VGP NV (VGP) Earnings Call Transcript

Welcome to VGP's result of Full Year 2019 conference call. Today's call will be hosted by Mr. Jan Van Geet, CEO; Mr. Dirk Stoop, CFO; and Mr. Martijn Vlutters, IR. Mr. Jan Van Geet, please go ahead, sir.

Good morning to all of you. At the moment, we are starting one on the call. I can see this here on my computer. And welcome to this press conference call about the full year 2019 results from VGP. I will just start. We have, last year, a record net profit of EUR 205.6 million, as you all could read, an almost 70% year-on-year increase. That's mainly thanks to a very strong business growth. And we signed and renewed rental income of EUR 54.9 million last year. That's an absolute record. And also, so far, this year has been really very strong for the first 2 months. We'll see what the coronavirus will do to our customers, but so far so good this year. It brings our total signed rental income to EUR 155 million. That's almost a 50% increase year-on-year. And we had 34 buildings under construction at the year-end. We haven't or we have an owned and secured land bank of 6.21 million square meters at the year-end, that's 40% increases. We delivered 19 projects to the market, which were all 100% let. And we started our landmark VGP Park Munich project, which has been something which I've been working on for the last 6 years. We bought it initially in 2013. We swapped it with [indiscernible] which isn't an easy exercise to do, but end goods all good, we are constructing it now, and it will be almost 300,000 square meters of lettable area, which we will deliver to the market in the next year. And as we recognize our profits only at the moment when we start construction, not before, this is -- there is very little of these new projects, Laatzen and Magdeburg in Munich only residual into our profit for last year. So we are very confident about 2020 going forward because we let the foundation for that in 2019. We expanded our partnership with Allianz Real Estate. So far, our special relationship is still very special. We launched the second 50:50 joint venture, which is copy paste of the first one, only with different target countries. So the other countries in Western and Eastern Europe, I'll react to them, except for Latvia, are now all to be implied into our joint venture structures. And we completed 3 successful transactions for a total value of EUR 610 million with Allianz in the last year. We also issued a new bond at the end of the year, and we arranged several bilateral credit facilities with different banks and -- which we have not drawn so far. So the portfolio value grew from EUR 1.9 million, 43% up to EUR 2.771 million in 2019. That's including the joint venture portfolio at 100%. And we have a record growth in committed annualized rental income, which goes now up to EUR 155 million. But a part of that still needs to be constructed. So it will come in later this year, beginning of next year, and even so far until the beginning of 2022. We have a record net profit, of course, due to the development of letting activities. As I said, it's EUR 205.6 million after tax. And we will propose to our general shareholders meetings that we will pay out a dividend of EUR 60 million. That's an increase of 47.7% year-on-year or which equates to the EUR 3.25 per square -- not per square meter, I'm sorry, per share and profit too much of the development. There is a lot of change in the markets. And [indiscernible] has done a very good job on that towards sustainability. It seems that it now becomes absolutely necessary. And we are in a unique position to deliver also to our customers and that demands for renewable energy. So we have created a new company, VGP Renewable Energy N.V., which has already invested in 16 megawatts of installed PV solar panels. And we have a further 36.8 megawatts of solar panels in the pipeline, which we will deliver either to the grid, either to our customers, depending from country to country. Each country has a little bit of different framework agreement to be looked at with subsidies, et cetera. We agreed with our joint venture partner that from 2020 on all of our buildings, and everything which is actually under construction already, is -- have BREEAM Very Good certified for all of new developments in all the countries in Europe, without any exception. We had a -- or some changes to the Board last year. After 12 years, we could not -- the mandates have to be renewed. And we have now 60% women on board and 60% of our Board are also independent non-executive directors. We have Ann Gaeremynck, Katherina Reiche and Vera Gäde-Butzlaff. They are all 3, since last year, nominated as our Board members. I think the initiative to launch our VGP Foundation, a charity organization, which will invest in 3 different types of things: In cultural heritage; in children, which have a little bit of difficulties in life; and in nature preservation. And we have some very nice names on board. I will tell a little bit more about this on the General Shareholder Meeting. We have -- we are setting up a green financing framework. When we started, of course, the construction of our VGP Park Munich, which is really -- it is the top class sustainable project in our portfolio. We're going to have 12 megawatt solar panels on the roofs who will heat and cool with geochemical energy. It will be -- it will have green roofs partly and it will have green facade. It's really a very nice project just outside of Munich. It's actually on the S-Bahn. So you can reach it by -- with almost with the metro, and it's very close to -- most of you will know that it's very close to the export outflows at the fast trade. We have a new company Code of Conduct, and we will publish in our annual report our new Corporate Responsibility report in accordance with GRI Standards. On the operational performance, we saw a really strong momentum for leasing growth in 2019. And we signed a record EUR 54.9 million rental income. So that spreads over 245 tenant contracts. And we have EUR 52.7 million of that was through our own portfolio and EUR 102.3 million through the joint ventures. And the occupancy rate was 99.8% for the completed portfolio of nearly 100%, meaningfully led. We -- over the last years, since 2014, that makes a compound annual growth rate of 46.1%. And the joint ventures, you can see it here very well, we had a capital expenditure last year of EUR 540 million. And the net cash inflow from divestments of our joint venture was EUR 339 million. So it really is a very good working system inside of VGP. We're very happy with it, how it functions. And then, yes, it's a strong growth, of course. But if you look at it today, we are in a very diversified investment portfolio. The bulk of it, 58% of our assets today are in Germany, and I don't see why we couldn't be happy about that. And the investment portfolio has grown to EUR 2.77 billion, 43.1% growth. And Western Europe represents already 73% of our total portfolio and 78% of our operating EBITDA, including the joint ventures at share. And it's weird, we only started one year ago in the Netherlands, but it's growing in the Netherlands. We're growing at a faster relative pace. In the last 6 months, we signed 120,000 square meters of new rental agreements in the Netherlands. I really have to congratulate my Dutch team that they are doing a very good job. And we also bought some outstanding new land plots in the beginning of this year. We signed some NOIs for outstanding new land plots. So we are very happy. Where we are -- in my meeting with my management, we have a KPI system. We go through, what we are going to do this year, all of them are very enthusiastic. So we will see what happens because we don't have a crystal ball. But so far, we think that both Spain, Italy, the Netherlands, Germany, but also Eastern Europe, all of them are going to contribute relatively a lot to our new growth in this year. If you look at completed versus under construction and the land bank, we have now almost EUR 2 billion of assets completed with 69% of our assets in total. We have EUR 391 million of development land. A big chunk of that is Munich because that was really expensive. And we have EUR 469 million of assets under construction, which is 17% of our total assets. In the -- it's a very long-term leased portfolio. Combined, it stands at 8.9 years, which I think makes us a very good student in the class. Our own portfolio is leased for 12.5 years and the joint venture for 7 years, and the remaining weighted average lease term of the portfolio. And if you look at the tenant portfolio by industry segment, we were before, 5 years ago, the automotive-related tenants were a lot bigger than it is today. That's not because the automotive is going away out of our portfolio. We still have the same tenant, and we closed a very big lease agreement with BMW last year. But the others are growing a lot faster, and especially e-commerce. So that's why it's changing. The Krauss Maffei group, you can say, it is our biggest customer today. We have them in 3 different locations with 3 different branches of their group. It's a very large stock exchange for the group, and -- but it's 17% now, but I'm confident that the end of the year this will go down relatively a lot because we have a lot of new projects in the pipeline. Our top 10 client's accounts for 45% of the total portfolio. And most of them are repetitive things. We have Amazon, 2x; Danish, 5x. And, yes, it's -- most of them are a lot of spend in our portfolio. During 2019, we delivered a total of 19 buildings, representing 287,000 square meters. And the largest share -- so not very much, but we have a lot more construction today. The largest share of new developments delivered for tenants were active in were -- was e-commerce, it was 41%. And then logistics, 35%, but you have to see that the part of this logistics is actually also working for e-commerce. So it's relatively bigger. And the light industrial represented 11%, light industrial only, for example, is the light industrial customer of [indiscernible] Group, which we have in [indiscernible]. In the current development pipeline, at December 2019, we had a total of 34 buildings under construction, which represents 706,000 square meters when it was included at EUR 45.8 million of new lease contracts, and the portfolio under construction was 78%, pre-let today. And when we come to it, the purchases are just started up, which is our own pre-let that we are starting at 331,000 square meter in the pipeline, yet coming up, and this 11 projects, which are also all pre-let. So Western Europe reflects 78% of the total development pipeline, we have to say. And the 331,000 square meters of the 11 pre-let projects, this equates to EUR 30.4 million of pre-let agreements. And if you look at the developments, it's going to change, but Germany is the biggest one now, with 43%. Spain is going to construct a lot this year. There, we have 16% under construction, and the Netherlands is going to construct a lot this year. As I said, we just did a new pre-lease in Nijmegen, and we're going to start up a couple of new developments in the Netherlands. We just also signed a very nice LOI for one of the most iconical land plots in our portfolio, which we were able to secure in the Netherlands. Also the Czech Republic, Romania. These are countries, where last year, we had a little bit less activity because we had no lands available. But this year, as you know, we always buy our land from the planning departments. And this year, we already achieved some very nice permitting for our new land plots. So we bought already a couple of land plots, where we started transaction activity on -- till this year, both in Bratislava, where we have a very big one. And -- but also in [indiscernible] and in Durbin in the Czech Republic and in Slavia next to the airport in Prague. And we have new land acquired, which will start in [indiscernible]. On the financial performance, [indiscernible] we have a well advanced land bank. The well advanced land bank, which supports our future growth, is now 6.2 million square meters, which is acquired or secured. That -- and in addition, we had at the year-end, 1 million square meter of land from other auction, which is subject to due diligence where we do our things, where we can also construct 50% roughly development potential on it. But in 2020, we already signed LOIs for another 1.64 million square meters, on which we can develop 0.94 -- almost 1 million square meters. It has been added. So we have embedded in our development, in our land bank, a development potential of 3.29 million square meters. We foresee in this year, the KPI in this year says that we will construct almost 1.4 million square meters on the startup, including what is under construction now. So -- that is most of that is also to be delivered in 2022 -- '21 and even in 2022, partly. If you look at the geographic breakdown, Germany is still the biggest one, Czech Republic has increased a little bit and Romania and the Netherlands will be the biggest grower now because we really signed some nice deals. On the financial performance. So our operating profit went up EUR 101.3 million to EUR 252.4 million. And there is an increased profit shares from the joint ventures, EUR 20.5 million more than offsetting the lower net rental income. The net rental income just comes out of the fact that we have sold so many assets to the joint ventures. But on a look-through basis, the net rental income is up EUR 3.2 million to EUR 46.7 million. And the net valuation gains on our property portfolio are EUR 188.2 million. EUR 89.6 million is driven by increase in new construction activities and revaluation gains from these new construction activities. And the own standing property portfolio is valued on a weighted average yield of 5.76% against 6.29%, which reflects that there is a lot of German assets now. It's weighted far more to Germany where the yields are a little bit more aggressive. We had administrative expenses of EUR 21.1 million. This reflects the expansion of the VGP organization over the last 12 months. We currently have 225 persons working for us directly on our payroll, and we intend to grow relatively strong with another 50 to 60 people during the year 2020. If we look at the income statement by segment, then you know we provide this information earlier to show a little bit what the 3 income streams are inside of VGP. The left column is investment, called Investment, relates only to rental income. EBITDA has generated some rental income. And so, the share in the results of the JVs is up with EUR 9.6 million, and it corresponds to the VGP shares in the result of JVs, excluding annual reevaluation results. That's only really net rental income. So the EBITDA went up from 42.4 in 2018 to 46.2 in 2019. From the Development side, as we are transferring and selling our assets, so we are also realizing our extra profit. The EBITDA went up with a lot to EUR 169.5 million from EUR 46.4 million. And then, in the Property and Asset Management, as the joint ventures, they are becoming larger and larger. So the revenue also goes up, this recurrent income, we could say. The joint venture management fee income was EUR 10.5 million. The administration expenses, which are against that of EUR 3.2 million to the EBITDA from the joint venture from the Property and Asset Management, are EUR 7.2 million. From next year on, we will show 4 slides, because in the fourth one, we will also have the income generated out of the sale of Renewable Energy. This will be provided from next year on. We will have this as, of course, in income statement. On the assets side, our investment properties amount to almost EUR 800 million, EUR 793 million. And the Disposal Group held for sale of EUR 170 million. Combined, it's up EUR 219 million to December '18, despite the fact that we did 3 transactions and we sold for EUR 610 million of assets. The completed portfolio has decreased by EUR 27 million to EUR 94 million. And Under Construction, it has increased by EUR 204 million to EUR 338 million. And development land, of course, has increased a lot and mainly also due to Laatzen and Munich by EUR 147.8 million to EUR 360.6 million. By the way, Laatzen -- and we are finalizing 2 big iconic and new lease agreement, which will be, and we are very confident about it, fully let before the end of this quarter. We're almost there for signing. And it's 2 very long lease agreements with 2 iconical German retailers. At the year -- at the end of the year, we had a cash position of EUR 176 million. And we had an additional unsecured bank facility available, undrawn of EUR 150 million. So we were in a quite comfortable position at year-end. And If you look at the shareholders' equity and liabilities, so the equity went up to EUR 700 million, up EUR 156 million since December, total liabilities of EUR 925 million, up EUR 255 million and we had a financial debt of EUR 780 million. It increased EUR 194 million year-on-year. That's because we issued the new bonds. And we have several multiyear credit facilities in place. In the trade debt and other current liabilities this reflects the increased construction activities, but there is also a sum to be paid for the land in Bratislava in 2020 because, as you know, we always buy our land subject to having the permits. And in Bratislava, we are already the owners. But the payment is only due when we exit from the highway, which is currently under construction, will be ready, and we -- that is foreseen in June, July of this year. That's a payment of EUR 25.8 million. We have the company's target maximum consolidated gearing of 65%. And at the end of the year, it stood at 37.2%. So we have us a bit of room left to grow. To summarize it, and how should I say this, 2019 has been a very nice year. But as I said, there is a foundation that -- for the years to come. We are confident, thanks to the -- actually, the only profit into our bookkeeping at the moment when we start construction, and we are going to start a lot of construction this year of project which we pre-let last year. And we are very confident that 2020 will be a good year. We had a very solid business growth across our portfolio and almost everything is a record, if you look at it. The new joint venture with Allianz Real Estate, they allow us for continued rapid cash recycling and de-risking. I was in Paris 2 days ago. We had a meeting with Allianz and the understanding is really going very well. So I think it's not the last thing, which we will have done together. And we have a very nice land bank. And I am a strong believer that, that is the biggest asset we have. The land bank is at fair value, but it's fair value at our cost price, at our purchase price, in our books. So there is no inflation of profit coming from the land bank. We have an enduring, so far, this year. I have to say, we have a very strong momentum for leasing growth. And we have signed, already, very nice lease agreements still this year, and we are confident that we can keep on leasing this year. We will see what happens. And that's about it, I think. So we're very much looking forward to be able to explore more the renewable energy. We believe that we have a fantastic platform to do that for our customers. And our customers, themselves, they are driven towards more and more to taking on both renewable energy and being green. And we can offer it to them. We have the platform for that. We can put solar panels on our roofs and deliver them the energy. We can take advantage of the atomic energy. It's a bit weird because in our country, we get subsidies from not gas. And in Germany, we get subsidies for using gas. So it's a little bit scattered over Europe. But everywhere, there is really -- very interesting opportunities, and we're very excited about that. There is a couple of appendixes, which I would like you to look at one of them maybe. Well, as you can see in the first appendix that the 2 joint ventures, there is -- we have already 1-- in excess of EUR 1 billion of net cash proceeds recycled out of it, which I think demonstrates very nicely that the JV is really working well for us. In the second slide, we have, a little bit, an idea about our VGP Park München. If you look on the top, you see an S. That's the S-Bahn. So people really are in 500-meter walking distance on the park. It's very good accessibility, direct exits from the highway, and you see the Kreuz München-Ost. We are really -- we are literally 15 minutes away from the city center. The location is really frothy, which is fantastic. And we have 67 hectares over there. We are going to construct 310,000 square meters. And as I said, 12. megawatts solar panels on the roof. It's a very nice one. And then, you see the Laatzen one also, it's also very close by the latter in Laatzen despite no maintenance or parking [indiscernible]. So I guess I am going to close up here. I hope you all liked it, the results of 2019. And we are going to do our best at VGP to make from 2020, the best possible. Thank you.

Operator, you can open the line for questions.

[Operator Instructions] We'll take our first question from Mr. Alexander Makar of Berenberg.

Congratulations with the fantastic year. Happy to see one stock conquering the market today. Just from my side, I have some follow-up questions. You have spoken about the success of the Dutch market with over 120,000 square meters of leases. Can you maybe highlight a bit more on the outlook for 2020? And more specifically, how are the current regulations or the discussions on the nitrogen, et cetera, affecting your developments or growth ambitions?

Good morning, Alexander. We have -- in our portfolio, we have currently 2 assets, one in Roosendaal and one in Nijmegen. Both have an irrevocable permit. So we can still develop another, roughly, I have to calculate quickly, 130,000 square meters. And the fact that's what we have already under construction. And -- so that is irrevocable, that we don't have an issue with the nitrogen problems there. The -- that's solved over there. And it's an attention point in Holland. And we were able to secure a very nice land plot, and a very big one, by the way, which we signed an LOI. So it's not really final account say where it is, but also there, there is an irrevocable permit. And it would allow us to develop a very high amount of top-class assets in a top-class location. So the outlook is really, very positive. And for me, it's nice. It's like coming home because I can use my mother tongue and my -- speak mother tongue. And I always have to do my business in other languages. And here in the Netherlands, it's pleasant for us. And it works well. Please, like.

Okay, clear. And then maybe about the renewable energy platform. And so you've spoken about 60 megawatts in solar panels and other 36 in the pipeline. Maybe just about wind energy. Given the size of your development parks, is this something which is economically viable or interesting to implement at some point?

For wind energy, you really need to have the very big -- the bigger the better, these wind masts. And it -- I don't think it's compatible to our development strategy. We will take a look at it, but it's not something which we immediately now will go and invest in. We want to do really add-on things to our normal business. So I think you have to -- wind energy, you can see that we are far away from every building and for everything. It's something which will be difficult to step into. Or we would have to say, we become a real renewable energy investor, and we do only that. But for the time being, it's -- for us, it's an add-on to our existing business. It's something we want to offer to our customers, and it's related to our buildings directly.

Okay, clear. And then just maybe one final question. When we look or listen to the peers as well, the building up of land banks is becoming increasingly difficult. Yet, you recorded quite some growth in that aspect. But are there any specific regions where the development of greenfields or the permitting is becoming a real problem for you today?

It's everywhere in Europe, to be honest. So we -- as a matter of fact, we have to be -- we have to face it. Before 10 years ago or even 5 years ago, my average -- and the average time which we needed to have a permit was 12 to 18 months. That's at least doubled today. So we need to really invest in our land bank going forward, but it's not like humanity stops or there is no new project anymore. We just need to be able to convince them and come with good arguments to do new developments. And you see in Munich, it hasn't happened for 5 years, any big development, and we just did one of the largest ones last year. So with a little bit of patience and a good team on it and a longer term view, I think you can still do nice developments in Europe, and it's true that it's very difficult. And especially, you will be really amazed, but the most difficult market today is the Czech Republic. And there is 2 -- a 2% unemployment rate and most of the local governments say, why should we do anything else? We have no people who can go and work there. That's the most difficult market, but also Germany is becoming increasingly more difficult, but we're really spending time on it. And I have to say that with spending time and energy and dedicated people to it, we are still able to really acquire very nice rentals.

Okay. And maybe...

I'm quite confident.

Okay. And maybe just a follow-up on that. Is that increasing or inflating the land cost significantly? Or is the increase in rental levels, offsetting most of the price inflation?

Yes. In my opinion, land is never expensive. It's a weird thing but I'm going to say, but for a top location, you have to pay a top price. And the reality is that the rental price, which comes out of it, offsets the cost -- the extra cost for the land price. If you look at Munich, in Munich, we paid EUR 300 per square meter for the land, which has no infrastructure yet. But the rental level -- but of course, we are speaking about a rental price of more than EUR 7 per square meter. So it's really offset. And that we see that throughout the whole of the bank land is cash. The amount is also -- always -- its -- I prefer to go to places where land is scarce, and where there is more demand and offer, then you can -- you're in a better place there.

We have Mr. [indiscernible] from KBC Securities.

[indiscernible] speaking. Very nice results, indeed. A few questions from my side. First one, we see that measures to try to contain the coronavirus has impacted supply chains worldwide. To what extent it is risk for VGP? And do usual contracts have a kind of force majeure closed building? The first question.

Yes. We have -- all of our contracts are for a defined period of time, and there is no possibility to step out for a force majeure. There is no force majeure closing inside. That's the first thing. So this year, we have less than 2% of these agreements, which come to maturity. So the -- and we already know that the customer is going to prolong. So there is no risk in our portfolio in the short term. And we don't know yet how this is going to impact our customers, and I have no idea about this. But there is a lot of retail inside of our customers. There is a lot of local business cases. And I think it will -- nobody knows today what it will do. It will make us think probably about how should we reshape our supply chain because we are maybe too dependent on China. Maybe it's more tense than it is. I don't know yet. I have no idea about it. The only thing I can say is that so far, until now, of course, it's a very recent event. But until now, the market is really very strong in Europe in the distribution. We have -- in all the markets, we have very -- we are actually at record renting levels again. This year, in the first 2 months, we did a very nice deal. So it's good. We'll see. I have no crystal ball. I can't tell you.

Okay, that's clear. Then a second question, VGP reported EUR 188 million of revaluation gains. What part is driven by revaluations of the standing portfolio? Can you give a view on that?

Yes. I need to find it in the numbers. Dirk, did you get them -- those?

Yes. It's -- if you look at the -- we give the split of what we've disclosed so that -- you have to settle the EUR 188 million -- between EUR 117 million, which is in IT and the EUR 36 million, which is in held for sale. And then there is another EUR 35 million, which is -- which has been disposed. I think that you will see that most of it is driven by the current construction activities that we're doing, including Munich.