Shaftesbury Capital posts maiden results following merger

The newly formed Shaftesbury Capital (SHC) boasted an “excellent start” in its maiden half-year results, and you can see why. It swung to a £799mn pre-tax profit following the former Capital & Counties’ (Capco) reverse merger with its bigger West End Reit rival Shaftesbury. 

However, the IFRS numbers were not due to improved underlying operations but the merger itself. Capco bought Shaftesbury at a 32 per cent discount to its net asset value (NAV) to become the West End's biggest landlord, with the £804mn saving made in the deal pushing the new company from an operating loss to a pre-tax profit.

Operationally, Shaftesbury Capital did post a net rental income bump, but this was thanks to the increased rent roll of the now larger company. From a margin perspective, the new portfolio is less efficient. Capco's gross margin was restated at 82.5 per cent last year. This year, Shaftesbury Capital’s gross margin was 70.8 per cent

One reason for this is vacancy. Just 2 per cent of the smaller Capco’s assets were unlet this time last year compared with 5.9 per cent for Shaftesbury Capital this year. There are some signs the new management is attempting to change this. Shaftesbury Capital signed £15.1mn worth of new leases over 220 transactions during the six-month period at 5 per cent on average above the estimated rental value. For context, Capco managed just £3.9mn worth across 25 leases this time last year, while the former Shaftesbury did not report those numbers.

An improving market for tenant demand will also help Shaftesbury Capital. On the office side, West End leasing activity has returned to pre-Covid-19 levels. In fact, according to Savills, the square footage of newly leased West End office space in the first half of this year was more than in the first half of 2020, 2021, and 2022 combined. Tenant demand for West End retail is also picking up, albeit slowly. Having fallen in every quarter from pre-Covid to the first quarter (Q1) of 2022, West End retail rents saw growth in Q2 2022, a flat Q3 and Q4 2022, and growth in Q1 this year.

The jury is still out on whether Shaftesbury Capital can make the most of this improving tenant demand and its newfound size and scale. Its current discount to NAV may look like an opportunity, but we maintain our rating. We await more evidence to see if the new management’s strategy will drive value. Hold.

Last IC View: Hold, 124p, 02 Mar 2023