Inovalis Real Estate Investment Trust

TSX:INO.UN

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for taking the time to listen to the Inovalis REIT Podcast for the Q3 2018 Financial Results. This presentation will be made by the CEO, David Giraud; and the CFO, Anne Smolen. Please note that comments made during this call contain forward-looking information within the meaning of applicable securities legislation, which reflects the REIT's current expectations regarding future events. This is based on several assumptions and is subject to a number of risks and uncertainties, many of which are beyond the REIT's control that could cause actual results to differ materially.

[David Giraud, Chief Executive Officer]

Thank you all for listening. Inovalis REIT is managed by Inovalis SA, a first class European real estate asset manager and the REIT's largest shareholder. The REIT is a long-term investment vehicle for stabilized office properties in Europe, and we are committed to further growing the REIT. Quarter 3 2018, so Inovalis REIT's positioning itself to invest funds raised through the completion of the product placement promissory note in quarter 2 2018. Management is currently in the process of evaluating several planned investments with a view to completing acquisition in quarter 4 2018. The REIT also continued to maximize the rental units achieved through CapEx across the current portfolio assets, allowing the REIT to deliver consistent return to unitholders. Quarter 3 2018 saw the overall occupancy rates slightly decreasing from 97% to 93% over the same period for the portfolio properties and by the REIT as part of joint venture arrangements. The decline in occupancy is a result of the departure of Ademe, the former tenant of the Vanves property that occupied approximately 50,000 square feet. As this vacated space consists of [ wonderling ] of the Vanves asset, management are using this departure as an opportunity to deliver the greatest value to unitholders through the redevelopment of this asset. In the meantime, short-term tenants are being actively sought prior to this redevelopment. Work on the Rueil property, which has been partly financed through the acquisition loan, has started. The REIT's participation in this project provides the REIT with a consistent return on the financing provided, while also allowing the REIT to participate in the upside of this development for a 20% profit sharing agreement. The project has been secured based on the signature of the 12-year old lease by Danone with delivery of the project expected probably end of quarter 1 2020. Let me now share further thoughts about our European markets. In France, after an excellent quarter 2, market activity returned to normal levels in quarter 3 with EUR 3.4 billion in investment recorded for the quarter. This takes the year-to-date figure to EUR 12.8 billion as at September 30, 2018 and marks a 33% year-on-year increase in investment activity. Rents in Paris have also continued to increase, driven by restricted availability and increasing demand. Rents in central Paris have increased by 9% year-on-year. This trend is also reflected in the increasing rents for the Greater Paris Region, where there's been an 18% year-on-year decrease in available inventory. This is positive for the REIT's French portfolio, which contains asset located in both central Paris and the Inner Rim. The REIT has also taken active steps to further increase rental income. We are completing approximately $3 million of capital expenditure for the portfolio for 2018. We anticipate that these improvements will allow the REIT to negotiate higher rents upon the expiration of the leases and to continue to attract new tenants with -- when vacancies arise. In Germany, the transaction volume on the German commercial real estate market continue to increase. The big 7 cities, Berlin, Dusseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart, have seen an increase of 27% year-on-year. Office remained the most popular as plus accounting for approximately 45% of investment for the year-to-date. Continuing positive economic development, accompanied by falling unemployment and growing level of office-based employment, are reflected by the robust demand for space. Office space they kept in the big 7 cities, where that's remaining historically eye level for the first 9 months of the year at 7% above the 5-year average. Thank you very much for your attention, and I will now turn things over to Anne, our CFO, who will review the financial results.

[Anne Smolen, Former CFO & Secretary]

Thank you, David. In our Q3 MD&A available on our website and on SEDAR, management has continued to present the REIT's operating and financial results using both GAAP and non-GAAP measures. I will focus on the results relating to the REIT's entire portfolio, including joint ventures, which are presented on a proportional consolidation basis and review the key following items: net rental earnings, administration expenses, debt-to-book value and FFO, AFFO. Net rental earnings. In Q3, net rental earnings for the entire portfolio of $9 million, excluding IFRIC 21 impact, was 9.5% higher than Q3 2017's of $8.2 million, driven by the net acquisitions across the portfolio, indexation and new leases, and partially offset by the previously discussed departure of Ademe from Courbevoie property. Administrative expenses. In Q3 2018, administrative expenses for the entire portfolio, excluding asset management fees, were $1.03 million. The increase of $0.2 million compared to the same period in 2017 was principally related to new acquisitions, increased activity at the Luxembourg holding company level and the increase in costs relating to the Canadian structure. Debt-to-book value. For the entire portfolio, the debt-to-book value at the end of Q3 2018 was 50.7%, a slight decrease over to Q4 2017 figure of 51.2% due to the increase in the value of the asset and significant ongoing amortization of the debt. Now let's look at the FFO, AFFO figures. FFO for Q3 2018 of $0.20 per unit is $0.01 lower than Q3 2017 FFO and slightly below guidance. Q3 2018 AFFO per unit of $0.21 is $0.01 lower than Q3 2017 AFFO and slightly below the management guidance. The delay in the investment of the proceeds from the private placement promissory note is responsible for the reduction in FFO, with AFFO impacted also by the ongoing CapEx across the portfolio. Management projects that the proceeds will be invested in Q4 2018 and anticipates FFO and AFFO and payout ratio will return to the guidance range following this investment. CapEx works were carried out during the quarter as part of the REIT's budgeted $6.5 million value maximization plan across 2018 and 2019. The strategy of the REIT is to complete renovation works following the departure of tenants, allowing us to re-let the vacated areas at higher rents. CapEx costs had an impact of approximately $0.01 on the AFFO during the quarter. For the year-to-date, approximately $2 million of improvement works have been completed across the portfolio. Thank you for your attention. We would be pleased to receive any question you may have. Do not hesitate to contact the members of the management team. Our contact information is available in the press release.