Covivio (COV) Earnings Call Transcript

Okay. Welcome, everybody. I'm very pleased to welcome you for the Full Year 2019 Results of Covivio. Just to start by Page 3, the key milestone we achieved last year. Strong operating performance, also a discipline in financial policy with the fact that we reached our target of LTV below 40% and also solid financial performance with an increase of all of indicators per share strongly increased. The strategy -- just Page 5. Just to remember, Covivio has 3 strategic pillars. First, is to be focused on major European cities. The second is to have a strong development pipeline. And the third is the client centricity. Those pillars are supported by our ESG strategy to build sustainable building, to reduce carbon emission and to generate well-being in all of our assets. That leads to a purpose that we announced last year, build sustainable relationship and well-being. Coming back to our pillars. The first one focused on major European cities. Last year, we increased our portfolio by EUR 1 billion to EUR 24 billion. Today located in 92% is the major European cities. The total return of all of our portfolio last year was above 10% on average. Second pillar, the pipeline. We increased strongly the pipeline last year. First, in the committed one by 40%, despite, I have to say, EUR 200 million deliveries and also strongly in the managed pipeline by more than 50%. The total pipeline is EUR 8 billion today in Covivio. The third pillar is relationship with our tenant. We have very good results in all of our sectors last year. In the office sector, we renew a lot of leases with current tenant, with the last operation we announced last week with Dassault Systems. So really an interesting and a big one. In total, we have an increase of 4% of the passing rent on this renewal, and we obtained -- continue to have a strong occupancy rates at more than 98% on our overall portfolio in office sector. I'm also very proud with the result of Wellio, our flex-office offer. Today, we are fully let at 99% occupancy. In the residential part, we have satisfied tenants, thanks to the last money survey study that we have -- we are the sole private company with a very good rating. And in the hotel sector, last year, we strengthened also the relationship with the historical partners, with Accor in France, with a new operation with 32 hotels in France and we will do that this year, but with the negotiation that we made with NH, where the operations that we announced just at the beginning of this year. And now Tugdual will present the results of 2019.

Good morning, everyone. So to comment this 2019 activity, we obviously start with a very short description about the context on our different markets. Overall, the dynamic is very strong. First on offices, where vacancy rate continued to decrease, thanks to very high level of take-up and a very limited amount of new supply. On resi, the situation is unchanged as far as fundamental is concerned. And probably that new regulation will not address this topic. And finally, on hotels, despite some short-term challenge, I would say, the overall growth is expected by 4% to 3% and in the next few years. When I start with Offices, the strong performance on like-for-like is explained by the figures of: France office, plus 2.6%; on Italy, plus 1.3%, in the context of still very high occupancy rates, which means that the performance is mostly driven by indexation, obviously, but also on reversionary potential that we are able to extract, plus 4% on the EUR 54 million of rent that we have renegotiated with our tenants. Last thing is on the pipeline. So we have signed this year, 83,000 square meter on our new buildings, mostly in Paris and Milan, with the average lease maturity of 11 years. Second, Hotels. As I said, overall, tourism evolution is very supportive for the asset class. And that's why, on our management contract, we fully benefit from this very good performance, plus 2.3% like-for-like revenue growth on 24% of our portfolio. On the other side, we have experienced a quite weak performance on our Hotel Accor portfolio, which is fully variable rents, mainly due to the fact that Accor is performing today, performing and financing an important amount of CapEx program to renovate the rooms and the lobby, and this will help us to fully benefit from a nice performance in the next future, due to the expected increase in the RevPAR of those hotel post renovation by Accor. Last on German Resi, another strong year. On average, more than 4% like-for-like rental growth, obviously, in Berlin, but also in the other cities of our portfolio, that account for 50% of our overall German Resi portfolio. And this strong performance has been a very good outcome of this 2019 year. But I have to say that in 2019, we have also discussed a lot about expected new regulation. This new regulation has been approved and will be shortly put in place in Berlin. So what is the financial impact for us? First, on the rents that are above 120% of the rental cap, we will have, starting at the end of this year, so around Q4, we will have to reduce those rents back to the rental cap. Second, starting probably beginning of March, on the rents that are between 100% and 120% of the rental cap, we will have to adjust the rents when a tenant is vacating, and we decide to relet it to another tenant. So those cumulative effects will have quite limited impact on our 2020 rents between EUR 1.5 million to EUR 1.9 million. And in 2021, we will have the full year effect of those 2 important measure, with a plus EUR 6 -- minus EUR 6 million impact on a group share basis. Last things, needless to say again, but there is still a high level of uncertainty on this law, as it has been approved by the Berlin State, but since that it's not a competency of local but the competency of federal estate. So we know for sure that there is a lot of people that are currently drafting opposition to come to the federal level. And last, as I said at the beginning, it is not addressing the main topic of the Berlin market, which is shortage of new supply. Does it change something on our portfolio, on our strategy in Milan -- in Berlin, sorry. So a few reminder of what is our portfolio in Berlin. First, it's high-quality and very liquid portfolio. Today, on average, our buildings is made of 11 apartments. So quite small size. Second thing, half of our portfolio is still in condominium. So that means that it's very liquid, and we can adapt the strategy to the evolution of the regulation. And simple example is, in 2019, we have sold around EUR 50 million in Berlin with a 60% profit on the last book value, taking into consideration that currently the average value of our Berlin portfolio is EUR 2,800 per square meter. Second thing is our development capacity. Today, we have an important pipeline in our portfolio made of existing land that we have for long years and also new lands that we have recently acquired. So today, EUR 850 million, where we could decide either to develop and rent or to develop and sell. This will depend on the evolution of the regulation, obviously. But what we can say is that, on this pipeline, we expect more than 40% margin when it comes to either let or to dispose. Also reminding that new buildings is exempt from new regulation. And last, diversification. Today, Berlin Resi rents account for 9% of overall revenue of Covivio. That means that the impact, that I described to you just before, is 1% of the total Covivio revenue. So for all those reasons, and despite short-term challenge on rents, we still are very convinced that this Berlin market has very strong fundamental and this regulation is not changing our view on the long-term potential of the Berlin market. Then on activity and on asset rotation. You know that we have always been very active and you will discover that we will continue to do so on the acquisition and disposal program. So last year, we sold EUR 1.2 billion of assets. For the first year, it was mostly mature assets in offices. Saying that, I'm just explaining that the 2019 has been the last year in terms of important volume of noncore on nonstrategic assets, and this strategy is close to the end. So 70% of the disposal program was made by mature asset, mostly in office, in the -- in France and in Italy. And the remaining part was made of noncore on nonstrategic assets for instance, on hotel or retail in Italy. We have been able, on the same times, to secure EUR 1.5 billion of investment, then mostly done on CapEx, so CapEx on our committed pipeline, but also buying some lands to renew the future pipeline. CapEx in our 3 countries, so Paris, Berlin and Milan, and on the other side, we have been able to buy portfolio and asset for a total amount of EUR 0.9 billion. So it's much smaller on a group share basis, around EUR 300 million, mostly done on our hotels in Europe and also resi outside Berlin and some Berlin offices. One of the key achievement of this year has been stated by Christophe is the increase in the development pipeline because we have been able to increase the committed pipeline by EUR 1 billion, specifically in Paris, for instance, the asset in Central Paris, the asset in Levallois, or in a very brilliant area in the south part of Milan, but also in resi in Berlin. The total amount of committed pipeline is EUR 2.3 billion and should deliver a 5.9% yield and with an expected 30% or more value creation. One of the last news on this committed pipeline has been the recent announcement of a key transaction with our long-term partner Dassault Systems, that's a very successful story that is lasting than -- more than 10 years and started in 2008. So we will build for them an additional 27,000 square meters, with more than 7% yield. And on the same time, we will secure a new 12-year lease on the whole countries. Finally, a few figures. I will obviously not comment all of them, but just stated some interesting figures. So at the end of 2019, we had, on the balance sheet, portfolio of EUR 24 billion. This portfolio on a like-for-like basis increased by 5.3% and all our main cities have benefited to this very strong performance. Second, thanks to this asset rotation policy. So last year, more disposal the investment and also the success, strong success of our scrip dividend, dividend in share that has been taken by 83% of our share capital. We have been able to more than achieve our objective to be below 40% leverage. That was an objective that we stated just 1 year ago and to be below 40% at the end of 2019, and we are today at 38.3%. That has led to an upgrade by S&P, and we have today a very long-term and secured debt, 6.1 year maturity and around 1.5% cost of debt. So this increase in value has led to, obviously, an increase in NAV. NAV today -- NAV is per share EUR 105.8 per share, so an increase of 6.1%. And an increase by 4.4% in April triple net asset value. Last slide about EPRA earnings. So we have been able to deliver stronger-than-expected growth on EPRA earnings per share, plus 4.4% versus an initial guidance of more than 3%. This is due to the overall good performance on the rental side, obviously, very strict and content management of the costs that are steady during this period. And also, cost of debt, that has been financial debt, financial interest that had been steady during this year. So overall, EUR 5.31 per share, an increase of 4.4% for 2019. I will now let Christophe explain what is the future for Covivio.

Thank you, Tugdual. So what is our main news for 2020, and for future years. First, we announced, at the beginning of this year, an important acquisition. It's the hotel sector, which is 8 emblematic hotels in Europe, that we will acquire by the end of the first part of this year. It's a EUR 573 million new acquisitions of emblematic hotel, mainly in Italy. In the same time, we negotiated acquisitions -- we negotiate with NH long-term lease for 15 years. It's a triple net lease, and that allows us to have with this very nice portfolio, a minimum guarantee rent of -- a yield of 4.7%, and a target yield which because of the rent, is the yield a variable component of 5.8%. This operation leads us to have a unique and non-replicable portfolio in the hotel sector now in Europe with EUR 7 billion in total of assets, an average yield of 5%, loan maturity, we say 50 years of maturity on average, and we also increased the quality of the portfolio during the last years. Today, we have 75% of upscale and mid-scale hotel in our portfolio. Second main driver of the future growth is pipeline. Tugdual explained just before what we have done in the committed pipeline last year, with a strong increase, but we have also a strong increase in the managed pipeline. That's the growth of the future. And with managed pipelines for roughly EUR 6 billion today, mainly in the office sector, but also more and more in mixed-use asset that we will develop in your main -- 3 main cities, which are Paris, Berlin and Milan. Just one focus on Paris. Inside Paris, we have a strong and important pipeline to be developed in the future. We have the figures [indiscernible] 30. What is key for us is that we have in Paris CBD, 3 short-term projects that we will launch in the coming months in 3 big assets that will be vacated by Orange, the current tenant in 2020 and 2021. This strategy of the pipeline leads us to a regular deliveries that will be increased during the last -- next years, and to around EUR 600 million of group share deliveries for the next 5 years. And that will create a lot of future value for Covivio. Now moving to German Office. Yesterday evening, we announced the takeover of the Godewind Immobilien company. So it's a company for EUR 1.2 billion of office portfolio. It's 10 assets, in fact, in the main German cities and 1 development project. It's a really quality portfolio with secured cash flow and growth potential. Why to do that? For us, it's a logical step in our story. We are established in Germany since 2005. Today, we have a strong platform, 570 people working on our strategy in residential and hotel, historically. We also established partnership with local administration and partner during the last years. We also decide 2 years ago to move in the office sector in Germany. We have an existing team today for asset management, property management. We put in place a strong development team in resi, but also in the office sector since 2017 in Germany, and we have already EUR 280 million of offices and EUR 600 million of development pipeline, mainly in Berlin. The German office market is really well oriented. In terms of trends, we have demands that exceeds the offer. We have the evolution of the supply and the demand to the last year in this slide, also the ones that are increasing. 5 years -- last -- probably 5-year period during the last period and continue to expect to grow, thanks to the expectation of the brokers and the market. When you are looking to the cities where we want to be in the future. We are in Berlin and we will be in the future in Frankfurt, Düsseldorf, Hamburg and Munich, all the trends are positive, in terms of take-up, in terms of fruition of the vacancy. Now looking to the portfolio of Godewind. Its 10 office assets for a total number of square meter of 290,000 square meters. We put a value of EUR 1.2 billion for this portfolio that represent per square meter less at EUR 4,200 per square meter. Today, the current vacancy is 8%, and we have immediate yield of 4.3% on this portfolio, and the target yield is to be above 5%, thanks to vacancy reduction and capture reversion potential, which is more than 10% as of today, and we have also one development of 15,000 square meters in this portfolio. Its 10 quality asset in the top German cities, you see in Frankfurt, Dusseldorf, Hamburg and Munich. Just looking more in detail on this portfolio. First, in Frankfurt. It's 40% of the portfolio with 4 assets. Just one word on City Gate. City Gate is in the city center of Frankfurt. Today it is really under-rented because today, 22% reversion potential on this very nice asset. It's the heart of the city of Frankfurt. Another focus on the Frankfurt Airport Center. It's a big asset, roughly 50,000 square meter. It's completely connected to the Terminal 1 of Frankfurt with a lot of tenants. And today, low vacancy and a yield which is really interesting. In Düsseldorf, 2 assets, 1 in the airport and the other one, the most important, Herzog Terassen, was completely refurbished since its acquisition by Godewind. Today, it's roughly fully let. It's really the CBD of Düsseldorf. Now in Hamburg, also 2 assets. The most important one, it's Zeughaus, is a very nice asset. In fact, it's 2 buildings in a good location and also in a very good condition and today, very good let also. And to end in Munich, 2 smaller asset. The acquisition of these 2 asset was made recently. Today, vacancy is high. So we have to work to reduce this vacancy in the future. And in one of those assets, there is also a development potential of 15,000 square meters, where there is also today some discussion for a significant pre-let. What are the key terms of the offer that we made, and we signed yesterday with Godewind. We secure 35% of their share yesterday. We will launch a cash voluntary public takeover in the next month. We imagine by the end of March, just after we obtain the green light of the authorities. We have the commitment of Godewind management to file a delisting application at the end of the offer period. This offer is welcome and support by Godewind management and the Supervisory Board of the company. What are the financial terms of this offer in terms of price per share? We will offer a price of EUR 6.40 per share. This represents a premium for 15%. So to -- compared to last year price and 33% versus the 3 months VWAP, and it represents a premium of 5% roughly compared to the EPRA NAV at the end of last year. In terms of time line, yesterday, we signed this transaction documents, and we expect that the end of this operation will occur by the end of May and also delisting of the company. After this transaction, what will be our portfolio in German Office? We will have a portfolio of -- platform of more than EUR 2 billion of asset in the main German cities, Berlin, Frankfurt, Hamburg, Düsseldorf and Munich, with EUR 1.5 billion of existing assets at a yield of roughly 5%. And also EUR 600 million of development project, mainly in Berlin, in fact, with a target yield of 5% to 6% and the target value creation to more than 35% for this operation. Just in terms of development, one word in Germany. So one of the biggest development we have today in Covivio is Alexanderplatz project. It's a 60,000 square meter project. Where do we stand? And so total cost estimated today at EUR 500 million and the target yield on cost at more than 5% in this location in the heart of the city of Berlin. We obtained last year the pre-building permits. We expect to have this year -- to obtain this year, the building permit and the delivery today is forecast in 2024. Just to remember, in this location, we also have another capacity to develop another building of 70,000 square meters, and we are -- we will study that in the future years. We have also developed, in Berlin, other projects. We will give you more color on 2 projects that we have already negotiated that will be developed in the near future in Berlin. We expect to be committed for these 2 projects this year in the south, and one is the Schonberg area and another is the Aldershof area. Just before answering all your questions, some words on the outlook and guidance. This very good result for 2019, that was presented by Tugdual, leads us to increase our dividend per share to propose to the general meeting to increase our dividend per share by 4% to EUR 4.80 per share, and we will offer to all our shareholders, an option of dividend -- payment of dividend in shares. All the shareholders that are part of the Board of Covivio has already been committed to be part of this dividend share that we want today, roughly 50% of the shareholder base. And that will lead to a new capital increase of Covivio between EUR 200 million to EUR 420 million. In 2020, we will continue accretive investment, as just described, big investments that we will do in the coming months. We will also pursue our disposal policy, active disposal policy, mainly now on mature assets because, as Tugdual said before, we are at the end of the exiting of the nonstrategic and the noncore portfolio. And what is key for us is also to keep our LTV below 40%. In terms of guidance, what we expect for 2020. Really, we expect good operating performance to continue, where just to mitigate the full year effect of the deleveraging that we have done last year because a lot of disposal was just performed by the end of 2019. So that will have a full impact in 2020. And we have also the impact of the increase of the pipeline that we've done during the last years, especially in '19 and '20, that have a temporary impact on the EPRA earnings for 2020. All of that leads to our guidance for EPRA earnings for more than EUR 5.40 per share in 2020. Okay. Thanks. And now with Tugdual and with all the team, which is with us, we are available to answer your questions.

Bruno Duclos for Invest Securities. I have a first question regarding the Godewind acquisition. So if I understand well, provided that you have the antitrust commission authorization, you are sure to have 100% of the company?

We are not sure because it's to be tendered. After that, we have -- today is 35%, which is secure. And after, it will launch a public offer, and we will see who of the shareholder will contribute their share to the -- tender their share to the offer.

Okay, but the mandatory -- the delisting will not be mandatory?

In Germany, delisting is different than in the other country. It's in the hands of the management of the company. So the management takes the decision to accept to delist the company after the offer, not depending to the number of shares that will be tendered to Covivio.

Okay. And is the impact of the acquisition included in the guidance?

Yes, all is included in the guidance.

Okay. And the -- so you have told us about the impact of the new Berlin law on the revenues. And at the same time, the value of the portfolio is not changing. So could you elaborate a little bit on this point?

What we can say today, yes, what Tugdual said before is that what we see in this market of Berlin. There is a strong shortage in terms of flats. So all what he is doing to increase his shortage was increase the price in long term, that's true. And that not leads to cash flows on rent. What we see last year -- at the end of last year, the city of Berlin, [ acquired ] a lot of flats with portfolio at very important price -- so above the current valuation, for example. So and -- it's a city of Berlin. So what we -- today, it's difficult for the appraiser to take into account. Is the DCF the impact of the rent? Because in the DCF, yes, we will have a negative impact. But when you see the strong difference between block value and unit value, there is a huge gap. And just to remember, in our appraisal value in your account, we have all our portfolio at block value. Also, the 50% that are today able to be sold flat by flat. So there is a huge resell value. And we expect, but we are not the appraiser, but we expect that there will be no impact on this law on the appraisal value for -- in 2020.

Regarding the disposals in 2020. So you will be focusing on mature assets, but could you give us a little bit more color about the split between the various...

We will continue to do what we have done in the last year in each of our asset class. So we will sell more flats in Berlin. That's something that we will increase, that's sure because of the regulation, because of the valuation, and so on. That's what we'll do. And after that, we'll continue to have more disposal. We have also -- we want also to reduce of Telecom Italia exposure in Italy. So we forecast to push on that in 2020, and we will continue into Office sector in France and also in the Hotel sector to continue to have our regular disposals. As of today, what we imagine for the disposal plan of 2020 is a minimum disposal of EUR 600 million.

Florent Joubert from ODDO BHF. So I would have maybe three questions. So first question is about your acquisition policy. So in January, so you announced a significant acquisition in Hotels. In February, you announced a significant acquisition in Offices. So my question is, do you think that or do you ambition that you would continue the year in this way? So second question, you give us some figures about the vacancy in the office market, and also on the assets that you are buying. And maybe, for example, of City Gate, so I think there is a significant vacancy. So how will you be able to reduce this vacancy, for example, for this asset, and for the other assets? And third question is about -- is it possible to have maybe more color on the like-for-like growth that you expect for Residential in Germany in 2020?

Okay, I will take the first one and Marcus Bartenstein will speak about strategy in Germany after. And so on the acquisition, yes, we've done a lot of things since the beginning of the year. So I think we have not forecast, we have the same speed of acquisitions over the last of the -- rest of the year. We are very happy with these 2 transactions. I have to say, no, it's a question of timing that this is -- for example, on the Hotel operation, we worked more than 18 months on this transaction. So it's not too easy to manage a deal like that -- off-market deal, so that takes a lot of time and it's a very good operation for us, but it was -- it takes a lot of time to organize that. On the German office, we look at a lot of potential targets during the last months also. And I have to say, and when we decide to move on Godewind because we consider this portfolio, the size of the company, the fact that it's a very simple transaction, fits the best compared to what we need and what we would like to do. So -- and we don't forecast in the coming months to have last transaction to announce in the market. Perhaps, Marcus Bartenstein, our Co-CEO of Germany, just one word of -- about the strategy in Germany.

Yes. Strategy in Germany is, of course, we make now this big step to the office segment in Germany. Sorry. We have -- we will continue with the work, which was started by Godewind when they were buying the assets, City Gate, for example, was the last as if they've purchased. So they have not fulfilled their asset management plan. We will acquire a strong platform with the Godewind team, so we are happy to integrate them. And so we will benefit also in the key figures with their experience, and we will do the asset management shop, which is quite normal. In terms of rent regulation, I mean, we have seen all the impacts in the results for 2020, 2021, and we believe also that the German Constitutional Court will cancel this law at the end because this is a real, let's say, real impact on the German legal constitution. So this is not what was wanted to have a real influence in existing contracts, which is now made. And therefore, we see a potential in canceling this law.

Maybe to add some words on the specific topic of what we expect in terms of like-for-like rental growth. And just for you to have in mind, 50% is -- of rents outside Berlin. On this, we consider that we will continue to benefit from the same trends around 4%, 4%. And now on the Berlin part, we expect for this year to be close to 0, I would say.

Yes, because we don't expect that this year, the law will be canceled because the process is long, but what Marcus said is important, we consider that this law is on unconstitutional. And that in the future, we can -- we imagine to recover the ones that we will lose this year.

[indiscernible] I have one question on the U.K. hotel portfolio. You had 1 year of operations, and the figure seems a bit sluggish, can you comment on the performance, please?

Dominique will answer the question.

So in fact, we were impact by the uncertainty of the Brexit, of course. And at the same time, [indiscernible] decide to do a refurbishment program, a huge refurbishment program. So almost all of the hotel were under refurbishment during this year. So it was a little complicated in terms of ramp-up of the turnover. But you have to have in mind that it's a good news for the future from this refurbishment program. And at the same time, you have to have in mind that we have a minimum guarantee on this hotel portfolio. It's a very long-term contract for InterContinental. So we really think the action plan will lead to a good result in the long term.

So no disappointment on the performance, just normal for you?