Carmila S.A. (CARM) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Carmila's First Half 2024 Results Presentation. Today's presentation will be focused on first half performance and the Galimmo acquisition, which closed on 1st of July. Carmila continues to deliver a strong operating performance with leasing activity at an excellent level. Appraisal values are unchanged at EUR 5.9 billion, when growth from indexation offset yield expansion, the average net yield is 6.6% as of end June. Rent growth was plus 3.4% in the first half, in line with indexation and driving earnings growth. Finally, we continue to benefit from a solid balance sheet and strong leverage metrics. Now on the Galimmo acquisition on Slide 5. Carmila acquired 93% of the Galimmo shares on 1st of July and granted a put option to Primonial for 7% of the shares to be exercised by the end of July. It is a complementary portfolio in the Northeast of France. It was acquired at a significant discount to book value. The deal is immediately accretive to net asset value and will drive earnings growth in H2 of this year, with the full effect next year. In compliance with market regulation, Carmila will file a simplified tender offer in the coming weeks, followed if Primonial exercised this put option by a squeeze out for the remaining shares. On Slide 6, from a strategic perspective, this acquisition is perfectly aligned with Carmila's expertise in asset management and transformation. For instance, consider one of Galimmo's center near Strasbourg, showcased on the slide. This asset is representative of Galimmo's shopping centers which are strong local leaders and caused by hypermarkets and situated in regional cities. Carmila will implement its strategy to optimize the merchandising mix and leverage the Carrefour-Carmila ecosystem. This acquisition also expands Carmila's footprint, providing more opportunities for growth initiative, value-creating projects, specialty leasing and Next Tower. We are delighted to welcome the Galimmo team and are enthusiastic about embarking on new project together. On corporate social responsibility and Carmila's commitments under its building sustainable growth strategy on Slide 7. On the first semester, we launched our first solar auto generation project in Spain. We are on track to meet our goal of net zero Scope 1 and Scope 2 emissions by 2030. For the second consecutive year, Carmila was included in the CDP A list for the quality of its climate disclosure. 96% of assets are BREEAM certified. Carmila centers are an important contributor to the local economy and a help for local communities. Shopping centers are also major local employers. Turning now to trends and retail sector on Slide 8. Investors continue to be more positive on retail real estate as omnichannel is the winning model. New leisure and restaurant concepts bring people to physical locations. As shown on the slide, Carmila is also committed to develop innovative leisure concepts. We have signed an innovative new leisure concept in Rennes. Successful discount retailers, such as Action, [indiscernible] and Adopt, continue to open stores in new locations. Carmila has shown its capacity to pivot to new tenants and new concepts. This has driven low vacancy and the strong operating performance, which we expect to continue. Finally, to conclude my part of today's presentation, these are the main messages. We have closed the acquisition of Galimmo, and it will drive earnings growth in the second half of the year. We have revised up earnings guidance, thanks to the good performance of the first semester and the Galimmo acquisition on the first of July. We now expect a recurring EPS of EUR 1.65 in 2024. And finally, we announced today another EUR 10 million share buyback, having completed a EUR 10 million share buyback in H1. I will now leave the floor to Sebastien to talk about Carmila's performance on the ground.

Thank you, Marie, and hello, everyone. There are 3 key messages in this part of the presentation. First, operating performance remains strong. Then, operating performance has been driven by an excellent commercial activity. Carmila continues to pivot the mixed merch to growing sectors and retailers. And finally, we continue to transform our centers with agile projects. Now on the first semester activity. As I mentioned, leasing is very strong with 500 new contracts signed. Carmila centers are attractive to retailers, offering sustainable and affordable rents. We continue to see positive reversion, plus 2.7% on top of indexation with the occupancy cost ratio for retailers remaining below 11%. Occupancy is above 96%. Retailer sales are up by 1% and footfall is stable across the 3 countries. I would like to remind you that this is compared to a dynamic 2023. The main takeaway is excellent leasing activity and solid fundamentals. Let's dive into the mixed merch on Slide 12. You can see that we are strategically pivoting towards a broader launch of sectors beyond fashion. Health, gifts, leisure and new restaurant concepts are all a larger share of rents at the end of June. In the Sports segment, we have signed new leases with Decathlon and Intersport. Franchises are also a major source of leasing business. The Carmila platform has a team that supports franchise development and offer support services to retailers. Many successful retail concepts are based on franchises. Some of the most successful are chocolate and food gift concepts, like Les bougies and [indiscernible] or street food concept such as O'tacos. Focus on innovation and marketing on Slide 13. Along with events, specialty leasing, support footfall and make centers more attractive. Specialty leasing revenue on pop-up store are up plus 16% in the semester. There have also been several significant marketing initiatives, a French kids TV channel, Gulli, organized a tour of 10 Carmila centers. Carmila continues to run online video campaigns with Carrefour's media partner, Brut. And finally, the most recent Miss France made an appearance at Rennes Cesson. Now turning to Carmila's project pipeline on Slide 14. First, on the major projects, we are still working on the definition of 5 extensions. The most advanced is Orléans, which we will start in 2025. Agile restructuring project is the core of Carmila's strategy and continues to create value in 2024. For example, in Spain, we developed a retail park in Burgos, with 4 medium-sized units, including Kiabi, MediaMarkt, thanks to our partnership with Carrefour. Finally, Carmila also has long-term opportunities in mixed use. That is all for my part of the presentation. I will now hand over to Pierre Thirion, Carmila's CFO.

Thank you, Sebastien. Hello, everyone. It is great to be here again. Here are my top 3 key takeaways. First, earning growth will continue this year, and we have revised up full year earnings guidance. Second, the portfolio value is unchanged and we have the positive impact on net asset value of the badwill from Galimmo. And finally, Carmila's leverage and funding position remains among the best in the sector. Now let's look in more detail at first half net rental income. We continue to see organic growth in line with the indexation effect of plus 3.4%. We have been able to pass indexation to tenants. Rent collection is at a high level in line with 2023 at 97%. On Slide 17, you have the P&L line by line. I won't go through all of the details. We are strictly managing the cost base. There is a controlled increase in financing costs. The rent growth I mentioned has more than offset higher financing costs and recurring earnings are up versus the first half of last year despite asset sales. On Slide 18, the recurring earnings per share, up 2.4%. It is slightly higher than the increase in recurring earnings due to share buybacks. We have revised up our earning EPS guidance to EUR 1.65, up 3.5% versus 2023. This guidance integrates the good results of the first semester and the contribution of Galimmo, which is 3% on a full year basis, and then contributes to 1.5% for next summer. The synergies will start progressively from 2025. Moving on to the valuation of the portfolio. Growth in the rental base from indexation has fully offset the effect of higher discount rates. And then appraisal values are unchanged versus end 2023. There is no perimeter effect in the period. By country, portfolio values were overall slightly more resilient in France than in Spain and Italy, which are a smaller share of the portfolio. This relates to specific changes in the rental base in the 3 countries over the period. But the underlying trends of stable high occupancy and rent growth in line with indexation are similar. Shifting to our usual slide showing the long-term view on yield expansion on Slide 20. The increase in the net initial yield of the portfolio since 2017 is now well over 100 basis points. That increase in discount rates has been offset by growth of rental base. In the case of Carmila valuations, assumptions are seen as reasonable. We also benefit from renovation carried out since the creation of Carmila as well as our track record with agile projects. Next, on leverage metrics, Slide 21. Carmila remains among the best in class, even including the impact of the Galimmo acquisition. LTV is below 40%, even including the 170 basis points from Galimmo. Net debt to EBITDA stands at 7.5x. It will mechanically increase with the Galimmo acquisition to around 7.9x. These leverage metrics are compatible with the BBB rating, which was confined by Standard & Poor's following the announcement of the acquisition. And there is significant headroom versus bank covenants. On funding and liquidity on Slide 22. The situation is very good, with a significant cash position and no new funding needed until 2027. On 1st July, Carmila acquired the shares in Galimmo for cash. Galimmo has refinanced -- Carmila has refinanced Galimmo's mortgage loan facility with an intragroup bridge loan, as it was repaid under a change of control provision. A group of French banks has agreed to refinance this bridge loan in September. Let's turn to the financial impact of the Galimmo acquisition on Slide 23. There will be 5 million of synergies starting from 2025. The acquisition is immediately accretive with a plus 3% impact on EPS before synergies and plus 5% after synergies. A badwill of approximately EUR 158 million will be accounted in the second semester. This badwill results from the margin between the net assets of Galimmo and the consideration paid by Carmila. Galimmo integration will have a positive contribution on Carmila net disposal value of plus 5%. Finally, on the LTV impact, the LTV impact is around 170 basis points. The pro forma LTV of 39.7% as of end June '24 is in line with the target of 40%, which has been set for the plant building sustainable growth. The end of June typically marks the peak in the LTV as the dividend has just been paid. Turning to net asset value, Slide 24. On top of usual bridge showing mainly H1 earnings and the dividend, we have presented the impact of the Galimmo transaction. As you can see, EPRA NTA is down 2.4% on a stand-alone basis. You have the usual seasonality from the prior year dividend, but only half a year of earnings. The pro forma NTA with Galimmo is plus 5.8%. It integrates the impact of the badwill and the deferred taxes of Galimmo. To sum up the financial part of today's presentation, here are the main points I would like you to keep in mind. The valuation of the portfolio is unchanged versus end 2023. LTV is at 39.7%, including the impact of Galimmo and 38% without. Carmila continues to deliver a predictable financial performance, with growth this year driven by the Galimmo acquisition at very attractive terms for Carmila. I will now leave the floor to Marie for the conclusion.

Thank you, Pierre. Just a few words to conclude the presentation. In the first half of this year, commercial performance has been especially strong as Carmila's financial performance and balance sheet metrics. The successful execution of the plant put Carmila in a position of strength and has enabled us to acquire Galimmo. We are confident on the outlook for the rest of the year, including the contribution from Galimmo. Our successful strategy can now be rolled out on this larger perimeter which will continue to see earnings growth next year. For now, we are focused on the Olympics, which should be an exciting period for France and retail. Our shopping centers are ready to celebrate, with a full program of events and activities, [weave,] leisure and antique. We are now available to answer your questions. Let's start the Q&A session.

[Operator Instructions] We currently have no questions coming through. [Operator Instructions] Since we don't have any questions coming through, I will hand you back to your host to conclude today's conference.

There is no question on the chat. So thank you for participating in this call.

We have one [indiscernible]

I would have just a question to clarify the guidance because you have raised the guidance on the back of the Galimmo consolidation and a better H1. But still, it looks a bit cautious to me. So could you give some color on the breakdown of it? I mean, for H2, do we need to consider any disposals impact going forward? Or what are the drivers to have quite a weaker H2, please? And the second one would be related to the first one. Could you give an update on your disposal program, please?

Okay. Thank you for your question. I will take the first one with the -- about the guidance. So as you can see, performance of the first semester is good. In EPS, it's plus 2.4%, H1 '24 versus H1 '23. We will have the same trend for the second semester regarding the Carmila stand-alone portfolio. And then to get to the guidance, you have to sum up the Galimmo impact. So the Galimmo impact will be 3% without synergies. Just to remind you that synergies will start in 2025, and we won't have any impact on synergies in 2024. So for the Galimmo contribution, we will just have one semester, the second semester. So the annualized contribution of 3% will be the [indiscernible] in 2024, which is 1.5. So if you sum up the 2 plus on the stand-alone perimeter, plus the contribution of 1.5, you get to the 3.5, and that's where we stand in the guidance.

And concerning the disposal program, so in 2023, Carmila sold 3 assets in France and 4 in Spain, all in line, with appraisal value for a total of EUR 130 million. Two assets in France were sold as part of the target to sell another EUR 100 million of asset by end 2024 for a total of EUR 45 million. We are working on additional disposal by the end of this year. Thanks to our reasonable average value per center, we have access to local investors as family offices which are interested in local and resilient retail convenient assets. So we are working on additional disposals. I think there is no other question online.

But there is one question on the chat. So the question on the chat is, could you provide details on the operational performance of Galimmo assets? And how they compare to the overall portfolio? So the performance of Galimmo asset is comparable to Carmila's portfolio, stable valuation, good footfall and retailer sales performance. They have a small decrease in financial occupancy rates in the first semester, but we believe that, thanks to Carmila's strategy of pivoting the mix merchandising, we will be able to recover high financial occupancy rates on the first semester. So the assets compared -- they are comparable to Carmila's overall performance. And I think we have other questions on the phone.

Yes. We've got one more question from Alex [indiscernible].

Also on the Galimmo assets, you mentioned they are indeed comparable. But I was wondering, have you set any CapEx budget aside to get these assets up to speed, so to say?

Can you repeat? Sorry, I haven't heard the last part of the question.

Yes, sure. I will repeat. So on the Galimmo assets, you said they are indeed comparable. I was wondering if you have set any CapEx budget aside to maybe upgrade the assets a bit further?

What we've seen is that Carmila has a strong track record in Agile restructuring project to create value. So it will be a manageable amount for Galimmo's portfolio, similar to what we do on the current Carmila portfolio.

We've got one more question.

This is Florent from ODDO BHF. So yes, I would have maybe an additional question on Galimmo SCA. So we have understood that you have identified some synergies, mostly on cost. But could you maybe give us some more colors on what could be the additional initiative that you could implement maybe in the next 2 years -- 2 or 3 years by implementing the Carmila platform at Galimmo SCA? And what could we expect maybe in terms of creation of additional revenue or value creation?

Yes. Thank you, Florent, for this question. So on the revenue side, further there is a lot of synergy concerning the mixed merchandising. We think that we are very efficient within Carmila and a good strategy. So we will roll out the strategy on the Galimmo portfolio. Then we probably saw in the first semester that we are very efficient also on specialty leasing. So we think there is room to improve the specialty leasing on the Galimmo portfolio. Thirdly, we are very good at developing agile project. By agile project, we mean projects that create value, especially on the parking. We did a lot with Carrefour on the Carmila portfolio. And when we want to develop those type of projects on the Galimmo portfolio with the partnership with Carrefour, and then we can imagine, for example, Next Tower is already under point to see how they can develop 5G tower on the Galimmo portfolio. So we have plenty of projects, and we are eager to work with the Galimmo team and the Galimmo -- and the Carmila team to develop those new projects.

We currently have no more questions on the phone coming through. [Operator Instructions] We don't have further questions coming on the phone now.

Okay. There is a last question on the chat. Will you consider monetizing your digital infrastructure tower assets, given very large transaction multiples within this sector?

Well, for the time being, we are developing as planned our strategy. I think it's not the time to think about that, but it could come in some time. We are very happy to have this capacity and this expertise to develop 5G tower. I think it's a very profitable business for Carmila. Well, if there is no more question, thank you very much for your attention, and have a nice day and a nice summer. Thank you.