Covivio SA

PAR:COV

Earnings Call Transcript 2020-Q1

[Operator]

Good day, and welcome to the Activity at End-March 2020 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Christophe Kullmann. Please go ahead, sir.

[Christophe Kullmann, CEO & Director]

Thank you. Good evening, everyone. Thanks for joining this call on the Q1 activity of Covivio. Before going through the first quarter news flow in this crisis phase, let's take a step back on our business model.And on Page 4. As you know, Covivio is a diversified company, mainly exposed to Office and Residential, which represent 84% of our portfolio as of today. Diversification in terms of asset class and in term of countries offer a secure profile to the company. The resilience of our revenues relies also on the solidity of our tenant base. On Offices, which represents 60% of our portfolio, 91% of our revenues come from large corporates. On German Resi, residential activity is one of the most resilient. We have no vacancy and benefit from a market with a structural lack of supply. On Hotels, 96% of our tenant base is made of major operators, leaders in their market, such as Accor, InterContinental and NH Hotel.Focusing on our Office portfolio, Page 6. We have built our portfolio through strong relationships with large corporates. You see some of the main names in slide. Those corporates have been our partner for a long time. This strong relationship has always been the source of security and value creation through high occupancy, long leases and regular renegotiations. Obviously, the basis of this successful strategy is the quality of our portfolio, high-quality buildings located in strategic locations, Paris, Milan, top German cities and let at reasonable rents, especially in Paris, where we have a huge reversionary potential. Diversification on the partnership strategy with large corporates has offered us a strong resiliency in the past. You see the figures, Slide 7, on occupancy and lease maturity. Our occupancy rate has always been higher than 95%, and we have been able to keep high rental visibility, thanks to long lease maturity.On our development pipeline, Slide 8. The development pipeline has always been a source of value creation and quality improvement of our portfolio with a limited risk. One example, looking at the 480,000 square meter of offices we delivered for the past 10 years, the occupancy of the buildings delivered has reached an average 96% on the year of the delivery. Today, this pipeline is very fast on the office project in some allocation, 54% is pre-let, of which 75% of the 2020 deliveries, and we expect more than 30% margin. And second of residential developments in Berlin in the context of civil housing shortage, we expect margins above 40%.In this environment, it's also important to remind you the strength of Covivio, starting with a solid balance sheet. LTV 38.3% at the end of 2019, along on sheet debt with an interest cover ratio of 5.7x. This is in line with our BBB+ rating with a stable outlook. Diversification is also strong in our funding sources. For example, we put in place at the beginning of this month, a new debt of EUR 270 million on a German Resi portfolio with 10-year maturities at a cost below 1.2%.In order to keep the balance sheet strong, the AGM of today has approved a dividend of EUR 4.8 per share with the option to be paid in cash or in shares. As of today, 49% of the share capital committed to take shares that will be issued at EUR 47.80 per share, excluding dividend, which represents on the basis of today's share price, the discounts of the shareholders will take it of more than 11%. This dividend share will represent between EUR 200 million and EUR 420 million of capital increase to finance our announced investment.Finally, in term of liquidity, we have a comfortable EUR 2.5 billion liquidity made of cash and SCF. Our commercial paper program continue to work following the announcement of the ECB, which enable us to keep on accessing to competitive mulling. Our debt profile has been largely extended, and we have an ample headroom versus our covenants.Now I hand the floor to Tugdual Millet for Q1 rental activity and asset rotation.

[Tugdual Millet, Chief Financial Officer]

Thank you, Christophe, and good evening, everyone. So on Page 14, on the main KPI for the revenue at the end of March. The total revenue amount to EUR 241 million, with first on Offices where we benefit from the positive trends we experienced on the market where we are, so plus 1.5% like-for-like rental growth on French Office and 2.4% on Italian Offices, and particularly plus 4% on the Milan-only Offices during this first quarter.The strong evolution that you see on German Office is due to Godewind, which we started to consolidate during this first quarter. And our German Resi portfolio continue to be strong with plus 3.5% at the end of March, all the regions contributing to this cost level.And finally, on Hotels, we are seeing the impact of the pandemic on part of our revenue, which leads to a 10.4% decline during this first quarter.Moving more into detail by asset class, Page 15 on Offices, we continue to discuss on projects on letting opportunities relating with our clients in France and in Italy. Because most of them need to implement some decision to move, and we have a pipeline of short to midterm discussion on existing resources, but also on our development pipeline. It's obvious that virtual reality is also a key driver for clients to continue to discuss in this context.During this first quarter, we negotiated 26,000 square meters, including 4,600 square meters in Paris and Turin during this last month only. Covivio is the real estate partner of big corporates. So as such, our exposure to very small companies is very limited and the credit risk of our clients is fully under control. For very small companies impacted by the mandatory closure, as asked by the French government, we have decided to apply rent cancellation for the 3 months, which represent around EUR 400,000 for Covivio.Page 16, we see that Resi is also performing well with a plus 3.5% like-for-like rental growth during this first quarter. And for example, in North Rhine-Westphalia, we have been able to deliver a plus 18% on relating during this first quarter. Overall, that means that trends continue to be strong despite additional regulation.Considering the quality of the portfolio, the level of unpaid rents continue to be extremely low, and even if it's marginal, considering the contacts will pay also a special attention to a small retail portion that we can have on the ground floor of those assets, and we are discussing on a case-by-case base with the small client.Finally, Page 17, on Hotels. Our clients are facing an unprecedented challenge with a major part of our hotels that are for now closed. There is an important drop in occupancy rates, which explains the minus 10.4% evolution on a like-for-like basis during this first quarter, particularly with minus 26% on Accor portfolio, mostly in France, with lease based on turnover and minus 27% on our operating properties, most of them being in Germany with some of them still open to date. In this difficult situation that our clients are experiencing, we are effectively negotiating with all of them in order to find the best solution to first face this environment; and second, prepare in the best condition, the recovery. Considering the importance of the crisis for our tenants, a part of our fixed rents will also be impacted. The negotiations are currently ongoing, and we will give more color during our half year results in July.Finally, expectation are that domestic customer will be the first one to support the recovery. I think it's encouraging for the different geography where we have most of our hotels.Moving now to the asset rotation activity and on Page 19. So on the disposal side, we are delivering, in fact. Portfolio that were under agreement at the end of '19 has been sold for a total price of EUR 179 million, of which a EUR 115 million of B&B Hotels in Germany. And more importantly, the appetite for core mature assets from France insurance companies, OPCI or SCPI, contribute to -- continues to be high risk price that we are negotiating above 2019 appraisal value. Since the beginning of the lockdown, we secured most of the EUR 190 million of new agreements, mostly on Offices, with a plus 7% premium on appraisal values. This good performance makes us quite confident on our objective to sign more than EUR 600 million of disposal for 2020.We are also, Page 20, on track on our investment that we secured during the last few months. The most important of those being the Godewind acquisition with the 10 offices located in the top 7 cities of Germany. We have tonight secured around 70 -- not -- 74%, sorry, of the share capital. This is the figures of -- we just received few minutes ago, and the calendar is unchanged with the second period that will end mid-May and delisting expected in May also. The AGM of Godewind will occur on May 7, which enable us to effectively change the governance. The other one is the hotel acquisition that we secured end of '19. Here also, we are on track with the closing targeted in September 2020 and a new 15-year lease with NH, offering a minimum 4.7% yield on cost.So to conclude, Page 22. What I would like to emphasize today is that, first, we have a resilient revenue profile that will enable us to get through this crisis. Yes, hotel activity will be impacted, is impacted, but you see the figures for Offices already. The activity is sound there, and this is 84% of our portfolio. On the other hand, the work of our team and the discussion continue to deliver, and we keep on delivering on the disposal and the investment plan, specifically also on CapEx.Regarding guidance, last, we start to see the end of the lockdown in Europe, but still with a lot of uncertainty. So this is why we decided to wait until first half results to give you an updated guidance.To conclude this presentation on the solidarity effort, we decided to implement Page 23, sorry. First, we put in place different measures to help our clients, small and medium-sized companies all over Europe. We also put our hotels at disposal of the health authorities and propose to offer overnight stay to healthcare staff once the crisis will be over. In Italy, for instance, we provide financial support for the production of sanitizing gel. And finally, as you may remember, when we announced our purpose last year, we also decided to create a foundation for Covivio, and the budget of the foundation has been raised in order to help vulnerable people badly hit by this economic crisis.So thank you for your attention, and we are now happy to answer to your question with Christophe. So this is now the time for Q&A session.

[Operator]

[Operator Instructions] We'll take our first question from Peter Papadakos with Green Street Advisors.

[Peter Papadakos, Head of European Research]

I just had 1 question on Office actually, not Hotels. Is there anything you can say about what types of deferral requests you have been asked by tenants? We get a lot of disclosure in -- from the U.K. office companies on that front. But is there anything that you can say for your portfolio for the French Office, and specifically, what percentage of the rent roll has asked for some sort of a reprofiling of lease payments for the rest of 2020?

[Christophe Kullmann, CEO & Director]

Thank you for these questions. I have to say, thanks to the tenant base we have with very large corporate, 91% of our clients in Office are large tenants in France and in Italy. We have very few questions like that. We -- for example, for the Q2 rent, we have almost those paid as usual. It was in France. We had some question on the small companies, but as you have said, for us, a very small part of what we have because the very small cap size company account less than 1% on our revenues today. So what we can say today in terms of rent that are paid, we have very small impact on our portfolio, both in France and in Italy. The sole big questions are about small company. And I have to say, retail, for those we can have, there are some discussions. And we accept, as also Tugdual said, for the very small companies in France to cancel 3 months of rents and that represents a total is EUR 400,000 that was decided before.

[Peter Papadakos, Head of European Research]

Okay. So it sounds like what you've flagged today is on the Office side is what is the majority of the, let's say, of the discussions which are going on with regards to Office, and we shouldn't see any deterioration on that front from the larger client customer base?

[Christophe Kullmann, CEO & Director]

As today, yes. As today, I can say we have some question mark. I have to say, we raised some questions for some tenants. But we had no specific discussions at. The sole discussion, I have to say, that we concluded where in Italy with 2 tenants, where we accept some free rent period more, but also we prolonged the lease that will have no impact on the IFRS rent, and that will, for me, it also secures the rent for a longer period. So that's the type of further discussions that we could also have in the future in France. As I said, as of today, this was not the case.

[Operator]

We'll take our next question from Celine Huynh with Barclays.

[Celine Huynh, Research Analyst]

I have 3 questions, actually. Forgive me, it's a bit long. The first question is on the Hotel portfolio and more specifically on the fixed leases. I think you mentioned, Tugdual, that you wanted to get the operators help them get on the other side. What does that mean? Is that more rent waivers or rent deferrals? That will be my first question.Then my second question would be, can you share with us your discussions with your valuers currently? How they could write-down the Hotel portfolio in June '19, especially on the variable leases portfolio, where most likely you'd be getting 0 revenues in Q2. Same question for Italian Offices.And then my third question would be on your LTV guidance. You mentioned wanted to maintain your disposal target of above EUR 600 million by the end of the year. Do you think EUR 600 million is enough to maintain your LTV below 40% if we factor in some write-downs coming through?

[Christophe Kullmann, CEO & Director]

Thank you for the question. First, on the Hotel side. So what is we have said, is that we are directly impacted by the significant decrease in activity of around 50% of our Hotel revenues. But also, given the magnitude of this crisis, part of its fixed rents will also be impacted, and we've, I would say, ongoing discussion with all the partners we have to find with them solution to get through this crisis together. So that means that we will have an impact also on the fixed rent. Today, it's too early to give you figures because we have those discussions that are ongoing that would give us perhaps some free rent period of this year, perhaps longer lease, perhaps no impact on this year. And we will give more color in July on this point after I hope we'll find agreements with all our partners. That was the first point, first question.On the valuation, as of today, I'd say that it seems to be also a little bit early to give complete color on that. What is clear is that on 84% of our portfolio, which are Offices and German Resi, we are confident on the valuation. For example, and all what Tugdual said on the new agreement we had in the French Office portfolio during this last month, I have to say, the solid point to discuss also with appraiser on the fact that there is room in our appraisal value. On German Resi, as of today, we have also some discussion with the appraiser and we don't expect any decrease of value at the end of June. We expect new small increase. And on the Hotel side, I imagine there would be an impact. But just to remind whether we'll not take into account the result of the first part of the year because of the shift that will not be technically taken. It will be a loss for the first part, not in the valuation. So we will see -- and I have to say today, it's really too early to give figures on this point. On the last point on the LTV side, perhaps Tugdual?

[Tugdual Millet, Chief Financial Officer]

Yes, on the LTV side, what we said is that we have this objective to sign a minimum of EUR 600 million. So considering the investment program that we have with the Godewind, et cetera, the dividend in share, we will probably be slightly above 40% at the end of the year, but that does not change our objective to be below 40%. That will take maybe a bit longer time.

[Celine Huynh, Research Analyst]

Okay. Okay. Can I ask you a last question on your pipeline, your development pipeline on the pre-let. Are you seeing some tenants walking away from the pre-letting agreements or delaying the decisions so far?

[Christophe Kullmann, CEO & Director]

No, I have to say that's not the question because lot of tenants as of today for what is signed, but what is clear is due to this situation, there is a slowdown in the new discussions. And that's true and that will take more time because people need also to take into account the new environment. No thing that's changed, but -- in what is signed today, but what we see is that the tenant market is less active, especially in this lockdown situation than it was at the beginning of this year.

[Operator]

[Operator Instructions] We'll take our next question from Jonathan Kownator with Goldman Sachs.

[Jonathan Sacha Kownator, Financial Analyst]

A couple of questions, if I may. On the Hotel side, you've obviously made a lot of acquisitions in the past. Do you see potential -- would you have any appetite for potential opportunities in the market if there is a discounted price? And where would be your appetite in terms of pricing i.e. how would you think about interesting perhaps cap rates or how you want to frame that in terms of returns? So that is the first question. Second question, in terms of Offices, perhaps you're thinking slightly more medium term, given also all the pipeline of Offices in Paris, in particular, that is to be delivered over the next 2 to 3 years, how do you expect rental growth to evolve? And do you expect a significant correction potentially of market rents in Paris Offices? Or would you think it should be fairly moderate at this state? I appreciate, obviously, it's more speculative. But any color or guidance or your views would be certainly helpful at this stage.

[Christophe Kullmann, CEO & Director]

So on the first point on the appetite on investment in the Hotel sector, I have to say today, we have done a program of investment of the year. So we will not go through a new investment in this year. After that, we need to await, really, the evolution of the situation. You know the hotel industry is a cyclical industry. We have today to face very bad time in the industry. But we know that in the future, we don't know exactly when, but it will recover. So we are continuing to be committed to invest in this asset class in the long term, but not immediately today because we need also to wait and to sustain our balance sheet with LTV after what we've said before.On the Office side, what we see today, just to remind, the capacity rate in Paris, it's at historical low level today. And there is really -- it was not so many projects under construction. A lot of projects was forecast to be launched but not so many under construction. First of all, I have to say with this situation, we will see a delay in the realization of work. So we imagine, for example, for all portfolio, that you imagine that we have almost 1 quarter delay of all the main works we have to do. In terms, that means that today, I don't see a huge oversupply impact. But what I see and what I feel after some discussion with big tenants is that, that so cost reduction will be a key driver over the next month then. And that means that the top rent will be difficult to continue to be paid or to achieve. So I think that what is key today if we have the right assets in terms of quality, but also in terms of rent that means not too expensive. And when I look into the portfolio of Covivio and to our development, I think it fits really well to this also economic objectives.

[Jonathan Sacha Kownator, Financial Analyst]

And if I may, then perhaps just to bounce back on the Hotel, if that is your stance in effect. I mean, would you be tempted to renegotiate the deal that you've done recently? If you're very cautious to the extent that it's not closed, is there any opportunity for you to reconsider that?

[Christophe Kullmann, CEO & Director]

It was -- we were fully engaged to do the deal. So what we have negotiated is to postpone the acquisition to as initially forecasted that we acquire this portfolio by the end of this month. And we postponed the acquisition at the beginning of September. And that's what we have done. And also, we have worked with the tenant with NH, ZAC Clichy, his commitment, his firm commitment to take these assets at this date of beginning of September and to pay us rent with minimum guarantee of 4.7%.

[Operator]

We'll now take our next question from Laura Gomez with Kempen.

[Laura Gisela Gomez Zuleta, Senior Research Analyst of Real Estate]

You answered already my first question with regards to the delay of the pipeline. So thank you for that. Circling back to your comments on rents, do you expect to revise any of your yield on cost reductions, given the fact that may be now higher level of rents are kind of difficult to attain?

[Christophe Kullmann, CEO & Director]

What I have to say, most of our future pipeline -- first of all, with the committed pipeline, which is ready to launch, and we have not so huge rents, we are -- in Paris 17th with St-Ouen and interesting rents also in Villejuif. So I have to say no question mark on this part of the pipeline. The future pipeline, the managed pipeline is mostly composed of assets inside Paris that are today less, I have to say, to the tenant. And perhaps also this crisis will delay a little bit the exit of this current asset. So we will see, and I have to say it should be the decision more so next year than for this year to decide if we decide to postpone some of this future investment.

[Laura Gisela Gomez Zuleta, Senior Research Analyst of Real Estate]

Understood. And then maybe just 1 question -- an additional question, if I may. We've heard statements from corporates saying that maybe some non-front office operations would be more driven to work from home as this crisis evolves and maybe there would be a need for less kind of mid-office space. So for the more peripheral, if you will, assets, there seems to be maybe not a -- like not a need for as much space as previously thought. You mentioned your tenants or the discussions that you're having with your tenants are they're not withdrawing from negotiations. But do you see them maybe reducing the amount of space that they previously had stated that they needed?

[Christophe Kullmann, CEO & Director]

I'd say it's too early to answer this question. It's a real good one. But for me, it's really too early to have an answer to that. Today, it's not a question of our clients. It could be the question in the future perhaps, but not today. So really, I think it's a point that everyone is thinking today in the office environment, but what I see because we have also some -- we signed some leases during this period. We do have said that before. And we have -- it's although a tough discussion during these days with other potential tenants, so there is really a situation that continue to move and to be alive after that in terms of strategic evolution in terms of using of the office. I consider it's really too early to give a clear answer on that. We will have a lot of things to say, people in this area, I think more on that, but I have no answer today.

[Laura Gisela Gomez Zuleta, Senior Research Analyst of Real Estate]

That's highly appreciated. It's way too early, but I just thought maybe you had some color, but helpful nonetheless.

[Operator]

We'll now take our next question from Duclos, Bruno from Invest Securities.

[Bruno Duclos, Financial Analyst of Real Estate]

Could you give us an update on what is going on, on the construction sites of your pipeline? And could you give us a little bit of when you do expect the construction start -- sites to restart? And another question is about the construction cost. Does this have an impact on the cost of your pipeline? And what is your view of the construction cost after the crisis? Do you expect more competition? Or on the contrary, less project and lower cost?

[Christophe Kullmann, CEO & Director]

Yes. On the -- where do we stand in the works. First of all, all of our projects were stopped in France and Italy during the last week. But until the end of last week, we had opened 3 projects in France that are now starting to work, not at full speed, but starting to work. So -- and we imagine that by -- during the next 15 days, all of our work sites will be reopened and work will restart. After that, as I said before, we imagine that the timing will be longer because the new rules of -- protection rules will be important, and it could be some delays as that will continue in the delivery of the projects. So for us today, most important is to discuss with the tenant that Godewind is a little bit postponed, they are very early in some assets.In terms of cost of constructions, I imagine that this crisis will have an impact on the amount of work that will be done in the future. And that means that we will have two impacts: first more protection costs that will increase the construction cost; and second, less competition on -- between the different projects, and that means to our company the end costs that could be lower. So it's today, for me, also difficult to give a clear answer to that.

[Operator]

At this time, it appears there are no further questions in the queue. I do apologize, we do have another question. We'll take our next question from Florent Laroche-Joubert with ODDO.

[Florent Laroche-Joubert]

This is Florent Laroche-Joubert from ODDO BHF. So I would have 2 questions. So first question about your like-for-like growth in Milan. So I think you told us that it was 4%. So just to know where does it come? And my second question, so it is about your disposal objective of EUR 600 million. So could you please explain us how and why you are so confident to reach this target?

[Christophe Kullmann, CEO & Director]

Yes. I will take the second one, and Tugdual, you can answer for Milan. On the disposal plan, why? Because just when you see the figures that we disclosed today, we have interesting agreements on mature assets that we were on the disposal plan. So it was something that we forecast and that we were able to manage during this lockdown period. So what we see that there are also SCPI, OPCI that raise equity and today are active to continue to work in the office market. We have, I have to say, also other discussions that we have not disclosed today that make us kind of confident that we will be able to reach this amount of disposals. Tugdual, if you want to answer for the like-for-like in Milan?

[Tugdual Millet, Chief Financial Officer]

Yes, in Milan, specifically, as I mentioned, we had a plus 4% like-for-like rental growth for Q1. This is mainly due to first very solid occupancy level. So we increased the occupancy during this first quarter. And also given a bit higher impact due to renewal, so we have been able to increase the rents at renewal debt with an important tenant. So those 2 drivers explained the very good performance during Q1.

[Operator]

We'll take our next question from Alvaro Soriano with Bank of America.

[Alvaro Soriano-De-Miguel]

Just 2 questions on uncertain COVID-19 impact. Any of your tenants are thinking in increasing the distance between employees and that could impact in the short term, the level of take-up in some of your buildings. I'm referring if some of your tenants are thinking in signing their footprint just to keep employees safe. And the second question is in your workspace, your WeWork space. Wellio, your brand, do you expect to control the health on those spaces?

[Christophe Kullmann, CEO & Director]

I let Tugdual answer to the second question, I don't really catch it.

[Tugdual Millet, Chief Financial Officer]

Me neither. Sorry, you will have to say it again, sorry. WeWork, but that's it.

[Alvaro Soriano-De-Miguel]

Yes. Obviously, to be honest. No, basically, on your Wellio flexible office space, if you expect to improve or to try to control as much as you can, the protocols in terms of health, try to keep COVID-19 contention measures under control as far as some of your -- of the people working on those premises are out of your scope or out of your control? That would be the second question.

[Christophe Kullmann, CEO & Director]

Okay. So 2 questions into the COVID-19 impact. Well, yes, this question of what I have to say for some of our biggest tenants, we have some remarks coming that they want to -- they can stay as longer in offices because also they need to have more stay for their teams during the next months, perhaps here to face this new situation. So perhaps, it could have an impact and it could go so -- but I have to say today, it's really, really too early to say that. But what is clear is that each of our tenants are working on sanitary measures to really understand and to really protect their employees in this new situation. And after the lockdown situation, it will be really different in the office that it was before the lockdown.In terms of our Wellio site, yes, we will put in place specific measure to prevent what we can on the virus situation. And so we are working on the protocol. As of today, we are working also with a lot of other companies that are to see what are the best practices that we can put in place to protect the employees of our clients in the Wellio site.

[Operator]

Thank you. It appears that we have no additional questions in the queue at this time. I'd like to turn the conference back over to management for any additional or closing remarks.

[Christophe Kullmann, CEO & Director]

Okay. Thank you, everybody, to listening to this conference call, and see you soon. I hope directly, not through a phone. Bye.

[Tugdual Millet, Chief Financial Officer]

Bye.

[Operator]

Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.