Shaftesbury Capital posts profit in first annual results

Shaftesbury Capital (SHC) – now the biggest West End landlord – had much to celebrate in its first annual results since its formation through the reverse takeover of Shaftesbury by Capital & Counties. The merger and the stabilisation of interest rates boosted its valuation and IFRS earnings. On an underlying basis, earnings per share (EPS) were also up, leading to a jump in the dividend from 2.5p per share to 3.15p per share.

Being bigger helps, but so does the West End's revival. The landlord signed 526 lease deals over the period, accounting for £37mn of rent, at 10 per cent ahead of the estimated rental value. If this keeps up, underlying EPS and dividends will keep rising, with consensus forecasts predicting shareholder payouts will hit 3.41p per share by the end of 2024, 3.86p by 2025 and 4.61p by 2026.

There are some teething problems post-merger. The portfolio's vacancy remains higher than pre-merger, up to 4.9 per cent from 2.5 per cent, as the better-let Capco portfolio combined with the more empty Shaftesbury portfolio. Gross margin is also down from 76.9 per cent to 72.7 per cent, partly as a result of that increased vacancy making the assets less efficient. The landlord says several leases are "under offer", pushing the vacancy rate down to 2.1 per cent when they complete. Or rather, if they complete, as no letting is guaranteed. This would improve the margin further. Then again, the correct gross margin is hardly wasteful.

The other big post-merger question is where further growth will come from. Lots of development in an area as tight as the West End is not an option. The merged company has shown it can grow by acquisition, and there are other assets around the West End it could snap up, but its niche means its options are limited. Even if it could find something it likes, it would need to finance buying it with higher-rate debt.

Still, all Reits face similar problems, and, in the short term, Shaftesbury's growth looks likely to come from rent and valuation increases. Net asset value (NAV) has surged post-merger and has risen per share, meaning investors who held the stock pre-merger now have something with more equity value. The NAV is still far from 2019 levels, but the share value prices this in and then some. Indeed, with property values recovering and leasing activity picking up, we do not see SHC's discount to NAV as justified. We see this as an opportunity to buy in and invest in a slice of the West End. Buy.

Last IC view: Hold, 120p, 3 Aug 2023