The letting of BHS space at Walthamstow highlights the potential for income growth from within the existing portfolio.  Lettings to Lidl (18,000 sq ft) and The Gym (15,000 sq ft) will generate a 40% uplift in headline rent on the relevant Walthamstow unit even before the letting of the remaining space, where there is strong demand, is taken into account.

 

This reinforces our belief that our centres offer attractive and affordable space to retailers and leisure operators alike.

 

Delivery of Asset Management Initiatives

 

The Group has spent £21.2 million of capex on wholly-owned assets during the year, including:

 

·      £6.2 million at Maidstone - scheme refurbishment and TJ Hughes reconfiguration

·      £4.2 million at Wood Green - new Travelodge and extended Easygym

·      £2.9 million at Blackburn -  the opening of the new Ainsworth Mall entrance and units

 

The redevelopment of the Buttermarket Centre, Ipswich, has been completed on time and on budget facilitating the sale post year end.  This was a complex construction project involving the creation of an Empire Cinema on the two upper levels surrounded by a suite of nine new restaurants including Coast to Coast, Prezzo, Wagamama and Cosy Club.  The joint venture invested capex of £25.1 million to transform the scheme from a substantially empty shopping centre to a thriving leisure-led destination.

 

Recycling for Growth

 

The sale of The Mall, Camberley, for £86 million, representing a Net Initial Yield of 5.9%, was completed in November 2016.  The transaction crystallised an IRR of 10% based on the acquisition price at the time of Capital & Regional's buy-out of The Mall Fund in 2014.  It has also raised funds to invest in more accretive investments both in our existing portfolio and by way of acquisition.  The Camberley sale followed the earlier acquisitions of the Marlowes Shopping Centre in Hemel Hempstead and the adjacent Edmonds Parade and Fareham House properties for combined consideration of £53.8 million.  The consolidated scheme presents the Group with the opportunity to reposition the Hemel Hempstead town centre.

 

Similarly, the sale shortly after year-end of our joint venture interest in The Buttermarket Centre, Ipswich at a net equivalent yield of 5.9%, realising an expected £13.5 million to the Group, gave us additional fire power for investment.  We quickly put this to use with the acquisition of The Exchange Centre, Ilford, for £78 million, representing a net initial yield of 6.7%, which completed on 8 March 2017.  The Exchange Centre, Ilford, dominates retail in the town centre and offers great potential for leisure and residential development given its Crossrail link which is expected to open in 2019.  It also further strengthens the London and South East bias of our portfolio.

 

The Group has a track record of acquiring assets at attractive prices and of recycling capital once innovative and entrepreneurial asset management initiatives have been completed.  This is not just about capital discipline but about creating fuel for growth by achieving very attractive returns.

 

Enhanced Balance Sheet Strength and Flexibility

 

On 4 January 2017 the Group completed the refinancing of its five wholly-owned Mall properties by entering into three new debt facilities totalling £372.5 million with a weighted average maturity of 7.8 years, rising to 8.8 years if the extension options are exercised.

 

Interest has been fixed enabling us to lock into the historically low interest rates, resulting in an all-in cost on these new facilities of 3.27%.   In addition, the refinancing has also enabled the Group to diversify its sources of funding and increase the quantum of capex funding.   Critically, the facilities also provide flexibility for asset recycling.  We believe that these significant benefits offset the one-off charge of £11.0 million associated with the early redemption of the existing facilities that was recognised in the year.

 

Outlook

 

Whilst the business environment may be challenging, the prospects for Capital & Regional are exciting. Our assets have proven to be very resilient and Capex investment over the last two years has provided a strong platform for future income and dividend growth.  Our portfolio of asset management initiatives continues to grow with leisure reconfigurations providing an opportunity to reposition both the Hemel and Ilford schemes.  We are looking for planning consent for the extension and residential development to be granted at Walthamstow during the year whilst the development of master plans in Luton and Wood Green are likely to be transformational for both the town centre and our shopping centres which sit at the heart of each community.

 

"Looking forward, there is no shortage of accretive opportunities both within our existing portfolio and beyond.  This underpins our confidence in the growth prospects of the business by enabling us to focus on those initiatives which generate the best returns."

 

 

Operating Review

The Capital & Regional business model is founded upon the acquisition, ownership and management of dominant community shopping centres which are convenient for shoppers and generate strong footfall with high levels of repeat visits. These are primarily located in strong south east locations and offer retailers and leisure operators high quality space in thriving schemes at affordable levels of occupational cost. Every scheme in the Group's portfolio is subjected to intensive asset management from the Group's specialist in-house asset management team which identifies opportunities to invest capital expenditure in a highly accretive manner.

The value of the Group's platform is emphasised by the strong operational performance in the period with lettings and lease renewals combined being above ERV, occupancy being maintained at high levels, together with the successful asset recycling that has taken place.

Wholly-owned	2016	2015	Change
As at 30 December:
Contracted rent (like-for-like)	£57.5m	£56.6m1	+1.6%
Passing rent (like-for-like)	£53.0m	£53.7m1	-1.3%
Occupancy (like-for-like)	95.4%	96.7%1	-1.3p.p.
Portfolio value	£794.1m	£822.7m	-3.5%
For the year ended 30 December:
NRI	£50.4m	£47.3m	+6.6%
NRI (like-for-like)	£42.8m	£42.3m	+1.2%
Footfall - versus prior year	-0.2%	-0.6%
Footfall - versus national index	+1.9 p.p	+1.1 p.p.
Total Property return	4.1%	16.0%	-11.9 p.p

¹ Hemel Hempstead as at acquisition used for 2015.

Contracted rent increased by 1.6% on a like-for-like basis, driven by a strong letting performance despite the impact of the BHS administration which initially reduced both passing and contracted rent by £1.3 million. By 30 December 2016 £0.6 million of income had been contracted in relation to the BHS space and a further £0.3 million has been signed since the year end. In total at 30 December 2016, there was £2.7 million of contracted rent in a rent free period of which £2.6 million will convert to passing rent in 2017.  There is also a further £1.8 million of contracted rent where the income will commence once the works to create or convert the units has completed.   

Occupancy at 30 December 2016 reflects the impact of the BHS administration where the units involved closed during the second half of the year. Whilst as noted below good progress has been made reletting the units the impact of BHS on occupancy at the year end accounted for 1.2 percentage points of the decrease.

 

New lettings, renewals and rent reviews

Wholly-Owned Centres excluding Camberley	Year ended 30 December 2016
Number of new lettings	58
Rent from new lettings (£m)	£4.0m
Comparison to ERV1(%)	+2.3%
Renewals settled	24
Revised rent (£m)	£1.6m
Comparison to ERV P1 (%)	+1.7%
Lettings and renewals compared to previous rent	+18%
Rent reviews settled	24
Revised passing rent (£m)	£3.3m
Uplift to previous rent (£m)	-
Comparison to ERV (%)	+3.5%

¹ For lettings and renewals with a term of five years or longer which did not include a turnover rent element 

There has been strong leasing activity across the wholly-owned portfolio reflecting the affordability of the schemes, with £4.0 million of rental income achieved through new lettings and a further £1.6 million of rent on renewals settled.

For renewals, we also consider the net effective rent taking into account the valuers assumptions on tenant incentives. The net effective rent achieved on all lease renewals which were for a five year term or greater and contained no element of turnover rent was, at 96.5% of ERV, 3.4% higher than assumed by the Group's valuers.

 

Creating opportunity from adversity following the BHS Administration

 

The value of the Group's in-house team is perfectly illustrated by the progress made in reletting the BHS units, resulting in the delivery of significant income increases at Blackburn and Walthamstow over the rent paid by BHS.

 

At Blackburn, the entire store has been re-let. Wilko have taken a 10 year lease of a 24,500 sq ft store and Sports Direct, who were a subtenant of BHS, have become a direct tenant. This has resulted in a £73,000 uplift in income. Handover of the store to Wilko is scheduled for May 2017.

 

In Walthamstow, the Group took a surrender of the BHS lease from the administrator and a 25 year letting has been completed with Lidl on 18,000 sq ft on the ground floor since the year end. On the first floor, The Gym has signed a 15 year lease over 15,000 sq ft and a Turkish restaurant has agreed a 15 year lease on a 6,800 sq ft ground floor unit. There are three further retail units totalling 5,400 sq ft which are still available. The Group's aim is to increase rental income at the units in this centre by approximately £500,000 more than was receivable from BHS and the deals referred to above will secure 79% of that targeted income.  The estimated capital expenditure to achieve this is £4.1 million, of which 11.5% will be met by the headlessor, London Borough of Waltham Forest, resulting in a net incremental income return to the Group of 12%.

 

In Maidstone, the Group is pursuing a number of asset management strategies ranging from a single letting of the whole store to scenarios where the store is subdivided for multiple occupiers.

 

Other leasing activity

 

Momentum on other lettings has been equally strong driven by the affordability and quality of the space at our schemes. Occupancy costs in our schemes are significantly lower than regional prime centres. Our service charges are extremely competitive, an overall £4.92 per sq ft which is below Jones Lang LaSalle's most recent OSCAR benchmark of £5.67 per sq ft.  Average rent is around £15 per sq ft and total occupancy cost ratio is estimated at 12.6%¹. Across the portfolio, the 2017 business rates revaluation will result in an average decrease in rateable value of 13.5% for the six wholly-owned schemes held at 30 December 2016, with four of the schemes showing significant declines and the two London schemes at Walthamstow and Wood Green increasing by 7.1% and 15.0% respectively.

 

Further progress has been made in increasing the leisure element in our schemes with 13 new leisure lettings completing with a rent of £0.8 million. The increasing leisure offer, which now stands at over 10% of the portfolio compared to approximately 7% at the end of 2014, attracts a wider customer base and increases dwell time. 

 

Highlights of letting activity as a whole include:

 

Blackburn - in addition to Wilko, lettings were made to Costa, Burger King and Muffin Break totalling 6,500 sq ft on terms of at least 10 years.

 

Luton - Holland & Barrett took a new 3,700 sq ft store whilst JD Sports upsized to a 5,500 sq ft unit and Schuh took a 3,400 sq ft unit, all on 10 year terms. Lettings were also completed on a cluster of five new catering offers, further improving the leisure offering at the centre.

 

Maidstone - TJ Hughes has taken a 10 year lease of a 33,000 sq ft unit and Poundland has completed a 10 year lease on a 6,400 sq ft store.  Holland & Barrett have relocated and upsized to 5,000 sq ft and several other occupiers including Greggs, McDonalds and Pizza Hut have refitted following on from the general refurbishment of the scheme that completed in the summer of 2016.

 

Walthamstow - in addition to the The Gym and Lidl lettings, Holland & Barrett has taken a 4,400 sq ft unit on a 10 year term and Shoe Zone and Select each have signed for five years for a 3,300 sq ft store.

 

Wood Green - lettings have been made to Choice and Footlocker on 10 year terms for units of 5,900 and 3,800 sq ft respectively. Pret has taken a 15 year lease on 2,500 sq ft at the entrance to the scheme. Since the year end the letting to Five Guys of a new 3,750 sq ft restaurant has been secured and we are progressing discussions with a national retailer to expand into unused basement space.  We have also received an attractive offer from a national food retailer for a 7,500 sq ft convenience store.

 

¹ Estimate based on Blackburn, Luton, Maidstone, Walthamstow, Wood Green.  See Glossary for further details.

 

 

Administrations and Insolvency

 

Wholly-owned Centres	Year ended 30 December 2016	Year ended 30 December 2015	6 months ended 30 June 2016
Administrations (units)	18	9	12
Passing rent (£m)	2.4	0.5	1.9

 

 

In 2015, on a like-for-like basis, there were nine administrations with passing rent of £0.5 million, compared to £2.4 million of passing rent in 2016, which was largely due to three administrations: AJ Levy Group where seven units were affected, BHS which accounted for three units and Ed's Diner which affected two units. Eight of the affected units have been re-let at an increased level of rent. At 30 December 2016, there were five units with passing rent of £0.5 million which were affected by tenant administration where the tenant was continuing to trade. 

 

There are four units impacted by the proposed Creditors Voluntary Arrangement submitted by Blue Inc in early March 2017 with a combined rent of £0.2 million.  There were two other units impacted by administration in 2017 up to the date of these results with a combined rent of less than £0.1 million.

 

Income security has been strengthened by the improved tenant mix, in particular, through greater diversification, given the increased levels of leisure use within our schemes.

 

Capital expenditure and developments

 

The Group's £65 million Capex plan was announced with The Mall acquisition in 2014. £21.2 million was spent in 2016, bringing the total spend to date to £36.1 million.  The largest element of the unspent funds relates to the Walthamstow development. The projected income return on these projects in total is over 10%.

 

Spending in 2016 included:

 

£2.9 million at Blackburn relating to the reconfiguration to create a 15,000 sq ft gym and three retail units in the new entrance opposite the redeveloped bus station.

 

£6.2 million at Maidstone including the refurbishment and works to secure the letting of the 33,000 sq ft anchor store to T J Hughes which has reported strong trading since opening.

 

£4.2 million at Wood Green including the conversion of offices into a 78 bedroom Travelodge and the extension of the gym. The 23,000 sq ft gym was handed over in March 2016 and the Travelodge works are progressing well with handover expected by August 2017. In addition Deichmann opened following the amalgamation of two units to create a new 5,800 sq ft unit.

 

A new multi-year capital expenditure plan has now been formulated which incorporates the remainder of the £65 million and planned spending on the recent acquisitions in Hemel Hempstead and Ilford. This totals £80 million at an anticipated average income return of around 10%, with at least £30 million expected to be spent in 2017. This emphasises the accretive opportunities inherent within the portfolio owing to their location and dominance.  The £80 million includes:

 

·      £13 million repositioning of The Marlowes, Hemel Hempstead

·      £8.5 million net repositioning investment in The Exchange, Ilford

·      £4.5 million conversion of the Market Hall at Luton into 50,000 sq ft of MSU space.

·      £3.5 million for the reconfiguration and break-up of the former BHS store at Walthamstow

 

The Group continues to progress its plans to extend Walthamstow to deliver 92,000 sq ft of new retail space and over 400 residential units. An agreement has been reached with the London Borough of Waltham Forest within which the headlease will be extended from 71 years to 250 years. Public consultation has taken place and a planning application is expected to be submitted in March 2017 with consent expected by the end of the year.

 

Footfall, car park income and trade index

Footfall at the Group's wholly-owned shopping centres outperformed the national footfall index by 1.9 percentage points during 2016, registering a small decline of 0.2% versus a national ShopperTrak index decline of 2.1%.

 

Car park usage was 5.5 million visits, resulting in gross car park income increasing by 1.3% with tariff increases more than offsetting a small decline in usage.

 

Our in-house C&R trade index estimated retailer sales to be 0.1% higher than 2015, indicating resilient levels of trading across the portfolio.

 

Short term lettings

Short term lettings are used to maximise the vibrancy of our schemes, to minimise the costs of vacant units, and to provide opportunities for new and growing retailers to experience our schemes. At 30 December 2016, on a like-for-like basis, there were 59 temporary lettings (2015: 74) for a net rent of £0.8 million (2015: £0.4 million) as compared to an ERV of £2.5 million (2015:£ 3.9 million). With increasing levels of occupancy, the Group will look to convert these lettings onto permanent terms with higher rents.

 

Investment portfolio performance

The property level total returns for the wholly-owned portfolio, as held at 30 December 2016, are set out below:

 

	Property valuation	Capital return	Total return	Initial yield	Equivalent yield
30 December 2016	£m	%	%	%	%
Wholly-owned portfolio	794.1	-1.9	4.1	6.0	6.2

 

Acquisitions and Disposals

The Group continually assesses the returns available from the schemes within its portfolio and actively seeks to recycle capital into assets or projects which offer more accretive opportunities for the Group's in-house asset management team to generate income and value.

 

Disposals

The Mall, Camberley

The Group completed the sale of The Mall, Camberley to Surrey Heath Borough Council on 28 October 2016 for £86.0 million at a net initial yield of 5.9%.  This compares to the value of £75.0 million, and a net initial yield of 7.18%, when Capital & Regional bought out The Mall Fund in 2014.  Allowing for the capital expenditure invested and income returned since then this represents an IRR of 10%.

 

Buttermarket Centre, Ipswich

The Group sold its 50% interest in The Buttermarket Centre in Ipswich to National Grid Pension Fund on 17 February 2017.  This is expected to realise £13.5 million to the Group after repayment of related debt, delivering an IRR of over 40%. The initial consideration received was £9.8 million with the expected balance of £3.7 million, contingent on the completion of the letting programme. The impact of the sale is reflected in the year end numbers as the investment was reclassified as an asset held for sale at 30 December 2016.

 

The centre was acquired in March 2015 through a 50:50 joint venture with Drum Property Group for £9.6 million at a Net Initial Yield of 8.5%. A £25 million reconfiguration and modernisation created a 235,000 sq ft retail and leisure complex. The retail space has been consolidated onto the ground floor and is anchored by TK Maxx and New Look, while Empire Cinemas has taken a lease of a 12 screen cinema on the upper floors, as part of a leisure suite of nine restaurant units including Prezzo, Wagamama, Byron Burgers and Coast to Coast and a Pure Gym.

 

Acquisitions

The Marlowes, Hemel Hempstead

On 5 February 2016 the Group completed the acquisition of The Marlowes Shopping Centre for £35.5 million, representing an initial yield of 7.0%, with the vendor funding the replacement of the glazed atrium roof as part of the transaction. The Group subsequently acquired the adjacent Edmonds Parade and Fareham House properties for a total of £18.3 million. 

Together these provide the Group with substantial control of the retail heart of a strong south east town with the potential to be fundamentally repositioned as an attractive shopping and leisure destination, following on from the significant local authority investment which has already benefitted the town.  The Group is planning to invest capital expenditure of around £13 million in the next three years with a targeted income return in the high single digits.

 

The Exchange Centre, Ilford

On 8 March 2017 the Group completed the acquisition of The Exchange Centre, Ilford for £78 million, representing a net initial yield of 6.70%.

The Exchange Centre is located opposite Ilford train station which will be rebuilt ahead of the opening of Crossrail, which is planned for 2019.  It has three trading levels with 77 units providing 300,000 sq ft of lettable space and a multi-storey car park with over 1,000 spaces.  The scheme is anchored by Debenhams and Marks & Spencer with other retailers including H&M, Next, River Island, Sports Direct, TK Maxx and Wilko.  The Group is planning to make a net invest of approximately £8.5 million of capital expenditure in the scheme, focused primarily on transforming the leisure offer and crystallising value from the significant residential opportunity.

 

Redditch

The Group has a 20% interest in, and is the property and asset manager of, The Kingfisher Centre, Redditch. This scheme was also affected by the BHS insolvency in 2016 but following the year end the entire 46,000 sq ft store has been re-let to The Range on a 10 year term. Other significant lettings include the letting of space that had never previously been let, to a soft play operator, 360 Play, on a 14 year lease.  Contracted income marginally decreased by £0.1 million to £12.2 million at 30 December 2016.

Occupancy at 30 December 2016 was 93.3% (2015: 96.7%) as a result of the BHS and Ed's Diner insolvencies which occurred in the second half of the year and represented 3.7% occupancy. Both of these units have now been re-let.

 

Snozone

In an increasingly competitive market place, Snozone produced another strong performance returning profits of £1.4 million. With the roll out of its mobile slopes and the launch of a Disability Snow school and Education programme, Snozone continues to enhance its core offering and explore new opportunities to innovate.

 

Financial review

 

	2016	2015	Change
Profitability
Net Rental Income	£52.6m	£49.3m	+6.7%
Adjusted Profit1	£26.8m	£24.0m	+11.7%
Adjusted Earnings per share	3.8p	3.4p	+11.7%
IFRS (Loss)/Profit for the period	£(4.4)m	£100.0m
EPRA cost ratio (excluding vacancy costs)	25.8%	26.4%	-60bps
Net Administrative Expenses to Gross Rent	13.6%	14.8%	-120bps
Investment returns
Net Asset Value (NAV) per share	68p	72p	-4p
EPRA NAV per share	68p	71p	-3p
Dividend per share	3.39p	3.12p	+8.7%
Dividend pay-out	88.7%	91.1%
Return on equity	(0.9)%	23.5%
Financing2
Proforma group net debt	£328.6m	£338.1m	-£9.5m
Proforma see-through net debt	£354.0m	£355.7m	-£1.7m
Adjusted for the 2017 sale of Ipswich and acquisition of Ilford:
Proforma see-through net debt to property value3,4	46%	45%	+1p.p.
Proforma average debt maturity4,5	7.8 years	3.6 years	+4.2 years
Proforma cost of debt4,6	3.26%	3.51%	-25bps

 

¹ Adjusted Profit is as defined in the Glossary and Note 1 to the Financial Statements. A reconciliation to the statutory result is provided further below. EPRA figures and a reconciliation to EPRA EPS are shown in Note 5 to the Financial Statements.

² 2016 adjusted for refinancing of the Mall assets completed on 4 January 2017.

³ See-through net debt divided by property valuation.

⁴ 2015 adjusted to reflect Hemel Hempstead acquisitions completed in February/March 2016.

⁵ As at date of results, assuming exercise of all extension options.

⁶ Assuming RCF fully drawn.

 

The above results are discussed more fully in the following pages.

 

Profitability

Components of Adjusted Profit and reconciliation to IFRS Profit

Amounts in £m		Year to 30 December     2016		Year to 30 December 2015
Net rental income
Wholly-owned assets (see analysis on next page)			50.4		47.3
Kingfisher, Redditch1			1.7		1.8
Buttermarket, Ipswich2			0.5		0.2
			52.6		49.3
Net interest (see analysis on page 14)			(20.3)		(19.5)
Snozone profit (indoor ski operation)			1.4		1.4
Central operating costs net of external fees			(6.9)		(7.2)
Adjusted Profit		26.8			24.0
Adjusted Earnings per share (pence)3			3.8p		3.4p
Reconciliation of Adjusted Profit to statutory result
Adjusted Profit		26.8			24.0
Property revaluation (including Deferred Tax)		(14.5)			74.8
(Loss)/profit on disposals		(2.6)			2.5
Loss on financial instruments		(2.5)			(0.8)
Refinancing costs		(11.0)			-
Other items4		(0.6)			(0.5)
(Loss)/profit for the period		(4.4)			100.0

¹ See note 7d to the Financial Statements.

² See note 7e to the Financial Statements.

³ EPRA figures and a reconciliation to EPRA EPS are shown in Note 5 to the Financial Statements.

⁴ Includes £0.5 million for the non-cash accounting charge in respect of share-based payments (2015: £0.6 million)

 

Adjusted Profit and Adjusted Earnings per share increased 11.7% reflecting good operational performance in the period together with the positive impact from the Hemel Hempstead acquisitions, net of the sale of The Mall, Camberley.

Included within Loss for the period is the £11.0 million of refinancing costs triggered by serving notice on the existing debt facility on the five Mall assets on 28 December 2016 (see below for further details).  They comprise £7.6 million of fixed rate loan redemption costs and the non-cash write off of the £3.4 million unamortised financing costs at 30 December 2016. 

Central operating costs net of external fees has improved by £0.3 million.  We expect our continued emphasis on reducing costs and improving efficiency to deliver a cost saving of at least £0.5 million per annum for 2017.

Wholly-owned assets Net rental income

Further detail on the components of Net rental income for the core wholly-owned portfolio is provided below.  Included within wholly-owned for 2015 were the results for Blackburn, Camberley, Luton, Maidstone, Walthamstow and Wood Green. 2016 includes Camberley until its disposal on 11 November 2016 and the contributions from The Marlowes, Hemel Hempstead acquired on 5 February 2017 as well as the adjacent Edmonds Parade and Fareham House properties on 26 February 2016 and 18 March 2016 respectively.  Net rental income attributable to Camberley in 2016 was £4.2 million (2015: £5.0 million) and the Hemel Hempstead assets were £3.5 million (2015: nil).

Gross rental income increased by 7.8% to £62.0 million and Net rental income by 6.6% to £50.4 million. 

Amounts in £m		2016			2015
Rental income			51.0		47.7
Car park income			8.5		7.4
Ancillary income			2.5		2.4
Gross rental income			62.0		57.5
Service charge and void costs			(4.4)		(3.6)
Bad debt			(0.8)		(0.5)
External Operator/Fund Manager fees			(0.1)		(0.1)
Other property expenses	Car park costs		(3.4)		(3.1)
	Head leases		(3.1)		(3.1)
	IFRS head lease adjustment1		3.6		3.6
	Letting and rent review fees		(1.2)		(1.2)
	Administration expenses		(0.5)		(0.7)
	Repairs and maintenance		-		(0.2)
	Other costs		(1.7)		(1.3)
			(6.3)		(6.0)
Net rental income			50.4		47.3

 

¹ Notional interest charge with offsetting opposite and materially equal credit within net interest.

 

Net Asset Value

1.6 pence of the fall in Net Asset Value per share was due to the costs associated with putting in place the new long-term debt on the five Mall assets.  A further 1.2 pence was due to the 1% increase in stamp duty during the year and 0.9 pence from the fall in property values.

 

Financing

Net interest on a see-through basis

Amounts in £m		Year to 30 December       2016		Year to 30 December 2015
Wholly-owned assets
Net Interest on loans			14.0		13.0
Amortisation of refinancing costs			1.4		1.3
Notional interest charge on head leases1			3.6		3.6
			19.0		17.9
Kingfisher, Redditch			0.8		0.8
Buttermarket, Ipswich			0.1		-
Central			0.4		0.8
Net Group interest		20.3			19.5

 

¹ Notional interest charge with offsetting opposite and materially equal credit within other property operating expenses.

The increase in interest on Wholly-owned assets is a consequence of interest incurred on the Hemel loan of £1.1 million since acquisition.  It is expected that total debt costs will be at least £0.5 million lower for 2017, benefiting from the refinancing of the Mall assets that completed on 4 January 2017 and as detailed further below.

Proforma see-through debt

The following analysis is provided on a proforma basis to reflect the refinancing of the debt on the five Mall assets that completed on 4 January 2017.  This is essentially the year end position as the notice to repay the existing debt had been served on 28 December 2016 and the redemption costs were reflected as a charge in 2016 profit.  The table has been further extended to show the impact of the sale of the Buttermarket Ipswich on 17 February 2017 and acquisition of The Exchange Centre, Ilford on 8 March 2017 to reflect the position at the time of reporting.

Group share	DebtP1	Cash2	Net debt	Loan to ValueP3	Net debt to valueP3	Average interest rate	Fixed	Duration to loan expiry	Duration with extensions
30 December 2016	£m	£m	£m	%	%	%	%	Years	Years
Mall assets	362.5	(17.3)	345.2	49	47	3.27	100	7.8	8.8
Hemel Hempstead	26.9	(1.9)	25.0	49	46	3.32	100	4.0	6.0
Group RCF	-	(41.6)	(41.6)	n/a	n/a	3.52	-	2.4	2.4
On balance sheet debt	389.4	(60.8)	328.6
Buttermarket Ipswich	9.7	(0.1)	9.6	36	36	3.51	-	-	-
Kingfisher Redditch	16.8	(0.8)	16.0	55	52	3.66	100	2.3	2.3
Off balance sheet debt	26.5	(0.9)	25.6
Proforma see-through debt	415.9	(61.7)	354.2	49	42
Adjusted for the sale of Ipswich and acquisition of Ilford:
Ipswich disposal	(9.7)	(9.7)	(19.4)
Ilford acquisition	39.0	40.3	79.3	50	50	2.76	100	7.0	7.0
See-through debt at time of results	445.2	(31.1)	414.1	49	46	3.26	94	7.0	7.8

¹ Excluding unamortised issue costs.

² Excluding cash beneficially owned by tenants.

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

 

Our target range for net debt to property value remains 40%-50% with an intention to bring this to the lower end of that range in the medium term.

 

As noted above the existing debt on the Mall assets was refinanced on 4 January 2017 and the following commentary therefore reflects the new arrangements:

 

Blackburn, Maidstone, Walthamstow and Wood Green

These were refinanced with a £165 million 10 year loan with Teachers Insurance and Annuity Association of America with a one year extension option, and a £100 million bank facility of five years with two one year extension options with The Royal Bank of Scotland plc.  £90 million of this latter facility has been drawn down with a further £10 million available to fund future capex. 

The weighted average maturity of the two new facilities is 8.1 years, rising to 9.5 years if the extension options are assumed to be exercised.  Interest on the new facilities has been fixed resulting in an overall blended rate of 3.33%. 

Luton

 

As part of the refinancing The Mall Luton was transferred out of The Mall Limited Partnership which holds the other four assets.  It is now held in a separate structure which allowed us to fund this asset separately and provides greater future flexibility.  Luton was refinanced with a £107.5 million seven year loan with Wells Fargo Bank International Unlimited.  Interest on the new facility has been fixed at 3.14%. 

 

The Hemel Hempstead debt facility

 

The £26.9 million Hemel Hempstead loan, which was drawn in two tranches in February and March 2016, was for an initial five year term with two one year extension options available at the end of each of the first two years, the first of which was agreed subsequent to 30 December 2016.  Interest is fixed via two seven year swaps resulting in a total interest rate of 3.32%.

 

The Exchange Ilford debt facility

 

The £39 million facility with DekaBank Deutsche Girozentrale was drawn on completion of the acquisition of The Exchange Centre, Ilford on 8 March 2017.  The debt has been 100% hedged for the full term using interest rate swaps resulting in an all-in cost of debt of 2.76%.

Group Revolving Credit Facility (RCF)

Interest on the facility is charged at a margin of 3.0% per annum above LIBOR. A non-utilisation fee of 1.5% is payable.  No amount was drawn at year end. 

Covenants

The Group and its associates and joint ventures were compliant with their banking and debt covenants at   30 December 2016.  Further details are disclosed in the 'covenant information' section at the end of this report.

 

Going Concern

 

Under the UK Corporate Governance Code, the Board needs to report whether the business is a going concern. In considering this requirement, the Directors have taken into account the following:

·      The Group's latest rolling forecast in particular the cash flows, borrowings and undrawn facilities;

·      The headroom under the Group's financial covenants; 

·      Options for recycling capital and or alternative means of additional financing for funding new investments; and

·      The principal Group risks that could impact on the Group's liquidity and solvency over the next 12 months and/or threaten the Group's business model and capital adequacy.

The Group's risks and risk management processes are set out on the following pages.

 

Having due regard to these matters and after making appropriate enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Therefore, the Board continues to adopt the going concern basis in preparing the financial statements.

 

South African secondary listing

 

At 30 December 2016, 58,253,524 of the Company's shares were held on the South African register representing 8.29% of the total shares in issue.

 

Dividend

The Board is proposing a final dividend of 1.77 pence per share, taking the full-year dividend to 3.39 pence per share, representing an 8.7% increase from 2015.  The Board has re-affirmed its guidance that the company will target year on year dividend growth in the range of 5% to 8% per annum over the medium term.  

 

The key dates in relation to the payment of the 2016 final dividend are:

 

·      Confirmation of ZAR equivalent dividend and PID percentage             13 April 2017

·      Last day to trade on Johannesburg Stock Exchange (JSE)               24 April 2017

·      Shares trade ex-dividend on the JSE                                               25 April 2017

·      Shares trade ex-dividend on the London Stock Exchange (LSE)        27 April 2017

·      Record date for LSE and JSE                                                         28 April 2017

·      AGM                                                                                              9 May 2017

·      Dividend payment date                                                                   16 May 2017

 

The amount to be paid as a PID will be confirmed in the announcement on 13 April 2017.  If a Scrip dividend alternative is offered the deadline for submission of valid election forms will be 28 April 2017.  South African shareholders are advised that the final dividend will be regarded as a foreign dividend.  Further details relating to Withholding Tax for shareholders on the South African register will be provided within the announcement detailing the currency conversion rate on 13 April 2017.  Share certificates on the South African register may not be dematerialised or rematerialised between 25 April 2017 and 28 April 2017, both dates inclusive.  Transfers between the UK and South African registers may not take place between 13 April 2017 and 28 April 2017, both dates inclusive.

 

 

Charles Staveley

Group Finance Director

 

Managing Risk

Risk management process

There are a number of risks and uncertainties which could have a material impact on the Group's future performance and could cause results to differ significantly from expectations.

Ahead of every half year and year end the Group undertakes a comprehensive risk and controls review involving interviews with relevant management teams.  The output of this process is an updated risk map and internal control matrix for each component of the business which is then aggregated into a Group risk map and matrix which is reviewed by executive management, the Audit Committee and the Board and forms the basis for the disclosures made below.  This process clearly outlines the principal risks, considers their potential impact on the business, the likelihood of them occurring and the actions being taken to manage, and the individual(s) responsible for managing, those risks to the desired level.

This risk matrix is also used in performing our annual assessment of the material financial, operational and compliance controls that mitigate the key risks identified.  Each control is assessed or tested for evidence of its effectiveness.  The review concluded that all such material controls were operating effectively during 2016.

Principal risks at 30 December 2016

Following the risk reviews carried out at 30 June 2016 and 30 December 2016 two risks have been added to the list of principal Group risks to the list disclosed in the 2015 Annual Report being property valuation and business disruption from a major incident.  Property valuation reflects the risk that given the relatively low current volume of investment market activity a lack of relevant comparable transactional evidence could increase the level of subjectivity in property valuations and widen the range of possible outcomes.  Business disruption from a major incident reflects the potential impact to operations and future trading of a significant event such as a terrorist attack. 

Otherwise it was concluded that the nature of the Group's risks had not significantly changed, although the ongoing economic and political uncertainty in the UK, most prominently due to the result of the EU referendum, has increased some of the wider market risks that the Group is subject to. 

 

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

 

 

Risk	Impact	Mitigation
Property risks
Property investment market risks
·  Weakening economic conditions and poor sentiment in commercial real estate markets could lead to low investor demand and an adverse movement in valuation	· Small changes in property market yields can have a significant effect on valuation · Impact of leverage could magnify the effect on the Group's net assets	·  Monitoring of indicators of market direction and forward planning of investment decisions ·  Review of debt levels and consideration of strategies to reduce if relevant
Impact of the economic environment
·  Tenant insolvency or distress ·  Prolonged downturn in tenant demand and pressure on rent levels	· Tenant failures and reduced tenant demand could adversely affect rental income, lease incentive, void costs, cash and ultimately property valuation	·  Large, diversified tenant base ·  Review of tenant covenants before new leases signed ·  Long-term leases and active credit control process ·  Good relationships with, and active management of, tenants ·  Void management though temporary lettings and other mitigation strategies
Valuation risk
·  Lack of relevant transactional evidence	· Property valuations increasingly subjective and open to a wider range of possible outcomes	·  Use of experienced, external valuers who understand the specific properties ·  Use of more than one valuer ·  Valuations reviewed by internal valuation experts and key assumptions challenged
Threat from the internet
·  The trend towards online shopping may adversely impact consumer footfall in shopping centres	· A change in consumer shopping habits towards online purchasing and delivery may reduce footfall and therefore potentially reduce tenant demand and the levels of rents which can be achieved	·  Strong location and dominance of shopping centres (portfolio is weighted to London and South East England) ·  Strength of the community shopping experience ·  Increasing provision of 'Click & Collect' within our centres ·  Digital marketing initiatives Monitoring of footfall for evidence of negative trends ·  Monitoring of retail trends and shopping behaviour
Concentration and scale risk
·  By having a less diversified portfolio the business is more exposed to specific tenants or types of tenant	· Tenant failures could have a greater impact on rental income · Reduced purchasing power could impact the ability to drive economies of scale and the feasibility of certain investment decisions regarding the operating platform	·  Regular monitoring of retail environment and performance of key tenants ·  Maintaining flexibility in operating platform ·  Further diversification considered through acquisitions or joint ventures
Competition risk
·  The threat to the Group's property assets of competing in town and out of town retail and leisure schemes	· Competing schemes may reduce footfall and reduce tenant demand for space and the levels of rents which can be achieved	·  Monitoring of new planning proposals ·  Close relationships with local councils and willingness to support town centres ·  Continued investment in schemes to ensure relevance ·  Investment in traditional and digital marketing
Business disruption from a major incident
·  Major incident takes place	· Financial loss if unable to trade or impacts upon shopper footfall	·  Trained operational personnel at all sites and documented major incident procedures ·  Updated operational procedures reflecting current threats and major incident testing run ·  Regular liaison with the police ·  Key IT applications hosted offsite ·  Insurance maintained
Development risk
·  Delays or other issues may occur to capital expenditure and development projects	· May lead to increased cost and reputational damage · Planned value may not be realised	·  Approval process for new developments ·  Use of experienced project co-ordinators and external consultants with regular monitoring and Executive Committee oversight
Funding and treasury risks
Liquidity and funding
·  Inability to fund the business or to refinance existing debt on economic terms when needed	· Inability to meet financial obligations when due · Limitation on financial and operational flexibility · Cost of financing could be prohibitive	·  Refinancing of debt on the Mall assets completed shortly after year end  improved liquidity and long-term security ·  Ensuring that there are significant undrawn facilities ·  Efficient treasury management and forecasting with regular reporting to the Board ·  Option of asset sales if necessary
Covenant compliance risks
·  Breach of any loan covenants causing default on debt and possible accelerated maturity	· Unremedied breaches can trigger demand for immediate repayment of loan	·  Regular monitoring and projections of liquidity, gearing and covenant compliance ·  Review of future cash flows and predicted valuations to ensure sufficient headroom
Interest rate exposure risks
·  Exposure to rising or falling interest rates	· If interest rates rise and are unhedged, the cost of debt facilities can rise and ICR covenants could be broken · Hedging transactions used by the Group to minimise interest rate risk may limit gains, result in losses or have other adverse consequences	·  Regular monitoring of the performance of derivative contracts and corrective action taken where necessary ·  Use of alternative hedges such as caps
Other risks
Execution of business plan
·  Failure to execute business plan in line with internal and external expectations	· Potential loss of income or value resulting in lower cash flow and property valuation · Reputational damage negatively impacting investor market perception	·  Management of projects and the individual shopping centres by experienced and skilled professionals ·  Strong relationships with retailers and contractors/suppliers ·  Ongoing monitoring of performance against plan and key milestones
Property acquisition/disposal strategy
·  Exposure to risks around overpayment for acquisitions ·  Portfolio not effectively managed through the investment cycle, with sales and de-leveraging at the appropriate time	· Overpayment may result in acquisitions not delivering forecast returns · The Group may not be able to take advantage of investment opportunities as they arise · Covenants may move adversely when the cycle changes	·  Regular monitoring of the property market and the use of professional advisers ·  Impact of cycle reflected in business planning
Tax risks
·  Exposure to non-compliance with the REIT regime and changes in tax legislation or the interpretation of tax legislation ·  Potential exposure to tax liabilities in respect of transactions undertaken where the tax authorities disagree with the tax treatment adopted	· Tax related liabilities and other losses could arise	·  Monitoring of REIT compliance ·  Expert advice taken on tax positions and other regulations ·  Maintenance of a regular dialogue with the tax authorities
Regulation risks
·  Exposure to changes in existing or forthcoming property related or corporate regulation	· Failure to comply could result in financial penalties, loss of business or credibility	·  Management undertake training to keep aware of regulatory changes ·  Expert advice taken on complex regulatory matters
Loss of key management
·  Dependence of the Group's business on the skills of a small number of key individuals	· Loss of key individuals or an inability to attract new employees with the appropriate expertise could reduce effectiveness	·  Key management are paid market salaries and offered competitive incentive packages to ensure their retention ·  New LTIP awards made in 2016 ·  Succession planning for key positions is undertaken as evidenced by CEO transition announced post year end ·  Performance evaluation, training and development programmes are in place to maintain and enhance the quality of staff
Historic transactions
·  Historic sales have included vendor warranties and indemnities and as such, the Group has potential exposure to future claims from the purchaser	· Warranty and indemnity related liabilities and other losses could arise	·  Use of professional advisers to achieve properly negotiated agreements in terms of scope, extent of financial liability and timeframe ·  Monitoring of ongoing exposure

 

 

 

Unaudited preliminary consolidated income statement

For the year to 30 December 2016

 

			2016		2015
	Note		£m		£m
Continuing operations
Revenue	3		87.2		80.7
Cost of sales			(32.5)		(29.1)
Gross profit			54.7		51.6
Administrative costs			(10.9)		(10.8)
Share of profit in associates and joint ventures	7a		0.3		7.8
(Loss)/profit on revaluation of investment properties			(14.2)		68.0
Other gains and losses			(1.8)		0.2
Profit on ordinary activities before financing			28.1		116.8
Finance income			0.4		0.7
Finance costs			(33.0)		(19.9)
(Loss)/profit before tax			(4.5)		97.6
Tax credit	4a		0.1		-
(Loss)/profit for the year from continuing operations			(4.4)		97.6
Discontinued operations
Profit for the year from discontinued operations	13		-		2.4
(Loss)/profit for the year			(4.4)		100.0
Continuing operations
Basic earnings per share	5a		(0.6)p		13.9p
Diluted earnings per share	5a		(0.6)p		13.7p
Continuing and discontinued operations
Basic earnings per share	5a		(0.6)p		14.3p
Diluted earnings per share	5a		(0.6)p		14.0p
EPRA earnings per share
EPRA basic earnings per share	5a		3.7p		3.4p
EPRA diluted earnings per share	5a		3.7p		3.3p

 

 

 

Unaudited preliminary consolidated statement of comprehensive income

For the year to 30 December 2016

 

			2016		2015
			£m		£m
(Loss)/profit for the year			(4.4)		100.0
Other comprehensive income:
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translation of foreign operations			-		(1.6)
Gain on a hedge of a net investment taken to equity			-		-
Total items that that may be reclassified subsequently to profit or loss:			-		(1.6)
Total comprehensive income for the year			(4.4)		98.4

 

There are no items in other comprehensive income that may not be reclassified to income statement.

 

Profit for the year and total comprehensive income is all attributable to equity holders of the parent.

 

The EPRA measures used throughout this report are industry best practice performance measures established by the European Public Real Estate Association.  They are defined in the Glossary to these financial statements.  EPRA Earnings and EPRA EPS are shown in Note 5 to these financial statements. EPRA net assets and EPRA triple net assets are shown in Note 11 to these financial statements.

 

 

 

Unaudited preliminary consolidated balance sheet

At 30 December 2016

 

			2016		2015
	Note		£m		£m
Non-current assets
Investment properties	6		838.5		870.0
Plant and equipment			0.9		0.6
Fixed asset investments	13		1.9		1.6
Receivables			14.3		15.9
Investment in associates	7b		13.9		15.9
Investment in joint ventures	7c		-		11.7
Total non-current assets			869.5		915.7
Current assets
Receivables			13.4		13.7
Cash and cash equivalents	8		49.1		49.9
Assets classified as held for sale	7c		13.9		-
Total current assets			76.4		63.6
Total assets	2b		945.9		979.3
Current liabilities
Bank loans	9		(334.6)		-
Trade and other payables			(41.3)		(33.7)
Liabilities directly associated with assets held for sale	7c		(0.4)		-
			(376.3)		(33.7)
Net current (liabilities)/assets			(299.9)		29.9
Non-current liabilities
Bank loans	9		(26.2)		(374.9)
Other payables			(4.4)		(2.1)
Obligations under finance leases			(61.4)		(65.4)
Total non-current liabilities			(92.0)		(442.4)
Total liabilities	2b		(468.3)		(476.1)
Net assets			477.6		503.2
Equity
Share capital			7.0		7.0
Share premium			158.2		157.2
Other reserves			60.3		60.3
Capital redemption reserve			4.4		4.4
Own shares held			(0.4)		(0.6)
Retained earnings			248.1		274.9
Equity shareholders' funds			477.6		503.2
Basic net assets per share	11		£0.68		£0.72
EPRA triple net assets per share	11		£0.67		£0.70
EPRA net assets per share	11		£0.68		£0.71

 

 

 

Unaudited preliminary consolidated statement of changes in equity

For the year to 30 December 2016

 

										Other reserves
												Net
											Foreign	investment	Capital	Own
			Share				Share		Merger		currency	hedging	redemption	shares		Retained		Total
			capital				Premium1		Reserve2		Reserve1	Reserve1	Reserve1	Reserve3		Earnings4		Equity
			£m				£m		£m		£m	£m	£m	£m		£m		£m
Balance at 30 December 2014						7.0	157.2		60.3		1.6	(0.4)	4.4	(0.6)		189.5		419.0
Profit for the year						-	-		-		-	-	-	-		100.0		100.0
Other comprehensive loss for the year						-	-		-		(1.6)	-	-	-		-		(1.6)
							-		-			-
Total comprehensive income for the year						-	-		-		(1.6)	-	-	-		100.0		98.4
Credit to equity for equity-settled share-based payments						-	-		-		-	-	-	-		0.6		0.6
Dividends paid (Note 14)						-	-		-		-	-	-	-		(14.7)		(14.7)
Other movements						-	-		-		-	0.4	-	-		(0.5)		(0.1)
Balance at 30 December 2015						7.0	157.2		60.3		-	-	4.4	(0.6)		274.9		503.2
Loss for the year						-	-		-		-	-	-	-		(4.4)		(4.4)
Other comprehensive income for the year						-	-		-		-	-	-	-		-		-
Total comprehensive loss for the year						-	-		-		-	-	-	-		(4.4)		(4.4)
									-		-	-	-
Credit to equity for equity-settled share-based payments						-	-		-		-	-	-	-		0.5		0.5
Dividends paid (Note 14)						-	-		-		-	-	-	-		(21.7)		(21.7)
Shares issued, net of costs						-	1.0		-		-	-	-	-		(1.0)		-
Other movements						-	-		-		-	-	-	0.2		(0.2)		-
											-	-	-
Balance at 30 December 2016						7.0	158.2		60.3		-	-	4.4	(0.4)		248.1		477.6

 

Notes:

1           These reserves are not distributable.

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

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

4           The Company has determined what is realised and unrealised in accordance with the guidance provided by ICAEW TECH 2/10 and the requirements of UK law. In accordance with UK Companies Act 2006 s831(2), a public company may make a distribution only if, after giving effect to such distribution, the amount of its net assets is not less than the aggregate of its called up share capital and non-distributable reserves as shown in the relevant accounts.

 

Unaudited preliminary consolidated cash flow statement

For the year to 30 December 2016

 

				2016		2015
		Note		£m		£m
Operating activities
Net cash from operations		10		41.1		29.9
Distributions received from associates		7b		0.5		0.2
Distributions received from fixed asset investments (including German B-note)				4.2		-
Interest paid				(14.6)		(13.4)
Interest received				0.1		0.4
Income taxes received				-		0.9
Cash flows from operating activities				31.3		18.0
Investing activities
Disposal of German joint venture		13		-		42.3
Disposal of The Mall, Camberley				85.7		-
Other disposals				0.7		-
Acquisitions in Hemel Hempstead				(56.6)		-
Purchase of plant and equipment				(0.5)		(0.2)
Capital expenditure on investment properties				(20.6)		(11.4)
Investment in joint ventures				-		(6.4)
Settlement of forward foreign exchange contract				-		2.0
Cash flows from investing activities				8.7		26.3
Financing activities
Dividends paid (net of Scrip)		14		(21.7)		(13.2)
Bank loans drawn down				26.9		-
Bank loans repaid				(45.4)		(23.4)
Loan arrangement costs				(0.6)		(0.4)
Cash flows from financing activities				(40.8)		(37.0)
Net (decrease)/increase in cash and cash equivalents				(0.8)		7.3
Cash and cash equivalents at the beginning of the year				49.9		42.6
Cash and cash equivalents at the end of the year		8		49.1		49.9
Notes to the unaudited preliminary financial statements
For the year to 30 December 2016

 

1 Significant Accounting Policies

 

General information

Capital & Regional plc is a company domiciled and incorporated in the United Kingdom under the Companies Act 2006.  The financial information set out in the announcement does not constitute the Company's statutory financial statements for the years ended 30 December 2016 or 2015.  The financial information for the year ended 30 December 2015 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies.  The auditor reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.  The audit of the statutory accounts for the year ended 30 December 2016 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the company's annual general meeting.

 

Basis of accounting

These unaudited preliminary consolidated annual financial statements of Capital & Regional plc are prepared in accordance with IFRSs as adopted by the European Union. 

 

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that comply with IFRSs in March 2017.

 

Accounting developments and changes

In the current financial year the Group has adopted Annual Improvements to the IFRSs 2010-2012 Cycle (various standards).  None of these standards have impacted the Group's reporting.  Other than this the accounting policies applied by the Company were the same as in the prior year.

 

Going concern

The financial statements have been prepared on the going concern basis. Details on going concern are provided within the Financial Review.

 

Operating segments

The Group's reportable segments under IFRS 8 are Wholly-owned assets, Other UK Shopping Centres, Snozone and Group/Central.  Other UK Shopping Centres consists of the Group's share in the Kingfisher Limited Partnership (Redditch) and, until its reclassification as held for sale on 30 December 2016, Buttermarket Ipswich Limited.  Group/Central includes external management fee income, Group overheads incurred by Capital & Regional Property Management, Capital & Regional plc and other subsidiaries and the interest expense on the Group's central borrowing facility. 

 

Wholly-owned assets and Other UK Shopping Centres derive their revenue from the rental of investment and trading properties. The Snozone and Group/Central segments derive their revenue from the operation of indoor ski slopes and the management of property respectively. The split of revenue between these classifications satisfies the requirement of IFRS 8 to report revenues from different products and services. Depreciation and charges in respect of share-based payments represent the only significant non-cash expenses.

 

The Group's interests in the assets, liabilities and profit or loss of its associates and joint ventures are proportionately consolidated and are also shown on a see-through basis as this is how they are reported to the Board of directors. There are no differences between the measurements of the segments' assets, liabilities and profit or loss as they are reported to the Board of directors and their presentation under the Group's accounting policies.

 

Adjusted Profit

Adjusted Profit is the total of Contribution from Wholly-owned assets and the Group's joint ventures and associates, the profit from Snozone and property management fees less central costs (including interest, excluding non-cash charges in respect of share-based payments) after tax.  Adjusted Profit excludes revaluation of properties, profit or loss on disposal of properties or investments, gains or losses on financial instruments and exceptional one-off items.  Results from Discontinued Operations are included up until the point of disposal or reclassification as held for sale.

 

A reconciliation of Adjusted Profit to the statutory result is provided in Note 2a and, on a per share basis, in Note 5, where EPRA earnings figures are also provided.