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Good day, and welcome to the Gecina Business at March 31, 2018, Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Méka Brunel, CEO. Please, go ahead.
Yes. Good morning to everyone. Thank you for being online with us for this conference call related to our business activity in Q1 2018. I'm Samuel Henry-Diesbach, and I'm here with Méka Brunel, our CEO; and Nicolas Dutreuil, our CFO.After a quick introduction by Méka regarding our performance and figures for this quarter, we'll be very happy to answer the question you may have.So I now hand the floor to Ms. Brunel.
Thank you very much, Samuel. Good morning, everyone. Before discussing our business performance in this first quarter, I would like to give you an update on the real estate market trends in the Paris Region. As you probably noted, the first quarter of '18 followed on from the trends we observed on '17 for the Paris Region's office market, with most central areas in Paris City mainly being well ahead of the favorable trends we -- which have been observed previously. Take-up showed further progress, up plus 13% at March-end following plus 8% in '17, and a 10-year high for the first quarter and probably, this is related to the very good growth performance of France in global and Paris, specifically, in this case.This is really an outstanding performance, especially given the shortage of availability of available supply on the market and can be seen across all Paris City's submarkets, but more specifically, at the heart of the business districts, plus 52% for Paris' extended Central Business District.Immediate supply has continued to decrease and to contract, minus 7% in the last 3 months. Particularly, in Paris, minus 11% for the first quarter, where the vacancy rate is down to a historical low level of around 2.5% versus 5.7% for the entire Paris Region.In 12 months, immediate supply at the heart of Paris is down by 23%. Faced with these trends in the region's best business districts, tenants are positioning themselves upstream from program that are under development.Market trends confirm the recovering in the most central areas, where our portfolio is concentrated. The shortage of quality premises at the heart of Paris is, therefore, driven -- driving market trends up. Cushman & Wakefield reports that rental values are up by around 8% to 10% for Paris City, but still stable or under moderate pressure in peripheral sectors.I would like now to share with you a few elements regarding our business activities in this first quarter. Rental income are in line with the group's targets. Probably you noticed that on a current basis, the group's rental performance is plus 40%, primarily reflects the full impact of the significant changes in scope from '17 with the acquisition of Eurosic.The change in rental income over the second half of the year will be on a smaller scale since Eurosic was acquired in the third quarter of '17, while also taking into account the progress made with the sales program.On a like-for-like basis, the performance came to plus 1.8% at the end of March, outperforming significantly the indexation, plus 0.8%. On the like-for-like growth on office perimeters, plus 1.8% as well. The performance is being driven primarily by the most central sectors, where market trends are favorable, particularly Paris City, plus 1.9%, and Western Crescent, plus 3.2%.On a like-for-like basis, residential portfolios are improving as well at plus 1.7% for the traditional residential portfolio and plus 2.7% for the student residences, reflecting the enhancement of this portfolio management with further reduction of vacancy rate on traditional residential portfolio and the improved performance of a formerly weak residence in Lille.Leasing and pre-leasing are in a very positive start from the beginning of the year, especially on the pre-letting side of the pipeline. First quarter of '18 followed on from a particularly dynamic year in '17 in terms of leasing. Since the start of this year, Gecina has let, pre-let, relet or renegotiated nearly 75,000 square meters, including the leases currently signed on the preliminary agreements, of which 60,000 square meters are pre-letting of building under development. This represent a potential annualized rent volume of almost EUR 39 million, with around EUR 32 million for buildings under development.64% of the premises in the deliveries expected for '18 has already been pre-let, including preliminary rental agreements to be covered by leases in the short term. For the entire committed pipeline, this rate beyond '18 -- actually, including '18, this rate is now 55%, which is a very solid percentage.As far as the sale programs targeting at least EUR 1.2 billion is concerned, already nearly 70% is secured. EUR 436 million of commercial buildings have been sold since the start of the year or are currently under preliminary agreements. These sales have been secured with an average premium of around 10% versus the latest appraisals value. The sale programs aim to realign the group's portfolio around the Paris Region's most central real estate sectors and reduce the group's debt to reach an LTV of less than 40%. Only 1/3 of the sales concern buildings in Paris or the Western Crescent, with 2/3 distributed across Paris' Inner Rim, the Outer Rim and other regions.With disposals which have been achieved in '17, EUR 814 million of disposals have been achieved or are secured today, representing already 70% of the sales program targeting at least EUR 1.2 billion announced following the acquisition of Eurosic. In addition, more than EUR 800 million currently are subject to exclusive talks. If -- including these potential sales, total disposal plans will therefore be already above EUR 1.6 billion, thus ahead of the EUR 1.2 billion minimum which we have announced to the market last year.Finally, last but not least, Gecina continues the optimization of its balance sheet. We have been very active in Q1 on the liability management of our portfolio, with EUR 500 million bond issue with a maturity of 12 years and a 1.625% coupon, plus EUR 700 million of new long-term bank credit lines set up in the first quarter, of which the first responsible credit agreement, which we are very proud of, indexed against Gecina's CSR performance, representing EUR 150 million, but this is something which probably we'll continue to have a look at.As a conclusion to this short introduction, I would like to tell you that this positive market environment allow us to confirm with confidence our targets for '18 for recurring net income growth by 3% to 6% above what we have reported in '17.And now we are ready to answer to all your questions.
[Operator Instructions] And we'll take our first person from the queue, who is Charles Boissier from UBS.
You mentioned EUR 1.2 billion of disposal, potentially rising to EUR 2.2 billion. Now given you have achieved 70%, as mentioned, EUR 800 million of exclusive talks, is it fair to assume that the base case is more likely the EUR 2.2 billion? And then I think the guidance for 2018 was based on the EUR 1.2 billion in term of EPS growth of 3% to 6%. So do you think also, potentially, you will have to revise the guidance? And then I have a question on IFRS 16 because it requires tenants to recognize their leases on the balance sheet, and I think it's coming now in 8 months. Do you have conversation with tenants already on this topic? And will this mean that -- perhaps shorter leases or perhaps [indiscernible] internalization of the real estate? I'm thinking as borrowing costs are still extremely low, what impact do you forecast from IFRS 16?
Charles, answering your second question on the discussion with the tenants about IFRS 16, I must say that, so far, we don't have special conversation with tenants. So it doesn't mean that this is not something they may have in mind, but this is not on the top of their lists when we have conversation together. Actually, the main issue for most of the tenants, because of the recovery of the market growth and the growth in general economic growth in France, is much more to be able to find the right place to lease for their business rather than conversation around IFRS 16. At least this is not something which has been reported so far, but we'll follow that up with you in the coming period. As far as our targets are concerned, I will leave Nicolas to answer your question, but you know my motto, which is underpromise and overdeliver, so we are absolutely continuing to improve the quality of our portfolio, but we are on track with what we have said from the beginning. Go ahead, Nicolas.
Well, that's clear that, as you know, we don't want to be in a situation or we are not in a situation of being a forced seller, meaning that we will not commit on a specific figure in term of disposals. That's the reason why when we announced the Eurosic acquisition, we disclosed the range of disposal between EUR 1.2 billion to EUR 2.2 billion. What we said is that, depending on market condition, we will be closer from EUR 2.2 billion than to EUR 1.2 billion. As you can see, if you make the calculation and if you add what is already secured and what is under exclusivity, we are today at EUR 1.6 billion, so in the middle of the range. We will see how is the market evolving, but as Méka is saying, for sure, we will continue to take advantage of today's market condition to continue to enhance the quality of -- to improve the quality of the portfolio. Maybe it will have an impact on the guidance, but today, based on all the figures that we have disclosed to the market, we are in line with what we have said at the beginning of the year. So there is no reason to review the guidance, so we confirm the plus 3% to plus 6% of the FFO per share increase.
[Operator Instructions] We will take our next person from the queue, who is Pierre Clouard from Natixis.
I have 2 questions. The first one on the like-for-like growth. Are you confident to reach the 2.5% like-for-like growth of 2017 for 2018? And the second one is on the residential part. As you may know, there is a big portfolio to be sold by the SNCF this year, at least. Is this kind of portfolio could be a good fit for you or not at all?
I'm not sure I get your first question regarding the plus 2.5% like-for-like growth in 2017.
You reached in 2017 2.5% like-for-like growth. Are you confident to reach this level in 2018?
Actually, if you split the 2.5% like-for-like growth -- the like-for-like performance globally, you see that the key driver is mostly regarding indexation and changing vacancy. And if you -- so it means that we are not sure that the 2.5% can be reached in 2018. We will see. That said, the dynamic from the reversionary potential, which is not that huge when you split the like-for-like, which is the most important part of the like-for-like, is still improving. So the evidence of what we have achieved in Q1 is fully in line with what you can see in the market, meaning that we have positive drivers on the rental markets, which will drive the like-for-like positively. That said, if you take into account the indexation, that's mostly the impact of vacancy because the vacancy at Gecina, the vacancy rate is already low. The contribution for a decrease in vacancy shouldn't be that big. In 2017, the impact from a decrease in vacancy was rather significant. And we will see if it's going to be the same figure in 2018 or not, but that's probably not something that we can be fully certain of and that will be seen. But probably if you split it, indexation, you can have your own assumptions. Positive materialization of the reversionary potential will be also having an impact. And then vacancy, that's that question mark. But you can assume probably that given the fact that the vacancy rate is already pretty low, it shouldn't be massive.
If I want to -- oh, I'm sorry. Go ahead, Pierre.
No, just to understand the reversionary potential. In 2017, it was, if I'm not wrong, 6.5%. Maybe can you give us an idea of what you are expecting for 2018?
Look -- Nicolas speaking. Well, I understand that it could be a little bit frustrating when you are modeling the increase of the rent, but the main issue we have is that this growth is coming from dozen of leases that we are renegotiating every year, and it depends, of course, a lot on specific situation of tenants. So having some sort of regular growth is something that, of course, we cannot achieve. Well, what we can say, as Samuel was saying, is that clearly, the trend is positive in average.
I don't know if you are done with your question on the reversion, but I can answer your question on the residential portfolio. Well, definitely, this is a large portfolio on the market, and what that shows is that the interest for the multi-residential portfolios is back and the demand for this type of portfolio for middle-class people is definitely back on the market. But we, of course, as Nicolas said, we are not a forced seller, but we are not -- we are neither a forced buyer. But a couple of things about the strategy of Gecina. Today, the strategy of Gecina is around -- which have been approved by our Board of Directors and presented to the AGM yesterday, it's about developing living spaces, whether it is for living, working, co-working or studying, for our clients at large. And we would like to keep the percentage of our diversification. We are definitely based on -- focused on the office sector, around 80% of our portfolio, and would like to keep the rest around 20%. Now to your specific question, we looked at this portfolio. I think that this is a very good reference for the market in the coming period, and we'll see what's going to happen. But we didn't -- we decided not to go there because I think that we have still a lot to do and we need to understand the governance of that. I think that -- but I think that this might be a new milestone to the change of the way of living and the transformation from ownership to usage of living spaces, and this is a real milestone and comes -- and definitely bring our strategy -- it's a justification of our strategy, which is the right one in the market. But I think that we'll see and probably, the results of this competition will be a good orientation for our own portfolio. And this is completely in line with our vision and our strategy to the need and the support of investors for multi-residential in the market.
And as there are no further questions over the phone, I would like to hand the call back to Méka Brunel, CEO, for any additional or closing remarks.
Thank you very much. I'm pretty sure that all the people who are on the phone have a lot of other questions. Samuel, Nicolas and myself are 100% available to answer all your questions, and of course, bring a couple of other comments on one-on-one conversation. I wish you a very pleasant day. I hope that you have, wherever you are, the same beautiful weather we have here in Paris. Have a good day. Take care, bye.
Thank you. So ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.