Hello, everyone, and welcome to the Capco Interim Results presentation. My name is Victoria, and I will be coordinating your call today. If you would like to ask a question during the presentation, please press star one on your telephone keypad. When preparing to ask your question, please ensure that your line is unmuted locally. I'll now pass over to your host, Ian Hawksworth, to begin. Please go ahead.
Good morning. Welcome to Capco's Interim Results presentation. This is the agenda. I'll start with an introduction and provide an update on the proposed merger with Shaftesbury. Sital will present the financial review, and Michelle will update on Covent Garden. I'll then finish with a summary and outlook, followed by questions. Capco is a central London REIT with a portfolio of unique investments valued at GBP 2.4 billion. Our strategy focuses on value creation opportunities to generate long-term returns from investing in prime central London real estate. Our principal asset is the landmark Covent Garden estate, representing over three-quarters of our total portfolio. Capco has a 25% interest in Shaftesbury PLC, which is the owner of a mixed-use portfolio of over 600 buildings, many of which are adjacent to Covent Garden.
As you know, we recently announced a recommended all-share merger of Capco and Shaftesbury PLC to create Shaftesbury Capital PLC. We're delighted that shareholders have recognized the benefits of the merger by approving the transaction at the general meetings held on the 29th of July. We look forward to completion by the end of this year, following completion of the CMA process. The merger of Shaftesbury and Capco unites two complementary real estate portfolios under single ownership to create a GBP 5 billion portfolio comprising 2.9 million sq ft of lettable space across 670 predominantly freehold buildings with 2,000 individual units. The combined group will offer more diverse portfolio at scale with greater efficiency. We'll take the best of both companies, utilizing our combined skills, experience, relationships, and networks to deliver an even stronger operational platform.
We look ahead with confidence and aim to build on the legacy of our two companies as we create a leading central London REIT and seek to deliver sustained growth in income and a progressive dividend policy. The West End has bounced back remarkably with a sustained recovery since summer 2021, leading to a consistent improvement in footfall and spend, as well as reduced vacancy levels. Covent Garden has had a very active first half. Footfall continues to improve, and we've seen the return of international visitors over recent months. Customer sales in aggregate are ahead of 2019. There is high occupancy across the estate, excellent levels of leasing activity and rent collections are normalizing. We've recorded strong demand across all users with leasing transactions for the first half, 9% ahead of December 2021 ERV, resulting in a 5% valuation uplift.
The Elizabeth line has now opened and further enhances access to the West End. Turning to results. We're very pleased with activity and performance across the estate, which has generated considerable operational momentum. The Covent Garden valuation increased by 5% like-for-like to GBP 1.8 billion, primarily as a result of ERV growth. Overall total property value increased by 4.5% over the period to GBP 1.9 billion. The Covent Garden valuation has contributed 9 pence growth to group NTA. However, this has been offset by a reduction in our investment in Shaftesbury, resulting in EPRA NTA of 209 pence per share. We continue to maintain a strong balance sheet with low gearing and high liquidity. Underlying earnings are 0.5 pence per share, and the interim dividend for the period is 0.8 pence per share.
We continue to implement our environmental and sustainability agenda and are pleased with progress. Capco has been recognized as a climate leader in the 2022 Financial Times survey and has joined the U.N. Race to Zero. We remain focused on responsible stewardship, investing in high-quality realm, public realm, improving air quality in the area, and providing support for the wider Covent Garden community. I'll now hand over to Situl for the financial review.
Thank you, Ian. Good morning, everyone. I'll take you through the financial summary, starting with the income statement and then moving on to the balance sheet and our cash and debt positions. As you can see, underlying net rental income is GBP 28 million, up significantly against the first half of last year. This is reflective of the recovery in trading conditions, including the continued normalization of income collection. Over 95% of rent has been collected for the first half, and that trend has continued into Q3. This also includes a GBP 1.7 billion write back of the bad debt provision due to collection of historic arrears. Other income relates to the receipt of the full year dividend from Shaftesbury in February.
A further distribution of GBP 4.7 million was received in July and will, together with any further dividend income in the second half, be included in full year earnings. The increase in underlying administration costs is reflective of upward pressures highlighted earlier in the year across a number of areas, including higher payroll and share option costs. Net finance costs have been reduced to GBP 14.3 million, driven by lower gross debt following repayments of GBP 200 million during the first half. These movements taken together resulted in underlying earnings of GBP 4.3 million before the dividend income received from our investment in Shaftesbury post period end.
We are pleased to announce a dividend of GBP 0.8 pence per share to be paid as a PID, reflecting improving cash earnings and in line with the level indicated at the time of the merger announcement. This chart shows the transition from gross income of GBP 58.6 million to ERV of GBP 79.2 million on the right, highlighting the potential for revenue growth over time. There have been a number of movements in income with strong levels of leasing activity offset by some properties moving into refurbishment. In addition, certain units were vacated and are now under offer, which has contributed to the ERV uplift of 4% during the period. New leasing activity is reflected in the rent-free and step rent style. A significant proportion of the amounts here will move into gross income later in the year.
The contracted and under offer position was GBP 72.6 million and EPRA vacancy remains low at 2%. Moving on to the balance sheet. The total market value of property assets increased by 4% to GBP 1.9 billion. The like for like movements at Covent Garden was 5%, with the majority of this being due to rental growth. The equivalent yield moved in slightly to 3.82%. The valuation of Lillie Square decreased by 2% to GBP 84 million. The Shaftesbury shares are held at their thirtieth of June share price of 522 pence. This compares with a year-end share price of 615 pence and Shaftesbury's March NTA of 679 pence per share.
Net debt was stable at GBP 605 million with group leverage at 25%, whilst Covent Garden loan to value has been maintained at a low level of 20%. EPRA net assets were GBP 1.8 billion or 209 pence per share. The principal areas of cash movement relate to the operating cash inflow of GBP 7 million for the period, equivalent to the amount of the interim dividend of 0.8 pence per share, and the debt repayment of GBP 200 million. Group cash was GBP 139 million, and together with the undrawn RCF, there is access to liquidity of GBP 439 million. We have a strong capital and liquidity position and a modest level of capital commitments.
Overall group leverage and the loan to value position at Covent Garden have been maintained at low levels. The cash interest cost of debt has been reduced and currently comprises the following key elements. The Covent Garden private placement notes at under 2.8%, the exchangeable bonds at 2%, and commitment fees on undrawn facilities. In relation to the proposed merger with Shaftesbury, we have put into place a standby loan facility in order to fund any redemptions of the secured mortgage bonds. We will continue to target a resilient and flexible balance sheet with appropriate covenant headroom, diversity of sources and maturity of debt, and access to significant liquidity. To summarize, we will focus on revenue growth and conversion of that to distributable income in line with our progressive dividend policy, and we will maintain a strong balance sheet and disciplined approach to capital management.
I will now hand over to Michelle.
Thanks, Philip, and good morning, everyone. Covent Garden has had a very active first half. Footfall continued to improve as we welcome back overseas visitors and customer sales are ahead of 2019. Occupational demand has been strong across the U.K., resulting in 25 leasing transactions, securing GBP 3.9 million of income, 9% ahead of December 2021 ERV. Net rental income increased by 14% like-for-like, and ERVs are up 4% to GBP 79.2 million. There was a 5% valuation uplift in the first half, driven by ERV growth and six basis points from yield contraction. Vacancy is low at 2%, and we've had 11 in-store openings since the beginning of the year. The pedestrianized environment and al fresco scheme is performing very well, supporting Covent Garden's position as London's leading outdoor dining destination.
We continue to engage directly with the consumer and as early adopters of digital, our investment into new channels is proving fruitful. We have commenced a number of targeted capital initiatives which will improve values and enhance environmental performance. This slide demonstrates the retail Zone A rental values across the estate. We have a plan for each of our buildings and a broader curation strategy for every street. We believe that James Street, King Street, and the Royal Opera House Arcade have the ability to attract high-quality premium brands, which has been the focus for these areas. There are six other streets as well as the Market building, which enable us to deliver our strategy of introducing a broad range of brands and high-quality food and beverage, which when combined with these, allow our customers to shop and dine at every level with a richness of choice.
Growth for the first half of the year has been predominantly driven by retail leasing activity on King Street, the Market building, and James Street, along with 5% ERV growth in the F&B portfolio, reflecting the strength of trading performance in our restaurants. There is continued leasing momentum across Covent Garden. Since inception, Capco has introduced over 250 new retail and hospitality concepts, refreshing the customer line-up, which as you can see, gets better and better. Demand continues to polarize towards the best locations as seen by the activity in the first half of the year, and we are pleased to have secured demand from target categories, including sustainable, luxury, and digitally native to name a few. Luxury brand Tudor will open in the Royal Opera House Arcade, joining watch brand TAG Heuer on James Street.
House of Zamali, PVP, and Dior have agreed terms and will open in the coming months alongside WatchHouse, adding to the vibrant mix at Covent Garden. 11 new brands have recently opened, including Rails, The Chestnut Bakery, and Prasi Fine Jewelry , and Sacred Gold. Sustainable and digital brand Reformation has now opened its London flagship. Refurbishment to enable the combination of Carriage Hall and two Long Acre units, the Uniqlo new flagship continues to progress well. There is a good pipeline of leasing activity with a further GBP 3 million currently under negotiation, and we are confident we will convert this over the coming months. We have always seen the value of understanding our customer and the expectations of our visitors.
Having been early adopters of digital marketing and generating high-quality content, we are pleased with the strong levels of engagement and sustained growth in our channels, as well as the interest in conversion from our website. This allows us to speak directly to our consumers and understand key trends, which gives us confidence that our strategy is relevant to our target market. Alongside footfall and the data we capture around sales, which represents over 80% of our customers, this will help provide a rounded picture to inform our asset plan. Strategic public realm enhancements will assist in creating value from our assets, as well as better connect the consumer with our estate.
This includes schemes such as al fresco dining and pedestrianization, as well as tangible sustainability improvements, all of which are important pillars to creating a world-class estate capable of attracting the most exciting brands and concepts and engaging with contemporary consumers. We continue to invest in Covent Garden. We have now commenced a number of targeted capital initiatives, including F&B schemes on Maiden Lane and Bedford Street, a flagship F&B townhouse on King Street, and an office refurbishment on Long Acre. Combined, these represent about 50,000 sq ft and approximately GBP 25 million-GBP 30 million of CapEx over the next 18 months-24 months. These incremental investments will unlock value while enhancing the environmental performance of our buildings, and we expect to achieve a minimum of EPC rating of B on all of these initiatives.
In addition, the recent office refurbishments at 35 King Street and 5-6 Henrietta Street have now completed with a number of sublets, reaching a new office rental term of 95 GBP per sq ft. With respect to acquisitions, we are tracking the investment market closely where a number of opportunities are currently under review and where appropriate, we will look to acquire. In summary, we are pleased with the momentum across the portfolio. We're confident in the holistic approach to asset management, including leasing, investment, public realm marketing, as well as keeping close to our customers to deliver rental and income growth and maximize Covent Garden's potential for all our stakeholders. I will now hand you back to Ian. Thank you.
Looking ahead, there is strong operational momentum at Covent Garden with demand across all uses. Customer sales in aggregate are ahead of 2019 levels and footfall continues to improve, providing confidence in our leasing strategy for further rental growth. Central London is not completely insulated from the prevailing macroeconomic and political headwinds. However, the West End and our portfolio of remarkable properties have demonstrated strong resilience. We're delighted that shareholders have recognized the benefits of the merger with Shaftesbury and approved the transaction last week. We're looking forward to bringing our two companies together to form Shaftesbury Capital once the CMA process completes. The merger of Capco and Shaftesbury is a compelling strategic fit, creating an almost irreplaceable portfolio of properties in the West End.
Combination will generate both short and long-term benefits, including greater efficiencies and synergies, a more diverse portfolio with a stronger operational platform, a considerable scale, and 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 annualized gross income and ERV.
Shaftesbury Capital will be financially strong with a flexible capital structure, significant liquidity, and will benefit from enhanced access to capital. We look ahead with confidence as we aim to create a leading central London REIT and deliver cost savings, sustained growth in earnings and progressive dividends, while implementing a holistic environmental approach as custodians of these remarkable parts of London. That concludes the formal presentation. We'll now take questions from analysts. Please let the operator know if you'd like to ask a question.
Thank you. We will now start our Q&A session. If you would like to ask a question, please press star one on your telephone keypad. When preparing to ask your question, please ensure that your line is unmuted locally. Our first question comes from Osmaan Malik at UBS. Please go ahead.
Morning, guys. Thanks for the update. I guess the question is just around tenants. I guess you're seeing very limited signs of recession, but I guess broadly, there are a lot of people struggling right now. I'm just wondering to what extent are your tenants able to pass through this inflation? Are they? How are they doing? Do you have any on the watchlist? Are their margins being squeezed? Because I guess you're saying that you're slightly ahead of sales of 2019, yet there's been quite a lot of inflation since then. Just a bit more color on how your tenants are performing, please.
Morning, Osmaan. It's Ian here. Look, things on the ground are positive at Covent Garden. As you can see from the statement, we've had a very active period of leasing with those transactions ahead of ERV, and also ahead of passing rent. You know, it's a positive environment on the estate. I'm sure a number of you have been down over the summer months, but it's been very, very busy. I think moreover, the pipeline is also strong. I mean, we don't have a lot of vacancy. We only have about 2% vacancy at the moment, but there are a number of transactions in negotiation at the moment. You know, they're showing a similar sort of pattern as we've seen in the first half.
We're all obviously aware of what's going on in the macroeconomic environment, but at the moment, on the ground at Covent Garden, it's positive.
Very, very good. You mentioned around tourists are returning in increasing numbers, but could you give us a sense of where do you think we are, I guess, relative to 2019 levels? Where are tourist numbers right now?
Yeah, I think we'll be able to give a better update after the summer. I mean, we don't keep track of every customer that walks through the estate, but you know, footfall is positive. If we look at our websites and our various social media outlets, which are, you know, very busy at the moment, you can get an understanding of where some of the international visitors are coming from. It's a similar sort of pattern that we saw pre-COVID really, in that you've got quite a lot of European visitors, North American visitors and sort of the Middle East. It's quite positive, but as I say, we're still quite a long way below where we would have been pre-COVID.
As that begins to further recover, it will add to the domestic footfall, which has been very strong now for the last 12 months.
Great. Great. Not sure there's room for them, to be honest. On acquisition, I think I'm right in thinking, in saying that you didn't make acquisitions during this period. Is it because you were very much fixated on Shaftesbury, or was it more that there wasn't much coming up at a competitive price? Could you give us a bit of color on acquisitions, please?
We're tracking quite a lot of things, I'd say. I think you can see from the performance of the portfolio the last six months that we've been focused on the performance of the portfolio. We've had a very strong period of activity both in terms of leasing and promotional activities on the estate, which has sort of differentiated Covent Garden from other destinations in the West End. As in terms of the actual investment market, it is very busy in and around Covent Garden. You know, the type of assets that we look at are relatively small in terms of lot size. They tend to be freeholds. A lot of them tend to be owned by private investors. Those that have come to market, we have looked at.
There's been one or two transactions immediately adjacent to the estate, which we have felt didn't meet our return criteria. There's an office property sold on Bedford Street recently, which was at a you know what I would say is a strong price. There was some certain leaseback activity in one or two of the hospitality areas adjacent, again, at very strong pricing. It's a very active market. You know, where things do come up, there's real competition, both from domestic and international investors. Hopefully, you know, there'll be opportunity for us to deploy capital in some of the core investments that we've been tracking over the years. It's a very busy market, but we are able to acquire real estate if it meets our return criteria.
Thank you very much. That's all for me.
Thanks, Osmaan.
Thank you so much for your question, Osmaan. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. We have a follow-up question from Osmaan Malik. Please go ahead.
Firstly, just to comment, if no one's asking questions, it could be because it was a little difficult to access the telephone line. I had to try a couple of times before my line was picked up, so I'm not sure if other people have had that issue. As I still got the floor, just one more question that I just wanna clear up. Am I right in thinking for the costs involved with this potential merger, is the only thing that's being reflected in this set of results, the GBP 9 million in the admin expense, or are there other provisions that have been put through and have possibly reduced the NTA? Thank you.
Hi, Osmaan. It's Situl. You are right. The cost in relation to the transaction, which have been reflected in the first half results, is exactly GBP 9 million. You are aware the balance of the costs were set out in some detail in the transaction documents in the prospectus and scheme document and the circular. The vast majority of those will be conditional on successful completion, so they will be back-end costs. You are right, it's the GBP 9 million of non-underlying costs in the first half.
Thank you.
Thank you. Our next question comes from Maxwell Nimmo at Numis. Please go ahead. Sorry, Max, your line is open. Unfortunately, we're not receiving any audio from your line, Max. If you could please re-register your question.
Can you hear me now?
Yes, we can hear you now. Please go ahead.
Great. Sorry. Thanks for that. Yeah, just, I guess a follow-up question from Osman, just in terms of the tourists that we're starting to see come to London and how that's translating into these customer sales. Clearly probably seeing less of high-spending Asian tourists, but perhaps, as you say, due to dollar strength, a bit more of the North Americans. How's that feeding into the different types of customer sales, you know, in terms of is luxury doing? You would expect maybe a little bit worse, but
Yeah.
Some perhaps other areas doing a bit better. Just wondering if you've got a bit more color on that. That would be great. Thank you.
Yeah, of course. Hi, Max, it's Michelle here. You're right. You know, we've always taken a more of a category selection approach to the way we think about the retail leasing strategy. Some of the categories that I've mentioned, things like luxury that you've highlighted, differentiated F&B, sustainable, digital, that's really where we've had a lot of activity in the first half of the year. If we just stand back from that for a moment and look at how the sales are performing, we're very confident that we've selected the right categories because the sales that are coming out, in particular from those categories, some of which you've mentioned, are actually very, very strong. We're pleased with that performance.
When you look at that relative to 2019 levels in aggregate there, they're well ahead of 2019. In terms of the specifics as to how it breaks down between international and domestic spend, I couldn't tell you that right now. But it's certainly noticeable, you know, simply walking around the estate, and I'd be delighted to take you around any time. You can just start to see tourism building alongside the domestic and London interest that we have from existing consumers.
Yeah, Max, just to also add to that, I mean, the premium sectors are outperforming. I think you suggested that high-end is sort of not doing as well. It's actually outperforming and over-indexing against all other categories at the moment. Yeah.
Great. That's really helpful. Thanks, guys.
Thank you.
Thank you so much for your question, Max. As a final reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. At this time, there are no further questions, and I would like to pass back over to Ian for any final remarks.
Thanks for joining us this morning. If you didn't manage to ask a question for whatever reason, please do give us a call. Look forward to updating you further over the course of the next few months regarding the transaction, regarding the merger, and we're delighted to show you around the estate at any point over the summer. Pleased to say that it is busy out there. Thank you very much for your attendance today, and look forward to seeing you in due course. If we don't see you in the next few weeks, please have a great summer, and we'll see you in the autumn. Thank you very much for joining us this morning. Thank you.