Gecina SA

PAR:GFC

Earnings Call Transcript 2019-Q3

[Operator]

Good day, and welcome to the Business at September 30, 2019, Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Madame Brunel. Please go ahead, Madame.

[Mahkâmeh Brunel, CEO & Director]

Good morning, everybody. With Nicolas Dutreuil and Samuel Henry-Diesbach, we are very pleased to present you our quarterly reports and results, which shows the solidity of our performance, the quality of our portfolio, and the way the company is getting transformed and looking forward the new world we are facing. The macroeconomy -- just a minute. But before discussing that, I will like to give you a little bit of update of where the real estate market trends in Paris Regions are so far. The office market followed on from the trends observed this past quarters for the Paris Regions office market with most central areas and Paris City mainly being well ahead of the favorable trends observed. While take-up in the Paris Region is done by 11% year-on-year at the end of September, the third quarter recorded an increase in the volume of transactions. Overall, take-up year-to-date remains high, in line with the long-term average, which represent a solid performance while immediate supply is at an all-time low. This is a reflect of solid performance on the rental market despite a shortage of immediate supply. Immediate supply levels show, indeed, a further contraction, minus 6% year-on-year. The market is still very positive for the most central sectors as revealed by vacancy rates close to all-time low. In the City of Paris, [close to] 2%. But also in the most qualitative business areas offering prime access to transport facilities in the immediate neighborhood of Paris, especially Neuilly, vacancy rate 3.3% now, Boulogne 6.4%, where Gecina is strongly implemented as well. As a result, rents on new leases are up plus 6% year-on-year, clearly driven by the outperformance of Paris City, 7 -- plus 7.3% for the CBD year-on-year and plus 16% over the last 18 months, while trends for the Paris Region's other sectors show stability slowly. The macroeconomic environment and these positive rental trends are continuing to drive up investment volumes, plus 16% year-on-year and, as a result, values per square meter for investment transactions across all sectors. This context brings us even more confidence regarding our strategy to increase further our presence in the location-driven by scarcity and centrality, which has been our real motto in the last 5, 6 years, through the portfolio rotation but also to enhance the quality of our portfolio through our pipeline of projects in these core locations and the development of our brand, YouFirst. To summarize, this means that despite of the current macroeconomics complexity and uncertainty, the market trends remains particularly supportive in the most central areas of the Paris Region. I would like to share with you a few elements regarding our business activity. And for doing so, I will hand over the mic to Nicolas Dutreuil. Nicolas?

[Nicolas Dutreuil, Deputy CEO of Finance]

Thank you, Méka. Good morning, everyone. So as you have seen, we have rental income, which are in line with our target once again, reflecting our outperformance in the most central area. Meaning that if you look at our rental income, we are now up by 1.1%. If you remember, we were at minus 1.4% at end of June, meaning that, clearly, all the benefits of the deliveries we've done in 2018 and 2019 are now offsetting the impact of the disposal we have made last year. Meaning that, of course, we are benefiting from improvement of the quality of our portfolio, thanks to the disposals. We're focusing on the most central location and high-quality buildings. And also, we will come back to that in one second, creating value, thanks to the disposals. If we go back to our rental income, you have seen that the like-for-like is accelerating. We are now plus 2.4% for the group, globally speaking. 1.7% coming from indexation and 0.7% coming from change in vacancy and, of course, a revisionary potential. Which is very important because it means that, of course, as Méka was saying, we are benefiting from the very good market conditions. But also from the reorganization of our leasing teams, which enable us to be much more active and close to our customers to go to -- reach the highest front we can get in Paris. And of course, to prelet our development pipeline as you've seen, but I will come back to that in one second. We have also announced a good news on the leasing side of development pipeline. And if you adjust from all these deliveries, the rents coming from the deliveries or like-for-like, meaning that we have more than EUR 50 million of France coming during the 3 first quarter of the year, coming from the deliveries we've done in '18 and '19. It's almost 15 project. The like-for-like will be at more than 10% for the year -- for the year, respectfully. So as I said, we've been very active on the leasing sector. We have let or relet 1,012 -- 112,000 square meters during this period. It represents almost EUR 40 million of annualized rents. And what's interesting is that, of course, it has enabled us to deliver some like-for-like growth but also to prelet a part of our pipeline. We have announced during this press release -- in this press release, sorry, that we have prelet our Friedland pipeline operation, 100 and 1000 -- 1,500 square meters in the Paris' CBD. And we have prelet one more floor in Carré Michelet, which is representing 3,500 square meters. Globally speaking, if you look at all the operation we are going to deliver in '19 and '20, the preleasing of our portfolio and our development pipeline is now 64%. We are still, of course, having discussion on other buildings. We've been also very active on the disposal side, as you've seen. We are year-to-date at almost EUR 500 million of assets sold or disposal secured. Part of this being, of course, the hotel portfolio, which is still under preliminary agreement that should be closed before year-end. And as I said previously, of course, the disposal program for us is a way to continue to improve the average quality of our portfolio but also to create value, thanks to the premium we are able to achieve on these disposals. We are at almost 6% premium on all the disposals we've done in the year. And as we have always said, we will continue to be very active on the disposal field. Meaning that we consider that we have to take advantage of today's market condition to continue the work we've done on our portfolio, and continue to improve the quality of the portfolio with some disposals. So we still have a couple of discussion for additional disposal end of this year. So very active on the leasing side, very active on the asset side and also very active on the liability side. As you've seen, we have continued to greenify, I'm sorry for the word, our balance sheet, meaning that we have taken advantage of ordering...

[Mahkâmeh Brunel, CEO & Director]

Making our balance sheet green, again.

[Nicolas Dutreuil, Deputy CEO of Finance]

Make our balance sheet green again -- greener. We have taken advantage of the discussion we had with a couple of our banks to renegotiate some bank facilities, to sign some additional green financings. So today, if you look at this responsible loan agreement. It's -- in addition, more than EUR 660 million of additional lines that we have signed. And so meaning that we have almost 20% of our bank facilities, which are today responsible finances. So as Méka said, and maybe that's the conclusion of what we could say, we are very confident on, of course our business model. I'm very confident on the guidance we have given to you for the 2019. And so we reiterate the guidance we've given. And we have already updated, you remember, end of June.

[Mahkâmeh Brunel, CEO & Director]

Thank you, Nicolas. I think that now Samuel, Nicolas and myself, we are 100% available and thrilled to listen to your questions and answer to them. So if there is any questions, do not hesitate.

[Operator]

[Operator Instructions] We will now take our first question from Celine Huynh of Barclays.

[Celine Huynh, Research Analyst]

Méka, I just have 2 questions. The first one is regarding the disposals. So you've sold out a 5.5% premium to book value, and 2/3 of it was nonstrategic. Your peers are selling Paris offices and crystallizing double-digit premiums. Do you think, at some point, you will consider making -- selling more inner Paris offices versus outside Paris noncore assets to get advantage of the friendly market, like you said it was? And the second question is on the year-end dividends. I appreciate that you don't guide on dividend, but it would be great if you could give more color around it. The recurring EPS will slightly go down this year, and you've consistently grown the dividend per share in the past. So will you increase the payout ratio to sustain an increase in EPS this year?

[Mahkâmeh Brunel, CEO & Director]

So thank you very much. Very good questions. One is on the distribution program. Again, the question is not whether you are selling inner ring or outer ring asset, it is the quality and the strategy you are driving and what you are expecting from this strategy and how you're making money. Just one thing to remind, we are getting advantage of this special market to be very active and very supportive to sell assets, which, if there is any downturn, they would be no value, no value. So the double-digit today, if we keep the assets, which are on the Périphérique, and we consider that they are no more coping with our strategy, would be nonsense for the strategy of the company. We need to keep it clear and to refocus on the best market ever. And because of that, we definitely need to take advantage of these markets to focus and to fly to quality. It doesn't mean that we are not selling a couple of better assets in better locations. For us, it's a question of asset management, as I already mentioned that in a couple of our conversations. And the asset reviews, we are running each year, we are getting very close in the coming weeks. We have our annual asset review, going deep dive in each asset and consider whether there is still room to create value or not. And according to what would be the analysis of our asset managers here, we will decide whether to dispose or to remove to the development pipeline or to keep it as is, considering there's still room to create value. So this is a sort of discipline we are running for many years. And I think it has improved the quality of our assets at the same time. And it has improved the quality of our valuation. As far as the guidance for the dividend, as I already mentioned a couple of times before, this depends on the decision -- of the Board's decision, which is taken with our annual results. And I consider that the Board is 100% sovereign to take any decision which makes sense. We would -- as a management, we would recommend to the Board but the Board is finally -- has the final say on that. But definitely, maybe, Nicolas or Samuel, you can give a little bit of color as how you consider our earnings per shares in the coming period.

[Nicolas Dutreuil, Deputy CEO of Finance]

I think that's something that now you are very familiar with, meaning that, as you know, we are very focused. And I think that the results we are delivering or demonstrating that it is the right thing to do, focused on this total recon strategy. We know that we can have some volatility on short-term FFO per share. And as you say, that's what we will get this year. Meaning that, in the past, if you look at what we did, we've been able to maintain or increase the dividend. But as Méka said, it's clearly too early to say because it will be a discussion we'll have with the Board. But just keep in mind that if you look at all the growth which is embedded in our development pipeline, you remember, we have said that we have EUR 130 million to EUR 140 million of additional net income coming from the pipeline based on end of last year income. It means that we have very good visibility on where will be the growth tomorrow for...

[Mahkâmeh Brunel, CEO & Director]

And by the way, just I would add that you can already see that in our revenues, which we are publishing today that we are almost -- still today compared to last year's same period because of the amount of the EUR 52 million coming from new leases and pipeline. So this is a good demonstrations of how this pipeline is really contributing massively to our result in the coming period. I think Pierre Clouard is on the line. Pierre-Emmanuel. Pierre, it's over to you.

[Pierre-Emmanuel Clouard]

Yes. I have 2 questions on my side. The first one, I just wanted to come back on your disposals. So it seems to me that you might be able to do more disposal than initially planned. What do you intend to do with those -- with the proceeds. So decrease the leverage, acquisitions, share buyback, maybe something else? I don't know. So that's my first question. The second one is on your reversionary figures, especially on price so on the 30% positive reversion figure. Can you give us [ mark around ] on how does it compare to last year or to 2017, for instance?

[Mahkâmeh Brunel, CEO & Director]

Very good questions, again. I'm going to answer on the dispositions, and let, maybe, Samuel give us some colors on the reversionary. On the dispositions, definitely, for us, disposition is about strategy and how to improve the quality of our portfolio and our performances. So definitely, again, the asset review we are running in the coming weeks is going to be crucial in the list of assets we might dispose getting advantage of our global environment. And you know that we are not shy to do the needed dispositions, which could bring us to improve the quality of our portfolio. Remember, when we sold the health care sector, our leverage went down to 29%. We did massive disposition since we bought Eurosic, around EUR 2 billion. So this is not something we are shy about, and this is whatever the market is. We are not -- we never fall in love with our assets. Now what would be the outcome and the results of this deleveraging or the dispositions? How would you -- how would we use the money? Again, off to the Board, but we know that we have all the tools. And we have already, in the past, used all the tools we have in our bucket to -- whether it is share buyback, whether it is -- I don't know, deleveraging, whether it is all kind of your increasing the dividend, whatever. We use all the tools and amenities we have in our bucket to improve the quality of our returns to our shareholders. So this is not something we're shy about. Maybe, Samuel, a little bit of color about the market.

[Samuel Henry-Diesbach]

Yes. For the market and the way we do, we'll see that into our own figures. That's interesting to see that the market trends on the rental side is still very positive on the mass fabrication while it's not the case in secondary areas, seeing that's -- or in less central locations. So it means that while it's significantly up in the City of Paris, Western Crescent is flattening in Ile-de-France and the rest of the Paris Region is still kind of flattening. And that's something that we do see as well in the breakdown of our performance within our portfolio. So it means that we are able to achieve on the headline trends and uplift, which is kind of double-digit in the City of Paris. While we only maintain the level of trends on other locations and even in some secondary areas where we're not that much exposed, we have some negative materialization of negative reversion. But all in all, it's in line with what we do have. That said, the portfolio of lease ending every quarter is quite different. So that's always difficult to have some precise analyst but the trend is here in any case. And what we see is that if you take into account only the net contribution from the uplift materialization into the like-for-like figures, then we see a positive contribution for Paris City, mutual in the Western Crescent until something negative, otherwise. So we do see this granularity of performances between the locations, and that's something that we don't expect to change in the coming quarters or years. As the situation is still very strong in terms of take-up in the City of Paris, where the vacancy is very low. So we are -- every quarter quite well surprised to see that we have a significant take-up volume in the City of Paris, despite of the fact that vacancy has never been so low. So it's clearly something that brings us even more confidence regarding the capacity to create some qualitative assets, which are in the pipeline in the City of Paris. So the situation is pretty good, and the way our figures reflects the trends is indeed here. So clearly, we see an improvement and increase of the situation.

[Pierre-Emmanuel Clouard]

Okay. Samuel, just to come back on your disposals, what would be then your recommendation to the Board. So acquisitions, are they like, again, delivered?

[Samuel Henry-Diesbach]

Nice try.

[Mahkâmeh Brunel, CEO & Director]

I don't believe that our Board members would appreciate if I tell you as a confidence over the phone. But definitely -- now more seriously. We definitely are thinking about all these items right now. There's a lot going on, probably something, again, we did not really emphasize that much, but I think that everybody knows today that the transformation of Gecina -- deep-dive transformation in terms of digitalization, in terms of putting in place the brand and the organization is definitely also ongoing. So a lot going on, this quarter will be, well, like all the other quarters actually, very active. And we'll come up with some recommendations. I have a lot to say, and we have a lot to discuss among ourselves before getting to the Board and having this conversation with them. So this is going to come up in the next couple of months. But you will know about it. I'll tell you. I think we have no other questions online, of course, do not hesitate to call any of us any time, especially Samuel, who's 24/7 available for you guys. And I wish you a very pleasant day. Thank you. Bye-bye.

[Samuel Henry-Diesbach]

Thank you. Bye.

[Nicolas Dutreuil, Deputy CEO of Finance]

Bye.

[Operator]

Ladies and gentlemen, this does conclude today's conference call. Thank you all for your participation. You may now disconnect.