Lar Espana Real Estate SOCIMI SA

MAD:LRE

Earnings Call Transcript 2018-Q3

[Hernán San Pedro, Head of Investor Relations]

Thank you, and good afternoon, everyone. Welcome to Lar España's 9 months 2018 Earnings Conference Call. [Foreign Language] I'm happy to greet you after our last Investor Day held in Madrid and in London last month, where we had the opportunity to present our next generation retail strategy and went through our business plan. Today, we will present our results for the first 9 months of the year. As always, a press release was issued this morning and the presentation is also available in our website, app and the official page of [ FENMUE ]. Joining me this afternoon are Miguel Pereda, Lar España Board Director and Executive Officer of Grupo Lar; Jon Armentia, Corporate Director of Lar España and José Manuel Llovet, Commercial Real Estate Managing Director. As usual, after the presentation, we will answer any questions you may have. Now, I would like to turn the call over to Miguel Pereda.

[Miguel Pereda Espeso, Acting CEO & Director]

Thank you, Hernán, and good afternoon, everybody. [Foreign Language] Let me start this call on Page #4 of the presentation, with the main highlights of the first 9 months of this year. First, regarding our operating results, we continue our positive trend, with our net profit showing a growth of 12%. Our property operating results is also up 44% compared to the same period of last year. EPRA NAV per share stands at EUR 10.76, that represents a 13% increase compared to 2017. Lar España continue to outperform the market in both retailers' declared sales and also footfall. We have been now beating the market for 11 quarters. Our Developments and our refurbishments continue to progress according to plan. Vidanova Parc is fully open now and operative, with 100% of the GLA signed. And Lagoh -- the Lagoh pre-lease figure, has gone up to 76% of the surface. Our residential development, Lagasca99, is already 90% in sales; and Eloy Gonzalo office building has already reached 100% occupancy, even before completing the works. We also continue our assets rotation study. During the third quarter, we completed 2 different disinvestments, the first one was in July, when we sold our logistic assets for almost EUR 120 million. And in August, we also divest Galaria retail park for almost EUR 12 million. We have also recently signed a 7-year credit line for an amount of EUR 70 million with the European Investment Bank. Lar España is the first entity in securing in Spain a credit line of this amount, but also of these characteristics, and this will contribute to the fulfillment of our company business plan. This is especially interesting to see that sustainability is one of the main pillars of this financing. Also other finances that we secured in this year was the Lagoh -- Lagoh development, Rivas Futura and also Abadía commercial gallery. Finally, I would also like to highlight our dividends target mentioned on Investors Day, and will consist in 5% dividend yield over an average of NAV, and also a special dividend linked to Lagasca99. We have also started this quarter a share buyback program, we will -- for an amount up to EUR 30 million, that we'll be describing later in detail. This will be and is another way of maximizing shareholders' return. As you also may know, Grupo Lar -- the manager -- has reinforced its stake in Lar España and now holds 10% of the share capital of the company, becoming the second largest shareholder of Lar España. In terms of ESG, we continue to foster responsible investments in sustainable assets through BREEAM certification. We now have in-use 8 "very good" and 2 "good" certifications. And in newbuild assets, 3 "very good." That shows the higher standards in this respect that we as a company have. In July -- and now in Page 5, as you may recall, we sold our logistic assets as was planned for an amount of EUR 120 million, which implies a strong premium of 76% after invested CapEx, and a 30% premium above December 2017 price. In 2014, was -- Lar España started this business and was the first -- one of the first players buying logistics assets in Spain. The active management implemented, mainly focusing in re-letting, and the good performance of the Spanish logistics sector, explain to a large extent the difference between the sale and the acquisition price. In fact, those logistic assets were sold at an exit yield of 5.8%, while they were acquired at a net initial yield of 9.4%. Let's move to page number -- Slide #6. As was announced, and as I was mentioning at the beginning, Vidanova, our first development, is now fully open and operable. That happened in September, and that happens more or less -- a little bit more than a month ago. Since then, the pro forma (sic) [performance] has been outstanding and the feedback that we are receiving from our tenants cannot be better, as most of them are selling above their own estimates. During the first week, the park receives more than 170,000 visitors, and more than 460,000 in the first complete month that was October. We remind you that Vidanova Parc was fully leased before its opening and holds more than 40 leading brands, with an expected stabilized yield on cost that will be around 9%. Lagoh, in Slide #7, will also be a very important source of value creation, as it will become the leading retail destination in Andalusia, and is due to be open around summer 2019. Its valuation keeps growing and has already reached this quarter EUR 106 million. To-date, 76% of the surface has been already signed or committed, and we have the brands like Inditex, Primark, Media Markt, Mercadona or Yelmo Cines that are already committed to the project. These projects will hold more than 200 tenants. The project is unique in size and concept, and will be a natural barrier for future market competition in Seville. Lagoh will also benefit from an excellent location, just 4 kilometers away from the city center of Seville, and with a very strong catchment area of more than 1.4 million inhabitants. We are expecting yearly revenue of around EUR 15 million. In Lagasca99, we expect to deliver most of the units, 90% sold today, before the year end. And we will start the delivery in the next weeks. As you probably know, there are 44 units -- 44 apartments with an average floor of more than 400 square meters, and an average price per square meter of EUR 11,300. The valuation of the asset has increased up to EUR 203 million this quarter, and is owned 50% by Lar España, as it is a joint venture on a 50-50 basis with Pimco. The project is 100% sustainable building, complying with a BREEAM quality seal. As was announced in the Investor Day, a special dividend that will be paid once all the units are delivered, has been announced. In terms of business plus -- business plan execution, we've done good progress, reflected in Slide #9. Since we announced our business plan, around 50% of our target disposals have been completed so far, with mainly 2 office buildings, 3 non-core retail assets and the logistic portfolio, all of them up to an amount of around EUR 250 million. And in terms of our acquisitions, we bought already 3 assets for an amount of EUR 85 million. Average exit yield of those non-core assets sold, was 5.8%, while the average net initial yield of the new acquisitions stands at the level of 6.5%. Before going to the financial, let me remind you on Slide #10, our TES project that was presented in our recent Investors Day, held in Madrid and in London. Lar España is very focused on this transformation, that is based on 3 main pillars: Technology, as a way to optimize the process involving our activity, to facilitate the service and the relationship with our clients and to improve data collection and data management. Engagement, providing a unique offering by transforming shopping centers into experienced-led destinations. And sustainability, reinforcing aspects such as environment, sustainability, accessibility and society. All this is helping us to achieve a successful shopping center performance and to reinforce the position on every single asset that we own. And now, I will turn the call over to Jon Armentia.

[Jon Armentia, Corporate Director]

Thank you, Miguel, and good afternoon, everyone. In Slide 12, I would like to highlight the strong financial figures delivered in the first 9 months of the year. Gross asset value grew 7% compared to September 2017, up to EUR 1,526 million. Financial debt grew to over EUR 600 million with the cost of debt coming in at 2.27% and the net loan-to-value at 31%. Growth rental income also grew 2% year-on-year, reaching almost EUR 59 million. EBITDA registered robust growth of 45% up to over EUR 60 million, and net profit also climbed by more than 12% to over EUR 80 million. In terms of EPRA, EPRA NAV came in at EUR 1,018 million, and per share was up to EUR 10.76. Annualized net rent also increased to almost EUR 70 million, 7-0. The company's return on equity amounted to 13.5%, whereas return on assets stood at 8%. Let's move now to Page 13 to go over the retail performance. As you can see in this slide, 87% of our gross asset value and 93% of our rental income came from our retail assets. In terms of retail yields, EPRA topped-up net initial yield was 5.6%; and reversionary net initial yield, 6.5%. This highlights the growth potential of our retail portfolio, if the entire GLA was led at market rents. Our operating results continue to register solid growth. Like-for-like growth rental income grew 3%. Like-for-like net operating income increased at 4.1%, and the occupancy rate rose to 94.6%. During the first 9 months of 2018, Lar España continued to actively manage its retail portfolio. We signed 105 leases, including renewals, relocations, re-lettings and new lettings resulting in an annualized tenant rotation rate of 7% for the portfolio, and almost EUR 6 million in negotiated rent. Slide 14. As we announced in the first quarter and in order to monitor our progress, we completed our quarterly specific valuation of our development projects. Lagoh, Lagasca99 and recently opened Vidanova Parc. And also the Eloy Gonzalo office building after its refurbishment. The valuation showed the value of these assets to have increased significantly. More than 23% value uplift for Lagasca99, Lagoh, and Vidanova Parc in just 3 months, and more than 5% in just 3 months also for the Eloy Gonzalo refurbishment. Slide #15. As of September 30, 2018, the total value of Lar España's portfolio totaled EUR 1.5 billion, up 38% versus the acquisition price. 87% of our gross asset value came from our retail assets. During the first 9 months of 2018, Lar España acquired 2 properties for EUR 76 million, Rivas Futura retail park and Parque Abadía retail gallery. We also made disposals to the value of EUR 244 million, Egeo office building, Nuevo Alisal, Villaverde, and Parque Galaria retail houses and the logistics portfolio, with a further EUR 156 million corresponding to asset revaluations in 2018. Going to the next slide, #16. I will go over the results for Q3 2018. The performance of all of our business activity is clearly satisfactory. Our properties generated a rental income of almost EUR 59 million, mainly the 93%, thanks to our core retail activity. The results of investment properties disposals line mostly corresponds to the EUR 17 million, thanks to the sale of the logistics portfolio. The operating results for the company's properties are up 44% year-on-year versus, while EBITDA is almost 45% up. The changes in the fair value of investment properties entry mainly corresponds to the difference in the fair value of investment properties assigned in the valuations completed at June 30, 2018 and September 30, 2018, in this case for Lagoh, Vidanova Parc, and Eloy Gonzalo. The profit for the period after divestment and performance fees reached over EUR 80 million, a 12% year-on-year increase. In Slide 17, you can see that the company's total debt stood at EUR 607 million at September 30, 2018, with EUR 140 million of this corresponding to a senior secured bond. And the rest, EUR 467 million, to bank debt, diversifying our funding sources between the bond and the bank market. 82% of the total debt amount matures after 2021. This debt implies a net LTV of 31% at the end of the period. The average cost of debt is 2.27%, with the majority of debt being fixed -- the 98% exactly. In the Slide 18, you can see the company's new balance sheet structure, where financial net debt remains at nearly EUR 480 million. In October, we secured a 7-year credit line for a total amount of EUR 70 million with the European Investment Bank as part of the Investment Plan for Europe. We are proud to be the first entity to secure a credit line for this amount, and with such terms and condition which by its very nature contributes to the fulfillment of our business plan, as sustainability is one of its main pillars. Slide 19. On September 28, we announced the start of our buyback program of up to EUR 30 million for the company's own shares, representing 3.33% of the company's share capital. The program was approved by the Board of Directors during its meeting in September, after authorization was granted at the Annual General Meeting in May 2017. The purpose of the share buyback program is to reduce Lar España's share capital, in line with the company's objective of increasing total shareholders return. This is an opportunity to show the strong potential and the future value of Lar España shares. We have already bought 880,000 shares at 25% of the program's target. The buyback program will be valid for 3 months as per the publication of the important information announcement, meaning, it's in -- its end date is December 28, 2018. And now, I turn the call over to José Manuel Llovet, who will go over the business performance.

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

Thank you, Jon. Hello, good afternoon. Let's start with the operational performance in Page 21. As you can see, Lar España has been outperforming the market in both sales and visitors for 11 quarters in a row, despite having 4 shopping centers under refurbishment. Footfall is stable and above the national average of minus 0.9%. This decrease is mainly due to the excellent weather during September that has affected sales especially in fashion. It is not included in this report but it is good to say that October has been a very good month in number of visits that compensates the bad performance of September. It is interesting to remark here that the average stay in our shopping centers of our customers has gone up 7% compared to the same period last year, up to 87 minutes. This is a new metric presented in the last Investor Day, and talks about more time per visit, which has a direct influence on increase on sales. Talking about sales, tenants declared sales have increased by 0.5%, outperforming the Spanish national average of minus 3.1%, published by the INE, national statistics authority. Again, the effect of a bad September mainly in fashion sales that has been clearly improved during October and November. In the same page, and regarding letting activity, we have signed 105 operations during the first 9 months of the year, with EUR 5.8 million of new rent and 25,461 square meters GLA rotated, which implies an annualized rotation rate of 7%, and a rental growth of 8% as proof of the active management strategy implemented by Lar España. We have increased occupancy with higher quality tenants and removed low performers. This is one of our pillars of TES strategy -- improve clients' engagement through an increase of quality tenants. In Slide 22, let me go over the CapEx invested year-to-date in 2018. CapEx, as you know, is an important tool to create value in our shopping centers. All the CapEx generate more value than the amount we invested and all the CapEx generate higher revenues and increase in quality of our assets. Accumulated CapEx until September 2018 has been EUR 77 million, but note, that most of it, 87% -- 86% is for our developments: Lagoh, Vidanova Parc and Lagasca99. The remaining part is invested in our operating assets. We have already finished the refurbishment of Albacenter and Eloy Gonzalo, and both investments have generated very high value, as we will see later. Currently, we are refurbishing Megapark, Portal de la Marina, As Termas, and Gran Vía de Vigo. A strong improvement in image, client service and a special focus on restaurants areas to improve dining offer and experience. El Rosal and Anecblau will be refurbished in 2019. In Page 23, as I mentioned to you before, we have here 2 good examples of full refurbishments that have created a strong value for Lar España. First, Albacenter, the shopping center that has been successfully refurbished and repositioned, reinforcing its attractive (sic) [attractiveness] as a retail destination with an attachment area of more than 390,000 inhabitants. The shopping center now benefits of new entrances to welcoming our customers in a full renovation in the inside, in a modern and urban style. EPRA topped-up net rent has increased 8.3%, while its valuation has gone up 11% to almost EUR 58 million. Footfall is up 3% and total sales have grown 11%. This is an important element of our value proposal to achieve our goal of being strong leaders in our catchment areas. In Eloy Gonzalo office building, figures are also very impressive. Its valuation has increased over 160% to over EUR 39 million, with average 100% occupancy before the completion of the refurbishment. wework, its main tenant opened in summer its new coworking center in Madrid of floors 1 to 6 of the building. In Page 24, we're mainly focused on net operating income. The ambitious asset management to increase visitor sales, additional to the investment in selected CapEx, have a single objective: increase rents and returns for our shareholders. Like-for-like occupancy rate has gone up 1.5%. Like-for-like NOI up 4.1%. Like-for-like gross rental income up 3%, and we have reduced incentive to tenants by 9.7% versus last year. And now, in page -- we are moving to Page 25, where you can see that we have projected an estimation of net rent in a medium term. The main drivers of our plan are, one, leasing activity in line with our current results; second, the opening of Lagoh in 2019 and third, our investment business plan. Looking at the chart, we start with an EPRA annualized topped-up net rent of EUR 70 million. There is a reversionary potential of EUR 10 million: EUR 6 million coming from the difference between current passing rent and the estimated rental value, which is fixed by the external valuators; and EUR 4 million of current vacancy at ERV as well. Additional -- additionally, we will have Lagoh that brings EUR 15 more million since its opening in summer 2019. And finally, we have the expected contribution of the future investments of our firepower of EUR 15 million of rent according to our business plan. This is a theoretical exercise, which shows the exciting potential of our company in the future. Of course, as you may have noticed, I have only referred to retail assets. And now, I pass it over to Mr. Pereda.

[Miguel Pereda Espeso, Acting CEO & Director]

Thank you. Just to conclude this presentation, I would like to make some closing remarks. During the first 9 months of this year 2018, we maintained our positive operating trends, shown in the increase of our net profit up 12%, and property operating results of 44% compared to the same period of last year. Our properties under development are also becoming a significant source of value for our shareholders. This quarter, Vidanova Parc is fully opened and operative with 100% of its surface leased. Meanwhile, Seville -- Lagoh has already signed or committed 70% of the gross lettable area with first-class retailers. And Lagasca99 reached 90% in sales, and its first units are going to be delivered very soon. Also I would like to remark on the successful execution of our asset rotation study that has been explained. This quarter, with the disposal of the logistic portfolio and the Galaria retail park, we are 50% ahead of the total divestment plan target, and we will have very good prospects for the rest of the plan. On the other hand, in acquisitions, we are also making very good progress, and we have already acquired an amount of EUR 85 million. In terms of financings, during 2018, we have financed more than EUR 200 million in several new credits, and that will improve our balance sheet. The last one, granted this quarter has been the new EUR 70 million credit line with the European Investment Bank, and all that guarantees the execution of the development of our business plan. Finally, we remind you our dividend target of more than 5% over average NAV, and the special dividend linked to Lagasca99 delivery that will be an amount around EUR 25 million. This quarter, we have also started a EUR 30 million share buyback program, as was explained, has been already executed in an amount of around 25%, and these acquisitions were done with discounts to NAV that are around 20%. Thank you to all of you for attending the call.

[Operator]

[Operator Instructions]

[Hernán San Pedro, Head of Investor Relations]

We can start with the Q&A. The first one has been sent through the site. Could you give an update on the share buyback program and how much of the EUR 30 million mandate has been loaned? And the second one, could you please give an update of the sale of the office portfolio -- premium to book expected to be in line with previous office disposals? If we return to Page #19, the first question will be answered by Jon Armentia; and the second one by Miguel Pereda and Jose Manuel Llovet.

[Jon Armentia, Corporate Director]

Okay. For that one, the first one, we have already bought 880,000 shares, which means that 25% of the program started.

[Miguel Pereda Espeso, Acting CEO & Director]

Regarding -- this is Miguel speaking. Regarding the remaining office sales. The plan is to divest those assets in the first part of the business plan, so meaning, the next month, and we think that the valuations in our balance sheet will be clearly achieved, I think that we...

[Operator]

[Operator Instructions]

[Hernán San Pedro, Head of Investor Relations]

Okay, no more questions. Thank you very much for your attention, and please let me remember you that all the departments of the company are at your complete disposal. Feel free to contact with us for any questions. Thank you very much and good afternoon.