Gecina SA
PAR:GFC
Earnings Call Analysis
Q3-2023 Analysis
Gecina SA
Gecina's conference call opened with an introduction to their robust third-quarter performance, evidencing the company's positive trajectory. The CEO, Benat Ortega, alongside Deputy CEO of Finance, Nicolas Dutreuil, highlighted a substantial rental growth of 7.3% across their portfolio, significantly outpacing the previous year's growth of 2%. Contributing factors included strong organic rental growth of over 6% and strategic contributions from the company's development pipeline.
Gecina demonstrated their tactical acumen with the securement of EUR 1 billion in asset sales, which were 10% above last appraisal values, enhancing their financial buffer amidst slower investment market conditions. Moreover, they reported disposal agreements amounting to EUR 111 million, commanding yields below 3% and an 8% premium above appraisal values. These sales further strengthened their balance sheet, providing additional financial leverage and stability.
The company's successes continued with the announcement of fully leasing two significant pipeline assets. The 35 Capucines building is fully let to a premium luxury group, and the Mondo building, a sizable 30,000 square meter property, has been pre-let to a leading French corporate CAC 40 company, reflecting the robust demand for high-quality office spaces in Paris CBD. These pre-lettings, especially for Mondo, underscored Gecina's capability to attract and secure top-tier tenants well in advance of completion, ensuring high rental levels and endorsing the attractiveness of their refurbishments.
Encouraged by the strong market conditions, Gecina has confirmed an upwardly revised forecast for the 2023 fiscal year. Originally projecting a 4-6% growth in recurring net income per share, the company has now updated those figures, anticipating a 6-8% increase. This revision reflects confidence in their leasing markets, rent indexation abilities, contributions from the development pipeline, and strategic financial management to mitigate interest rate impacts. The expected recurring net income group share is projected to range between EUR 5.9 and EUR 6 per share.
In a responsive approach to the changing financial landscape, Gecina has fortified its position through an active hedging policy and long debt maturities. This approach is aimed at minimizing the impact of rising interest rates on the group's financial expenses, ensuring that Gecina maintains solid financial foundations and prudent fiscal management heading into 2023.
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Hello, and welcome to the Gecina Business at September 30, 2023 Conference Call. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Mr. Benat Ortega, the CEO; and Nicolas Dutreuil, the Deputy CEO of Finance, to begin today's conference. Thank you.
Good morning to everyone and thank you for being online with us this morning for this conference call related to our business activity in Q3 2023. I'm Samuel Henry-Diesbach, and I'm here with Benat Ortega, CEO; and Nicolas Dutreuil, Deputy CEO in charge of finance. After a quick introduction by Benat regarding our performance since the beginning of the year, Benat, Nicolas and I will be happy to answer the question you may have. I now hand the floor to Mr. Ortega.
Hello to everyone, and thank you for being with us this morning. Before we can answer your questions, I would like to quickly comment our performance and recent achievements. This quarter has been particularly robust again and confirms our good momentum. We've been able to post strong rental growth at the end of September at 7.3% in total and even 8.1% on offices. This is far stronger than what we've been posting last year at the end of 2022 when rental growth was only 2% for the group. This is the result of the combination of strong organic rental growth, reaching more than 6% and a positive and strong contribution from the pipeline. Like-for-like growth has been supported not only by indexation, 4.6%, but also occupancy rate improvement by 130 bps and rental uplift along tenant rotation, 14% in average. As a fact, the rental uplifts are still at high levels, reaching on offices 26% in Paris City in average and 14% in total for the office, suggesting today, again, a large outperformance from Central Paris over the peripheries. The residential portfolio shows a rental uplift now reaching 13%, 1-3, and a strong improvement when compared to what the group were able to grab these past years. Remember, 10% last year, around 6% between 2018 and 2021 and below 2% before. On the 2 portfolios, offices and resi, our efforts to improve our operational performance and our products and allocations are key to deliver these releasing spreads. On top of this like-for-like performance, our 7.3% rental growth is also supported by a positive contribution from the pipeline, thanks to recent deliveries. Indeed, the pipeline contributes by EUR 16.4 million, taking into account the delivery of l1ve and Boetie buildings in the Paris CBD and the 157 Charles de Gaulle in these. And the effect of building vacated mid-2022 to be redeveloped with their delivery schedule in 2025, Icone-Marbeuf and Flandre 27 canal in Paris, both now in Paris. You already know that the group was able to sell EUR 1 billion of assets in H1 this year, 10% above last appraisal values and with a cash flow yield effect of around 2.5%. Since then, we have continued and EUR 111 million have been secured from disposals and are today under preliminary agreements. Here again, with a yield below 3% and still above appraisal values with almost 8% premium. These opportunistic deals further improve the group balance sheet, obviously, in the context of significantly slower investment market these last months. But in our view, the biggest news from this quarter is on the re-leasing side, with 2 major assets of our pipeline now fully let. The 35 Capucines building in Paris CBD, a bit more than 6,000 square meters, which is scheduled for delivery during the first half of 2024, led to a luxury group and [ Alofa ], all the office space is now fully let. But more importantly, a rare operation for Paris CBD markets, named Mondo, 30,000 square meter building now fully pre-let to one single large French corporate member of CAC 40. Such an operation is relatively exceptional given the size and the location and having this asset fully let more than a year before completion perfectly illustrates the strength of Paris City office markets and the quality of the refurbishments delivered by Gecina. To date, 100% of the office space to be delivered in '23 or '24 is now fully let with rental levels, which are higher than initially anticipated. We are now working on the leasing of the assets that we'll deliver in 2025 in Paris City, Icone-Marbeuf, and 27 Canal-Flandre again. Following this quarter, Gecina is confirming its growth forecast for 2023. Remember, we raised our guidance midyear when publishing our half-year results, initially expecting our recurring net income per share to grow by 4% to 6%. We now confirm our new targets that recurring net income group share is expected to reach EUR 5.9 to EUR 6 per share and thus delivering 6% to 8% growth per share in 2023 in the context of good leasing markets I just explained, solid indexation of our rents and the good contribution from the pipeline. And all that combined with Gecina's long-term long debt maturities and active hedging policy that enables to limit the impact of interest rate rise on the group's financial expenses for 2023. Nicolas, Samuel and I are now available to answer the questions you may ask. Thank you.
[Operator Instructions] We will take the first question from line, Florent Laroche-Joubert from ODDO to begin to this call.
So congratulations for the leasing of Mondo. So maybe a first question. So could you maybe come back to the conditions why this group of CAC 40 has signed at Mondo in which conditions. This would be my first question. And my second question will be on the investment market. So as you noted on your side, any changes in the behaviors between buyers and sellers in the offices market this last week and what would be for use a wide condition to start looking at opportunities for acquisitions.
Thank you, Florent, for your question, questions, by the way. Why did they sign with us? I think it's a combination of several factors. Obviously, we can't communicate on the name because they need to announce that to their employees before we communicate on who it is or will be not too detailed. But the idea behind signing such a lease is, one, the quality of the assets, I think we -- within the marketing, we said we have built and designed Mondo after COVID and thinking by 3 dimensions, which have been convincing for the clients. Obviously, the location is clear, so I will not comment on that. The first one was ultra flex. So we have designed Mondo to allow someone that would commit for long term to be capable to use that in different ways the assets. So large floor plates, unique in Paris, more than 3,500 square meters of floor plates, gives a lot of flexibility, we thought with external services, a lot of gardens, a lot of services, restaurants, which will be extremely vibrant. So that flexibility is key for a large corporate to take a long-term commitment. Second, it was ultra lively. So we have thought that asset to be extremely lively, open to the city with a lot of new food offer services and so on. So being lively, being capable to attract talents, being capable to attract back employees to their office was key, and the third was ultra green, it's a super low-carbon building. And I think we are convinced also that tenant who come into our building also through the general policy by Gecina to be excellent in operations and excellent in efficiency in terms of energy. And I think it's a combination between an excellent building in terms of design, green, but also the fact that we will operate that in a super lean manner. So those 3 reasons, I would say, have been key. Regarding investment markets and behaviors and so on, I think the market is still quiet. There is a limited number of buyers. So for the time being, it's pretty quiet. So we have been quite active, as you saw since the beginning of the year. It's not easier than before. So it's still pretty quiet, to be honest. We -- there is a lot of rumors about people wanting to sell secondary assets and so on. But remind you, there is not so many players that are willing to buy especially secondary location, secondary assets. So still pretty quiet.
We will take the next question from line, Stephane Afonso from Invest Securities.
Yes. Two questions on my side. And the first one on the Western Crescent portfolio. What could we expect in terms of renewals or departures over the next 12 months? And also on this part of the office portfolio, could we have an idea of the reversion rate that was captured at this stage? And regarding the fact that incentives are still increasing in this area.
The vast majority of the assets that we own on the Western Crescent is in Boulogne and in La Defense. As I said during previous calls, La Defense has been secured recently for long, so we have no specific expiries over the next several years, in fact. Regarding Boulogne, we have a series of assets, but same no major expiry over the next 12 months. Obviously, they will come later in time, in '26, in '27 and so on. But for the time being, no specific expiries over the next 12 months?
And now we own also a couple of assets in Neuilly. So theoretically, Neuilly is considered as being the Western Crescent even in this market, is moving like a Parisian market. But the same in Neuilly, in that we have fully let a couple of buildings during the last months. So here again, no specific issues coming in the next 12 months.
But Neuilly, there is more opportunity, by the way, when we have an expiry because then clearly that market is as tense as Paris. So.
Ok. And on the reversion please?
On the reversion, same, I think as we don't have so many expiries, there is no specific pressure. Obviously, the rents and the prime rents are not growing as fast as indexation so -- in those markets, except [ new again ] So obviously, we will have to monitor that situation over time.
We will take the next question from Ana Escalante from Morgan Stanley.
My question is also related with the investment market. You flagged that in the last few months, there's been a slowdown in the number of transactions. But when looking at market reports, it looks like transactional prices -- transaction price decline is accelerating also in Central Paris, like some market reports point to a decline of 11% year-to-date, 6% in the third quarter. Could you please comment on that? What do you think likely decline in prices could be in the second half and how that will impact your final year valuation as of December? And also given the different expectations in buyers and sellers, where do you see deals going to in order to find a common ground for both of them?
First, I think we have proven that our portfolio was liquid. So against the general market, which is a bit quiet, you saw that we sold EUR 1.1 million of assets with premiums compared to last year value. So I think what we have tried to prove this year is the fact that we are not a proxy of general markets. Our assets are not managed in the same way. The type of tenants we can attract in our buildings are not the same, that's the general market. So that's first. I will not comment on obviously on the appraisals at the end of the year, that will be for our call in February. Maybe on the market, I think one needs to combine and to look at the yield effect, and we have been taking a yield effect for now 12 months or 18 months, a significant one even in Paris, 10% to 15% down even in Paris, and that was a slide that we showed in July. But then you needed to look at what is the rental uptick and the rental growth behind it. So I think it's quite complex. Again, the market is quiet, but we need to be quite specific on where the market grows. So that's obvious that the yield effect is active even in Paris. And that you show -- you see that in our appraisals -- our previous appraisals. I think over the last 24 months, the evolution was 14%, 1-4, in our appraisals, the yield effect. So it's already in place. It might continue. We'll have, again, like conventional assets over time.
But even if it continues, you've seen that we have a very strong balance sheet. And what we've done during the year in terms of disposals will be at the end of the year, very helpful in terms of impact on our balance sheet. When you look at what we have sold, and as Benat said, it was more than EUR 1 billion of assets. It's representing almost 15% of that beginning of the year, meaning that, what we've done during the year is clearly a strong deleveraging of Gecina. And so, of course, having a company being able in case of to absorb adjustment in value is different.
We will take the next question from line, Allison Sun from Bank of America.
Congratulations on this very good results. I have 2 questions. First of all, on this Mondo building, I wonder if you could give us a ballpark as the level you are leasing at right now for the spring? And secondly is on your leverage. Do you feel comfortable with your current leverage, including metrics like LTV, net debt-to-EBITDA? And do you have any further plans to reduce it.
Yes. On Mondo, for the timing, the transaction is still quiet in the confidentiality mode. I think we are happy with the level, it's higher than what we expected. So for the timing, I would say that average is pretty good, good level of rent achieved. But that's also linked to the scarcity of qualitative offer and supply that you have in Paris. On the debt metrics, I think we have proven that we can manage that situation. We are at 32% LTV, we have no JV, no debt, no secured debt. We have a long-term -- very long-term hedging policy. So I think we have proven to be a pretty robust and disciplined company.
Okay. If I can add one more. That's actually following Ana's question. I know you cannot really give us too many details on the -- for your valuation, et cetera. But what kind of conversation you're having with valuers in the past 3 months? Do they have any comment on the Paris office market or how the cap rate should involve in their view?
Listen, we are still at the very beginning of the work with them. They are supposed to give us a fair review, I think, in 2 or 3 weeks from now. So we'll have a better view by beginning of November, but obviously, we are talking about the 31st of December accounts, and we are early October. So I think we will monitor the situation. Again, the best way, in fact, to prove the quality of our portfolio is to show what we have done. And again, this quarter, it's small volumes, okay? But we have disposed below 3%. Again, so we are not always a full proxy of the market.
[Operator Instructions] We will take the next question from line, Ben Richford from Societe Generale.
Just 2 questions. Firstly, on the disposals you've made and the yield on that. How much of that was influenced by vacancy if you -- a portions say any of the for the vacancy, what would the yield have been? And then secondly, just any strategic thoughts you have on residential, whether you see long term, you want to continue owning student residences, for example?
Yes, on disposals, yes, it was influenced by vacancy because we sold 2 vacant secondary assets offices. But even the ones that we are occupying were at 3%. So -- and obviously, back to Ana's question, I don't see so many reports pointing out the leases that we have done this year. Look, we have been selling, what, almost 10 assets excluding the one on [indiscernible] that you tell me it's a bit typical, but still and all of them were done below 3% yield. So -- and that's nowhere within the reports because it has been done one by one and most of the time with our brokers. So that's one. And second on resi, we -- you saw that we have been raising significantly reduction over time. we still have a lot to do. It's not easy, in fact, to deliver growth on resi. It's a very industrial business. We have been dishing up digital, we are dishing up quality of design, quality of services, somehow being a bit more proactive to raise rents, and that's paying off for the time being. So we are still on working mode there. But I'm quite enthusiastic about the way we have been revamping our business model on that.
Thank you. It appears no further questions at this time.
Yes. If there are no further questions, we can close this call, but thanks a lot for attending this call this morning. We'll meet in the coming weeks, probably some of you guys along conferences and road shows potentially. Please note that our next publication will be for full year 2023, the 14th of February after the market closed. And please remember, in the meantime that we are all available if you have any follow-up questions, so feel free to give us a call. Have a good day. Bye.
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