Icade SA

PAR:ICAD

Earnings Call Transcript 2022-Q1

[Operator]

Hello, and welcome to the Icade Results as of March 30, 2022, call. My name is Josh, and I will be your coordinator for today's event. Please note this conference is being recorded. [Operator Instructions] I will now hand you over to your hosts, Olivier Wigniolle, CEO, and Victoire Aubry, CFO, to begin. Thank you.

[Olivier Wigniolle, executive]

So good morning, everyone. Olivier Wigniolle speaking. So thanks for joining this call today. So I'm going to present our Q1 2022 result with Victoire Aubry, our CFO; and Anne-Sophie Lanaute, our Investor Relations, is also with us. So this presentation will be followed by a Q&A session.

So maybe before -- to start with the figures and the numbers. Just a few words regarding the overall environment for Icade. So I think it's now fair to say that the sanitary situation is fully stabilized in France. And regarding that standpoint, the situation on our different markets is really back to normal.

However, as you know, a new geopolitical crisis at the horizon during the first quarter of this year and leading to some like these uncertainties and indirect consequences on our businesses, I mean, and I will come back to that, especially on the supply chains for construction materials. So we have to take into account this new environment, I would say, once again.

So let's go now directly to Slide 5 to start the presentation with the figures of our revenue. So I'm now on slide -- on Slide 5 of the document that is presented. So our total revenue on a 100% basis, which means the IFRS P&L, amounted to EUR 414 million, which is an increase of plus 4.4% compared to the first quarter of last year in group share, which is now probably the main focus that we have on our revenues.

The revenues increased by plus 6.1% up to EUR 390 million. So if you look at the revenue from our investment portfolios on a group share basis, they increased by also by plus 6.1%, up to EUR 443.3 million. On a like-for-like basis, we have a difference between the Office portfolio and the Healthcare division, which Victoire and I will come back to that specific item that are behind those figures.

For the Property Development division, Icade Promotion, the strong momentum continued during the first quarter, with a plus 5.9% increase in revenues at EUR 241 million. Overall, as I said, group share revenues amount to EUR 390 million, a plus 6.1% increase and a plus 3.7% like-for-like increase.

I'm now on Slide 6. And so let me now comment the key highlights for the period. So the figure that we are presenting this morning reflect in our view, a solid business performance across our 3 business lines. Victoire will come back to that and will elaborate more into the detail, but some few numbers.

For the Office portfolio, the gross rental revenue group share stood at EUR 86 million, up by plus 1.4%. The positive impact of the 2021 acquisition, Equinove, Prairial as well as significant completion in 2021, including our building Fresk and Origine have more than offset the negative impact of 2021 disposal and the departure of some tenants. Let me remind you that we managed to dispose last year more than EUR 400 million in 2021, of core and fully let asset. So Victoire will also comment on the like-for-like evolution. It is decreasing in line with our budget and expectation and there are beyond this figure, some specific items.

It is mainly the -- is mainly explained by the departure of 2 of our tenants from the Eqho Tower in La Défense and paradoxically, a very good news, the renewal of the lease of AXA France, our largest office tenant within our portfolio.

AXA France occupies 75,000 square meters of office space in Nanterre, just behind La Grande Arche de la Défense. AXA is a tenant with Icade for now more than 15 years. They entered the building in 2007, and we have renewed the lease with AXA France at the end of last year.

Regarding the Healthcare division, revenues are strongly up, plus 14.6%, driven by the significant investment volume recorded in 2021, more than EUR 900 million and just to remind you, mainly outside of France. So let me also highlight that for both portfolios, the impact of a rising inflation and also a rising indexation has already been captured over this first quarter for both Property division, plus 1.3%. And the impact of rising indexation is expected to accelerate from Q2 onwards.

For Icade Promotion, our development subsidiary, the sales momentum remains very solid, still driven by a very strong demand for residential. And residential schemes are representing more than 78% of total revenue for Icade Promotion. Economic revenues for Icade Promotion stood at EUR 264 million, up plus 6% compared to the same quarter last year. Figures for new orders are also very well oriented for Icade Promotion after having reached a record level in 2021. Orders are still up by plus 5% in volume and even plus 28% in values, and Victoire will give you some more details shortly.

Second takeaway of the first quarter, I would like to highlight, is the continued execution of our strategic plan and our 2022 priorities that are well on track. For the Office division, on top of that, the good news is the improving letting market, especially in Paris area, but also in the regional cities. With a little bit more than 500,000 square meters of office let during the first quarter in Paris region, the market is up by plus 40% and very close to the 10 years' average, which is, frankly, a good news for Icade. Investment market remained also very active. Therefore, we are able to continue the dynamic asset rotation within our Office portfolio with the disposal of 2 mature assets for a total amount of EUR 400 million.

One is already completed and the other one is under preliminary agreement. The volume of disposal already represents roughly 2/3 of our targeted volume of disposals for 2022. And I can confirm the appetite, the strong appetite for mature assets in the Paris market. Regarding the Healthcare division, growth and diversification continued with 2 acquisitions closed in South of Europe, in Spain and in Italy.

Let me remind you that more than 30% of the EUR 3 billion investment plan by the end of 2025 of our Healthcare division has been completed so far. Moreover, as the volume of new project -- of new investment project and the review is still growing. So we are very positive on our capacity to deliver the acquisition volume. In addition, and this is something quite new, Icade Santé disposed during Q1 2022, a small portfolio of 4 assets for EUR 78 million with a 10% premium of the latest appraisal value, and this small transaction was decided for reason of portfolio optimization.

But it's also a good news in terms of valuation for the valuation of the entire portfolio. Finally, Icade Promotion, as I said, continues to benefit from a very strong residential holder demand. And if it's true that one of the consequences of the geopolitical crisis in Ukraine is an impact on cost of construction. Due to market appetite for residential and construction process optimization, the situation is also, time being still manageable.

On the liability side of our business, for sure, we are more than satisfied with the new bond that we have issued very early in January, EUR 500 million, 8-year 1% coupon, is for sure, clearly a good news for Icade and the financing of our activity.

On our low carbon targets, and as we want to remain among leaders in the real estate industry, we have once again, in February, increased our ambition. And we are aligned, our 3 business line on the plus 1% degree pathway. And we will use now the SBTi standards in order to make sure that all our figures regarding carbon footprint will be reliable and transparent.

So I will come back to the outlook and guidance in the conclusion. But now I leave the floor to Victoire. Victoire, the floor is yours.

[Victoire Aubry, executive]

Thank you, Olivier, and good morning, everybody. Let me share with you the operational performance of each of our business lines more in detail, starting with the Office Property division. I'm on Slide 8. And let's talk first about leasing activity.

In a rental market under normalization showing sign of recovery, as Olivier said, the top figures reflect the resilience of Icade Office portfolio, offering rental income up plus 1.4% to EUR 86 million in group share, especially in the context of significant volume of disposal last year.

More than EUR 500 million for the record was more than offset by 2021 acquisition and completions. On a like-for-like basis, despite a negative figure end of March, minus 3.3%, we remain confident for the near term. Why? First, the evolution is very concentrated on 2 events: the first one, the departure last year of tenants from the Eqho Tower in La Défense, as Olivier said just before; and the second impact, the renewal of AXA France headquarter in Nanterre-Préfecture, a strong but very positive negotiation for us. The tenant renewed 100% of the 75,000 square meters of floor space for the next 9 years for a level of [ 29 with B&B ] of course.

This renewal clearly reinforce a rental basis, but it has also a negative impact on a like-for-like. A word on the financial occupancy rate. It stood at 87.5% as of March 31, 2022, broadly in line with the rate end of December. I remind you this indicator was impacted by the disposal of 4 fully leased mature assets last year as well as the completion of 2 major buildings for which a part is still vacant.

Important for me to highlight that the evolution of the vacancy rate from 10% end of March 2021 to 12.5% end of March 2022 is 100% due to the vacancy of new and very well-positioned asset in the contemplating market, [ very efficient complete execution ] [indiscernible] adapted to new work organization standards, I'm speaking about Fresk and Origine.

So at this stage of the year, we confirm our confidence to be able to fully let those 2 buildings before the end of the year and target, therefore, a financial occupancy rate above 90%. Finally, and it is the third reason to remain optimistic for the coming months, regarding Icade's Office division's GRI and a recovering market inflation. As a reminder, 100% of the office leases are indexed on indices integrating an inflation component. 75% on ILAT indices and 25% on ICC and ILC indices. With the rise in the various indices since Q3 2021, the average indexation that is reflected in Q1 for office rental income is a plus 1.2%.

The impact for the whole year is estimated at plus 2.8% with a stronger effect in the second half. In effect, the indexation impact is implemented at the anniversary date of the lease each year. And regarding the portfolio, it's spread during all the year. So definitely, for all those reasons, concentrated 2021 departures, no one since January 2022, positive outlook on indexation, vacancy concentrate on new and efficient buildings. We remain positive in the context of recovering French letting markets.

Regarding investments, we continue to invest in pipeline, of course, for an amount comparable to last year, EUR 50 million end of March.

Last topic I want to share with you on the Office division is definitely the continued asset rotation. After more than EUR 500 million of disposals in 2021, we managed to dispose 2 buildings in the first quarter for a total amount of EUR 400 million, as Olivier said. We completed the sale of the Millénaire 4 building, a 20,000 square meter asset located in Paris, 19th district, for EUR 186 million.

This area, the Millénaire business park, represented for Icade after selling a portfolio of 4 assets during the last 5 years and an equity IRR of more than 10%. We also signed a preliminary agreement for the sale of the Gambetta building, a 20,000 square meter asset located in Paris, 20th district, for EUR 219 million, of course, fully in line with the last gross asset value, slightly above.

Those 2 operations demonstrate again the strong appetite of investors for core assets and attractiveness of Icade's Office portfolio. It also gives the Office Property division the head start on its 2022 asset disposal plan. As a reminder, we target an annual average volume of disposal of EUR 500 million to EUR 600 million.

Let's now move to the Healthcare division. I'm on Page 9. As Olivier commented before, rental income is strongly up with an increase of merely plus 15% to EUR 52 million on group share basis. This growth is mainly driven by the acquisition completed in 2021 in France, but more widely [ approached ] in Portugal with the acquisition of 4 private clinics end of 2021 for EUR 230 million on a 100% basis, but also in Italy and Germany.

And in March, acute and post-acute care contributed 85% of the total Healthcare rental income. We continue to benefit from a solid portfolio of long-term committed tenants. Financial occupancy rate is unchanged at 100% and the average lease break is circa 8 years, nearly stable versus last year. And last but not least, what about inflation and indexation in this portfolio? As for the Office division, nearly 100% of the health care leases has indexed on indices integrating an inflation component. At end of March, 55% of the gross rental income was indexed on ILC. I remind you that ILC is an index of [ French ] Commercial Rent Index, in English, which represent trends in consumer prices, excluding tobacco and housing rents for households in metropolitan France and the overseas departments, so directly reflecting inflation.

The indexation impact, including Q1 Healthcare rental income is a plus 1.4%, slightly above Offices, mainly due to the foreign part of the portfolio. Anniversary date of the lease are concentrated in Q1 in Germany. The impact for the whole year is estimated at plus 3% with a marginal effect in the second half.

On growth side, after a strong investment activity in 2021, particularly in the second half of 2021, the volume of investment in Q1 2022 is broadly in line with Q1 '21. The division pursued its diversification with acquisitions abroad and in acute and post-acute care, representing EUR 21 million group share split between Italy for EUR 13 million and Spain for EUR 8 million.

So far today, we have already completed more than 30% of our EUR 3 billion investment plan by 2025. And in addition, as Olivier said, the volume of projects under analysis is growing. And finally, we announced the sale of a portfolio of 4 private clinics in France for EUR 78 million. This operation has been made with a 10% premium above appraisal values consulting the value portfolio, if necessary, and improving the quality of the portfolio, as Olivier mentioned just before.

Now on Slide 10 for our third business line, a few comments regarding property development with Icade Promotion. Sales momentum continued in Q1 2022. We could have spoken about catch-up effects in Q1 2021 with figures end of March 2022 overperforming Q1 '21, we can definitively speak about the strong and positive dynamic and concrete posture.

Economic revenues grew by 6% to EUR 264 million, driving both residential, representing close to 80% of the total revenue and also the Office segment. Operational indicators are also very well oriented after a record level in 2021, orders are hot again. It is a plus 5% in volume and plus 28% in value driven by the Paris region.

The business is still supported by strong demand from both individuals back in the market in 2021 and a continuing strong appetite from institutional investors that represent 41% of the total revenues. Now looking at leading indicators, they remain well oriented, confirming growth potential.

Total backlog stands at EUR 1.8 billion, up by plus 2.1% compared to December 2021, plus 3.5% for residential. An additional potential of revenue of EUR 2.9 billion deriving from the residential portfolio that we do control through options or preliminary agreements.

In total, the medium-term revenues potential for Icade Promotion is now a EUR 7.7 billion in the 5 coming years. To conclude my comments on the development business line, Icade Promotion continued to adapt its solution through Urbain des Bois, the subsidiary dedicated in low-carbon timber construction launched in 2021, and was recently chosen for a significant project. You have the detail in the press release or AfterWork by Icade our solution dedicated in the conversion of offices.

Just before handing over to Olivier for the outlook, I would like to say a word about the liability, we continue optimization and expanded the use of green finance. First, Icade issued last January, a new EUR 500 million green bond, bringing the total amount of green bond of outstanding to EUR 1.7 billion.

The operation was done at a very attractive conditions, 8 years, 1 coupon -- 1% coupon, and we are more than glad that this operation is [ turning heads ] regarding today's market conditions. Thus, green and social debt instrument represents 35% of total gross debt, and we have room to continue to improve this percentage with very solid and rigorous criteria.

Icade Santé has also continued to strengthen and on power its liabilities with 2 operations, including the financial of revolving credit facilities for EUR 400 million with a 5-year maturity, conclude on very attractive terms. It will enable Icade Santé to cancel the EUR 200 million advance taken out with Icade. So Olivier?

[Olivier Wigniolle, executive]

Thank you. Thank you very much, Victoire. Let's go now to Slide 12 to conclude this presentation of our Q1 2022 revenues and give you some outlook. So let me first recall which are in our mind, the 2 key takeaways of this first quarter.

The first one is a solid business performance across our 3 business lines. And the second is a clear continued implementation of our strategic plan that will end at the end of 2022, just as a reminder. So in terms of outlook, let me also highlight, as I said that the COVID-19 crisis is clearly behind us and that the positive effect of inflation that is already visible in our Q1 revenues will rise from Q2 onwards.

On the other hand, the geopolitical environment has deteriorated with potential indirect and favorable consequences on our market, especially on the supply chain for construction material. So we have reacted immediately to adapt our business to this volatile environment with appropriate action to manage increasing construction cost. In this context, we are still very confident that we will deliver our objectives stated for 2022.

So let me first recall our priorities for 2022. For the Office Property Investment division, we are really focused on letting and renewal activity, disposal plan and opportunistic acquisition and still ready to launch some new development projects. But as you know, we are now really selective on that just to take into account the environment.

For the Healthcare division, our priorities for 2022 are still the same, growth expansion and continuing tenant and geographic diversification. For the liquidity and the listing of Icade Santé, which is still one of our priorities, it will be, as we already said, when the market condition will allow.

A word maybe on the nursing home controversy in France that occurred during the first quarter. So the outcome of the investigation launch on ORPEA by the French government to reinforce the regulation of the operation and to increase control of the use of public funds paid to operators.

That's the first outcome. And probably, we will have some more after the summer. So at the level of Icade really, we do welcome this measure. It is clearly -- it is clear now that we will have, in the near future, the same kind of a regulatory environment between the Nursing Home segment and the Acute Care business, and you really do think that it's a positive move for the industry and for the investment in health care real estate. So we are really favorable to that.

For the Property Development division, Icade Promotion priorities are still to increase revenue. To achieve a higher margin. For sure, it's a little bit more challenging in the context that I have described. And also to accelerate in the low carbon construction. In this respect, the promising development of our Urbain des Bois, our dedicated subsidiary for wood construction, is really appealing.

And as far as CSR and low-carbon strategy are concerned, we have dedicated a slide in the appendix to that reflecting how the group stepped up again our low-carbon targets. And with the target that all of our business lines will be aligned with a plus 1.5-degree pathway by 2030.

And the Say On Climate and Biodiversity resolution was proposed to our General Meeting last Friday and the resolution was approved by more than 49% (sic) [ 99% ]. So clearly, our shareholders are aligned with us on what we are doing in terms of low carbon footprint. So subject to -- I think it's just a statement that we still have to make.

But subject to the non-degradation of sanitary condition, and the possible consequences of the current geopolitical context, we clearly do confirm our guidance for 2022. So our net current cash flow per share is expected up plus 4% excluding the impact of 2022 disposal. The net current cash flow for our Healthcare division will be up by plus 5% to plus 6%. And finally, our 2022 dividend subject to General Meeting approval, will be up by plus 3% to 4%.

So thank you for your attention. And now Victoire, Anne-Sophie and I are ready to answer your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Stéphane Afonso from Invest Securities.

[Stéphane Afonso, analyst]

So 4 questions on my side, if I may. So the first one on the Office division. Could we have an idea of the reduction rate in Q1? And also 1 question regarding the disposals on the Healthcare division. So what is actually the rationale behind those disposals that will be dilutive for the cash flow?

And 2 questions for the property development activity. So you're saying that you have taken concrete measures to offset the rise in construction cost. But what are they actually? And my second question, so is it possible that the strength of the demand in Q1 in property development is partly due to the fact that the private investors have advanced their buying decision regarding the rising interest rates?

[Olivier Wigniolle, executive]

Okay. Victoire, could you answer the first one? I will answer the 3 other ones?

[Victoire Aubry, executive]

The first 1 -- your first question is regarding reduction. That's it? Just to be sure we understood. Okay. As I said before, the main impact regarding the like-for-like evolution, compare March '21 to March '22, is a net negative figure regarding exit and entrance of tenants.

So I'm not speaking about positive or negative reduction. As I said, AXA renewed the leases with a level of trend fully in line with ERV, but it's fair to say that this trend is -- this tenant is in our portfolio since 2007, meaning by that, when we renewed last year, the leases, of course, we had to align the level of rent [ at the vis-à-vis ] in line with the market. So that's the main impact we had last year regarding reduction.

[Olivier Wigniolle, executive]

On the 3 other questions. So the rationale for the small disposal within the Healthcare division, just as I said, it's optimization of the portfolio. It means at some time we have several assets which are close to the other. We know that maybe some operating companies will move from a building to another.

So it was -- it's the first disposal that we have, I think, ever made within the Icade Santé portfolio. It's clearly not part of the strategy to have the rotation within the Healthcare portfolio as we do have within the Office portfolio. But on this one, it seems that we are not 100% sure what will be -- how the renewal of the leases for those 3 properties will occur.

So we do think that it was, I think, an appropriate move to dispose some of them. And the good news is that even with some [ utilization ] uncertainty and especially in 1 of the assets, the overall valuation of the portfolio is 10% above last valuation. And after that, if you look asset by asset, 1 is clearly impacted by the nearer future.

But on the 2 others, the difference between last valuation is maybe closer to plus 20%. So it's really -- even if it's a small transaction, EUR 78 million, in our view, it's an interesting pricing of this portfolio. So concrete measure to deal with our -- with the rising cost of inflation.

For the time being, on ongoing schemes, it's less a question because the contract where we signed last year or before the rise of construction goods. So it's more a question for the second part of the year of 2023. So what we are doing, clearly -- mainly the main measure is to change the way we do manage construction.

At Icade, we usually, and most of our contracts are general -- GMAX contracts with [ general ] contractors. So now we have mainly -- especially to split and -- the overall contract by -- in 2, 3 or 4 parts, one for the structure and the concrete; the other one for the facade; the third one, for all the technical elements; and the fourth for all the elements linked to decoration. And by doing that, we are offsetting the margin of the [ general ] contractor. So it's the main measure that we have to implement -- to face the rising costs. It means that at the end of the day, the scheme is a little bit more complex to manage from a technical standpoint because it's easier when you have a single [ general ] contractor.

When you split all the works in 3 or 4 parts, you have to make sure that all the companies working on the same scheme are aligned on the same timing and so on. But that's the main measure. Second, for sure, we have, on every P&L of our scheme, we have a provision which is called, how do you say, [ Aleya ] also in English, which is usually 4% to 5%. So we, for sure, we have to use that in order to face rising costs.

And finally, and maybe surprisingly, we are still able to increase new sales price because -- and it will be the transition with your fourth question, because clearly, the demand is really strong. And therefore, we are able to increase the sales price.

Just to give you an example, we have launched, just last Saturday, a scheme in Versailles, west of Paris. And just during the weekend, we have been able to increase twice sales price due to the very high level of demand. So that's the way we are managing the rising construction costs. So trend for residential is supported not only by private investors, but mainly by institutional investors. And which just to remind you that it represents now more than 50% of all our revenues for the Development division.

Also by private clients, but not individual investors, but just they are buying apartments to live in. So your question -- behind your question is what will be the future of the P&L scheme, which is for the people which are not familiar with that, is the tax incentive scheme that we have in France for investing in residential for private investors.

And the end of the scheme -- of this tax incentive scheme is the end of 2022. For sure, we don't know exactly what will be the future of this tax incentive scheme, but it's not the main driver of the growth of the market, the number of the new orders that we have signed at -- which is still up by plus -- more than 5% compared to last year, which was a record year.

And if you look, it was plus 28% [ 8% ] in value. For sure because we are in more and more schemes in Paris area compared to the past. So that explains the different in term of growth in value. So even if I do recognize that the increasing construction cost is not a good news for sure. And sometimes it is not only a question of increasing cost, now it's just the supply chain, which is -- shall I say, which is broken.

And sometimes, you have difficulties to find construction material. To find iron for the time being is really challenging because it used to come from Russia and Ukraine for a large part of the market. So it is clearly, the supply chain is completely more than disturbed. So it's a bit challenging.

But as we do see for the time being and maybe for 2022, it's manageable, and hopefully, our supply chain for construction materials will be back to a normal situation by the end of this year.

[Operator]

Our next question comes from the line of Celine Huynh from Barclays.

[Celine Huynh, analyst]

Just 1 question on my side, please. Would it be fair to say that you're indicating a like-for-like rental growth higher than 3% by the end of the year and it is higher than what you were expecting during the last result? And if that statement is correct, why didn't you feel confident enough to increase your earnings guidance?

[Olivier Wigniolle, executive]

Celine, the answer to your question is our confidence to relet some premises that were vacant in the Eqho Tower, to fully let our Fresk building and to fully let our Origine building. So that we are confident if the -- the answer to your question, are we 100% sure that the environment will be stable enough to achieve that? I don't know.

I don't know, but as Victoire said, the property that we have on the market are probably the best property on their respective submarket. So our guidance is based on a conservative scenario for reletting. So why do -- we don't increase the guidance at the end of Q1? Let's see in July what will be the situation, but I hope you will recognize that the environment is complex, let's say like this.

And if you have any clear view of what will be the final scenario for the crisis in Ukraine? We don't have. And maybe you could have a complete stop on some supply chain or you could have a scenario on rising interest rate. Sorry to mention that, but you have seen that the word of nuclear weapon have been used by some political leaders in Russia. So we clearly don't know, though I think it's going to be too soon to be absolutely confident that the result by the end of the year would be better than the one expected last November or in February when we released our guidance.

What we could say for the time being is that we are confident with the existing guidance. Let's see in July what will be the evolution of interest rates, geopolitical situation. I will say political evolution also in France because even if we had, sorry to say that, but I will say, a positive result yesterday evening, we have now only the election at the parliament in June. We don't know what will be the situation.

And all these elements makes the environment, let's say, a bit complex and volatile. I really do think that Icade is able to manage the environment. To increase the guidance, again, a bit too soon to have a clear view on that.

[Celine Huynh, analyst]

Yes, I hear you Olivier. But does that mean indexation is higher than what you had expected during the last result, but you are more cautious on occupancy rates?

[Olivier Wigniolle, executive]

No. No, no, no. I mean -- I don't mean that we have a clear view on positive elements such as indexation. As you know, clearly, the indexation for commercial leases will be probably between 4% to 5% on average. And this year, it's clearly not what we had in our central scenario when we had made the guidance at the beginning of the year. That's the positive element. We are still positive on the reletting process.

But as we have discussed, we have -- on the other hand, we have negative elements in the environment, which are not linked to Icade, but they could offset part of the positive news. And it's a bit -- at the end of April, it's a bit too soon to have a clear view to see which side the balance will move.

And again, it's linked to elements which are clearly, nothing to see directly with Icade. We do not control the cost of the price of iron, we do not control the final level of interest rates, we do not control final result of election of the parliament. And all of these elements, I think, could have an impact on our different markets. That's why we are, again, really confident in our capacity to deliver on what we have announced. To deliver more, we have to wait a bit.

[Victoire Aubry, executive]

A little bit too soon.

[Operator]

Our next question comes from the line of Florent from ODDO BHF.

[Florent Laroche-Joubert, analyst]

So I would have 2 questions. The first one on the offices. So you have said that you -- there is today a strong appetite in the investment market for mature assets. So does that mean that could we expect maybe a [ nozzle ] disposal at Icade in the very short term?

And maybe a second question on that. Have you any view today on how investors analyze the geopolitical context for investing in mature assets? And how they analyze potential increase of interest rates? So that will be my first question.

And my second question would be on health care. So can we -- are you confident today that the nursing home controversy will not impact your potential [ charter for the ] liquidity event?

[Olivier Wigniolle, executive]

On your first question, as you probably have in mind, our target in terms of volume of disposal is between EUR 500 million to EUR 600 million in the Office portfolio. So we have, for the time being, achieved EUR 400 million. One is under preliminary agreement, but it's a firm preliminary agreement.

So we will put -- and we have started to put other assets on the market. And that's why I was able to make this comment because we do see institutional investor, which are the buyers for mature/core asset. They are really more and more risk adverse, that for sure. In the context and the environment that we were describing, clearly, life insurance company, pension fund, asset manager for their retail fund, they are clearly risk adverse and more and more. Therefore, it means they have a strong appetite for core assets. So we are confident in our capacity to deliver our disposal plan in attractive conditions. For the time being, no impact on valuation of rising long-term interest rates.

As you know, we are -- during the last 12 months, where we have an increase of long-term interest rate for more than 125 basis points. And it came through as all the players were saying. If you look at the level of the risk premium at the end of 2021, it was the highest level for the last 10 years.

So we all had in mind that there was a buffer to absorb an increase in long-term interest rates because if additional investors are -- have still a strong appetite, if they are still risk averse, they are also -- they are always making some arbitrage between sovereign bonds and alternative assets.

So for the time being, with an increase of roughly 125 bps in French long-term interest rate, you have no move in the valuation of core office building. And I will add also -- it is true also for health care assets. So it means that the market has considered that it was reasonable to decrease the risk premium.

So I think, for sure, if you have an additional 125 bps, maybe my answer will be different. But for the time being, at this level of long term of interest rates, on the French market for our Office portfolio. But in Europe, for health care assets, we didn't see -- and that's why also it's important to have disposal within the portfolio to make sure that our valuations are accurate and so on. But for the time being, the market has accepted to decrease the level of the risk premium. For the second question, Victoire...

[Victoire Aubry, executive]

Regarding the -- regarding the nursing home controversy and potential impact on the process of the IPO.

[Olivier Wigniolle, executive]

Yes. I don't know if you -- that's a very French topic. I don't know if you have seen the debate between the 2 candidates in the presidential election last Wednesday, but the question was not addressed, but was mentioned. And the reelected President had said he didn't see any reason to cancel the private sector for nursing.

What we have seen in the first measure that was announced, and that will be implemented probably very soon. They were just announced by the French government. It will be -- it was only more a question in terms of controlled audit. For the standards, again, if it's about real estate standards, we are really confident with the fact that private nursing home operators in France, such as ORPEA, Korian, Colisée and the others, their portfolio, including the assets that we have on our portfolio, are the best standards of the market.

So I think there is no reason to see that there would be any impact on the real estate side. On the operating side, we don't know what will be the new standard for nurses or doctors or care assistants within a nursing home facility. They are -- surprisingly, there are no standards for the time being.

So there will be new standards. Again, if you look at what is the financing system for nurses and doctors and care assistants, for the time being, it's financed by the French social security and -- for part of that. And the second part is financed by local authorities in France, it said the department, which is the second highest level of local authorities after the city.

So if the -- the financing system will remain the same, I don't see, for the time being, any major impact on the operating margin of operating company. And again, I think it's important to remind how the level of rent is determined for a nursing home. It is not a question of supply and demand like for retail or office or logistics.

It's based on the cost of the property. So the cost of the property, it's the land for the construction cost. So you could assume that especially on the construction cost side, it will maybe even increase a bit. And after that you just apply a cap rate.

For the time being -- and as I said, it's quite stable in the French market. For the time being, the cap rate is between 4% to 4.5%. I don't see any reason, especially with rising interest rates, to have a decrease, a significant decrease in cap rate. Maybe for best asset and you have some transactions, especially with retail and asset manager, with retail fund, just below 4%, so maybe you have a room for cap compression, which means at the end of the day, a risk premium that will be smaller.

But -- and that's the way we do calculate the rent for nursing home. And you could assume that the French government will launch a lot of new projects. So I don't see any reason why the rents for nursing home facilities will decrease. After that, for sure, we are also checking in terms of credit risk, some ratios such as the [ fourth ] ratio of the EBITDA covering the level of the rents.

So how will be the evolution of operating margin of private operators? Let's wait for the new standards. We do understand from the French government that it will be probably mixed with the restructuring of the retirement system in France. So it will probably take some time before final implementation.

But what could be sure in our view is that the demand for nursing home rooms and facilities is increasing and increasing. The demand is really more than significant. So we will have to build some more new facilities. And I don't see due to what is the state of the public financing in France, I don't see that the public sector will be responsible for everything. So it means that French government will need private operating companies to face the increasing demand. And therefore, they will have to accept a bit like for acute care operating companies, companies such as [ Essen ] or Générale de Santé Ramsay, they are making a reasonable level of profit.

And I really do think that nursing home sectors and acute care sector will we have, at the end of the day, the same kind of a regulatory environment, the same kind of level of profitability, and there is no controversy on the acute care sector. Let's see if there will be any political reaction.

I'm sure you have seen at [ KKR ] launch on -- not on Générale de Santé Ramsay, but on the mother company Ramsay in Australia. This could have an impact on Générale de Santé Ramsay in Europe. But it means that even investors, which have probably in mind, quite a high level of return on that investment, they do consider that the environment is stable enough to invest.

But for the time being, what we do see, let's say like this, that my main shareholder is Caisse des Dépôts is, let's say like this, close to the government as you -- it's a public financial institution. We have a lot of discussion on that topic to see what could be good news for the sector. But we don't see, for the time being, any major risk for the private operating companies regarding the nursing home sectors.

[Victoire Aubry, executive]

Last one. Perhaps the last question?

[Olivier Wigniolle, executive]

The last one was?

[Victoire Aubry, executive]

Perhaps last question. Last question.

[Olivier Wigniolle, executive]

Last question. It's a question. Do we have another question?

[Victoire Aubry, executive]

Yes.

[Operator]

We do indeed. The last question comes from the line of Ben Richford from SocGen.

[Benjamin Richford, analyst]

Just I can see there's a put pressure on rents in the short term. You've got indexation that's lifting rents, both in office and health care. You've got rising construction costs, which increased the required rent for new health care facilities, but I'm just thinking, can you provide a bit more perspective on the long term? Because obviously, you've had rent rolldowns in some office assets, and that's an indicator that we might have indexation lifting rents in the short term, but they may need to be reset down by the market in the future.

And likewise, a bit of insight into health care renewals because equally, there has to be -- what is the process for setting rents at renewal? Because it isn't a simple case of looking at the cost to build the facility and applying a yield because you might be 10, 20 years since it's been produced. Is it compared to the rents on new facilities, for example? How does that process work? So just some insight into both of those segments and how rents might be driven in the long term, please?

[Olivier Wigniolle, executive]

Again, on a long-term perspective, I agree with you. Short term, the environment is complex and volatile, you have positive news, negative news. You have up and down because due to all those elements that we were mentioning. On the long term, for the time being, we do see a range for health care as stable, and they have always been stable.

Everybody has to keep in mind that rents for acute care asset or nursing home, they just follow indexation at the end of the day. There are no move up or down, and especially outside of France when you have 25 years leases. And even in France where you have shorter leases, when we do renew the lease, there is no negative or positive reversion.

Rents are stable. And frankly, as I said, I don't see any reason to see why it will change. And then there is a change clearly under the scale due to the fact that premises will cost more and so on and so on. Maybe there is probably a trend for higher rents, especially if you have higher long-term interest rate. For offices, clearly, you have to go market by market, submarket by submarket for the markets in which we are active. At the level we can on the midterm, not to say long term, but midterm perspective, we'll make some comments.

What we do see, I think as I said at the beginning that as -- the good news, the volume of letting transaction is still, let's say, 10% below 2019, but very close, minus 2% compared to the 10 years' average. So I think it's fair to say that market is -- quarter after quarter is back to normal. In the Paris area -- in the Paris region, vacancy rate is overall stable, even if you have some differences between the different submarkets. But overall, the -- and no one is launching new scheme on a speculative basis.

There are some appetite for large transactions, even in the currency market when we are active. You may have seen in the document that we have signed within the Icade Promotion, our development subsidiary, a significant transaction in the north of Paris, the building is fully let.

We are not allowed to disclose the name of the tenant for the time being. But the market is still active. Again, no one is launching due to a complex environment, a new scheme on a speculative basis. The CBD vacancy rate is probably close to 0 or something like that. It means that probably in the near future, some corporates that are looking for new premises for cost reason, level of rents or just for availability, they could have appetite for best location outside of Paris.

So our central scenario is not based on the significant increase of rental values within our portfolio. But we do not see, for the time being. And when you look at the transaction, what was interesting, the renewal of the lease with AXA. They have been approached probably by all the landlords of La Défense, all the landlords of west of Paris. They have decided to stay in the building. And for sure, it's not a renewed building. And just to remind you that there have been a tenant with Icade for more than 15 years, which is a bit -- quite unusual, and not to say a recall, means that they will remain more than 20 years in the same building.

For sure, in terms of rental value -- is the rental value of building which is 15-years old. But more or less, it means that we have to offset part of the indexation that we had during the last 9 years. We do not have any investment on the buildings. They didn't ask us for -- to improve the quality. And at the end of the day, even if we have a negative impact on the like-for-like growth, I will say that rental values are more or less stable.

That's the way we do see the market. And back to your question on construction cost, if they are rising, if you do assume that rental values are not increasing. I think that the situation where no one has appetite to launch a new scheme on speculative basis will continue. Which is, in one hand, a, double good news for us, which means it protects the existing portfolio, not only our book but the others. And b, as you know, we have this flexibility on our land bank. We are working really hard with local authorities on cities where we have our land bank, in order to have something more mix in terms of use with residential, probably life science building and data center buildings and so on.

For sure, election were 2 years ago. But in France, it takes time. And I'm sure that by the end of this year, we will have very good news that we will be able to show in terms of use of our land bank. So overall, and even I do recognize and the environment is complex. We really do think that we do have a lot of competitive advantages to cross and -- or to go through these complex environment.

And we don't have -- for sure, we have stress scenarios as any corporate. But clearly, and even with our Board, and we do we don't think that the stress scenario will be the one that will occur.

Thank you to those who've joined this call. If you have any additional questions, do not hesitate to send them to Anne-Sophie, Victoire or myself, and we will be more than happy to revert to you as soon as possible. Thank you very much. Goodbye.

[Victoire Aubry, executive]

Goodbye.

[Operator]

Thank you very much for joining today's call. You may now disconnect your handsets.