While its community-centre strategy has provided a sound platform for navigating these unprecedented times, performance over the past 12 months was severely impacted by Covid-19 and the UK's extensive lockdown measures. As a result, it made no contribution to Growthpoint's distributable income for the period. However, the gradual easing of lockdown restrictions has led to a strong rebound in retail and there is more room for improvement ahead.

Performance

As a backdrop to our current performance, it is worth noting that C&R adopted a new strategy in 2017 to best position our assets to deal with the structural changes that were having an impact on the retail sector before Covid-19. Through our asset management and leasing activities, we began remixing our centres to serve their communities better by focusing on non-discretionary or needs-based retail and services, such as grocers and gyms, for instance, instead of department stores.

The pandemic accelerated the structural shift in retail and has been an excellent stress test of our strategy. Our portfolio has proved to be robust, while our assets have been shown to play a fundamental role in serving their local communities. The shopping centres that are further advanced with re-tenanting in line with our new community strategy and have more grocery and essential retail have fared better in their operational performance and softened the fall in valuations witnessed across the retail market. While we have not been immune to the impacts of Covid-19, we are in a better position than we would have been had we not already started on this journey. With hindsight, we would have liked to have moved even faster.

Our commitment to our business strategy of increasing community services in our centres and unlocking the potential for more income streams – including mixed-use through added density like our residential plans at Walthamstow – has really been reinforced by our experience during the pandemic.

After its first lockdown, the UK implemented two further national lockdowns and frequently changed regional tier restrictions between July 2020 and June 2021. During much of this time, only around a third of our tenant space was open and this had a significant impact on trading and footfall. However, our strategic shift to providing non-discretionary goods and services ensured that all our centres remained open throughout the financial year.

On another positive note, each time restrictions eased between the lockdowns, our portfolio recovered quickly. The third and longest lockdown was in place from 26 December until 12 April, with non-essential retail permitted to reopen thereafter, albeit still with capacity restrictions to manage social distancing. By the end of June, 99% of leased units across the portfolio were trading and footfall had increased from 30% of the numbers seen in 2019 to 72%. Retailers reported strong sales and consumer engagement.

The challenging environment during many long months of lockdown is reflected in our metrics, but while we have suffered, the impact on community centres has been much less than on "prime regional malls" and "city" centres. Our centres' incomes and values have also been made more resilient by more affordable rents of around 12GBP – 15GBP per square foot per year. Our assets are in popular dormitory towns and suburbs with a focus on London and the South East of the UK and our retailers are outperforming in suburban and community centres.

The government's extension of its moratorium on normal landlord-tenant legal remedies for collecting rentals to March 2022 has had a substantial impact on rental collections. Many retailers have acted responsibly, with most agreeing to temporary deferments. We also have a good core of tenants who have paid in full. From January to June 2021, we collected around 70% of rental billed and an increase is anticipated over the coming months as the economy and retail trade recover.

During FY21, we continued to support both our small and independent retailers and tried to ensure that larger, wellcapitalised retailers honoured their commitments. All the same, arrears increased and we needed to provide more for bad debt. There was an increase in company voluntary agreements (CVA) and liquidations as the impacts of the pandemic challenged retailers' balance sheets, some of which were already under pressure before the health crisis. This included Debenhams, which closed its three stores in our portfolio. Our efforts to re-let these spaces are progressing well. The portfolio occupancy remains a robust 90% and fortunately, we are seeing fewer liquidations and CVAs in 2021 and encouraging levels of leasing interest and transactions.

Our top 20 tenants are robust and do not represent an area of significant risk. A further positive is that the retailers which represent our most significant current and future tenant base are resilient and growing. Grocery and pharmacy retailers are expanding their physical footprints, as are service businesses and retailers in the value apparel and general merchandise category. We continue to benefit from our strategic focus on independent retailers. In the period between the reopening of non-essential retail in mid-April and the end of June 2021, some 75 new lettings or renewals were either finalised or are in the process of being finalised.

Our relationships with retailers are paramount and our retailer support liaison team has increased its efforts to nurture strong partnerships. Coming out of the Covid-19 environment, we have noted the rise of the "retailpreneur" and have actively been attracting and accommodating smaller independent retailers in pop-up stores and smaller kiosks. Some of these retailers are now growing in our portfolio following their initial success, showing that providing a fertile environment for start-ups can create new sources of income for us and maximise revenue. We have started leveraging underutilised space within our centres' car parks as neighbourhood hubs for providing a range of innovative, tech-enabled retail and services. Opportunities exist in last-mile logistics, dark kitchens, e-bike and e-scooter rental stations, electric vehicle charging stations and self-storage solutions.

An emphasis on "staying local" has led to more discovery and focus within local neighbourhoods. The concept of the 15-minute neighbourhood – where consumers can easily access all their day-to-day needs including food, education and outdoor space within a 15-minute walk from their homes – is increasingly coming to the fore in the UK, and our centres are benefiting because they revolve around communities and promote walkability, in alignment with our environmental, social and governance (ESG) strategy of being more sustainable and lowering our environmental impact.

The shift towards localism in the UK is especially noticeable in London, which is essentially a vast city made up of many small towns and our assets there have shown the most resilience over the past 18 months, during which our assets have lost approximately a third of their value. The rate of value decline in the first six months of 2021 slowed to half the pro rata rate experienced in 2020 and expectations are that it will slow again in the final six months of 2021. Considering that this trend would usually indicate the approach of the bottom of a valuation cycle, and keeping in mind that community centres are expected to perform better than others, we are optimistic that the decline in our property values will not continue in 2022.

We entered the financial year with new equity funds from the Growthpoint transaction and we intended to use these, in part, to pay-down debt. However, in the uncertain landscape of Covid-19, we have held off to create a buffer of cash and flexibility in the business. We will maintain this position until there is a clearer path forward and have also remained in close discussions with our banks regarding covenant waivers as a result of our decreased property values. Waivers on all our assets have been agreed until October 2021. Holding on to the funds has given us great security, but it is not the best financial option. We have carefully categorised our debt, and analysed various options and structures so that we can move forward purposefully and strategically, and we are working with the banks to find a more permanent solution as our operational environment stabilises.

 

Portfolio highlights

Although we have continued to realign our centres with their communities through proactive asset management and leasing, we have also slowed our capital spending to about a third of normal levels to protect our cash flow and balance sheet. We remain cautious about committing central cash until we have a better line of sight as to any additional Covid-19-related restrictions that could further impact the trajectory of capital values. Our capital spending in FY21 has been heavily focused on three priority projects: planning for the Walthamstow residential project, adding the grocery offering of Lidl to Luton, and undertaking the groundwork to repurpose our Debenhams stores for best use.

ESG

The past 12 months have accelerated stakeholder expectations regarding ESG issues. As part of our agenda to ensure that our assets are fit for the future, we have renewed our long-standing commitment to ESG best practice, ensuring that it will continue to serve our communities and strengthen our position, performance and perspectives. We have developed a new overarching, integrated ESG strategy for 2021 and our reporting is guided by recommendations from the TCFD.

We want our centres to be leaders in sustainable practice – underpinned by our commitment to net-zero operations – and have a positive impact on our communities. We will partner with local authorities and community groups and support local initiatives for sustainable solutions to environmental and social issues. Our ESG strategy will build on the following key areas:

To assist with our target setting, we will adhere to the United Nations' Sustainable Development Goals (SDGs) that are relevant to our business. This will define our priorities and the core activities needed to reach our targets for 2030 and help us to communicate more consistently and effectively with stakeholders about our impact and performance.

We have completed a disclosure to GRESB and plan to include our CDP performance for 2021. Using a straight-line trajectory, and a baseline of 2015, a 4% annual decrease in baseline carbon emissions is required each year to achieve carbon neutrality for scope 1 and 2 emissions by 2040. From 2015 to 2019, we invested more than GBP1m in energy efficiency projects and these have achieved 90% energy savings to date. Our focus was on scope 1 and 2 for areas that were directly under our control. In 2020, we added a focus on scope 3, which includes usage by retailers, occupiers and staff.

To support community living, our shopping centres partner with the communities we serve. Key stakeholders include:

Our FY21 community support in numbers:

C&R's diversity and inclusion programme was also launched in FY21 to ensure that we can continue our commitment to inclusion and drive innovation within the business that we believe will have a material impact on our performance.

 

Covid-19

The UK government's response to the pandemic was twofold: protecting lives by ensuring that the healthcare system and hospitals could cope and protecting livelihoods by trying to preserve jobs. At C&R, we view this as a humanitarian crisis first and then an economic one and believe that every link of the retail value chain should shoulder the burden.

The nature of our business has seen us providing a lifeline to the communities we serve by giving them access to groceries and essentials in safe environments. The importance of this has resulted in all our centres remaining open throughout the pandemic. However, a percentage of retailers were not authorised to open. Our in-house management team provided guidance and direction to all our retail customers and occupiers throughout the pandemic. We safeguarded against empty properties and supported the "Covid secure" plans of those who were able to trade. To assist the many small and independent businesses whose shops are their only source of income, we also carefully managed our capacity to shoulder a share of the burden throughout the entire period.

We worked hard to keep our shopping centres safe and remained connected to our customers by actively engaging with the local community digitally. Our detailed safety assessments and adherence to protocols and restrictions meant that none of our assets suffered forced closures or fines. In addition, our established working relationships with the local authorities and environmental health officers (EHOs) allowed us to collaborate with other stakeholders in the community and through this we were able to maintain operations and protect both our business performance and our local communities.

The Covid-19 pandemic has undoubtedly affected our work practices at our properties and our support office, but with some reconfiguration we were able to create "work bubbles" to allow those staff who wanted to return to the office to do so. We also applied measures to protect and support our centre-based teams during the pandemic and developed "management bubbles" to keep them safe.

To assist with all staff members' mental health and well-being, our "All About You" committee' focuses on ensuring that employees feel connected, engaged and supported. We also launched our Employee Voice 24/7 tool which allows employees to anonymously provide feedback to the business on any issue or topic that is important to them. All feedback submitted is reviewed and acted on by the senior leadership team.

In June 2021, we undertook an Employee Engagement Survey to understand how our employees have managed through Covid-19 and how we can support them in returning to the office. Overall, our response rate was 97%, and the overall score was 7.8 out of 10.


Prospects

Although we have learnt to be cautious when speaking about recovery, all indications are that we are moving on to surer footing. This environment is enabling more longer-term planning and a return to "more normal" business.

There is good reason to be optimistic within the UK. The advancement of our vaccination programme has put us ahead of the pack. After the pandemic pushed customers towards online shopping last year, the tide has now turned and e-commerce is not dominating retail spend. Shoppers are demonstrating that they still enjoy the physical retail experience.

We have already seen an increase in activity in the real estate capital market, shopping centre footfalls are recovering, retail sales are trending higher, retailer performance is improving and property valuations are showing real signs of stabilising. The UK economy is set to reopen almost entirely in July 2021, when capacity limits will fall away and this will create more room for improvement.

We are increasingly confident that both consumers and retailers share the need for well-located, accessible community retail and service centres with affordable occupancy costs and we have a good leasing pipeline in place.

C&R will seek to build on our strengths going forward by incorporating more independent retailers and alternative space usages in our centres, with a focus on services that are critical to our communities.