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Good day, and welcome to Gecina 2023 Half Year Earnings Call. [Operator Instructions] This meeting is being recorded.
And at this time, I'd like to hand the call over to your host, Benat Ortega, CEO. Please go ahead, sir.
Good morning to all of you, and thank you for attending this H1 earnings presentation. You've probably seen already our key figures. To summarize our results during first half 2023, I would like to point 4 key elements. Our recurring net results per share is up 7.5% versus H1 '22, with a like-for-like rental growth nearing 7%, favored by indexation, positive re-leasing spreads and occupancy rate increase. Second, following the disposal of €1 billion of assets in H1, 10% above appraisal values and with an exit yield of 2.5% in average, all debt metrics have been improved.
For instance, LTV is down 150 basis points in 6 months, now standing at 32.2%. Our debt is now 95% hedged in average over the period 2023 to 2027, but these disposals have also positive impacts on net debt-to-EBITDA, ICR and liquidity and have an accretive impact on earnings per share this year. Three, our ESG leadership has been further reinforced, thanks to an efficient soberness plan put in place mid last year. In the last 6 months, we have optimized energy consumption of our portfolio by 17% and CO2 emissions by 21%, on the road to carbon neutrality by 2030. Last but not least, though strong achievements supported by favorable trends on our markets provided outperformance, and therefore, we raised our guidance for '23.
We now expect for the whole year a recurring net result per share up to €5.9 to €6 per share, an increase by 6% to 8% versus 2022. Let's dig now more into details into strong operational performance this half year. As shown on the graph, the recurring net result in H1 is up by 7.5%, largely driven by a strong like-for-like contribution, €19 million. This performance is reinforced by a positive contribution on the pipeline with 4 assets delivered since early 2022. Financial expenses slightly increased in H1, but average cost of debt is stable since summer last year, thanks to our hedging policy.
We will come back on this with more details later during this presentation. Then on the like-for-like rental growth, I just mentioned €19 million, up 6.9%. It has been supported by all drivers positively oriented. We are in a growing dynamic quarter after quarter with indexation following the inflation last year contributing significantly to our cash flow growth. And it will continue to feed like-for-like growth in the coming quarters.
We have improved occupancy for several quarters also, leading to a contribution by 1.9%, and 0.7% comes from the uplisting brands from our last leasing negotiations. Obviously, the performance book in H1 is supported by solid operational achievements on all our businesses. But if we look specifically on our well-located office portfolio, we have signed 84,000 square meters of new leases, let, relet or renewed year-to-date. Gecina since have been able to secure plus 15% uplift in rents through tenant rotation, mostly thanks to central location where reversionary potential captured even reached 33% in Paris City. Occupancy rates also have increased by 100 basis points as a result of strong leasing activity since the beginning of 2022.
And pre-leasing up for the projects to be delivered in the next 12 months stands at 82% as of today, thanks to all that leasing activity. And in a context where prime buildings are very rare in Paris, Gecina has been able to secure several operations at new prime rents reference around or above €1,000 per square meter per year, including 2 new deals signed in Q2, 35 Capucines to be delivered and the 24 Saint-Dominique in the Seventh District before the departure of Boston Consulting Group that has recently moved to our iconic Live assets.
These transactions clearly confirm a new reference for prime rents in Paris CBD. This confirmed prime rents don't really come as a surprise given the strong polarized market in the co-locations where vacancy rates are at 2% in Paris City, something you may admit is quite similar when compared to other megalopolis worldwide. And this is due to supply/demand imbalance in favor of land loans in Paris City, where 44% of the take-up occurs, but only 14% of the supply of the Paris region is there.
Consequently, market rents have grown by 8% in Paris CBD in 1 year, while immediate supply is decreasing further downtown. As a reminder, we do own 85% of our office portfolio in co-locations, namely Paris, Neuilly or Boulogne, which provides good inflation hedge and natural reversionary potential. On our resi business as well, trends are very solid in H1. On traditional resi, we are now able to capture 13% re-leasing spread along tenants rotation. As a reminder, this figure was 10% in '22 and 6% in average from 2017 to 2021.
So clearly, acceleration in uplifts. And we are currently in a [indiscernible] on our resi business, furnishing our front, adding more services into our buildings to deliver better growth in the future. It's a lot of work. On top of this strong like-for-like dynamics on offices and resi, pipeline is delivering quarter-after-quarter a better contribution to our cash flow growth. This contribution turned positive in 2022 and increased further in H1 '23, thanks to 4 significant project deliveries since early '22, including in '22, the 157 Charles de Gaulle, Neuilly led to Sanofi mostly, and live in CBD, I mentioned to Boston Consulting Group and other companies.
In H1 2023, the delivery of the office building Boétie fully led to Eight Advisory and residential program in Ville d’Avray. Finally, on cash flow, financial expenses went up by €9 million in H1 versus last year. Let's take some time to dig into that. Average debt -- net debt in H1 '23 increased by around €240 million versus H1 2022, so contributing to financial expenses increase this half '23. But it's a temporary effect because of our €1 billion disposals achieved late in June.
Second driver comes from the hedging portfolio and more specifically from the caps. As a reminder, our debt for '23 is fully hedged and 18% of that is made by caps. During H1 '22, Euribor was negative, and caps were not active then.
On this part of the debt, net interest, in average, was, therefore, negative in H1 2022 at around minus 0.4%. But in summer '22, rates have increased and those caps have triggered at a cap rate of 0.2%, stabilizing that cost of debt since then, and therefore, temporary effect on the debt volume, but also temporary effects on the hedging, again, H1 versus H1 is negative, but H2 versus H2 will be equal.
Financial results were solid, but we have also accelerated on our ESG strategy. In '22, as a leader in our industry regarding ESG, we launched an ambitious energy efficiency plan, aiming to significantly optimize energy consumption and carbon footprint of our portfolio in operations. This is more than 2,400 sensors, which have already been installed in the office portfolio so far, covering 100% of our portfolio, of which 1,002 have been added this past 6 months, enabling each building operating conditions to be adjusted in real time with weather and real occupation of our building with a view to optimize quickly its performance. We had these past 12 months more than 300 interactions with our tenants to favor the soberness plan deployment we were proposing over our portfolio in operations. Also, Jason has built a dedicated task teams that is gradually being deployed.
To date, 47 assets have been already fully reviewed. And this plan is proving successful, even exceeding our initial hopes. Energy consumption has consequently been optimized by 17% in 6 months. That should be compared to an average decrease per year around 5% for Gecina since 2008, while the market average were decreasing its energy consumption by 2% in average per year. This is another powerful tool for Gecina on the road towards our net zero carbon strategy by 2030.
To date, carbon emission on our portfolio decreased by 75% since 2008 when we started to set up early targets on that field. Cash flow ESG for these past quarters have also been animated by numerous questions regarding valuation change in the context of uncertainties. We need to underline the fact that the current office investment markets are driven by different trends, especially for the most central areas of Paris region. First, it's the fact that investment markets have shrunk in H1 in volume. Such limited liquidity at core cap rates upward by appraisals, having, therefore, a negative impact on valuations.
But on the other hand, and this is what you see on the right-hand side chart of this slide, the very polarized rental market in favor of the most central locations drove rental dynamics very differently between locations. A positive rental effect on the most central area is, therefore, positively supporting valuations. Splitting these 2 effects in H1 brings an instinctive color for valuation moves versus end 2022. The yield effect adjustments contribute negatively by around 7% in 6 months, but rental effect impact is heterogeneous, positive in Paris by 5% versus minus 6% in peripherical locations. Given Gecina's portfolio centrality, like-for-like valuation change is at minus 4% in the office perimeter and is showing a strong resilience as well on the residential portfolio down 2% only.
Consequently, NTA NAV is down 6%, limited decrease thanks to a moderate leverage effect with an LTV around 32% to date, but also capital gains on our disposals achieved year-to-date. Yes, because we've been able to sell €1 billion of assets in H1 on a relatively muted investment market, but with a 10% premium above book value at the end of '22 and a 2.5% exit rental yield. These transactions are made of 6 assets, including 3 office buildings in the CBD, 1 office building in the rim, 1 residential building in Courbevoie and the well-known and 101 Champs-Elysées, so quite diversified in terms of disposals. Such disposals will not only enhance our financial structure, which was already strong. but it will also fully secure the financing of our pipeline ahead and will bring opportunistic outlook for firepower in case potential attractive deals would occur ahead.
So yes, all our debt metrics are positively impacted by these transactions. LTV and net debt-to-EBITDA are lower, liquidity, hedging position and ICR are also reinforced as well. On top of that, all operational metrics also improved, with accretive impact on regarding net results and NTA with the premium, but also on our average net initial yield. It's 1 of steps ahead of the delivering process that has been driven by the company between 2017 and 2021, that brought our LTV down regularly at around 32% again today. Since 2018, we've been net seller by an average of €650 million per year, and the LTV has been reduced by 8 points to 32% today, while improving significantly our portfolio, selling mature on peripherical assets and investing in our pipeline in Paris and --
On top of the disposals, we have been securing €600 million of new financing. Combined -- those 2 combined, so disposals and new financing, Gecina's liquidity position is significantly improved to €4.1 billion. The available excess liquidity today reached €2 billion at end of June. It was €1 billion 6 months ago, covering all refinancing needs until 2028 at stable net debt. This is 1 more year than what we've published by end '22.
Our hard work this first half has significantly reinforced our hedging position.
On the left-hand side of the chart, you can see how our hedging position has been reinforced this past month. Today, our debt is fully hedged for 2023 and hedging will progressively fade year after year, but remaining over 90% until 2027. And in average, our debt is hedged at 95% from now to end '27, providing visibility on our cost of debt. Following all those announcements, disposals and strong operational successes, S&P has already reconfirmed our credit rating at A minus.
If we move to the pipeline because the proceeds of those disposals are meant to -- on the long term to fund our pipeline as well, in H1 '23, we've been delivering 2 new projects for a total of 20,000 square meters, including a prime office building fully let and the residential project in Ville d’Avray. These 2 projects will contribute to cash flow growth in '23 and '24, but not only '23 and '24 because the committed pipeline currently under works will contribute to our cash flow growth over the coming years by around €70 million on an annual basis. Most of these deliveries are expected in '24 and '25 -- and early '25 by the way, with large and emblematic project in the CBD such as Mondo or Icone, or 35 Capucines I mentioned earlier.
In the coming 12 months, 2 of these projects are set to be delivered in Paris CBD and more, and are already pre-let at 82%. With good signs, these figures should improve shortly.
Such pipeline in appealing locations, driven by the lack of qualitative products available for tenants, feed our confidence for growth ahead. As already mentioned, we have decided to accelerate capital rotation with the idea to redeploy capital by selling mature assets into promising and value-creative projects of developments in the same locations in order to maintain or even grow our exposure to central locations.
Consequently, the weight of central areas into our rental income basis will raise infinite once delivered and led by 260 basis points. As a conclusion, this first half has been a strong operational half year, supported by positive trends on our core markets despite a quite uncertain and challenging financial context. But above that, we've been able to accelerate our capital allocation strategy with €1 billion of disposals.
Although new -- the new reality today requires cautiousness and agility, but considering our reinforced hedging position, our operational performance exceeding our expectations and the pipeline, we are raising our guidance for '23, now expecting the recurring net result per share to be up by 6% to 8% this year between €5.9 and €6 per share. Thank you for your attention.
With Nicolas Dutreuil, our Deputy CEO; and Samuel Henry-Diesbach, we are now available to answer your questions.
[Operator Instructions] And our first question comes from Florent Laroche-Joubert from ODDO.
So thank you very much for this presentation. I would have 3 questions, if I may. So first question, so would it be possible -- so we have seen that we have a strong relation at this semester. So would it be possible to add maybe more colors on what could be your potential of revision the next coming period? The second question would be on the valuation of assets.
So we have seen the correction in valuations in your presentation. So -- but what could we expect in 6 months by doing the same exercise? And my third question, so what could -- what would be the visibility that we could have on the dividend for 2023 and 2024?
Florent, thanks for your questions. I will take them randomly. So visibility on dividend, obviously, it's way easier when cash flow is up to give visibility. But obviously, that will be a decision by early next year for '23. So we'll not give any guidance on the dividend we will propose to the general assembly in next year.
But obviously, it gives comfort to deliver a good dividend. On valuation, we try -- it's H1 results. H2 results or full year results will be next year in February. So that will be the good timing to comment, in fact, the end '23 valuations. We have done a serious exercise, reviewing one by one all the assets with our presence, being sure that all the assumptions are rational.
So we see -- and I think what we have proven by our disposals also is that we have investment teams which are capable to sell above book values, which is also a good sign for me of the strength and the quality of our portfolio. And maybe the last -- and maybe the last topic on that, and that's linked to the 2 questions. Yes, we have a significant re-leasing spreads when we signed leases, we -- you saw that we grew a reversion from 7% to 15% in Q2. So we think we have, especially in Paris, where you have seen ERV growing significantly recently, a significant headroom to grow our rents there. And that comes a bit on valuation.
We see growth potential on rents, growth potential, thanks also to indexation, which have grown our cash flow base. And at the same time, values have increased yield significantly in H1 with an impact by 7%, like I mentioned. So I think all that comes together.
[Operator Instructions] The next question comes from Thierry Shell from Natixis.
So I have 3 questions. The first one is, have you withdrawn any marketing sales, I mean, disposals regarding the €1 billion you've disclosed? Is there any marketing you have just withdrawn to understand if you have tried to just sell the most attractive one? Second is, how much you are from the trough in terms of devaluation of your portfolio? And third is about the letting of the pipeline.
It looks like you have rushed up to fulfill the vacancy rate, I guess, in such a rising rent environment, market trends, I mean, you could have waited to have a better valuation. So just understanding the rationale behind that.
Thanks, Thierry, for your questions. On withdrawal marketing of disposals. No, we -- that's not the way we do it. We have a tailor-made investment approach trying to understand for each asset what could be the target. And if you see what we have sold, in fact, we have been very precise on the way to dispose assets.
I don't believe in wide marketing in the current investment market. So we need to be super proactive and precise. So we have -- when you look at the list of this we have done, we have gone to where the pockets of money were available at an attractive price for us. That has been our strategy for now in the last months. On leasing and leasing strategy and managing the vacancy rate, I think we are a pragmatic company.
We are a medium, long-term company. So when we see an attractive leasing deal, good quality company, we don't keep the buildings empty to grow ERV. So I think -- every year, we have leading volumes anyway. So we're -- on the markets where we are dominant, what we try to do is step by step moving the rents up. So that's what we have done on the CBD.
We have been the first one to lease at €1,000 and maybe the only ones for now. We have done the same in Neuilly. We just signed excellent deals in Boulogne above 500, which were above the last transactions. So step by step, as a leader, we try to push the rents up when we think it's relevant. So keeping empty the buildings to move the ERVs up theoretically, I am not a huge fan of it. So getting the cash flow and moving to the next one.
And maybe on your third question regarding valuation. If we consider that the top of the values were half last year, end of H1 2022, when you combine the decrease we get in H1 this year and the decrease of H2 last year, it's an aggregate decrease of minus 7%, globally speaking, on the whole portfolio of Gecina. Having said that, if you are more focused on the yield impact, in fact, you can consider that during the last years, we've been compensating decompression in cap rates with an increase in ERV, already beginning of 2022 and even end of 2021. And if you look globally to how our cap rates have moved and this yield effect on our valuation for the last 24 months, it's a decrease by 14% that we had on this 2 years period of time.
And compensated obviously by a rent effect with positive ERV growth and cash flow growth. So that's why combined, you don't see that decrease. But obviously, the yield effect has been already taken up to 14% in our valuation. And we have in appendices a dedicated slide on Slide 26 -- on Slide 47, sorry that you will find the details location by location.
By the way, if I may, just asking the question, I really appreciate the Slide 25 on the yield effect, rent effect. What would have been the rent effect, yield effect and maybe cost effect regarding the pipeline portfolio?
We just shown this first half an increase in the ROI of our pipeline because of optimized works and better rental conditions. So we grew on ROI on the pipeline -- on the committed pipeline by 30 basis points. So the situation is even improved for our pipeline projects in terms of ROI.
And it seems there are no further questions in the phone queue, but we have a few questions on the web platform. So we'll switch over to the web questions. Over to you, sir.
Yes, we have first question from Bruno Duclos, Invest Securities, which is to what extent do you see working from home impacting your business, in particular when renewing lease and that all the tenants reducing the surface let stage?
Yes. Thank you, Bruno, for the question. Yes, the working from home has obviously an impact on -- but different impacts depending on the locations. We have seen, for some tenants, a decrease in surface because they are optimizing through flex, the square meters they are using. On the other hand, some of the companies are taking more square meters to have more meeting rooms because the office becomes a collaborated space more than a computer space.
So that's the effect, number 1, which is not clear, but, in my view, more reducing quantity of square meters overall more than increasing. At the same time, we see a strong appetite from tenants from centrality. At some point, if you want to bring back your employees to the office, to grow creativity, to improve communication inside the company and so on, you need to be well located. And that's what we have seen in the last trends, which is a concentration on the best transportation hubs, especially public transport. Car is less easy to use these days.
So clearly, a concentration on transportation hubs. So that has improved clearly the take-up on Paris and some are also in La DĂ©fense and Boulogne.
And the second question from Bruno still. How can we estimate the cost of upgrading the residential portfolio to environment and requirements as a percentage of current value portfolio? And do you intend to sell some of these residential assets?
The second one is easier. Yes, there is no -- as I said, we have the idea and we have decided to accelerate capital allocation. So if we think some of the assets -- independently, if it's ready or offices have a lower potential in terms of value creation then it can be disposed if we can find a buyer at a good price. So it's -- we have no specific view on if it's office or already. The second on the cost to upgrade.
We are currently assessing it. It costs some money, but as you can see, in fact, our portfolio is not that much -- the rents are pretty low in our resi portfolio, in my view. So I think it will come with value creation. So that's what we are working on. That's why I was saying that we are working hard on our resi portfolio, in fact, to grow the services, to improve the flat and to get the maximum potential of that portfolio.
So that will come along. It's -- we have no cliff in terms of CapEx. As you may remember, I don't know if I told that in '22, but we have only 4% of our resi portfolio, which is F&G, which is the flat that you will not be eligible for rent starting in '28. So it's a super minor part of the portfolio. And it's only when we need to release, and obviously, we'll have to renovate those flats and we will cope with that issue. So there is no cliff. So it will come along the value creation in my view.
Yes. Adam Shipton is asking, please could you explain a little bit further on why the digitalization of the letting process appears to have impacted negatively the student housing occupancy in Q2?
Interesting question, you are looking at the details. Yes, indeed, in fact, we have clearly improved the occupancy on our student housing since 2020. But in fact -- and that thanks to digitalization because now a tenant can book a flat from New York or Singapore fully digitally. So that has driven clearly an acceleration in occupancy for our portfolio. So that's majority.
But in -- for certain situations, you know that students tend to stay shorter for some of the programs and digitalization is clearly accelerating it. But we have removed the human flavor of our Force manager, which were located on site and knew, which were the programs of the people staying a full year and some staying only 3 months or 6 months. And in order to optimize occupancy, especially in Q2, we were, in the past, humanly favoring the students staying longer. So learn from mistakes. So we have kept the full digital process, but for next year, we will add a human validation to be sure that we don't take too many students that stay too short period of time in our residences.
A question from [indiscernible]. Beside the pipeline, any investment opportunities considered in the current market?
We are -- like we do for divestments, we are opportunistically looking at the market. So far, nothing really interesting that we have seen.
And a couple of questions from [indiscernible]. The first one is, can you please give us more color on the components of the guidance, at least? Second -- so more specifically on indexation, the repayments of commercial paper. Second question is, would you consider registering your exposure further to La DĂ©fense and noncentral locations? And the last question, but you answered already, do you see any attractive opportunities arising in the market today?
Components of guidance uplift. Like you saw, we sold €1 billion of assets at [indiscernible]. So obviously, there is a dilutive aspect with compared to our initial budget, and therefore, guidance. And we have improved, in fact, what we thought was our leasing program for '23. So there is basically half dilution from disposals and half better operational performance against our budget, again.
On La Defense, and -- like I said, we are optimistic on disposals. If we can sell -- and the disposals are there to improve the average quality of our portfolio. So that's what we mentioned a lot. We are first redeploying capital into central locations through our pipeline. And again, 260 basis points of rental income will be up, thanks to that reallocation from what we have done in H1.
So the intention is to continue. So we have several ways to do it. So no specific points. I think we have -- the La Defense portfolio is pretty reduced at Gecina. Again, 85% of the portfolio is in excellent locations, but optimizing the quality is for sure a general intention that we keep, but with no urge.
The question from Celine Huynh, Barclays, which say that the €1 billion sale at 2.5% cap rate was kind of unexpected. And she is wondering if there can still be some opportunity to sell at this price on the market assets that we will have in our portfolio in a context where cap rates have gone up?
We prefer to positively surprise the market. So if we can do it again, we surely do. Yes, the investment market is limited, but there is still appetite for qualitative assets. So we will see. I don't like to provide guidance on disposals.
Again, we have one of the strongest balance sheets in Continental Europe, so there is no rush. I think having no rush is also a way to optimize disposables because people don't see us as a distressed seller, and we have attractive assets. So we'll do it professionally with no rush and try to find the right balance in terms of capital allocation.
[indiscernible] is asking, what is the marginal cost of debt today, all in? In case interest rates stay at this level, what is the minimum yield on cost you will require for the pipeline?
Yes. Today, if we look at our marginal cost of debt, meaning when we are raising some commercial paper in the market, we are at 3.5% more or less.
And then maybe we can switch to additional questions that we have on the call.
We have a question from Jacques Perdrix from Heitman.
My question was answered. I was wondering what was in the guidance in terms of the capital recycling and repayment of the commercial paper yielding 3.5%. But I think you gave the answer here. So that's all for me.
Thank you very much for listening to our call. Thank you for your questions, and happy to meet you in person as soon as possible. Have a great summer, if we don't meet in the meantime.
Thank you. This concludes today's conference call. Thank you for your participation.