Inmobiliaria Colonial SOCIMI SA

MAD:COL

Earnings Call Transcript 2018-Q3

[Operator]

[Audio Gap] Regarding the third quarter 2018 results. The management will run you through the presentation, which will be followed by a Q&A session. [Operator Instructions] I am now pleased to introduce Mr. Pere Viñolas, CEO of Inmobiliaria Colonial. Please go ahead.

[Pere Viñolas Serra, CEO & Executive Director]

Thank you. Good afternoon. It's Pere Viñolas speaking. I am, as usual, with Carmina Ganyet, Corporate Managing Director; and Carlos Krohmer, Chief Corporate Development Director. The idea is to present you the results of quarter 2018 and main highlights on Page 6 of the presentation. I would say that the main highlight is that the results remain outstanding. This year so far, gross rental income going 22%, up. And more importantly, the like-for-like for this period is 5%, up, like-for-like, which is really healthy, and we're very happy about it. Recurring EBITDA also 20% up. Recurring earnings 15% up. We will go as usual more in detail in a minute. Now then, we are going to the main highlights. The first highlight was 5% like-for-like growth. The second highlight is, we confirm EPS guidance for -- by the end of 2018 EUR 0.22 per share. Behind these numbers, it is a strong operational performance, more than 150,000 square meters let with top Tier clients. Vacancy rates remain healthy, around 5%. Projects. Main projects of our pipeline are being delivered, and rental growth remains also healthy, with double-digit release spreads as you'll see in a minute. I am skipping to Page #7. I won't go into the details because basically here, you see a little bit of the same. Gross rental income EUR 258, 22% up. Recurring net profit EUR 68 million, 15% up. Full year 2018 EPS guidance confirm $0.22 per share. And here, there are a number of details as to the breakdown, but since we'll -- I will go in a minute, so now I'm skipping this Page 7 to skip to the section on market, and I will go back with additional details at the section of operational performance. I asked -- I will ask now Carlos Krohmer to start with a view on the macro fundamentals of our sector.

[Carlos Krohmer, Director of Corporate Development]

Okay. Thank you, Pere. Very quick overview on the markets. Barcelona, very strong, historically low vacancy rate in CBD, 3.6%, below 4%. And this in an environment where the prime rents have increased 7% and record take up in the third quarter. On Madrid, plus 38% take-up year-on-year, 140,000 square meters in Q3. This is the highest take-up figure in the last 10 years. And therefore, also a significant year-to-date increase in prime rents. Paris, strong take-up increase year-on-year, 6%. And by far, the lowest vacancy rate, I would say, in history in Paris and probably around Europe, 1.5% in CBD, and rents accelerating reaching levels above EUR 800 per square meter/year. Investment markets have accelerated in the -- at the beginning of the second half. Very strong investment volume in Barcelona, close to EUR 500 million and prime yields at 4% and increasing investment interest. In Madrid, EUR 600 million of office volume. Acceleration and transaction activity in the second half, and prime yield is 3.75%. Paris, investment volume of EUR 13 billion year-to-date. This is 33% year-on-year increase, 2x the long-term average. And it's a very liquid market, more than 35 transactions above the size of EUR 100 million. And all of this with a healthy spread, 3% yield means 220 basis points on the reference rate.

[Pere Viñolas Serra, CEO & Executive Director]

Thank you. I will now start with the operational performance section. I'm on Page 12. Well you saw at the beginning that the headlines maybe for this presentation would be healthy like-for-like rental growth confirmed, 5%, which is a very relevant number in relative terms to our competition and in relative terms to our history. And you'll see later on that it is spread across our domestic markets in very similar terms. Now let me go through it what's behind that number. In Page 12, basically, what you can see is that the Latin performance has been quite strong. We've been signing this quarter 82 contracts, more than 150,000 square meters being signed. Incentive remains quite healthy, particularly in Spain, 8% on average. The vacancy remains also at a 5% level, which is also a very nice level. If we go a little bit more in-depth, I'm now on Page 13. If instead of talking about a like-to-like, we talk about the growth on signed rents or the release spread, then we should be saying that the growth on signed rents, that is the comparison between signed rents and ERV by the end of last year, then this growth, it's 10% for the third quarter. Remember that in first quarter was 6%, second quarter 12%. So it remains quite strong. And if we go into the breakdown by regions, Barcelona confirms that it's really hot. After we have 24% growth rate in second quarter, the third quarter remains 18%, which is really hot. Madrid goes hotter, it's 12%; and Paris remains 4%. So you can see the details coming from growth on signed rents are remarkable for this quarter. This is for growth compared to the end of last year. If we talk about release spread on the right-hand side of this Page 13, you see an average 26%, where Barcelona is 32%, Madrid, as a coincidence is 32%. And let me emphasize that Paris shows also a remarkable 13% in terms of release spread. So growth rates for rental growth remained very healthy. And look for a even brighter picture that the one you see when we talk about it like-for-like, that is always a more smooth version of what's going on. I will skip Page 14 because it's mainly plenty of examples about release spreads and growth on signed rents. Just to mention that there are no particular examples that we have to highlight. And then I would move onto Page 15 to talk now about occupancy having spoken already about rental growth. Vacancy levels remain a healthy 5%. It would be much lower if it wasn't because of a couple of projects that is not just delivered and because of the Axiare vacancy rate that we're managing right now. Barcelona remains at the strong end of 1% of vacancy. Paris remains also very healthy, 2% vacancy. In Madrid is where 2 things are happening. First by September 30, Discovery and Window, the 2 projects we were just delivering are still allowed for 2% vacancy. I have to say that as we speak, these 2 projects have been delivered, and occupancy have been improved further, so that number will be lower today. And -- but then, most of all we have the vacancy coming from Axiare, which is something that we're working on. So that's why Madrid shows a bigger number, but the overall average remains at 5%.Page 16, just to confirm the successful delivery of the projects that we have initiated in the last 3 years. Discovery fully delivered at a yield on cost of almost 8% and an average ERV of EUR 26. And as of today, it's 66% of preletting in that building. Principe de Vergara, it's delivered also at a yield on cost of a healthy 7.6. The average rent signed has been 24, and it's -- it was prelet of 80% at the close of third quarter. Today would be even higher. And finally, Glories in Barcelona has just been delivered very recently, being 94% prelet. And these numbers allow us to confirm a yield on cost of, again, almost 8%, 7.9%. So you can look at the total product cost in terms of euros per square meter at the bottom of the page. So the pipeline delivery is being confirmed in terms of the main fundamentals that we expected. I will ask now Carmina to run you through the section on financial performance.

[Carmina Ganyet I. Cirera, Corporate General Director]

Okay. Thank you, Pere. In Page 18, what we show here is the double-digit growth in gross rental income, 22% enhanced through the Axiare acquisition. And on top, as we mentioned before, the gross rental income like-for-like increased outstanding at 5%. In every single market, as you see in the left-hand side in the page, 5% in the total average share of our portfolio, but 5 -- 4% in Barcelona, 5% in Madrid and the stronger market that in Paris is also 5%.In Morgan-run analysis, this like-for-like growth 5% is driven mainly by rental prices increase. That one in Madrid with a very strong effect as you can see here, 2% price driven in Barcelona, 2.7% price driven in Madrid out of this 5%. And Paris remains still well above our peers with price effect of 2% and additional volume in part of a positive 3% for this 5% like-for-like growth.As you know, well, this year, we have a lot of events. I would say is probably a year of transformation events at Colonial level and the capital restructure and the capital -- the financial management has been following all these extraordinary events. First of all, we have been able to issue new equity of EUR 663 million because of Axiare measure and because the upfront project mainly will take place in November after the approval of the capital increase after the -- or with the key acquisitions from the stake of SFL. Then, we have issued in April EUR 650 million bond issued at Colonial level and in May, EUR 500 million in SFL. After this bond issuance, we have been able to do a very active capital management, through 2 liability management. One, booked in this quarter, in May, we had reported EUR 375 Colonial bond and another additional liability management in SFL, which will take place in October, and we will see the impact in the year-end. On top, with this liquidity, we have been canceled debt, the number of debts, mortgages, especially from Axiare, EUR 393 after the measure. So after July, EUR 282 million bilateral in Axiare has been also referenced. And also as you know, we have EUR 441 million in asset disposal during the year. So as a consequence of this active liability management, we have already a healthy and strong balance sheet, and Standard & Poor's has recognized this actively management in liability. So today Colonial is the highest corporate rating in Spanish real estate with BBB+. So the high end of the investment grade, with a loan-to-value below 38% with a cost of debt below 2%, 1.92%, and with a debt maturity very healthy, 6 years debt maturity, and with a very strong position in terms of liquidity to maintain this capacity of maintaining this very strong credit profile at Colonial Group. So as a summary, the P&L shows this 22% up gross rentals -- gross rents from EUR 212 million up to EUR 258 million third quarter 2018. The recurring earnings shows an increase of 15% in cumulative terms. Below this recurring earnings, you'll know that Colonial update valuation twice per year. You see in this third quarter results, the impact of the valuation in June 2018. You will see in the year-end the update valuation from the total portfolio of Colonial. So keeping in mind that the income you see and the P&L EUR 304 million is the revaluation as of June 2018. Then as a consequence of the active liability management, we -- I mentioned before, we have a negative impact of EUR 90 million in 3 quarter results. Cancellation of mark-to-market derivatives from mortgage from Axiare and the impact of the reportage of bonds. So as a summary and as a consequence of this total impact, the profit attributable to the group remains at the level of EUR 281 million.

[Pere Viñolas Serra, CEO & Executive Director]

Thank you. So it's Pere Viñolas again speaking. I think that as you have seen the summary is that the results so far this third quarter are quite healthy. And on top of the 5% like-for-like in the growth, we seen a 10% rental growth on signed contracts and more than a 20% release spread. So looking backwards, the results are very satisfactory. A quick comment now looking forward about future value creation. How can we say that we remain confident about the prospects for Colonial going forward for the next few months? A very quick comment because what I will mention now has already been shared, for example, at the time of the last Investor Day. I think that there are 3 or 4 things to be discussed very quickly. First, we remain very confident on the value that can be delivered through our pipeline, Page 24. We remain with a pipeline of EUR 1.5 billion, that -- you can see this Page 24 that has a long number of projects that are all of them delivering a healthy use on cost on the last column. A very healthy cost in terms of euros per square meters. I think that this allows for an important rental growth expected for the next few years. On Page 25, a second reason to be very optimistic about our future is, when you see that release spread that we're having is above 30% for the quarter -- third quarter of this year. And then you look at the commercial lease expiry date, the maturity date that you can see in this Page 25. I think that we'll be able to capture rental growth in a healthy level when you look at where the release spreads are and where the next contracts are maturing. On Page 26, if instead of talking about rents, we talk about capital values. This is the page we usually disclose, where you see the recent transactions that we're aware of in the Madrid city center and Barcelona and Paris. And we compare this with the Colonial average. Of course, it's not directly comparable, but it gives you a very good feeling of where Colonial stands as opposed to recent transactions that are happening in the 3 markets. I won't go into details, but I think that the spreads -- the slide speak for quite itself. And finally, the last value driver that we're working on is capital recycling. You see at the Page 27, the different Alphas that we've been delivering, how we have been changing a little bit their profile. This year, we just presented Alpha 4 a few weeks ago, where we included a successful divestment at a very healthy premium on -- compared to the appraisal values, but also very interesting acquisitions on Page 28. We disposed assets for a total of EUR 441 million, where the premium on GAAP was 12% global. So that's another value driver. But then I think that we remain capable of buying smart. And in this last quarter, we've been able to invest, we believe, sensibly. The most notable transaction has been the acquisition of the 22% of SFL, the additional stake that we've been able to secure at a 19% discount on NAV. By the way, this is well known because this was disclosed to the market a few weeks ago. Just yesterday, the signature, final signature of the public bid took place. Shares -- we'll be trading new shares by the end of next week, as we mentioned, at last. And also last week, it's important to mention that the General Shareholders Meeting, which more -- with more of 80% of shareholders attending, this transaction was approved, I would say, remarkably with a 99.99% of votes for, which is a very healthy support. And on Page 29, just to give a little bit of flavor of what all these things means. Well obviously a question means that if we had in June an NAV of 9.11, although appraisals do not take place until year-end as we all know, only because of the aggression of these deals that we've just gone through. The pro forma NAV only with these deals goes from 9.15 -- 9.11 to 9.44. I insist all this reflects only the direct impact of the SFL transaction and nothing else. The -- whatever is left, of course, will come in December as expected. Also because of these deals, the market cap and the NAV of the company grows, the NAV coming very close to EUR 5 billion. So just to give you the impression that we share that besides a very healthy third quarter in terms of KPIs, in terms of rental growth, we are confident about this main -- same fundamentals going forward. So that's all for the presentation. So thank you. And as usual, we are now available for any questions that you may have. Thank you.

[Operator]

[Operator Instructions] The first question comes from Alvaro Soriano-De-Miguel from Societe Generale.

[Alvaro Soriano-De-Miguel]

Just a couple of details. The first one is on something that you usually report but this time you didn't report is the maintenance CapEx in first half of 2018. You reported something like like-for-like CapEx EUR 28 million. I don't know if we could have a view on that figure as of 9 months 2018? Then the second question is about the disposal of the Méndez Álvaro project to Catalana Occidente, the insurance. Can we know how the payment is going to happen? I mean, you're going to receive the cash once the project is delivered to the owner? Or you are going to receive a cash flow stream through the project through the construction of the assets? And linked with that question on how that asset is going to be paid. I would like to know on the EUR 441 million disposal with 20 -- with a 12% premium to gross asset value. I would like to know to what extent that premium, that 12% percent is explained by that project? I think the value creation of that project is massive. And I would like to know -- have a sense as to what extent Axiare assets create premium on that transaction? And finally, on the logistic portfolio. I know that is a lot of details for your question. But on the logistics portfolio, could we have a view on what is the rental income-producing that portfolio?

[Pere Viñolas Serra, CEO & Executive Director]

Thank you, Alvaro. I will pass now over to Carlos and to Carmina. But just to comment on the more global question about the premiums on the disposals. We mentioned that you cannot be very specific about the disposals because of the confidentiality agreement that we signed. Although, I would say 2 things. One, that you're right. I mean, the Catalana Occidente deal was remarkably healthy or remarkably good in terms of the upside. But second, this does not mean that the rest of the transactions that related to the Axiare or the other transaction that we did related a little to Alcalá were not profitable. But we already mentioned at the Investors Day that all transactions were profitable, that some of them were above this 12% premium -- average premium. And some of them were below, but those that were below, I would say that the vast majority of them were quite close to 10%. So you're right. #1, the Occidente deal is maybe the best one of all of them. But that does not mean that this allows to sell at no profit of the rest. The rest remain also quite healthy. Going through the maintenance CapEx. Carlos is going to provide you with some comments and then Carmina with some other comments again, on Catalana Occidente transaction.

[Carlos Krohmer, Director of Corporate Development]

The annual run rate of maintenance CapEx in our group is EUR 9 million. There was some things that was not properly reported on that table. I'm sorry for that. But the run rate is EUR 9 million. I have not the specific figure here for 2018, but it will be around EUR 9 million or EUR 10 million. This is the run rate for our global portfolio, Spain and France, in terms of maintenance CapEx. All of the rest is projects and refurbishment projects.

[Carmina Ganyet I. Cirera, Corporate General Director]

Well some additional comment to Catalana Occidente, answering your question. The answer is yes we are going to receive the cash of course, there is an upfront payment. And we're going to receive the different payment of the total amount of this sale during the development project, which we expect to be finished in 2021, beginning 2021.

[Pere Viñolas Serra, CEO & Executive Director]

That's basically it, I think. Maybe some question about well, the logistics. If not you have the number here of course, later.Okay. We'll come back, Alvaro, later with the logistics because we don't have that number right now. Thank you, Alvaro. Next question, please.

[Operator]

The next question comes from Jaap Kuin from ING.

[Jaap Kuin, Research Analyst]

My first question is on the reversion and forward-looking rental expiry. I mean, if I look at the schedule, Page 25, that 2019 seems to be a year with above average volume of lease renewals. So if you're able, could you maybe look ahead to those of next year and then maybe describe either if there are key risks there for, let's say, large leases where you already know that the tenant will leave? Or if you perceive this as kind of an opportunity to generate higher like-for-like and then if that logically leads to higher like-for-like 2019 for what you're currently reporting also on the back of higher indexation next year?

[Carlos Krohmer, Director of Corporate Development]

Basically, what we wanted to show here and also on the Investor Day is that our like-for-like has been stable and strong during the last 3 quarters. Every quarter around 5%. And I think this is what we can really say about this going forward. So going forward we are not now -- I think it would not be wise to give now very specific guidance. But we clearly, think that we could be in levels similar to the ones that we're reporting right now. And why? Why, because the underlying markets are very healthy as we have shown. And because we think that in Spain there is a lot of rental recovery of the markets still to come and Paris is accelerating. So the current level is a strong one, and it could continue in similar levels. But to give a very specific guidance for 2019, I think at this point would not be that wise. But at the moment as you can see, it's been stable at these levels.

[Jaap Kuin, Research Analyst]

And then regarding let's say, potential big leases expiring next year because of the higher volume or it is just coincidence? Do you foresee any risks there for next year?

[Pere Viñolas Serra, CEO & Executive Director]

No. There are -- this is Pere Viñolas speaking. I think that certain particular names that we're working on were, as of today, we remain, how I could say that, quite comfortable or quite confident with the discussions that have taken place at these levels. So although, the expiry date is there, we do not see any particular risk or downside at this moment. Maybe the opposite, as you say, an opportunity.

[Operator]

The next question comes from Celine Huynh from Barclays.

[Celine Huynh, Research Analyst]

Two questions on my side. The first one is about the vacancy rates in Madrid. How do you feel about the vacancy reduction from the Axiare portfolio especially in the east of Madrid considering the amount of speculative supply to be completed next year in the same area? I found that the vacancy in Madrid has barely moved from H1 '18. So is it harder than you expected when you acquired the company? The fact that you sold some buildings with high vacancy rate, I'm thinking about the Cristalia business park for example. Is that because you felt that it was too difficult to reduce the vacancy so the best solution was to sell it? And then, my second question will be on the future for the logistics portfolio, are you still planning to sell it and if so when?

[Pere Viñolas Serra, CEO & Executive Director]

I will start with a general comment and maybe Carlos can be more specific. We do not sell any building based on short-term, let's say, challenging or less challenging scenarios about leasing. Usually it's the opposite. When we're in a, let's say, a situation of high vacancy that were more upside or value we can bring on the table through our -- for our work. So it was in the case of the disposals, it was more about an analysis of our exposure of Colonial plus Axiare after the transaction. And we thought that in certain markets, submarkets of Madrid we had more exposure than what we wanted to have. So it was more a correction of our asset allocation than something linked to our leasing strategy. Before Carlos can go into more deep comment about vacancy reduction. The logistic portfolio will remain where we have been in recent weeks. There is no particular initiatives at this moment regarding this portfolio, it's under strategic review and no decision has been taken regarding a potential sale or any potential significant transaction regarding this portfolio. So no news about this logistics portfolio. And coming back to the vacancy and how it may look like going forward. Carlos, if you would like to add anything else?

[Carlos Krohmer, Director of Corporate Development]

On the vacancy, I would like to mention 3 things. Number one, one of the big motivations to acquire Axiare was that it was really a grade A asset portfolio, so very good product and so we bought into reversion. So we like to have a very good product in our portfolio. As of today we have very interesting available product both from Colonial and from Axiare and as you have seen the Madrid market is accelerating. What does this mean that now it's starting to spread beyond just the Castellana and so to have a good product is now the key element. And so what we also are in a good position when we have such a high occupancy of the global portfolio is to really then look for the best offer and try to get the maximum price. So we see this as an opportunity and we will see in the coming quarters what we can -- what we can tell you on this in terms of price.

[Operator]

The next question comes from Pedro Alves from Caixa Bank.

[Pedro Jorge Gouveia Alves]

Three questions, if I might. The first one, despite the high release rates captured in the quarter it seems that has been a decline in the rental like-for-like growth in Madrid or at least flat in the quarter. If you could explain the reasons for that? The second question is if you could explain the drivers behind the decline in the recurring EBITDA margin in the quarter. And thirdly, on incentives, you mentioned an average incentive of around 8% in Spain. Could you share the figure for the Paris portfolio as well? And how the incentives have evolved across this year?

[Pere Viñolas Serra, CEO & Executive Director]

Thank you, Pedro.

[Carlos Krohmer, Director of Corporate Development]

Okay. Let's start with the last question. On the incentives you have it on Page number, I think in the beginning of the operating performance part. There the incentive for Paris is shown. It's 13%. 13%, it's an extremely good figure, 4 years ago, this incentive was in Paris in general terms around 22%. It has gone down -- I talk about the market, to 16% in the center of Paris, and we are signing at 13%. So this is an extremely good ratio. In terms of EBITDA margin. Yes you are right, it has decreased a little bit the EBITDA margin on gross rent. But this has an explanation that has to do with things that we explain on our Capital Markets Day in Barcelona. Basically what is happening is at the Varga Center, an asset, a retail asset that was in operation at the beginning of this year, we are now fully transforming. So we have there no rents but we have costs. So this is the reason because -- why we temporary have here a higher, so a worse EBITDA margin on gross rents. But this is because we have here a fantastic project where we're going to increase quite significantly the rents. And in Madrid, it's a similar explanation although there the impact is much lower, is because of Discovery building being released and being at the beginning of the year, in operation with costs in operation, but not yet with the rent. So it's a pure temporary effect and it's because of phasing into operation, the projects. So it's putting into value, the projects. And on the -- could you please remind me on the first question that I did not get exactly. On the Madrid like-for-like, what was your point there?

[Pere Viñolas Serra, CEO & Executive Director]

A decline.

[Carmina Ganyet I. Cirera, Corporate General Director]

The decline in the last quarter.

[Carlos Krohmer, Director of Corporate Development]

Decline?

[Pere Viñolas Serra, CEO & Executive Director]

Which page are you referring to? Sorry, Pedro.

[Carmina Ganyet I. Cirera, Corporate General Director]

13, probably.

[Pedro Jorge Gouveia Alves]

I'm referring to the implied like-for-like growth in the Q3 in Madrid, which has slowed down compared to H1. But I think you already mentioned the Discovery building impact.

[Carmina Ganyet I. Cirera, Corporate General Director]

Yes.

[Carlos Krohmer, Director of Corporate Development]

Well, the pure third quarter analysis, I just refer to the quarter. I don't have it here. What I can tell you about the like-for-like cumulative figure this 5% is that there's, as Carmina said, strong price increases on -- price increases that we reported in previous quarters in the asset. And it was about 56 in Recoletos. And there are several buildings that were last year on average occupancies of around 80% to 90% and that are today at the level of 100%. Then obviously, it's not always homogeneous every quarter. Every quarter depends a little bit on how the rents fall, how the contracts are due. Some of them are due in the second quarter, some in the third quarter. Then it can be that then some quarters you have a little bit less letting activity. But I think the important thing is that quarter-on-quarter, if you look every single quarter the cumulative figure has been quite high.

[Operator]

Your next question comes from [ Vlad Ivanic, ] BNP Paribas.

[Unknown Analyst]

I had a question on your capital structure. So how do you view your capital structure currently and are you looking to extend your maturity profile further or to undertake any further liability management exercises?

[Carmina Ganyet I. Cirera, Corporate General Director]

No. In fact, today, we have 6 years maturity debt. We have closed all the liability management and to extend debt maturity. This is the reason why we did double issuance. We -- only what's outstanding now it's finishing the cancellation of part of the mortgages coming from Axiare acquisition. But as of today we feel comfortable with this long-term maturity debt profile. The first maturity will come in 2023. So we don't expect any additional liability management in organic -- in ordinary business running. So we don't expect any extraordinary event in terms of the capital structure.

[Operator]

Thank you. Ladies and gentlemen, there are no further questions. I now give back the floor to the company. Thank you.

[Pere Viñolas Serra, CEO & Executive Director]

Just to thank you, all of you. I think that we're happy today, pleased to share with you this set of, again, remarkable results, from a non-British firm as we are. So thank you all of you, and see you next time. Bye-bye.