Covivio SA

PAR:COV

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and welcome to the Covivio First Quarter 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to the CFO, Tugdual Millet. Please go ahead.

[Tugdual Millet, Chief Financial Officer]

Yes. Good evening, everyone. I'm pleased to present to you the Q1 results and review and activity. I will go through the presentation in details, and then we will be available with Paul to answer to your question.First, Page 4, I wanted to start this presentation with sharing some encouraging signs of resiliency of the office market in Europe, with the updated figures that we collected for this first quarter. I have to say that both on letting side and investment side, we see comforting dynamic with overall comparable level of take-up between Q1 2020 and Q1 2021, showing a catch-up effect with rent stable and transaction evidence demonstrating that on good assets, price continued to be well oriented.Page 5, this is also what we feel on the ground with an important increase in the amount of discussion on vacant spaces and in the transaction that we have been able to sign during this first quarter. First, on the main letting challenge that we shared during this full year presentation, on the 4 out of the 6 most important buildings where we have letting challenge, we have been able to increase occupancy in France and Germany, mainly.Second, in Milan, the dynamic is very strong again as we've been able to sign deals with 22% reversion -- positive reversion effect. Finally, more than before, the capacity for our clients to team up with flexible real estate operator has proved to be rewarding for us.Two interesting transactions demonstrating also the need for offices. The first one is Onepoint, a very successful digital company has decided to sign a new 9,100 square meter lease on the future development in Bordeaux. We own their headquarter in Paris that we delivered to them few years ago. A very good example of partnership.Another interesting example is Eiffage, another long-term partner with which we signed a lease extension, their whole headquarter for a new 10-year lease at the same rent.Page 6. One of the good news of this Q1 is on Germany is important news that is the entire cancellation of the controversial Mietendeckel law, which enabled us to deliver positive figures in Berlin consequently. We have decided to come back to the contractual rents and ask for the previous rent to our tenant. Obviously, being very careful with our clients that could have some difficulties, and we will help them finding constructive solution. On the other part of the portfolio, we continue to have strong growth. Thanks to reversionary and also CapEx program.On hotels, Page 7, Q1 has been, again, very difficult due to the current situation. The Q1 has shown a clear difference between performance in France, where we have 1/3 of our portfolio versus the rest of Europe. And we expect that following the acceleration of the vaccine in Europe, the constraints will be progressively eased and then removed. The example that we see of the U.K. is in this respect, interesting to follow. And we also see that clients are in the starting block for booking hotels in the near future, as shown in the graphs on the right-hand side of the Slide 7.Then Page 8, what does it mean precisely for our revenue. Let's first focus on office and resi where overall revenues are almost stable at EUR 130 million and slightly positive on a like-for-like basis, plus 0.3%. The negative impact on the offices is mainly explained by negative indexation and a slight decrease in the occupancy rate in 2020, having a full year effect now.Finally, on our hotel portfolio, we show a decrease of minus 46.2% on a like-for-like basis, considering the fact that the COVID effect has impacted hotels starting only mid-March 2020 after 2.5 months of good performance. This minus 46% is a bit better than what we experienced during the full year of 2020.Then Page 10 on the portfolio side. It's -- this slide is a reminder of what we presented during the full year results. The office portfolio, Covivio office portfolio, is mostly exposed to the most important European cities, among which Paris, Milan and the top 5 German cities. And the portfolio rotation that we regularly achieved has enabled us to refocus it on the inner cities and most connected assets.Our road map, Page 11, in this context is, at the end, fairly simple, more CBD and particularly strong location and connection. Thanks to the pipeline and the disposal plan. Increasing opportunity to transform office into resi if needed. And last, more services and flexibility to address the additional requirement of our clients.For the first objective, Page 12, the beginning of the year has been fairly successful with EUR 500 million of transaction of which EUR 278 million cash in that were under preliminary in 2020 with 8% premium on last book value; and then second, EUR 221 million of new commitment, mostly offices in France, Italy and Germany with 6% premium on end of 2020 appraisal value. We are consequently on track on our disposal plan objective of more than EUR 600 million.On the pipeline, then Page 13, we will have a significant activity in terms of delivery this year with close to EUR 500 million of investment delivered. And what I want to stress is the strong success of those new products. We have an average of 82% of preletting level on this pipeline. And I would say, the pipeline of the letting discussion for Silex in Lyon, Symbiosis in Milan is really encouraging. And we should benefit from the value creation of this pipeline also this year.Another good news, Page 14 for future value creation is the obtention of the building permit in Alexanderplatz in Berlin, We are now launching this iconic mixed-use project in the City Center of Berlin together with our partners Generali and Covéa.Finally, Page 15, on transformation of offices into resi. We have currently in France 3 projects ongoing, 100% presold. And we are now working on 5 new projects that will be launched this year for more than EUR 200 million budget in a former Orange or EDF office assets.Moving then to Slide 17. So during the first quarter, we received our definitive figures of carbon intensity on our portfolio that we share now. And as a reminder, we set ourselves the challenging target of carbon reduction of 34% by the end of 2030. The target that has been validated by Science BTI and ambitious because it does include all emission scopes, including construction activity. So at the end of last year, we were able to reach minus 20% ahead of schedule.Then last but not least, to finalize this presentation some changes in the Covivio's senior management. So following the announcement of Dominique Ozanne to leave the company for an entrepreneurial project, the management of Covivio Hotel will evolve with myself that will take the new role of CEO of Covivio Hotel teaming up with Elsa Tobelem, who will be the Deputy CEO. Elsa has worked for more than 15 years with Covivio Hotel and specifically involved on the asset management side and investment side.Paul will then become the new CFO of Covivio, and all this will be implemented starting 1st of July. We have to say that first time enthusiastic about this new role within Covivio and that also, I'm very happy of this evolution of Paul that you all know together with the finance team, I'm convinced that he will succeed in this nice evolution. This is then my last presentation to you as the CFO, obviously. And now I'm happy with Paul to answer to your question. Thank you very much.

[Operator]

[Operator Instructions] The first question today comes from Pierre Clouard of Kepler Cheuvreux.

[Pierre-Emmanuel Clouard]

First of all, congrats on your newer position. Actually, I have only one question that is on the guidance. I do not see any mention on the guidance. Does it mean that it's canceled or not at all?

[Tugdual Millet, Chief Financial Officer]

No. That means it has been confirmed again, obviously too early to review this guidance. We will give more update probably for half year results. And this would be also midyear that we will give more color on the different activities and would be the occasion to be probably more precise on this guidance.

[Pierre-Emmanuel Clouard]

Okay. So there is no reason to be worried on the guidance. And then just to follow up on that. What are your expectations on the potential recovery of the hotel business? And maybe just to come back on the U.K. Given the nice vaccination progress that has been achieved in the U.K., are you expecting a nice recovery in the U.K.? And in the end, do you think that you will receive at least EUR 1 upfront in the U.K. in 2021?

[Tugdual Millet, Chief Financial Officer]

Yes, a lot of not so easy question. I would say, first, obviously, the more we move forward with the vaccine and also the arrival of the summer period, the more we are, I would say, optimistic on the recovery. Nevertheless, as we said, during full year results, we remain cautious, and we expect mostly an acceleration probably starting during second half.And more specifically on the U.K., I have to say that -- as I said during the presentation, this is a really encouraging news. This is also a market that is mostly and specifically on our portfolio, mostly domestic. So all this is positive.Would it be positive enough to trigger a significant amount of rent for 2021? I think we need to remain cautious. I hope that it will be the case, but the next few months would be really a key to have more precise impact on that. And obviously, we will have, I'm sure, clear our view on all that for our half year results.

[Operator]

The next question comes from Florent Laroche-Joubert of ODDO BHF.

[Florent Laroche-Joubert]

Congratulations for your new positions for you, Tugdual and Paul. So I would ask 2 questions, if I may. So first question. So is it possible to have an update on your discussions in offices in Dusseldorf and in Hamburg? And the second question will be on German residential. So can we say that the court ruling will change something in your strategy in German residential?

[Tugdual Millet, Chief Financial Officer]

Okay. On the first question, when we mentioned the fact that there is increasing discussion on letting opportunities that was specifically on our 2 assets in Hamburg and Dusseldorf that are among the top 6 assets that we want to optimize in terms of occupancy. As you probably saw we've been able in Hamburg to increase the space of an existing tenant, adding 3,000 square meter on top of what we had previously. And we have other interesting discussion to follow. And really, the level of activity has picked up recently.And in Dusseldorf, we have also interesting discussion on, let's say, between 4,000 to 10,000 square meter. As you probably could expect it's long discussion. It's a live discussion. And I hope that, again, on this aspect, we could have good news for half year results. So things are progressing. This is the case in Germany and also in France. And as we said, the resi seems to have a more positive news flow that enable companies to be a bit more optimistic in the future.Then on German resi, The -- we added and we share with a lot of other people the fact that we hope that law to be unconstitutional, we have been I would say positively surprised by the -- at the end, it's a bit earlier than what we expected. And it's much clearer also than what we expected. So all this is positive and support the fact that we strongly and we will continue to strongly believe in the Berlin market.So no, I would say, change on this part. What we changed and we've been -- also we went to that during full year results is that probably on the development pipeline in Berlin, we are more moving on the development to rent strategy than previously a development to sell strategy. So that's the main impact that was anticipated.

[Operator]

[Operator Instructions] The next question comes from Jonathan Kownator of Goldman.

[Jonathan Sacha Kownator, Financial Analyst]

I hope you can hear me.

[Tugdual Millet, Chief Financial Officer]

Yes.

[Jonathan Sacha Kownator, Financial Analyst]

Two questions for me. So in your guidance, if I remember correctly, you had the negative impact of Berlin within the guidance for EUR 5 million to EUR 6 million. So should we expect a reversal of that impact would be the first question.On the second question, office to resi conversions. Can you perhaps help us understand better the economics since you've announced the new projects. What is the type of economics that you're getting on these conversions? Whether it's sort of profitable or whether it's a mitigation for an office that is getting obsolete is rather the question.And on German resi as well, I think you've said that you wanted to claw back previous trends unpaid. If you can confirm the amount of that and the decision to do that best they can -- maybe they will claw back previously unpaid rents.

[Tugdual Millet, Chief Financial Officer]

Okay. On the first question, you got it right. It's what we said. What we took into account in the guidance is the negative impact of this regulation of around EUR 5 million to EUR 6 million. So this could have a positive effect, obviously, on 2021. We have given, I would say, a guidance that is with EUR 380 million to EUR 395 million. So this is large enough to have plus and minus. And that's why I insist again, it's a bit too early to give more precise guidance. Obviously, with this news, we are a bit more comfortable and optimistic. But to be more precise, we will have to wait until end of June.On the second question on office to resi, it's really a strategy that is with the objective to preserve the capital, to preserve the value as soon as the office tenant is leaving and preserve or, I would say, maximize versus an alternative use. What we are, I would say, to give more precise figure in terms of expected return on this redevelopment. Obviously, it is profitable. Because what we expect when we launched this program is to have around 10% return on the development to sales strategy. So 10% on the basis of the last appraisal value of the program and that is why we are doing this activity.And that's something that we will achieve also in the new developments that are coming at the end from a former assets that were, as I said, occupied by clients like Orange or EDF that were previously big-sized assets in not so tertiary or purely office environment. And the best alternative use is obviously resi. And having the capacity to do that on a whole is really positive to preserve the capital and the value on our balance sheet and the profitability.Then on your last question, yes, that means that we will cut back the previous rent. So in 2020, as it will be the case for most of the landlords in public or private in Berlin, except, as you said, Vonovia. For us, it's a few million euro. And obviously, we will be very careful. If we feel that for some clients is difficult and we will find, obviously, and I'm sure some solution for those kind of problems.

[Jonathan Sacha Kownator, Financial Analyst]

Does that mean, sorry, on German resi that you are going to slow down on privatizations or are you intending to continue to...

[Tugdual Millet, Chief Financial Officer]

Privatization has not been so far a big problem for us. It was, yes, increasing, but still small in the, I would say, profitable profile of what we have in Germany. But we will continue to do so. As it has -- that's always been an interesting booster to the performance. But at the end, limited in terms of volume when we compare also with the asset rotation that we could have done in the past.

[Operator]

The next question comes from Marie Dormeuil of Green.

[Marie Amelie Charlotte Dormeuil, Research Analyst]

Just a question on my side with regard to the office market, maybe the French office market. For the new leases that you've signed, can you give us a sense of how the rental level compares to what you expected? And I'm thinking about the new projects you're launching. And for the leases that you're signing on your existing assets, again, can you give us a sense of how the rental level compares to previous trends, but also to market levels. And if anything, just give us color on 10 incentives that would be help.

[Tugdual Millet, Chief Financial Officer]

I will let Paul answer to this question.

[Paul Arkwright]

Yes, Marie, basically, you've got some details on Page 5, actually. So we were able to sign new leases in Paris and in Milan in our city above the previous rent, whereas in La Défense on our CB 21 asset, we are minus 12% versus the previous rent. On the development pipeline, I would say, interestingly, we have been able to reach record devotes in Silex 2 in Lyon, which is right in front of la Part-Dieu station. So right in the Silex 2.

[Marie Amelie Charlotte Dormeuil, Research Analyst]

Can you hear me?

[Paul Arkwright]

Yes.

[Marie Amelie Charlotte Dormeuil, Research Analyst]

Sorry, my line was not good. Okay. Understood. And just on yes, Garibaldi, so you mentioned a record 22% at least on rent. But I guess the reason -- and I'm just guessing, so is it -- it was just an old lease that expired and just the uplift to market level? Is that a sale?

[Paul Arkwright]

That's correct. It is -- that was rather old. And so we were able with those new signings to crystallize the reversionary of this asset.

[Marie Amelie Charlotte Dormeuil, Research Analyst]

Got it. And do you see any changes in terms of -- so I guess here, we're talking headline rents. So have you had to grow incentives or maybe bigger contributions to potentially installation costs or some tenant CapEx, just to get a sense of where the net -- where do we land on a net basis?

[Paul Arkwright]

So what you have on Page 5 is headline rents. Actually, IFRS rents are pretty much on the same direction, actually. So not that much of differences. And we were, let's say, in La Défense, we gave more incentives and that explains the minus 12%. Whereas in Garibaldi, for example, the level of incentive was not increasing versus last year, which -- and in Germany, in the new signings that we have made, for example, if I take the major one, the 3,000 square meters, it's a garage in Amedei. We were able to sign with plus 20% versus the same the rent on the existing surfaces for this tenant because it's a tenant that has increased its surfaces in this building.So to answer to your question, basically, we see increasing incentives, especially in some areas in the Greater Paris, like La Défense not that much at this time in -- for good assets, well located as Silex 2 in Lyon or Garibaldi in Milan.

[Operator]

[Operator Instructions] As there are no further questions, I'd like to hand the call back to your speakers for any additional or closing remarks.

[Tugdual Millet, Chief Financial Officer]

Yes. Then thank you for your attention and hope to speak to you soon. Have a good evening. Bye-bye.

[Operator]

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You may now disconnect.