Cofinimmo SA (COFB) Earnings Call Transcript

Ladies and gentlemen, welcome to Cofinimmo's Half Year Results of 2023. [Operator Instructions] This call is being recorded. [Operator Instructions] The speakers of today are Jean-Pierre Hanin, Jean Kotarakos, and Yeliz Bicici. I propose to start. Mr. Hanin, the floor is yours.

Thank you. Good morning, ladies and gentlemen. Thank you for being with us this morning for the presentation of our Cofinimmo's 2023's half year result. I have a few colleagues around me in this conference room; Jean Kotarakos, CFO; Yeliz Bicici, COO, Offices and Real Estate Development; Hanna De Groote, Head of ESG; Maxime Goffinet, Head of Treasury; Jonathan Hubert, Head of Control; and Philippe Etienne, Head of External Coms. As usual, we will try to go rapidly through the presentation to have enough time for Q&A. So let's start with the highlights of this first semester 2023. As you know, Cofinimmo's portfolio is in transformation, with the Healthcare segment now accounting for 73% of the group's portfolio. The group has achieved solid results in a volatile and challenging macroeconomic context. The net result from core activities has reached EUR 114 million. This is a 5% increase compared to H1 '22. The total of divestment already closed and those that are already scheduled to be closed by the end of the financial year amount to approximately EUR 200 million. That represents 2/3 of our divestment objective of EUR 300 million for this year. In H1, we have already completed EUR 128 million of divestment, mainly in offices, which is in line with the forecast. The gross rental revenue are up 8.8% over the last 12 months, and the occupancy rate stays high at 98.5%. And the residual lease lengths reached 13 years. We also continue to manage efficiently our financial structure. Let's illustrate this. Our interest rate risk is hedged at 99%. This percentage ranges between 85% and 100% for the period '23 to '27. Our average cost of debt stays low at 1.4% and is expected to remain at this level this year. Our debt-to-asset ratio stand at 47.6%. This is essentially due to the seasonal effect of the payment of the dividend in June just before the end of Q2. We expect this ratio to drop to 45.6% by the end of this year based on the current assumptions. Our headroom on committed credit lines amount to EUR 686 million. And as you know from our previous reporting, all maturities of '23 were secured. Based on this, we confirm our gross dividend outlook for the '23 financial year at EUR 6.20 per share. Last but not least, on the ESG side, we continue to be a green leader. You will recall that back in February, we were included in the Bel ESG Index launch by Euronext. Then in April, Cofinimmo has been listed in the Financial Times 500 Europe's climate leaders. We are the only began property company in this list. We have also got several new brand certificate for health care assets. Our company profile and strategy is well known by all of you. So let's go directly to Slide #8. The chart on this slide illustrate the transformation of the portfolio towards health care. You can see that since 2018, health care real estate grew from 45% to 73% in our portfolio. At the same time, the offices segment went from 38% to 20%, and the distribution network segment was reduced by more than half. As you know, we own property in 9 European countries. And at the end of June, 47% of Cofinimmo's total portfolio is located outside of Belgium. I'm now on Slide #10, which illustrates again the ongoing portfolio transformation. If we cumulate divestment deals both in offices and in distribution networks that are already realized and those to be closed until the end of this year, we are already at EUR 200 million. This represent 2/3 of our full year target at EUR 300 million of divestment. On the right side bar chart, you see the realized divestment in offices in H1, amounting to EUR 109 million. Since 2005, net divestment in offices are almost at EUR 755 million. We also have almost completed the disposal of Cofinimur I, which are the mass insurance agencies in France. We should be able to divest this entire portfolio by Q3 '23, but we'll come back on this later. On the healthcare acquisition side, on the left bar chart, we have done for EUR 151 million of investment over the first half year, and we are in line with the outlook. On Slide 11, you can witness our accelerated portfolio growth in 2018 on average 12% per year. In the meantime, we kept the debt-to-asset ratio under control far below the legal covenant. Let me remind you that the H1 figures of 47.6% include the seasonal effect of the payment of the dividend. The net zero investment budget for '23 was designed to have a neutral effect on the debt-to-asset ratio between the year and '22 and '23. Cofinimmo's market cap was approximately EUR 2.3 billion at the end of June and is now around EUR 2.4 billion. The daily liquidity remains sound. And now on Slide 14. If we look at sustainability, we continue to set the tone and are seen as a very credible player by all our stakeholder. This was again illustrated during H1. Let me give you some example. You already know that earlier this year, Cofinimmo was included in the new Bel ESG index launched by Euronext and that on the ESG financing side, we have been added to the top SBTI, 1.5 degree ESG bond issuer by Euronext. SBTI, as you know, is an acronym for science-based target initiatives. On top of that, Cofinimmo is part of the financial timeless of 5-year climate leader. Among the 8 Belgian companies that are part of that ranking, we are the only real estate company as already highlighted earlier. Last but not least, we have also been granted several new BREEAM certificates. I will go now to Slide #20 to talk about our property portfolio. As you see, the occupancy rate remained high at 98.5%. You also see on this slide, the top 10 list of our tenant. Please note that Clariane is the new name of the Korian Group. Please allow me to say a few words on ORPEA. The voluntary conciliation procedure has resulted in an agreement on the restructuring of ORPEA financial debt that was validated by the Commercial Court of Nanterre earlier this week. It provides for the French state through the [indiscernible] to acquire a majority stake in ORPEA and for the conversion of part of ORPEA's debt into capital. ORPEA should therefore go on with this recommendation strategy for the benefit of its resident employee and their family. Let's move now to Slide 21. The overall weighted average lease term remained stable at 13 years. It's even at 15 years for health care. Compared to last year, yields are only slightly expanding at 5.8% growth and 5.4% net. Overall, our average net yield stayed well above 5%. Now in the absence of Sebastien Berden, who could not join us today, let me take you through the highlights of the Healthcare segment, and I'm on Slide 24. You see that our investment in health care illustrate our mission to consolidate our leadership in healthcare real estate in Europe. By doing so, we are very active in participating to the expansion and renewal of the health care property portfolio in Europe. You see the 9 countries where we are active in, and we continue our diversification within the health care subsegment, which is a clear differentiator from our peers. Despite the headwind, we maintained our investment activity in high-quality health care real estate for approximately EUR 150 million. The fair value of our Healthcare segment amount to EUR 4.5 billion. We own now 308 sites for above 1.7 million square meters. The following slides records all the acquisitions that we have made through the first semester of this year, and our acquisition earlier this month. Let's go now to Slide 26, and let me give you a few words on one Dutch and one Belgian deal we made during this semester. In Hilversum, a city of 90,000 inhabitants 20 kilometers from Amsterdam, we completed in Q1 the delivery of an ultramodern care clinic for the Tergooi Group on a brand-new hospital side. The building has a number of outpatient clinics such as dermatology, ophthalmology, plastic surgery, oral surgery and aesthetic medical center and a diagnosis studio on a total surface of 6,700 square meter. The use of new technology and energy efficiency application made the health care clinic a sustainable A plus high-tech building in which high quality care is provided. The triple net lease agreement has already been concluded for the care clinic for a fixed term of 20 years. The investment budget amounted to approximately EUR 30 million. In Belgium, on Slide 27, we acquired a very modern nursing and care home near the city of Liege, the fourth largest city in Belgium through a contribution in kind. You will remember that the structuring boiled down to paying for an asset or a propco with newly issued shares. It does offers the double merit of acquiring an asset and strengthening our shareholders' equity at the same time. Les Jardins D'Ameline, that's its name, is a premium asset of more than 10,000 square meters. It was built in 2017 and expanded with a new wing in 2020. This modular and flexible side as an excellent A-label energy performance. It's fully operational and offer 111 bed nursing and care home 43 assisted living apartments as well as 5-day care beds. The triple-net lease is signed with operator Orelia for 27 years. I will now give the word to my colleague, Yeliz Bicici, which will highlight some project in the geography she is responsible for.

Thank you, Jean-Pierre, and good morning to everyone. As you can see on Slide 26, in Germany, we have completed the development of 2 innovative health care sites in Kaarst and Viersen. Both projects have an energy label A and are designed as environmentally friendly health care campuses, integrating a variety of care and living options for their residents. These are parts of a larger pipeline of 9 assets in the North Rhine-Westphalia region signed in November 2020 and of which now 3 assets have been completed. After the completion and entry into the consolidation scope of these 2 sites as well as the one of the site in newly delivered in 2022, more deliveries are still planned in the coming quarters. With the delivery of all sites, we will have a total of 1,200 units, all to be operated by Schönes Leben Gruppe, with leases with a fixed term of 25 years. On the same slide, you see that in Finland, we had 2 projects completed in H1 in Kuopio and in Helsinki. Both assets represent accumulated investment value of EUR 36 million. In Kuopio, the nursing and care home offers 75 beds spread over a total service area of approximately 4,200 square meters. The double net lease has been concluded with operator Nonna Group for a fixed term of 20 years. The level of energy performance of the building is A. The nursing and care home in Helsinki offers 83 beds spread over total service area of 4,000 square meters as well. A double net lease has been concluded with operator Attendo for a fixed term of 15.5 years and the level of energy performance of the building is B. We can now move on to Slide 29 for the breakdown of our distribution networks, which is now mostly comprised of the Pubstone portfolio. At end June 2023, this segment represents a fair value of almost EUR 500 million that cover together 313,000 square meters and now count 877 sites. This is almost exclusively from Pubstone for which I remind you that we have a long-term contract with AB InBev, both in Belgium and in the Netherlands. On Slide 30, an update on the other part of the distribution network, which is Cofinimur. It is composed of insurance agencies of French insurer map, which are almost all divested. At this day, 252 assets have been already sold for a total fair value of almost EUR 110 million. There is only 13 remaining assets in the process of being sold, and we are confident that we will complete this disposal by the end of Q3 this year. Let's now talk about the office segment as of Slide 32. The fair value of the office segment represents EUR 1.2 billion at end June 23 versus EUR 1.3 billion 6 months ago. It represents 51 sites for approximately 400,000 square meters. On Slide 33, you can see on the map and the bar chart that our aim is to create value through capital recycling. We keep the largest footprint within the Brussels CBD, which accounts for 72% of Cofinimmo offices portfolio. We are also speeding up the divestments in the decentralized or periphery regions as well as some buildings in the CBD, which we divest for ESG reasons. The following slides give a chronological update on this. Slide 34. As a reminder, in Q1 '23, we have divested Mercurius and Georgin for approximately EUR 35 million. Slide 35. In Q2, we signed no less than 5 establishments. You see the name of the buildings on your slide for approximately 82... [Technical Difficulty]

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The main driver behind the decrease is include the reduction of the dividend in Q2 23 for EUR 6.20 per share. Let's have a look now at the financial resources as of Slide 45. To date, we raised EUR 80 million of equity through contribution in clients in Q3 and the optional dividend in Q2. We see the [indiscernible] have been possible despite market headwinds. On the debt capital markets, nothing new in January '22 when we issued with success our second sustainable benchmark bond of EUR 500 million, a condition one can only dream of today. More important here is that our S&P credit rating was confirmed in March '23 [indiscernible]. As you can see on slide 47, we managed to realize an important refinancing operation. And we did this at credit spreads comparable to those witnessed in H2 '22. Please remember that there is no long-term debt maturing in '23, aside to the refinancing carried out last year and at the beginning of this year. All in all, we have now more than EUR 2.6 billion in sustainable financing under the form of several instruments, including the sustainable commercial paper program that was on Slide 48. Slide 49 highlights the ongoing access to diversified funding sources. Among others, the relation with 20 leading banks. The average debt maturity now amounts to 4 years, and that is around this figure. This is because it's nearly 4.5 years. At the same time, the average cost of debt has only slightly increased in line with budget at 1.4% at the end of June versus 1.2% in 2022. We currently expect to remain at the level of 1.4% throughout the financial year. Slide 51. And as I already highlighted, we can see that we have no maturity left in '23 and that the debt maturities are well spread. On the 30th of June, the headroom on the committed credit lines was about EUR 686 million. On Slide 52, we can see that 99% of the group's current debt is hedged. And between the years '24 and '27, the hedging ratio ranges from 85% to 100%. This puts us in a comfortable situation in the current uncertainty sorry, in the current uncertain interest rate environment. I now I hand over to Jean-Pierre for the highlights on our '23 outlook.

Thank you, Jean. On Slide 54, you will find a breakdown of our initial 2023 investment and divestment budget as we published it last February and confirmed end of April. We just added a footnote highlighting the fact that the investment budget of EUR 300 million is including the acquisition through contribution in kind, since they have a favorable effect on the debt-to-asset ratio. As you can see here in the pie chart on the right, the lion's share of the investment of EUR 300 million growth to health care real estate, of which EUR 151 million has already been done in H1. On the left pie chart, the amount of offices are mostly CapEx related. On the divestment side, if we take into account what we have already done in H1, which is EUR 128 million, plus the additional divestment expected to close by the end of 2023, we stand at approximately EUR 200 million, well on track to realize our divestment objective for EUR 300 million for the full year. This implies that the net investment would then be milled, excluding the contribution in kind and be neutral on the debt-to-asset ratio based on the budgeted assumption. These give us, as shown on Slide 55, a portfolio outlook for this year of approximately EUR 6.4 billion after execution of the current development pipeline. I will end this presentation with the outlook for 2023 on Slide 56. Our initial outlook for this year stood at EUR 6.95 per share at the level of the net results from core activities. This take into account the budgeted divestment and dilution from capital increases known at that time. Now taking into account the fact that we are ahead of budget in and that there has been unbudgeted capital increase in Q2 and Q3. We are in a position to confirm our EPS target at EUR 6.95 per share, both deviation from the budget offsetting each other. For your convenience, we also updated the line showing the expected denominator for the computation of the 2023 EPS. Those figures allow us to confirm the outlook for the gross dividend at EUR 6.20 per share for 2023, stable compared to 2022. We want to thank you for all your attention and we are here now to answer your questions. So who is taking the first question?

[Operator Instructions] Our first question comes from Frederic.

Can you hear me?

Yes.

It seems also that there has been an issue during the presentation on the on the WebEx platform. Apparently, there was no sound for more than 5 minutes, just so you know. But just doing several questions on my side. The first one considering the lack of transaction in the nursing home market, could you comment on the way appraiser look at your health care portfolio today? Do they apply a discount to less solid operator? Or do they look all assets the same way? And I guess my question is, do you see a big wide spread on valuation in your health care profile today. That's the first question.

Well, there is no change in the valuation methodology already, I would say, before this turbulent time experts, whatever in health care and other segments are always looking on the line by line and they do not apply per principle definition discount whatsoever. As you know, we have been able to pass on indexation fairly well which, of course, is an important element in the valuation methodology. So there is not at all discrimination among health care assets or the type, I would say, or exceptional element in their valuation part. So this was for your first question. Can you repeat the second question, Frederic?

I haven't asked it yet. I ask question by question. The second one is a bit related to what you say. It's linked to operator. So if you look at the difference between -- and it was already the case in Q1, but if you look the difference between indexation and like-for-like rental growth in health care, you see it's a negative spread. So if you do the math, you'll come roughly at EUR 2.3 million that you may have been given as an incentive to some operators. I guess the question I have is, do you feel confident that it will be enough for H2? Or do you see other tail risk in your portfolio?

Well, so far, we feel confident the situation among operators and mostly, I would say, in Germany, globally on the market is not yet totally settled mainly due to the lack of staff, which has always been a key issue, but which is today an either higher issue, combined with higher cost since as you may remember, I've already highlighted this that this collective bargaining agreement, which has been basically concluded on the first of September of last year make the total personnel cost for many operators, higher cost. So we -- so far, as we look at our portfolio based on the information we have today, it's only a marginal part, which basically are under close monitoring from our side. So what we have done today based on what we know, should allow us to continue.

Okay. So now it's well monitored. That's what you said?

Yes, yes, yes.

Okay. And maybe the last one for me. If I read the press release correctly, you stated that the core results are a bit higher than the initial outlook you gave in February. I guess the outlook you gave early February did not include recent contribution in plan. Is it a reason why you don't increase the guidance today for full year? Or are you present for other reasons in H2?

Well, indeed, back in February, we didn't know whether we would do a stop dividend, optional dividend or not. And the contribution in kind is always something until the last minute. You don't know whether it will go through or not. So we are indeed cautious also for the second half of this year. As usual, I think you know us quite well, Frederic and we prefer to stay disciplined and be like this.

Our next question comes from [ Steven ].

I have 3 questions. First is, what is the target or expected net yield for new prime health care acquisitions for the most relevant countries? Let's start with that.

I don't know, frankly speaking, because there are not many transactions on the market. So I have not seen a lot in the last weeks and months. There are some larger portfolio that are expected to be on the market as of September, I heard. For example, I think that [indiscernible] is supposed to market its international we use outside of France portfolio. But frankly speaking, if I look at the last 6 months, there were rumors about portfolio that were supposed to be marketed and that were never at least to our knowledge been in the market. So I cannot tell you today what would be the new year.

Okay. Clear. What are you willing to pay, let's say, the ORPEA assets? And let's look at the prime good tenant, et cetera. What are you willing to pay? Is that over 6% or lower is also okay for you?

Well, you know the reality of financing. We have to take it into account basically, if you would take long-term financing today, fixed rate, it would be around 4.5% at best. So we have to be -- to take this rate and frankly speaking, as there are not a lot of transaction, we have not looked exactly how much we would be willing to pay because we are so busy with our divestment that today, we are more a seller than an acquirer. But clearly, as usual, we would have to take this new financing condition into consideration.

Okay. Clear. Maybe a different question on occupier health. Could you provide some metrics on occupier profitability? I don't know, main rent coverage rate show or underlying occupancy for the most important countries?

Well, the only recent data I have is on France because you may have spotted that [indiscernible] has disclosed a few days ago, their occupancy ratio, which was quite healthy and progressing since last year. It's a bit too early in the year to have really a picture of occupancy. The trend clearly is positive in most countries. And I think the only element which might be hindered to a fast recovery is basically the shortage of staff, which was already before the COVID the first priority of many operators and which is still today. But it's clearly on a good direction in Europe.

Our next question comes from Francesca.

I escalate the question of Steven. Referring to the EUR 150 million acquisition you finalized so far. Can you disclose the average yield on these latest transactions?

You mean for the pipeline we have done so far or for? I'm not sure could you be more precise?

For the investments that you finalized so far, what's the average yield?

You mean the very few transactions we have done. It's basically the market rate. I've not done an average because we don't have many acquisition outside our pipeline. It was so marginal that don't really change the bottom line because as you know, the vast majority, the vast majority of what we have done this year is basically executing the previous committed pipeline.

Okay. And then you move to...

That's why it's very difficult to say what is today the price of health care asset on the market because there are not many transactions.

Yes, understood, and it's fine. And a question on indexation, as you already started discussing with tenants about indexation for 2024. What is the bit you're feeling? Is anyone asking for cap mechanism, for example, or other mechanisms, is this part the negotiation dynamics, negotiation conversation with them?

Yes. Well, you know that indexation pass through at an anniversary date of contract. So anniversary date has rated all over the year. So it's, I would say, almost an ongoing exercise. We are not yet discussing '24, but it's clear that basically the big high is almost behind us because we have passed, I would say, the largest part and expectation, if one can still believe in some macroeconomic forecast, that it should go down after the end of this year. So -- but we are not yet forecasting what will be the indexation in September '24. And so it's far to, I would say, based on anticipation that basically today are really difficult to firm up.

Okay. And changing again argument on the disposal, what do you expect for this final EUR 100 million cash that needs to be finalized until December, how confident you are on [indiscernible] what kind of visibility you have so far? Can you give some color on this?

Well, I prefer to look on what we have achieved so far. I remember that when we announced back in February, a target of EUR 300 million, many, many people were telling like last year, by the way, that this was a too ambitious target and not achievable. I understand this comment because indeed, it's difficult market environment. And for those who are never divested assets, it's a total new process. As you will appreciate in Cofinimmo global track record over the year, we are used to prepare a divestment. It's not something you do overnight. And when we had announced EUR 200 million, we had, of course, already advanced discussion on some of assets. But it's clear that it's a process in the current environment where you also need to make your opinion about the financial stability of your buyer and that's why it's a lengthy process because on both sides, there are a number of analysis that takes more time. But that's why we are quite proud that basically we have already engaged 2/3 of our objective in midyear. Now to be fair, in July and August, the activity is quite low. So I would have a better view somewhere in September, October. But having already secured or engage 2/3 of our portfolio, I think the EUR 200 million is not unreachable, like maybe one could have had this perception back in February where the EUR 300 million looks like the Everest. So today, it's still something we need to deliver. But I think the fact that we have been able to really deliver what we have announced show our commitment, show our discipline and show that we are also a reputable counter party that can engage into process that do not deliver surprise in terms of quality of the assets that we are delivering. So that's where we stand today.

And I know it might be a bit too early to ask, but do you think that the net Vivo investment approach will be replicated even for 2024. Is this sustainable?