Gecina SA

PAR:GFC

Earnings Call Analysis

Gecina Reports Strong Q3 Performance and Increased Rental Income

In Q3 2024, Gecina saw a 6.7% rise in gross rental income, fueled by a 5.4% indexation and 1% from new leases. The firm delivered three major projects in Paris, with a robust 28% rental reversion in the office sector. Occupancy improved slightly, and they posted a strong GRESB score of 95%. Looking ahead, Gecina expects recurring net cash flow of approximately EUR 6.4 per share, indicating positive cash flow despite a soft leasing market, which is experiencing a gradual recovery.

Strong Rental Income Growth

In Q3 2024, Gecina reported a notable increase in gross rental income, rising 6.7% year-over-year on a like-for-like basis. This growth stemmed predominantly from a 5.4% contribution due to indexation, alongside an additional 1% from successful rental reversion on new leases. The company's focus on capturing rental reversion has paid off significantly, especially in its office sector, which saw an impressive overall reversion rate of 14%, and an exceptional 28% reversion in Paris. The residential portfolio also performed well, with an increase of 16.5%. This uptrend illustrates Gecina's strong market positioning and adaptability in meeting rental demand.

Strategic Developments on Track

During the quarter, Gecina successfully delivered three large-scale development projects on time and within budget, further demonstrating their operational efficiency. Notable projects included the Mondo office asset, a 30,000 square meter space fully pre-let a year in advance, achieving the highest environmental certification; and 35 Capucines, which is also fully leased. Additionally, the successful conversion of an office building into residential apartments in Paris rounds out their strategic focus on high-demand sectors.

Sustainable Practices Noted

Gecina continues to lead in sustainable practices, illustrated by its excellent GRESB score of 95%, positioning it as the top-rated office REIT in this sustainability benchmark. Furthermore, all of Gecina's drawn and undrawn debt has now been classified as fully green, following the 'greening' of their latest credit line. This commitment to sustainability not only enhances their brand value but is also increasingly important for investors seeking environmentally responsible investment opportunities.

Forward Guidance on Financial Performance

Gecina's management is optimistic about the future, projecting a recurring net cash flow of around EUR 6.4 per share based on solid leasing activity and successful operational execution over the past nine months. Although the company anticipates some challenges from the macroeconomic landscape, the positive trajectory in rental income and cash flow supports a strong outlook for the upcoming quarters.

Leasing Market Dynamics

The leasing market remains somewhat subdued, especially in Q3 due to the impact of the Olympics and local elections affecting site visits. However, a noteworthy shift is observed in corporate attitudes towards returning employees to offices, with large U.S. banks re-evaluating their workspace requirements. This has created a potential uptick in demand for office space, although companies are still generally looking to decrease their total square footage compared to pre-pandemic levels.

Investment Market Overview

Despite current quietness in the investment market, Gecina has spotted opportunities, particularly within prime locations in Paris. The investment activity, though low, is characterized by strong demand for high-quality assets, indicating that while the volume of transactions has decreased, buyer interest remains robust. Notably, cap rates have been observed around 4%, presenting favorable conditions for Gecina in potential acquisitions. Their careful approach to capital allocation underscores their strategic focus on long-term value creation.

Debt and Financing Insights

The company's credit spreads are showing signs of improvement, currently ranging around 80 to 90 basis points for 5- to 7-year financing. Gecina's management highlighted that in this environment, bond markets remain more favorable compared to banks, as they navigate through reduced commercial paper dependency. This positioning provides Gecina with flexibility in financing options as they aim to capitalize on strategic acquisitions.

Market Challenges Ahead

Looking ahead, Gecina does face certain challenges, particularly with lease expirations in peripheral areas, which could lead to increased vacancies and negative rental reversion. As such, they must manage these expirations carefully while also tapping into the demand for well-located spaces to mitigate effects from less desirable assets outside of central Paris.

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and welcome to the Gecina Business at September 30, 2024. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]

Today, we have the CEO, Benat Ortega, joined by Deputy CEO in Charge of Finance, Nicolas Dutreuil as our presenters.

I will now hand you over to your host, Benat Ortega, to begin today's conference. Thank you.

[Benat Ortega, executive]

Good morning. Thank you for being with us today. Very happy to have the opportunity to present those -- this business update for Q3 2024 and answer your questions, obviously. During this first 9 months, gross rental income is up by 6.7% like-for-like, mainly driven by indexation, the effect of indexation, plus 5.4%, but also the contribution of reversion captured on new leases, a contribution of 1%. Obviously, we have continued to get a significant rental reversion from our office business, plus 14% overall and even better in Paris at 28% during those 3 quarters, as well as on the residential portfolio with an increased reversion of 16.5%. Some deals during Q3, during a more quiet leasing market, especially in Boulogne and around La Defense with a consulting firm or communication company, but also we have signed a lease with the university in Paris 7th arrondissement.

As such, occupancy is slightly up year-over-year. And more importantly, during this quarter, we have been capable, in fact, to deliver 3 large-scale programs, development programs on time and on budget. The first one being Mondo, around 30,000 square meters repositioned office asset located in Paris CBD, fully pre-let 1 year in advance and benefiting from the highest environmental certification start-up. The second is 35 Capucines, next to our head office in Paris, a bit more than 6,000 square meters office in Paris CBD, again, fully pre-let to a luxury company and a law firm. And third, we have just delivered a conversion of an office building into residential accommodation in Paris called Dareau on the 14th arrondissement, where 92% apartments have been delivered recently and will be let until year-end.

At the same time, during this quarter, we have the great news to have again an excellent score at GRESB, 95%. We are the first REIT on offices within that rating. And second news on the nonfinancial aspect of our company, 100% of our drawn and undrawn debt is now fully green following the greening of our latest or last credit line during Q3 2024. And as such, and especially thanks to those development projects delivered on time and on budget, we are now expecting to have our recurring net cash flow around EUR 6.4 per share and also the leasing, which have been rather good during this first 9 months.

Thank you for your attention. And obviously, we are here to answer your questions.

[Operator]

[Operator Instructions] And we will now take our first question from Florent Laroche-Joubert of ODDO BHF.

[Florent Laroche-Joubert, analyst]

I would have 2 questions. Maybe the first one on the investment market. So could you please give us maybe more color on your view on the investment market, notably in terms of liquidity and opportunities for you?

So my second question would be on the leasing side. Do you see any change of corporates that want to have maybe more the employees back at their office? So do you see any link with the leasing activity? And maybe so the leasing activity was also quite calm in Q3. Do you see any change in Q4?

[Benat Ortega, executive]

Thank you, Florent. So then 3 questions. On the investment market, as I commented for several quarters now, the investment activity is quiet. However, we have seen a series of deals, especially in Paris, especially Paris CBD at pretty decent value. So, again, a pretty quiet investment market, but still a decent liquidity on the central location of Paris region.

Regarding the back to the office, I think we saw a series of announcements by big corporates, U.S. banks, very driven by the U.S., by the way, which have maybe gone a bit too far on working from home policies. So, yes, from our conversation with tenants, that topic is back on the agenda. And yes, they are reassessing the needs of square meters. I'm not saying that the general trend is not decreasing square meters. I think that's still the case, but maybe corporates are reevaluating the quantum of decrease of square meters compared to what they used to have 15 years ago. So, yes, it's slightly changing. And I couldn't say it's a major shift, but psychologically, it's starting to be a small different change.

And maybe the -- on the leasing and more quiet leasing market, obviously, the activity has been impacted by the Olympics, which have complexified site visits, especially during July. And, obviously, the political uncertainties in Paris since June have not helped. So, yes, we have seen decelerating leasing activity during this quarter, but it doesn't look to change a bit the ambient, generally speaking, still very few qualitative office assets on central location and a pretty wide offer outside Paris. So still complex to manage outside Paris.

[Nicolas Dutreuil, executive]

And maybe if I can add one point on the investment market and what we've seen during Q3, I would say that, what's interesting is that, when you look at the transaction, which has taken place during this last month, you can see and it's, of course, public information that most of these deals have been made at cap rates around 4%, some of them even below, which I think will give for the appraiser for year-end a couple of benchmarks, which will be interesting because when you look at the valuation of our portfolio in central location, we are around this yield.

And second point, which is also interesting is that, of course, we could consider that the liquidity of the market has been reduced because of the smaller number of deals. But what's interesting is that, when you look at the building which has been put for sale, the demand for this asset is very strong, meaning that you have a quite large number of potential buyers looking at these potential acquisitions, meaning that in Paris, the lower amount of deal is not coming from a lack of demand, but much more because of a lack of supply.

[Operator]

And we'll now take our next question from Veronique Meertens of Van Lanschot Kempen.

[Veronique Meertens, analyst]

Two questions from my side. Maybe a follow-up on that investment market. Obviously, you currently added some new projects, probably more in the pipeline, but are you also actively scanning the market for interesting acquisitions? And are they there?

Plus secondly, on that development pipeline, any updates on the other projects? Is everything going to plan? And also in terms of letting activity? Or did that also slow down a little bit around the Olympics?

[Benat Ortega, executive]

Yes. On investment market and acquisition, like Nicolas said, a few assets are on the market these days. So we are obviously monitoring all of them, checking if it's in line with the return on capital we want to achieve on those. So for the time being, nothing specific. But, obviously, we are scanning the market. We are a big player in that market. We have some of our investment capacity. So -- but very careful on the way we allocate the capital.

On development, like I said during Q2 in July, we are working on getting the permits. And as you know, it's pretty complex to get those permits. So still working on it. And hopefully, we will have a good news by year-end.

[Veronique Meertens, analyst]

Okay. Clear. And on sort of like pre-letting rates, any updates on that side?

[Benat Ortega, executive]

Not material. Still working on it. We have signed one more lease, but nothing material.

[Operator]

[Operator Instructions] And we will now move on to our next question from Nadir Rahman of UBS.

[Nadir Rahman, analyst]

Can I confirm that you can hear me clearly?

[Benat Ortega, executive]

Yes.

[Nadir Rahman, analyst]

Yes. I had a quick question on the inflation and indexation because you said that your 6.7% like-for-like indexation is 5.4% driven by indexation. And I wanted to confirm, given that Eurozone inflation is starting to fall and we're seeing a slowdown, where do you see the indexation and therefore, the reversion potential -- sorry, the like-for-like growth going from here in the next few quarters?

[Benat Ortega, executive]

Thank you for the question. That will be more an answer for next call, annual results and next year guidance. But just to give you a flavor, obviously, inflation is decreasing significantly. So, obviously, the contribution of inflation will be probably the highest in 2024 compared to the next year. That's just mathematics. So, now, as you can see, we still have reversion so that should flow into the cash flow in the future. And have in mind that it's a lag effect. So even if inflation has decreased this year a lot, in fact, we are more benefiting from inflation of last year. So, obviously, that impact will decrease quarter after quarter in the next quarters.

[Operator]

We'll now take our next question from Jonathan Kownator of Goldman Sachs.

[Jonathan Kownator, analyst]

Just a question on credit spreads. Could you just let us know where you would stand today in terms of your credit spreads, please, for sort of 5-, 7-year financing? Do you see an improvement? Or are they rather stable?

[Benat Ortega, executive]

They are improving, obviously. But that's a public figure. But if you look at the 7-year bond, yesterday night, it would be in the range of 3%, 3.2%.

[Jonathan Kownator, analyst]

Okay. And...

[Benat Ortega, executive]

[indiscernible].

[Jonathan Kownator, analyst]

Yes, of course, that's not the credit spread. Yes, I know that.

[Benat Ortega, executive]

And the spread is depending on the duration, but around 80, 90 bps.

[Jonathan Kownator, analyst]

And would the bond markets be more favorable than the bank market right now? Or are they rather comparable?

[Benat Ortega, executive]

No. For the time being, it's still more attractive to go on the bonds. Have in mind that following all the disposals we did last year, we have decreased a lot our commercial paper activity. So for the time being, we are more looking at probably growing that amount, which has a very limited spread. And if you have in mind, it's a 1 bps, 2 bps spread before going on the bond market. So we still have flexibility on that for the time being.

[Jonathan Kownator, analyst]

Okay. The second question on -- just on leasing. Do you have any big leasing topic that you're watching, any big departures or any space where you have, I don't know, strong changes happening?

[Benat Ortega, executive]

Sure. You have our tenancy schedule in the appendix, not only in Q3, but Q2, I guess. So we'll have expiries on the outskirts of Paris over the next years in Boulogne, in La Defense between '25, more importantly, in '26 and '27. So, yes, we will have expiries, and we'll have to manage those situations. And in the meantime, obviously, we will have also expiries in Paris with more reversion. So that's a balance. But yes, we will have expiries on the outskirts, and that's where it's more painful with probably negative reversion and potential vacancy.

[Jonathan Kownator, analyst]

Are you seeing -- I mean, a broader question, I guess, but from that perspective, obviously, this very imbalanced market between strong demand in the center, more supply coming through in the outskirts and less demand. I mean, how is this playing out in your view? What do you see from owners of space in the outskirts? And are you seeing tenants starting to consider cheaper rent options at this stage versus being in the center? Or is it still status quo?

[Benat Ortega, executive]

I think it's -- you have like 3 markets basically. You have still a good market inside Paris. With adjusted rents, you have like Boulogne, La Defense, which are attractive and attracting people from other geographies. And then independently somehow on the rents, a very limited demand on the other locations inside Paris region. So that's still quite valid. So maybe what we have seen is, with declining rents and increased incentives in La Defense, a quite good activity in La Defense typically. So I think when it's well located, good public transport and adjusted price, then you find more demand. Typically, this has been the case for Boulogne and La Defense. But, obviously, it's painful in rents.

[Jonathan Kownator, analyst]

And so, how are the owners of the assets that are suffering at this stage reacting? And do you see any movements from, I don't know, funding partners, banks? Are you seeing more distress there? And any clue as to how this is playing out right now?

[Benat Ortega, executive]

For the time being, not really. The situation is as long as they have a lease in place and even with decreased rents, I think there is a kind of status quo between investors, lenders and tenants in that. So, again, we are not really exposed there. But from what we see from our window, it doesn't look to be -- to have happened a lot of distressed situation. So it's -- people are working, trying to collect cash flow. So not really a dislocation there.

[Jonathan Kownator, analyst]

Okay.

[Benat Ortega, executive]

That might sound surprising when I listen your silence, but that's what is happening.

[Jonathan Kownator, analyst]

Okay. No, fair. What's the latest update on your tower in La Defense? I mean, obviously, you're on the contract until 2027, but are you able to move earlier than that and sort of progressive strategy for that building? Well, those 2.

[Benat Ortega, executive]

Obviously, it's 2 listed companies at stake, so I will not comment on discussions, but we are working to prepare that and look at all the options.

[Jonathan Kownator, analyst]

Can you remind us when they physically move? Or are they -- have they moved out already or...

[Benat Ortega, executive]

No, they are still in the tower, still in the tower.

[Operator]

[Operator Instructions] We will now take our next question from Adam Shapton of Green Street.

[Adam Shapton, analyst]

Just a quick one. I know it's been a quiet leasing quarter, and you mentioned a wait-and-see attitude with the Olympics and elections and so on. Just wondered what you're seeing -- what you've seen over the last 3 to 4 months in your place, serviced office rollouts. Are you seeing good demand sort of in terms of pricing and what you're getting in terms of premiums to sort of conventional market rents there? Any update on that side?

[Benat Ortega, executive]

Yes. Same like I said on Q2, it's still a pretty decent business model with good premiums. But like the rest of the market impacted by that wait-and-see approach. So we have -- the leasing has been a bit more quiet, but we still see good demand, good visit activity. So nothing very different. Again, it's a pretty small portion of what we do, but still promising. I think it gives us -- and the idea, it's not a new business, but it's just a way to address differently the market and to have more option to lease somehow. So typically, we are testing and we'll test that in Boulogne with a small surface, 2,000 square meters in Boulogne that we'll deliver in November, also to open, in fact, our capacity to lease. So if someone needs an office for a project for 1, 2, 3 years, immediately available, immediately designed and furnished. That's an alternative to the rest of what we have vacant, which is more -- it takes like 4, 6 months to be in the office after furnishing, partitioning and so on. So it just gives us more options, in fact, for -- to get some clients.

[Operator]

And we'll now take our next question from [ Paul Ridge of R&Co. ].

[Unknown Analyst]

Just a quick question on my side. If we come back on the acquisition market on the investment market, what will be today the minimum yield you will be looking at for any acquisition? Can you give some color on that?

[Benat Ortega, executive]

No, we look at the total return. So the initial yield depends on if there is a vacancy, if it's under rented, if there are works. So it's more what we try to expect on the pipeline somehow as a total return. And I think the beauty -- so a few projects on the market. So I don't see so many deals to be done by Gecina, but the beauty of our company is that, we can buy assets that we need to keep for 10 years because you have tenants to evict and so on and then do works, or we can buy and manage to grow the rents. We can amenitize the asset, try to capture more reversion. So I think we have different options of assets to buy. So we are not a purely value-added player. We are not a pure core player. So we can play on several grounds. But still to buy, we need to find the right profitability and the right product and the right location. So -- but we have somehow more options than most of the players.

[Unknown Analyst]

Okay. But then on total return, is there -- I mean, is it moved regarding your cost of capital or...

[Benat Ortega, executive]

Yes, it's on cost of capital, obviously. It's -- but it depends on the risk we take. So I think we have a tailor-made approach. I think when we look at -- we are not an investment player. Somehow, we are a REIT. So we look at how does it improve the company. So does it improve the cash flow growth of our business? Will it generate a capital gain in 5, 10 years? So it depends on the risk we take and the speed of that. But, obviously, it has to grow our KPIs, our main KPIs, which are NAV and cash flow growth. And we can play on those 2 grounds.

[Operator]

And we'll now take our next question from Benjamin Legrand of Kepler Cheuvreux.

[Benjamin Legrand, analyst]

Just maybe a more specific question. I was reading somewhere that you have tenants leaving the Tour Mirabeau in Paris. And I was just wondering if it was getting emptied or if you had any plans for this tower to be relet. Basically, what's the plan for this asset?

[Benat Ortega, executive]

Yes. Thank you for the question. That might be -- but not being specific, potentially a new project for Gecina. But for obvious reasons, we have been silent on it.

[Benjamin Legrand, analyst]

Okay. Okay. And in the -- if I remember correctly, in H1 results, you were talking about some rent -- like rent decrease for 2025. I don't remember exactly the number. Was that considered in that number?

[Benat Ortega, executive]

Yes, that might be that situation.

[Operator]

Thank you. There are no further questions in queue. I will now hand it back to Benat for closing remarks.

[Benat Ortega, executive]

Thank you for all your questions and listening that call. See you soon. Thank you. Bye-bye.

[Operator]

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