Cofinimmo SA (COFB) Earnings Call Transcript & Summary

Hello, and welcome to the Cofinimmo 2019 Annual Results Conference Call. [Operator Instructions]. Today, I'm pleased to present Mr. Jean-Pierre Hanin, CEO. Sir, please go ahead with your meeting.

Good morning, ladies and gentlemen. Thank you for dialing into this conference call and for being with us for the presentation of Cofinimmo's 2019 annual results. In the room with me today, my colleagues are Jean Kotarakos, Chief Financial Officer; Yeliz Bicici, Chief Operating Officer Offices; Sébastien Berden, Chief Operating Officer, Healthcare; as well as our Head of Control, Jonathan Hubert; Head of Treasury, Maxime Goffinet; Head of ESG, [indiscernible] and our Communication and Investor Relations team [indiscernible] and Kenneth De Kegel. 2019 ended with very solid results. Just like last year's, these results are higher than the budget. In addition to an improvement in our occupancy rate, we note a further investment acceleration in healthcare real estate. After the EUR 300 million already invested in 2018, Cofinimmo made a series of additional investment for more than EUR 490 million in this segment in 2019. This sustained acceleration clearly illustrate our will to consolidate our leadership in healthcare real estate in Europe. At the same time, we continue to rebalance our office portfolio by refocusing our investment in the Central Business District of Brussels. Finally, we are strengthening our ambitions in terms of ESG by launching a new ambitious project core 30³, capitalizing on the numerous previous ESG initiatives of Cofinimmo. If we look at the main financial figures of 2019, the net result from core activities Group share stands at EUR 166 million, up by 15%, which is above budget and represent an EPS of EUR 6.81 per share. The Board of Directors intend to propose a gross dividend for 2019 payable in 2020 of EUR 5.60 per share. For 2020, the budgeted net result from core activities Group share estimated at EUR 7.10 per share and the gross dividend per share at EUR 5.80 per share, based on a gross investment pipeline currently estimated at EUR 375 million. As our company profile is well known by all of you, there is no need to explain the following slides. We can skip as well, Slide #5. Slide #6 is well-known and contain a breakdown of our global portfolio per segment based on a fair value of EUR 4.2 billion. Healthcare represent 56% of the portfolio as a consequence of the numerous recent investment in this segment. You see on the next slide, our geographical presence, and I would like to highlight here our entry in Spain since September 2019. To date, we acquired 3 land plots, on which we are building nursing facilities in the framework of the EUR 45 million first pipeline announced in September. The acceleration of our investment in healthcare can easily be seen on Slide 8, where you see the active assets rotation on the offices segment as well. Along with the implementation of its investment strategy, Cofinimmo scaled its ambitions up in terms of environment, social and governance matters, as illustrated on the next slide. In terms of ESG, we launched the project called 30³ aim at reducing further the energy intensity of our portfolio by 30% by 2030, to reach 130-kilowatt hour per square meter. This objective takes the level of 2017 as referenced, and has been established using science-based targets methodology. In order to reach this objective, we have set a series of targets for all of our segments. The 30³ project is capitalizing on the already long and deep experience of Cofinimmo in ESG and the many initiatives taken since years. Slide 10 shows previous initiatives, while Slide 11 shows the applied framework and the different assessments received. You will immediately notice on Slide 11 that Cofinimmo has been a pioneer in terms of ESG, with, for example, the application of the EPRA sustainability Best Practice Recommendation since 2012. And the obtention of the label Investors in People the same year. As far as governance is concerned, the significant presence of women at Cofinimmo has been confirmed by several studies on gender diversity in the governance bodies of Belgian companies. By way of example, the study carried out by the organization European Women on Board, indicate that Cofinimmo is the only Belgian company present in the European top 20 of its gender diversity index at the 11th place. On a global scale, Cofinimmo is also among the best performer. After a survey of more than 3,500 companies worldwide, the Equileap organization has included Cofinimmo in the top 100 of its ranking at the 75th place. All the above illustrate that E,S and G aspects are truly embedded in our organization, which has also experienced a very good year on the stock market, as shown on Slide 12. With a total shareholder returns of more than 40% since the end of 2018, the market capitalization of Cofinimmo reached nearly EUR 3.9 billion. In the following slides, we'll take a closer look at our property portfolio. As at the end of 2019, the occupancy rate reached 97% compared to 95.8% at the end of 2018. In healthcare, the occupancy rate remains very close to 100%. In the office segment, the rate reached 91.5%, coming from 88.8%, which is quite an achievement in a short period of time. This improvement comes from the strong letting activity and from the rebalancing of the portfolio. The weighted average of our original lease term is now 12 years compared to 11 years at the end of 2018. The yields are slightly compressed compared to 2018 but remain in line with the level of the 2 previous quarters. I will now invite Sébastien Berden, our Chief Operating Officer, Healthcare, to take you through the highlights of the healthcare segment.

Thank you, Jean-Pierre. As already mentioned, our healthcare department has been very active this year. After a first acceleration in 2018 with a total of EUR 300 million invested in healthcare real estate, the group invested an additional EUR 491 million in this segment in 2019. Thanks to a series of acquisitions in Belgium, Netherlands and Germany as well to the delivery of a series of projects in France and the expansion of our activities in Spain, our fair value now accounts for EUR 2.4 billion. The sustained acceleration clearly illustrates our desire to consolidate our leadership in healthcare real estate in Europe. Moving to Slide 19. The segment now represents a surface area of more than 1 million square meters, spread over 197 assets. The following slides records all the acquisitions that we made last year. I will not comment each of them but selected some to focus on. Let's move to Slide 20. The acquisitions we made in Belgium on the 26th of June has been listed by one of the major Belgium brokers as the biggest real estate transaction in Belgium in 2019. It concerned actually 2 different transactions, closed on the same date at which we acquired through a contribution in kind about 15 nursing homes for a total amount of EUR 300 million. The 15 assets are spread over the country and represent together 100,000 square meters. All were modern buildings leased for the long term to outstanding debts. Let's now move to Slide 23. The slides we are skipping show some development projects in France. So being on Slide 23, here I would like to highlight the transaction shown on the right-hand section of the slide. In April, we acquired for EUR 8 million our 12th medical office building in the Netherlands called Sionsberg. It used to be a former hospital reconverted in a medical office building in 2015. It is located in a green healthcare cluster at Dokkum in the north of Netherlands. Interesting in this story is that we found a local partner with whom we demolished parts of the former hospital and we renovated the rest to attract new tenants like a GP company, general practitioner; a pharmacy; and consultancy offices for the hospital of [indiscernible] and physiotherapy, thereby giving a new life to a building from the '80s and providing a continuum of care for the inhabitants of Dokkum. Let's now move to Slide 31. The slides we're skipping show a couple of MOBs we have bought last year as well as some of our German transactions. Now being on Slide 31, 2019 was not only an interesting year, it was also promising because we have launched our Spanish activity. This slide shows you the 3 first project of our Gloria pipeline, which will total EUR 45 million, once all 5 buildings will be developed. The first building on the left is our Vigo building located in Galicia that -- for which the construction site was launched in May 2019. And today, we are finishing the structure of the building. It will be delivered in November 2020 for total amount of EUR 8 million. The second construction in the middle is building located in Oleiros, also in Galicia. Also there, we have started construction, and the budget is EUR 11 million. The third project on the right hand is Cartagena located in Murcia also project for EUR 13 million. Next to these 3 projects, 2 other sites have been identified in Valencia and Andalusia, for which we will start construction soon. All these buildings will have a lease for 20-year term on a double net basis and will be operated by CLECE, one of the main operators in the state. The acceleration of our activities in Europe also called for the reinforcement of our teams. So 2019 was also promising from the fact that we set the conditions for an even better performance for the next year by reinforcing the teams. First, early last year, we attracted Marc-Philippe Goldschmidt, who left Patrizia and joined our group as a Managing Director for our new German subsidiary, Cofinimmo Dienstleistungs-GmbH based in Frankfurt. In September, and in order to push our recent expansion to Spain, we have been able to welcome María Garbayo García coming from Armonea. And last but not least, we have recently announced our new key addition to our team with the arrival of Kees Zachariasse, who will join us in -- on the 1st of March. Kees is currently a partner at Deloitte in The Netherlands and will be managing the Dutch healthcare portfolio and support its growth. I will now give the floor to my colleague, Yeliz Bicici, COO Offices.

Thank you, Sébastien. Moving on to Slide 34 with the breakdown of our distribution networks. Our 2 portfolios Pubstone and Cofinimur I represent at the end of 2019 a fair value of 1 -- EUR 0.6 billion. Both networks together cover 386 square meters and account for more than 1,200x. As you know, they are characterized by steady activities, good relationship with tenants and high occupancy rates and steady yields. As there were no significant changes, I propose to skip to Slide 37 and discuss the office portfolio. The fair value of the office segment represents EUR 1.3 billion at end 2019 and counts 80 sites for more than 550,000 square meters. On Slide 38, you will see the 2 acquisitions we made in the Central Business District of Brussels. On the left hand, you see a future development shown in the European district. And on the right hand, you have a picture of a building already up and running in the immediate vicinity of the central station. The building combines comfort with design in the middle of a historic setting with the cathedral streets in the background. The redevelopment work of the Quartz building in the Brussels CBD are progressing very well and will be finished by the second quarter of 2020. 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 40 gives an overview of the major disposals initiated over the last quarters. This includes, of course, the disposal of the medium-size Souverain site vacated by AXA in 2017. The second map on Slide 41 helps you visualize the trend in progress with the 90 divestments concluded in the decentralized area of Brussels or its periphery and the acquisition of 2 office buildings in Brussels CBD. I will now give the floor to Jean Kotarakos, CFO, who will take us through the details of the financial results.

Thank you, Yeliz. As already mentioned by Jean-Pierre, 2019 ended on very good results above budget. For the overall portfolio, we can see that the growth rental revenue grew by 10% year-on-year. This represents a like-for-like growth rental of 2%. Bottom line, on Page 44, the actual results are higher than budgeted with a core EPS of EUR 6.81 per share versus a prior year figure of EUR 6.55 per share. This has been achieved despite the mechanical dilution arising from the rights issue on July '18 and the contributions in kind of '19. More specifically, I would say that the net rental income increased by 10% to reach EUR 233 million. It is higher than projected. The loss of income related to the Egmont I and II offices, as a reminder of EUR 2 million nonrecurring in the first quarter of 2018. This loss of income then was more than offset by the rental income generated by the investment in healthcare real estate in Germany, Belgium and The Netherlands. The operating results before result on the portfolio increased by 11%. The financial result is at EUR 16 million compared to EUR 22 million last year. This includes financial income and net interest expenses. As far as financial income is concerned, please note that 2018 and '19 recorded one-off items of more or less the same amount, I mean, EUR 3 million. Net interest expenses decreased compared to last year, mainly due to the average cost of debt, which decreased to 1.4% compared to 1.9% 1 year earlier. Taxes, although rising, are in line with the budget. Hence, the net result from core activities stands at EUR 166 million, which represents EUR 6.81 per share as highlighted just this fall. After having commented on the net results from core activities, let's have a look at the other items that bring us to the IFRS net results on Page 45. The financial instruments -- sorry, the financial instruments net charge of EUR 24 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 portfolio amounts to EUR 62 million versus EUR 4 million 1 year earlier. Therefore, the net results Group share stands at EUR 205 million versus EUR 146 million 1 year earlier. This represents a 41% increase. Regarding our balance sheet structure, there are no surprises, but the growth over the last 12 months can easily be seen in investment properties and in equity, the red boxes in the chart, indeed. The total asset reaches EUR 4.6 billion, and 93% of which are investment properties at fair value financed by EUR 2.5 billion equity and EUR 1.9 billion of financial and non-financial debts. On Slide 47, we analyze the change of the debt-to-asset ratio between December '18, 43% and December '19, 41%. The lower ratio year-on-year comes from major movements that nearly offset each other during the last 12 months. Firstly, the effect of the investments on the debt-to-asset ratio, plus 6.9%, was nearly offset by the effect of the contributions in kind of April and June '19, minus 6.5%. And secondly, the effect of the dividend payment, plus 2.7%, was more than offset by the result on core activities generated during the period, minus 3.7%. At the end of the journey, the debt-to-asset ratio is 2 percentage points below the level of 2018. The main EPRA KPIs are reported on the Slide 48, on which you will also find a reconciliation of the IFRS NAV to EPRA NAV and EPRA NNNAV. Let's have a look now at what we did on the financing side. As already explained earlier, Cofinimmo raised in the first half of 2019, gross proceeds of EUR 296 million through 3 contributions in kind in April and June '19. We will skip the Slide 51 and go straight away to the next slide. During this year, we carried out a series of financing activities, which have been already commented in the previous quarter. I will just highlight on Slide 53, the fact that Cofinimmo is one of the 3 entities besides, one, Belgian Banking group; and the Belgian State to participate in the Euronext Green Bonds community. Green & Social Bond was issued as early as in 2016, while a new Green & Social Loan was put in place in March '19. As you can see on Slide 54, the average cost of debt amounts to 1.4% compared to 1.9% 1 year earlier. 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 December, the headroom on the committed credit lines is about EUR 1.2 billion. After deducting the credit lines, kept as backup for the commercial paper program, the headroom reaches almost EUR 500 million available to finance the activity and the investments of the group. On the hedging side, 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 budget in 2020 and the investment pipeline.

Thank you, Jean. First, I would like to remind you that our mission to consolidate our leadership in Europe and healthcare real estate is illustrated by the sustained investment pace of the past 12 months. In 2019, we invested about EUR 491 million, exclusively in healthcare real estate i.e., almost 5x the average amount invested in the financial years prior 2018. At the same time, we continue to optimize our office portfolio by recentering it towards the Brussels Central Business District. We did this by means of disposal in a decentralized zone and acquisition in the Brussels CBD. The gross investment pipeline for 2020 is currently budgeted at EUR 375 million, mainly in the healthcare segment. Beside this, some asset rotation are budgeted mainly in the office segment. On Slide 60, you have an overview of the breakdown of development projects and acquisitions that were not yet closed at the end of December 2019. Let's now have a look at the budget 2020. Taking into account the pipeline just described, we forecast EUR 7.10 per share as the net current result from core activities versus EUR 6.81 per share in 2019. Please bear in mind that the denominator for 2020 would be higher than for 29 -- 2019, given the pro rata temporis effect of the shares issued in the first half of 2019. Based on that, we target a gross dividend of EUR 5.80 per share, higher than the EUR 5.60 per share for 2019 that we will propose to the shareholders at the next Annual General Meeting in May. Thank you for your attendance. We are here now to answer your questions.

[Operator Instructions] We have a first question from Pieter Runneboom from Kempen (sic) [ ING ].

I think it was like 1 half year ago, something that you stated some numbers on portfolio targets in [indiscernible] double the healthcare portfolio in 5 years or more and bring offices to EUR 1 billion. Does this target still stand?

Yes. And I think we are well on track because since I made the statement, we reinvested EUR 800 million. So we're still following this target.

Okay. Good. And could you maybe shed some extra light on the Spanish healthcare market in terms of maturity compared to Belgium?

Well, first, the underlying business model, which is the aging population is more important than in other European countries, that's the first element. The second element is that in terms of nursing home infrastructure for healthcare, there is a clear lack of assets. And that explains also why we're entering in Spain through greenfield project. So it's clearly a market which is quite comparable to the other market where we are present. But with, I would say, a growth prospect, which is more important and you can qualify it as a bit less matured compared to France and Belgium, for example. And we are very happy with the offered results and also with the reaction we get from the major operator in Spain.

Okay, great. And yes, we saw a good set of results.

We have a next question from Celine Huynh from Barclays.

Just wondering, it looks like Spain is kind of a priority for you for your future healthcare expansion. But are you also looking at other markets at the moment? And my second question will be on your compression expectations for Brazil offices and healthcare. We've seen a large transaction in the Brussels office market, which means that there is an increase in liquidity in the space. Do you think that it should be reflected into the valuation of your properties in the next reporting? And same question for health care, given the high level of investment activity in the European space.

On the first question on geographies, yes, we constantly look at opportunities. But for us, it's not a must to necessarily enter into a new market. As you can see, in the market where we are present, even the so-called mature market, we are still capable of having nice transactions. So I would say Europe is on our radar screen, but each country has a plus and minus. And with already 5 countries where we are present, we have a lot of in our plate, but we remain very open at looking at opportunities in other geographies.

And when you look at future opportunities, are you looking at higher-yielding markets as a priority?

It's a combination of a yield, but quality of underlying assets because finding higher yield is quite easy. But as you may know that in certain markets, you have a range of yield, which is wider than in, let's say, France or Belgium, but reflecting the fact that the underlying assets are of a less good quality, and frankly speaking, sometimes of a very poor quality. So I know that all the markets are looking for yields and return, but we are also first a real estate owner and a long-term real estate owner. So it's very important for us that the acquisition we are making are of good quality. And if we find a higher yield, we, of course, look at it, but the quality of the underlying asset is extremely important because one day, might not be tomorrow, it might be in a couple of years, you pay the bill in terms -- at the minimum in terms of CapEx.

Okay, got it. Can I have an answer on your compression expectation?

Yes. Well, I don't have a crystal ball. It's clear that we all witnessed a certain compression if talking about the Brussels market, you see indeed yield which are for the Brussels market quite new. Will it continue or not, you have also to distinguish really for prime asset or not. I don't know Yeliz, how do you see the situation?

Yields are compressing, indeed, but it's not only in the offices. We see that in many segments. Just a highlight on Brussels. Yields are compressing but are still very interesting compared to other markets like Paris or London or Berlin. As Jean-Pierre said, the quality of the underlying asset is important because indeed, yields are compressing, but beware of yield compression without looking to the real estate. And then another remark that I would like to add is that, we have experience and we could buy core assets, but we could also buy value-add assets or assets to redevelop. And there also -- there might be -- and we are looking for them, we bought the Loi 85 building last year at a rather good price because it is a development project. But since we have the teams in-house, we can also look for opportunities like that. So it's a mixture of quality, experience of teams, expertise that we have in-house and the fact that Brussels, yes the yields are compressing, but it's still very interesting compared to other European cities.

Thank you, Yeliz and...

Sorry, can I ask you what kind of yield on costs you're seeing for development project around Brussels offices at the moment?

So it will depend on the...

It's really project-by-project base. But let's look at more recent projects.

Profits.

Yes, yes.

If we take one of the recent projects that we have that is currently running, it's clearly higher than 6%.

Okay, okay. Okay...

To take the second part of your question, it was about healthcare. Sébastien?

Well, of course, healthcare becomes more and more competitive market. So there also we see compressing yields. That's why we think it's very important to be diversified, the importance of Spain for instance as a fifth country in our portfolio is enormous. Because thanks to this diversification, we can still find pockets of value. And remember, we don't only diversify in countries or in geographies, we also try to diversify in type of care. And remember, for instance, the portfolio was resulting in medical office buildings. That's clearly a pocket where we can still have interesting activity -- investments with higher yields simply because we manage better the tenancies, we can find new tenants for buildings, like the example I gave you in Dokkum. And so it is compressing, but there are still pockets of value that we can definitely find.

We have the next question from Frederic Renard from Kepler Cheuvreux.