NSI NV

AEX:NSI

Earnings Call Analysis

NSI: Strong Operational Year and Proactive Strategy

In 2023, NSI had a robust operational year with noteworthy achievements like a record low EPRA vacancy rate of 5.2%, and impressive like-for-like rental growth of 7.4%. The company successfully sold assets at 20% above book value, notably without a capital gain on the last EUR 24 million deal. The gross initial yield has risen to 7.9%, up from the averages in 2017-2018, reflecting the strength of the portfolio. Notably, tenant leases have shortened, indicating a more dynamic and hands-on operational approach in the office sector. The company has seen significant outward yield expansion, which has been the main driver of valuation decline. Nevertheless, prospects look positive with actions to enhance sustainability and create value. NSI is prepared for tax changes due to restructuring, ready to mitigate the impact of FBI changes from 2025. With a strong balance sheet and low loan-to-value ratio, NSI announces a EUR 20 million share buyback, showcasing confidence in its strategic direction.

Sustainability Achievements and Future Commitments

The company has been persistent in enhancing its sustainability credentials, evidencing a long-term commitment with significant progress made over the years. Holding a sector leader position in GRESB and nearly all their properties being rated 'A' for energy performance is a testament to this. Anticipating future regulations, they are well ahead of the legal requirements expected by 2030, positioning themselves as a sustainable leader poised for continued advancement.

Fiscal Structure Optimization in Anticipation of Regulatory Changes

In anticipation of regulatory shifts in the FBI (Fiscale Beleggingsinstelling) regime, the company has proactively restructured, aligning their assets outside of the FBI framework. This strategic move incurs a manageable tax cost of approximately EUR 2 million for 2023 and 2024, balanced by the creation of nearly EUR 40 million in deferred tax assets. These assets, a rarity among peers as confirmed with EPRA, will serve to mitigate tax impacts and bolster the EPRA NTA, offering a shrewd financial cushioning against future fiscal policy adjustments.

Robust Financial Position with Opportunity-Driven Capital Allocation

Demonstrating a formidable balance sheet, the company sails through with no anticipated debt issues until mid-2026, underpinned by a conservative loan-to-value ratio of 31.5%. The past challenges, including the COVID-19 pandemic, have been tactfully navigated, leading to a stronger, more resilient business. Capital allocation reflects a poised investment strategy, with a EUR 20 million share buyback program underscoring confidence in the intrinsic value of their current portfolio and signifying a potential for shareholder value enhancement.

Steady Earnings with Modest Impact from Asset Sales

The company's guidance for 2024 is set against a backdrop of solid earnings in the previous year with an expectation of a slight earnings decrease to EUR 1.95 or EUR 1.94 per share, primarily due to a modest increase in tax rates. The guidance remains resilient even after the sale of Laanderpoort, which interestingly positions the company financially to re-invest EUR 24 million into the business. With minimal indexation on lease contracts and a stable dividend policy, the company's financial forecasts are quite stable, signaling a steady operational performance in the foreseeable future.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the NSI Preliminary Results 2023 Call and Webcast. [Operator Instructions] Please note that today's conference is being recorded.

I would now like to turn the conference over to your speaker, Laura Gomez Zuleta, Head of Investor Relations, Treasury and Business Development. Please go ahead.

[Laura Gomez Zuleta, executive]

Good morning, and welcome to NSI Preliminary Results for 2023 Call. I will now hand over to Bernd Stahli, CEO, who will give a presentation followed by a Q&A session.

[Bernd Stahli, executive]

Thank you, Laura. Good morning, everyone. Looking back, 2023 was an important year for NSI. It was a very intense year with a reset on the development pipeline, a serious restructuring to prepare for the FBI changes in 2025 and the whole process of the strategic review. Fortunately, we've never had to worry about the balance sheet in that process.

Operationally, 2023 could not have been better. We've been able to convert healthy occupational demand into a record low EPRA vacancy of 5.2%. We've had 7.4% like-for-like rental growth, and we've had been leasing ahead of ERV rising year fees. Positively, as we go into 2024, the result of our efforts is that NSI is once again back on the front foot. The many positive details in the presentation today should confirm this to you. We go to Slide 7. It shows the journey that we've been on over the last couple of years. Keywords; concentration, better assets, better locations and higher efficiency.

Slide 8 shows that the asset rotation continued in 2023. Notwithstanding the difficult market environment, we managed to sell assets on average, 20% above book value. Looking at the deal that we've done for '24 and we'll talk about it in more detail later. For Laanderpoort -- upfront, I can tell you there will not be a capital gain. We booked it at the sales price of EUR 24 million at the year-end. So there is no capital gain on Laanderpoort to be expected during 2024.

Slide 9 shows what the portfolio looks like today. We will again touch on it in more detail later, but the 7.9% gross initial yield is a yield that we've not seen for a long period of time. And if you compare it to our own history, it's higher than we've had for a long period of time, and it's a different portfolio now than what it was back in 2017, 2018. So for us, this is all sort of element of a reset and an adjustment that we've had to go through. But it makes us -- actually today, be in a very good position.

I mentioned before that 2023 was a good year operationally. Slide 10 points out the slightly lower WAULT. And I think that's the beginning of a trend in offices more generally to be expected where leases are going to get shorter. It also means that the dynamics of offices are changing. It is becoming a much more operational asset class. It means you need to be much more hands on and that you need to sort of also organize yourself and you have the mentality to deal with that. And what you can see, and that's why we pointed them out next to each other, we've managed to keep the vacancy low. In fact, we've actually achieved the lowest vacancy rate over the last 20 years or so, the lowest level that we've had since 2005.

So the operational side of the business and the more operational nature of the business hasn't had any impact on the way we've dealt with our vacancy that you achieved because you actually take care of your customers, you provide them with the right level of services, but also with the right level of assets in the right locations. And that comes back in tenant satisfaction, which has gone up. And therefore, because we're actually offering the right products in the right markets, we've also seen our ERVs go up, and we've been leasing ahead of ERV. Actually, all of that very good results, and we're pleased with that as we go into 2024.

Basically, Slide 11 shows you an example of how you get there. Taking your customers seriously, giving them exactly what they need in terms of location, sustainability services, amenities, flexibility and activation of buildings, results in buildings where you can actually achieve, as you can see here, with two examples of HNK that we're working on at this point in time, where we're achieving 13%, 14% new letting levels of above ERV.

Our clients are happy with us, the [ 7.8 ], it's not as quarter high as [indiscernible] I think but as a company today, that's a very good result. And for all the shortness of leases and the turnover of leases that we've seen and the discussions about tenants that are about to walk away, you can see for our managed offices, which have a contract length of typically about a month, our occupancy is back to where it was pre-COVID. We're now at 90%, and that is more or less where we expect it to be. So again, people that want to move can move, will have moved in our [ HNKs ] and they're deciding to stay because the product meets their needs. And I think that's a key element to discuss at some point later, which you want to call.

Valuation-wise, Slide 12. This is the part where we've got very little control over what happens. We've seen significant outward yield expansion, and that's been the major driver of valuation decline in 2022. The peak to trough for us is now 21%. The yield movement out has been pretty indiscriminate. Everything has sort of been moved out because of lack of liquidity and I think that indiscriminate nature of the yield expansion that we've seen is also something where the opportunity in the period have may emerged. And it's not just offices, even our Life Science assets in Leiden, they're down 15%. Famous last words, but given the movement we've seen in interest rates since the end of last year, we're sort of sensing we've seen the worst, not necessarily could maybe drift a little bit lower, but today's valuations are closer to the bottom than we've seen for a long time.

Slide 13, development. We've had to adjust our plans in the face of what were difficult market conditions. Beginning of last year '23, we already announced the postponement of Well House because the economics didn't make sense. And we basically -- since this half year stage have been communicating that we were in discussions with ING to improve the economics of our contracts to make the business case more viable, that's been a long discussion, and we're now in a situation where we decided that the best way forward for us was to exit the development. It would have been a EUR 200 million project, which on a EUR 1 billion balance sheet is 20%. It's a lot of risk. It's a large project. Arguably in fairness at this point in time, too large for NSI.

And the benefit of it is that with this price, where we're quite pleased with the result, we've now been able to release a lot of capital to the business that can be utilized elsewhere in the business in a more profitable way. If we -- when we started back in 2019, this was a project with a normal margin. As the yields fell, this would have been a very profitable project. As the yields moved out, this went from very profitable to marginally profitable to possibly even loss-making.

There was no value for us to continue deploying capital for a period of two years for a project that wasn't going to make a lot of money. So this was actually the best result. ING gets the building at once, and we got to move on. Having said that, and that's actually a quick shout out to the development team. This is not something you do quite easily. Projects that basically change hands typically fall still for a longer period of time because the new buyer needs to figure out what he owns, what the risks are and what the position is, of that development. And the fact that we've been able to hand it over to ING gives you -- should tell you that we've basically delivered a project that was genuinely ready to go where all the risks were properly mitigated. And therefore, yes, we haven't built it potentially as a development for us that has been a success.

Vitrum, we mentioned to you before that as long as the legal process continues, we need to make sure that we get some income out of it. That has now been taken care of. The building has been led to someone that is going to lease it on a flexible basis, which gives us the opportunity to pursue the legal process. And if and when we get all the approvals that we need and the economics make sense, we will start to look forward again to a redevelopment of that asset.

The slide also shows development remains a core competency to the business. And I think that is a point to make, maybe no longer the larger projects that we've sort of been talking about like Laanderpoort. That is 20% of your balance sheet, that is in one individual project, maybe too much. But there are going to be opportunities in our portfolio, redevelopments or otherwise, where we think we can still make a difference by executing our knowledge and capabilities in this field.

It may well mean that we bring in additional capital, JV capital, private capital to bring it forward. And it could, well, be that like with Laanderpoort, rather than building it ourselves and owning it, it may end up being sold at some point if we feel that we've made the most out of the opportunity. So it is a part of the business. It should be part of any office business to at least do an element of this type of activity on the merchant or on the side of the business. But for us, we are actually quite pleased with where we stand today.

Slide 14. A lot of detail on sustainability. We can go into the detail if you want. But at some point, I think it should become clear that we've done everything that we should have done over the last couple of years to make the business more sustainable. The graph top right shows that it's not been something that we've been doing for the last two years, but it's been a long-term journey for us in cutting our sustainability credentials and also actually delivering the value add. We're a sector leader in GRESB. Our EPC labels or 95% A, and that's probably going to be the legal requirement from 2030 onwards. So we're basically 6 years ahead of time, we're at pretty much where markets will want to be at that point.

CRREM, an energy intensity, I think that is going to be the number that most people will focus on going forward. Again, we've made small steps, and we've got plans to continue on that journey for the period ahead.

So far on the operational portfolio valuation side. Slide 16 is maybe a slide that you've not seen from us before, and that's correct because it's only new today that we have restructured to prepare for a post FBI world. Lots of new detail. And my advice to you would be to read it again later as there's lots to absorb here. Just to make clear, NSI N.V. is still a [ BV -- ] FBI. It will stay so in 2024, and it may even stay so beyond 2024.

The one thing that has changed is that our assets today are now held outside the FBI. So they are starting to pay some tax. All in all, due to the restructuring, we will be paying a total of about EUR 2 million in tax during the period 2023, 2024, and that includes some one-off costs to a total -- basically see it as an investment of EUR 2 million to obtain close to EUR 40 million in deferred tax assets, which will help to reduce and mitigate the impact of FBI changes in 2025 and beyond. I think that's the key message you should be walking away from today.

Whilst the impact on EPRA EPS is simple, there's just a little bit of tax to pay on the direct results, it's probably harder to understand and interpret the impact on our EPRA NTA. We check with EPRA and there aren't that many companies that have positive deferred tax assets. What the market will make of it, we'll see we've given you all the details for you to figure out what you think the NTA is. EPRA needs to include the deferred tax assets. But we've also given you the pretax NTA in the slide here, for you to figure out what you want to do with that.

Slide 17, 18, 19 and 20, they're self-explanatory. Slide 21 shows our debt profile. We have no issues until mid-2026, and given our very steady business and low LTV of 31.5% pro forma for the disposal of Laanderpoort, we expect no issues either. So balance sheet-wise, we're actually in great shape.

That leaves us with the outlook. I think we can generally say that everything that could have been thrown at us has been thrown at us over the last four years. Starting with COVID back in 2020. We're not alone. Everyone in offices, everyone in real estate has had an adjustment to go through. It's been a painful reset for some, including ourselves, but we've done what people should expect from us, i.e., keep our head down and just deal with it and try to come out stronger. We've done that. And so as I said at the beginning of the presentation, we're now back on the front foot. It feels good, it gives energy, and it gets everyone at NSI excited for the period ahead. We think we've got all the elements in place to drive differential performance from here.

Key in all this is the team, the team I'm totally proud of. That said, the market is still in a state of flux. Prices have corrected and with our balance sheet, this provides room to pursue opportunities, but we're not in a rush. A few deals that we have seen come to the market so far have been of interest to us. In fact, at this time, the existing portfolio is still the most attractive investment that we see, which is why now with Laanderpoort and its capital commitments gone, we feel comfortable to commit EUR 20 million through share buyback. Details on that will follow in due course.

With that, I would like to hand it back to Laura to open it up for Q&A.

[Laura Gomez Zuleta, executive]

Thank you, Bernd. We will now be opening it up for Q&A, and you can ask your questions either through the platform or the phones.

[Operator]

[Operator Instructions] And the questions come from the line of Francesca Ferragina from ING.

[Francesca Ferragina, analyst]

Can you give some more color on the assumptions behind the guidance, mainly in terms of top line and financial charges? And also, can you make a little comment about dividend policy for 2024?

[Bernd Stahli, executive]

In the guidance for [ 2024 ], I think your starting point could very easily be the earnings that we've had this year, EUR 2.01. We've given you the detail that our tax rate in '24 is going to be slightly higher than 2023. And therefore, that difference in tax rates automatically reduces the earnings to somewhere EUR 1.95, EUR 1.94. The sale of Laanderpoort has virtually no impact on our guidance because it wasn't income producing. It wasn't the standing assets. In fact, if anything, it's a slow positive that we're bringing EUR 24 million back into the business. That is going to be basically utilized again.

There is very little indexation. The lease contracts that we have that most of our -- 30% of our leases are indexed in January and the indexation in [ January ] was [ 0.2% ]. So if you take into account that we're going to get a little bit of indexation, you can sort of see wider ranges so more or less slightly lower than where we were for 2023. On the dividend policy, I think we've done the reset. I wouldn't expect many changes from here.

[Francesca Ferragina, analyst]

Okay. That's clear. And maybe changing arguments. Would you say a little word about the type of conversation you have with the government around FBI going forward?

[Bernd Stahli, executive]

It's -- the FBI changes that were previously indicated, have now been [ voted ] through parliament, so that's a given. From 2025 onwards, we will no longer be able to invest directly in real estate as an FBI, which is why we've done the proactive and preemptive restructuring in 2023. The government did make a statement in our -- back in the end of 2023, that is looking at the possibility to create or revive a new regime for -- to be competitive in a European context, we need to find out what they mean and what that -- how that could work and if that actually works. And which is why in the results, between the CEO comments, I did say flowers only at the finishing line. Yes, nice that they're having conversations, but first see then believe.

[Francesca Ferragina, analyst]

Yes. Understood.

[Operator]

Thank you. We are now going to proceed with our next question. And the questions come from the line of Vincent Koppmair from Degroof Petercam.

[Vincent Koppmair, analyst]

I had a couple of questions just quickly. You mentioned clients were more demanding now since offices and the new market dynamics have changed. Do you believe then going forward, if there's more demand from clients that overall margins or net rental income margins could decline?

[Bernd Stahli, executive]

I'm not sure I see the link directly between the one statement and the lower margins. What we see is that as clients are getting more demanding, they want to make sure the space is really -- that fits their needs. So it needs to be hitting all the right details with respect to fundamental -- environmental data. It needs to be sustainable. It may require them to -- if it may need them to basically -- let's put it differently.

Some tenants that are now looking for shorter leases will not be able to fit out economically their space in that they can't depreciate the fit out cost over a shorter period of time. It may mean that we're going into a world where we need to spend a bit more time on preparing the space and making it sure it's also basically fitted out for them to step in immediately. It changes the dynamics because it means that some of the burden with respect to investment in the space comes towards us as a landlord. And typically, tenants are paying a premium for that, and we're going to see how that works out economically. I think it could actually be an opportunity, but it's too early to tell.

[Vincent Koppmair, analyst]

Okay. Very clear, it [ did ] answer the question. Is the contract structure is also slightly different for the [ modern ] shorter-term leases?

[Bernd Stahli, executive]

No. Not necessarily.

[Vincent Koppmair, analyst]

Okay. Clear. In H1, you mentioned that you identified more or less EUR 150 million of assets you would consider to dispose of, is that still the case? Do you still consider them? Or has that slightly changed?

[Bernd Stahli, executive]

The ING is not part of EUR 150 million. That's separate. The EUR 150 million is still there. And it's basically the strategy to get focused more and more on Amsterdam. So we have still some provincial assets that we think it's better to redeploy the capital to a market with longer-term better growth dynamics, which is Amsterdam. So far, we've done not much out of that pockets of assets, but that's also a reflection of current market conditions. There's very little liquidity at this point in time. And we're not in a need to pursue it at all costs, so it will happen when the market is right.

[Vincent Koppmair, analyst]

Okay. Very clear. And I had just two more additional questions. [indiscernible], you mentioned indeed that you're looking at potential of joint ventures to go then maybe on an acquisitions for you in the future. Do you already have potential candidates for those joint venture with whom you're talking to?

[Bernd Stahli, executive]

This is something -- last year, we've had other things on our mind in terms of dealing with restructuring, strategic reviews and the development reset. This is the objective for this year to see what our options are. And obviously, up until now, there's been very little we could have done with respect to the FBI legislation. So it's a journey for '24 and beyond. It's not a promise. It's going to happen this year. We'll see. The fact that there is little capital also means there's very little JV capital at this point in time. So don't read it as something that is going to be imminent.

[Vincent Koppmair, analyst]

Of course. Okay. And then I just had one last question. Of course, at the end of H1, the change in CFO, from my understanding, current CFO is more interim situation. Is there an update on that?

[Bernd Stahli, executive]

Good question. The -- we indeed now have a contractor on an interim basis that basically has stepped in to fill the void. The process to find a new CFO is underway. We thought we had a candidate and then literally 5 minutes to 12 that ended up not being the case. So we've had to restart the process, and therefore, assume it's going to take a bit of time before we get our act together on this.

[Vincent Koppmair, analyst]

Okay. Clear. And that's just my last question, I promise. Since you have disposed of Laanderpoort, would this also mean would consider selling at Vitrum and Well House for the right price?

[Bernd Stahli, executive]

All our assets are for sale at the right price.

[Vincent Koppmair, analyst]

Okay. Very clear. Thank you very much. Have a nice day.

[Operator]

Thank you. We are now going to proceed with our next question. And the questions come from the line of Carlo Wiegand from ICAMAP.

[Carlo Wiegand, analyst]

I just have two quick questions. So given the sale of Laanderpoort and the loss of your tax stages, would you consider doing a larger capital return than the EUR 20 million buyback?

[Bernd Stahli, executive]

We've -- the buyback that we're doing today is the response -- our response to the capital release that we had as a result of the sale of Laanderpoort. I think it's too early to see how the cycle evolves from here to be able to make a call how we are going to deploy the remainder of that capital.

[Carlo Wiegand, analyst]

Okay, I understand. And what was the valuation of Laanderpoort at half year and 2022?

[Bernd Stahli, executive]

I think actually, if you look at the numbers, and I'll -- we've had a small positive on 2022. Now actually, we've got a small positive on the midyear stage. I think everyone that goes into our website and find the detail, you can see an acquisition costs somewhere in the EUR 30 million. If you do the analysis, we've gone from an acquisition plus CapEx spend on the project, minus all the rent collected and adjusted for the sales price, I think total ownership loss over that period was about EUR 6 million, EUR 7 million.

[Operator]

Thank you. We are now going to proceed with our next question. And the questions come from the line of Ventsi Iliev from Kempen.

[Ventsi Iliev, analyst]

First one on the Well House development, I know this is suspended until further notice, but has your views on a change even marginally, especially regarding economics? And then more specifically, could you please comment what rent levels you could expect for it now? Again, has it changed over time? And what [ unit cost ] that translate to currently?

[Bernd Stahli, executive]

At this point in time, it's hard to argue. Talk about a yield on cost because all the variables are up in the air. To get this project going again, we would need to get a new land price quote from the municipality. We would need to get a new quote from the contractor, which we've not done. And therefore, rent levels, I think probably at somewhere EUR 550 a meter, even when we get to -- based on today's assumptions on where the market is. But no, don't expect anything imminent. There's nothing happening anytime soon.

[Ventsi Iliev, analyst]

Okay. And then second and last question on HNK. You mentioned that your signing leases 13%, 14% above ERVs. So are these ERVs for managed offices or just traditional offices because I can imagine that ERVs for managed offices should be higher also given the higher operational costs?

[Bernd Stahli, executive]

Correct. But no, this is actually traditional leases.

[Operator]

[Operator Instructions] And the questions come from the line of Kai Klose from Berenberg.

[Kai Klose, analyst]

Just two questions from my side. The first one if we compare the service costs not recharged to the gross rental income, '23 was a bit higher compared to '22, was it a one-off? Or is this a ratio we should expect going forward?

And the second question is I couldn't find any details [indiscernible] all of that on letting volumes in '23. Could you maybe split how new lettings and extensions?

[Bernd Stahli, executive]

First question on the service costs not recharged. During the year, our vacancy at year-end was lower. But during the year on average, we had a slightly higher vacancy. So actually, there's a difference -- and that actually has explained why we've had to incur some of it ourselves. And yes, because of the high indexation, we've had some caps that meant that we've not been getting -- being able to recharge everything to our tenants in some cases.

On the letting side, we need to come back to you on that. I don't have the numbers at hand.

[Operator]

Thank you. We are now going to take our next question and it comes from the line of Vincent Koppmair from Degroof Petercam.

[Vincent Koppmair, analyst]

I had a quick follow-up question. My question would just be in terms of your EPS guidance that you gave, would this also include the impact of the share buyback?

[Bernd Stahli, executive]

That's a good question. The answer is no, it's not in there yet.

[Operator]

We have no further questions on the phone line at the moment. Please continue.

[Bernd Stahli, executive]

Laura?

[Laura Gomez Zuleta, executive]

Don't appear to have any questions on the platform either. So I wish you all a good day, and thank you for having joined us.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you, and have a good day.