Icade SA

PAR:ICAD

Earnings Call Analysis

Resilient Performance Amidst Market Uncertainty

Icade reported solid results for the third quarter of 2024, with significant developments across its investment and development divisions. Rental activity remained strong, with almost 51,000 square meters signed or renewed, contributing to a property rental income increase of 3.6% like-for-like, driven primarily by indexation. This showcases the company's ability to navigate a challenging rental market, evidenced by the overall take-up in Edenn France, which has decreased by 9% year-over-year.

Growth in Property Development and Rental Income

The Property Development division saw a 9.6% rise in orders, signifying a glimmer of recovery influenced by falling interest rates. Despite an otherwise cautious sentiment in the market—especially concerning housing permits, which were down 50%—the overall resilience was reflected in the completion of strategic asset disposals. Icade sold four well-positioned offices above their appraised values, emphasizing the stability and desirability of their asset portfolio.

Financial Metrics and Guidance

Total IFRS revenue reached EUR 1 billion, stable when compared to the previous year, thanks to an increase in rental income by EUR 8.5 million. Icade anticipates a net current cash flow from strategic operations in the range of EUR 2.75 to EUR 2.90 per share, with total expected cash flow at the higher end of EUR 3.55 to EUR 3.70 per share for 2024. This guidance reflects the company's robust financial management and loan servicing capabilities.

Balance Sheet Management and Hedging Strategy

Icade maintained a strong liquidity position of EUR 2.4 billion and implemented proactive debt management measures, including the buyback of EUR 350 million in bonds. A recent issuance of EUR 150 million in new bonds at favorable terms indicates solid financial health. Furthermore, the company’s cost of debt was reported at 1.52%, supported by a strategic hedging policy to maintain stability against market fluctuations.

Market Outlook and Strategy Forward

Despite positive momentum in the rental market and Property Development indicators, Icade is adopting a cautious stance due to prevailing market uncertainties. The management emphasized the importance of selectivity in launching new operations, particularly as the political climate and regulatory changes loom ahead. The potential impact of a declining rental income forecast for 2025, projected at EUR 60 million, remains under close scrutiny as they prepare for potential re-leasing and repositioning of existing assets.

Concluding Remarks on Future Developments

In conclusion, Icade is positioned to adapt and respond to market conditions effectively, with ongoing focus on maintaining high-quality assets, liquidity, and strategic planning in service of long-term growth. Investors can expect updates in early 2024 regarding progress and changes in strategic orientation as Icade continues its journey in navigating an evolving market landscape.

Earnings Call Transcript 2024-Q3

[Operator]

Hello and welcome to the Icade Results as of September 30, 2024. My name is Caroline and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]

I will now hand over the call to your host, Nicolas Joly, the CEO, to begin today's conference. Thank you.

[Nicolas Joly, executive]

Good morning. Nicolas Joly speaking. Thank you all for being here today on this call. I am with our CFO, Christelle de Robillard. This morning, we are pleased to present Icade's results as of September 30, 2024. This presentation will be of course followed by the usual Q&A session. So let's start with Slide 5 for an overview of the main messages for the third quarter of the year. The Investment division reported a solid rental activity with almost 51,000 square meters signed or renewed during the quarter. Property rental income continued to grow rising by 3.6% like-for-like driven by indexation. Property Development indicators showed a slight improvement with orders up 9.6% compared to the same period last year against the backdrop of falling interest rates. Nevertheless, we remain cautious in a market still uncertain over the coming months.

During the third quarter, we also demonstrated the appeal of our asset portfolio through the disposal of 4 well-positioned offices located outside the Paris region in Neuilly above the latest appraised value. Given the resilience of our business and very high finance income expected this year, we are aiming for a 2024 group net current cash flow towards the top of the guidance. We will of course come back to this at the end of the presentation. Let's look now at performance by business division starting with Commercial Investment. The rental market in the Paris region continued to slow with take-up down for the third consecutive quarter. Over 9 months, take-up in Edenn France is down 9% compared with last year. Against this backdrop, Icade's team posted a very good performance with almost 51,000 square meters signed or renewed in the third quarter bringing the total volume over the first 9 months of the year to 107,000 square meters.

These signatures and renewals represent an annual rental income of EUR 12.4 million and a WALB of 6.7 years. The good rental momentum was firstly driven by the well-positioned offices, which accounted for 84% of the EUR 12 million of additional income. In particular, we are pleased to announce the signing of a prelet agreement for 24,000 square meters of office in Toulouse on an annual basis accounting for an annual headline rent of EUR 5.6 million. This new project scheduled for completion in 2027 represents circa EUR 70 million of CapEx. In addition, we signed 2 new leases that in my view illustrate our ability to build special dedicated relationships with our major institutional tenants. The first one is with Schneider Electric for a 3,800 square meter additional space in Edenn increasing the prelet rate of this asset to 85%. The second one is with Veolia for more than 5,000 square meters in Aubervilliers in addition to the existing 45,000 square meter already let for its head office.

The financial occupancy rate stood at 86.6% as of September 30, 2024, down minus 1.3 points compared with the end of last year. This decline mainly concerns offices to be repositioned with the financial occupancy rate in the well-positioned office segment remaining above 90%. Let's now move on to Page 8 related to the asset rotation. The investment market is, as you know, still very calm with an investment volume of less than EUR 7.5 billion, down almost 19% year-on-year. Outside the Paris region, the investment market is even down by 26% compared with the same period last year. Nevertheless, we managed to complete this quarter the sale of 2 assets in Marseille for EUR 45 million and to sign additional sale agreements on 2 other assets in Lyon and Neuilly for EUR 37 million. This disposal to first-class users and investors were carried out above the appraised value at the end of June 2024 at prime rates and they testify to the quality and attractiveness of our assets.

Let's turn to Slide 9. This quarter, Icade delivered 2 office assets representing a total of EUR 5.8 million annualized headline rents. The first asset named Cologne is a 2,900 square meter office building in the Paris Orly-Rungis Park let to Phibor, Vinci Energies subsidiary. The refurbishment of this building is a showcase of our expertise in adapting assets to climate change and to the risk of vulnerability to heat waves by 2050. The second called Next is a state-of-the-art 15,800 square meter office asset in the heart of Lyon Part-Dieu, which has been completely refurbished to meet client needs and highest environmental standards. The building was 100% prelet more than 2 years before delivery. Let's now move on to the operational performance of the Development business line. Supported by the fall in interest rates, we recorded a slight positive upturn in orders this quarter.

At the end of September, the Property Development division booked more than 2,800 orders, up plus 9.6% in volume and plus 2.3% in value compared with the same period last year. The improvement has been particularly noticeable in sales to individuals while the momentum on block sale has remained relatively in line with what we've observed in the first half of the year. Despite these positive signs, we remain cautious about the months ahead in a market context that is still fraught with uncertainty linked to the pace of interest rate cuts, the end of favorable Pinel tax regime and the political environment in France. In this context, the group has been still highly selective as shown by the figures. Firstly, the housing permits filing were 50% down versus last year; secondly, the sales launches declined by 32%; and thirdly, the presold rate on operations launched has been maintained at 80% year-to-date.

And I will now hand over to Christelle for an update on the financial results.

[Christelle De Robillard, executive]

Thank you, Nicolas. Let's move to Slide 12 in which we present the trend in consolidated revenue as of September 30, 2024. The total IFRS revenue amounted to EUR 1 billion, stable compared with last year. Over the first 9 months of the year, the stability of revenues is explained by the good performance of the Property division with rental income up by EUR 8.5 million. The consolidated revenue from Property Development division is slightly down, driven by the reduction in the backlog. Let's jump directly to next slide for details on Property Investment division. Gross rental income amounted to EUR 280 million as of September 30, 2024, up plus 3.1% compared with the same period in 2023. Growth was mainly driven by indexation plus 5.5%, partly offset by the effect of tenant departures minus 2.2% and negative reversions on renewals minus 0.2%.

Performance varies according to asset class and is particularly supported by like-for-like growth in the well-positioned office and light industrial segments at plus 6.3% and plus 6.5%, respectively. Economic revenue from the Property Development business stood at EUR 829 million at the end of September, down minus 1.7% compared with the same period last year with the various business segments following different trends. Firstly, revenue from the Residential segment was up plus EUR 35 million compared to the end of September 2023 driven by the reduction in the backlog built up at the end of 2023. Secondly, revenue from the Commercial segment was down minus EUR 56 million compared to the same period in 2023. As a reminder, the first 9 months of 2023 were positively impacted by the opportunistic sale of an office building on rue Taitbout in Paris for EUR 40 million.

Let's move on to Slide 15 related to balance sheet management. The group continues to manage its balance sheet proactively. Firstly, we maintained a very strong liquidity position at EUR 2.4 billion at the end of June 2024 covering the group debt maturities until mid-2028. Secondly, over the first 9 months, we proactively managed our debt maturity schedule. In the first half 2024, we successfully bought back EUR 350 million of bonds, enabling us to reduce the next 2025 and 2026 bond maturities. In July 2024, we issued EUR 150 million of new bonds at attractive terms maturing in 2030 and 2031. Thirdly, we have maintained a robust hedging policy. In particular, we strengthened our long-term hedging profile in June and July with EUR 200 million of forward swaps starting in 2026 and 2027. To be noted also that our 2024 debt is still fully hedged.

I'll hand over to Nicolas for the conclusion and details on the guidance.

[Nicolas Joly, executive]

Thank you, Christelle. Well, based on the group's results as of September 30, 2024 and our year-end forecast, we expect; on the one hand, a net current cash flow from strategic operations to be towards the top of the EUR 2.75-EUR 2.90 per share range given the resilience of the property business, the significant finance income and tight cost control; and on the other hand, we expect a net current cash flow from discontinued operations of circa EUR 0.80 per share. So as a result, we expect a group net current cash flow for 2024 towards the top of the EUR 3.55-EUR 3.70 per share guidance range. So to wrap up. Well, I would say that we saw encouraging momentum in Q3 with good rental activity, an improvement in liquidity on some small and core assets and better operating indicators for Property Development despite the context that still remains uncertain. At the same time, we are continuing to work on our reshape deployment challenges on which we'll be happy to provide you with an update in the full year results 2024.

And with that, let's start the question-and-answer session.

[Operator]

[Operator Instructions] We will take the first question from line Celine Huynh from Barclays.

[Celine Huynh, analyst]

I just have 2 questions, please. The first one, can you confirm how much annualized IFRS rental income is expected to be lost in 2025 due to tenant departures? That would be my first one. And my second one is on the disposals of the healthcare portfolio. I think you mentioned in the last set of results that you were going to talk about the disposal of the Italian portfolio, which is part of [ Assure ]. Can you provide an update on this and also on the sale of the French portfolio to Primonial? How binding is your option to Primonial, i.e., can you break it if there's another buyer?

[Nicolas Joly, executive]

Celine, thanks for your question. Well, on the first one regarding the lease expiry schedule, I will firstly answer on '24 to be as transparent as we've always been. So as for '24, we are broadly in line with what we've shared in July with EUR 24 million of rent loss year-to-date and we expect an additional EUR 25 million before the end of the year, including the Pulse building with [indiscernible]. So on those EUR 24 million plus EUR 25 million, the majority are composed of to be repositioned offices in the Pulse building. Regarding 2025, we will give you more visibility of course in the full year 2024 results. It's a bit early to tell. Maybe just to share the growth figures. We are here talking about a total annual rent of EUR 60 million. So this is below what we were facing in '24, which was a record year. There's also the fact that 60% of those EUR 60 million concern the first semester. So definitely we shall have good visibility next February and we will be as transparent as we've been this year about our revenue expectations.

For your second question on the Healthcare disposal, well, actually there are no major news during the past 2 months. It was quite a short period of time since the end of July. Of course there's absolutely no change of strategy on our side and still the priority to execute Stages 2 and 3. Maybe a word on Stage 2. We still have discussions with Primonial and other investors confirming their interest in the asset class and the uniqueness of the asset portfolio and also confirming that most of the investors wait for the year-end to confirm the stabilization of the value before moving on to their investment process decision. And on Stage 3, we're referring to the Italian portfolio. Indeed, the marketing of this portfolio is ongoing. As we shared in July, we structured beginning of September a dedicated process with the bank after receiving an unsolicited offer in July on part of the portfolio.

We expect some LOIs mid-November and hopefully, we'll be able to organize a second round in Q4 for expected sale agreements and closing during the first semester of 2025. We will of course also keep you posted on the next step. You know that in the meantime, we are still benefiting from cash flows and dividend. And as for the agreement with Primonial, as we've already said in the past on Stages 2 and 3, this is not a binding agreement with Primonial. So Primonial is not compelled to buy. They are compelled to prioritly dedicate their inflows. But as you know in the current context, they don't have inflows anymore. That's the reason why we are going to third-party investors, especially international investors too. But the agreements are nonbinding, but that also give us the room to renegotiate with other type of investors for example.

[Celine Huynh, analyst]

Can you confirm the size of the Italian portfolio, please?

[Nicolas Joly, executive]

Yes. It's roughly 40% on the international total portfolio.

[Operator]

We will take the next question from line Valerie Jacob from Bernstein.

[Valerie Jacob Guezi, analyst]

I've just got 2 questions. My first one is on the Property Development business. You're saying that you're seeing better operating indicators and I think the turnover is down versus last year and is expected to still be down next year. And I was wondering if you could help us understand what does that mean for margins and how quickly you think you can restore the margin of this business? That's my first question. And my second question is you've done 2 disposals ahead of book value and I just wanted to know that if that makes you confident that your asset values could be stable in H2 or do you expect more weakness due to some tenants departure?

[Nicolas Joly, executive]

Well, on your first question regarding the development activity, well, the turnover indeed is pretty stable, but also due to the fact that there's been months now that we are more and more selective as you saw on the figures shared on the presentation. I would say that yes, we've seen some recent positive sign in the market with the falling interest rates, slight increase in orders, also a decline in cancellation rates by private individuals. All of that are good news. But once again in our view, the political and fiscal context still calls for caution. Still ongoing discussion on the finance bill, you got the municipal election in March 2026 that are tomorrow and there's also the end of the Pinel tax scheme at the end of 2024. So that's the reason why we think we need to remain highly selective in the launch of new operation as shown in the presentation. And as for the second question on the asset value, well, yes, we were pretty satisfied to see that we were able to find some liquidity on the asset especially above the recent valuation.

More globally I would say that we still have the similar view as the end of July meaning that the main part of the adjustment is in our view behind us. The risk premium has been restored. Maybe you all know that; but as a reminder, over the past 24 months as of June 30, 2024 the adjustment on the total portfolio was minus 26%. Of course the strongest adjustment was on the to-be repositioned assets whose value has been almost cut by half. We saw that the portfolio value slowed less in H1 compared to the last period. We remain cautious as some further value adjustments are still possible in our view by the end of 2024 especially on the to-be repositioned assets due to the polarization of the investment market as you know. But interest rate cut seems to be well underway now even if we also need on this side to remain cautious about the pace of the decline, which is still data dependent as explained by the Central Bank. So that's globally our view, too early to tell. The discussion with the appraisers are only starting now.

[Valerie Jacob Guezi, analyst]

Can I just ask a follow-up question on my first question? I mean I understand you say you need to remain selective, but does that mean that you're going to do less in volumes, but at better profitability? I mean if you can be a bit more specific on what that means?

[Nicolas Joly, executive]

Yes. We are more selective both on the margin of the new operations that are launched, also more selective on the level of pre-commercialization before launching the operation, but we still have some operations that have lower margin that need to be delivered. On that, we went through the whole portfolio, as you know, at the end of June and now have a clear view on what is ahead of us. So we still need to deliver some historical operation with lower margin, but we are really selective on the new ones to be launched.

[Operator]

We will take the next question from line Laroche-Joubert from ODDO.

[Florent Laroche-Joubert, analyst]

So maybe I would have a first question on offices property, the investment. Could you please give us maybe more colors on the level of rents of the leases signed this quarter compared to previous rents that you could have signed in the same areas? And that would be my only question.

[Nicolas Joly, executive]

Okay. Florent, thanks for your question. Well, as for the new leases signed, we are also there in line with what we've shared. I mean we still sign the new leases and renewals in line or above the ERVs with incentives that are in line with the market. So no major change with our strategy on the past month. And as you know, therefore, we are still crystallizing the negative reversionary potential we shared with you. On this one, there's no updated figure of course to disclose on this Q3 result on the well-positioned asset. Maybe you can consider a gap that is slightly widening compared with the beginning of the year as indexation remains strong in '24 and continue to impact positively the rent, but not the ERV. But of course we will provide you with an update in the full year release on that. But globally every time we sign a lease, it's at ERVs or above with incentives in line with the market.

[Florent Laroche-Joubert, analyst]

Okay. And can I in terms of follow-up question. So could you please tell us how you see the ERV to change during the year, Y-o-Y?

[Nicolas Joly, executive]

Well, ERVs remained pretty stable over the past months and years. We saw that the incentives increased over the past months and years. There was like a slight inflection on some areas outside of Paris regarding the incentive on the last data shared. For example in Ile-de-France, but only the beginning. We are still expecting ERV to be maintained pretty stable as for well-positioned offices.

[Operator]

We will take the next question from line Amal from Degroof Petercam.

[Amal Aboulkhouatem, analyst]

So I think one of the question was already answered previously about the conditions for the recently signed lease contracts. Perhaps just a follow-up would be on the lease that expired in 2024 so roughly EUR 50 million. What's the share or the amount that you are expecting to relet by next year out of all the lease that have expired or are about to expire in Q4?

[Nicolas Joly, executive]

Thank you, Amal, for your questions. Well, as we said, the majority of those departures were coming from assets to be repositioned and the Pulse building that formerly hosted the Olympic Committee. So for the to-be repositioned assets, you know that our strategy and conviction about that is that really hard to find a new office tenant. That's the reason why the teams are working on repositioning scenarios that can be anything, but offices. So we don't expect to sign new leases on those ones. And the strategy once again is to reposition the asset and then sell them once we've secured the building permit for example. And for the Pulse building, well, on this one, no major news to share on this Q3 too. And as we've already said, this will take time because even if this is a great building, it's still hard momentum from the global area, the northern part of the Parisian region and the more local environment is still evolving there. So it will take time definitely before reletting this space.

[Amal Aboulkhouatem, analyst]

Perhaps a follow-up question. You didn't provide any guidance for dividend, but you seem more confident on the, let's say, EPS, net current cash flow figure for 2024. Can you share with us perhaps what would be the criteria given your liquidity position and the current liquidity in the market? How do you see the dividend evolving or being set in 2024?

[Nicolas Joly, executive]

Of course it's too early to talk about dividend, but we'll stick to our philosophy. And as we've said in the past, our priority once again is to retain as much cash as possible to finance reshape in our strategic plan. So the distribution will be limited of course to seek obligation. But I'm sure you also have in mind that we have this remaining residual healthcare distribution obligation accounting for EUR 2.54 per share.

[Operator]

We will take the next question from [ Nadia Rahman ] from UBS. The line has been dropped. We will take the next question from Neeraj Kumar from Barclays.

[Neeraj Kumar, analyst]

I have just one quick question regarding your hedging profile. It says you entered into EUR 200 million forward swap agreement during the quarter. Can you provide a bit more color around this and is it linked to any potential refinancing activity you may incur in the short term?

[Christelle De Robillard, executive]

Thank you for your question. So indeed, we mentioned that we are fully hedged until end of 2024 and we manage also at the same time to have a good level of cost of debt. At the end of June, we posted a cost of debt at 1.52%, which was indeed slightly improving than to a swap entering into force from the end of 2023. At the same time, we are very cautious and proactive regarding our hedging policy. That's why we implemented 2 new swap recently for more than EUR 200 million that will enter into force starting in 2026 and 2027. So all in all, this should help to keep cost of debt below 2% until 2026, in particular due to the expected drop in gross debt, but also with this good level of hedging.

[Operator]

[Operator Instructions] We will take the next question from line [ Nadia Rahman ] from UBS.

[Unknown Analyst]

Sorry my line was disconnected earlier. Just one question on the inflation and the indexation that you're seeing in your rent and the like-for-like. So I believe there was I think roughly 5.5% indexation contribution, but then you're seeing a negative reversion and also from the tenancy. So with inflation coming down across the Eurozone more widely and in the next few months, there's a soft macro environment, where do you see the indexation going from here? And do you think you'll still see the same like-for-like across the coming few quarters to a year?

[Christelle De Robillard, executive]

Thank you for this question. So indeed, you're totally right. Our performance at the end of September was majorly and entirely supported by the good effect of indexation at plus 5.5% at end of September. But indeed when we look ahead, we are expecting inflation in 2025 to decrease and to be more between 2.5% to 3% and then to continue to decrease slightly.

[Operator]

We will take the next question from line Aakanksha Anand from Citi.

[Aakanksha Anand, analyst]

I just had a quick question on healthcare sale pricing. Is there any potential to renegotiate the pricing that might be upward or downward under the agreement you're already in for Stages 2 and 3? And just a quick one follow-up on that is do you think you might get more negotiating power with a third-party investor outside of the current agreement?

[Nicolas Joly, executive]

Thanks for your question. Well, about the price on the healthcare transaction, I'd say the basis is basically the NAV. That's the price at which for example Primonial has some call option on our share. But definitely there's optionality of negotiating some potential price below that or above if Primonial is not in a position to buy the share. So basically as once again the WALB agreement is definitely nonbinding on the Stages 2 and 3. Well, there is main direction pointing at the NAV, but we have opportunity and room to negotiate some discounts or prices above. What we don't want to do, as already shared, is to accept very large discounts for just the sake of saying that we sold the healthcare business. Of course we can be open to some slight discount depending on the size of the potential investment. But our view on that is that as this delivers steady and predictable cash flows that are supporting our group cash flows, that would not make sense to accept very large discount on that. But if we want, we have room for.

[Operator]

There's no further questions on the line and we will hand it back over to your host for closing remarks.

[Nicolas Joly, executive]

Okay. Well, thank you all of you for being here or on the call. Looking forward to sharing some news for the full year results next February in 2024 and before that, looking forward to seeing you again. Bye-bye. Have a nice day and a nice week.

[Operator]

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