Lar Espana Real Estate SOCIMI SA

MAD:LRE

Earnings Call Transcript 2019-Q1

[Hernán San Pedro, Head of Investor Relations]

Good afternoon, everyone, and thank you for joining us today. Welcome to our first quarter 2019 results presentation. As always, the press release was issued this morning and the presentation's also available in our Investor Relations website, at Folleto Informativo official page and in our app.Joining me this afternoon are Miguel Pereda, Board Member of Lar España and Chief Executive Officer of Grupo Lar; Jose Manuel Llovet, Managing Director of Commercial Real Estate of Grupo Lar; and Jon Armentia, Corporate Director and Chief Financial Officer of Lar España. After the presentation, we will answer any questions you may have. Now let me hand the call over to Miguel Pereda.

[Miguel Pereda Espeso, Acting CEO & Director]

Thank you, Hernán, and good afternoon, everyone. Let me start this presentation with the highlights of Lar España First Quarter 2019 Results. First of all, the results continued its positive trend and had a healthy growth. Our net profit is up 15% and our results from operations are up 18% compared to the same period of last year. According to the most recent independent valuation of Lagoh, its value has registered a significant increase of 25% in the last quarter since December 2018. EPRA NAV per share stands now at EUR 11.38.Moving on to our assets. Lagoh pre-leases have gone up to almost 95% of GLA, and we have already delivered 30% of its units to our tenants so they can start their own construction works. We have also delivered more than 90% of the units of Lagasca99, our residential development.This quarter, we sold Marcelo Spinola office building with a revaluation of 95%. And Eloy Gonzalo, the last office building in our portfolio, has also been sold in April, this time at 3x over its acquisition price.In the corporate side, we are paying next May 2024 a EUR 75 million dividend or EUR 0.8 per share over the 2018 results, which offers 7.5% yield over 2018 average NAV or a 10.8% dividend yield over the market cap of the end of the quarter. On top of this dividend, we finished our first share buyback program of EUR 30 million, and we have also announced that we are executing our second share buyback program of another EUR 42 million. Our goal will be to amortize all those shares at the end. Finally, our leverage stands at a very comfortable level of a net loan-to-value of 29%, with an average cost of debt of 2.2%.In Slide #5, we can see the positive evolution of our main figures along those years. We have been increasing dividends year-on-year, and in a few days, we will be paying the highest dividend in our history. Along with the dividend, EPRA NAV has been growing at a very attractive growth rate. Our assets have been reevaluated in every period at about 40% since acquisition at the end of 2018.Retail EPRA NAV initial yield stands now at a level of 5.6%. This is especially attractive when we compare it with some of our main European competitors. In the debt side evolution, we have decreased our net debt during the past year. And as we said before, LTV stands now at a level of 29%.In Slide #6 and 7, we can see the major milestones of 2018 and Q1 of 2019 with a strong focus in what has been the asset rotation. The results of this divestment plan has been very positive, with average exit yield of 5.2% and strong values over acquisition costs. After the execution of the plan, now we can say that we are a 100% retail company.We also celebrated our AGM in April, and all the proposals voted were approved with ample majority, including the dividend distribution for the year. Our shares went ex dividend on 24th of April and we will receive the dividend payment on 24th of May. We have successfully sold our office portfolio and completed at 7 -- 67% of our business plan in terms of divestment. This goes up to 90% when we include the delivery of Lagasca99 residential units that is almost done.Our last divestment shown in the Slide #8, is Eloy Gonzalo and is a clear example of this successful story. We bought the building in December 2014 for an amount of EUR 12.7 million. And it was sold at a price of EUR 40 million after a strong refurbishment and releasing. This amount reflects a price of more than EUR 6,000 per square meter. The building was fully occupied with WeWork as the main tenant with around 70% of the GLA.In Slide 9, 10 and 11, we will go over our retail development, Lagoh. This year, 2019, is crucial for the Lagoh project. After Vidanova's successful opening last year, we will open Lagoh, Sevilla during the month of September. Lagoh will become an Andalusian leading retail destination offering a wide offer of leisure, fashion, home furnishing, dining and entertainment. It is already a very important source of value creation for our company, for Lar España. Lagoh will be a vast family-oriented complex of more than 100,000 square meters, with close to 200 units that will become the best shopping center in Sevilla. Due to the unique size and concept, it will become a natural barrier for future market competition. Of to date, 90% -- 95% of the gross leasable area has been signed or committed with first-grade retailers such as Inditex brands, Primark, Media Markt, Mercadona or Yelmo Cinemas (sic) [ Yelmo Cines ], and we have already delivered 30% of the units with tenants, which have already started their own works. We expect a revenue of EUR 15 million per year in rent, and 14 million visits in a catchment area of 1.5 million inhabitants.Lagoh valuation keeps on growing and has reached EUR 165 million at the end of the quarter. We believe this valuation will continue its growth through the year as we get closer to the opening date. The construction works are progressing well and according to plan. The structures are already completed, and the covering is almost finished. Installations are well advanced at around 78%, and the focus now is on the key that works.Now, Jon will review the financial numbers in more detail.

[Jon Armentia, Corporate & Financial Director]

Thank you, Miguel, and good afternoon, everyone. In Slide 13, I would like to run you through the quarter's strong financial figures. Gross asset value stands at EUR 1,481 million, distributed across 17 assets, which is lower than at the end of 2019 (sic) [ 2018 ] due to the divestments executed in the quarter. Group rental income in Q1 2019 amounted to EUR 19.4 million. Operating results grew a healthy 18% year-on-year as well as net profit which climbed 15%. Gross financial debt stands at EUR 625 million with the net loan-to-value at a comfortable 29% and diversified funding sources at a very competitive cost of 2.2%. Once again, these figures clearly demonstrate the strength of our balance sheet.In terms of EPRA, EPRA NAV amounted to EUR 1.041 million and EPRA NAV per share rose to EUR 11.38, EUR 10.58 after adjusting the dividend effect. Annualized net rent also increased more than 3% in comparison to December 2018 to over EUR 72 million. The company's return on equity amounted to 13.4%, whilst its return on assets stood at 8%.Let's move to Slide 14 to go over the retail performance. As you can see in this slide, retail represents 95% of our gross asset value as of March 31, 2019 and accounted for 99% of our rental income during the first quarter of the year. In terms of retail yields, the EPRA topped-up net initial yield stands at 5.8% and reversionary net initial yield at 6.3%, showing the raw potential of our retail portfolio if the entire GLA was leased at market price.Our operating results continue to improve. Like-for-like group rental income grew 2.4%. Like-for-like net operating income increased by 0.4% and the occupancy rate now stands at 95.3%. We have also seen very impressive commercial activity during the quarter. We signed 25 leases including renewals, relocations, relettings and new lettings, resulting in rental uplift of 13.5% with over EUR 2 million of negotiated rent and more than 14,000 square meters rotated in the period. Additionally, a total of 12 relettings were closed during Q1 2019 in our Lagoh development project.Slide 15 shows the variation in our portfolio value over the years. During the quarter, we divested Marcelo Spinola office building and delivered most of the units at Lagasca99. Thanks to increases in value, mainly for Lagoh, even after the divestments carried out, our portfolio is valued at EUR 1.5 billion. We believe there's still room for the portfolio to register further value uplift.Now let's turn to Slide 16 to go over the P&L. Our operations performance is clearly satisfactory. Our assets generated a total income of almost EUR 20 million mainly from our core retail activity. The company's operating results are at 18% compared to the same period last year. The change in fair value of investment properties relates to the difference in the market value of our Lagoh asset as it is the only one that has been valued in the quarter. Profit for the period amounted to EUR 17.6 million at 15% year-on-year.In Slide 17, you can see that the company's total debt stood at EUR 625 million at the end of the quarter, EUR 140 million of which related to the senior secured bond. Net financial debt stood at below EUR 423 million, and net rental value stood at a comfortable 29% at the end of the period. The average cost of debt was 2.2% with most of the debt, 93.4%, being fixed.Let's move to Page 18. Based on 2018's results, our annual general meeting approved the payment of EUR 75 million in dividends or EUR 0.80, 8-0, per share. This is the highest dividend in the history of our company, and it will be paid on the 24th of May. We raised the dividend significantly by 67% over the one in 2017. If we calculate the dividend yield based on 2018's average NAV, the yield climbs to 7.5%. While if we calculate it based on the market cap at the end of the quarter, it stands at 10.8%. This implies a shareholder return of 13.24%, well above our 12% target. Once more, Lar España has entered the IBEX Top Dividend Index and one of the listed companies on the Spanish exchange with the highest dividend yield.Moving on to the next slide, #19. In addition to the dividends paid, we are always looking for new ways of maximizing our shareholders' value. We have completed our first share buyback program, buying back 3.1 million shares or 3.01% of our share capital. We have also announced that we're in the process of carrying out our second share buyback program of EUR 42 million via which we plan to buy back another 5% of our share capital. The purpose of this buyback program, which will run over the coming 9 months, is to further reduce Lar España's share capital. Our goal is to amortize all the shares we buy back.And now let me hand the presentation over to Jose Manuel Llovet, to review the business performance.

[Jose Manuel Llovet, MD Retail, Offices & Logistics]

Thank you, Jon. Hello. Good afternoon, everyone. We are now in Page #21, talking about the operational performance of the portfolio. And the first point that I want to mention is that this quarter, there is a calendar effect that must be considered for comparison purposes. Easter this year was in April, and last year it was in March, and this has an evident impact in our performance indicators, as you all know. In any case, we keep on track. Lar España has outperformed the market in number of visitors for 13 quarters in a row despite having 5 shopping centers under refurbishment.Footfall was 100 basis points better than the Shopper Track Index, and it is relevant that the average time per visit is very high, reaching almost 90 minutes per visit. It is obvious to say that the higher time, the higher sales and the good communication and knowledge to the customer. You all know that we are using our customer journey analysis in terms of services and behavior inside the centers and online communications with all the clients, thanks to apps, beacons, services, online reservations and loyalty programs.In Page #22, we are talking about sales. We also beat the Spanish market this quarter. Tenant declared sales have increased 0.2%, while the Spanish market was down 0.2%. This is not bad considering the Easter effect that I told you before.In letting activity, Jon has already mentioned. We have signed 25 lettings with EUR 2.3 million of new rent and 14,000 square meters of GLA rotated, which implies a rotation rate of 12%. The rental growth was 13.5%. This, again, consolidates 3 main ideas: First is the quality centers -- is that the quality centers have demonstrated their strength. In first class assets, rents are growing -- are growing as strongly through time supported in the increase of visits, the increase in time per visit and the reinforcements of consumption. Second idea is that there is a very clear reversionary potential in our centers. Last year, we finalized with a 12.4% rent uplift in rotation, and this year, we have started with 13.5%. Third idea is that this is the result of an excellent asset selection when we buy and of the active management strategy implemented by Lar España, including the policy of smart CapEx that creates value. This is the key of success and the reason why the best retailers select our centers and invest in them in reforms and extensions.Now we move to Page 23. We wanted to include this slide about how we work in relation with retail trends. This is a small example of some actions we are taking to improve our client experience. One action is the opening of pop-up stores in many of our shopping centers to test new concepts and formats. A good example is the opening of IKEA pop-up stores in Gran Vía de Vigo and Portal de la Marina. The experience has been very successful and opens the doors to new collaborations.Another important trend is the opening of flagship stores in -- by the main retailers. The main retailers select their location very carefully, as you know. Whilst they close nonefficient stores, they expand and refurbish the best location, and this perfectly matches with our main strategy that you know perfectly well: being the dominant in our catchment area and being the best choice for the best retailers. This is the case of Inditex group, Zara expanding and refurbishment in Anec Blau, where we will have the biggest Zara store in a shopping center in Catalonia, Portal de la Marina and Gran Vía de Vigo. The other brands of the group are doing the same. For instance, we are proud to have the second biggest Lefties in a shopping center in Spain in Portal de la Marina.Of course, all the sets of brands of the group is present in Lagoh with a large image, offer and technology. And it is obvious to say that this kind of stores bring more visitors to our shopping centers, so the whole asset is benefited from this trend.A fair topic to briefly touch here is technology. You know that we have embraced technology as the future of retail. We work for transformation of our shopping centers in omnichannel spaces, offering multiple experiences to the customer. This will increase as well the value of our physical space for retailers.And just to complete this slide, I do not want to forget mentioning food and beverage. This is becoming the more important for us -- offer for shopping centers, and we are focused on improving experience and quality. 40% of visitors choose which shopping center to visit based on its food and beverage offering, and the visitors stay more time and spend more money.Let's move to Page #24. In 24, we are going to go over the CapEx invested in the quarter. 90% of the total CapEx is invested in the development of Lagoh. Miguel has just told you the main information about Lagoh, and I just want to say that this can be only done with the best development team. We are sure of the success of the center, and it will become an extraordinary source of value for our shareholders. The remaining 10% in CapEx is part of the smart CapEx plan for all the operational assets. It is not makeup and decoration. We are remodeling the centers according to the trends that we mentioned before: more space for the best retailers, resizing of outdated formulas, attraction of best leisure operators and reinforcements of food and beverage areas. And all with a clear objective to increase rents and returns. We have already finished a good number of centers and are working in many others. This year, we will complete the total renovation of Megapark and Portal de la Marina, El Rosal, Gran Via de Vigo and Anec Blau. Albacenter was refurbished last year, and thanks to this improvement, we are being able to change a big part of the center. We have resized the hypermarket, and we will bring a new food anchor and some medium-sized units, increasing offer and global quality of the center.And in Page 25, you can see the estimation of rents in the medium term. The main drivers of our plan are: First, continue with our leasing activity in our shopping centers, increasing the rents of our assets; second, the opening of Lagoh in September; and third, our future investments. You have in front of you the chart. And looking at it, we start with an EPRA annualized topped-up net rent of EUR 73 million. There is a reversionary potential of EUR 80 million and EUR 4 million more coming from the difference between current passing rent and the estimated rental value, which is fixed by the external evaluators. And on top of that, EUR 4 million more are current baked in unit at estimated rental value as well. Additionally, we will have rents coming from Lagoh that will bring EUR 15 million more since the opening in September. And finally, the expected contribution of the future investment of our firepower of EUR 15 million more of rent according to our business plan. Note please that this is obviously a theoretical exercise which shows the exciting potential of our company in the future.And now let me pass the call over to Mr. Pereda, again.

[Miguel Pereda Espeso, Acting CEO & Director]

Thank you, Jose Manuel. To conclude this presentation, I will like to make some closing remarks. During the first quarter of 2019, we maintained our positive financial trend zone in the increase of our net profit up 15%, and results from operations of 18% compared to the same period of last year. We are happy with the performance of our development in Lagoh, where we reached 95% of GLA leased and committed and 30% of the units delivered to our tenants. We had a strong revaluation in the project of plus 25% in this quarter. In Lagasca99, we have already delivered 90% of the units.We have also announced a significant increase in our dividend to EUR 75 million or EUR 0.8 per share, the highest to date, and our net LTV stands at 29%. Additionally, we have initiated our second share buyback program.Thank you for attending the call, and now we are open to your questions.

[Operator]

[Operator Instructions] Our first question today comes from José Cravo calling from Santander.

[José Francisco Cravo, Equity Analyst]

Can you hear me?

[Miguel Pereda Espeso, Acting CEO & Director]

Yes.

[José Francisco Cravo, Equity Analyst]

Okay. So I have 2 questions, if I may. First of all is on your investments. Can you give us an update on what you're planning to buy? And if you have further visibility on more -- on acquisitions for the second quarter or second half of the year? And my second question would have to do with the like-for-like performance of your assets on the second quarter of '19. What are you expecting in terms of the GRI and like-for-like growth given that you have a positive impact from the calendar?

[Miguel Pereda Espeso, Acting CEO & Director]

Thank you. This is Miguel speaking. Regarding investments, we are clearly open to new investments in the next future. And our loan-to-value but also our cash position give us a very good position for that. As you know, we are mainly based in 3 different categories and our focus is going to be in 3 categories: One is assets, probably smaller sometimes, that are linked to investments that we already have. And those investments, what we will do is reinforce not only the portfolio but the position on some of the assets where we are already in. Second will be medium to big shopping centers, where the fundamentals are good and there is a clear growth potential. So it's an angle of value added. And third, we are approaching a situation where because Lagasca99 is finished because Vidanova has been delivered and we are close to the opening of Lagoh, clearly, the company will be open to study strong developments in the future. There is not a specific calendar for that, but clearly we are open -- I mean, from today to study the new opportunity that we can find in the market.Regarding your second question, Jose Manuel, do you want to jump in?

[Jose Manuel Llovet, MD Retail, Offices & Logistics]

Yes. The second question, if I am not wrong, was that our estimation of GRI and like-for-like growth for the second quarter. So what I can tell you is that the growth in the first quarter like-for-like has been 2.4%. So we expect to keep on track and to keep on having similar numbers in the second part of the year. So this is what I can tell you right now.

[Operator]

Our next question comes from Jaap Kuin calling from ING.

[Jaap Kuin, Research Analyst]

My first question is on the value uplift of Lagoh. You say it's plus 25%, but I see in the P&L EUR 10 million. So is that 25% -- is that including the CapEx? So if I try to calculate it, it comes down to around EUR 30 million, so that would make sort of CapEx plus the EUR 10 million in the P&L. So if you could please confirm that. I think the second question I have is on the reversion you show. At the fourth quarter last year, you said it was plus EUR 6 million. Now it's plus EUR 3 million. Could you maybe describe the moving parts there to bridge the difference? And then another question will be on the rent uplift. You clear -- you called the 13%. But I think that excludes Zara lease. So could you also give the number including the Zara lease?

[Jon Armentia, Corporate & Financial Director]

Yes. Thank you, Jaap, for your question. This is Jon Armentia. For your first question, as you have just said, the evolution of the 25% is a revaluation in comparison with December but including the CapEx invested. Deducting the extreme net effect will have a revaluation around to 8.5%.And the second one, I think that it was in relation of the reversionary potential we have. If you go to Slide -- sorry. Yes, this one, Slide #25, if you have not seen that, in the previous quarter, what we had was on the first column, EUR 70 million; on the second one, EUR 6 million; and the third one EUR 4 million. Adding all of those amounts, we will reach into EUR 80 million. What we are presenting now in March 2019 is that part of the reversionary effect, the reversionary potential that we had in the previous quarter is just now in our portfolio. So if we are marking the same reversionary potential and EUR 80 million, but the good news is that part of the reversionary that we had in the previous one, in the previous quarter has been achieved in March 2019. So it's a positive movement. And the third one in relation with the rent uplift, if we exclude the effect of Zara, will be in 5.6% of rent uplift increase.

[Hernán San Pedro, Head of Investor Relations]

Okay. Thank you very much for attending the call. There's no more questions. Please remember that all the company is at your disposal. Feel free to contact with us for all that you need. Thanks very much and good afternoon.