Gecina SA

PAR:GFC

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and welcome to the Gecina Q1 2021 activity conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Méka Brunel. Please go ahead.

[Samuel Henry-Diesbach]

Good morning to everyone. Thank you for being online with us for this conference call related to our business activity for Q1 2021. I'm Samuel Henry-Diesbach. And I'm here with Méka Brunel, our CEO; and Nicolas Dutreuil, our Deputy CEO in charge of finance. And after a quick introduction by Méka regarding our performance in Q1 2021, Méka, Nicolas and I will be very happy to answer the question you may have. So I now hand the floor to Mrs. Brunel.

[Mahkameh Brunel, CEO & Director]

Thank you, Samuel. Good morning, everyone. Thank you for attending this call. As you may have seen already in our press release published yesterday, our performance has been strong year-to-date, proving resilience, flexibility and agility. This is particularly a strong and solid performance, especially compared to Q1 2020, which was, I may say, a normal and hot period of the year, and shows that we are very marginally impacted by the coronavirus impact since -- even though the lockdown has started in March last year. Facing difficulties during the lockdown and the COVID crisis, Gecina's performance had proven resilient and reinforced further our belief regarding our strategic positioning. Gecina rental income is up year-to-year by 1.3% like-for-like. This solid performance despite the health context highlights the relevance of our choices in the last few years, as a reminder: realignment around central sectors of the Paris region, confirmation of the residential business with assumed ambition for growth, active portfolio rotation, value extraction on buildings with strong potential, flexible and cautious balance sheet, delivering value-added services to our clients.I would like, however, to highlight a few elements before answering with Nicolas and Samuel to the questions you may have. Although take-up are still down versus pre-COVID Q1 2020, we see signs of recovery starting in Q1, bringing confidence for the rest of the year. This start of an upturn in transactions is consistent with realistic market observations with positive trends starting up for small and mid-sized properties. We also see this in the context of globally stable headline rental values despite an increase in the vacancy rate on the markets resulting directly from the temporary slowdown in the lettings rate since March 2020. Transactions under 5,000 square meters take-up in Paris Central Business District is stable compared to the first quarter of 2020, that was relatively unaffected by the coronavirus shock, around minus 1%. In general, the lower level of transaction in the Paris region for the first quarter of 2021, down by 30% from the first quarter of 2020, is mainly linked to the exceptional transaction signed last year for over 120,000 square meter in La Défense. Excluding this single exceptional transaction, the contraction is -- in take-up is limited to minus 4%, once again, confirming the start of an upturn for the Paris region rental market with larger operations as well. Our letting business was strong in Q1. The number of interactions with prospects in Q1 is back in line with Q1 2020 before COVID-19 crisis. Number of visits is, for instance, almost 10% higher than in Q1 2020. Gecina recorded more than 30,000 square meters of transactions during the first quarter. This is 22% higher compared to Q4, if excluding the exceptional deal with Orange. This upturn marks the start of a recovery that is expected to ramp up during the second half of the year, accompanying the gradual improvement in economic visibility. Illustrating this start of an upturn, the pre-leasing rate for projects to be delivered in '21 and '22 has progressed up to 6 points since the start of the year to now reach 43%. Discussions are also underway with several potential tenants for various buildings from the development project pipeline. Several discussions are in progress these days, and we can be confident this pre-let ratio is likely to improve again in a rather short term. The key transaction included the progress made with letting the Carré Michelet building in La Défense, delivered at the end of 2019 and now almost 90% let, as well as the leasing of around 4,000 square meter in the Anthos building. Reversely materialized in Q1 is plus 8% on offices and plus 7.2% (sic) [ 7.3% ] on residential segment. These new leases have been signed in average with the firm maturity of 6.4 years, well above our office portfolio average remaining firm maturity of 4.5 years.As a consequence of this solid performance, mostly in the most central location, our like-for-like performance appears rock solid. With a normalized level of rental collection now fully aligned with what was historically observed before COVID-19, like-for-like rental growth reached 1.3% -- plus 1.3%, plus 2% on offices, which could be split in the following categories: a positive contribution from reversionary materialization contributing for plus 0.2%, positive indexation contributing for 0.7%, a temporary impact on increasing vacancy rate as a direct consequence of the slowdown in the volume of transactions, particularly for commercial leases and student residence, but expected to normalize along the coming quarters, contributing for minus 1.8%; from a rent catch-up effects for the period from 2017 to 2020 on retail units, following the decision by the authorities, ruling on a back-dated increase in rents, a plus 2.2% contribution. Gecina set up in Q1 an even more ambitious CSR roadmap for the future with the launch of the CAN0P-2030 plan, aiming for Gecina's operational portfolio to be carbon neutral by 2030 versus 2050 previously according to Paris Accord. We have launched, in parallel, the requalification of all bonds as Green Bonds, which represent EUR 5.6 billion, which is a very innovative approach and includes a global and dynamic trend, subject to approval by note holders at the general meetings. We increased the lines of responsible bank credit lines up to 49%, and we introduced an environmental performance criterion for 15% of long-term incentive plans. This all leaded us to be included in the new CAC 40 ESG index, which is a remarkable recognition of what Gecina has undertaken, and we consider that this is a sign of continuation of what we have to assume on that subject in the coming period. Gecina has also finalized or secured EUR 133 million of disposition year-to-date with a premium based on last valuation of plus 4.3%. Fair to say that both residential and office assets have been sold with a premium. EUR 76 million are already finalized. The rest is under preliminary agreements. These disposals contribute to further scale back of Gecina's exposure to secondary location strategy, which is engaged since 2015. As a consequence of all these results, the guidance of 2021 is maintained, even considering disposals achieved or secured year-to-date. We initially stated that following the impact of the disposition completed in 2020 and the assets freed up for redevelopment, slowdown in indexation in 2021 and extended letting time frames, particularly for assets from the pipeline, the recurrent net income per share is expected to contract in 2021 to around EUR 5.3 per share. This guidance was disclosed before any potential impact of disposition/acquisition in 2021. Although the volume of sales completed since the start of the year or under preliminary agreements to date represent EUR 133 million, Gecina is keeping its guidance unchanged for the year, illustrating the confidence made possible by a solid first quarter. As a reminder as well, over the longer term, the projects from the committed and to be committed (controlled and certain) pipeline and the normalization of the leasing rate for the assets delivered in '19 and '20 are expected to generate EUR 120 million to EUR 130 million of additional annualized rental income (IFRS), providing visibility, growth and value creation for the years ahead. Thank you for your attention. And Nicolas, Samuel and myself are now available to answer to the questions you may have.

[Operator]

[Operator Instructions] We will now take our first question from Florent from ODDO BHF.

[Florent Laroche-Joubert]

So I would ask 2 questions, if I may. So first question would be, could you please give us maybe more color on where are today's prospects? And could you please tell us how you are confident to let at least a significant part of your 40 deliveries in offices that obviously will be delivered in 2021? So that's my first question. And my second question will be on residential. So is it possible to have an update on where you are with your residential development projects?

[Mahkameh Brunel, CEO & Director]

Thank you, Florent, for these 2 questions. On the residential side, you probably may know that it becomes very complicated in France to build new residential building, and everybody is looking to buy multi-res buildings. But with the agreement we signed, with the partnership we have with Nexity and a very active period we had with several other developers. I think it took time to start, but we feel confident to continue to fuel new development. Of course, it takes time, these are new buildings, they need -- you need to have, let's say, roughly 2 years before completion. But this has started. And I think during the course of the coming months, we're going to announce some significant acquisitions in that sector on new buildings. We are also working on converting some of our assets -- office assets into multi-res. We do not have that much available, by the way, to be converted. But those we have, we are working hard with municipalities. And hopefully, we're going to reach some agreements on that side too and be capable to convert some or to continue our densification the way we did in last year with the 12 new apartments, would make the new apartments we have created in the 12th district of Paris. As far as the leasing -- the pre-leasing on the redevelopment, which are going to be delivered this year is concerned, as I said, we have a couple of very strong conversations going on with different prospects, of course, until the last moment. You know the way we act. We are very cautious and make sure that we are capable to deliver the good. But I must say that the market is very active. The locations of our assets are really appreciated by -- or -- and the quality of the asset appreciated by our tenants or potential prospects. And I hope that we can be capable to finalize a couple of these transactions in the coming period and make announcement to the market. Globally speaking, the market is very, very active, which is not something we could see earlier this year in January or early February. But it has really -- even during the -- by the way, the course of this third lockdown, we have seen a real acceleration, which I'm just wondering if it is not much more related to the quality of our location and the redevelopment compared to others. Too soon to make any comment on that. But definitely, we see a lot going on, and the teams are absolutely very busy on that side.

[Operator]

We will now take the -- our next question from Celine Huynh from Barclays.

[Celine Huynh, Research Analyst]

Hi, can you hear me?

[Mahkameh Brunel, CEO & Director]

Celine?

[Celine Huynh, Research Analyst]

Méka, I have 2 questions for you. The first one would be regarding indexation because you were kind of expecting a slowdown in indexation to the full year guidance. But the indexation seems to be the main driver of the like-for-like rent growth in Q1. So my question is, do you still see indexation down for the full year?And then my second question will be on incentives. Can you comment on the level of incentives you're giving on new leases and how this compares to a year ago?

[Mahkameh Brunel, CEO & Director]

Good question. Thank you very much. Indexation, Samuel or Nicolas, you want to take over on that question?

[Nicolas Dutreuil]

Yes, sure. Nicolas speaking. On indexation, we are clearly benefiting on this Q1 from a lag effect of the growth of indexes -- indices, sorry, of Q1 last year, meaning, that's clearly the lag effect we were referring to when we had disclose of full year 2020 accounts, meaning that we are clearly expecting much more challenging period for the next quarters, where we should benefit or be impacted by negative indexation, even if it is limited negative, but it will be negative for the 3 remaining quarters of the year. And you remember, as we said, it will impact our like-for-like growth. We would benefit regarding the like-for-like, so on the revisionary potential of positive reversionary. And you've seen that all the rent we have signed during this first quarter, will contribute positively to like-for-like in term of reversion. So we should be impacted, as I said, negatively for indices for the remaining part of the year.And we knew also that was part of our guidance that regarding the occupancy rate, it was going to be challenging in 2021, even if, as Méka was saying, all the positive signals that we are today seeing in the market in terms of leasing should contribute to a recovery of this occupancy rate and will benefit to our incomes for 2022.

[Mahkameh Brunel, CEO & Director]

On your question on what kind of incentives we are granting to our tenants, depending where the asset is located. It's interesting to by the way, to emphasize the fact that there is a lot of interest for offices. And the maturity of the leases we are signing today is longer than what we had -- what we already have in our portfolio, which remains an indication that there is a real need still for offices as a tool for corporates to attract talents, et cetera. And centrality matters even more than before. In terms of incentive, depending whether it is in Paris or La Défense, we are in line with what the brokers are mentioning, globally speaking, a little bit of upward in the leasing in incentives in the best location, not in the CBD, but in -- the best in Paris. But in La Défense, it is in line with what it is. Having said so though, couple of months ago, La Défense was getting vacated, and everybody was mentioning that nobody is going to La Défense. Now La Défense is attracting a lot of tenants coming from different other areas, especially different places where people were in campuses further from the city center, et cetera. And they consider that being in business area, business districts with interaction with other companies, other clients and other counterparts and partners make a lot of sense. And this is what most of our tenants are mentioning when we are interacting with them. Next question? Oh, Celine, do you want to make any -- I'm sorry.

[Operator]

Our next question from Ben Richford from Societe Generale.

[Benjamin Paul Richford, Equity Analyst]

Two questions, I'll give them both together. First one, it seems a very positive outlook, and I just wanted to check I've got the tone of that. Is that positive versus a quiet leasing volume in the market for the last 3 or 4 quarters? Or is that sort of more of a common versus normalized pre-pandemic levels? That's the first question. And secondly, well done with the ESG momentum and the green financing initiative. I think that's excellent. Just a question on the green financing. Is there an initial change in cost, i.e. do you pay, the same, more or less interest initially? And how do you expect that to trend going forward?

[Mahkameh Brunel, CEO & Director]

Nicolas, Samuel, go ahead.

[Samuel Henry-Diesbach]

Yes, Ben, thank you for your questions. Getting to the first one, the fact that we are seeing improving trends in the market is something that is obviously to be compared to the weakness that we've seen during the pandemic period of time last year in 2020, with a strong trend towards something that tends to be a normalization process. So it means that when we are talking about volumes of takeup in Q1 2021, we are more or less in line with what we have seen last year, same period of time before COVID-19 crisis.So that's something that we felt already by the end of 2020. That's something we do measure internally, the number of interaction we have with tenants. And we've seen that between October and December, we have this strong recovery in terms of number interaction. That's something which is confirmed now with even higher number of visits on assets to be let than what we have seen in Q1 2020. And in terms of takeup, we are more or less in line with almost a normalized trend.So far, it's still early to say if we're going to see in Q2, Q3 only a normalization process or a catch-up of what hasn't occurred in 2020. So -- but in any case, what we are seeing is something which is showing every month, an improvement in terms of volume of transaction, number of interaction with tenants, number of visits, et cetera. So that's positive signs that, all put together, brings clearly confidence regarding the capacity we have to bring back our business to something more normalized compared to what we are usually seeing, especially in the best areas, in the more central areas of Paris City, for instance.

[Nicolas Dutreuil]

And regarding the green financing, 2 aspects. First one on 100% Green Bond structural target, of course, no impact on the short-term on our cost of debt, meaning that what we are doing on the existing bonds, we are just asking to the bondholder to agree on a change in the use of proceeds to finance or refinance a part of our eligible assets, thanks to these bonds. And so meaning that, technically speaking, the maturities, the coupon, the issuers, of course, remain unchanged on the existing bonds. Having said that, of course, we see premium for Green Bonds insurance today in the market, meaning that for next insurance -- and we have taken the commitment -- committed that they will be green, we should benefit from this premium. Always complicated to give a number, but according to the DCM, departments of banks, we are talking to, should be something between 2, 3, 4, 5 bps, maybe. Regarding loans and bank loans. The cost of initial financing is the same one than for regular financing, I would say. Having said that, you know that the margin we are paying to the bank will depend on financial aspects, like always, but also on ESG 1 and meaning that the more we will be efficient in terms of ESG and the more we will reach our goals in terms of low carbon emission, in terms of number assets certified, as you know we will benefit from a premium, meaning that the cost of this financing will be negatively impacted.

[Mahkameh Brunel, CEO & Director]

If I may to add a global comment to your 2 questions, which are very important, and thank you for these 2 questions. One is, as Samuel said, I don't believe that we are in any normalized area because, as you probably know, France is still in a kind of lockdown, and we are expecting kind of reopening, maybe end of May, in the course of June. And it's -- it doesn't seem to be something which we can absolute -- 100% be sure of and consider. And this makes the -- as a consequence, the fact that the market is so active, regardless of this lockdown and all the limitation and restrictions we have, because we have lockdown and curfew, means something. But I don't believe that we are in any kind of normalizations one way or another. So just let's consider what we have as is.And then the second thing is in terms of ESG, we are working hard on that side. I'm happy to see that globally speaking, everybody is following the same path. But I think that we have no choice. And the conversation we have with our tenants or potential prospects, they are emphasizing a lot the necessity on the top of location, location, location, of the quality and especially the ESG, the environmental characteristics and the qualities of our assets. And this is quite outstanding. And this is the reason we -- because of what we have done so far, and probably that's the reason we have joined CAC 40 ESG, but these are the reasons that pushed us also to include and to try to green, if I may, the whole bond portfolio we have. Of course, it is subject to note holders general assembly. But I think that this goes on the right direction without any changes in terms of rating or anything. But of course, it gives more visibility and more reporting and more knowledge to our note holders about our portfolio and creates a dynamic.

[Operator]

[Operator Instructions] We will now take our next question from Pierre Clouard from Kepler Cheuvreux.

[Pierre-Emmanuel Clouard]

So I have 2 questions on my side. The first one is on the 3 stores that have been vacated since the beginning of the year. So can you give us more details on the tenants, and maybe on the expected revision on those 3 stores? And maybe the locations would be useful as well. The second one is on the share buyback. Have you made up your mind on a potential share buyback on that?

[Mahkameh Brunel, CEO & Director]

Thank you, Pierre. Samuel, on the first question.

[Samuel Henry-Diesbach]

Yes. Emmanuel, you're right that we have 3 retail units where the tenants have left in -- that's not in the beginning of the year, but in 2020. So that's something that was already in the spot vacancy that we published by the end of 2020. These -- so we won't go into that much detail. But globally, this is super-prime location. So as you know, the retail portfolio that we do have is made of a few assets that we have between Champs Élysées, Place Vendôme, Place de la Madeleine, Rue Royale, Boulevard des Capucines, so in the very, very heart of the CBD of Paris. That's prime locations, super-prime location. That's absolutely not absent that -- there is a strong appetite for tenants regarding these locations. So no question about that. We will see what kind of reversionary potential we can capture. We can be relatively confident even if the situation should bring some pressure. So we will be relatively cautious when talking about that. But we could be -- we could have good surprises on several units, given the locations and the potential appetite of tenants. A few days before, the situation is very -- or few months before, the situation is very -- is set to normalize ahead. So the context is relatively -- we can be relatively optimistic, and not only regarding the fact that vacancy in this segment is likely to normalize progressively ahead, but also that there is a chance that we can capture some positive reversionary potential on these units. And maybe to a question, that it's not neutral to see that we have also a catch-up in rent, so it means that we are talking about retail units. The situation is that this super-prime location for retail units is relatively solid at such a point that we are still in a situation of capturing uplift potential even with [the red hot retail ] effect. That's what have been achieved in Q1 through this catch-up effect on the retail units as well.

[Mahkameh Brunel, CEO & Director]

Yes. On the share buyback, as we had a lot of conversation with investors during the course of our road shows in February, we consider that, we run the numbers, we discussed with the Board a couple of times. I think that we -- and again, we show that the authorization has been redone and has been extended for another year. Now globally speaking, we still need to see where we are going to be out of this period of lockdown and uncertainty in terms of the virus and also continue to harvest the good news from the market, especially the leasing market, which are -- which will help us to have a better understanding of what's going on. A little bit too soon, but again, it's still on the table and among other tools, we might use if needed.

[Pierre-Emmanuel Clouard]

Okay. And just to come back on disposals then, do you expect to realize more disposals in 2020 -- 2021?

[Mahkameh Brunel, CEO & Director]

Yes. In terms of disposition, we continue to continue to improve the quality of our assets, the quality of location, and the disposed assets, we consider that we have already created value, and we can dispose because this is time to download and to continue to work on the most -- that's per se, strategic, I may say, or best location assets. A couple of things can come, but this is not about huge amount of disposition. This is part of our global strategy in order to improve the quality of our assets. Some might come. Today, we have confirmed our expectations in terms of guidance for 2021. And hopefully, this will continue. I'm a little bit cautious because of all this health crisis. It's very difficult to see where we are heading to in terms of lockdown and opening, reopening, et cetera. But so far, so good.

[Operator]

We will now take our next question from Marcus Phayre-Mudge from BMO.

[Marcus Andrew Phayre-Mudge]

My question was actually related to the buyback. So it has been answered. But I would just comment that we are seeing a bifurcation between occupational markets and in the investor community, i.e. there is plenty of capital out there seeking to buy assets -- high-quality assets at record low yield. So I would implore the Board to look very carefully at that in relation to the share price.

[Mahkameh Brunel, CEO & Director]

Thank you, Marcus. I have to agree. There is -- on the side of the leasing market, which, for me, is related to the economic situation. Definitely, there's a lot of capital available, and that's the reason the answer I gave to Pierre earlier is that we consider, if there is an opportunity to sell an asset that makes sense in terms of catch-up, in terms of value creation, definitely, we would do so and continue to outperform what we have to do. And we see a lot of signs on that side. Again, this is a question of whether we have to keep, to sell or to continue to redevelop and -- because of the cost of the equity. And we consider that all the time. Definitely, this is something we are considering.

[Operator]

We will now take our next question from Christopher Fremantle from Morgan Stanley.

[Christopher Richard Fremantle, Executive Director]

I just want to understand if I've got your views on the rental market, correct. If I look at market data on levels of vacancy or supply, I mean, those measures have gone from record lows in late 2019 back to levels -- to much higher levels seen before rent started to grow 5 years ago or something. And that was a time when market rents were 20% or 25% lower. So I've just got 2 questions for you. Do you see that higher level of supply or higher level of vacancy as very temporary and vacancy rates starting to fall again within the next 12 months?And secondly, do you think that it's likely this higher vacancy will have any real impact on rental levels and rental growth as it has done in the past?

[Mahkameh Brunel, CEO & Director]

Yes. Thank you. Good questions. So -- well, again, we are in the middle of the lockdown and everything related to that, and it's hard to have a very clear view. But a couple of comments. We see a real polarization between the best location and the secondary one, and it has increased. By the way, this is something that we were expecting for the last couple of years and we mentioned very often. And this is something which is really crystallized today. People are attracted by most central areas, most efficient buildings, most business districts and mixed-use areas, et cetera. Now in terms of rental market, what we are seeing in Paris, and this is something which is a surprise at some point, but means that the trends we have mentioned before are even stronger than what we will either imagine in first place. We are seeing that the headwinds in Paris best areas, best CBDs at EUR 915, EUR 930 per square meter, which are very high, even higher than last year or 2019. So this trend is quite unusual to see after a period of crisis. And maybe this crisis is not an economic crisis, maybe it will become -- it's not a financial crisis anyway. This is a health crisis, which probably will have an impact, although with all the equity which has been injected, all the liquidity which has been injected by central banks, et cetera, it's very hard to see how it's going to work. But the headwinds in the best location, best building, best areas are still high and improving. And this is an indication which is hard to analyze today, but it's quite [ evident ].And it's not just one. I have been through many crises in my life. You would have -- after a crisis, you would have 1 or 2 leases at higher rent headwinds but not a generalized numbers of leasing at those numbers. This is exactly what you're seeing today. Couple of negotiations ongoing in Paris at those kind of headwinds and quite unusual. What does that mean deeply? I won't make any comment. Again, we're in the middle of the storm. But I think that, for me, it's a sign of the value of location, location, location, centrality, centrality, centrality and the highest standards in terms of services and also environmental standards for buildings. This is something which is very recurrent, and those kind of conversation we have. Besides that, what we have observed in the last negotiations, either we have completed or ongoing today, we are -- all conversations are with CEOs or Deputy CEOs of the company is much more interested by strategies and the way they're going to run their business rather than only real estate teams or even CFOs for cost-killing. This is brand new. I'm not mentioning, of course, Nicolas Dutreuil.

[Operator]

As there are no further questions at this time, I would like to turn the call back to your speakers for any additional or closing remarks.

[Mahkameh Brunel, CEO & Director]

Thank you very much. Thank you very much for attending. Of course, Samuel, Nicolas and myself and Stéphane Saatdjian also, we are -- all the 4 of us available for any further question you may have, any time 24/7, especially for Samuel. Enjoy your Friday, and have a nice weekend. And see you soon for further, I hope, good news. Take care. Bye.

[Operator]

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.