Cofinimmo SA

XBRU:COFB

Earnings Call Transcript 2020-Q2

[Operator]

Hello, and welcome to the Cofinimmo 2020 Half Year Results Call. My name is Annika, 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 your host, Jean-Pierre Hanin, to begin today's conference. Thank you.

[Jean-Pierre Hanin]

Good morning, ladies and gentlemen. Thank you for dialing into this conference call and for being with us for the presentation of Cofinimmo's 2020 half year results. In the room around me -- or with the appropriate distance, I have today Jean Kotarakos, CFO; Francoise Roels, Chief of Corporate Affairs and Secretary General; Yeliz Bicici, COO, Offices; Sébastien Berden, COO, Healthcare; as well as our Head of Control, Jonathan Hubert; Head of Treasury, Maxime Goffinet; our Head of ESG, Hanna De Groote; and our Head of External Communications and Investor Relations, Jochem Binst together with Lynn Nachtergaele, our Investor Relations. Let's move now to Slide #3. As we have seen, Cofinimmo's results are solid despite the current health crisis context, with EUR 331 million invested over the half year, including the delivery of several projects, which contribute to our objective of reducing the energy intensity of our portfolio. Cofinimmo is still aiming at achieving the investment budget of EUR 375 million planned for this year. Furthermore, the 2 capital increase of June, the optional dividend and the contributions in kind totaled almost EUR 141 million and the financing operation concluded over the half year are reinforcing Cofinimmo's to its strategy. With a debt-to-asset ratio of 41.8%, Cofinimmo's consolidated balance sheet shows a strong solvency, which is a valuable asset in the current changing environment. The past half year ended with results which are in line with the outlook for 2020 we published in April. Since the beginning of the year, we invested EUR 182 million in healthcare. With these investments, Healthcare represents now EUR 2.3 billion. This account for 57% of the group's overall portfolio, which has now reached EUR 4.5 billion. Moreover, we pursue our strategic goal in our Offices segment by strengthening our presence in the Brussels Central Business District. Not only did we acquire an office building in this area for EUR 40 million, we also delivered the landmark Quartz building. The net result from core activities group share stands at EUR 88 million, an 18% growth compared to the first half year of 2019. The expected gross dividend payable in 2021 can be confirmed at EUR 5.8 per share. Moving to the next slide, #4. Following the outbreak of the COVID pandemic, Cofinimmo has implemented several measures to ensure the continuity of its activities while making the health and well-being of all its stakeholders its priority. The operational teams remain in close contact with the group's tenant to ensure the continuity of services and help them get through these difficult periods. Cofinimmo reviewed the situation at its counterparties on a case-by-case basis in order to find a balanced solution where appropriate. In this context, in order to reflect the doubt as to the current ability of some tenants to pay their rent and without prejudging the outcome of the discussion with this tenant, Cofinimmo has already booked write-downs on trade receivables for approximately EUR 2 million. The lockdown measures have had very little impact on ongoing construction side and investment projects. As from mid-May, Cofinimmo was able to resume the execution of its growth strategy and despite the current changing context, still aiming at achieving the investment budget of EUR 375 million planned for 2020. With a debt-to-asset ratio of 41.8% as of the end of June, Cofinimmo's consolidated balance sheet, whose BBB rating was confirmed in April, shows a strong solvency which is a valuable asset when addressing the current crisis. Our company profile is well-known by all of you. So I will skip the next slide, and I am basically going directly to Slide #7. This is the chart you know with the breakdown of our global portfolio per segment based on a fair value of EUR 4.5 billion. Healthcare represent over 40 -- 57% of that portfolio as a consequence of our strong acquisition activity in the first half of 2020. We see on the next slide that we are currently present in 5 European countries, and we will share more details with you later in this presentation. On Slide #9, you see that our investment in Healthcare was strong in the first half year despite the health crisis. July was also a busy month in terms of investment activity. In terms of ESG, we started implementing the project called 30³, aimed at reducing further energy intensity of our portfolio by 30% by 2030 to reach 130 kilowatts per square meter. In order to reach this objective, we have a set of series of tangible targets for all of our segments that we remind on this slide. I'm on Slide 11. As you know, Cofinimmo has a long and deep experience in ESG. This slide shows previous initiatives. Slide 11, the past, while Slide 12 show the applied framework and the different assessment received consistent with the slides we showed in February. The current COVID context, I'm on Slide 13, enables Cofinimmo to focus on the "S" of ESG, that can also refer to solidarity. In addition to the measures already listed on Slide #4, Cofinimmo supports initiatives aiming at fighting against the pandemic and its effect in the Healthcare sector, and more particularly, in nursing and care home as well as hospital. The budget for the donations represent an amount of EUR 0.5 million. Moving to the next slide. Cofinimmo's market cap was EUR 3.3 billion at the end of June. Daily liquidity remains sound. The total return since end of June amount to 12% higher than the indices. On the next slide, we zoom on 2020. Cofinimmo showed resilience to the effect of COVID-19 on the financial market. Total return in 2020 at minus 2% is markedly better than several indices. The following slide will take a closer look at our property portfolio. I'm on Slide 17. At the end of June, the occupancy rate reached 97.5% compared to 97% at the end of 2019. In Healthcare, the occupancy rate remains very close to 100%. In the Office segment, the rate reached 92.7% coming from 91.5% is mainly on the back of new rentals. The weightedAverage of residual lease term is 12 years, as illustrated on Slide 18, and remains unchanged compared with the end of 2019. Also compared to 2019, yields are nearly unchanged. I will now invite Sébastien Berden, our COO of Healthcare, to take you through the highlights of the Healthcare segment, starting on Slide 21.

[Sébastien Berden, Chief Operating Officer of Healthcare]

Thank you, Jean-Pierre. As already mentioned, our Healthcare department has been very active this first half year. Despite the current health crisis, the group invested EUR 182 million in high [ quality ] healthcare real estate. Thanks to a series of acquisitions. The fair value of our Healthcare segment now amounts to EUR 2.6 billion, and our continued investment really illustrates our mission to consolidate our leadership in the healthcare real estate in Europe. Moving to Slide 22. The segment now represents a surface area of more than 1 million square meters, spread over 207 assets. The following slides records all the acquisition we made during the first 6 months. I briefly commend them. On the 10th of June, we acquired through contributions in kind 6 healthcare sites for a total amount of EUR 105 million. They are all situated in the Flemish region of Belgium and represent together 38,000 square meters. All our modern building leased for 27 years. Moving to Slide 24. During Q1, we completed the extension of an orthopedic clinic in Rijswijk in the Netherlands. This 11 million project has a surface of 4,000 square meters, triple net leases spans on a period of 15 years. We also acquired a to-be renovated nursing home and care home in the Hague in the Netherlands. The investments amounts to EUR 4 million. But on top of that, we will do a renovation project for EUR 10 million. We expect the works to be completed in Q3 2021. In July, also in the Netherlands, we delivered the reconversion of a former bank office into an MOB in Bergeijk in the Southern Netherlands. Also in July, was a very busy month because we acquired also the nursing home Moermont in the Dutch city of Bergen op Zoom situated in the South of the Netherlands. This was an investment of EUR 46 million. In the second quarter, moving to Germany now, we completed the project of a psychiatric clinic in the town of Kaarst near Cologne in Germany. This is a facility with approximately 70 beds and 20 day care units. It's a state-of-the-art mental health facility that we leased on a long-term basis to Oberberg. At the end of the second quarter, Cofinimmo also signed agreements for the acquisition of a nursing and care home in Bickenbach, very close to Frankfurt. The transaction value will be approximately EUR 16 million. And worth mentioning is that after this transaction, we will reach the milestone of 40 care sites in Germany. The value of our Healthcare portfolio in this country is already more than EUR 500 million. So 3x more than at the beginning of 2018. Moving to Slide 30 and to Spain. You'll remember that Cofinimmo entered Spain in September 2019. We were -- where we already hold a healthcare real estate portfolio with a fair value of about EUR 20 million. This comprises the 3 sites on the construction in Galicia and Murcia since 2019 as well as a land reserve. In July, we acquired a first standing asset in Andalusia, and the plots of 2 additional projects in Catalonia and Valencia. It's worth mentioning that the project team of the Office Department of Cofinimmo is actively leading those development projects under the supervision of my excellent colleague, Yeliz Bicici. Their long-established knowhow and expertise are key assets in the setup and execution of those projects. And this is probably a very good bridge to hand over to my colleague, Yeliz, for the next part of the presentation.

[Yeliz Bicici, Chief Operating Officer of Offices]

Thank you, Sébastien. Moving on to the next slide for the breakdown of our distribution networks on Slide 32. Our 2 portfolios, Pubstone and Cofinimur, represent on 30th of June 2020 a fair value of EUR 0.6 billion. Both networks together cover about 380,000 square meters and count almost 1,200 assets. As echoed in the press [Audio Gap] in 2020, Cofinimmo and AB InBev concluded amendments relating to the Pubstone portfolio. This agreement is fully in line with the assumptions taken into account when we updated the 2020 EPS guidance in April. We will not elaborate any further on this topic since we do not comment on the situation of individual customers. Regarding the MAAF portfolio, it was subject to a memorandum of understanding relating to the contracts expiring in 2020. The forthcoming signature of the agreements resulting from the execution of this memorandum will result in an increase of the average residual lease term. I propose to skip to the next slide and discuss the Office segment as of Slide 35. The fair value of the Office segment represents EUR 1.3 billion at end June 2020, and count 77 sites for 540,000 square meters. Moving on to Slide 36. You see the acquisition we made in the CBD of Brussels. We invested approximately EUR 40 million to acquire the building Troonstraat, a building containing a well-known medical center and offices in the neighborhood of the European institution. On Slide 7 (sic) [ Slide 37] , you will see our building Quartz. In June, we performed the provisional acceptance of this building. This landmark office [Audio Gap] combines an innovative architecture with high sustainability and the key strategic location. Quartz will become the home of the European Free Trade Association, the EFTA Surveillance Authority and the Financial Mechanism Office. It is part of our strategy to improve the overall balance of the office portfolio. We do this by reducing the portion of the portfolio invested in the decentralized zone in favor of properties located within the CBD. Slide 38 gives an overview of the major disposals initiated over the last quarters. This includes the Leuvensesteenweg 325 building, of which the divestment has been signed in April 2020. The second map on Slide 39 helps you visualize the trend in progress with the divestments concluded in the decentralized area of Brussels or its periphery and the acquisition of 4 office buildings in the Brussels CBD. I will now give the floor to Jean Kotarakos, CFO, who will take us through the details of the financial results.

[Jean Kotarakos, CFO & Executive Director]

Thank you, Yeliz. I will start on Slide 41. And as already mentioned by Jean-Pierre, Cofinimmo's results are solid despite the current health crisis context. For the overall portfolio, we can see that the gross rental revenues grew by 10.6% year-on-year, which represents a like-for-like rental growth of 1.6%. Page 42, the core EPS is in line with the outlook published in April 2020. This has been achieved despite the mechanical dilution arising from the issues of shares in 2019 and in June 2020. The core EPS amounts to EUR 3.40 per share versus the prior year figure of EUR 3.23 per share. If we look at the top line, the gross rental revenue amounts to EUR 126 million compared to EUR 114 million at the end of June '19, up 11%. Thanks to the acquisitions made between those 2 dates. Rental income after gratuities, concessions and termination indemnities amounts to EUR 123 million compared to EUR 111 million as of June '19, up 10% compared to '19. In order to reflect the doubts as to the current ability of some tenants to pay their rents, and without prejudging the outcome of the discussions with these tenants, we already booked write-downs of around EUR 2 million over the first half. After taking this into account, the rental income, net of rental charges, amounts to EUR 121 million compared to EUR 112 million, up 8%, in line with the outlook announced last April. The disposal of the Souverain (sic) [ Souverain/Vorst ] 23 and 25 buildings at the end of 2019 resulted in a decrease in the operating charges of almost EUR 4 million, in line with the outlook. The financial result is stable. This includes a one-off financial income of EUR 1 million linked to the contributions in kind of the 10th of June '20. The net expenses represent an average cost of debt, which decreased to 1.3% compared to 1.5% 1 year earlier. Hence, the net result on core activities stands at EUR 88 million, which represents EUR 3.40 per share as highlighted just before. After having commented on the net result from core activities, let's have a look at the other items that bring us to the IFRS net results on Slide 43. The financial instruments net charge of EUR 18 million is mainly due to the fair valuation of the hedging instruments, in line with the change of future interest rates on the financial markets over the period. These are noncash items. The result on the portfolio amounts to minus EUR 10 million versus plus EUR 29 million 1 year earlier. On the one hand, this mainly includes a goodwill impairment of EUR 10 million. Usually, the goodwill impairment test is performed at year-end. This time, following the public statement of ESMA of May 2020, we anticipated the impairment test and performed it on the end of June 2020. The environment arises from the passage of time and the update of macroeconomic assumptions like the expected inflation rate. On the other hand, the like-for-like variation value of investment properties is nearly flat at 0.2%. Therefore, net result group share stands at EUR 60 million versus EUR 71 million 1 year earlier. Regarding our balance sheet structure, you will see on Slide 44 that there is no surprise. The growth over the last 6 months can easily be seen in the investment properties and in equity, the red boxes in the chart. The total assets reached EUR 4.7 billion, and 94% of this are investment properties at fair value, financed by EUR 2.5 billion of equity and EUR 2 billion of financial and nonfinancial debt. On Slide 45, we analyze the change of the debt to asset ratio between December '19, 41% and June 2020, 41.8%. The higher ratio year-on-year comes from major movements that nearly offset each other during the last 6 months. Firstly, the effect of the investments on the debt-to-asset ratio, plus 3%, was nearly offset by the effect of the contribution in kind of June 2020, minus 2.1%. And secondly, the effect of the dividend, plus 3.1%, was partially offset by the result in core activities generated during the period, minus 1.3%, and the fact that 44% of the net dividend was paid out in shares. And this is a change of minus 9 -- 0.9%, sorry. At the end of the journey, the debt-to-asset ratio is only 0.8% -- sorry 0.8 percentage points higher than the level of 2019. Most of the main EPRA KPIs are reported on Slide 46. On Slide 47, you will find a reconciliation of the EPRA NAV to all -- no, sorry, the IFRS NAV to all EPRA NAV metrics, the 2 old ones and the 3 new ones. So on this slide, #47, you can see that the NAV is somewhere between EUR 96 and EUR 107 per share, depending on the concept you find the most relevant. Let's have a look now at attribute on the financing side. You can go to Slide 50 and look at the equity. As explained earlier, Cofinimmo rate in the first half of 2020, gross proceeds of nearly EUR 143 million through 2 successful operations, the optional dividend and contributions in kind followed by [ EBV ] in June 2020. On Page 51 you will see that during the first half of 2020, Cofinimmo issued long-term commercial papers for a total amount of EUR 29 million. This was performed in the month of February, which means before the COVID period; and also in June, which means in the current quarter. On Slide 52, you will see that during this first half, we carried out a series of financing activities, post- and pre-COVID. The activities resulted in a headroom on credit lines of nearly EUR 900 million in the beginning of July to finance our investment and activities. I will just highlight on Slide #53 the fact that Cofinimmo is one of the few major entities to participate in the Euronext ESG Bond community. The Green & Social bonds issued as early as in 2016, while new Green & Social loans were put in place in '19 and '20 for a total amount of EUR 135 million. As you can see on Slide 54, the average cost of debt amounts to 1.3% compared to 1.4% in the full year 2019. The average debt maturity remains unchanged compared to the end of last year and stands at 4 years. The sources of financing are well diversified, and the debt maturities are well spread, as shown on Slide 55. At the end of June, the headroom on the committed credit lines is about EUR 1.8 billion. After deducting the credit lines kept as a backup for the commercial paper program, the headroom reached almost EUR 900 million, as already mentioned. On the hedging side on Page 56, more than 60% of the group's forecast debt is either fixed or hedged until 2024. And I will now give the floor back to Jean-Pierre, who will take you through the outlook for 2020 and the investment pipeline.

[Jean-Pierre Hanin]

Thank you, Jean. As already mentioned at the beginning of the call, Cofinimmo is still aiming at achieving the investment budget on EUR 375 million planned for this year. On Slide 59, you have an overview of the breakdown of the project that were not yet closed at June 30. Since then, the development project related to the MOB in Bergeijk and the Quartz landmark building were finalized. The acquisition under conditions of the site in Bickenbach, South of Frankfurt, is expected to be closed in the coming weeks. Moving to Slide 60, and let's have a look at the outlook for 2020. Taking into account the pipeline just described, we confirm our outlook of EUR 6.60 to EUR 6.85 per share at the level of the net current result activities group share as formulated in April 2020. Based on that, we can confirm the target of a gross dividend of EUR 5.80 per share higher than the EUR 5.60 per share for 2019. Thank you for your attendance. We are here now to answer your questions.

[Operator]

[Operator Instructions] First question is coming from the line of Frederic Renard from Kepler Cheuvreux.

[Frederic Renard, Equity Research Analyst]

Can you hear me? Hello?

[Jean-Pierre Hanin]

There's no question?

[Frederic Renard, Equity Research Analyst]

Hello, do you hear me?

[Operator]

Yes, we can hear you

[Jean-Pierre Hanin]

I think you are clear. I hope that's not a technical issue. So…

[Frederic Renard, Equity Research Analyst]

All right. It's good. Okay. Thank you for the presentation and congratulations on the resilient results, maybe also a congratulation to the team that's pushing down the average cost of debt. I've got 4 questions actually. One is linked to the EUR 2 million write-down that you took on your… [Technical Difficulty]

[Operator]

Could we just wait one moment, Frederic? We're having some technical issues. One moment.

[Frederic Renard, Equity Research Analyst]

Okay.

[Operator]

Hello, are you able to hear me?

[Jean-Pierre Hanin]

We don't hear you. So… [Technical Difficulty]

[Operator]

Apologies for the delay. My name is Tom. I'm an operator with…

[Jean-Pierre Hanin]

Just this delay, but we are still waiting to get the connection?

[Operator]

Yes, that's correct. Your operator, Annika, has just been having some technical issues. Would you like to take the next question from Frederic Renard? Okay. If you'd like to take the next question, it comes from the line of Frederic Renard from Kepler Cheuvreux.

[Frederic Renard, Equity Research Analyst]

Can you hear me?

[Operator]

[Foreign Language]

[Frederic Renard, Equity Research Analyst]

They don't hear me.

[Operator]

Alvaro? No, not working.

[Jean-Pierre Hanin]

Ladies and gentlemen, I'm very sorry, but it seems that for unknown reasons, questions are not arriving to us. And I see that there are 3 different participants that have questions. So unless the situation can be fixed very quickly, I suggest that those 3 participants call Lynn, and we will be very happy to answer it in private calls, but let's wait.

[Operator]

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

[Jean-Pierre Hanin]

So it sounds that the technical issue is outside. So nothing we can do. I really apologize. But since the technical issue is not on our side, I think we have no other choice than basically close this presentation. And please, for the 3 of you who have question, I really thank you for your patience and ask you to call Lynn Nachtergaele, and we'll be, of course, very pleased to answer your questions on private calls. And again, very sorry, but technical issue is not on our side and nothing we can do. All right. Thank you to all of you and sorry for this very unfortunate technical problem. Thank you, and bye-bye.