Lar Espana Real Estate SOCIMI SA

MAD:LRE

Earnings Call Transcript 2018-Q1

[Hernán San Pedro, Head of Investor Relations]

Thank you, and good afternoon, everyone. Welcome to Lar España's First Quarter 2018 Earnings Conference Call. [Foreign Language] A press release was sent this morning and all the presentations are also available in our website, app and [indiscernible] official page. As usual, joining me this afternoon are Miguel Pereda, Board Member of Lar España and Executive Officer of Grupo Lar; Sergio Criado, CFO of Lar España; José Manuel Llovet, Managing Director of Commercial Real Estate of Grupo Lar; and Jon Armentia, Corporate Manager of Lar España. After the presentation, we will answer any questions you may have. And now, I would like to turn the call over to Miguel Pereda.

[Miguel Pereda Espeso, Proprietary Director]

Thank you, Hernán. Good afternoon, everybody. Let me scroll on Page #5 of our presentation, with the main highlights of the first quarter of the year. Regarding results and balance sheet, we continue our positive trend, growing revenues and earnings on a very healthy way. According to IFRS, revenues grew to almost EUR 20 million, up 9% compared to the same period last year, thanks to the good performance of our portfolio, including the new asset that we acquired. Our EPRA NAV is now almost EUR 970 million, including the new valuations of our development assets that includes VidaNova, Palmas Altas, Lagasca and Eloy Gonzalo the office building that is under refurbishment at the moment. And the company will follow this rule in the future of doing quarterly valuations of developments until the moment of the opening.EPRA NAV per share is EUR 10.47 at the end of Q1 that adjusted with the approved dividends in the last AGM held in April stands at EUR 9.98 per share, as you can see in the footnote of that page. Our debt stands at a very comfortable position of 33% of net loan-to-value. We have very diversified funding sources, at cost of 2.2%. On the performance side, retail net operating income saw a very healthy like-for-like improvement of 5%, reflecting our focus in management opportunities across our retail portfolio. I will also like to highlight our leasing activity with an increase of close to 60% in square meters that will have rotated compared with the same period of 2017. Lar España continue to outperform the market in both sales and footfall. Our retailer sales, according to the declared figures, grew 3.9% compared to a sector average of 1.9%. Our assets rotation process continue, and we reached EUR 100 million in the quarter, with a very successful disinvestment in Alisal, Villaverde and also in Egeo office building. On the other hand, we'll acquire retail assets that's worth EUR 75 million. All of them are new strategic opportunities and will add value to our portfolio. Our retail developments continue to progress very well. VidaNova in Sagunto has already reached 98% of GLA signed and committed and Palmas Altas re-leases figures is going up to 63% of the total GLA.Let me now use the Slide #6 to refresh the composition of our portfolio. Our gross asset value, following the revaluation of our developments and also these investments that I have just described is now EUR 1.54 billion. Out of this, 82% are core retail assets. As you can see, 91% of our annualized net rents comes from our retail activity, with our EPRA annualized net rent reaching EUR 73.3 million this quarter. And the average EPRA topped-up initial yield of the portfolio is now at 5.6%. I would like now to turn the call to Sergio Criado, who will go through our financial results in more detail.

[Sergio Criado Cirujeda, Chief Financial Officer]

Thank you, Miguel. Good afternoon, everyone. Let me start with a mention of our recent valuation process of our developments. Given the progress of our developments, with less than 2 months to go for VidaNova's opening, less than 12 months for the opening of Palmas Altas and less than 3 months for the first deliveries of Lagasca99 residential units as well as the good progress of the full refurbishment of the Eloy Gonzalo office building, the company have asked for a specific valuation of all of them. It's important to mention that the company will update this quarterly valuation as a way to increase the focus on the value evolution of those developments near its completion. As a result, the value of these assets has increased significantly. More than 11% in the case of Lagasca99 plus Palmas Altas plus VidaNova Retail Park and almost 10% in the case of offices, thanks to the refurbishment of Eloy Gonzalo office building.On Page 9 now, our portfolio gross asset value is EUR 1,536 million, first, including our recent acquisitions for a total of EUR 76 million; second, our divestments of EUR 113 million; third, the difference between the price of paying for those assets; and last, the recent appraisal we have just mentioned of our developments.On Page 10, I will go over the first quarter 2018 results. The evolution of our operations is clearly satisfactory. Our assets generated a rental income of also -- of almost, sorry, EUR 20 million, mainly from our core retail activity. Property operating results are 9% above the same period last year, while EBITDA is 8% above. Profit for the period after the divestments reached more than EUR 15 million, clearly above the first quarter of 2017. As you can see, as an example of efficient, the company has full control of operational and also corporate cost versus the figures in 2017, having today a bigger portfolio under management. Recurrent funds from operation reached EUR 12 million in the quarter, and a couple of figures more return on equity more than 13%. Return on assets, more than 8% in this quarter.I am now on Slide 11 where we explain our real estate manager, Grupo Lar divestment fee. As a reminder, the calculation system is stated in the investment management agreement for the performance fees based on the total shareholders' return. The definition for that return is the yearly change in EPRA NAV, net of the effects of capital increases and adding the dividends paid. According to the last amendments of the original investment management agreement, the limit of the performance fee was set at EUR 10 million, leaving the rest of the amount conditioned to the achievement of EUR 100 million in divestments. This condition has been achieved during the first quarter of 2018, with a total figure of EUR 112.5 million. Therefore, the EUR 17.9 million has been accrued during this quarter. This amount, net of corporate taxes, is reinvested in shares of Lar España NAV, with a lockup period of 3 years. The total number of shares issued by the company to fulfill this payment to the manager is 2.1 million shares, which represent 2.2% of the total share capital. And after this payment, the total stake of Grupo Lar in our company and Lar España Real Estate SOCIMI is going to be 7.8%, showing the manager's commitment and alignment with the company. In the Slide 12 -- on the Slide 12, sorry, you can see the total debt of the company, EUR 589 million, which implies a net LTV of 33% at the end of Q1. Average cost of debt continues to be at historical lows of 2.2%, while 87%, the majority of the debt, is fixed. 41 bps, 41 basis points of reduction in cost has been achieved in the last 2 years. The backloaded amortization profile of the debt is reflected in an average debt duration of 6.4 years. We have also mixed our funding sources between the bond market and the [ Bam ] market and we will maintain this approach, always reducing our financial credit risk.On Page 13, during the quarter -- during this quarter, Lar España has signed a EUR 8.7 million credit to finance the Galeria Abadia acquisition and the future CapEx for this project with a fixed cost of 1.93%, which reflects the continuous improvement of our financing cost. This new credit is on top of the May 2017 loan that we signed in the same SPV and with the same lender, Banco Santander, to finance the initial Abadía Retail Park acquisition. We have also included in our debt structure the loan that financed the acquisition of Rivas Futura Retail Park in Madrid for a total amount of EUR 27.5 million and fixed cost of 2.3%. This was signed also with a local bank, BBVA, at an -- in an SPV level. And finally, let me explain our dividends on Slide 14. Lar España AGM approved the 4th dividend distribution by our company in 4 years. With the payment of EUR 45 million or in a per share basis, EUR 0.49. That means EUR 0.49 per share. This implies a 50% growth versus 2016 dividend. Taking the reference of 2017 NAV, the dividend yield is 5.1%, in line with the guidance we gave out over last Analyst Day. The effective payment is going to be on the 18th of May, exactly in 7 days. I would also like to remind you that we will also pay Lagasca99 extraordinary dividend once the residential units are delivered, leading the final amount of this extraordinary dividend linked to the future business plan execution. Now I would like to turn the call over to José Manuel Llovet to explain our operational results.

[José Manuel Llovet]

Thank you very much, Sergio. Hello, everyone. Despite a solid Q1, we have a good number of things to share with you today regarding the 3 main parts of the business, that are operations, investment, divestment and development. The first thing is that we are having excellent operational results with the implementation of our asset management strategies. The results in sales, visitors, tenant rotation and increase in new branch is remarkable. Second is that we are strongly involved in asset rotation. We have sold with excellent results, some noncore assets, now buying dominant retail assets that reinforce our position as second operator of the market and first investor in retail park -- in the retail park segment in Spain. Third is that we are on track with our developments, both in calendar and costs. We are having various some tenant interest. We have an outstanding [ relative ] figures that I will tell you in some minutes, that has led the high success of the projects. Therefore, we are delivering on time and quality what we proposed to do. I'm going into retail, we are starting Page #15. Lar España continues to outperform the market, both in sales and visitors. In sales, Miguel mentioned before is 3.9, above the 1.9 of the national average. In footfall it's 1.7, clearly above the national average of 0.1% as well. In letting, we have signed 35 operations during this quarter, with EUR 1.8 million in new rent or almost 6,000 square meters GLA rotated. The annualized rotation is 5%, and what is more important, the rental growth is of 9.3%. You remember and I always mention 2 rules. First, retain and improve best retailers and anchors. Second, improve customer shopping experience with new and innovative tenants, replacing low performers.Now in Page 16, we've seen the main operational KPIs. The increase of sales and visits that I mentioned you before is producing a positive impact in financial results. Like-for-like occupancy rate has gone up 1.9 points. Like-for-like NOI growth of 5%, GRI growth, like-for-like as well, 2.4%; Mall income like-for-like, 2.4%. And on the other side, a good reduction in incentives to tenants that have fallen 6% versus last year. We keep on accelerating the active asset management. This team is doing an excellent job and the results is more than 30% rotations [ since ] acquisition. We now just moved to Page #18 to the asset rotation strategy. This is the second point that I mentioned you in the short introduction that I did. The asset rotation this investment and divestment. It has been said, and I'll repeat again that we have acquired 2 assets during Q1, for a total of EUR 76 million. Rivas Futura Retail Park in Madrid for EUR 61.6 million and a net initial yield of 6%. Rivas Futura is the third largest retail park in Madrid and the 9th in the [ history's ] ranking. The other one is Abadía's Commercial Gallery for EUR 14 million and a net initial yield of 7.3%, which completes Abadia's previous acquisition and raises management control to 81%.On the other side, we have sold 8 assets for EUR 113 million. Egeo office building for a EUR 79 million, 22% increase versus acquisition price. Nuevo Alisal retail park for almost EUR 21 million and a 24% increase versus acquisition, and Villaverde Retail Park for more than EUR 12 million, a 35% increase versus acquisition price.In global figures, we are buying at 6.2% net initial yield and selling at 4.9%, a difference of 130 basis points, more than 20% of relative difference.Now we move to Page 19. We inform about the remaining noncore assets. As it is public, we will continue our policy of selling noncore assets to crystallize value for our shareholders. According to the last valuations, we have office sales for EUR 94 million and logistics for EUR 87 million. And we are working hard to maximize value and price. A right example, one of the best in my opinion is Eloy Gonzalo. We have totally transformed a mid-quality office building in Madrid in a high-quality one. It was acquired for EUR 12.7 million, invested EUR 7 million in CapEx and play-book value certified. But what is more important is that thanks to this work, we have rented 6 of the 7 floors to wework, that as you know, is the leading company of co- working spaces worldwide. We got very good rent of EUR 25 per square meter and a mandatory duration of 15 years for a 20-year total. We are very proud of the team for this exceptional achievement.Now let's move to developments. This is a block that I mentioned to you before. Operations, investment, divestment, and now development. So as Miguel just mentioned, we are only 59 days apart from the opening of VidaNova Parc. Construction works continue successfully with 91% of the urbanization works completed and 55% of the total construction of the warehouses built as well. We expect to open VidaNova Parc on July this year, with [indiscernible]. We have reached a 98% of total GLA signed and committed, including, as you know, top retailers, Leroy Merlin, Decathlon, C&A, Urban Planet, Worten, Yelmo Cines. All in all, VidaNova has shown valuation of almost EUR 30 million in the last appraisal.We are very satisfied with the evolution of the project and are facing the final and tough part of this challenging project. And in Slide 21, you see the map of the retail park and the structure. I would say that it's impressive. The number of quality tenants that we've signed and committed and make us being very, very optimistic about the performance of the opening of the scheme. This retail park will be an important source of value creation for Lar España.Page 22, this is Palmas Altas our super project in Seville. Just to recall, 100,000 square meters of indoor and outdoor retail and leisure complex that will be the best family entertainment and retail center in Andalusia region. Since the beginning, the project has been elected by top retailers to have their best shops. And in many cases, also their flaxseed stores in Seville and Andalusia. 63% of the GLA has been signed or committed, including 8 commercial brands of Inditex Group, Primark, Media Markt, [indiscernible] , Mercadona, Yelmo cinemas, [indiscernible] gastro market, Five Guys and a large Etcetera. The pictures that you can see in the slide, it is impressive and speaks by itself. Works are on time, on track and costs are as well controlled and on track. And we think that we are in the way to complete in the best manner possible one of the most important developments for Lar España and also for the shopping-center Market in Spain. And just a few words, our other super brilliant in this space is residential. As you know, Lagasca99. We will be delivering the first units during the second quarter of 2018. We keep seeing very strong interest from national and international investors and 80% of the total is already sold. Just for your information, sale prices per square meters are circa EUR 11,000. This is all for my part. So Miguel?

[Miguel Pereda Espeso, Proprietary Director]

Thank you, [ José ]. And I would like to conclude this presentation with some closing remarks of the main messages that we have presented in this call. During the first quarter of this 2018, we maintained our strong operating and financial trend of results. Our profit for the period grew 45% versus the same period of last year. And the robust performance of the existing portfolio is also strong in the 9% growth of our rental income to reach almost EUR 20 million in the quarter. I would also like to highlight that our active management and the strong market environment is supporting our retail KPIs. In Q1, we have 13.6 million visitors, that represent 2% increase and also an increase in the reported sales of our retailers close to 4%. Both clearly above market metrics. We have continued the construction of our development as José Manuel was explaining. And some of them are now very close to the opening. And we have acquired 2 retail assets for EUR 76 million, the net initial yield of 6.2%. On the sales side, noncore assets were sold in an amount of EUR 113 million, with an average net initial yield of 4.9%. As part of the announced asset rotation is starting to crystallize the value of our portfolio. Finally, our AGM approved the payment of EUR 45 million in dividend based on 2017 results. That represents 50% more than the ones in 2016. The amount represents a 5.1% dividend yield over average EPRA NAV in 2017 and it is part of the company's commitment to our shareholders. Thank you to all of you for your attention.

[Hernán San Pedro, Head of Investor Relations]

Thank you very much, Miguel, Sergio and José Manuel. We have first one question from Mr. [indiscernible] about the mix of retailers we have achieved in VidaNova Parc. I think that we can use another time, but Page #21. Manuel?

[José Manuel Llovet]

Yes. I think we have a map in Page 21. You can see what is the mix that we are proposing and we have already committed. First of all, you know that the asset has a 44,400 square meters GLA and in this scheme, we have done different things. First, the anchors. You have Leroy Merlin DIY and also you have furniture, you have Decathlon. You have also a supermarket a good anchor called Masymas very strong in the region. Now what is more new in this scheme is that we have included and we are creating a new generation retail park, with a laser entertainment and [indiscernible] has a very -- is really a protagonist of it. Then, if you can see the map, top left, you can see that we have Yelmo cinema. Yelmo cinema is going to implement a cinema theaters of next generation with a premium quality. So we understand this is going to be the leader by far and this is going to be one of the retailers or one of the tenants that is going to attract more people from longer distances. As well, we have Urban Planet, Urban Planet is a teenager's laser area, there's jumping in it, wall climbing, thank you, Sergio, and many different activities that are going to attract a lot as well. And we've also created a number -- an area for restaurants, the Centris Distrito Parc is going to have restaurants, is going to have terraces. We're going to create a Plaza around with gathering with all these kind of comfort areas for the customers. So it's a kind of hybrid, it's a kind of mix, new generation retail park, good anchors, laser and different activities, including cars, including petrol station and many other services as well.

[Operator]

[Operator Instructions] we have a question on the line from Max Nimmo from Kempen.

[Maxwell Wilson Nimmo, Analyst]

Quick question from me on the potential logistics, divestments. When -- have you got any kind of more color on kind of timing of that? And I see the lease length is about 1.7 years, would you look to extend that before selling them or sell them as they are? And second question apologies, I missed the start of the call. You're talking about moving to quarterly valuations and developments, can you just explain a bit more as to why you're doing that. And that's just on the development side, if I'm correct.

[Miguel Pereda Espeso, Proprietary Director]

Miguel speaking. Starting with the last question, we decide to do that because the movement in valuing developments and even more in this stage of those projects is quite high. And it's also very difficult, we think, for the market for investors to predict how this value is changing because there is a mix of asset value growing but also a lot of CapEx investments. So really having a good understanding on how these values are moving we thought was a good idea. For the rest of the portfolio it's more of predictable, that's what we think and the effort and the cost of doing that every quarter, we don't think it makes any sense. But having mainly [indiscernible] in the stage where we are, we thought that will be a good information for investors to have this quarterly until the moment of opening not after that. And we will continue that trend. So that was what was discussed at the audit committee and proposal at the board level. Regarding the logistics. Yes, we have started already a process of selling logistics. We're very confident that was announced this would be part of the disinvestment plan during this year. So we're very convinced that this sale will happen before the year ends. So and clearly we are also because of this situation of the market, quite confident that values that we can obtain today, above the last valuations that [ we won ] at the end of the year.

[Hernán San Pedro, Head of Investor Relations]

Okay. Thank you very much Miguel and José Manuel. There's no more questions. Thank you very much for attending the conference call. Please remember and feel free to contact with our departments: Financial, Commercial Real Estate and Investor Relations for all the additional information you would need. Thank you very much and happy weekend.

[Operator]

Ladies and gentlemen, that does conclude today's call. Thank you for joining. You may now disconnect your lines. Have a lovely day.