© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to Gecina Q3 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Méka Brunel, Nicolas Dutreuil, Samuel Henry-Diesbach. Please go ahead.
Yes. Good morning. Hello to everyone, and thank you for being with us for this conference call related to our business activity for Q3 2018. I'm Samuel Henry-Diesbach. I'm here with Méka Brunel, our CEO; and Nicolas Dutreuil, our CFO. We do quick introduction by Méka regarding our performances and figures for these 9 months, and we will be happy to answer all the questions you may have afterwards. And I hand the floor to Mrs. Brunel.
Thank you very much, Samuel. Good morning, everyone, and thank you very much for being with us this morning. We are very pleased to present you our performance by the end of September 2018. And I would like to, before going through that, to give you an update on the real estate market trends in the Paris Region. As you probably will know about that, the third quarter of '18 followed on from the trends observed these past quarters for the Paris Region's office market, with most central areas and Paris City mainly being well ahead of the favorable trends observed so far. Take-up shows further progress, up plus 6% at the end of September following a plus 8% in '17. This is quite outstanding performance, particularly given the shortage of available supply on the market, especially in the most central location of the Paris Region. This performance can be seen across all Paris City's submarkets, but more specifically, of course, at the main central and in the heart of the Parisian CBD, plus 16% for Paris' extended Central Business District. Despite of an historical lack of supply, now vacancy rate is, in the CBD, at around 1.5% only versus 5.3% in average for the whole region in there. Immediate supply has, therefore, continued to contract, and represent minus 13%. Of course, particularly in Paris, minus 25% in 1 year, where the vacancy rate is down to a historically low level of around 2% and even 1.5% in the CBD. Faced with these trends in the region's best business districts, tenants are positioning themselves upstream from programs that are under development. The largest part of the take-up in Paris City is made of offices under development today. Market trends confirm the recovery in the most central areas where our portfolio is concentrated. This shortage of quality premises at the heart of Paris is, therefore, driven -- driving market trends up, and we do not expect this positive trends for Paris City to downturn, as only 10% of the future supply to come ahead by 2022 is set to be in the city. Market trends, therefore, show average year-on-year growth of around 10% for Paris City in 1 year, less so outside of the city where market trends are increasing in a lesser extent, for instance, 1.5% in the Western Crescent, but still we are observing increase in that area too. The context brings us even more confident regarding our strategy to increase further our presence in the location, driven by scarcity in centrality through the portfolio rotation, but also to enhance and improve the quality of our portfolio through our pipeline of projects in these core locations.I would like now to hand over to Nicolas Dutreuil to give you much more specific information about our activity in that quarter. Nicolas?
Thank you, Méka. Good morning, everyone. So as you've seen, if you look at on a current basis to rental performance, we are year-on-year at a plus 31% growth, and this is clearly the effect of the integration of Eurosic as you remember that we have started to consolidate Eurosic last year, end of August.And now interesting, on a like-for-like basis, we have a performance now of plus 2.2% at the end of September, and we are outperforming significantly indexation, which is at plus 1.1%. And what is interesting also is the trend, which is positive compared to what we issued at midyear where we were at plus 1.8%. So a very positive dynamic on this like-for-like.That's something that we see clearly on the office perimeter where we are plus 2.1%, and this performance is driven mainly by the most central location where we have our building, where we are facing very, very positive trend in this market, more specifically in the CBD, plus 2.1%; on the Western Crescent, plus 3.4%. On the residential portfolio, the like-for-like is improving as well. We are at plus 2.1%. Here again, we have a positive sequential improvement. You remember that we were at plus 0.6% last year and plus 1.8% during the first half of this year. This is a result of the reduction of the vacancy rate, more specifically on large apartments, which were maybe more difficult to let last year. And we have improved our auditing teams and our letting process globally speaking and also on this type of apartment. But also, and this is something that we have highlighted, you remember during -- or yesterday, that we are targeting an increase by more than 5% in term of reversionary potential in the resi portfolio, and we are starting to benefit from this positive reversionary potential. If we look at now the letting and the pre-letting, as you've seen, this year has been very, very positive, especially on the pre-letting side for the pipeline. Where you can see that we are today pre -- renegotiated or let or pre-let or relet nearly 150,000 square meter since the beginning of the year, which is quite a large amount if you compare, of course, to the market but also to the Gecina portfolio because this is close to 10% of our portfolio. If we look at the pipeline, we are at 66% of the spaces in the '18 and '19 deliveries, which has been let or pre-let, knowing that we have and continue that -- well, of course, working on already secured or very active discussion on additional spaces, and we should be above this percentage we have sold. On the deliveries of the pipeline, so we're continuing, of course, on delivering work. We have, since the beginning of the year, delivered nearly 164,000 square meters, almost being most of this part, of course, being offices. Since the beginning of the year, it represents 8 buildings. And the ones that you are used to follow in our communication, 4 of these buildings being inside Paris City, 3 in the Western Crescent and 1 in Lyon Part-Dieu. What's also very interesting is that -- and that's part of the engine of Gecina, we are overselling our development pipeline. And we're in the middle of the process of going through all the portfolio to identify which was the best building to transfer depending on the situation as well as the tenant base and so on to the development pipeline to refuel this development pipeline for the future. Last point, which is also something that you know we're very focused on since the acquisition of Eurosic, which is the disposal program. We have today sold or secured EUR 1.4 billion of disposal since the start of the year. EUR 1.3 billion being commercial residential -- sorry, commercial buildings and the remaining part being residential. What's interesting here is that if you look at what we have sold, but that's also a figure we have already disclosed, we are mainly on buildings located in area which are not strategic for us outside of Paris. So part of the buildings sold inside Paris is only 8% and with values in average 2% above the last -- latest pre-appraisal value. And we are, of course, continuing during all this asset review process, of course, identifying what could be sold in the portfolio to continue this program.
Thank you, Nicolas. As you see, we have had a very busy quarter. And on the top of that, we continue the transformation of Gecina and what we have undertaken since the acquisition of Eurosic, which has been a success in terms of very quick integration, exceeding the group's initial expectations, but also thanks to the capacity of Gecina and Eurosic teams together to deliver what we have -- beyond what we expected, what we -- what was the -- what are the results of the company.And in view of that, we are now, thanks to this acquisition, scaling up the capacity of the company and giving us the -- all the strength to face what is going to be interesting in the coming period, of course. And that's why we are consuming our NAV growth per share, which is recurrent -- sorry, recurring net income per share, which is expected to deliver a growth above 8%, and we are confirming this guidance. Now I would like to hand over to you the floor and very pleased to answer your questions. Thank you.
[Operator Instructions] We will take our first question from Charles Boissier from UBS.
I have 3 questions. The first one is, you mentioned you're juggling the process of screening assets to feed into the pipeline. What yield on cost do you see from those projects? Is it what you used to mention as control on certain projects where the yield on cost was around 5.6%? Second question, you did a share buyback about 18 months ago. At that time, you were buying share at EUR 1.22 on average. And right now, the stock is at 20% NAV discount, so close to that level of share price as of 18 months ago. Or do you think about the merit of a buyback? Currently, would you consider -- or consider it? Or is it not in the count, now given that you have ongoing projects and a relatively larger pipeline as of 18 months ago, so it's a different situation? And then thirdly, on the like-for-like, you mentioned you have 2.2% like-for-like, a dynamic trend. Is the 2% guidance for the year still the right number? I'm just thinking if there is anything in Q4 that makes you prudent and confident the 2% are still relevant. Or given the current context as it stands today, do you think that in principle it should be higher?
Very good questions. Thank you very much, Charles. I think I will let my colleague to answer on the growth, of course, and maybe on the assets review. The asset review is a recurrent annual review we run each year. So it's not going to impact what is already in the secured and controlled pipeline. But it's about what's going to be the future in 2, 3, 4 years. So it's a recurrent review we are launching each year and we are doing -- we are going through each year to consider which assets should be kept, which assets should be redone, et cetera, and it doesn't impact the very -- the next year or the coming year to what is already identified in the pipeline. But on the share buyback, a good question. Actually, the markets are very, very, I would say, agitated in the last period of time. The reason we launched the share buyback at the time was that we couldn't find any decent acquisition in the market at decent prices as an investment by early 2017. Then we had the opportunity to buy Eurosic a couple of months later. But I think that the share buyback is an investment actually, and it has to be considered as an investment. And it's not something that we are really considering or not considering today. It depends on what's going to happen in the coming period and it's among other tools we can have in the market in the coming period. Now maybe, Nicolas, on the 2% rent growth -- rental growth?
Well, clearly, as you have seen, the 2.2% is above the 2%, which is the minimum guidance we've given in term of like-for-like for this year. We have not updated it, but there is no reason as a figure of the year and to be lower than the one we have published today. But as I said, the 2.2% is above the 2%, so that's -- we are fine with that.
[Operator Instructions] We will now take our next question, Pierre Clouard from Kepler Cheuvreux.
I'd just like to come back on the like-for-like growth. Can we have an idea of the reversion observed during the quarter? And again, do you expect any big renegotiation until the end of the year that could impact this like-for-like growth? And also can we have an update on the pre-letting of Be Issy, which is currently vacant, and Ibox? And what are your expectation on these buildings?
Thank you, Pierre. Very good questions about the pre-letting and also like-for-like, but I will let Samuel to answer you on the like-for-like side. On the pre-leasing today, what we have already signed represents 66% of the spaces under development. But we are with a couple of preliminary agreement on term sheets with a couple of tenants. We consider that we can go up to 74%, 75% in the coming period and more to come. Definitely, the new organization of Gecina is completely dedicated to let and/or pre-let sooner than later. 150,000 square meters already let or pre-let since the beginning of the year. It's quite an outstanding and quite an important amount of square meters, and we continue on working on that. Now on Be Issy specifically, as I mentioned a couple of times, this is still a question mark, although there are a couple of people interested. And hopefully, fingers crossed, we can see good movement on that side, but nothing specific so far. As I said a couple of times, this is a real issue for us so far, it still remains.
Yes, Pierre, regarding your question about the materialization of the reversion, you see that we have let or relet, renegotiated 150,000 square meters since the start of the year, on which we have achieved new developed rents that were around 5% above the previous ones in a ridge. So that's headline compared to headline, which is only to be applied to half of these surfaces in total because close to half of it comes from new lettings from the pipeline. So -- and what it means, these figures, is that you have to really to split market between what is in the heart of the best locations of the Paris Region and the location which are outside of the city mostly or in the secondary locations where the reversionary materialization is much weaker if and when it exists. So really you have this to split the market and the performance is driven, of course, by the most central location and specifically the situation in Paris City.
Yes. And to that point...
So for the Q4, do you expect any big renegotiations?
Big renegotiation?
Yes.
On an existing lease?
Yes.
Well, nothing specific so far on the Q4 as far as I know. No, I don't believe so.
We will now take our next question from Cecil (sic) [ Celine Huynh ] from Barclays.
Three questions on my side. First, can you give us some more color on this 4.5% like-for-like rental contraction in the Paris offices ex CBD? I understand that this is mostly attributable to a single building, so can you tell us more where is the building located? How did the tenant manage to get a negative reversion on its lease renewal? Second, can you comment on the relevance of the exposure to regional cities? I'm thinking about Lyon. The like-for-like rental growth is bigger than the rest of the portfolio. Is it still strategic for Gecina to keep those assets? And then finally, on the resi portfolio, you have disclosed a 5% reversionary potential. Given that the rent restriction system is planned to come back by the end of the year in Paris, do you still feel confident about achieving those 5% and why?
Yes, thank you for your questions. Samuel speaking. Getting the minus 4.5% that you have in Paris City outside of the CBD, that's due to one single asset that we have on fringe of the city, so I think there is one though outside of Paris and one though inside the city. So just to say that it's not really in the heart of the city. But there's also some renegotiation which have been done almost 2 years ago now, and that's entered into the operational scope in the beginning of the year, so we have -- or at the end of last year. So that's clearly the impact of one single asset that was over rented that we had last year outside of that. If you exclude these so many assets, then you -- but only this has explained the negative figures that you can find there. So it means that the wide general earning performance is very good. And that's also the -- maybe a way to explain a bit better the 5% uplift. That's made also of plenty of small elements that brings the final performance to potentially to be slightly different. So it means that when compared to the like-for-like, then you have some other elements like sometime temporary vacancy between the former and the new tenant that you have, that impact the way it may be transferred to the like-for-like. So that's something that we'll be seeing.
Maybe on the question on Lyon. Of course, when you look at the size of the portfolio which are in the region today, it's still important. But you know that we are in preliminary agreement for the disposal of the largest part of a regional asset located in the French region, which will be closed very shortly. And meaning that the size or the breakdown of the portfolio will be adjusted. And after this disposal, we should be at around 3% of the portfolio -- of the office portfolio located in the region, so something which will become marginal.
[Operator Instructions] We'll take our next question from Jaap from ING.
Just a follow-up on the rent uplift, you said on half of the leasing volume 5% uplift. Could you also describe what happened to discounts on average over the year-on-year period to get an idea about the economic uplift? And secondly, on the disposals, could you maybe detail the volume of disposals which have already been closed to kind of facilitate probably a bit more correctly? So those are my questions.
Thank you very much. I just want to make sure that we understand correctly your questions. The first one is about the incentives, right?
Yes.
Okay. So just on this one. Definitely, in the city center or the best location in the area, the most central areas, it is decreasing sharply and continues to decrease. In small spaces less than 1,000 square meters, it's almost 0. And in areas average in Paris is decreasing from 15% to around 12-ish for a 6 years' term period. So it's really decreasing and in a very sensitive way. Now the second question regarding the disposition, I just want to make sure, could you please repeat again? Just want to make sure that we understand well what you're asking us for.
So you've announced EUR 1.4 billion year-to-date. So of that EUR 1.4 billion, what amount has actually already left your books?
What is under preliminary agreement and what is already sold, tenant and sold, right?
Exactly.
Okay.
Yes, on the EUR 1.4 billion, you have I will say around 50%, which is finalized already and the rest is under preliminary agreement.
We will now take our next question from Christopher Fremantle from Morgan Stanley.
I just had 2 questions, one specific and one a bit more general. Just on the specific question, just as you look to refill the pipeline, I think you indicated in the release you'd expect to lose EUR 20 million as you -- of rental income as you refill the pipeline. Can I just ask, should we expect you to lose most of that income in the 2019 year? Or should we expect that to be spread over the next couple of years? Any guidance you can give or any update on that would be helpful. And then just on the more general question, obviously, you said it's been a very strong few years for the market and the rental outlook remains strong. Can you just update us on what you're seeing or what guidance you're being given in terms of property yields from your valuers? I mean, do you think property yields for the sort of assets in your portfolio are continuing to fall? Or should we expect a period of stability going forward? Or any color that you can share on that would be helpful, I think.
Yes. Thank you, Christopher. Very good questions. On what you considered as a loss of rent is actually a building which is going to be vacated. So we know that the tenants are leaving. So it's not a loss of rents per se, but it's a vacant building that we put in our pipeline. EUR 20 million under Samuel's and Nicolas' direction, this is mainly for 2019, right, because the buildings are already vacant, or about to be actually. They're going to be vacated in 2019, something like this and '20 importantly.
Yes, this EUR 20 million figure represents the volumes of rents that we have captured on these assets so far in 2018. So the significant part and the largest part of these are likely to be vacated and therefore transferred to the pipeline for redevelopment or renovation in 2019. So you can imagine that some rents that will be temporarily missing in -- consequently in 2019.
And for your second question, we haven't yet seen the valuers. They are starting their home works, and they are reconsidering everything, so we don't know what's going to be the outcome of that. But as an opinion we can have as a corporate, we already mentioned that a couple of times and still believe that the cap rates will remain quite steady in the coming period. They are not going to drop anymore. I don't believe that they will move up, at least in areas we own our assets, which are very central and there's a lot of scarcity around. Although, when you look at all the transaction which have been signed even recently, the cap rates are quite low, even sometimes lower than what is our average values, but we are on sustainable valuation on long term, but we don't see anything coming from that. This is going to be also compensated in the coming period though by indexation in one part and the other part is coming from the market trends moving up or the real rents, which are contracted in our lease contracts moving up. So -- but we don't see any big move so far in cap rates. And again, we see every day transactions moving on in Paris and they are not showing any weakness on that site.
It appears there are no further questions at this time. I would like to turn the conference back to you for any additional or closing remarks. Thank you.
Thank you very much. Thank you for everybody -- oh, there is another question coming up. Okay, I don't see any other question. Of course, we remain available with Nicolas and Samuel to answer all the other questions you may have.Again, we are very proud of this very strong results, which, again, scale up the capacity of the company in the coming period, and we continue to share our good news in the market with you. Have a very nice day, and thank you very much for attending this meeting. Goodbye.
That concludes today's call. Thank you for your participation. You may now disconnect.