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Good day, ladies and gentlemen, and welcome to Gecina Q3 2020 Activity Conference Call. For information, the call is being recorded. At this time, I'd like to turn the call over to your host, Ms. Méka Brunel. Please go ahead, ma'am.
Yes. Good morning to everyone, and thank you for being online with us for this conference call related to our business activity in Q3 2020. I'm Samuel Henry-Diesbach and I'm here with Méka Brunel, our CEO; and Nicolas Dutreuil, our deputy CEO in-charge of finance. After a quick introduction by Méka regarding our performance and activity in Q3 2020, Méka, Nicolas and I will be very happy to answer the question you may have. And I now hand the floor to Mrs. Brunel.
Thank you, Samuel. Good morning, everyone. I'm very pleased to share our views and our results for Q3 for the 9 first month of the year with you this morning. You may have seen already in the press release, which have been published yesterday, our performance has been quite strong year-to-date despite the -- all the uncertainties which we are going through. This performance has been driven, of course, by the strength of our balance sheet, the quality of our portfolio, the fact that the portfolio is almost 70% in the most central areas of Paris and the fact that we are expanding in the multi-res sector and also the quality of our client base. And I would like to add the -- what has been done throughout these last few years in terms of restructuring and reorganizing the company, both in the quality of people and also in our capacity to renew ourselves. Therefore, the Gecina performance is proving our resilience and is reinforced further -- and reinforced further our conviction regarding our strategic positioning. Of course, this highlights the fact that our strategic choices have been relevant in the past years: realignment around the central sectors of Paris region; affirmation of the residential business being part of our business with assumed ambition for growth and the active portfolio rotation we have been through; the extracting value of the buildings with strong potential; and of course, keeping our balance sheet flexible and cautious in delivering value-added services to our clients, especially through our YouFirst brand. Let me highlight few elements before answering with Nicolas and Samuel to your questions you may have. First of all, the markets where Gecina operates have shown resilience and supportive trends again this past month. Polarization in favor of more central areas is definitely the key point. We have seen investment markets still solid, especially on the most central areas. The volumes, of course, have nothing to do with where they were last year. The lockdown and the COVID pandemic has neutralized something like 4, 5, 6 months in terms of market activities. But the volume invested since the start of the year are still nearly 7% higher than the 10% average -- than the 10% -- than the 10-year average. Major transaction have been finalized in the last few weeks on the market, confirming domestic and international investors' appetite still for office real estate in the Paris region and -- especially in the most central areas of Paris City. In this still supportive market, Gecina sold EUR 476 million up until now of assets with circa 5% premium over last valuations. The rental markets remained solid and are not weakening, especially in the most central areas. Take-up end of September is down by almost 46%. Again, it's also due to pandemic and also a lot of question about the slowdown in terms of volume. But this had a significant upturn in the rental activity in September, with strong growth in the number of visits and expressions of interest in the properties to be let by the group. However, levels of available supply are still extremely limited in the heart of Paris City, where the vacancy rate is still persistently low, 2.9%. As a result, market rents in Paris City continued to show slightly positive trends, reflecting the solidity and resilience of the most central office markets. And it confirms a significant level of reversion potential at the heart of the CBD and in the rest of Paris City in markets that are continuing to move in a positive direction for landlords. Just as a reminder, almost 70% of Gecina office portfolio is located in Paris or Neuilly-sur-Seine areas, where the scarcity of available assets and their attractive central positioning will ensure a strong level of resilience for the coming half year periods.For the peripheral areas where Gecina has scaled back its exposure considerably since 2015, the situation is less favorable than in the heart of Paris, of course.Return to the office, already reality in Paris, of course, regardless of what's going to happen in the coming period because of the pandemic. We are ahead of the most other major cities. At the end of September, based on public data, indicate that traffic levels in Paris workplaces were only minus 34% less than a normalized situation, whereas they are still down by almost 58% in New York and 63% in London. This indication that employees are returning to the office for companies whose premises are located in Paris is consistent with the group's indicative estimate obtained by surveying a sample of clients and footfall levels in company restaurants across its buildings.Our performance has been strong year-to-date. 96% of our office rents has been collected so far for the 9 first month. If we include rent deferral to be mostly paid in the coming weeks, this ratio would be raised to -- up to 98%. Only 0.4% have been written off year-to-date, and less than 2% are still on the recovering process.We see -- reflect a normalization rent collection in the third quarter, reflecting that we are on the same similar basis level observed in the same period last year. Like-for-like rental growth reached 2.7% of the whole portfolio; 3.5%, if we look at the offices only; and of course, almost 6% if we include the deliveries we have had last year in the same period. Uplift is materialized, has indeed been strong again this quarter, although transactions in volume have been slowed. Rental market have thus proven the resilience in the most central areas. The leases we have signed, for instance, over the period show a headline reversion rate of around 15%, with 25% in the CBD and Paris 5/6/7 and 16% for the rest of Paris City, 1-6, compared with the lower or even negative rate for the other sectors. On a current basis, 0.7% -- minus 0.7% less rents collected have been seen year-to-date. Organic growth and the contribution by the asset delivered in '19 and early '20 globally offset the loss of rent resulting from the sales and the disposition, which have been completed during this same period, and the transfers of building with strong potential value creation to the pipeline. So globally, the performance have been extremely resilient this year on YouFirst Residence. And although YouFirst Campus, which is our student housing schemes, which has been badly impacted with all the universities shutting down early this year, have been completely reversed, with 94% of the rooms let by the end of September, very similar with the levels we have seen in the academic year in September '19 and points to an encouraging situation for the whole year, and so our capacity to refocus and our teams to work hard to fill this portfolio. That's the reason why we raised our guidance for 2020 to the upper end of our guidance which we put. We had a bracket in July, and we consider that we can raise it to EUR 5.70 a share for 2020. And this increase in our 2020 guidance reflects the solid performance as achieved since the beginning of the year and the good level of real estate markets in the most central sectors that is what we see in the market. Now Nicolas, Samuel and myself are available to answer the questions you may have.
[Operator Instructions] This first question is coming from Florent Laroche-Joubert who's calling in from ODDO BHF.
Yes. This is Florent Laroche-Joubert from ODDO BHF. So yes, I would have 3 questions, if I may. So my first question, it's about the new dynamic in the offices market. So you have told us that you have a strong level of visits. So could you please give us maybe more color in the changes in requests by tenants and prospects? Are they looking for smaller offices, less kilometer [ by desk ], more flex office, et cetera?My second question will be on the residential portfolio. So you have signed a partnership with Nexity, and now the residential portfolio is a subsidiary. So if you have the choice, what do you prefer to keep? 100% of the residential subsidiary or maybe open the capital to other investors? And so my third question would be on the dividend. So I know that this is a decision that will be taken at the end of the year by the Board of Directors. But based on your new guidance, could we say that it would make sense to distribute a stable dividend compared to last year? And since you have a REIT status, what could be the required amount that you may have to distribute?
Yes. Thank you, Florent. Good questions as usual. I will start with the third question because you got the answer by yourself. Dividend has always been, for us, a question of the Board decisions once we have the year -- full year results, and we are not going to change that. I think the guidance we are giving give a direction. And -- but we consider that this should be done, and we have always said the same thing every year, each year. It's not going to change now. This is due to the decision of the Board with the annual results. Now to the other questions, I start, by the way, by the bottom. Yes, go ahead. Nicolas, you want to add something.
Yes. Good morning, everyone. Maybe just one last point regarding the question raised by Florent on the dividend. Regarding the distribution obligation, as you know, we are distributing each year much more than the obligation we have according to the REIT status that we have, meaning that it should not be an indicator of where will be our level of dividend for the future.
Yes. Thank you, Nicolas. To the question about the subsidiary, whether we want to keep the 100% of the subsidiary or not, as you probably know, we consider that multi-residential, multifamily, it's a real strategic direction of the company. We have worked on that since I joined the company in January '17. And today, for us, it's a real direction, it's a real division of the company. And what we have signed with Nexity is also to give us a capacity to expand and continue to grow this subsidiary, not on a slow path, but accelerate our growth.Now thanks to the strength of our balance sheet, we do not need to absolutely open the equity of the subsidiary tomorrow just in terms of the -- giving us the capacity to -- give a chance to this subsidiary to grow. But if we are considering one day to open the equity of the company, it will probably will be related to our -- to the strategic view we would have with 1 or 2 other investors and not only having a financial partner. So this is a real need in France. It's not going to slow down. The needs are here, and we consider that the supply is absolutely lacking in the rental sector, and we definitely need to strengthen our capacity. So we have -- we gave ourselves all kind of optionality, and I'm glad that we have been able to do it before this huge pandemic. So we'll continue on that side and give you more color as soon as we have better color, but so far so good. And on your question on the office sector, what people are visiting, of course, the lockdown do not enable people to look at new premises, whatever. And of course, all the companies are questioning themselves about the way they are going to organize their businesses. Now everybody also recognize that it's very difficult to consider that everything is going to be done, and you need to have to look at your premises and to reconsider the way your premises are organized and managed and fit out to be more welcoming and give people better understanding of how they're going to work together. The -- there's a lot of question marks, but what we see is also there are needs for people for central areas, and centrality even more matters today.So with all this question mark, Gecina with YouFirst office -- [indiscernible], sorry, is really accompanying all our potential prospects to give them a chance to understand what they are looking for and to give them best solution for what they are looking for. But hopefully, if things are going well, we will see things moving on the right direction in the coming period. But definitely, we are a partner of our clients. And the question mark we are seeing is we -- as a partner, we are giving them also our vision and the way they should consider their needs for offices. Globally speaking, people are looking for better spaces, better location, probably less metrics, although they are still considering different options. And the main question is how they are going to attract people and make them work together and launch new projects. The reality is that working from home doesn't need to -- doesn't give you a chance to launch new projects, and also not everybody can work from home. For instance, you cannot supervise sites from home, you cannot market from home, you cannot do all kind of different businesses from home. And it's just about working from home helps for daily businesses. But anyway.And you also mentioned coworking or flexibility, et cetera. Definitely, flexibility is going to be the main work, and flexibility is not only in terms of reducing the length of the leases. But the fact that you can work from everywhere, you have all the facilities and all the devices needed to work from everywhere. It is going to be an important topic.Make a long story short, I think the mega trends you observed from the last couple of years are not going to disappear. On the opposite, due to the pandemic, they are going to accelerate. So this is something we're going to follow up and of course report any time to the market.
[Operator Instructions] Our next question is coming from Alvaro Soriano calling in from Bank of America.
Yes. Thank you very much for the presentation. Just one question. Méka, what sort of conversation is Gecina having with your largest tenants right now, if any conversation is happening? I mean ENGIE, Orange, [indiscernible] or EDF, what sort of needs of the space these companies are discussing with Gecina right now in the future?
Thank you. Very good question. We do not -- I mean depending on the length of our leases, I think all our tenants are very busy with their own business, so we do not have regular conversation with everybody about their needs. If your question is if they are reverting to us and talking about their future needs, actually, those were in a long-term leases, are not really focused on having separate conversations, and they are focusing on their own business. So I do not believe -- I mean we do not see -- we have much conversation with our tenants being completely in the panic and asking for changing completely their lease contracts or whatever. We have regular conversations with everybody. We are through a crisis. The crisis -- the economic crisis is here, and it's important. But so far, we do not have specific conversation with some people. Among those you have quoted, we are talking about either expansion of the leases or -- I mean the length. For instance, ENGIE lease is still 6 years going forward. So we do not have specific conversation with them today, and they are not asking for specific conversation, except that they have all considered that we have been -- probably with most of our other colleagues and landlords, we have been very quick and very supportive of -- when they asked us to adapt to the buildings in their capacity to be COVID-compliant. And we have been very quick to -- by the way, all buildings have been opened during the lockdown, and we have been very quick to answer back and to give them all the facilities they needed. And the agility of our teams have been absolutely considered by our tenants. But so far, they are not something specific which we should be worried or concerned about except that the crisis we are globally going through altogether.
We'll now take questions from Celine Huynh calling in from Barclays.
My question, only one, is on the incentive level. I understand how that rents are stable for now but can you give us a broad indication of the current-level incentives and how it has evolved since January?
Yes. Celine, thank you for your question. Well, what we said in the document is that we have a strong confidence regarding the most central areas. We are having less visibility regarding secondary locations. What is happening these days is that headline market are still even slightly up if we trust some ImmoStat figures, so we should be cautious with that. But it means that the headline rents are still extremely solid in the most central location. I'm talking mostly about Paris City, Neuilly, for instance, which represents around 70% of our office portfolio. And that's areas where we still have a positive reversionary potential. And in these areas, the [ biggest seating ] power is not moved into the hand of tenant so far. So it means that incentives are not moving that much in the specific location when you have competitive assets in central locations. And then in some secondary locations, when our strategy in the past drove us to reduce significantly our exposure there, headline rents are rather flattening. But there is a slight signal that some incentive here and there may grow slightly. So far, there is nothing very significant that we see, the situation to be a bit less in favor of landlords and the discussion to be a bit more challenging. That's part of the job that we are used to do, but we should see on the rental market that there is a polarization in favor of central location, which reflects -- which is to be reflected in terms of headline rents, but also in terms of incentive, you see the same thing. When -- in the City of Paris, when you have still less than 3% of vacancy rates, you can imagine that there is absolutely no reason to have a different discussion with the tenants than the one we could have a few months ago. And that's one of the things that drove incentives to be rather similar, more or less. It's always a question of [ Champs Elysees ] that -- what it was before. So nothing really significant in Paris City and maybe a slight increase in some secondary locations of the Paris region.
Okay. Okay. Put it this way. For the leases you've signed year-to-date, have you seen an increase in terms of incentives? Not talking about the market, the leases you signed. The leases you signed this year for Gecina, have you seen yourself an increase in terms of incentives? Because I appreciate your comments...
No, that's -- no, no, this is what I told you. It means that -- or it's not significantly different to what we could have expected. It's not significantly different to what we have achieved last year. And that's so far. But that's mostly driven by the good visibility we can have in the City of Paris. And in some few specific situation, it could be a bit more challenging in some secondary locations, but we are not that much exposed to these areas. But globally, there are no significant change compared to what we could have expected before the COVID-19, not materially different to what it was before, actually. And that's probably the consequence of having a very central portfolio. As I was telling you, 70% of the office portfolio is inside most central areas where vacancy is low, and tenants' appetite is strong. So that's Paris City and Neuilly mostly. And so no real difference compared to what we could have expected earlier this year.
We'll now take questions from Mr. Pierre-Emmanuel Clouard calling in from Kepler Cheuvreux.
Thank you for the presentation. I have 2 questions on my side. The first one, on disposals. We saw that the market is pretty beyond today, for core offices today, especially in Paris. Can you tell us your view on how disposals could evolve in -- before the end of 2020 and 2021? And would you be opportunistic to maybe accelerate the disposals that you will do in months to come? And the second one is on the -- on renegotiation on your leases. You renegotiated almost twice the level of today's last year. Maybe can you give us the number of leases that you will need to be -- that will need to be renegotiated until the end of the year and maybe the estimated reversion that goes with it?
Yes. Thank you, Pierre. Good questions. On dispositions, you know that we have an asset review each year, by the way, like every year, is in November. So it starts in -- 10 days from now. And every single year, we look at our portfolio, we see which assets are mature or nonstrategic and whether we should dispose or put in the pipeline or keep it as is and lipstick works and put it back to the market. So this is the regular works we are doing. Since, by the way, 2017, we have already sold something like EUR 3.5 billion of assets, which is quite strong and quite regular. This is something which is an ongoing process, and we are not neither accelerating nor reducing. We are keeping the path and continuing to do what the job is. One thing which is important to have in mind, the questions of selling core assets or not, it's a very short-term question. The question is about the strategy and where we see the company in the coming period, where we should keep our assets, where we should reposition our portfolio. We definitely consider that centrality matters, and centrality will continue to drive value in the coming period. We have mentioned that with the 3 mega trends, which probably you recall, about centrality and multi mixed-use areas, which is the first trend; the second one is digitalization and flexibility; and the third one is the climate change. We consider that this from mega trends, not only they haven't disappeared, but they are accelerating. So we will continue to focus on what makes more sense and which is much more valuable in the future, whatever the future is. And we consider that so far, our strategy is rewarding and continue to reward and to continue to be value-creating in the future. So we are much more positioning on that. On the renewal, the question of how much renewal we have or not and the question of where we stand with our tenants, and the question is where they stand and where they are in their position, we have less renewal this year because there are less leases to be renewed. And although we consider that it is a strong business we are doing, and we are still renegotiating with our tenants where it is needed in terms of renewal. So it's -- I'm not saying it's business as usual, but it's part of our jobs and what we are doing on a day-to-day basis and what makes it an operating company different from others.
Okay. Just to come back on disposals. We are clear that you are not sellers of core office today?
Well, we are selling not core office. We are selling major assets, which we consider that we are done with value creation as far as you are concerned, and they have still value for buyers.
[Operator Instructions] We now go to Marie Dormeuil who's calling in from Green Street.
Just wanted to know if you have -- if you...
I'm sorry, could you -- hello? Marie, could you please speak louder because we don't hear you well. Good morning.
Is it better now?
Thank you.
Is it better now?
Yes, it is. Go ahead.
Just wanted to know if you have a somewhat [Audio Gap]
It's too early to have a full visibility. But the interest is here, the quality of the assets are under -- or emphasized by potential tenants, and we'll see [Audio Gap]
Does that answer your question, Ms. Dormeuil? Thank you.
Yes.
[Operator Instructions] We now go to [ Mr. Vincent Stillman ] calling in from [ Zadig ].
I just wanted to clarify, you mentioned ENGIE is a 6-year lease. I thought they were moving to their new headquarter in La Garenne in 2023 or something like that. Do they have like a breakup clause? Or it's a fixed 6-year...
It's a fixed 6 years. So they can move, but they still are our tenants. And they are committed.
Okay. From now, 6 years from now.
Yes.
Mrs. Brunel, we do not appear to have any further questions at this time, ma'am.
Thank you very much for attending our conversation this morning. Of course, if you have any further questions, do not hesitate to -- you're in touch, of course, with Samuel and his team. But Nicolas and myself are also available for any further conversation. And have a very nice day.
Ladies and gentlemen, that will conclude today's conference. Thank you very much for your attendance. You may now disconnect. Have a good day.