Icade SA

PAR:ICAD

Earnings Call Analysis

Icade Confirms Stable Outlook and ESG Commitment

In a complex market, Icade delivered solid Q3 performances in Commercial Investment and Property Development, showcasing resilience. A strong balance sheet was highlighted, partly due to 1.4 billion EUR cash from the first phase of Icade Sante's sale. Ongoing asset sales and new investor discussions progress. Icade's ESG leadership and climate-responsive initiatives, such as electric vehicle charging station installations, were also emphasized. They confirmed 2023 net current cash flow guidance between 2.95 and 3.05 EUR per shareand expect a property value decrease to continue in H2 2023 with stabilization in 2024.

Solid Operating Performance Amidst Market Volatility

In the face of a complex market environment, Icade has demonstrated operational resilience with solid performance in Q3 2023. This has been particularly evident in their two main businesses—Commercial Investment and Property Development. Despite market uncertainty, the company has reaffirmed its commitment to sustainability and ESG achievements, as it pursues initiatives like the electrification of uses and the installation of charging stations for electric vehicles.

Revenue Growth and Dividend Policy

Icade's consolidated revenues have grown, showcasing a 3.8% increase from the previous year, breaching the EUR 1 billion mark. Alongside this revenue growth, Icade confirms adherence to earlier communicated dividend policy with an anticipation of at least a 10% hike in total dividends for 2023 as compared to 2022.

Commercial Investment Activity Highlights

The Commercial Investment division, despite experiencing a slight downturn due to significant disposals in 2022, has posted a like-for-like increase in gross rental income by 2.5%, bolstered by robust leasing activities and rent indexation. Rental momentum remained stable with over 150,000 square meters signed or renewed to date, contributing unanimously to annual rental revenue. The financial occupancy rate saw an uptick of 100 basis points from the previous quarter, now standing at 87.5%.

Property Development in a Challenging Market

In a contracting property development market, Icade's Promotion revenues impressively rose by 4.9%, attributing this to increased bulk sales and significant commercial segment progress on key projects. Although there is an expected impact on margins at the end of the year due to a rise in block sales, the company remains confident in its guidance, with a proactive focus on managing the balance sheet and working capital.

Financial Prudence and Divestment Strategy

Icade has taken steps to fortify its balance sheet through strategic divestments, including the sale of its healthcare activities. The net current cash flow per share for 2023 is projected to be between EUR 2.95 and EUR 3.05. This forecast includes the effects of disposals made this year and a specific delineation of healthcare division contributions. The company also emphasized financial prudence by redeploying cash into high-yield financial products and reducing credit line exposures, expecting to surpass the anticipated financial product returns due to rising interest rates.

Future Outlook and Strategic Plan Development

Icade is currently laying the groundwork for its strategic plan to be unveiled at the start of 2024. The firm is actively engaging with customers to gauge future demand and is focusing on value-creation initiatives. In dealing with increased sales cancellation rates, the company has stabilized its position and is maintaining a strong emphasis on its block sale strategy. As it advances, Icade is poised to share the full extent of its annual results and strategic plan elements with stakeholders in early 2024.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to Icade results as of September 30, 2023. My name is Alicia, and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand you over to Nicolas Joly, CEO; and Victoria Aubry, CFO, to begin today's conference. Thank you.

[Nicolas Joly, executive]

Good morning, everyone. Nicolas Joly speaking. Thanks a lot for joining this call today. I'm with Victor Aubry, our CFO. And I'm going to present the main figures and key facts of the third quarter 2023 for Icade. And as mentioned, this presentation will be followed by a Q&A session. To sum up on Slide 5, in a market environment that remains complex, Icade posted solid operating performances in Q3 in its 2 businesses, which are Commercial Investment and Property Development, testifying to the group resilience. I would also like to remind you that we have a very solid balance sheet among the least leverage in the market, following the completion of the first stage of the sale of Icade Sante, which brought in EUR 1.4 billion in cash on the 5th of July. We are currently pursuing the process of selling our residual stake in the healthcare division, in particular, by working on the possible entry of new investors alongside Primonial and the minority shareholders. The process of selling off our international assets has also been initiated. This quarter, Icade also demonstrated once again its performance and strong commitment to ESG.Indeed, Icade has been recognized by GRESB as a leader in the European diversified listed property category with a 5 points improvement on last year's rating. Besides, Icade teams have been strongly committed to major initiatives aimed at improving the energy performance of buildings, accelerating the decarbonization of real estate and developing solutions to adapt to climate change. For example, the teams have been fully mobilized to work towards the electrification of [ uses ], a pillar of France's low carbon strategy. We have notably planned to install 1,300 charging stations for electric vehicles by 2025 and to accelerate the use of renewable energies, both in assets managed by commercial investments and in building constructed by Icade Promotion.Finally, in view of the solid results presented, we confirm the net current cash flow guidance communicated to the market last July as well as the dividend policy previously presented. On Slide 6, at the end of September, Icade's consolidated revenues stand over EUR 1 billion, up 3.8% versus September 2022. On the commercial investment activity, the gross rental income is slightly down by 0.9% in the context of significant disposals in 2022.On a like-for-like basis, the performance is positive, plus 2.5%, carried by a very solid leasing activity and indexation on rents. In a sharply declining property development market, Icade Promotional revenues remained solid, up 4.9% versus last year. This performance is mainly driven by the increase in block sales operation and the higher revenue from the commercial segment due to the progress of work on major projects signed in 2022 and on execution of opportunistic transactions, such as the Taitbout transaction in H1 2023.On Slide 8, let's now dive into the performance by business line and start with the Commercial Investment activity. The Commercial Investment division has evolved in a sluggish, leasing and investment environment in 2023 year-to-date. On the rental market, the third quarter was quite better oriented than the first semester, with take-up down by 12% at the end of September versus minus 22% at the end of June compared with last year. The investment market is still at a standstill with volume down by almost 48% compared with the same period last year.In this environment, Icade's rental momentum is very solid with over 150,000 square meters signed or renewed since the beginning of the year, of which 50,000 square meters in Q3 2023. These major renewals represent an annual rental revenue of EUR 42 million and a WAULT of 5.7 years. This strong leasing activity confirms demand for assets that means our customers' requirement in terms of centrality, environmental quality, high level of services and flexibility.Two examples shared with you signed in the third quarter to illustrate that. Firstly, we signed 2 new leases for a total surface over 7,500 square meter in the building La Defense 4/5/6 in Nanterre, less than 1-month after the departure of the previous tenant. Secondly, we finalized the commercialization of the FRESK building with a 6-year lease signed with Inserm. The dynamic leasing activity also illustrates the solid demand for our business parks. Since the beginning of the year, Icade signed and renewed circa 50,000 square meter in Paris Orly-Rungis with different types of assets such as offices, light industrials or hotels after reconversion project. The financial occupancy rate stood at 87.5% at the end of September, up 100 basis points versus June. It was supported especially by EDF Renouvelables on the Origine building in Nanterre and Inserm's lease on FRESK, bringing the occupancy rate for these 2 assets to 100%. On a like-for-like basis, gross rental income was up, plus 2.5%. The growth was supported by positive impact of indexation representing plus 4.6% over the first 9 months of 2023.On Slide 9, in terms of investment policy, we remain cautious and selective as we have been in recent months. In July 2023, we acquired the remaining parts of the Ponant B building, ideally located in the 15th district of Paris, allowing us to hold full ownership of a 33,000 square meter real estate complex and to envisage some value-adding transformation in the medium term. With regard to investments in the development pipeline, they were limited at EUR 109 million over a period of 9 months. Asset disposals are being managed opportunistically with almost EUR 90 million already completed at the end of September, in line with NAV as of December 2022 and circa EUR 90 million under preliminary agreements. Relying on our very solid balance sheet, we do not anticipate any new transaction before the end of the year in a still wait-and-see investment market.Let's now move on to Slide 10 to the operational performance of the Property Development business line. As in June, the residential market is in sharp decline, with reservation down 35% compared to the same period last year. In this slowing environment, Icade Promotion is holding up well with total orders down 22% in volume and 12% in value. In this context, Icade's Promotion priorities to monitor its balance sheet and to keep its working capital under control.Following on the -- from the first half year, Icade Promotion continued to focus on bulk sales in the residential segment. Sales to institutional are up by 15% in value and represent more than 45% of the total orders in volume as of September 30 versus 35% last year at the same time. In addition, Icade remains very cautious in launching new operations. Projects launched since the 1st of January were over 60% presold and the construction starts are down 50% versus the budget as of September 30. However, to be noted that fewer sales launches, higher block sales and the downward adjustment of sales price should [ write ] on margins at the end of the year.On commercial side, although the sales were down sharply in the first 9 months of the year, down 7% compared with the same period in 2022, Icade Promotion successfully signed in the third quarter, some really nice transactions like the signature of the VEFA agreement with a subsidiary of a leading bank group for the construction of a service sector property complex of almost 20,000 square meters in the Archipel Wacken business district in Strasbourg. As of September 30, the backlog of Icade Promotion reached a solid EUR 1.7 billion, down circa 9% versus December 2022, but securing the sales expected for 2023.On Slide 12, results to the end of September 2023, demonstrate Icade's operational resilience in a complex and volatile macroeconomic environment. Icade continues to manage its balance sheet prudently, which has been strengthened by following the completion of the first stage of the disposal of its healthcare activities. In this context, Icade confirms its annual guidance, now expressed, as you know, on a pro forma basis following the deconsolidation of the healthcare activities. The group pro forma net current cash flow per share is expected between EUR 2.95 and EUR 3.05 in 2023, including the effect of 2023 disposals. In addition to the pro forma guidance, Icade specifies the contribution of healthcare division this year, which represented EUR 1.25 per share for the first half of 2023.Regarding the dividend policy, the Board of Directors confirms, subject to approval by the Annual General Meeting, the total 2023 dividend should be at least plus 10% higher than the 2022 dividend. The dividend will be made up partly of the recurring dividend based on minimum legal distribution obligation and partly of special dividends for EUR 2.54 per share at least, resulting from healthcare step 1 disposal.On Slide 13, we look forward to seeing you on February 19, 2024, for Icade's full year results. The team and I are keeping on building the group's strategic orientation for the coming years and are working on an operational rollout. We'll be happy to share Icade's new strategic plan with you beginning of next year.So thank you for your attention. And now let's move on to the Q&A session.

[Operator]

[Operator Instructions] We are going to take now our first question from Stephane Afonso from Invest Securities.

[Stéphane Afonso, analyst]

Do you hear me?

[Nicolas Joly, executive]

Yes, very well, Stephane.

[Stéphane Afonso, analyst]

Okay. So I have a couple of quick questions. So the first one on offices. Could we have the average reversion rate that was captured since the beginning of the year? And also, what proportion of the leases having a break or expiry this year has been secured at this stage? And finally, regarding the sharp slowdown in the SAP market, how confident are you in the ability of Primonial to secure Stage 2 and 3 of Icade Sante disposal?

[Nicolas Joly, executive]

Stephane, well, as for the offices reversion, as you saw, we have some negative reversion on our renewals on an average, around 8%. And that is the reason why the like-for-like, as you see, is slightly below the global indexation rate. Keep in mind also that we had a specific deal with Veolia because, as you know, the global like-for-like is plus 2.5% with Veolia, but without Veolia, it would have been plus 4.4%. That's for the reversion. As for what is expected in 2024, we are working on those renewals. As you see, there's EUR 90 million roughly on discussion in 2024. We started securing a significant part of that. To give you some more detail about that. I'd say that 25% of those EUR 90 million are related to light industrial activities and not offices. So that could be actually an opportunity for us with some positive reversion to be expected on those ones. And as for the remaining 75% of those rents, I'd say that 60% are located in what we consider are well-positioned offices so not significantly worried about that. And we are working on the remaining ones, and we are having some pragmatic discussion with the tenant. And that's also the reason why we are anticipating the potential reconversion of some of those assets. And as for the healthcare business and Step 2 and 3 of the transaction.So as for step 2, -- the next sale of the next stage of the Stage 2, our remaining stake in Icade Sante France, well, it relies on 2 pillars: the first one being using the inflows of Primonial. So keep in mind that Primonial has a commitment to use in priority those inflows for Icade Sante, but as you were highlighting, of course, the collection of those inflows is slowing down currently. So that's the reason why the focus is given on the second pillar, which is the potential entry of new third-party investors on Icade Sante, and we have some interest of some investors.And as for step 3, regarding the international asset, [indiscernible] portfolio, we have launched the marketing of the first asset in Portugal, specifically, and we have some confidence in the execution of the asset sales. Of course, in the current context of persistently high rates and slowdown in transactions, those steps may take longer than initially expected. But given our strong balance sheet, we are under no financial pressure, of course, and we will transfer those assets on conditions that we consider satisfactory. And until then, of course, as you know, Icade will benefit from the dividend increased by its residual participation in healthcare activities.

[Operator]

We'll take now our next question from Florent Laroche from ODDO BHF.

[Florent Laroche-Joubert, analyst]

So yes, maybe 1 question for me on the strategy. So you will present your new strategic plan on early 2024. So what would be your next -- your priorities for the next months? Are there any tangible example to provide to us? And maybe also a question on property development. So you expect a downward adjustment of your margin at the end of the year. So is it possible maybe to have a little bit more color on that?

[Nicolas Joly, executive]

Florent, well, effectively, we'll be happy to share with you strategic plan beginning of 2024. What we expect for the next month is what we are already doing for the past ones. I mean, we are on the ground, interacting with our customers in order to clarify and identify future demand. We carry out very regular workshops with business leader in order to move forward on the operational variation of the roadmap. We also work to identify value-creating vertical. So I'd say that the main goal is to present to you a strategic plan at the start of 2024, which is supported by concrete achievement, definitely because we think that it's not only about sharing convictions but also trying to demonstrate what we want to achieve. And as for the property development margin, of course, as you saw, there was an increase in the block sale because we have a strong focus on managing our balance sheet. There is a slowdown in the individual demand. So we expect that this will have an impact on lowering the level of margin. And of course, also, we expect net current cash flow below by the end of the year on the property development. But still, we are very confident on our guidance given the fact that the financial products, especially from the cash even from the healthcare business will be strong and stronger than expected due to the high rising interest rates before the end of the year.

[Operator]

We'll take now our next question from Veronique Meertens from Kempen.

[Veronique Meertens, analyst]

2 follow-up questions on the office market. You mentioned about the reletting for 2024, but what does it still do for 2023? In other words, what are your expectations for the occupancy rate in the coming quarters? Do you expect it to maintain at this level? And then secondly, we've seen on [ INSEAD ] data that incentives, especially for the more secondary markets have risen quite sharply. Can you elaborate what the census offer you for the recent relettings?

[Nicolas Joly, executive]

Veronique, well, as for the occupancy ratio, well, we think roughly should be maintained by the end of the year. We have some visibility for the transaction coming before the end of the year. So the competency rate should be maintained globally at the end of the year. As for the incentive, what we observed is definitely some rise globally on our markets, on the level of those incentives. From time to time, it's possible to give you an example that we go above 30%, for example. We think we have to be pragmatic to priorities to maintain our tenants and our buildings. That's what we did, for example, with Veolia. And it allows us to enrich the strong partnership we have with our tenants. We have some very large institutional companies, and we think we need to do that. But in any case, when we sign new leases or renewals, we do it at the market standard transaction, regarding both the rental values and the global level of incentives.

[Veronique Meertens, analyst]

Okay. One follow-up question about valuations reaching almost the end of the year. So probably talks with the appraisers have started. Can you maybe shed some light on how those discussions are going? We've seen small transactions coming through, but some of the lots occurs to see how those discussions are rounding at the moment?

[Nicolas Joly, executive]

Yes. So keep in mind that in this quiet market, with very few transactions since the beginning of the year, we've already registered a decrease of minus 6.7% at the end of June 2023. This represents a decline of minus 12% on 12 months. Well, we believe that the decrease is likely to continue in the second half of 2023, and expect roughly stabilization of the values in 2024. This is only the beginning of the discussion with the appraisers, but that's the feeling we get.

[Veronique Meertens, analyst]

Okay. And any ballpark figure what we can expect for the second half or is it still too early for that?

[Nicolas Joly, executive]

Sorry, Veronique, I didn't catch your question.

[Veronique Meertens, analyst]

Do you have a ballpark figure what kind of negative revaluation we can still expect in the second half or is it still too early for that?

[Victoire Aubry, executive]

Too early. It's a little bit too early. We are under discussion with the broker.

[Nicolas Joly, executive]

Yes. Yes, we have twice a year devaluation campaign at the end of December and the end of June from 5 independent property valuers. So it's just the beginning of the discussion.

[Operator]

We'll take now our next question from Ben Richford from SocGen.

[Benjamin Richford, analyst]

Two questions, please, on the development side. What discounts do you typically accept for block sales versus individual sales? And secondly, the sales cancellation rate has increased its about 30% now. What's the implications of this? Do you retain a deposit on these sales? How much is that? Do you change the policy with the expectation of more cancellations?

[Nicolas Joly, executive]

Yes. Well, as you know, so the main focus on our side is managing the working capital and balance sheet. That's the reason why we decided to accelerate on the bulk sales. To give you, I'd say, roughly it has an impact on, I'd say, something like 5% to 10% on the price. That's the reason why. As for the withdrawal rate, it's indeed increasing with a rate at 31.5% for the first half compared to 28.5% for the full year of 2022. As of September 2023, the rate is roughly stable versus June 2023 at 30.9%. So that's the reason why we think now it's globally stabilized, and we maintain, as we told, a strong focus on our block sale strategy to compensate that.

[Benjamin Richford, analyst]

Okay. And just a little more detail on how -- so this is 30% of orders are canceled. Do you get a deposit that you hold on that or?

[Nicolas Joly, executive]

Well, the main positive news is that we think that it's globally stabilized now. September was a bit difficult, but October is slightly better, I think. We don't necessarily expect some further increase in this withdrawal rate. I think the global rates have reached the [ pike ] actually. So it will be now rather a matter of time that -- a matter of increasing this rate.

[Benjamin Richford, analyst]

Okay. Understood. And how much cash are investors walking away from when they make the cancellation? How much deposit have they put up already?

[Nicolas Joly, executive]

No. Well, it really depends. As for those residuals, there is no such thing as some cash deposit regarding the individual because it can depend, for example, about their ability to get the agreement from their bank. So this is a pre-requirement before coming to the definitive agreement. So that's the reason why.

[Benjamin Richford, analyst]

Understood. So no deposit held?

[Nicolas Joly, executive]

No, not regarding individuals. Of course.

[Operator]

[Operator Instructions] We are going to take now our next question from Allison Sun from Bank of America.

[Allison Sun, analyst]

Just 1 question from my side. I appreciate you disclosed like-for-like gross rental income. Can you maybe tell us what's the range of your like-for-like net rental income, please?

[Nicolas Joly, executive]

Yes, we usually communicate on the growth rate, and we don't communicate on the net rate.

[Allison Sun, analyst]

Yes. Or maybe is that still a positive growth because given that the property expenses things, do you grow really fast this year? Any indication or not really?

[Nicolas Joly, executive]

Yes. Yes, yes, that's right. On top of that, the impact of the vacancy. But apart from that, that's okay.

[Operator]

We'll take now our next question from Celine Huynh from Barclays.

[Celine Huynh, analyst]

Nicolas, I got 2 questions. I'll take them one by one, if that's okay. The first question is can you explain what you're doing with the cash currently that's sitting on your balance sheet until it's invested?

[Nicolas Joly, executive]

Yes Celine, yes, of course. Well, the good news -- the one good news from the environment globally is that we have an increase in the financial products due to the large rise of interest rates. So that's the first thing we do. We increased our level of financial products. We have also used our cash in order to reimburse EUR 100 million of credit line. We've also used our cash in order to decrease our exposure to new CP from EUR 550 million to roughly EUR 200 million now. So that's the main news at this stage of our cash. And in the meantime, the remaining cash placed on our accounts, of course, make that, as I've already said, financial products should be higher than anticipated given the rapid increase in the investment rates.

[Victoire Aubry, executive]

So definitely, we are not under pressure to use this cash. We are quite very comfortable to keep this in our balance sheet and to benefiting from a significant level of yield. As we said in the press release, it's 3.2% since the beginning of the year on average. And on the spot level today, these financial products represent around 4%. So clearly, no pressure, and we have the time to redeploy equity and of course, taking into account the current thought about the strategic plan.

[Celine Huynh, analyst]

And Victoire, what was the rate that you budgeted into your EPS guidance for this year?

[Victoire Aubry, executive]

It's a good question. Below that. Below that.

[Celine Huynh, analyst]

Okay. So there's a risk that you do better? All right.

[Victoire Aubry, executive]

Yes, exactly.

[Nicolas Joly, executive]

Yes. Yes. That's also the reason why we are strongly confident about the guidance even if we are evolving in a sluggish environment concerning the property development sector, especially.

[Celine Huynh, analyst]

Okay. And then my second question is on Icade Promotion. The presale threshold on housing is increasing from 30% to 60%. And in that 60% you disclosed, you say it includes institutional buyers. These guys are likely to take 100% of the project. So I'm guessing it is really difficult at the moment to build new development for retail customers since you can't reach that 60%. My conclusion will be that you're not building for retail customers currently. Can you correct me if that's wrong?

[Nicolas Joly, executive]

Well, actually, the 60% is an all-in-all level, including individuals and book sales because some of you told us that the 30% or 40% we communicated end of July was a main focus on individuals, while at the same time, most of the operators in the market are communicating on a global rates, including bulk sales. So that's the reason why we put this 60% so that you have all the information. Basically, historically, we were rather around 30% to 40% bulk sale in a global operation. Mainly our operation are a mix of individual sales and bulk sales, but the part of the bulk sales is increasing sharply, and that's the reason why we are now at a global 60% pre-let before launching the works. Having in mind that considering the individual threshold specifically, we've increased that level from 30% to 40%. Is that clear?

[Celine Huynh, analyst]

Yes.

[Operator]

We currently have no questions coming through. [Operator Instructions] I will hand you back to Nicolas to conclude today's conference. Thank you.

[Nicolas Joly, executive]

Yes. Thank you very much. Well, we've been happy to share this Q3 results with all of you. Really looking forward to seeing you again in the coming weeks and months, and we'd be really happy to share with you our full year annual results in February and also the main pillars of the strategic plan early 2024. So have a nice day, have a nice week. See you soon. Bye-bye.

[Victoire Aubry, executive]

Bye-bye.

[Operator]

Thank you for joining today's call. You may now disconnect. Bye-bye. Thank you.