Gecina SA

PAR:GFC

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and welcome to the Gecina Quarter 1 2022 Activity Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Samuel Henry-Diesbach. Please go ahead, sir.

[Samuel Henry-Diesbach, executive]

Yes. Good morning to all of you, and thank you for attending this conference call for Q1 2022. I'm Samuel Henry-Diesbach; and I'm here this morning with Nicolas Dutreuil, our Deputy CEO in charge of Finance; and Beñat Ortega, our new CEO. And after Nicolas will briefly comment our business activity for Q1, we will answer the question that you would have.

But before that, we are happy to have the opportunity this morning to open the call with a few words Beñat Ortega would like to share with you. Over to you.

[Benat Ortega, executive]

Good morning to all of you, and thank you for attending this conference call. I'm extremely proud to have this opportunity to introduce myself this morning to you. Obviously, I will not much comment on Q1 figures and achievements since I fully joined Gecina this morning. Nicolas and Samuel will briefly comment this performance and answer the questions you may have.

However, I think this is a good opportunity to introduce myself to you and tell you a few words. Some of you may know me already, either from Unibail-Rodamco, where I was in charge of offices during -- almost 10 years; or from Klépierre, the Pan-European leader of shopping centers that I joined in 2012 where I was a member of the Executive Board in charge of operations.

First, I would like to tell you how much I'm proud to join such a group. It's really an honor to lead the company owning such a unique portfolio of assets and projects in the very best locations of Paris Region. Centrality and asset quality are the DNA of Gecina. And as the new CEO, I will ensure that we deliver a best-in-class, client-centric approach in both office and residential businesses.

Over the last weeks, I have been touring the key properties, especially those under redevelopment. And I have also met the teams to ensure an efficient start in my new role today. During the next weeks and months, I will deepen my understanding of the company and its strategy. Short term, I will focus my energy and expertise to maximize our operational performance in order to deliver our shareholders value creation and cash flow per share growth.

I will also investigate any opportunities that could potentially improve our performance, optimizing occupancy, capturing reversionary potential and carefully managing our development pipeline while ensuring we don't miss any accretive investment opportunities.

As a conclusion, I would say that our portfolio is a major strength for the future, but I know from my previous experiences that execution is key. This is the way I intend to help our teams to enhance even further the road to performance. You will see that Q1 results are in line with what I've just said.

Nicolas, Samuel, the floor is yours.

[Nicolas Dutreuil, executive]

Thank you, Beñat, and welcome on board. Good morning, everyone. As you've seen, we have -- in the press release we have published yesterday night, we have disclosed a very dynamic first quarter, benefiting from the huge work made by the teams in terms of leasings.

Of course, during this first quarter of 2022, but also in 2021, all of our business lines are benefiting from this work and good market conditions, of course, offices, but also on residential where we have improved our leasing process and digitalized the relationship with our tenants, improving the quality and the efficiency of the leasing process, but also on student residence accommodations.

The result of all of that is, of course, an increase in all occupancy rate by more than 80 bps during the last 3 months where we are now at 20 -- 92%. This is not including all what we have let end of 2021 and beginning of 2022 with leases which are going to start second part of the year. As you remember, we have let buildings like Anthos, Sunside, 157 Charles de Gaulle, which will, of course, going to feed our growth for this year and next year. Of course, this will be one of the driver of our like-for-like growth for 2022.

The second one, which is going to be more and more important, is indexation. As you have seen, indexation is contributing during this first quarter to 0.7% for like-for-like growth. This is a number which is going to increase in the coming quarters, thanks to, of course, indexation and inflation. Maybe just to remind you, you know that there is always a lag effect between the numbers that we are contemplating in the market in terms of inflation. You know that, for example, in 2021, inflation in France was close to 4%.

And how these numbers are translating in our P&L, we gave you a couple of examples in the press release. But for example, the numbers which have been disclosed in terms of ILAT a few weeks ago are the numbers for end of 2021, and they will be applied to our leases where the anniversary date will be starting for the second quarter of 2022.

So it means that it will contribute to the growth of our rents for 2022 and the years after. But of course, it has not contributing to the growth for this first quarter. And if you look at what happened last year, we were, of course, with a negative indexation. So we've been impacted by this negative indexation, of course, for some leases during the first quarter of this year.

And this lag effect, if you remember well, could have also some positive effects because remember, during 2020, we have still benefited despite the negative numbers in terms of growth and inflation in France, benefited from a positive indexation. I think it was 1.6% for 2020.

So both occupancy rate and indexation will contribute to our growth -- has contributed for 20 -- for this first quarter and will contribute for the full year. And that's the reason why we have confirmed our guidance, both for the like-for-like growth for office portfolio at 3% on a full year basis and, of course, on our net recurring income at EUR 5.5 per share for 2022.

Maybe last but not least, we would like just to add at one point, which usually we don't do for Q1 numbers, but I think it's important considering today's market condition. It's regarding our financing structure. And just to remind you a couple of numbers that we have disclosed on our full year results presentation, but I think it's important considering what's happening today in the market to share this with you again.

It's regarding, first, the liquidity structure of the group. And we have already entered something, which is very important, prefinance or needs for the next 24 months. It means that the bond issuance we've made end of -- or second half of 2021 and beginning of 2022 are prefinancing the maturity that we will get this year and next year, meaning that even if these maturities are still in a repayment schedule because it was not possible for us to repay them in advance, we have now the cash books or at least the undrawn bank facilities to refinance them. So that's something that already is secured, first.

And second is regarding our hedging structure. As you've seen, we are, for this year, of course, hedged at more than 90%. But more important is looking forward, where we are, for the next 7 years, in average, hedged by 75%, which is also giving us comfort on the numbers for the coming years in terms of cost of debt.

That's the point that we wanted to highlight for these Q1 numbers. And now the floor is open for your questions.

[Operator]

[Operator Instructions] We'll take our first question, Florent Laroche-Joubert from ODDO BHF.

[Florent Laroche-Joubert, analyst]

So I would have 2 questions, if I may. The first question is to know if you could be, in the short term, in discussion maybe for disposal to be executed in 2022.

And my second question is more maybe to Beñat. So we understand that this is his first day. So there will be no -- or there is no big announcement today. But maybe is it possible to -- so we can see that the LTV ratio at Gecina is quite low today. And we understand that in the short term, maybe there will be a focus on the growth of the recurring EPS. And so what could be as in sensitivity of the new management with regard to share buyback program, for example.

[Nicolas Dutreuil, executive]

Yes. Thank you, Florent, for your question. I will take the first one regarding the disposals. As of today, of course, we are never giving any guidance in terms of disposals. And we are always, I would say, having an opportunistic approach on what could happen in the market. Having said that, today, we do not have any major projects or ongoing discussions on assets on our disposal program.

[Benat Ortega, executive]

And maybe, Florent, I guess the second question was more for me. Thank you for the introduction. Obviously, this is my first day. Share buyback program will not be at the agenda on my first days of my mandate. I think we'll work on all those topics about the asset allocation and so on. So let me start. I think we have a great focus on the pipeline, on development, on executing our strategy, which is a growth strategy, and we will look at all those topics later on.

[Operator]

We will take our next question from Allison Sun from Bank of America.

[Allison Sun, analyst]

I have 2 questions on the development pipeline. So first is, do you expect any of the projects delay this year or next year because of short of, let's say, of material? And also, do you expect your project IRR or profit margin will be squeezed because of increase of inflation for construction cost?

[Nicolas Dutreuil, executive]

Yes, sure. So of course, that's something that we are monitoring very closely because that development pipeline is clearly one of our growth driver, both for cash flows and for NAV.

Regarding our pipeline, you know that it is split in 2 categories, what is already launched, and on all these developments, we have contracts which are secured with contractors. So of course, in terms of cost, things are under control. And in terms of delay, of course, we are in regular discussion with the guys to make sure that they will be able to deliver in line. Until now, we don't have any information that these projects could be delayed.

For the projects which have not yet been launched, that's something also that we will have to consider very carefully. That's too early to say. Of course, we will be impacted in terms of cost. But for this one, when you look at the structure of our development pipeline, as most of our projects are redevelopments of existing assets, a large part of the cost of the project, in average, 2/3 of the development, is coming from the existing building, so not impacted by this type of increasing cost. That's only the remaining 1/3 which could be impacted. So of course, we will continue to work with contractors in order to negotiate as best as possible the cost of construction of this new development and monitor this very closely.

The other driver of the IRR, of course, is the rent we will get at delivery on this project. And this one, as cost of construction could increase because of inflation, because of raw material, we will benefit from this inflation and indexation, of course, also on the rent. So I would say that regarding the IRR, both the rents and the cost could be impacted. So that's, of course, numbers that we will disclose for the hidden cost of our development pipeline. But keep in mind that first, only a small part of 1/3 of the cost will be impacted, and 100% of the rent will benefit from indexation.

[Operator]

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

[Jonathan Kownator, analyst]

And it really would have been great if you could give a bit more color on the leasing market in Paris, what you're seeing. I mean you've highlighted very different trends between the center of Paris and outside of Paris. Why do you think there is such a strong demand inside Paris in particular?

[Samuel Henry-Diesbach, executive]

Yes. Thank you, Jonathan, for your question. That's interesting to see that actually, the market has been extremely -- been very strong globally year-to-date in Q1. And we haven't seen so far any potential slowdown because of geo-politic environments or uncertainties. And we have been surprised to the upside to see how quick there've been some leasing in the more central areas as well. So it's not only purely Paris City, it's including as well cities like Neuilly, for instance, where the market has shown quite good strength in Q1.

And so the polarization that we have seen in 2021 is something that we do see again quite strongly, and that's a trend that we are seeing in Q1 in favor of the more central areas. We have been able to reach -- even to break some records in terms of prime rents in our portfolio in the City of Paris and in the [ indiscernible ] as well.

So we are seeing really these 2 speed markets, these polarized markets in favor of the more central location, which feeds clearly our confidence when looking ahead of us. Although we want to be cautious because no one knows exactly what could be the consequences of some different events, but so far, I would say so good. And the Q1 market surprises to the upside.

So just as a reminder, Q1 versus Q1 last year on the market, that's plus 40% in terms of take-up. If you look Paris City, that's plus 60%. So prime rents and the average rents have increased in the year by more than 6% in Paris City. It's not the case on the more secondary areas, which is still here and there a bit challenging. But regarding the location of where our portfolio is, so it's around 75% in Paris City and we around 5% in Boulogne. So that's areas where we have been positively surprised.

Other positive surprise as well is La Défense, which behaves better than what we fielded, actually, level of trends are extremely attractive for tenants. And the takeup has significantly recovered already, which allow us to be quite successful in some few letting challenges that we had to solve and which have been largely solved if you consider the assets Adamas, Sunside and Carré Michelet.

So everything -- all the indicators so far are pretty strong, following the same trends that we have seen in 2021 and even stronger in terms of polarization and especially looking at the performance that we can see in the City of Paris when the vacancy is now back below 3% in the CBD.

[Jonathan Kownator, analyst]

If I can follow up from this. This is very helpful. Is there a chance that you can revise your guidance upwards then as a result, given the fact that you say you're positively surprised? First question. I know it's early in the year.

Second question also, maybe you can give a bit more color on the type of tenants that you're seeing that are actively looking for space currently in Paris.

[Nicolas Dutreuil, executive]

Sure. Jonathan, in terms of guidance, of course, too early to say. It will depend then on level of indexation, which is coming. It will depend on the leasing process. We are still ongoing. But you know that, of course, all what we are working on now will impact marginally 2022. It means that, of course, all the -- what's going to be delivered in the coming months will be more drivers for 2023 than for 2022, both in terms of market and in terms of leasing activity coming from Gecina.

Regarding the type of tenants, it's a -- the Parisian market is maybe compared to the London one, very atomized in terms of type of activity, type of tenants. So we continue to see demand coming from various industries for buildings, having contacts with all types of businesses. It could be, of course, all what is coming from lawyers and advisers and banks, but also luxury industries, services. So it's clearly all type of industries which are considering a strong case.

[Samuel Henry-Diesbach, executive]

Maybe just one thing -- yes, just to add a small thing regarding what Nicolas say. The feedback that we had when discussing with tenants and with agents as well in the market is that there is an increasing appetite for central areas and qualitative assets because tenants are now trying to maximize the way back to the office, the return to the office of their key employees. And they understood that quality and location are clearly increasingly important criteria, far more than a question of price per square meters. And we are seeing some key corporates, which are moving back into Paris because of that because they need the guys back to the office to enhance productivity, to enhance efficiency, et cetera. And that's a trend that is something that we did expect, but that we are starting to see in the figures if I trust what some agents told us.

[Nicolas Dutreuil, executive]

In the figures and in the type of potential tenants we are talking to, yes.

[Jonathan Kownator, analyst]

Okay. And do you know if they're reducing the space that they're taking? Or do you have any sort of guidance on other information?

[Nicolas Dutreuil, executive]

That's not something that we are monitoring. We do not have the numbers. But we can imagine that if the guys are leasing square meters, it is [ too legit ].

[Jonathan Kownator, analyst]

No, that's not -- what I'm saying is that, how much of it is taking space versus what they have previously?

[Samuel Henry-Diesbach, executive]

Yes. What is -- to your question, I thought the thing is that you can always have example one way or the other. So there are some tenants decreasing the total surface that they need, there are some other increasing. So you can find an example suggesting both trends. So far, there is no evidence. If you look at the recovery in terms of takeup, there is quite a good signal. That's something that we continue to investigate. But actually, the trend is really on the location and the quality of the assets. So that's the key criteria, more than the spaces maybe.

[Operator]

[Operator Instructions] There are no question at this time, sir. Please go ahead.

[Samuel Henry-Diesbach, executive]

Yes. If there are no other questions, we'll end this call. But once again, keep in mind and remember that I will be available if you have any follow-up questions that we [ can be online ] in the coming hours. So feel free to call me. We will meet you again, hopefully, in person end of July for our H1 earnings figures. And in the meantime, once again, feel free to call us. If you have any questions, always available and happy to take your questions. Have a good day. Bye.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.