Covivio SA

PAR:COV

Earnings Call Transcript 2019-Q1

[Operator]

Good day, and welcome to the Covivio Activity Q1 2019 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Tugdual Millet, CFO. Please go ahead, sir.

[Tugdual Millet, Chief Financial Officer]

Thank you, and good evening, everyone. Thank you for attending this first quarter results call. I will go through the main outcome of this fourth quarter -- first quarter in terms of rental activity and also investment and asset rotation activity. And then I will let you ask all the questions that you have on this press release that has been just issued. So a few comments on what we've done during these first 3 months, starting with a bit of context in terms of market environment. As we largely shared during our annual results, market is very supportive, I would say, both on the rental side. For instance, on the Paris region, vacancy rate continued to decrease and then supporting the evolution of market rents. And on the other side of the halves, in Milan, we have seen during this first quarter a historical level of pickup, which is also supporting the good dynamic on those markets. On the investment side, I would say more of the same. A lot of more -- a lot of traction on the investment side, still a lot of appetite for all assets which would be, I would say, a good support for the delivery of our disposal plan for this year that we have stated between EUR 1 billion to EUR 1.3 billion. So in this context, we have moved forward consistently with, I would say, our plan of doing asset rotation, financing of the development pipeline with disposal of mature asset. And for instance we have decided during this first quarter on the back of a pre-letting agreement with Boehringer group to launch a new 20,000 square meter building in the CBD area that is becoming very successful for tenants. And with this new development is there's some building that we are developing in this area, which is a good example of how attractive it's becoming this area in the south part of Milan. On the same time, still in Italy, we have signed a new agreement for EUR 256 million of assets, the mix, portfolio mix of asset in Milan and outside Milan, in line with appraisal value, which enable us to continue to deliver on our plan following the merger with Beni Stabili that has occurred at the end of last year. Which means that year-to-date, we have secured EUR 360 million of new agreements, of which 70% in Italy from them. Going to the P&L, some comments on the very good performance in terms of like-for-like rental growth because we have announced a plus 3.3% rental growth on a like-for-like basis, basically in line with what we've had last year. And when we look more into details, we see that on the French office, it's plus 4.2% on a like-for-like scope with an important part of this strong performance coming from an increase in the occupancy rate and, more specifically, the success of the full letting of Art&Co building last year. In Italy, it's plus 1% on a like-for-like scope and plus 1.3% specifically in Milan, basically mostly due to indexation because occupancy rate is very high on this portfolio, around 98%. In Germany, we still have a very strong performance, plus 4.1%, of which almost half of this performance is coming from modernization and a very good performance still in Berlin with a plus 5%. And last on the hotel side, it's a plus 1.2% during this first quarter. I would say quite a low figure versus expectation. That is mainly explained by the fact that Accor is increasing its CapEx program on all hotels, which has a short-term impact that is negative on the turnover but should benefit to the acceleration of RevPAR growth on this portfolio in the next few quarters. Moving then to the balance sheet. You have seen that during the AGM, we have announced that we have obtained an upgrade in our rating from S&P, moving from BBB to BBB+. For us, it's, I would say, a nice reward of our strategy aiming at improving the quality of the portfolio and also improving the balance sheet, which is linked to the new LTV guidance of below 40%. And last, the last AGM has approved a dividend in share that has been proposed and that would be choice of shareholder until the end of May with subscription price of 90 -- 81, sorry, EUR 81.29 per share. And finally, it has been also approved new 2 independent board members, Christian Delaire and Olivier Piani. So as a summary, I would say well on track on our objective to continue to increase our pipeline, and this pipeline is successful. And we continue to increase also the amount of new tenants and new agreements on our assets, well on track also on our disposal plan and with very strong like-for-like rental growth on this portfolio. That's it for the main comments on this first quarter activity. Happy then to answer to your questions.

[Operator]

[Operator Instructions] We will now take our first question from Christopher Fremantle of Morgan Stanley.

[Christopher Richard Fremantle, Executive Director]

Can you please just provide any commentary on your view of what is happening in the Berlin residential space right now? There has clearly been a lot of news flow around expropriations and the potential for a referendum there. What is your view on how this changes the investment case for your Berlin portfolio?

[Tugdual Millet, Chief Financial Officer]

Yes. Thank you for this question. Obviously, there has been a lot of, I would say, comments and -- on this last demonstration in Berlin and some rumors on an expectation about, I would say, a large buyback program by the city of Berlin in order to address the situation that is basically a lack of apartments following the strong inflow of people in Berlin and the very limited amount of new supply, which is driving years after years rental growth on this market. So I would say first thing what we consider is that the fact that the city of Berlin could buy back those portfolio will not solve the situation because at the end, it will always lack of building, which is the main driver of the rental growth. Second thing, today, there is not at all any political support, consensual political support around this solution. And third, there is -- and I think this is maybe the most important point for us, there is a kind of increasing awareness that the city needs to boost construction of new supply in Berlin to definitely ease this market situation. So what we think today is that what we try to do is to support this solution. You know that we have an important pipeline in Berlin in order to address this situation. And even if we are not a seller on the Berlin market, we know for sure that there is still room for a price increase. And I would say the rumors that are on this situation is not affecting at all the investment market in Berlin from what we see. There is more question about the next step in terms of regulation. But we think that with the current situation around regulation, there is maybe some new position that could be taken by the city of Berlin. But at the end, it will maybe soften the rental increase in the future but not kill the market dynamic of Berlin that is still very strong.

[Operator]

We will now take our next question from Peter Papadakos of Green Street Advisors.

[Peter Papadakos, Managing Director & Lead Research Analyst]

Two questions if you can answer. First one on French offices. You said Art&Co had an impact on like-for-like. Is that because you had it in your like-for-like bucket in 2000 and -- because it was starting to be a little let up from 2018? What -- how big is that impact of Art&Co? And maybe any other offices in lease-up mode contributing to this year's like-for-like? And second question, yes, second question is just on Milan. With regards to other developments, maybe also as you have in the southwest of the city, can you give us a little bit more comment on how is the leasing activity going in some of your big developments?

[Tugdual Millet, Chief Financial Officer]

Yes. Okay. So on the first question, the Art&Co building has been delivered at the end of 2016. So basically, it's entering in the like-for-like starting this year. And as it has been let beginning of -- no, sorry, '17, it has been let beginning of April '18. And then it's entering in the like-for-like rental growth as it has been more than 1 year that it has been delivered. So the impact of that is around 1.5%. So excluding this effect, like-for-like rental growth would be comparable with the one of last year. And then on the Milan market, both, I would say single lease and the area in the western -- southwestern part of Milan is, I would say, well in the radar of clients and tenants. So we have both discussion on single lease but also on the other buildings that are close to the future Aon headquarters where we have around 20,000 square meters. So we are working on that. And I would say we're in discussion that is basically in line with what we expect in terms of rental level.

[Operator]

We will now take our next question from Jaap Kuin of ING.

[Jaap Kuin, Research Analyst]

Just a quick question from me on the development pipeline. I am not sure if I read the press release correctly because I think it says EUR 1.3 billion committed at year-end '18 and then an addition of EUR 800 million for 2019. Could you maybe just specify what currently is the number for total group share committed pipelines? Or how should we read that section of the press release? That'll be the first one. And then yes, on German residential as well, thanks for the answer just provided. You hinted that it's further regulation -- or what was it that the Berlin government could take to limit rent growth? Could you maybe specify this a little bit further what you mean exactly by this? And additionally, do you have any indications where the changes or discussions ongoing on the land tax, where that is headed?

[Tugdual Millet, Chief Financial Officer]

Yes. So on the pipeline, all the figures that you mentioned are figures on a group share basis. So basically, at the end of '18, we had a committed pipeline of EUR 1.3 billion. And we expect it to increase by EUR 800 million this year, of which EUR 80 million that we've just committed on this building in Symbiosis. Just as a reminder, on the 3 big important project that we are to commit this year, are one in Saint-Ouen in Greater Paris in the northwest part of Paris. The second one is in Levallois so around 20,000 square meters. And the third one is in Berlin in Alexanderplatz. So those 3 buildings, we should commit that they will go to the committed pipeline. We are working on the building permit. But that's an objective for this year, and we are on track on -- versus what we expect. On the second question about regulation, so today, as we mentioned, the attention were around initiative for the Berlin inhabitants to find a solution to the problem of rent increase. This is mostly, as we said, not a solution that is supported by the city of Berlin. The city of Berlin has put in place few or some initiatives in terms of regulation in order to decrease the pressure and the reason with which the rents are increasing. The most important one will be the evolution of the calculation of the niche figure, and we will see the result by 1 month, around 1 month, having in mind that it was 10% 2 years ago. And since then, the market has continued to increase a lot. I think that the city of Berlin is also seeing the limit of too much and too complex regulations. So it's a bit difficult to anticipate what would be the order of possibilities. What is sure is that with the evolution of -- with the last initiative in terms of regulation, the city of Berlin has also tried to help Berliners to have better access to funding in order to acquire also their apartments. So that means that they are progressively finding other solution that's just a pure regulation on rent increases. And that's together with the capacity that they will have to boost construction. Those initiatives are, in our view, much more constructive to decrease the market pressure on rent evolution.

[Operator]

We will now take our next question from Christian Auzanneau of AlphaValue.

[Christian Auzanneau, Research Analyst]

Just a quick question about Italy, specifically related to the low spread between the valuations, not for you only, but for all the market, low spread between your net initial yield and the, let's say, risk-free rate Italian 1. So you have a view on how the asset valuation could move around 2019, first. And second, on how the market local one could react to, let's say, specific situation of become a buyer market and not a seller one.

[Tugdual Millet, Chief Financial Officer]

Okay. I will say we have a clear view on the fact that as far as Milan is concerned, there is no link at all between yield of the asset and, I would say, the yield of Italy. So there is no link at all because this is mostly international investor that are just benchmarking capacity to buy asset from Paris, Berlin or Milan or Madrid and Barcelona. What is fair to add is that there is maybe, when we move outside Milan, more sensitivity on this as outside Milan, it's more balanced buyers between international buyers and local buyers. So when it comes for Italian to buy, they are -- they have more in mind as they are financed locally the spread of Italian state. Saying that, we see, as we market this portfolio, very strong appetite and very strong conviction from internal shareholder and investor on the capacity of the Milan market to continue to develop and to offer interesting opportunities. So we will benefit from that, and we will continue to focus our objective in financing our developments through disposal. And with those disposal, a mix of mature assets in Milan and also asset outside Milan, where we have seen that performance is a bit weaker than what we experienced in Milan so far.

[Christian Auzanneau, Research Analyst]

So maybe 2 further questions then, more from my own culture than according to Covivio investment case. The first is outside Milan, as you mentioned, the market is [ pricing ] different. Do you see something like yield decompression of the local area, excluding Milan first? And maybe waiting for your answer on the second one.

[Tugdual Millet, Chief Financial Officer]

Yes. Yes. Basically, if we expect a yield compression, it would be mostly on Milan where there is a very strong buyer market as you said.

[Christian Auzanneau, Research Analyst]

Okay. And last question, weighted lots significant according to your size. But according to the pre-let ratio on the Symbiosis building in Milan, which is 30%, it's pretty unusual in your business -- I mean, in your buildings to have such a low pre-let ratio. Is that because you've got some weight for a progressive or quick ramp-up in product ratio or it's something else?

[Tugdual Millet, Chief Financial Officer]

No. It's, I would say, it's not specific to this situation. We have regularly decided -- and, for instance, in the Paris market, to launch a new development, 100% speculative. When we do so is that we consider the market traction is very supportive. And in most of the times, with this kind of size and this kind of asset, tenants are looking around between 1 and 2 years before they need to move. So it's important also to -- in a market that is really, as the Milan market, lacking of new offer to continue to benefit from this market to attract new clients. In fact, more specifically on this situation, I have to say that our initial plan was to launch it purely on a speculative basis because we had a lot of, I would say, different discussion between 3,000 to 10,000 square meter. And we had the opportunity to move forward with Boehringer. That is taking 1/3 of the building. And we are quite confident on our capacity to continue to regularly increase this letting level because on the same times, we continue to have discussions specifically on this building with other tenants.

[Operator]

[Operator Instructions] It appears there are no further questions at this time.

[Tugdual Millet, Chief Financial Officer]

Okay. So thank you, everyone, and have a good evening. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.