Mercialys SA (MERY) Earnings Call Transcript

Hello, and welcome to Mercialys' 2023 Half Year Results Meeting. [Operator Instructions]. Over to Élizabeth Blaise and Mr. Vincent Ravat, CEO, to start our conference for today. Sir, over to you.

Hello, everyone, and welcome to Mercialys' half year results meeting. To start our presentation, please go straight to Slide 3. Against a backdrop of macroeconomic turmoil in real estate and retail and as well as for the Casino Group, one of our tenants. During the first half of the year, Mercialys has confirmed its strength in 2 areas. #1, on the left side of the slide, you will see that the solid fundamentals of our business model based on affordable consumption for our customers is clear in terms of our brand price positioning and our retail mix of rent and occupancy rates as well below 11% at June 30 and also in terms of accessibility of our retail sites. On the right-hand side of the slide, you will see that we have a balance sheet under control, thanks to our proven ability to find the right liquidity for our assets. This enables us not only to smoothly absorb rising interest rates, but also to have the leeway to buy selectively and profitably at the right market timing. We'll back to these points in the course of our presentation this morning.

Hello, everyone. First of all, a word on the economic context, which makes Mercialys positioning based on the accessibility of its offering all the more relevant. On Slide 6, you'll see that since the first half of 2022, the return of inflation has been a key concern. Although it has not returned to a satisfactory level, inflation in France seems to have peaked at plus 6.3% in February 2023 before returning to plus 5.1% in May and plus 4.5% in June, the Banco France expects inflation to reach plus 4% in Q4 2023 before slowing to plus 2.4% in 2024. While the outlook for normalization is positive, inflation has weighed on households purchasing power and indirectly on their purchasing expectations. This is all the more to in France, where our fellow citizens perception of inflation is 3x higher than its true measure and where the index of confidence in the future has reached an all-time low according to one survey. Despite this environment, consumption in France held steady at plus 0.2% in Q1 2023 and plus 0.1% in Q2 2023 and should remain stable over the year as a whole, according to the Banque de France with an expected upturn of plus 1.5% in 2024, as you can see in Slide 7. French households are still benefiting from the surplus savings built up during the health crisis of 2020 and 2021. As you can see from the graph on the right, at 16.3%, the savings rate remains structurally amongst the highest in Europe and is still higher than the level recorded prior to 2020. Against this backdrop, we see on Page 8 that shopping centers performed well in terms of footfall. We carried out a survey of almost 1,500 shoppers in our centers. And this survey shows us that our merchandising mix anchored around every day needs responds well to this recurrent pattern of visits. And indeed, for almost half of our customers, these visits take place at least once a week. However, total footfall at Mercialys sites in the first half of 2023 was down 2% on the same period in 2022 compared with a national Quantaflow Index up by 3.7%, as you can see on the left-hand side. In fact, this performance masks a significant difference between footfall at Mercialys shopping centers and the performance of hypermarkets anchoring these sites with plus 2.3% for Mercialys shopping centers in line with the market, whereas hypermarkets have experienced a significant drop in footfall minus 8.9%. Such start stark decorrelation is a good illustration of customers' distinct shopping itineraries with shopping centers benefiting from their own nonfood appeal. In fact, the Procos, federation of specialized nonfood chains, confirms that nonfood sales are holding up well with a half yearly growth of plus 3%. In addition, the momentum of Mercialys' nonfood tenants is also reflected in their sales, which rose by plus 3.5% in the first half of 2023 as illustrated in Slide 9. At the end of May 2023, sales growth was plus 3.4% for national panel effect of shopping centers, up by 5.2%. The national panel's higher performance is essentially explained by a stronger take-back of major shopping centers within that national panel, and they had been impacted by the vaccination mandates in restaurants until the end of Q1 2022. Behind such sales performance also like striking sector discrepancies as confirmed per our recent consumer survey. As shown in the graph on the right, the respondents pointed to their intra-category consumption choices, mainly to the detriment of textiles and to a lesser extent, electronics and household equipment. As for the latter, this reflects a U-turn from the high level of equipment at the end of the COVID crisis. In Slide 10, accessibility is a decisive element in Mercialys' offering in the first place for tenants. Through their local leadership, our assets help to sustain the sales of our retailers, as Vincent mentioned. What's more, since consumers use them on a very regular basis for everyday needs, their technical features can remain relatively simple with few vertical links, no costly architectural developments and fusile parking lots. In our last publication, we indicated the share of charges billed to our tenants, EUR 40 per square meter on average, excluding property tax. Reasonable rents and charges combined with our ability to generate sustained sales have resulted in a sustainable occupancy rate of 10.9% and the first half of 2023, reflecting changes in the market mix. This rate is slightly lower than that observed in 2022 despite the effects of indexation and charges due to energy mainly. On the graph on the right, you will also find a breakdown of OCR by 10 segment. Structurally, OCR for Textile is top end of the range, standing at 16.1% in our portfolio. Services and catering are in line with the average and other sectors also led between 8% and 9%. Mercialys' business model is this instrumental to the economic health of retailers, which also contributes to controlling the vacancy rate. This model also responds to the sustainability of end consumer spending and is focused on satisfying essential needs at affordable prices for as many people as possible. Slide 11 shows that Mercialys' retail mix is highly concentrated on essential needs. So food retailing and restaurants, which account for almost 30% of the rental base. The everyday sectors of beauty and health, sports measure and services account for 34% of rents, while discretionary spending concentrated on personal and household goods represents 36.8% of rents. You will also note that over the last 5 years, the average customer basket within Mercialys scope has increased by almost 25% or plus 5.8% per year on average. This illustrates both the attractiveness of the retail mix and the greater efficiency of each visit for customers. prepared in advance and with smaller parties of people and of course, more recently, yes, we've had the effect of inflation.

As widely reported in the press over the past few months, Iconic ready-to-wear brands have shut down in France. And this is a new development, other sectors such as sports, toys and accessories have also followed suit. On Slide 12, you'll find a list of some of our brands in a difficult situation in France in the first half of the year. In addition to factors linked to the pandemic and to the end of associated subsidies, this closures are mainly the result of vulnerable capital structures with high levels of debt, and they are also the result of ill-adapted strategic choices vis-vis consumer expectations in terms of unsuccessful omnichannel approaches, and suitable customer experiences and not enough emphasis placed on eco responsibility. A stark contrast indeed also reinforced by the fact that some mid-range textile branch have not sufficiently clarified their positioning. But just because this market is in a challenging position on average does not mean that there is no room for recovery or growth. The takeovers of Kaporal, Pimkie, Courir, Go Sport and La Grande Récré bear witness to this with 9% of Mercialys' rental base. Camaïeu represented the largest impact from Mercialys among the brands, not taken over? And I will describe the progress of the associated re-let in a little more detail further down the line. None of the other brands in receivership or liquidation and without a recovery plan represented more than 0.3% of our rental base. This is largely due to the constant attention we pay to balancing our merchandising mix as Élizabeth reminded us. This constant attention to the market mix of our sites is the focus of Slide 13. You can see our overall rental exposure at June 30, 2023. Over the past 3 years, we have significantly reduced our exposure to the troubled personal goods sector with a substantial drop of minus 196 bps and our exposure rate is now below 30% at 29%. As a result, Mercialys' textile exposure is much lower than that of most of our peers in the European real estate sector. This constant quest to diversify our merchandising mix is reflected in the diversity of brands targeted for relettings of the former Camaïeu stores. They range from the optical and beauty and health sectors to more upmarket textile brands such as Lacoste faced with increasing polarization a significant reduction in market depth, particularly in the textile sector, we consider Mercialys' balanced merchandising mix and the average size of our assets which do not exceed 135 stores to be highly appropriate indeed. So in terms of the market mix, Mercialys strongly believes in diversifying its rental risk by focusing on food and coring. While the health crisis has reestablished the central role of hypermarkets in French food retailing in the eyes of observers in the discussions we have with all of you, the theme of these models running out of steam comes up regularly. While some operators are in a difficult position with hypermarkets are too big or with an ill-adapted offering, the success of decentralized formats, in particular demonstrates this inescapable role. Slide 14 shows that hypermarkets and supermarkets are still the main shopping channels in France according to a 2023 survey on channel-related choice criteria, not only for the best prices, a decisive advantage in times of inflation, but also for access to new products, a wide range and more responsible consumption. Mercialys, therefore, intends to maintain an exposure to market type of markets, a tenant category with a recurring index-linked revenue profile and very little exposure to competition from online sales as recently demonstrated by the disappearance of almost quick commerce players. Our strong belief in food retailing goes hand in hand with the desire to diversify our rental risk. Queue Slide 15 with Mercialys exposure to the Casino Group. The map shows the distribution of hypermarkets owned by Mercialys within our portfolio. So you have 5 food superstores, including one Monoprix, operated by Casino and 100% owned by Mercialys. 5 food superstores operated by Casino and 60% owned by Mercialys in Corsica, 10 super stores operated by casino and owned 51% by Mercialys and 49% by BNP Paribas. And finally, 3 Monoprix stores and 2 happy markets operated by casino and own 25% by Mercialys and 75% by Amundi. Mercialys' economic exposure to casino was therefore 18.3% at the end of June 2023. Via Casino's communications, you've been able to follow both reconciliation procedures open for the financial creditors as well as the equity contribution offer filed and which will be the subject of negotiations. In this respect, I would like to point out that Mercialys is not part of the conciliation procedure and that the Casino Group is up to date with its rent and service charge payments, including for the third quarter of 2023. You will also know that a memorandum of understanding has been signed with [indiscernible] Group of the Intermarché chain. Under this agreement, Géant stores will be transferred to Intermarché within the next 3 years according to the press, 7 Mercialys sites are concerned, including 5 where we do not own the hypermarket Tours, Albertville, Montpellier, Millau, and Valence2, where Mercialys owns 51% of the hypermarket Le Puy, 25% in Besançon, those stores, transfers will help to diversify Mercialys' rental base at 2 sites as well as the overall diversification of the food and coring of its portfolio slide already well underway in La Reunion, Rennes, Rodez and Motiva. At the same time, consumption patterns have evolved towards greater specialization, often making hypermarkets nonfood offerings less relevant. As a result, surface areas are becoming too large offering opportunities to restructure and rehaul with the benefit of the shopping arcade by creating new store locations or medium-sized stores to reinforce site leadership. This transformation and reletting process is one of Mercialys' long-standing areas of expertise and offers potential for positive reversion in the long term. Slide 16 gives a few examples of what has been achieved in Nimbus and FNAC. The average surface area of hypermarkets owned Mercialys is over 12,000 square meters. So restructuring to a more optimized 9,000 square meters would result in the conversion of around 90,000 square meters into shopping mall space. Slide 17. The current financial vacancy rate, excluding strategic vacancies to facilitate the implementation of expansion and restructuring plans stands at 3.3% for the first half of 2023. In line with the expectations, communications in February 2023. Following the liquidation of Camaïeu's vacancy rate is up only 2.9% recorded at end June 2022 and 31st of December 2022. Camaïeu represented 0.9% of Mercialys' rental base. At the end of June, 7 stores were leased. So almost 45% of the rent is concerned and an initial agreement has also been signed for 2 stores accounting for 15% of the brands concerned. It should also be noted that relets had an average positive reversion of plus 9%. Excluding the 30 bp impact of vacancies linked to Camaïeu, the current financial vacancy rate was virtually stable at the end of June 2023. Leasing momentum is illustrated by the signing of 65 lease renewals or relets in the first half of 2023. The reversion rate associated with these negotiations was plus 1.1% in a stark reversion rate context. Against this general backdrop, our ability to evolve in line with our customers' expectations once again underpinned our robust performance, which is summarized in Slide 18. In the first half, our organic growth in invoiced rents was plus 4.2%. Our EBITDA was down compared with the first half of 2022 due to a strong base effect last year of nonrecurring items linked to the management of the COVID crisis. And indeed, last year, it stood at 87%. We're returning now to a more normal EBITDA level. Recurring earnings per share, FFO per share came to EUR 0.62. This represents an increase of plus 0.3% compared with the first half of 2022 and is in line with our target for the year. As of the end of June 2023, our LTV ratio, including transfer taxes, stood at 36.1%, up from 34.3% at the 30th -- as of the 30th of June 2022. With regards to EPRA NDV net asset value per share, it came to EUR 18.8 down 4.3% year-on-year. It should be noted that this indicator was very positively impacted in the second half of 2022 due to the change in the fair value of fixed rate debt. More on this in the next few slides. Let us start with Slide 19, with organic rental growth. In the first half of 2023, it stood at plus 4.2%, including a 3.8% indexation effect. Given the continuing high inflation, the indexation cap for SME is set by a low pass in August 2022, which was extended to the 31st of March 2024, well, considering requests from the tenants concerned with regards to this cap. Well, the impact of this cap will reduce the effect of published initiation by around 10 bp over the first half of 2023. Actions taken on the portfolio had a negative impact of EUR 1.3 million on organic growth, notably through the impact of financial vacancies. However, our solid letting performance should support organic growth in the medium term. Similarly, the contribution of variable rents rose by EUR 1.4 million, contributing 1.7 points to organic growth over the period. This testifies to the resilience of tenant activity. In addition, changes in the scope of consolidation had a negative impact of EUR 1.7 million on first half rents, mainly due to the disposals completed in April 2022 with 2 hypermarkets. And in December 2022 with shopping malls in 2 locations. Lease rights, on the other hand, did not vary significantly. Overall rental income came to EUR 88.2 million, up by 2% on the first half of 2022. Slide 20 now with our recurring income. Our FFO. Here, you'll find the EUR 1.7 million increase in rental income, rental expenses for the first -- for the half year represented EUR 5.6 million at June 30, 2023, compared with EUR 1.4 million last year. In the first half of 2022, we benefited from nonrecurring income of EUR 5.7 million in respect of the impact of the health crisis, which reduced the level of expenses. At the end of June, 2023, the impact of this exceptional situation was limited, very limited at EUR 0.4 million, which largely explains the difference. Overheads rose modestly, reflecting once again Mercialys' efforts to control costs despite the impact of inflation on costs. Taking these factors into account, EBITDA gain to EUR 72.3 million, down 3.9% on June 30, 2022. EBITDA margin stood at 82% versus 83.2% in 2023 and 87% at June 30, this 30 of 2022. Net financial expenses stood at minus EUR 13.7 million at June 30, 2020, compared with minus EUR 14.2 million at end June 2022, benefiting from financial restructuring operations carried out in Q1 2023. Other operating income and expenses and capital gains on disposals and impairment represented an income of EUR 3.4 million compared with a net income of EUR 0.8 million in the first half of 2022 or EUR 2.5 million. This includes the effect of a EUR 2.1 million provision reversal relating to property dispute in La Reunion. Taxes represented and expand of minus EUR 0.3 million at end June 2023, stable compared with the first half of 2022. Share of net income from associates is also stable compared with June 30, 2022, as our noncontrolling interests as of the 30th of June 2023 in line with the first half of 2022. Taking these items into account, FFO was stable also compared with June 30, 2022 at EUR 57.5 million. It's up 0.3% per share to EUR 0.62 adjusted for exceptional items related to the health crisis. Recurring income would be up 10.3%. Let's move on to Slide 21, which shows changes in EPRA NDV, which stands at EUR 18.8 per share, down 10.2% over 6 months and 4.3% over 12 months. The main variations are the dividend for 2022 for minus EUR 0.96 per share, recurring earnings for plus EUR 0.62 per share, the change in fair value of assets of EUR 0.89 per share, including a rent effect of EUR 1.24 per share, a yield effect of EUR 2.3 per share and other effects of EUR 0.16 per share. The change in the fair value of fixed rate debt had an impact of EUR 0.63 per share. Mercialys' bond debt is still trading below par, but has risen in value compared with the 31st of December 2022, which explains this negative variation. Lastly, the fair value impact of derivatives and other items were minus EUR 0.27 per share. If we look in detail at the value of our portfolio on Slide 22, you can see that it stands at EUR 2.799 billion, excluding transfer taxes, down minus 3.4% over 6 months and minus 4.3% over 12 months on a like-for-like basis. Over the past 6 months, the like-for-like increase in value was due to a rent effect for plus 5% -- sorry, plus 4% and minus 7.4% yield effect. The average appraisal yield was 6.21% at the end of June, up by 46 bp compared with the end of December 2022 and plus 50 bp compared with June 30, 2022. The appraiser is maintained a side-by-side approach to appraisal based on the intrinsic risk and marketability of each asset. And their assumptions did not fundamentally change from one half here to the next with regards to the long-term rental growth rate or the metric rent ratio. However, appraisers did pass on the impact of rising interest rates in their appraisal rates or adjusted risk premiums to take account of a perceived increased risk of rental income linked to the group Casino. You have a few comparative data on Slide 23. You can see that Mercialys' appraisal rate is clearly higher than that of other real estate segments in France, whether it be logistics, shopping centers, retail parks or offices. The same appraisal rate of 6.21% represents a spread of 330 basis points over the risk-free rate, i.e., the 10-year OAT, as it stood at the end of June 2023. These factors demonstrate the defensive nature of our asset appraisal parameters. This profile is not reflected in the discount on NAV, which remains at 46% at a level comparable to that observed during the health crisis of 2020. Slide 25 shows that the refinancing operations of the company's debt in the first quarter of 2022, gave Mercialys a satisfactory maturity of 4.2 years at the end of June 2023. No bonds mature before February 2026. Mercialys has also undrawn financing resources for a stable amount compared with EUR 385 million at the end of December 2022, 69% of which was extended during the first half of 2023. As a result, the average maturity of undrawn bank borrowings was at 3 years, an optimization of plus 0.9 years. Furthermore, at the end of June 2023, 100% of the undrawn bank credit lines included ESG criteria compared with just over 53% at the end of 2022. Lastly, Mercialys is a triple B financing rating with a stable outlook was reiterated by Standards & Paul on the 24th of February 2023. On Slide 26, you can see the average real cost of debt drawn for the first half of 2023 was 2.1%, virtually unchanged from the previous year's level of 2% for the whole of 2022. Against the backdrop of a sharply rising interesting rates from the first half of 2022, Mercialys has strengthened its fixed rate debt coverage ratio, which stands at 96% for 2023 and 100% for 2024 compared with 87% at the end of June 2022. The introduction of fixed rate instruments and the termination of variable rate instruments will result in an increase in the average cost of debt drawn, which will be close to the average cost of the bond debt by the end of 2023, i.e., 2.6%. Slide 27. Mercialys financial structure has remained very sound, as we said, with an LTV ratio, excluding transfer duties of 3.6% on the 30th of June 2023 as compared with 35.3% of the 1st of December 2022, 36.6%, up 30th of June 2022, including transfer taxes the ratio stood at 36.1% at the end of the first half of the end of the first half of the year compared with 33.0% 31st of December 2021. The ICR was 5.2x '19 at 30th of June 2023 compared with 5.9 at 31st of December 2022. And this is well above the medium level, at least 2x as set by the banking covenants. On Slide 28, you can see the characteristics of investments that we may couldn't consider. In the case of both projects and acquisitions, the aim is to strengthen the leadership of access, assets held by Mercialys and boost the potential of rent reversion by diversifying their use through the development of health or co-working centers but also to continue to establish medium-sized stores, if necessary, by optimizing the hypermarket floor space. So we will also be able to reconfigure certain assets and continue to improve the customer experience with projects focusing on food, drink and leisure. The recent acquisition of a stake in the DEPUR Group, which I'll mention in a moment, will give us more possibilities in this area. We're also looking at targeted asset acquisitions in our core retail business or in related diversification. These investments will have to meet a strict quality criteria in terms of rental exposure and geographic location and it must include resilient sectors such as food. These acquisitions may be achieved by directly by us or in partnership. In that case, Mercialys would be able to capitalize on its management expertise for third parties. Lastly, Mercialys participates in calls for projects to develop new real estate once again on its own behalf or in partnership in addition to consolidating development margins, Mercialys aims to retain retail property it develops. As we mentioned in February, the economic and interest rate context means that a highly selective approach to projects and acquisitions, which must meet demanding criteria of a 250 basis points return above the refinancing costs must be applied. This will help us to boost the yield on the asset portfolio ahead of the refinancing of bond issues due to mature from 2026. Investments will also be made while maintaining the company's major balance sheet ratios. Mercialys continues to strengthen its know-how and with a view to reinforcing its expertise in consumer trends, the company took part a couple of days ago in an event organized by the DEPUR Group, which specializes in design and execution of large-scale food and beverage and entertainment projects of F&B&E. As you can see on Slide 29. Mercialys played a major role in this fundraising event alongside Bouygues Immobilier and the tourism/leisure fund of Banque pour l'Investissement becoming a major shareholder of the DEPUR Group. The pulse offer consists of structuring a range of food and drink and entertainment, leisure activities also is in a single location, combined with the complete customer experience. This offer is designed to enhance the appeal generated by the real estate and commercial mix of the retail outlets in order to develop footfall and sales for retail chains once again, with a view to supporting the potential for rent reversion. Finally, in addition to what I was saying about the development of portfolio, you can see a breakdown of this on Slide 30. The end of June 2023, the company's project portfolio stood at EUR 471 million for 2027 and beyond. As I was saying a moment ago, we will be analyzing the launch of these projects on a case-by-case basis based on the positive spread that will be determined by the group of 250 basis points of the refunding cost. This is why in a volatile environment for construction costs, particularly over the long term, we have removed the notion of target yield that was normally presented. This portfolio comes in almost half of Mercialys sites and around 30% of the projects involved restaurants, leisure and service activities, illustrating Mercialys expertise in multi-use facilities beyond this core retail property business. This potential for reconfiguring sites will help to maintain their attractiveness beyond local retailing alone. And this ensures their long-term viability in the catchment area as well as the cash flow profile. Having access to an asset base of almost 800,000 square meters on a portfolio of projects as extensive as this is invaluable in the context of a restrictive regulatory environment for commercial property developments. You may recall that the climate and resilience law enacted in 2021 with the objective of 0 artificialization net will make it considerably harder to build new capacity from now on. You can see in Slide 31, this will only reinforce an already well-established trend of declining administrative runs in the commercial property sector. The development portfolio naturally takes these regulatory aspects into account. This context should provide support for the value of retail property in France over the medium term, including the value of Mercialys assets. In conclusion, the events of the first half year may have appeared to some observers to be relatively unfavorable to Mercialys. And yet the company's operating activity based on a business model that's particularly well suited to the current economic climate has performed very well and resiliently. But Mercialys also showed over the first half of the year, that is solid balance sheet and its historically cautious approach have enabled it to adapt to the persistently unfavorable trend in interest rates while maintaining its capacity to invest selectively for future growth. In an environment where interest rates and possibly inflation looks set to remain persistently high, the company is approaching the next phase of its strategy with confidence. Our performance over the first half year, which is represented allows us to confirm our targets for 2023, namely, as you can see on the slide, growth in recurring earnings, that's the FFO per share of at least plus 2.2% versus 2022 and a dividend in the range of 85% to 95% of the FFO for 2023. So we have finished the presentation. Now I suggest that we move to the traditional Q&A session.

[Operator Instructions]

Well, I think this part of the year is very heavy in terms of the different publications or we've been crystal clear, but whatever the situation we are available with the team to answer any questions you may have later on. And on that note, I suggested we'd close this presentation for the half year results. And I'd like to wish you a very nice summer. [Statements in English on this transcript were spoken by an interpreter present on the live call.]