Shaftesbury expects further pain

Shaftesbury (SHB) is not your average commercial landlord. It has built a near-impossible to replicate portfolio in traditionally high footfall West End locations that have a unique cultural heritage, with Carnaby Street and Covent Garden accounting for two-thirds of its 16-acre estate. Yet with London’s pubs and hospitality venues facing their third period of shutdown this year as the capital is pushed into tier three, and international travel restrictions enduring, playing host to an entertainment mecca means the group has suffered more than most peers. 

Rent collection was just 53 per cent for the six months to September and declined further following the second English lockdown to just 37 per cent for the two months to the end of November. That was substantially below the broader average for retail landlords, which improved to 72 per cent for the fourth quarter, according to data from property management platform Re-leased, from 60 per cent the prior three months. 

Chief executive Brian Bickell expects social distancing and other restrictions to continue into spring and potentially early summer, which will continue to put financial strain on occupiers. He anticipates providing rent support to tenants until at least the end of September next year. Shaftesbury has already provided rent waivers and deferrals. “We are going to be very realistic about the expectation of recovering some of those arrears,” says Mr Bickell. 

It is therefore unsurprising that management attention is focused on preserving liquidity. Following the completion of a net £294m fundraising in November, it has £367m in available resources, against £31m in capital expenditure commitments. It has secured interest cover covenant waivers for term loans and its remaining revolving credit facility until between July 2021 and January 2022. The fundraising also meant the loan-to-value ratio improved to just over 22 per cent, meaning the group has the ability to withstand a further 45 per cent fall in the value of its assets before breaching associated covenants. 

A darkening outlook was reflected in a decline in the wholly-owned portfolio of almost a fifth, which caused the group to swing to a hefty pre-tax loss. That was partially driven by a like-for-like reduction in estimated rental values (ERV) of almost 7 per cent. Unsurprisingly, retail suffered the highest fall at almost 11 per cent, followed by food, beverage and leisure, while office ERVs declined by only 1.7 per cent.

That is a story playing out across the commercial lettings industry. Retail property has suffered the highest decline in value in the wake of the pandemic. In September, shopping centres and high street retail property values were approaching the levels they fell to during the aftermath of the 2008 financial crisis, according to data from Savills, and are substantially below their five-year averages. 

Given the decline in rents attached to traditional high street locations and shopping centres, it is unsurprising that landlords are having to think harder about how to draw footfall in. Shaftesbury already has an advantage on that score, specialising in mixed-use buildings; that is where – the small amount of – development activity continues to be focused. 

Fellow retail and leisure landlord Hammerson (HMSO) is also hoping to generate value out of mixed-use developments. Earlier this month the struggling property group gained approval for the redevelopment of Bishopsgate Goodsyard site in Shoreditch, East London, as part of a joint venture with Ireland-based developer Ballymore. 

Shaftesbury did manage to attract some tenants even in the midst of the pandemic, but it has been forced to be more generous in its terms. “It’s a bit more of a tenant’s market at the moment, because there’s a lot more space in the West End at the moment and some desperate landlords,” says Mr Bickell. For Shaftesbury, the EPRA vacancy rate rose to 10.2 per cent during the year, against a 10-year pre-Covid-19 average of 2.9 per cent. 

The shares are a high risk play on vaccine progress, the recovery in footfall to London’s West End and the group’s ability to attract tenants to boost occupancy rates. Given the quality of the portfolio and the doomsday scenario reflected in the shares' heady discount versus NAV, there could be considerable re-rating potential over the longer-term. Buy.

Last IC view: Buy, 467p, 29 Oct 2020