Warehouses de Pauw NV
XBRU:WDP
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Warehouses de Pauw NV
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Good afternoon, everybody, on this fantastic Friday with the third anniversary day of Alexander, we welcome you at our Q1 presentation of the results. So good afternoon from Wolvertem. First of all, we will give you a short introduction on our Q1 figures, and then we will answer directly some specific questions that are, let's say, in the market today, like the place of Romania in our portfolio, the joint venture in Germany, inflation, rent increase and the evolution of the building costs. And after that, there is time for a lot of Q&A. And since we are, let's say, in a normal Team meeting, you can do that by raising your digital hands or just by putting your question in the chat, and then we will answer them one by one.
So -- but first of all, let's look to Q1. I think we can say it is a perfect start of '22. And indeed, it is also a solid foundation for our new growth plan '25. And this thanks to the operational excellence that you can see here on this slide with a full house, everybody paying the bill and still a very nice pipeline -- development pipeline under construction. And besides this operational excellence, important also to mention and to fund the growth is the fact that we realized last week, green USPP at 1.5% for a 10-year duration and also our strategic stake in Catena. But indeed, key in this first quarter was, of course, the external communication and the internal rollout of our new growth plan, external growth plus where we added the value and the power of our existing portfolio and climate within our new climate action plan and energy as a business; two, external growth and indeed, this all and a broader EU footprint.
But never forget that this is only possible, let's say, based on our industry and the resilience of the supply chain and the investments that all the companies needs to do in their supply chain more than ever. This is the real driver of our company. And in short, this makes that we can confirm our earnings per share of EUR 1.2 for this year based on a strong first quarter. And I can say it is not a 1.2 -- and it's based on this strong EUR 1.2 like written in our figures at least EUR 1.2 earnings per share. But we stay cautious given the macroeconomic and geopolitical environment of today. But our business and our company is indeed supported by a very strong and very liquid balance sheet with today even more than 1.3 credit lines.
So I think this is, as a matter of fact, it's very short. The basics of our first quarter. If you have any questions concerning specific details. You can ask them. But then first, we will go a little bit deeper on the specific market questions. And first of all, Romania, the safe haven or one of the safe havens in Central Europe. Indeed, Romania, today is seen as stays happened by our clients since this strategic member of the EU and the NATO and it has also a very important role, not only for Europe and in Europe, but also, let's say, near the Black Sea and the last open harbor and Constanza for free trade and also as a link to the Middle East, where above Constanza there is a big military airport, which supports not only NATO operations in Europe, but also in the Middle East.
So Romania is geopolitically very strategic for the EU and for NATO. And also when we see it within our client portfolio, there we see very nice and good requests even in this difficult period. Let's say, we have finalized 3 or even 4 extensions -- or 3 extensions with existing clients and a new client who already ordered more space than initially foreseen due to the fact that they want to continue and to concentrate their activities in Romania.
And besides this, we have also some big production units and production companies like, for example, Yazaki and Pirelli, who said to us that they will concentrate more production in our buildings due to the fact that they had to stop or they wanted to stop production or also stock of, let's say, in Russia or in Ukraine. So there, let's say, and of course, it's always -- it's horrible what's happening in Ukraine, but let's say, Romania can profit from it as a stable country today with a good location near the Black Sea protected by NATO and this what we see with our clients every day. So there, let's say, we feel comfortable with the existing position of Romania in our portfolio, which is, by the way, today, only 15%.
Besides Romania, there is, of course, still our JV with VIB Vermogen, and as you all know, there has been a change of control by DIC. And there are 2 possibilities on the table today, let's say, or we continue with DIC in the JV or we use our change of control clause, and we can continue further alone in Germany. So -- and today, we are -- and we have had the first discussions with VIB DIC and let's say, we hope that we can give our clarity before summer about the future. But let it be clear, we will continue to invest and to grow in Germany in this way or in another way. This for our strategic positions in Romania and Germany, and then I give now the floor to Mick to speak about inflation and rent increase and the evolution of the building costs.
Yes. Thank you, Joost. Welcome all from my side as well. We have some -- several questions on the inflation of our contracts and to give you some color on that as to like-for-like in Q1 was 2.0%, which breaks down in 2.2% inflation, flat reversion and minus 0.2% occupancy, that's only a temporary thing. It's just some frictional vacancy related to tenants moving. What we said regarding inflation in the original guidance at the start of the year, at that moment, the weighted average forecast for the index -- CPI index in the countries in which we are active was 4.0%, and we would capture contractually 3.5%. And due to timing, we anticipated to reflect 2.5% of that in '22.
Now these figures when we update them with today's figures and the outlook for the remainder of the year regarding CPI, that this figure should now be a weighted average inflation or CPI in the countries in which we are active for '22 of 6.0%. And we can capture contractually a bit more than 5% and in -- effectively in '22, we should show around 3% in our P&L. So that means that the actual like-for-like figure for the full year should be closer to 3% versus the 2% we show today in Q1. And then the remainder of that inflation will feed through eventually in '23 because that's only a time lag. Now obviously, we'll also mention why flat reversions in the market characterized by scarcity.
What you see, as flat reversion in '22, is simply the effect of the negotiations of last year, which we said we were flat and in the meantime, we are also on track to secure as we have in our business plan, integrated EUR 1 million or 50 basis points of reversions per annum, and we are on track with that. And it is, yes, are mainly related to units that fall empty and yes, if the unit falls empty, we can relet them at minimum 10% higher rent. And also note that whereas we hear a lot of focus on reversions, which, of course, has our focus in a rental market, which is very strong and characterized by scarcity, we always mentioned that the process would take some time due to contracts in place and as we take a commercial approach as well.
But here, do not forget about the positive thing that is that inflation is really helping us right now to do it automatically because note that we just highlighted that there would be 2% extra inflation across the entire portfolio, which means that just as an example, that's the economic equivalent of resetting 10% of your contracts at 20% higher rents. So if you have solid inflation-linked contracts today that will far outweigh the effect of any reversions. So in a nutshell, we are well positioned to capture that inflation.
A second item is building price inflation, so construction price inflation there to give you what -- to give you an idea what happened year-to-date, in end of January at the full year results, we said that at that moment, year-on-year, there was an increase of 25% after construction prices had dropped 10% during COVID. That was end of January as a result of the Ukraine war and further supply chain bottlenecks mainly in raw materials. We have seen that number rise further with the year-to-date increase of 10% to 25%. So that will obviously impact absolute development yields, but yet note that the existing pipeline is largely derisked for rising prices as we have locked them in. It is mainly difficult discussions for those projects for which we have been negotiating now for a while. And there, in essence, in short, the pain will need to be split in 3 landlords, tenants and constructor.
And then for new projects there, there is a new operating reality with higher costs, but also with higher rents to be able to recharge those costs. And we also believe that in terms of outlook for construction prices, yes, the next months will still be challenging, but what we believe is that the current situation is so extremely exceptional and cannot last in our view that some projects, for example, in infrastructure and residential may get canceled, which may, towards the end of the year, alleviate some pressure on construction companies' capacity and hence prices towards the end of the year. And it's not a matter of materials not being available, they do not get here. That is the real issue.
And also note that yes, it will have some impact on development yields. But not that we are well financed as well as we just issued a EUR 500 million bond at a rate of 1.5%. So that's on construction prices, and we are now happy to hand over to you to answer all your questions. And may I repeat to raise -- to ask, raise your digital hand or either put your question in the chat box. Thank you.
I will start. The first one, Pieter Runneboom. Pieter?
Unmute please.
I was wondering what was the interest rate on the 10-year USPP excluding the pre-hedge?
It's 2.6%. The U.S. investors to receive 2.6% on a euro basis, and we will effectively pay due to the pre-hedge, 1.5%.
Okay. And then second question, could you maybe expand a bit more on the one-off income and recovery of taxes, which pushed up the EPS during the first quarter?
Yes. On the nonrecurring income is the fact that in -- as from Q2 last year, Q2 '21 until the end of last year -- until the end of this year, we will have per quarter around EUR 2 million of nonrecurring income related to tenant works. It's a bit more than as -- it's a bit more than we usually have, and it's concentrated over these quarters. And last year, it was not in the results so that give you year-on-year one-off gain. And we also had some Belgian REIT tax, it's tax on the corporate level, which is included in the G&E expenses for which we had a recovery of a tax of around EUR 2 million. That's a one-off.
Then the next one is Alvaro from Exane, Alvaro.
Just on future growth, what can we expect this year in terms of further acquisitions? Where do you want to invest, especially standing or yielding assets? Because I guess, in terms of land, you have some, but I don't know if you are keen to try to increase the portfolio by buying yielding assets or even some portfolios out there? How competitive is the market?
Well, as always, Alvaro, let's say, we are open and we are looking to everything within logistics. We always say that we -- let's say, we do everything. We buy greenfields, brownfields, doing our own developments, redevelopments, acquisitions, sale [ and leaseback ], and let's say, always given the fact that it needs to have and it needs to be an investment with a good IRR and which strategically fits within our business. And we always have lift from all kind of combinations of acquisitions of developments, redevelopments. So -- and depending on the moment on the cycle -- on the opportunities, it's a little bit more, but let's say, it's not a specific amount of a specific split that we foresee.
Okay. Well, so no pipeline on yielding assets, right? No -- you cannot share a figure of potential investment opportunities your team is analyzing right now, I don't know…
No, we never do that. We never speak about the negotiations we do. Of course, we look every day to investment opportunities that are proposed to us and to the colleagues. But let's say, we never give any -- we look at the things and we communicate the things we finalize.
Okay. Cool. And last question on appraisals and valuations, of course, 2% ERV growth it seems what the valuers are recognizing on your portfolio. But then your -- yes, your reversions are still flat. And then on the other hand, indexation is going to be closer to 3%, 4%. So what can we expect in terms of price assumptions for next valuations of your portfolio in the coming quarters, probably increasing the ERV growth potential or what is the view on that?
Of course, the Holy Grail of the valuators, of course, independent valuators.
We understand your question, but we do not want to speak before our turn. It's up to the valuators to reflect that. But yes, what we would view as a sensible thing is that they reflect the inflation, the indexation of the contracts in there, but the overarching metric would be the ERV because that's a structural increase and gradually, of course, due to the scarcity of the market and inflationary repressure they are reflecting this. So we would also expect a further -- to see a further rise in the ERVs within our portfolio, yes.
So to have things clear, and you talk quite often with the appraisers and you can influence their valuations, of course. That is obvious. 2% ERV growth when you are discussing with us weighted average CPI around 6% or structurally, you can reflect or you can capture contractually 5%, it seems that they are assuming a negative…
No, no, no, because the 6% was an annual figure and the 2% is a quarter-on-quarter figure. So I think that matches quite good.
Okay. And then next one is Frederic Renard.
I have a few questions on my side. First, on the development cost. You speak about that, but we are also speaking about some delays, at least apologies since you were mentioning that. I'm just curious, how do you assess the risk that you will have to suffer maybe more delays in the churn pipeline that you have due to maybe a shortage of staff or just materials? And could it impact your guidance for this year? And just to be sure, the guidance you communicate today, it does not include Catena's addition?
First, on the last part, the guidance, yes, we said for the guidance, we said it is looking very robust and we have a minimum of EUR 1.20. Why is that? Because we are not that much dependent on project deliveries this year, which are more at the end of the year and next year. So that's the concentration of the deliveries in the current development pipeline. So we are less dependent on that. And then what did we have -- so it's less risk for '22. And we have, in terms of positive developments, since the start of the year in comparison to what was included in the guidance at the start of the year, we have 3 elements.
We have higher inflation, as we explained, we have a strong Q1, which was underlying at par with our budget, but with the surplus of this recovery of the tax, which was not foreseen. And we have the acquisition of the Catena stake. And these 3 elements led us to say, okay, it is looking very robust. It will be -- it is strong. It will be minimum EUR 1.20. So that's on the first part of your question on the guidance. And then in terms of development lead times for most part of the development pipeline, especially the one we had at the beginning of the year with the EUR 600 million we had at the start of the year, there in terms of project deliveries and -- and construction cost budget overrun, it's largely derisked.
What we did say at the start of the year is that the lead times have become longer. And there, for example, in the past, it was as soon as you had a tenant and a piece of land, you had 6 months for permits, 9 months construction lead time. At the start of the year, we said the 9 months has become 12 to 15 months, so plus 3 to 6 months, and now it is really the higher end up to -- so plus 6 months versus in the past. And this is a reality which we need to operate that projects take a bit longer.
But Frederic, only for the one in negotiation.
Only for the new ones.
Let's say, for the projects in execution for the EUR 600 million under construction, yes, we can have, let's say, in some of the projects, 1 month or a little bit of extra. But today, let's say, they are all still under control, but it's done for the future.
But you see it, when we add projects right now, it is not -- in the past, when we added a project in Q1, a new project, it could have well been that it would be finalized by the end of the year, and you will now see it in the scheduled delivery dates for the projects that are added. As from this year in the pipeline that delivery dates are further into time, that is what will be the effect. And that only means that it is deferred growth, it will take a bit longer. But for the new projects, also take into consideration that we are implementing an indexation clause with the tenants in the sense that the rent -- their first rent will be indexed with the CPI during the development period.
Another question, but just curious on that, you spoke about frictional vacancy effect for the quarter. I'm just curious, considering the strong tailwinds we see today in the market and very low vacancy rate, what is the main reason why tenants are leaving the warehouses? Is it because it's in non-strategic location or anything you can give on that?
Yes. Actually, our -- we have a full house almost 99% occupancy, we have a full house. We have, in several countries, in total 6 million of square meters, there you have always some tenants moving in, moving out. And it's just a small technical thing, there is no -- the tenants they just stay and moving is a lot of CapEx risk to their KPIs, there is scarcity. We have even tenants -- a tenant in one location who said I would like to -- who didn't an exercise, who wanted another location and he did not find anything. So there when you see that in our statistics, we have a 90% lease renewal rate. It's just some of the shorter-term contracts. In the portfolio have always some movements.
Some temporary things but -- I would say nobody wants to leave the building, on the contrary.
And then maybe a final question on my side on rents, and you already answered some of the questions, but I'm just curious also, we are in a situation where inflation is everywhere. So not only in rent, but also energy, salary, price are increasing very much. And a lot of your clients actually operating under a very low margin and tight margin, if you speak about third-party logistics. I'm just curious, to your view or according to you, what would be a level of rent, which could, at some point, impact the activities of such operators in the warehouse?
We would say, first of all, that, yes, you are right, that a 3PL company typically operates under lower margins. But let's say, that also with them, a lot of activity in the supply chain, e-commerce, et cetera. So their margins have also improved. They have a lot of work right now. And they only make up 30% of our portfolio, 70% are end users, big international companies with strong margins and also a lot of them have pricing power. So -- and I think they have other concerns than the rent, which typically makes up, up to 5% of the supply chain cost when you look at their salary expenses or energy expenses or other type of raw material expenses, I think they have other headaches, then a 5% increase in the rent.
And I think today, Frederic, that the impact of the part of the rent within total cost is less than 10 years ago. Since there is more added value, more investments in automation and doing things in the warehouse, so the impact of the rent is less than 10 years ago.
Okay. So you don't expect to have a pushbacks when you lift the rent this year for the top popular C players?
Not for the moment, we have not seen it. And let's say, the alternative is just renting at a higher price. If they find something elsewhere. And in the end, the goods needs to be stocked. So they also can go to their clients and say, "I'm sorry, but I have to pay an indexed rent. I have to add and to higher my prices because otherwise, I don't continue to work for you."
And they often also work with the cost plus.
Cost plus -- or they work with the cost plus or with specific reversion elements like transport, it's the same. Almost all the logistic companies have transport cost revisions in their contracts since that, let's say, happened also in the past, even without such a big macroeconomic volatility around. No further questions, Frederic?
No, no, it's all for me.
Okay. The next caller from KBC.
Yes. I just want to go a bit further on to what Frederic's line of questioning. And you mentioned also in the beginning that your guidance depends or could be a bit conservative or considered conservative based on some certain macroeconomic scenarios. And we all know what's going on in Ukraine and so on, but can you be a bit more specific towards certain industries where you see that maybe also the sentiment is shifting that then makes you become also a bit more conservative?
No, it's not conservative. I think it's just, let's say, we are cautious since in a general way, there is no -- none of our clients today, let's say, of our clients is in trouble or has a specific, let's say, concentration on their business on Ukraine or Russia. But it's just, in general, let's say, we are 3 months for in a year, and yes, that can happen still a lot of things when we don't know what's going to happen the next month in general in Europe. There is, let's say, therefore, in a general way, we stay cautious. Not for any specific or logistic or client-driven reason. It's more the general environment in Europe. You never know, and it's still 9 months to go.
Okay. Okay. And there's also no, let's say, fear something we see now again in China with the COVID restrictions that there's maybe another supply chain disruption that you see or any other -- especially in the automotive, we see some figures already changing. There's no -- you cannot identify a certain segment or sector that makes you think that it could turn for the worse?
No I would say, on the contrary, this is again a proof of the importance of the logistics sector and the importance of the supply chain and the logistics of a company. I think indeed, it is now already, the fourth or the fifth disruption within 2 years. And so firstly, we concentrated on the disruption at the outbound versus the client with the omnichannel and everything what's happened there. And now we see a lot of disruptions with COVID with the Evergrande and the Suez Canal now again with COVID in China, we see a lot of disruptions in the inside of the inflow or the inbound of the logistics.
So I think this means, let's say, if it was not clear, this means now really the end of the globalization of the supply chain, of the worldwide efficient supply chain. I think now we are, let's say, definitely from just in time to just in case we go for, let's say, a confidential approach where you need more stock or reshuffling and reshoring. We all sat in the beginning I think, yes, reshoring will be a difficult one. But like you see now in automotive, for example, when you have to wait for more than 1 year for a new car, there is a problem in the industry. So they will have to bring back more production, for example, there will be a reshoring. But of course, this takes time. But this is what we see also. And therefore, Romania is one of those countries where you can see a reshoring where production can be extended.
So I think it's more an opportunity and people, again, say, we need extra stock today. When you have stock, you are king. And it is not let's say -- Mick will always say, cash is king but for my logistic clients, I say stock is king. And then so you need more stock, so full warehouses. So indeed, it happened again that disruption, but it's positively off the short and absolutely on the long term for our business.
Okay. On a totally different topic, I want to ask about Catena, and you explained in the press release about customer exchange or synergies or optimization of your logistics within both of your companies' customers. Can you explain that a little bit and how is there any way to kind of quantify your expectations? Obviously, there's the dividend, but then let's say what additional potential volume would you see from that?
Well, we cannot quantify it, but indeed, let's say, we can now offer to our clients, not only, let's say, the Benelux and France, Germany around and Romania, but we can also offer to our clients, the Nordics and today, especially Denmark and Sweden. So we can now offer to our clients 8 countries instead of 6. So this is the first element and besides that, there is also the knowledge sharing. They are -- let's say, they have also a lot of knowledge concerning ESG, climate and also the way of new trends, multiple floor, what's going on with, let's say, food e-commerce. And so, since we are, let's say, 2 commercial logistic real estate companies with the same feeling, the same spirit, we can learn a lot from each other and indeed share clients. But we cannot quantify it, I just can say yes, we will book it as an equity method, Mick, that you can explain. So we will, let's say, make it -- so we can put the earnings in our…
Our 10% share in the income.
Okay. And then just if I may, on that, just practically, if you bring on a customer for a warehouse, which they own in Scandinavia, is there then like a commission that we can see or is there a rental share or is it just that you bring on clients to them and they bring on the clients to you and then you both benefit? There's not like a formal agreement about revenue or commission sharing?
No, that's not -- it's not an idea of commission sharing, it's really about getting better from…
And reinforcing each other's growth profile and also strengthening our case for Germany.
And then the last one for the moment, Inna from Degroof Petercam, you also raised your hand.
Indeed. I would just like to go back to what Mick has mentioned about the construction costs. At the financial year -- full year results, you've mentioned that the targeted yield on cost for Western Europe is about 5% and 7% for Romania. Does that have any impact? And I appreciate the fact that you also mentioned that you would expect the current pressure to subdue, but does it have any impact on your current assumptions for the targeted yield on cost? And my second question is related to any prospective acquisitions that you would consider? Would there be a floor -- a yield floor to that or would you be working primarily with the IRR -- internal IRR returns?
On the yields, we still stick to our assumptions of 5% in Western Europe and 7% in Romania, but we do not exclude that temporary. We need to dig a little -- we need to go a little bit deeper because of the current situation. But then we expect also it to be more than offset by a higher inflation on these contracts as well and do not forget that we are executing a very nice pipeline at a 6% plus on average.
So that's our view on yields. And on acquisitions yield floor, I would -- we do not talk about yield floors, we will always look at it in terms of IRR because you would -- you can do a very nice acquisition at 3%, 4%, if it is mainly land value and you can just have a rented piece of land and have a sort of deferred development potential or you can make a very wrong investment decision at the yield of 6% for an acquisition, if it's -- if you capitalize too high a rent and if it's in term, it will only deflate. So that's how we look at it. So we look at it. We look at it in terms of reusability, relatability, the residual value and ultimately, the IRR and the quality of the income.
[indiscernible] you had still a question or was it your old hand still raised?
Excuse me, that's my old hand. I'll draw it back. Sorry.
And I see Alvaro coming back with a new question. Alvaro, then it's up to you.
Joost, no it's just a follow-up about the last question on ERV of appraisers. You said that the 2% is quarter-on-quarter. So implicitly, what we need to understand is that ERV growth in your portfolio on an annual basis is more 6%, right?
What we said is that the used quarter-on-quarter, that's what they did in our assumptions, they changed ERV on 1 quarter by plus 2%, so that's a quarterly figure. And on the inflation of the contracts, there we said, the average CPI in the countries in which we are active and for Europe as a whole is 6%, and we will be able to capture contractually a bit more than 5% spread over this year and next year, of course, due to the timing gap.
So okay, trying to clearly understand what is going on, on the appraisers. I guess appraisers, they have NOI estimates on a yearly basis. So if they -- I don't know if they move on a quarterly basis, the NOI they assume in year 1 to year 10 for this year -- so I guess they take more view on annual basis rather than quarter-on-quarter?
I understand. What they do is, we have -- they value with 2 mechanisms, either they use the discounted cash flow method or an income yield -- income capitalization method. What they then do is they reflect as a main assumption the ERV over, let's say, in their perpetuity and then they correct plus or minus the net present value of the difference between the ERV and the contractual rents. That's what, in essence, they do.
Then I'm looking, is there any other hand raised or no? No hands anymore. Is there somebody else who has a question part of a question in the chat? I'm just going to wait. Frederic, you still have -- you have a question?
Yes. And last question on my side. You have been having quite a nice yield compression in the [indiscernible] in 2021, we see another run but quite muted this quarter at minus 5 bps. I'm just wondering, today, how do you think also appraiser will tackle? I know you cannot speak on their behalf, but I'm just wondering today, if I'm looking at the portfolio at 4.3% and I still hear from the direct market that there are a lot of appetite and probably appetite below 4% in the [indiscernible] that's absolutely clear. Do you think that appraiser will continue to be a bit more, I would say, vocal in the exercise that they are doing every quarter for H1?
Let's say, we hope it at least. And indeed, I can confirm, Frederic, that, let's say, in the real market, even, let's say, with the rents going up a bit, interest rates going up in the last 2 months, let's say, that in the real world, and all the tenders, let's say, the prices stayed very high and indeed, competition is very big. So there is still a lot of money available and absolutely available for logistic investments. Since indeed, we can capture probably -- we can capture inflation probably more than offices, for example, and retail. So there the competition is still very hard and indeed, the market is still below 4%. So we don't see any yields coming down or whatever on the contrary, I would say. So -- and then if you look that the real market is, let's say, between 3% and 4%, and we are still valued higher, yes, I think there is still potential, but that's up to the appraisers. Mick?
Absolutely cannot comment anything anymore.
Yes. Okay, I see. Because the question is, of course, for years, we have been seeing that they have been reluctant or at least very prudent in the valuation approach. But today, we see a lot of deals going through. So I guess they will not be too prudent in Q2? And we know that H1 is often a big review, I would say, of assets. So I guess we should expect another round of 2% to 3% or even more revaluation of the portfolio. You agree with that?
We hope the same as you. We have the same hope.
Another question -- I'm just looking I don't see any hands are in the chat also not. So there is no further questions anymore from your side with the hands or in the chat, then I would say, then we leave you on this nice Friday afternoon, and we're going to celebrate together with Alexander has anniversary and like the people of the [indiscernible], the guys from Wolvertem they say goodbye, and I wish you all a very nice weekend. Have a good time and see you soon back physically or digitally.
Thank you.
Thank you. Bye-bye.