Covivio SA

PAR:COV

Earnings Call Analysis

Covivio's H1 2023: Strong Operational Health

In the first half of 2023, Covivio navigated a shifting market landscape, maintaining balance through asset disposals and dividend strategies. Despite some asset value adjustments, the company achieved a 7.6% like-for-like rental growth and sustained an occupancy rate of 95.8%. EPRA NTA per share dipped to EUR 91.1, but gearing remained under 40%. Office demand varied, with downturns in some areas but firm demand and rental increase in city centers, such as 9% in Paris. German residential rents saw a significant rise, with Berlin's rents climbing 16%. The hotel sector is buoyant, with revenue per available room (RevPAR) up 13% year-to-date, and up 20% in peak months. Amid these conditions, Covivio's EPRA earnings stayed stable, and the company raised guidance slightly for the remainder of 2023.

Strategic Dispositions and Robust Portfolio Performance

Covivio, in the face of shifting economic and financial landscapes, showcased resilience with a solid financial foundation underscored by strategic disposals and the implementation of a scrip dividend policy. Despite considerable market value adjustments, the company succeeded in maintaining a stable balance sheet while boasting a 7.6% growth in like-for-like rental income and an impressive 95.8% occupancy rate across their portfolio.

Guidance Lift and Healthy Financial Metrics

Covivio's steady Earnings Before Interest, Taxes, Depreciation, and Amortization (EPRA EBITDA) reflects its capability in preserving financial stability, with EPRA Earnings showing no adverse effects. The net tangible assets per share (EPRA NTA) saw a slight decline to EUR 91.1, attributable to the market’s downward pressure on valuations. Notwithstanding, the company's gearing remained comfortably below the 40% threshold. Encouraged by the underlying operational strength, Covivio nudged up its guidance for 2023, instilling confidence in the continuous growth momentum.

Market Dynamics and Portfolio Diversification

The market for office space presented a dichotomy, with overall demand softening due to the rise of remote working, yet city centers experienced robust demand, as evidenced by decreasing vacancy rates and surging rents, especially in Paris. The German residential sector also prevailed with a 16% upswing in rents amidst a supply-demand gap. A vigorous recovery characterized the hotel segment, with Revenue per Available Room (RevPAR) climbing by 13%, further propelled to a 20% uptick during the height of the travel season in May and June.

Operational Highlights and Growth Drivers

Operational performance shone with new lease signings of 44,600 square meters in both city and suburban centers. City center assets, such as Maslo and Zeughaus, achieved 95% occupancy, while strategic lettings offset the initial occupancy dip in suburban assets like CB21 and Atlantis. The like-for-like rental growth accelerated to 5.3% by June's end, reflecting Covivio's asset quality and location strategy, with a significant portion of their offices situated in prime city locations, reaping the benefits of high indexation and rental reversion. Meanwhile, the German residential portfolio exhibited a like-for-like rental growth of 3.8% along with a sustained high occupancy rate of 99%.

Resilience in Non-Core Assets and Enhanced Hotel Operations

Even non-core office assets earmarked for sale or conversion reported a positive rental growth of 2.7%. The company's multifaceted approach in hotel operations paid off with substantial like-for-like revenue growth of 20%. Covivio diversified its hotel portfolio through variable leases predominantly in France, operator-managed properties spread across Germany and France, and fixed leases that mainly benefited U.K. properties due to indexation and the outperformance of variable components. This successful strategy is further underscored by asset management initiatives, such as the renegotiation of leases with Melia in Spain and the launch of CapEx programs in prime tourism hubs expected to yield significant returns.

Earnings Call Transcript 2023-Q2

[Christophe Kullmann, executive]

Hello, everybody. I'm happy together with Paul to welcome you to this audio webcast and conference call to comment on Covivio's H1 '23 results. So let's start. Page 3 with some [ introductory ] comments on key achievements in H1 '23. First, in a changing economic, financial and investment markets environment, we managed to keep a healthy balance sheet despite significant value adjustment and thanks to new disposals agreement and scrip dividends.

Second, we kept on benefiting from more quality portfolio with a 7.6% like-for-like rental growth and a 95.8% occupancy rate. Linked with values, EPRA NTA was down to EUR 91.1 per share but we managed to maintain gearing close to below 40% policy and published a stable EPRA earnings. The strong operational performance also enabled us to slightly raise our '23 guidance.

First, on Page 5, we are on track with our disposal program. Over the semester, we agreed on EUR 350 million new disposal in group share with minus 1.2% margin, so really close to 2022 appraisal values. At end June 23, we are well on track to achieve EUR 1.5 billion disposal program by end '24 with already EUR 550 million realized in 7 months, knowing that on top of that, we also have more than EUR 350 million under advanced negotiations.

Second, I'm on Page 6. One of our priorities was to lower CapEx and reinsure centrality on our office pipeline. As you can see, following three deliveries, one project sold [indiscernible] and only one new commitment in City Center, pipeline decreased by 33% to EUR 1.6 billion. This office pipeline is high quality, 82% in City Center and 62% pre-let with a 5.5% yield.

Some comments about our H1 '23 deliveries, Page 7, totaling EUR 316 million. We delivered in Q1 Maslo, a core asset in Levallois, which was 43% pre-let. Over the semester, our letting teams managed to increase occupancy to 68%, improving the quality of the asset. In Q2, we delivered an expansion to Dassault on Velizy campus, a core asset with more than 7% yield, reinforcing the long-term partnership for more than 15 years now between Covivio and Dassault in this area. And we also delivered Le Floria, a smaller non-core assets in Fontenay, the east of Paris, which was refurbished in order to sell the asset.

In parallel, Page 8, we launched one new office project in Paris CBD. It's a Former Orange asset, well located, close to all public transportation in an area with quite no vacancy for quality buildings. Here, we are planning a complete repositioning to deliver in '26, a brand-new building with services and with high certifications. The amount of CapEx to be spent is rather limited compared to the total budget and should generate a marginal yield on cost of 6.3%. In the end, this is totally in line with Covivio's strategy to benefit from central positioning and improve the portfolio quality, but also generate higher earnings.

Last point on our priorities to strengthen balance sheet, Page 9, the scrip dividend, which was a success, we got the support of a large part of our shareholders with a 79% subscription rate implying a capital increase of EUR 279 million. To sum up, Page 10, good progress on balance sheet priorities on track on the disposal program, the refocused pipeline and the scrip dividend, strengthening equity. I will now leave the floor to Paul, who will comment on the operating performance and the results.

[Paul Arkwright, executive]

Thank you, Christophe. Hello, everyone. So let's start this part by the markets. Overall, supportive markets, as you can see, Page 12, starting with offices. The office market is mixed, you know it, work from home has impacted the office demand, which is decreasing actually in H1. But at the same time, we continue to see a solid demand from tenants for city centers. Look at the example in this slide of Paris, decreasing vacancy rate, 2.5%, increasing rents by 9%.

German residential then, so the gap between supply and demand continue to increase. So consequence, you see that in the slide, increase in rents by 16% on average in Berlin. Then in hotels, growth is robust. RevPAR up by 13% year-to-date and even by 20% in May and in June.

So what does that mean for our operating performance starting with offices, Page 13. We signed during the first half, 44,600 square meters of new leases, both in city centers and outside city centers. In city centers, we increased occupancy on Maslo, Christophe mentioned it. We also increased the occupancy to 95% on Zeughaus in Hamburg.

Outside city centers, in a more difficult market, we were able to fully let our tower of CB21 in La Défense and we were also able to relet more than half of the Atlantis building in Issy-Les-Moulineaux a few months after the departure of the tenant. Office rents benefited also from accelerated indexation, as you can see on this Page 14. As a consequence, like-for-like rental growth stands at a very good level of 5.3% at the end of June. On occupancy rates, let's say, we added two periods during this semester, a decrease in occupancy in Q1 following the delivery of Maslo and the departure in Atlantis in Issy-Les-Moulineaux but then in Q2 with a strong letting activity on those same assets were able to recover one point in occupancy rate up to 93%. So despite the polarization of the office market, we were able to record a 5% like-for-like rental growth, and this is thanks to the quality of our portfolio, look at the Page 15. 2/3 of our office portfolio, as a reminder, is located in city center, benefiting from high indexation and positive reversion in the first half.

This portfolio is well occupied, long-term lease and a strong 6.3% like-for-like growth. Then core asset outside city centers, it's 26% of the portfolio, like-for-like rents are up by 4.9%, mostly thanks to indexation and despite a negative reversion on 1/3 of this portfolio. This portfolio, as a reminder, is mostly led to large tenants with long-term leases, Dassault Systèmes, we mentioned it just before Thales, also Telecom Italia.

Then finally, on non-core assets, it's obsolete buildings to be sold or to be transformed into residential. But nevertheless, we have a rental growth, which is still positive at 2.7%.

Moving to German Residential, Page 16. The operating momentum here is also good. We recorded an acceleration of the like-for-like rental growth from 3.1% to 3.8% occupancy rates. You can see that on the left part is maintained at a very high level of 99%. This rental growth is expected to continue. As you can see on the right part, first, thanks to the indexation, inflation start to have positive impact actually on the indexes like the Mietspiegel. Look at the Mietspiegel in Berlin, plus 5.4% and a new update to come next year. Second, thanks to the reversionary potential and in H1, we were able to record a plus 20% uplift on our reletting, of which 27% in value.

Last but not least, hotels. Page 17. Performance, you see that very strong plus 20% like-for-like revenue growth. As you remember, we have three kinds of revenues that we show in the left part of the slide. So first one, variable leases, mostly in France, revenues here are now well above 2019, benefiting from central positioning and from refurbishment that we have done over the last years. Second, operating properties. It's in Germany, it's in France, we had a very strong plus 54% like-for-like growth. Here, we also had a positive base effect, especially in Germany, with the first half of 2022, which was still impacted by COVID.

Third, type of contract, fixed leases, plus 10% like-for-like growth this year, thanks to indexation, thanks also to the variable component we can reach on those leases following the outperformance of the hotels. It's mainly the case in the U.K.

Asset Management in hotels is a boost to our performance, it was the case last year, it has been the case in the first half, and we continue to work during this semester on further asset management action. You see that Page 18. On the left part, on lease properties, we signed a new lease with Melia in 2023 on three assets. It's in Spain, and on this, we increased the rent by more than 30% with a 9% yield on CapEx. On the right part, on operating properties, we also launched EUR 30 million of CapEx programs in hotels in Lille, in Bruges, and in Berlin, so big tourist destination with an average of 10% expected yield on CapEx.

So to sum up this part, in office, our city centers enable us to capture very good performance, in German residential, we will benefit from inflation and the lack of offer, which start to impact positively the rental growth. And in hotel, performance is very strong.

Let's go through financial results starting by appraisal values, Page 20.

Value declines were expected in this semester to reflect the new interest rate environment. And as a whole, we had minus 5.5% like-for-like decrease over the first half on this portfolio. Accumulated, and you see the next column, that means a value decline over the past 12 months of close to minus 8%. In offices, city center assets show more resilience on the back of rental growth. While, as you can see, noncore assets recorded a minus 18% decline, which bring accumulated value decline for this bucket of minus 25% over the past 12 months.

German Residential, the drop has been minus 7% in H1, equally spread actually between our different locations. That means minus 9% decline over one year. That means also that the price now per square meter in our portfolio in Berlin, it's EUR 3,200 per square meter, while in parallel, we have [indiscernible] at EUR 5,000 per square meter. And in Hotels, to conclude, values were more resilient, benefiting from the higher initial yield post-COVID and from the increase in revenues and the yield that you saw here of 5.5% is increasing by 50 bps over the first half of this year.

So this value drop directly impact our NAV, you see that on Page 21. EPRA NTA is down by minus 8.7% to EUR 9.2 billion; on a per share basis, it's minus 14% at EUR 91. [ You seem to have reached ] the main component of this decline, as I said, is a property value decline of minus EUR 9.5 per share. Then we also had the scrip dividend option impact of minus EUR 3.6 per share.

Financing on Page 22. We had a busy first half, EUR 765 million of financing and refinancing secured in this first part of the year with a 6.6 years average maturity, we extended the maturity of all the credit lines maturing in 2024 and started to reduce also the maturities of '25. For '24, the remaining maturities are first, bond, EUR 3 million coming to maturity at the end of next year. It's fully covered by our liquidity and then mortgage financings that are under refinancing process as of today. Thanks to this activity, you can look at the KPI on the right part of the slide, we keep a healthy debt profile, maturity stable 4.7 years, liquidity position has actually increased significantly from EUR 0.8 billion to EUR 1.15 billion, and our debt is hedged at 90%.

Alongside this refinancing activity, we also reduced the amount of the debt, as you can see on the Page 23 a decrease of EUR 175 million during the first part of the year, thanks to scrip option and to the cash sales. And taking into account the disposal agreements, as you can see, so the net debt will go pro forma further down by EUR 300 million.

All this leads to a sound debt metrics that we show on Page 24. Despite value decline and despite interest rate increase, you see loan-to-value 40.7%, close to our policy of below 40%. ICR, 6.1x, well above covenants, cost of debt is increasing on a limited basis from 1.24% to 1.46%, and net debt to EBITDA is improving down to 13.5x. All this enabled S&P to reiterate its rating at BBB+ stable outlook at the end of May.

So that's for the balance sheet. In the meantime, our operating activity has been strong, as I said before, and you see the results, Page 25, I will focus on one number, 7.6% like-for-like rental growth, a high level with growth across all asset classes. Half of this growth comes from indexation, mostly on offices. We saw it before on, 0.7% of the growth is linked to rental uplift, especially in German residential and [indiscernible] as you can see, comes from viable revenues in hotels. Despite disposal program, revenues are up also at current scope by plus 5% and the occupancy rate, 95.8% for 7 years maturity.

Let's now look at the EPRA earnings evolution, Page 26. With stable EPRA earnings in H1 compared to last year. As you can see in the bridge, we had, on one side, the negative impact on revenues linked to the deleveraging through the disposals. We have also the impact of this new environment in the cost of our debt and in the decrease of the property development activity. But despite that, we're able to keep in EPRA earnings stable. First, thanks to the positive contribution of the development pipeline with the deliveries. And second, thanks to the strong like-for-like rental growth I commented before.

So to conclude on this result part, just further achievement also on ESG, so certification of our portfolio is now at 93.5%, of which 63% of our office are now certified very good although. And we increased our debt linked to ESG KPI up to 50%. This ESG policy and performance has been rewarded during the first half by our shareholders through the approval of the sale on climate resolution and by our rating agencies as S&P with a score of 85 and the status of Sector Leader. Thank you, I'll now let the floor to Christophe.

[Christophe Kullmann, executive]

Thank you, Paul, for commenting on the strong operating performances and good set of results in this challenging environment. Let's now give some comments about the outlook. What we intend to do over the coming semester is to keep on benefiting from the pricing power we mostly see across our activities in offices, Page 29, indexation is expected to remain elevated over the coming quarters across all geographies with latest indexes between plus 6% and plus 7%. But overall in the market, the polarization is increasing.

As you know, we split our office portfolio in three categories for 67% of city center assets, they are rated in strong letting market with increasing pricing power. There, we intend to capture the reactionary potential, which was plus 8 -- 17% in H1. Then for 26% core outside the City Center asset, we plan to have inter-asset management to increase or maintain occupancy, sometimes accepting lower rents to conclude our 7% non-core asset [ here the idea ] is to reduce the exposure to this asset, converting them into resi or through direct disposals.

To conclude on our development pipeline, mostly in the City Center, we also deliver EUR 83 million of new rent by '27. Then on German resi, the fundamental on the operating side are really strong with widening housing shortage regulated indexation indices are increasing everywhere and also in Berlin, where we have the largest exposure and where market rents record some of the highest increase in Germany year-on-year. So we keep on benefits from high positive trends over the coming years, which should provide a solid like-for-like rental growth.

Moving to hotels, the momentum is positive. The increase in average [ day rate ] and RevPAR is impressive and occupancy is now back to '19 levels with buffer remaining. Hotel my expectations were reviewed upward by Oxford Economics by plus 10% for France and plus 20% for Italy. There are major event to come -- even to come, especially in France that will boost demand for hotels. And meanwhile, the offer is decreasing through Airbnb regulation in big cities and a reduced pipeline of hotels under construction in Europe. As a whole, Covivio will benefit from these trends with high indexation and fixed lease, gross expected and variable revenues and new asset management opportunities.

In the short term, thanks to higher contribution of indexation and once again, a better growth than expected in the hotels, we increased our '23 guidance to EUR 420 million versus EUR 410 million initially announced. To sum this presentation, first, we are well on track on this program. We once again recorded strong operating performance, and for the future, we'll benefit for our central portfolio with pricing power and we also increased our guidance so thanks for listening this presentation, and we are now ready with Paul to answer your questions.

[Florent Laroche-Joubert, analyst]

This is Florence Laroche-Joubert from BHF. Could you hear me?

[Christophe Kullmann, executive]

Yes we hear you.

[Florent Laroche-Joubert, analyst]

So thank you very much for this presentation. Now maybe I would have a few questions. So on the disposals that you have announced today. So is it possible maybe to have more color on the asset side you have disclosed. And for the coming. So could you please give us maybe an update on your view on the investment market. As you've seen a difference today on the different players on the investment market compared maybe to the start of the year. And maybe also a question on your occupancy rate in offices. So we have seen that your occupancy rate has been volatile let's say, in H1 2023. So what could we expect in H2 2023?

[Christophe Kullmann, executive]

Okay. First, on the disposals. So in offices, we have sold one development project in Paris, which is Anjou and non-core assets, mostly in Italy, for a total amount of EUR 268 million, on average, minus 2% margin. In German resi, we sold EUR 24 million in the first half on which two small assets for EUR 15 million, in line with June values and a EUR 9 million privatization with 48% margin. And in hotels, we sold mostly two assets in South Europe, in Spain and Italy, close to book value, that's on the -- what we have in this new disposal agreements. On the investment market, what we see really is a slowdown in the investment market everywhere in Europe today with a lot of people that are waiting exactly where the value will be in the future. We have a lot of other discussions because that's a EUR 350 million of advanced negotiation we give also in this presentation mostly, I have to say, in the office sector that we continue to -- where we will continue to have the most part of the disposals. We have discussion with end users but also with long-term investors that in different sectors.

On the occupancy rates, the evolution of H1, as Paul explained, it was just linked to two assets, mainly and that was Maslo, Levallois, 43% only occupied in the first half, and so [indiscernible] fully vacated in the first quarter and as you have seen on these two assets, we increased strongly occupancy during H2. What we expect is that this situation will continue in the second half and we hope really to have continued to improve this occupancy rate in the first -- in the second half, we have a way to say today. Also in the letting part, a lot of discussions and we are pretty confident to be able to achieve an increasing occupancy rate at year-end.

[Florent Laroche-Joubert, analyst]

Okay. Thank you.

[Operator]

We have another question from Miss Celine Huynh from Barclays. [Operator Instructions]

[Celine Huynh, analyst]

Hi can you hear me?

[Christophe Kullmann, executive]

Yes.

[Celine Huynh, analyst]

Two questions for Paul, please. The first one on refi. The refis you've done, EUR 765 million total share, can you provide color on what the holding cost was? And where you see average cost of debt lending this year and next -- and then second question would be on the earnings guidance of upgrade. Can you explain where the EUR 10 million upgrade is coming from exactly?

[Christophe Kullmann, executive]

I will let Paul handle these 2 questions.

[Paul Arkwright, executive]

Thank you, Celine, for those questions. So first of all, on refinancing, but well, a big part of the refinancing is actually undrawn credit line. So no earning cost on this part of non-utilization fees which are very limited. What I can say is that, on average, we had a slight increase into margin, but rate-limited, then we also did a tap on the bond with a yield of 4.6%.

And on German Residential, we did some mortgage loans for 10 years at a coupon of [ 84% ], so interesting still interesting level of margins. Going to your question on interest rates, cost evolution. Well, the decrease of the net debt enabled us also to increase the level of the hedging ratios for 2024 which is currently at 86%. And we are close to 80% also for 2025. So that means that this increase of the cost of debt would be very progressive in the next years. We shared in the Capital Market Day that the we expected the cost of the debt to reach 2.5% within 2026. I think that following this first half, we have postpone this increase even further, which is a good news.

[Christophe Kullmann, executive]

On earnings?

[Paul Arkwright, executive]

And on earnings, sorry, on the guidance. So well, half of it is coming from indexation which is more important than what we initially anticipated, especially in Italy and in Germany. And the other half is coming from higher performance in the hotel part.

[Celine Huynh, analyst]

Thanks, Paul.

[Operator]

We have another question from Ms. Mertin of Kempen. [Operator Instructions]

[Unknown Analyst]

Hello. Thank you very much for the participation tonight. A quick question on leverage and disposals, so you mentioned another EUR 350 million in the pipeline or is in advanced negotiations? can you perhaps give some more color on what you expect in terms of timing? Is that expected to come before the end of 2023?

And also more in line with that, what is your target or your [ value creation ] in terms of LTV before the end of the year? Because you're now slightly ahead of your -- above your own target of 40%, across even 43%, 44%. So curious to see what your views for that. And also, if you have any discussions with credit rating agencies and if they are a bit more worried about agencies given where valuations currently stands and might go the second half of the year.

[Paul Arkwright, executive]

Well, on disposals, timing of the disposal that we are under discussions with those EUR 350 million let's say that we expect to secure it within the next few months, which means closing will it be at the end of this year or early next year. we will see.

[Christophe Kullmann, executive]

But at this stage, we will not increase the target of EUR 500 million that we give, part we do more for this year. But all the discussions today with potential buyers are really volatile. That's what we experienced, I have to say, in some discussion in the first half. So really, we have this EUR 350 million of discussions and we hope to do most of them this year that will really depend on each discussions. On the second part of the LTV target, and the equations.

[Paul Arkwright, executive]

LTV target, it depends on the values. The target is to is to continue to reach our LTV policy of below 40% through our disposal program. That's what I can say at this.

[Christophe Kullmann, executive]

I have to say, a large buffer in terms of rating because today, we are far away from the -- and the change we have today with S&P. It seems that there is no immediate risk on any downgrade, especially with what we have done in the first half and what we expect to be delivered in the next one.

[Paul Arkwright, executive]

As a reminder, S&P updated their rating and they confirm the BBB+ stable outlook at the end of May. So fully aware of this current environment. And I think the full -- the actual results goes in the right direction for them.

[Unknown Analyst]

Okay, that's already very helpful. Two follow-up questions on that. Do you have an idea on -- or maybe S&P gave you an indication on what the amount of value write-downs you could still have or maybe in other words, what they would accept for this rating? And then secondly, I believed during your Capital Market Day, you will also vocal on disposals in the German resi segment. Up until now, it's not that much. Maybe you have set a light on progress there and if we can expect more in that segment as well?

[Paul Arkwright, executive]

Well, on values, what I can say at this stage is that basically, the value decline for the past 12 months, as you have seen, has been quite significant in minus 8%. But your question was on the buffer, so that means that including the preliminary disposal agreement that we signed and not yet closed. Our buffer to the BBB+ rating is 10% of value decline.

[Christophe Kullmann, executive]

Without any other disposal. So that's why we are clearly at this stage, confident to keep this rating in the near future. And the second question was on the disposal on the resi part. First half was really quite, I have to say, on the resi market for 2 different reasons. I have to say the first one is that on the block sales, investors who are waiting on the evolution of value. I have to say that what we have now in the values at the end of June and that at this level that we just closed the disposal block sales that we just have in the figures.

So I hope that the situation could change in the second half. And on the privatization, I have to say, in the first half, we don't have a lot of assets to be disposed with the assets that were privatized was really vacant asset for people that want to occupy their assets. We really expect to have an increasing amount in the second half because we will put other buildings under privatization. So we are really more optimistic for these figures for the second one -- second half.

[Unknown Analyst]

Okay. That's very helpful.

[Operator]

There is no further questions from our callers. Thank you very much.

[Christophe Kullmann, executive]

We have 2 questions for [indiscernible]. Paul could you take this.

[Paul Arkwright, executive]

Yes. So first question is on the hotel segment, so Q1 like-for-like was plus 58%. H1 is plus 20%. So that implies like-for-like figures of 3% to 4% in Q2. Actually, low, because in Q1 2022. We didn't updated the rents on the U.K. portfolio. As you remember, we renegotiated the U.K. lease last year, and so the update has been made in H1 2022.

So that's the first explanation, which is quite mechanic. And the second explanation is that the volume of activity in Q1 is smaller than Q2. So to make it short, activity has been robust in Q2, even higher than in Q1 when we compare to 2019 figures in our hotel.

[Christophe Kullmann, executive]

Especially, for example, in Germany, where we are lagging behind the rest of Europe in hotels, May and June were really good and over '19, that was not the case of the first month of this year, and the other point was.

[Paul Arkwright, executive]

So other point was on asset valuation. Does the appraisals take into account the reversionary potential on our office in the hypothesis and to what extent? Yes, they take a reversionary potential, most of the cases are quite cautious. So that means that they take essentially negative version potential and we have more difficulties to make them take the positive reversionary potential that I would say. That's for office.

[Christophe Kullmann, executive]

And there is another question.

[Operator]

Mozzi from Bank of America. [Operator Instructions]

[Marc Louis Mozzi, analyst]

Yes. Just wanted to make sure that I understand very well what you just said previously about the [indiscernible] headroom you have on your debt covenant leaving you only 10% of asset value decline before you reach one of those contracts? Is it the way I should understand thing? Or we should do something or there is a big nuance here on things?

[Paul Arkwright, executive]

Not covenant, covenant, it's 24%, 24%. It's not equivalent.

[Marc Louis Mozzi, analyst]

So what is the 10%?

[Paul Arkwright, executive]

The 10% is for the BBB+ rating. And again, it's value decline without any further disposal versus what we have as of today.

[Christophe Kullmann, executive]

And we know that it's not organic of S&P, if it will be the case, to be we could discuss, but that was on this part.

[Marc Louis Mozzi, analyst]

Sure. And can I ask a question on -- do you have any both covenant around unencumbered asset ratio? And if that is that the case? What is the percentage? And where are you at the end of June? And what sort of headroom leaves away do you think you have in terms of capacity to move some of your unsecured debt to secure that?

[Paul Arkwright, executive]

The only equivalent that we have on our bonds is that the unencumbered value has to be equal to the volume of the bonds. So headroom is.

[Marc Louis Mozzi, analyst]

100% then?

[Paul Arkwright, executive]

Yes.

[Marc Louis Mozzi, analyst]

And have you a clue of how many room that leaves to you in terms of capacity to move from unsecured to secured?

[Paul Arkwright, executive]

We just demonstrated during the first half linked to the EUR 765 million of refinancing, which are mostly secured actually. So that demonstrate the capacity to continue to work with the banks and the confidence of the banks to work with us.

[Marc Louis Mozzi, analyst]

Okay. Thank you very much.

[Christophe Kullmann, executive]

There are no further questions. So thank you everybody for listening and talk to you soon in the future road show. Bye.