Inmobiliaria Colonial SOCIMI SA

MAD:COL

Earnings Call Transcript 2019-Q3

[Operator]

Welcome to the Inmobiliaria Colonial Third Quarter 2019 Results Presentation. The management will run you through the presentation, which will be followed by a Q&A session. [Operator Instructions] I'm now pleased to introduce Mr. Pere Viñolas, CEO of Inmobiliaria Colonial. Please go ahead.

[Pedro Viñolas Serra, Vice]

Thank you. Good evening. This is Pere Viñolas. As usual, we have here Carmina Ganyet, Corporate Managing Director; and Carlos Krohmer, Chief Corporate Development Officer, who are going to join me in the presentation of the results for the third quarter of 2019. I will follow as usual the presentation. I'm on Page 6. And basically, the highlights of this presentation show, again, how satisfactory the results have been so far this year. We are presenting today outstanding financial results. The gross rental income of the company is now at EUR 263 million. That is a 4% like-for-like. And that translates into a recurring earnings per share of $0.20 -- $0.205, which is 33% up year-on-year. Recurring earnings are now EUR 104 million, that is 53% growth year-on-year. So as I will now show in detail the results of this third quarter, again, I think, are very much in line with our expectations and show a very good performance. We are presenting also a quarter where other things have happened. I would say that the main important transaction that took place during this quarter is the disposal of the logistic portfolio. I will refer again on this later on in this presentation, but it's another important element of the results of this quarter. A very important element to emphasize when having a look at our results is the strong operational performance. What I mean by this is that the results are excellent, are very good in terms of rental growth and in terms of occupancy and anything else that we can look at. But this could happen with not too much activity going on or with a lot of activity going on. What we highlight here in the first part of the presentation is the important level of activity that we've gone through. We have signed during the year until today almost 200,000 square meters. This is a very, very relevant number compared to our usual, let's say, numbers at this time of the year. We usually do, in average year, half of this. So it's very important to emphasize that the numbers you will see are supported by such a high level of activity at the company. You will see later on that, again, we remain with very healthy vacancy levels, improving on the numbers that we saw in previous quarters. You will see that the projects that we're working on -- working -- are going in the direction of being successfully pre-let. And generally speaking, there's strong growth in rental prices, measured in any way, rental growth, release spread or any other measure. So basically, we remain confident on the outlook that we've been going through in recent quarters. In Page 7, there is again the details of the main numbers that we are presenting today to the market. So I won't repeat again the numbers on gross rental income, recurring net profit and earnings per share, but you can see that are quite satisfactory. And also on the right-hand side of this slide, you can see the EPRA vacancy, which is now at 3.5% after a heavy volume of transactions of almost 200,000 square meters, which means almost 100 different transactions. In this -- in the bottom of this slide, you can see additional layers of information. The message again is similar to messages of previous quarters. Our growth is very satisfactory, and it's happening across all our domestic markets. Madrid is showing a 5% like-for-like; Barcelona, 3%; Paris at 3%. If instead of using this measure, you look at the release spreads, we have a double-digit release spread of 14% for the company, 34% in Barcelona, 18% Madrid, 7% in Paris. Or finally, if we look at the rental growth, meaning the rental prices that we are signing compared to the ERV of December 2018, it's 8% for the company, 10% Barcelona, 4% Madrid, 12% Paris. So the message would be, all our markets are going in the same level of positive performance. In Page 8, just to remember, the main point about the guidance that we are giving to the market. In terms of profit and loss, we expect our top line GRI to be around EUR 350 million by year-end. We expect the earnings per share to remain at around EUR 0.27 by year-end. And the dividend per share will remain with a growth of 10% year-on-year. We have also our guidance regarding capital recycling. We expected no disposal -- we expect disposals to be at a number higher than EUR 475 million. In fact, this number, it's almost been achieved by the disposals we've done so far. And we expect that year 2020 with more selective kind of disposals. We remain confident that we will go through an acquisition program with selective opportunities. So that remains also an objective for Colonial. In terms of financial policy, again, the guidance is the same one that we've been seeing before, the level of investment-grade rating that we have, which means our LTV in the range of 36% to 40%. And finally, we remain with a strong commitment to ESG. And we will show, let's say, major improvement in this area across the end of the year. I will now ask Carlos to step in and to explain us how the market has performed first, and later on, how Colonial has performed at the operational level.

[Carlos Krohmer, Chief Corporate Development Officer]

Thank you very much, Pere. Let's step to Page #10. You will see the third quarter data of the 3 markets, Barcelona, Madrid, Paris. Barcelona and Paris with really all-time low vacancy levels, below 2% and Barcelona presenting a record take-up of cumulative more than 300,000 square meters and reaching prime rents of EUR 27 per square meter month, 7% year-to-date increase. Madrid, it is important to highlight the very positive momentum on the take-up. The cumulative take-up for the first 9 months of the year has been 474 (sic) [ 474,420 ]. This means we will break the threshold probably of more than 600,000 square meters by year-end. And this is a 30%, 3-0, year-on-year increase of the take-up, basically also relying on a very strong second quarter. CBD vacancy has been further going down to 6.3% and prime rents at EUR 36. And Paris is very, very strong, 1.6 million of take-up in the year-to-date with a CBD vacancy level at 1%. Looking at the investment markets, we step into Page #11. The 3 cities where we operate show very high spreads versus the reference rate. When we go to the specific elements to highlight on every market, Barcelona is really facing a scarcity of supply. There is very strong interest, but they do not find really opportunities. So this is one of the main elements in Barcelona. Madrid, there has been a strong investment volume and basically dominated the transaction by international investors. And Paris is facing another record year, EUR 16 billion of investment volume on commercial real estate year-to-date. This is a 25% plus versus the previous year that was a record year. And a lot of large deals, more than half of the transactions above of EUR 100 million. So with this, let's step to the operations of Colonial. As Pere mentioned, I'm now on Page 13, this has been a very, very active year so far, 100 transactions, 200,000 square meters signed equivalent to more than 60 million of rents. When we look at our portfolio in terms of vacancy, extremely healthy vacancy levels. And we are signing rents -- our maximum rents are really at the same or even higher levels, that the prime rents that we can see on the data of the market [ comes on ]. Going a little bit into more detailed granular analysis of the rental growth of our commercial activity. You see here on Page 14 the breakdown of the activity in every quarter. In gray -- with the gray shadow in the third quarter. Basically, if we start on the left-hand side, you see the signs, the rent signed versus the ERV. We see quite strong figures in every city, 7% Barcelona, 6% Madrid, 12% Paris. To highlight, I would say, is the acceleration with positive momentum in Madrid of plus 6% versus 4% in the second quarter. Also quite important, Paris every single quarter with double-digit rental growth versus ERV. And when we look at the release spreads, Madrid and Barcelona with high double-digit release spreads. Paris has not so much renewals due to the more longer-term nature of the contract portfolio. So we had just in the first quarter release spreads, but also positive release spreads. And in second and third quarter, there's been no renewals. Page 15, just to show that this is across the board. Here we see examples of rental growth versus ERV. If we turn the page on Page 16, we see examples of release spreads. All of this activity has led to a significant reduction in vacancy.On Page 17, you can see how the Madrid portfolio has evolved in the last quarters and how there has been a very successful letting up of the former Axiare portfolio. And this also at the end has an impact on the total vacancy of the group that is at 3.5%. If we then turn to page to -- Page 18 and look at the breakdown of every market, we can see Barcelona and Paris with each 1.4% of vacancy and Madrid with 7.4%. Basically a relevant part of this is projects that were released by Axiare and we are letting up. If we look at the Madrid core portfolio, it stands at 2% like-for-like. So all in all, very strong and leading to a group vacancy rate of 3.5%.

[Carmina Ganyet I. Cirera, Corporate Managing Director]

Okay. In the next section, this is Carmina, we see how this strong performance is translated into the financial numbers. The first one is how the gross rental income increased from EUR 258 million to EUR 263 million and with our outstanding 4% like-for-like growth in comparable terms, highlighting that we are within higher like-for-like of 5%. And Madrid and Barcelona remained very strong with 3% in each market. How is the source of this rental growth? Basically, this like-for-like growth is driven by rental pricing increases. Barcelona and Paris full price driven with 2.7% and 2.2% in Paris and Madrid growth driven by a combination of price and volume, considering that in Barcelona and in Paris, we have a very significant -- insignificant vacancy rate with 1.7%. Basically, the rental growth or the like-for-like growth is driven by prices. And Madrid is a combination of volume and also prices with a significant increase of 3.2%. In this presentation also, we remind you, I'm in Page 22, the disposals of nonstrategic assets, basically logistics portfolio. Remember that we sold in the first semester Hotel Centro Norte. And also we executed and reached the sale of logistic in August. Basically, roughly speaking, 60% of this disposal has been already instituted this year, so in August. And 34% -- 35% of the remaining part of the logistics portfolio has been agreed, but will be executed beginning of next year or during the first semester of 2020. As a consequence of this nonstrategic asset disposal, the company, Colonial, is more focused in the office from 92% to 94% and enhancing, of course, the quality and the office exposure. So as a consequence of this strong number, we delivered, I'm in Page 23, a strong EPS growth from $0.154 per share to $0.205 per share. It means a 33% increase, with an increase of 53% recurring results from EUR 68 million the last year quarter to EUR 104 million this quarter and with a result of -- net result of more than 40% from EUR 281 million up to EUR 393 million. If you look at how our -- the variance analysis of these recurring earnings, we have had EUR 50 million, thanks to additional rental growth and additional projects coming to operation. On top, we have been added EUR 10 million, thanks to the financial costs and the liability management on the balance sheet -- the balance and the financial activities. And also, thanks to our increase in -- of our interest in SFL, as a consequence of the transaction, we executed last year that increase from 54% to 84% exposure. In SFL, we have added EUR 80 million more considering minorities from different facilities. And also to see what has been the impact of offloading secondary assets, as I mentioned before, as a consequence of that, the results -- recurring earnings that we show this first 9 months increased EUR 36 million from EUR 68 million to EUR 104 million. And finally, we continue to improve and enhance our balance sheet. As you know, we completed also all the finance -- all the refinancing from Axiare bilateral. We signed the first sustainable loan granted to a real estate company in Spain, thanks to the quality and sustainable brands we have achieved in our portfolio. Also, we took advantage of the low rate to issue an ECP program very opportunistic of EUR 500 million in Spain and in France. And thanks to all of this activity in the -- in our financial exposure, we have been able to reduce our financial costs from EUR 77 million to EUR 67 million. Today, after selling the logistics parts that have been executed, as of today, the company shows a loan-to-value of 37%. Our spot cost of debt being reduced on the 1.54%. We still have the benefit to have liquidity aligned and cash available for the organic growth. And also, we maintained our stable rating with S&P and Moody's with BBB+ and Baa2. Pere?

[Pedro Viñolas Serra, Vice]

So thank you. I would like now to start with the final part of the presentation. First, I would like to emphasize what we've seen in the presentation that was being carried out by Carlos and Carmina. Basically, I think that we are presenting numbers, which are very satisfactory in terms of operations and financial. But I would like also to highlight that -- the strategy that is underlying in all of this trend. Basically, I think that the company is benefiting from a very clear direction in their actions. We have been looking for a company that should be positioned in the CBD market and deliver very good results in all -- ordinary and non, let's say, organic activities. In this third quarter, I think that we also can see that the Axiare project, which started a year -- between a year and 1.5 years ago, now it's close to an end with this disposal of the logistics portfolio with very satisfactory results. So it's not only the evolution of the market, but also the delivery on our nonorganic strategy, which is proving to be very satisfactory for the company. The last part of the presentation about growth drivers, here what we try to share with you is not only looking at the past where the results have been very good, but trying to project them into the future, what kind of confidence does this give us in terms of future value creation. And in Page 26, we highlight the 4, 5 major points that we rely on in terms of confidence for future value creation. The first one doesn't need any particular number. It's only a reminder about our strategy. We think that we can deliver future value creation, basically because we think that we are on the right spot in terms of strategy, which is in the leadership in prime offices. We like this and we've been enjoying outstanding results in -- with this strategy, basically because short term, it's the right spot to enjoy really outstanding rental growth. The rental growth is happening basically where you don't have any relevant vacancy. That happens with CBDs. That's why, in the short term, we have been enjoying such a interesting growth. And that's why we believe this will still happen in the short term. In the long term, we like the -- our strategic positioning because we believe it's the best combination of risk and return. And in this particular time of the year, where we see such a lot of sensitivity on risk-adjusted returns and drivers regarding quality and defensive play. And I think that basically, our positioning, and I would not attach any number, but I think it's a strategic issue. Our positioning in prime CBD offices offer this kind of long-term approach. And finally, if you allow me, again, not about numbers, but in ESG terms, we believe that to be based in CBD is what allows you to deliver superior performance in terms of sustainability over the long term. Maybe that's not to be discussed today in detail, but it's something also to highlight now. So that's point one about how we are confident about future value creation. Point two, it's more specific, it's about the project pipeline. This is not great news, but it's always good to remind that we are sitting on a EUR 1.3 billion project pipeline, and this is performing in the right direction. Just to provide some color on this, on Page 27, for example, we provide some details on Castellana 163, where today, we can share that the level of pre-letting is already 70% and where signed rents have been doubling initial rent in place. This is a very interesting example of our activity regarding our pipeline, where we manage value-added initiatives in order to create future prime. I think it's a very interesting project, because it's something that we buy it a few years ago, where we have been investing in order to turn around this building. We have been doing this with many tenants inside, which creates another level of complexity. And today, this is in its final stages, with rents at the level of EUR 28, where they were at the level of EUR 14, and so a lot of value capture. That's a good example about creating value through the pipeline. In Page 28, at a more general level, we highlight that out of the 12 projects, including our pipeline, 5 show a good level of pre-letting, our total level of pre-letting, I would say, which allow us to say that out of the EUR 83 million of future GRI, we have already 27% secured today, which is relevant if we bear in mind that a big part of this pipeline is really long term. So point two about future value creation has to do with our pipeline. Point three has to do with rents. I think that we show today that the evolution of rents, it's been extremely outstanding until now. And here, I would like to emphasize one particular number. In Page 29, you can see the release spread captured in the third quarter of this year for Barcelona and Madrid. In Paris, there has not been any significant renovation. So it's basically about Barcelona and Madrid. If you look at the number, it's outstanding. And basically -- and this has been shown before by Carmina. If you look at the trend for this release spread during the year, what you can see is that the release spreads in the third quarter are actually higher than those that we saw in the first half of the year. So obviously, this is an isolated number for a particular quarter. So maybe we don't have to extract major theories. But in any case, we cannot say that we are, let's say, decelerating our trend of rental growth if we look at this release spreads. But the opposite, the third quarter has shown higher release spreads than in the previous quarter. So that is telling us that as of today, the mood remains very strong in Spain. If we also remind that the rent roll that we have is expiring in a relevant way year 2020, 29%, and it's the first potential exit that we have in our portfolio next year. What it's telling us is that you have the ability to capture this healthy market quite soon. So that would be point number three. Point number four, I'm not going to go into details, because that is already well known. The other way of capturing additional income is through the renovation program that allows us to capture reversion. And here, Charles De Gaulle, Torre Marenostrum are well on track and showing significant numbers, as you can see in this chart on Page 30, comparing previous contracts with a new one -- with the new products. In Page 31, you can see a more general look at this. And basically, you can see that the current GRI in June 2019 can be improved by 56% towards EUR 25 million after these renovation programs. So this is another source of value. And finally, let's say, our final source of value is the investment market. Here in this slide, there's only one chart regarding our investments and disposals. Before that, just to highlight the obvious that was shown by Carlos is that for our existing portfolio, valuations remain with a very interesting potential. When we compare our valuations with the valuations in the market, the upside is significant. And when we look at what's been happening with yields and the spreads between real estate yields and interest rates, I think that for existing portfolio, that's another growth driver. But beyond that, I think that we've been able to capture additional value through our acquisitions and disposals. Until now, year 2019 has been mainly about rotation with more, let's say, presence of disposals and of acquisitions. The message from our side is that we remain committed to acquisitions. We always have a significant pipeline under analysis, right now, maybe around EUR 1 billion of investment opportunities that we are going through, which are under analysis. And maybe I'd like to highlight that out of this, there are EUR 150 million, which are in very advanced stage. So because of all of these drivers, we remain confident about future value creation. We finish with this presentation, Page 34. We have the conclusions on what we've presented today. I think that we have presented, first of all, an interesting set of numbers in terms of rental income, earnings and earnings per share, with a very interesting growth in terms of rental income; in terms of like-for-like growth, 4%; and also in line with our expectations, very well on growth in terms of earnings per share with an increase of 53%. But maybe for me, it's almost as important as this to highlight the underlying drivers in terms of operations. Basically, what we have presented today is that the vacancy levels remain very healthy at 3.5%. But to be specific, what we've shown today is that now we are at 3.5% where we were at 4% in June and where we were at 4.5%, broadly speaking, in January. So it's not only that we're sitting on a very healthy vacancy, it's that we are still improving this number. Second, and I mentioned this before, but I would emphasize it again, our growth is not based on isolated trading operations, but in a very strong general activity. And as I said, the level of activity that we've gone through so far this year is like twice what it would be in an average year. So it's a lot of activity going on behind the numbers that you see. And third, the other underlying driver is, of course, rental growth. And here, what I wanted to highlight, I just did it a couple of minutes ago, it is not that we are still enjoying rental growth, but let's say, in a fading mood, where the growth is not already the same that it was. This quarter, whatever an isolated number may be, it shows higher levels of release spreads than previous quarters. So that gives us a very good feeling about where the company is today. So that's been the presentation of our results today. In Page 35, just as a reminder, we provide also a framework of guidance for the future of this company in the short term, with an expectation of top line GRI at the level of EUR 350 million by the end of the year. We remain confident with an earnings per share of EUR 0.27. The rest of the guidance, it's already well-known. In terms of capital recycle and acquisition program, we remain satisfied and committed on the level of achievement of our objectives. And in terms of financial policy, I think that we've also shown that we are working in the right direction, being already in a very satisfactory mood. Last, but not least, our strong commitment to ESG remains a priority. This is the presentation. As usual, now, we are open to any questions you may have. Thank you.

[Operator]

[Operator Instructions] The first question comes from Celine Huynh from Barclays.

[Celine Huynh, Research Analyst]

I just got one question regarding acquisition. So you have disclosed EUR 1 billion worth of project that you're looking at, which is quite a bullish statement. May I ask you what kind of asset classes you're looking at, where and how you're planning to fund this?

[Pedro Viñolas Serra, Vice]

Yes. Thank you. Well, first of all, I would like to highlight that on a regular basis, that would be the number of investment opportunities that we have under analysis at any given moment. In order to extract good investment opportunities, you have to be digging into many different alternatives. Basically, what I would like to say is that the kind of things that we are looking at are, as usual, assets that are set to be CBD assets within our domestic markets, Barcelona, Madrid and Paris, and mainly with either a component of value-added nature or a mix between CBD yield income-producing and value-added. Of course, we are looking at this number. But just to make it clear, our investment program basically is based on the fact that this has to be financed within the ordinary situation of the company, meaning that the LTV doesn't have to change significantly. So that would be part of our organic strategy, let's say, as the company has usually done in the past.

[Celine Huynh, Research Analyst]

Okay. So I understand that if you're going to acquire EUR 1 billion, you're going to sell EUR 1 billion as well?

[Pedro Viñolas Serra, Vice]

Yes. But I -- first of all, I would like to highlight is that it's highly unlikely that we invest EUR 1 billion in a single in -- but going to your sentence or your statement, yes, if that then happen, which is not the central scenario, we'd be in a framework of significant disposals happening. So the net investment would never be EUR 1 billion. Okay. I've been told that there are no additional questions. So I would like to thank you for your assistance today. No, sorry, one additional question, yes.

[Operator]

The next question comes from Florent Laroche-Joubert from ODDO BHF.

[Florent Laroche-Joubert]

So I would have 2 questions, if I can. So first question, a follow-up question on acquisition opportunities. on the acquisition opportunities that you are looking for, can we say that there are more off-market or more on-market? So this is my first question. And my second question will be on the vacancy rate in Madrid. How confident are you to reduce the residual vacancy in Madrid to, we can say, I don't know, a level that is similar to Barcelona and Paris?

[Pedro Viñolas Serra, Vice]

Okay. Thank you for the questions, which are very good ones. The first one, yes, maybe I should have emphasized it at this point and I didn't, usually, the vast majority of things that we are looking at are off-market transactions. You know that we are in the business of trying to find off-market transactions, which are -- have a higher level of difficulty in being identified, but later they come with a higher return. So we are not normally looking at, let's say, organized investment opportunities or processes in the market. And regarding Madrid, well, first of all, I should say that Madrid, compared to Barcelona, is a market where the offer is quite bigger, and that means that the balance between supply and demand has taken longer -- or it's taking longer to achieve because of this bigger supply that has to be met by existing demand. But regarding this, I think that we've shown in our slide the trend of the vacancy in Madrid. And basically, we think that it is going in the right direction. And the trend that you've seen in terms of reduction of -- I'm talking about Page 17. There, you can see our specific situation. But there what -- that you can see is that what it was 12% vacancy in March 2018, then it was 10%, then it was 9%. In the last quarter, it's been -- it has gone to 7.4%. So -- and if you can see the biggest reduction in vacancy has taken place in the last quarter, where it has reduced 1.8 points. So basically, where we are as a company is in the confidence that this trend is going to remain and go back to a level of below 5% quite soon, as this trend already more or less suggests. But as I said, the reason is that the structure of the Madrid market is a little bit more complex because of the bigger size of the offer than the one of Barcelona, where the situation is outstanding already today. Thank you. Now I'm being told again that there are no more questions. So thank you for everybody's attendance today, and we hope that we will want to come back to you with the same level of outstanding results soon in the future. Thank you. Good afternoon, or good evening.