Capital and Counties Properties – The business model and the directors

The business model of Capital and Counties Properties, Capco (LSE:CAPC) used to be much more adventurous, with stakes in various projects around London. Now it has a 50% share in a relatively small development, Lillie Square, which is getting smaller as apartments are sold. This only accounts for 6% of its assets, leaving 94% of its holdings in or around Covent Garden.
It is focused primarily on renting out hundreds of units. It has become so much more a property holding company rather than a speculative property developer (although it does develop some of the properties when the opportunity arises) that last year it converted itself into a Real Estate Investment Trust.
As such “the Group will focus on growing rental income and achieving operating efficiencies to develop dividend distributions in line with underlying earnings” In return for some restrictions a REIT structure lowers tax (the company does not pay tax on rents received or on capital gains – but shareholders will pay tax on dividends based on those rents).
One requirement of REITs is to distribute at least 90% of net rental income to shareholders (shareholders may be subject to a 20% withholding tax).  Other restrictions include that no one property accounts for more than 40% of total value (no problem for Capco) and interest cover (ratio of profits to finance costs) must be at least 1.25.  Obviously, the loss of rent in 2020 means this last condition has been broken. But there is a get-out clause: HMRC may waive the condition in “severe financial difficulties due to unexpected circumstances” – I think Covid-19 counts.
So, the idea of a REIT is to pump rental income to shareholders in the form of dividends.
One issue that bothers me with Capco is that it reports net rental income of £57m - £75m but, in the past, has let its costs (including fat directors remuneration) mount up to more than that, thus reporting small operating profits or losses. Administrative expenses are £34 – £56m each year on top of net finance costs of £5 - £27m. As well as operating losses, it seems to regularly lose out on property revaluations and sales.
Profit and Loss Accounts
£m H1 2020 2019 2018 2017 2016 2015
Net rental income 18 61 57 67 82 75
Other income 0.3 2 3 4 5 4
Gain/loss from revaluations and sales -438 -43 39 -90 -229 +457
Impairment of other receivables 0 -21 -19 -1 -15 -12
Administration expenses -17 -43 -34 -39 -56 -52
Net finance cost -5 -14 -5 -3 -27 -11
Share of loss from JVs 0 -3 0 0 0.3 0.7
Tax -1 -1 -4 -7 +17 -3
Loss/profit from continuing operations -441 -62 37 -69 -224 457
Profit/Loss from discontinued operations 0 -246 -161 +6 0 0
Loss for the year -441 -308 -124 -63 -224 457
Share of loss to Capco SHs -441 -254 -57 -0.4 -119 431
Share of loss to minority interests 0 -54 -67 -63 -105 26These numbers do not shine a glowing light on the directors in charge of this company – no wonder the share price fell. Net asset value per share has fallen from £3.40 in 2015 to £2.36 in June 2020. But about half of the losses were on the Earl’s Court adventure rather than made in the home territory of Covent Garden.
The directors have an ambition to get “underlying a
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