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Good day, and welcome to the Covivio 2021 Q3 Activity Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Paul Arkwright. Please go ahead, sir.
Thank you, and good evening, everyone. Thanks for being with us on this call. So let's say this last quarter has been very active for us on all fronts. And it shows the positive dynamics that we see across all of our activities. So let's start by offices. I'm on Page 4 of the slide show. So last quarter I've shown a catchup in the letting activity in all of our markets, as you can see in this slide. Obviously, we are not delivered of 2019, but we clearly see an improvement since summer. And we benefit from this improvement at Covivio level, as you can see on Page 5 of the slide show. So far in 2021, we have signed 134,000 square meters of new lettings. This is more than what we have signed for the whole year of 2019 or 2018. More than half of this number has been signed in the last quarter only. Our development has been a strong driver for those lettings. And more importantly for us is our capacity to continue to attract large and successful companies. As you see on this slide, like Moncler, Samsung, LVMH, Snam, et cetera. All this demonstrates the quality of our locations and of our buildings. So moving to Slide 6. We stress the example of Moncler, Moncler is one of the biggest successes of the Q3. We have signed with them predating in our symbiosis area in Milan for 38,000 square meters with a 15-year lease. This project, which will create close to 30% value creation is another success of this area. As a reminder, since the delivery in 2018 for Fastweb, so the first delivery of this area. Average rent has increased by 30%. And in 2021, we have signed 2 new headquarters in Symbiosis with Moncler and with Snam for a total amount of 57,000 square meters. For the future, we still have one building left to be developed that you see the red -- as red one on this slide. And then we will continue with the development of [indiscernible], a land bank in the north of Symbiosis, which will become the future [indiscernible] , and on which we can build 70,000 square meters of offices. So our development pipeline is a success, as I said, and it's a key growth driver for us. On Page 7. We delivered this quarter 2 new offices in new CBD and in Milan Symbiosis. 2 buildings fully fitted to the way tenants are using offices today and close to be fully red. That means that the 30% expected value creation is almost secured today. At the same time, in addition to Moncler headquarter, we committed 2 new projects in the CBD of Paris and Berlin. So first one, Madrid St Lazare will host our future headquarter. It illustrates all the value creation potential of our Parisian portfolio. So second project is in [indiscernible], the center of Berlin. It's a redevelopment of an asset which is nearby other residential buildings that we own in our portfolio. And we expect for those 2 buildings 30% value creations. Let's say, finally, on office activity and moving to Page 8. We also accelerated our transformation of obsolete offices into residential in France. We have committed 3 new projects in the last quarter. The main one is in Bordeaux Lac and will enable us to develop 45,000 square meters of new residential unit. So at the end of September, we now have EUR 312 million committed development pipeline of build-to-sell projects with a target of more than 10% margin. So let's take to sum up on offices. As a reminder of our strategy, it is made on 4 pillars: focus on central location, adapt and pursue our development pipeline policy, push on services and transform our obsolete offices into residential with additional value creation. So performance of this quarter fully illustrates the success of this strategy. Let's move now to German Residential. First on the market, Page 10. This market is brilliant, as you all know, lack of offer is pushing prices and rents up. And we believe the outcome of the general election is positive as it insists on further need to build more residential and to improve the quality of the housing stocks and to reduce the delay on building permit process. Moving to our portfolio, Page 11. Our performance in this context is strong. we benefit from a first 4% like-for-like growth with especially very good performance in Berlin and in North Rhine-Westphalia (NRW). The cancellation of the Mietendeckel has a positive effect, rather limited 50 bps. But more importantly for me is our CapEx program. That is a strong driver of the performance of this like-for-like growth, and it represents 45% of the like-for-like growth in German Residential. So low CapEx numbers that you see in Berlin is explained by the Mietendeckel effect of last year. With the cancellation of this law, we can relaunch our CapEx program, and this will drive future rental growth in Berlin as well as as it improves the quality of our portfolio. Growth potential results on value on German Residential and moving to Page 12. You all have seen, I'm sure the AKU's transaction. This is another illustration of how low is our portfolio current valuation and how high is the potential for growth. As a reminder, our portfolio in Berlin is valued EUR 3,200 per square meter and in Hamburg EUR 3,800 per square meter. This is without mentioning the spread between bloc and unit value of 60%, as you see on this slide. Then on hotel activity. This activity is also benefiting from a better environment. As you can see on the market figures that you -- we put on Slide 14. Remember what we told last July, as soon as restrictions are lifted, hotel occupancy is recovering rapidly. This is what we see since summer. So chart on the top of the slide shows the average occupancy rate of the hotels in Europe. It's significantly improving since May. And more interestingly, September occupancy is even better than what we have seen in July or in August. This, for sure, drives RevPAR up. And we are still far from 2019, but we see a real catch-up since July. Interestingly, the example of Paris. You see on the bottom right side of this slide, RevPAR has increased by 63% between early September and the first week of October. This is, for us, very encouraging. So what does that mean for our portfolio? And I'm on Page 15. Let's say, our variable leases and management contracts fully benefited from this recovery. They are mainly in France and Germany, and they are up now year-to-date by 16% for the leases and by 10% for the operating properties. As a reminder, they were strongly decreasing in H1. And in Q3 only, we see a plus 100% in leases and plus close to 400% year-on-year growth in operating properties on the EBITDA. On fixed leases, the like-for-like evolution of the rent is impacted by the rent-free period that we gave to the tenant last year, but the collection rate is very good at 93%. So good activity in our revenues in Q3. It is also the case for our disposal plan. And I'm moving to Page 17. We are well on track to reach our target of more than EUR 600 million of disposals for the year, as you can see on this slide, with plus EUR 110 million of new agreements. We are now at EUR 514 million of disposals with an average margin of plus 3% versus the last appraisal values. Offices represent the main part of the disposal plan with a total of EUR 376 million. That means also that since the beginning of 2020, we have sold EUR 1.1 billion of offices with an average margin of plus 5%. All that is coming to be reinvested in our development pipeline with a lot of value creation. Our positive performance of the quarter is also related to ESG strategy. You can see on Page 19 that we have been awarded a high score of 90 out of 100 by GRESB, increasing by 5 points in 1 year. This level make us one of the leader in our category it also illustrates the quality of our ESG policy and our ambition on this front. As a reminder, we announced last July, a new carbon trajectory with a reduction by 40% of our carbon emissions by 2040 and a target of the net 0 the same year. So on the 9 months revenues, Page 21, what does all this means for our revenues. Let's say that thanks to the very good performance of the quarter, we have improved significantly the like-for-like performance of our revenues, and we start the recovery. Office revenues are still impacted by the releases of last year and does not take into account the strong letting activity year-to-date, which is also mainly in the development pipeline. We expect, nevertheless, an improvement in the French office portfolio like-for-like growth to start next quarter. This delayed effect on offices is more than balanced by the strong performance in German Residential and the start of the recovery in the hotels. So -- and moving also to Page 23, following the better performance of our hotel activity than what we expected, we now target more than EUR 400 million of EPRA earnings for 2021. So before going through your questions, just one word on the agenda you'll see on Page 24. We will host our Capital Market Day in Paris in December 13. It will be in person, and we really hope that we will see you all there in Paris on December 13. Thanks very much, and I'm now ready to answer to your questions.
[Operator Instructions] And we'll now take our first question from Celine [indiscernible] with Barclays.
Paul, I've got 2 questions for you. The first one is on the leasing activity. Can you comment on the churns of the lease you signed on Schonberg recently? Did you get the EUR 400 per square meter rent you initially targeted? And what kind of incentive level it was? The second question would be on the office pipeline. I see that you committed 2 new development in the CBD for which you see 30% value creation. Does this number take into account 10% to 15% increase in construction costs in this sector has recently seen?
Yes. Celine, Thank you for those questions. So on [indiscernible] , we are very close to the EUR 400 million, slightly below, and with around 20% rent-free period. Most importantly, for me is that we have done the first step. We saw the person creating on this with a very good signature, which launched the letting process on this project. Regarding your question on the 2 new developments. So yes, we launched 2 developments in the CBDs on those. We see inflation in the construction costs. Part of this inflation is considered to be, let's say, temporary. And our development costs include a buffer on construction cost, around 10%. So we are comfortable on the fact that we will be able to reach the 30% value creation even with an increase in construction cost.
[Operator Instructions] We'll take our next question from Florent Laroche-Joubert with ODDO BHF.
I would have maybe 3 questions. So the first one, so would it be possible to have an update on your letting activities for offices in Germany? My second question would be on the recovery of the activity in hotels? So would it be possible to have maybe more colors on what are your expectations in terms of recovery of the activity for the next quarter then maybe the next year? And my third question would be on the disposals. So what could we expect for next year? So do you ambition to have also very ambitious disposal program?
Thank you, Florent. So on Germany [ feat ], I would say this is where we have seen level of letting activity lower than in Italy and in France. The occupancy has increased slightly versus H1 2021, but not enough. We have -- as a reminder, we have 3 main vacancy challenges on this portfolio, one asset in Hamburg for which we signed 5,000 square meters of new lettings. It's let at 81%. So let's say, we are in a good direction. The other one is one asset in Munich, which has been fully impacted by the bankruptcy of a wire card. It's a rather small asset. And it represents 15% of the vacancy. All the area has been impacted by this bankruptcy, so it will take time to recover. And the last one, which is the most important one is [indiscernible]. It's right in the center of the [ Segal ]. It's well also, which is the most potential. It represents half of the vacancy of this portfolio. The asset is, as you all know, well located. There's a lot of potential with 7,000 square meters of [indiscernible] that are today on use. At the beginning, WeWork was -- has signed a lease agreement, so was going to put CapEx on these assets. Finally, we canceled the lease agreement with WeWork, and we received an indemnity last year. So we launched a CapEx program on the part that we work with was going to take, which will also fully improve the use of these assets, open the [ traces ] and make really a flagship in the center of [indiscernible] . So that means that it will take time to do the CapEx. And it's why also you don't see this improvement in the occupancy for this quarter, whereas we have very good figures in France and in Italy.
For the asset in [indiscernible], so does that mean that we have maybe to wait -- maybe some more quarters before having this asset totally late or?
Yes, probably. So moving to your question on the disposals. We will talk about disposals 2022 with the full year results of 2021. So next February, let's say, that we always have a high level of asset rotation to reinvest into the development pipeline. It's part of the strategy in offices to regularly dispose for mature assets and to reinvest into the development pipeline with high value creation and an improvement of our portfolio quality. You had also -- sorry, you had a question on the hotel also, Florent?
Yes, please.
Recoveries. So let's say, we -- summer is very -- has been very good, September also. So we still have some, of course, uncertainty, but figures are very encouraging. So we expect it to continue, and this is what we have in our guidance. And we -- let's say, when we look at the forecast of specialists like STR and KG oxford Economics, they are expecting a faster recovery than what they expected before summer, especially for leisure and domestic [ intel ]. So we should benefit from it in -- within the end of the year, but mainly in '22.
And we'll now take our next question from Jonathan Kownator with Goldman Sachs.
One quick question. So a follow-up on vacancy effectively in offices. Beyond Germany, can you please outline if you have big areas of vacancy in France and Italy? And what's the plan there? And how you think it's going to evolve over the next quarters?
Yes, Jonathan. So let's say, first of all, occupancy owner, Italy offices and French offices are much higher. We are at 97% in Italy and 92% in France. We obviously have some occupancy challenges. In France, it's mostly 2 subjects. Two topics. First one is CB-21 La Défense. We have 10,000 square meters to be let. We have -- we signed leases. It's -- we see small and medium-sized companies coming back to this market, considering the price, the level of the rents that are becoming very interesting. So we signed and we are sensing the beginning of the year, close to 3,000 square meters. And then one asset in [indiscernible] which has been delivered in 18 months. It's partly let notably to[ Silex ], and we still have part of the assets to let. And in this area is taking more time. So most of our letting challenges today are on the development pipeline in France and in Italy. And this is where we see most of the, let's say, interest coming from the tenants.
Okay. So your expectation effectively is that you're seeing progress on these vacancies. And so you think that should decrease a bit over time.
Yes, it's lower than what we had. It's a very good dynamic on new offices in the development pipeline. But still, we see some progress and should continue over time.
And do you have big upcoming contracts expiring that you're already aware of in the office buildings?
By 2021, we don't see, let's say, major issues. Most of the lease expiries concern assets that will be redeveloped especially in Paris. So in addition to Madrid [ Salazar ], we have 2 more offices in the CBD of Paris that are going to be vacated by [ Orange ] and will be redeveloped. So I hope we can -- we will give more details from the next communication. And for 2022, let's say, we have 1/3 of the lease expiries will be redeveloped; 1/3 are already secured, so it will be prolonged; and 1/3 needs to be managed. So we will have discussion with the tenants, but we have all the year for that.
Okay. And you're not counting options there. These are leases just fully expiring as opposed to break options, sorry.
It's the next break options. So we have discussions ongoing. I hope that some will stay and -- but we'll see.
And so how big -- sorry, how big are your expiries in 2022 then, total square meters?
So total in term of revenues, it's EUR 59 million. So if I take 1/3 of it, it's EUR 19 million of revenues, which basically makes EUR 2.6 million -- 2.6% of our total revenues at Covivio [indiscernible].
[Operator Instructions] We'll now take a question from Alvaro Soriano with BNP Paribas.
On the Slide 14, on your hotels, can we discuss a little bit the stats on the U.K., how the hotel portfolio looks like in London. Just to get a sense of which city's recovering faster? Paris, London, perhaps if you can also elaborate a little bit on Germany. And then the second question, you raised a little bit your EPS guidance. How should we approach to your dividend for the year? That would be basically the 2 questions I have.
Okay. Thank you, Alvaro. Well, I will start with the last question on dividend. We'll talk about it with the full year results, so next February. Regarding the activity in the U.K. let's say, so on occupancy level, the U.K. in September, as occupancy was at our -- quite close to what we see in Europe. With the differences between London, so big cities and others, we are closer to 60%, 65% in the other cities and London is below. As a reminder, we have a [ MAC ] close on our U.K. portfolio, which means that considering the fact that the hotels have been closed for more than 3 months in a row in 2021, we expect some rents, but not a lot for the year 2021. So the most part of the recovery into 2021 is coming from France and Germany, which are, let's say, a major part of the variable revenues in our portfolio.
And we'll now take our next question from Oliver Reef with Surveyor Capital.
Perhaps I could just clarify the comments on the expiries. So if you could just talk about for 2021, the expiries and the rental impact, and then for 2022? If you could just go through the 1/3 one more time, so I missed that.
Sure, Oliver. So as I said, our 2021, most of the lease expiry is concerned, I said that will be redeveloped. You have all the metrics in the press release, but we will -- we can send you again the numbers with compound later on tonight. And on 2022, so office expiries represent EUR 59 million of revenues. So it's 8% of Covivio total revenues. And it can be splitted into 3 parts. 1/3 that will be, let's say, redeveloped into offices or transformed into residential. So we'll come to the development pipeline. Then 1/3 that are already secured. So let's say, no big deal on this. And 1/3 that are still to be discussed with the tenants. So at the end, letting challenges for us in 2022 represent 2.6% of total Covivio revenues. Is that clear for you?
Yes, perfect.
And it appears there are no further telephone questions. I'd like to turn the conference back over to our moderator for any additional or closing remarks.
Okay. Well, thank you very much. Have a good evening, and don't hesitate to come back to me or to [ compliance ] if you have any further questions. Bye Bye.
And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.