Icade SA

PAR:ICAD

Earnings Call Transcript 2023-Q1

[Operator]

Hello and welcome to Icade Results as of March 31, 2023 conference call. My name is Priscilla and I'll be your cordinator for today's event. Please note this call is being recorded. [Operator Instructions] In today's call we have Victoire Aubry, the CFO; Nicolas Joly, the CEO; and Anne-Sophie Lanaute, the Head of IR.I will now hand you over to your host, Nicolas Joly, the CEO, to begin today's conference. Please go ahead now.

[Nicolas Joly, executive]

Good morning, everyone. I'm Nicolas Joly. I'm here with Victoire Aubry, our CFO; and Anne-Sophie Lanaute, our Investor Relations. It's a real pleasure for me to be here today. Very excited to have the opportunity to lead Icade and its teams. I will obviously not comment on Q1 figures and let Victoire and the team do it. But I wanted firstly to pay tribute to the work carried out by Olivier Wigniolle and the many successes achieved over the past 8 years. I also want to sincerely thank the Board of Directors, its Chairman, Frederic Thomas, for entrusting me with such a mission. After roughly 20 years in the industry starting at Unibail's office division and spending 15 exciting years at Casino and Mercialys in real estate development and M&A transaction, I'm honored to open this new chapter as a turning point in Icade's equity story. I will be immediately working with the executive team, employees and all stakeholders. As you know well, our sector is going through a period of heightened uncertainty and volatility so the future positioning of Icade will need to reflect this new environment and draw on its natural strength, the many areas of expertise in health and a strengthened balance sheet given the transaction on Icade Sante. This in order to seize the opportunities that will open up. I look forward to seeing you once I've settled in.And now let's move on to the presentation of the Q1 figures and Q&A session. Victoire, the floor is all yours. Many thanks.

[Victoire Aubry, executive]

Thank you very much, Nicolas. Good morning, everyone. So before commenting the fourth quarter numbers, just a few words regarding the overall macroeconomic environment. As in 2022, the macroeconomic environment and the financial environment continued to be volatile over the first 3 months of the year still marked by persistent financing rates maintaining at high levels in the context of continued policy operating rates by central banks to fight against persistent inflation. It obviously makes for businesses, both investment in offices and development in residential, even more challenging. But it makes the main Q1 announcement, the Healthcare transaction even more relevant for Icade. The significant deleveraging of the balance sheet before the end of the year will enable Icade to get through the coming down real estate cycle more comfortably.Let's go now to Slide 5 to start the presentation with the key takeaways of the period I would like to share with you this morning. First, in this context as I mentioned just before, Icade's operational indicators remained resilient during the quarter reflecting once again solid fundamentals of our businesses. In term of revenues, the total amount in group share and excluding Healthcare, I will come back to that, stood at EUR300 million; globally in line with our quarterly year expectation, slightly above in offices thanks to better level of indexation and below for Icade Promotion that I will elaborate in a few minutes. Unsurprisingly, second takeaway for the period is the announcement mid-March of the exclusivity agreements between Icade and Primonial for the sale of Icade Sante, a significant transaction secured for an amount of EUR1.4 billion and in condition in line with December 2022 NAV allowing Icade to deliver 1 of its first 2023 priority, liquidity of Icade Sante.The third takeaway is directly linked with the previous one. The transaction of Icade Sante especially offers opportunity to deleverage significantly our balance sheet before the end of the year. Thus, we will continue to benefit from a solid rating at BBB+ with a stable outlook. Don't hesitate to have a look on the S&P publication the day after the announcement of the Healthcare transaction in March 2023. In that respect, let me remind you that LTV including duties is expected as end of 2023 and before capital allocation around 31% based on budget assumption regarding the valuation part and the net debt-to-EBITDA ratio should be close to 8x. And fourth, we held our general meeting last Friday and I wanted to highlight 2 resolution approvals. First, the AGM approved the payment of dividend of EUR4.33 per share, an increase of plus 3.1% compared to last year and important to highlight, fully paid in cash.And finally, the Board proposed the second Climate & Biodiversity resolution for the second year in a row approved in 2023 by more than 98%. I have a dedicated slide in this presentation. Let's now move on Slide 6 with the figures of our revenues and let me start with a word on the accounting treatment for the Healthcare business. Indeed in anticipation of the full deconsolidation of the Healthcare business as of the closing of the first stage, we applied in our Q1 reporting the accounting standard IFRS 5 relating to noncurrent asset held for sale and discontinued operations. As a consequence, the group revenues for Q1 2023 do not include the contribution of the Healthcare business and the comparable period has been restated of course. So total revenue group share for the first quarter stands at EUR300 million.This amount mainly reflects: first, slight decrease of revenues for the Office division minus 2.8%, a solid performance in our view in the context of significant disposal in 2022. I remind you we were net disinvestors last year. Excluding the impact of 2022 disposal, gross rental income would have risen by 3.7% on a reported basis. And the second comment on Icade's Q1 revenues, the significant slowdown on the residential market reflected in the Q1 turnover of Icade Promotion after also a particularly dynamic commercial performance in 2022 especially in Q4. Let's move on the operational performance of each business line starting with our Office Property division. I'm on Slide 8. As far as the market is concerned and you will have all in mind ImmoStat data, which were released 10 days ago. It is fair to say that the leasing activity remained quiet in the first quarter. In this context, Icade's asset management activity remained strong in Q1 with nearly 60,000 square meters newly signed or renewed over the first 3 months.This volume represents an annual income of nearly EUR14 million and a weighted average lease break of 6 years. There are several things to note here. First, 3 major renewals covering nearly 40,000 square meters signed in line with the market trends. It includes the renewal of the lease with the retailer Systeme U covering nearly 21,000 square meters in the Paris Orly-Rungis business park for a 9-term with a break option after 6 years. It also includes the renewal of the lease with Adecco for 13,000 square meters in Lyon for a 9-year term with also a break option after 6 years. Those renewals come after significant renewals in 2022, including the 45,000 square meter lease with Veolia, our third largest tenant, for 9-term lease and the 12,000 square meter lease with Club Med in the Pont de Flandre business park for a 3-year term. Second comment on leasing activity. A prelet on 7,500 square meters in des Portes de Paris business park signed with Equinix, a data center operator, for a 9-year term with no break option.The signature brings more than 21,000 volume rented by this operator in the business park. And third comment interesting also to note the continuing attractiveness of the park of Orly-Rungis with new leases covering more than 500 square meters (sic) [ 5,000 square meters ]. This includes a prelet of 300 square meters (sic) [ 3,000 square meters ] signed with a subsidiary of Vinci Energies for a 9-year term and also a 1,200 square meters signed for the sitout of a food hall confirming attractiveness of the business park for the gastronomy sector. Indeed I remind you that Pierre Herme and the Lenotre have already settled in this territory. Those significant signatures demonstrate the ability of the Office Property Division to maintain or attract tenants in the office portfolio even in a competitive market thanks to the quality of our buildings, good centrality, high level of technical and CSR criteria and the high level of services offered.Asset rotation continue with EUR150 million under preliminary agreement with an average yield for office buildings around 4% and we should be in a position to announce very soon a new disposal bringing the total volume to roughly EUR200 million. Given the financial impact of the Icade Sante liquidity operations and the implied cash-in, Icade will pursue its disposal plan using an opportunistic approach without any pressure. As far as the gross rental income is concerned, it stood at EUR83.3 million for offices and business park in line with our budget. I said before the slight decrease by EUR2.4 million compared to the same period in 2022 reflects solid performance in the context of high volume of disposal. On a like-for-like basis, gross rental income was up 2.8% for the office and business park segments driven by the positive impact of indexation at around plus 5% in Q1 2023.For the next quarter, we should have an indexation effect above 5% or even close to 6% implying upside on our conservative budget assumptions. I would add that there is no question about the company's ability to pass on the indexation. As a conclusion for the Office division, a solid start to the year in term of leasing activity in a very quiet market and an opportunistic approach on asset rotation, both disposal and investment side, taking into account the current market conditions. Let's move on the operational performance of the Development business line, I'm on Slide 9. The first comment on the market, all players are observing a market downturn in Q1. This is not surprising and is mainly due to the rise in interest rates over the last 15 months, which has led to a wait-and-see attitude from institutional investors and a reduction of households borrowing capacity. This trend obviously impacted the Q1 indicators with an economic revenue at EUR227 million, down 14% and housing orders from individuals down 15% in value.I remember you the market is down 37% right now for the first part of the year. Those numbers come after a very strong sales performance in 2022 with a record number of orders and revenues up more than 17% over the year, particularly supported in the last quarter. The decrease in housing orders also reflects an unfavorable base effect since the significant volume of bulk sales were signed in Q1 2022 whereas most bulk sales in '23 are expected to be signed in the following quarters. In this context, Icade Promotion continued to be agile and adept. The teams have taken action to cope with the new situation it has; an increased focus on the stock of unsold and completed units which was down 22% year-on-year; closer monitoring of commercial policy, price adjustments and sales promotions; an effort to adapt projects and require great land values; and an analysis of ways to adjust structural costs to this new context.As far as the medium term is concerned, Icade Promotion combined and will continue to benefit from solid market fundamentals and a well-adapted offer based on the strong expertise of the team and in line with the new market expectation. Let me illustrate my comment with the 2 flagship projects in the slide. First, Icade and Duval won a significant tender to develop a large mixed-use project in Saint-Nazaire including 340 housing units, office space, hotel and sport campus securing 2024 revenues and following. Second example, the commercial launch of Neuilly project has started well with orders for 40% of the project. This afterwork project relates to the conversion of a hotel into 166 residential units over more than 16,000 square meters. As of end of March, leading indicators for revenues remain high and will support the volume of revenue for 2023 despite the market turndown.The total backlog stands at EUR1.8 billion, stable compared to Q1 2022 and slightly down compared to end of December securing the company ability to deliver a stable revenue for the full year 2023. I would like now to share a few words on the announcement on Healthcare transforming transaction fully the Healthcare activity by the end of 2025. I'm on Page 11. We held a dedicated conference call on March 14 and you can find the dedicated press release on our website. Let me remind you the main outlines of the structuring operation and to give you a progress report. First, a few figures to present this very transforming operation for the group. The transaction represents 1 more time an amount of EUR3 billion to be paid in cash, including EUR2.6 billion for Icade stake in its Healthcare business based on NAV December 2022. On the top of this EUR2.6 billion, we have a shareholder loan of EUR400 million with Icade Sante and Icade Healthcare Europe.Second, the disposal of Icade Sante will occur with 3 stages. The first one relates to the sale of 60% of our stake in Icade Sante for an amount of EUR1.4 billion plus on top of that, repayment of Icade Sante shareholder loan to Icade for EUR50 million. This first stage will occur by the end of July 2023. The second stage to occur by end of 2025 is the disposal of our remaining stake in Icade Sante. And on the top of that, the third stage of the transaction is the disposal of our stake in Icade Healthcare Europe, which represents an additional amount of EUR0.3 billion paid on 2022 valuation plus EUR0.3 billion of shareholder loan, one more time the rationale and attractiveness for Icade shareholder and [ new owners ]. We have highlighted on this page 5 different elements. First, completion of liquidity event according to the current shareholder priority. Second, crystallization of the value of the Healthcare Property Investment division and unlock capital gain on its investment in Healthcare.Thirdly, and this is related to my previous comments, those capital gains imply the special dividend of approximately EUR700 million payable within 2 years of each share being made. The substantial cash generated by transaction will also help Icade to fortify its balance sheet, as I said before, and deliver. I mentioned in my introduction that the LTV was expected significantly down as of the end of 2023. Last, but not least, the cash in group represented fantastic additional room for capital allocation. Icade will be able to focus on its 2 remaining businesses, sizing potential growth opportunities in a market at the bottom of the cycle in accordance with the new road map, which will be announced by Nicolas as soon as we will be ready. In terms of progress, all conditions precedent and preliminary steps are currently being addressed and should be finalized in time for the first stage to be completed between June 30 and the end of July 2023.I'm here talking about usual conditions such as consultation of the employee representative bodies or obtaining IMF documentation of specific authorization. I'm now on Slide 13. As mentioned in my preliminary comments, the Board proposed a second Climate Biodiversity Resolution for the second year in a row and this resolution was approved by more than 98%. As last year, this resolution covers the low carbon policy and ambitions, which were reinforced at the beginning of 2022 as well as the result which are well-oriented, notably with a decrease in carbon intensity for each business in 2022 especially on our Office Investment division with a decrease of the carbon footprint by 29% over the period in 2019 to 2022. And notice that our carbon ambitions and the methodology to calculate it were approved last October by the SBTi, the world reference organization in the field. And last, but not least, the Financial Time informed us last week of our presence in the climate leader ranking, which aim to identify the European companies that best succeed in reducing their gas emissions. In Q1 we can also announce new commitments to biodiversity and soil protection.New commitments to 2030 are as follows: revitalize 100% of new construction on the Property Development division and in the business park of [indiscernible] by 2030, biodiversity support solution for 90% of the Office division assets, voluntary contribution to the restoration or conservation of ecosystems through rigorously selected programs. As you can see, our commitments on CSR topics remain strong and are in the heart of our businesses. Let's go now to Slide 15 to conclude this presentation of our Q1 20232 renewals and to give you some outlook. As indicated on several occasions in this presentation, the environment remains complex and volatile and so a certain wait-and-see attitude in the various markets. And in this context, it is fair to highlight that the business line posted solid performances in the first quarter reflecting the robustness of the fundamentals and the group's ability to adapt to market conditions. So Icade confirmed today's guidance for 2023 as announced at the end of February.In terms of guidance, group net current cash flow per share is expected to trend in 2023 stable to slightly positive excluding the impact of 2023 disposal. The impact of the liquidity transaction on the 2023 net current cash flow will be specified when the first stage closing is announced and by the end of July 2023 at the latest. In term of dividend policy, the evolution should be in line with the pro forma current net cash flow change with a payout ratio of approximately 80%. The Icade Sante liquidity transaction once fully complete will generate a total capital gain of around EUR1.2 billion resulting in a total distribution obligation of around EUR710 million. The timing of the exceptional distribution will depend on the actual pace of disposal at each stage. It should be noted that the SIC regime provides for the possibility of spreading each of the capital gain distribution obligation over 2 years. Thus, the assessment of the amount of the exceptional dividend for the year 2023 as well as the timing of the payment will be specified at the end of the announcement of the closing of the first stage of the transaction.I thank you for your attention. And now Nicolas and Anne-Sophie and I are ready to answer to your questions.

[Operator]

[Operator Instructions] We'll go with our first question from Veronique Meertens from Kempen.

[Veronique Meertens, analyst]

Two questions from my side. Could you elaborate on the assumptions you have for your NCCF guidance? Do I understand correctly that revenues for Promotion are expected to stay stable year-on-year and also curious to see what your like-for-like performance expectation for the Office segment is? You mentioned a key indexation trend upwards, but curious to see what the reversion is -- what your assumption is on the reversion on the relettings? And in line with that, could you highlight what the reversion was on the relettings that you did during Q1?

[Victoire Aubry, executive]

Okay. First part for your question regarding the net current cash flow expectations on a full year basis. As I said just before, we confirm our guidance. I mean by that we could have a stable not to say slightly positive. It will certainly depend on the performance of the Icade Promotion division. As you said, perhaps there is a little bit more volatility. And as you noticed, certainly the market is clearly highlighting a significant slowdown in 2023. So clearly if we have to be cautious, it's on the Development division. So far the team confirmed that we will be able to maintain turnover stable on a full year basis. One of the key topics will be of course to be focused on the margin to be sure that it will remain stable to secure the net current cash flow. But right now we confirm that we will be able to maintain our guidance.On the second -- for your second question regarding the like-for-like evolution on the office side, it's not an easy question. Certainly it's fair to say that we could expect, as I said in my presentation, a little bit higher level of positive impact of indexation on a full year basis. But in the meantime, all markets are very competitive and you understand that our focus is to maintain new tenants in our portfolio. And so because we are in a very competitive market, it means that we could have when we have renewal or some negative reversion. So I will remain cautious on a full year basis and I can just tell you that we will be able to maintain a like-for-like trend as we have announced for the Q1, but it's difficult for me to be more precise.

[Operator]

We will move on to our next participant Florent from ODDO BHF.

[Florent Laroche-Joubert, analyst]

This is Florent Lauren-Joubert from ODDO BHF. So actually I would have maybe 2 questions. So the first one on the disposal of Icade Sante. So on that point so first question. So could you please tell us how we can be confident on the fact that you will be able to dispose Icade Sante under the 3 stages that you have presented us and specifically for the stage #3? So this is maybe the first question on Icade Sante. Second question of Icade Sante. Could we expect maybe already an exceptional dividend in 2023? And my second question will be more for Nicolas Joly. So what will be your priorities for the next month in terms of capital allocation and investment? What sort of opportunities do you want to take? So could we expect maybe some acceleration in the divestment of your current land banks?

[Nicolas Joly, executive]

Florent, I will take the second question. Well, regarding the use of proceeds, of course it's a very legitimate question and I understand that everyone is eager to know more details on this. But as you all know, I started working at Icade last Friday so as you can imagine, it's definitely too early to comment as I want to make sure that any decision will be thoroughly analyzed and discussed with the rest of the team as well as our Board of Directors. But to answer on my priorities, my priority is definitely to get to know the teams and get to work with them immediately and of course also an in-depth review of the portfolio will be 1 of my top priorities. So be sure I will keep you informed in due time. And Victoire, maybe?

[Victoire Aubry, executive]

Florent, for your first question -- regarding your first question, how to be sure we will secure all the stage of the provision. First, I remember you Primonial is an asset manager so it's not possible for him to put we can say a binding offer for the full transaction on the table, but we have we can say a strong agreement to organize each stages and to secure each stages of the transaction. And especially for the third one regarding the Icade Healthcare Europe subsidiary, we have until the end of -- or we can say Primonial has got until the end of 2024 to organize the transaction and it will be some we can say incentive fees for that. So clearly it's an organization we can sell fully well -- we can say wide secured. But of course it will depend on the appetite of the market in the meantime, but it has to be done and closed before end 2024.So it's in my view a quite secured organization and if it's not if there is no possibility to sell it, we never know; we will continue to have the benefit of the dividend of the revenues of the asset so there is no significant stake. And in addition, just have in mind that the stake of Icade in the Icade Healthcare Europe subsidiary, it's EUR0.3 billion. So it's not the most significant part of our exposure. And last comment, we have a shareholder loan with this subsidiary and it's clear in the agreement that we will be reimbursed before the end of 2024 whatever it happens. So it's important to have this in mind. Your second question, exceptional dividend in 2023. Clearly it is a Board decision and to be fully transparent with you, the Board so far has not decided if there will be an exceptional dividend in 2023. Of course there will be an exceptional dividend, but I don't know if it will be paid in 2023 or as usual in beginning of 2024.

[Operator]

We will move on to our next participant Stephane Afonso from Invest Securities.

[Stéphane Afonso, analyst]

So the first one on your office portfolio. Could you give us the reversion rate that was captured during the first quarter and if possible to comment also on incentives. Also on offices, at this stage what occupancy rate are you forecasting by the end of the year? And maybe one last question on Icade Promotion. How do you see evolving your orders this year and also have you seen some changes on land pricing? And in that regard, how confident are you in maintaining your margin this year? And maybe 1 follow-up question. Could you be more specific regarding the incentives related to the third stage?

[Victoire Aubry, executive]

Your first question regarding Office division reversion in Q1, it's an average of around minus 6% to minus 8% depending the renewals that we have in front of us. So a trend we have is minus 6% and 7% compared to previous level of lease. But as we noticed and as we said -- as you noted and as we said, it's fully in line with the last ERV level in the market. So important to add that because it's renewals of old leases so that's why reversion is a little bit negative. Your second question about cap rate at the end of the year, you mean level of valuation?

[Stéphane Afonso, analyst]

No, no. Occupancy rate, sorry?

[Victoire Aubry, executive]

Occupancy rate before the end of year. We could expect a slight increase before the end of the year. We are expecting a significant announcement with the transaction of the leasing of the remaining part of [indiscernible] building. So it's not already certain so I remain cautious, but it could have a very positive impact on the occupancy rate of the group and it is clearly one of the key points to improve this level before the end of the year. And last question about Icade Promotion, what is expectation regarding the order level before the end of the year? Clearly we are expecting a slight decrease in line with the current level of the market. I remember you our level is quite stronger than the market right now at the end of Q1 and clearly we just begin to use the prices level to adapt or ability to increase reservation and so to increase our sales. I can just tell you that March and April seems to be better than January and February because we began to active such a level. So we are very cautious of course. We know that the market will not be easy, but we remain confident to be able to do better than the market.And your last question is about ability to maintain our margin if I understand well. And so it's a key question because as I said just before, we will use the price -- on the commercial point of view, we will use the price level. So clearly we will have to keep a great attention on our margin. That's why we are already focused on operational cost and structural cost and also it will be a key topic to maintain our margin for this year of course, but we will be focused on this objective. And you have also another question relative to the incentive on the stage of Icade Sante -- on the disposal of Icade Sante, the last part remaining stake of Icade Sante. It's the last question you have. That's it. Its incentive as every asset manager. Its incentive exactly as every asset manager is linked to the volume of the disposal and they will benefit from fees at each disposal. So I cannot give you the level, it's not public. I'm sorry. I don't want to tell you the figures, but clearly it's a good way to motivate Primonial as the main to focus on this execution of the disposal of the Icade Healthcare Europe asset.

[Stéphane Afonso, analyst]

And at least could we have a range?

[Victoire Aubry, executive]

As usual in the market, it's between 0.5 to 0.8. I don't know -- I know, but it's a range.

[Operator]

[Operator Instructions] We will move on to our next participant Jonathan Kownator from Goldman Sachs.

[Jonathan Kownator, analyst]

On the Property Development business, I think you're saying your cancellation rate has increased to 26.9%. Can you just help us understand again how you calculate that cancellation rate and the trends that you're seeing in the market underlying that to what point your clients can cancel?

[Victoire Aubry, executive]

The calculation of the cancellation rate, I propose that I will call back you, Jonathan, because clearly it's a technical question and I don't have the answer so far. It's fair to say that we have an increase of this rate during the first part of the year. What I can tell you is that since a few weeks it slowed down and it's maintaining at this level. But we will go back to you for a precise answer to your question. But it's clearly -- I'm sure you have in mind why the cancellation rate increased. It's mainly due to the level of mortgage rates and so it is a direct impact of the rising interest rate in the market. And also important to have in mind that the behavior of the buyer meaning by that physical person or investor institution, the mix will also have an impact of this level. And we are expecting higher level -- higher contribution of investor institutional so we will have certainly a decrease impact globally in the coming months.

[Operator]

[Operator Instructions] It appears there is no further questions at this time. I'd like to turn the conference back to the host for any additional or closing remarks. Thank you.

[Victoire Aubry, executive]

So thank you very much for your time.

[Nicolas Joly, executive]

Thank you all. Should you have any further question, we'll be happy with Victoire and Anne-Sophie to answer them. So looking forward to seeing you soon and have a nice day. Bye bye.

[Victoire Aubry, executive]

Have a nice day. Bye bye.

[Operator]

Thank you for joining today's call. You may now disconnect. Have a nice day, everyone.