Colonial SFL, Socimi S. A. (COL) Earnings Call Transcript & Summary

Welcome to the Inmobiliaria Colonial Project Alpha V presentation. The management will run you through the presentation, which will be followed by a Q&A session. [Operator Instructions] I'm now pleased to introduce Mr. Pere Viñolas, CEO of Inmobiliaria Colonial.

Thank you. Good afternoon to everybody. Together with me, there is, as usual, Carmina Ganyet, Corporate Managing Director of Colonial; and Carlos Krohmer, Chief Corporate Development Officer. The idea today is to present you what we call Alpha V, which usually it's a way to explaining our strategy in the ordinary course of business, which this time has mainly to do with the disposal strategy that we have been following in recent months. We would like to explain not only the disposals themselves and the specific terms and conditions of what we've just done. But moreover, what's the strategic rationale, the logic behind everything that has taken place and to what extent this confirms our views on our overall strategy. Within this presentation, we will start explaining the specific terms of the disposals of the last 3 months. There are 2 who take place actually yesterday, so they are brand new. And just afterwards, we will put this into the context of the full year disposal program also as a way to put this in context and to be able to share with you, as I said, the strategic rationale and what is -- are the main goals that we believe we have achieved by delivering this disposal strategy. We will also be doing some comments on the project pipeline that is under execution, just explaining where we are today. So I will skip now to Section 1 in Page 5, to talk about these recent disposals under the umbrella of what we call Alpha V, I will ask Carmina to step in and go into the details on this. Thank you.

Okay. Thanks, Pere. So what is really Alpha V? Alpha V is a disposal of 5 assets for EUR 400 million, with a very attractive pricing in average terms, 13% premium on the last reported GAV, meaning last reported GAV pre-COVID levels December '19 and with a significant value creation for our shareholders, thanks to these disposals. As you can see here, these 5 assets, 2 of them are -- were in Paris. 3 in secondary area in Madrid and the north of Madrid. The fourth asset is retail non-core out of Barcelona, in the south of [ Western area ] and the final settlement, as you know very well of the logistics portfolio that we sold in different steps. And the final one has been executed this year. So total amount of this EUR 400 million means 130,000 square meters, 35,000 without including logistics, we consider a well-balanced geographical mix of disposals. And as I mentioned, 1/3 in France, 2/3 in Spain with a very significant capital value obtain due to these disposals. In the next page, on Page 6, you can see the maps where these assets are. As I mentioned, Av Bruselas the north of Madrid, part of our core area, which we would like to be more focused on the logistic -- the final settlement of the logistic unit. Gavarres, as I said, in Tarragona in the south of [ Westers area ]. And then for the French assets, they are in prime areas, but small and sub-optimal size with a mature characteristic of those assets, which we decided to be sold in a very significant and important [indiscernible]. We go in more details, next page, Page 7. Basically, I mentioned Av Bruselas secondary assets, very opportunistic of market transaction. After being repositioned, and then I will explain the rationale, the real estate rationale behind asset-by-asset or disposals asset by asset. After being executed all the repositioning and capturing all the value, it has been sold in a very, I would say, opportunistic transaction and a very significant level of capital gain. Thanks to that with all the portfolio in Spain and with this very attractive levels achieved in the disposals. The value creation in average terms means 1.8x the project cost, which means 80% of capital value creation for the Spanish assets. Sorry, because we cannot be very specific in the specific premium on the GAV because of confidential agreement we have with the buyer. But to give you some guidance on what has been achieved, I would like to highlight is what I said, 1.8x value creation on the investment cost, which means 80% capital value creation. For the French assets, as I said, sub-optimal floorplates, small size. And after also going to all the repositioning process and capturing an uplift in all the rents of the contracts, we decided to sell at a very interesting level. 16% premium on the last reported GAV on pre-COVID GAV, which represents a capital value above EUR 20,000 per square meters, which means 30% more than our average capital value that we have in our internal price evaluation as of June 2020. So significant value creation, 1.7x since we bought and refurbish those assets. And of course, with a very interesting yield attached to the price that has been sold. We go -- if we go in more details about what is behind of those assets, I am in Page 8. So for Wagram, the real estate rationale for deciding disposal -- disposing those assets, basically, it's a very small asset. We were through all the refurbishment process, modernizing of the getting additional efficiency in the floor plans. And after obtaining all the energy certificates and capturing the value through repositioning and through rental growth, we -- as you can see, we have achieved a very significant premium to our GAV, which means 26% above the average capital value we have in our Paris portfolio. It means that we have obtained 2x of -- if we compare to the acquisition price in 2010. As a result of that, 100% of capital gain on acquisition price. We went to an auction process for this asset, as you can see here some details on that. In the initial phase, we got more than 40 interests -- or more 40 investors interested in this asset. Final bids were concentrated in 5 institutions and, finally, well, the profile of the potential buyers that we get in the -- in this process was this investors with a long-term view strategy. And finally, Aviva Investors was when we could execute this disposal. It has been settled in the first quarter of 2021, and this is why it has been included in this Alpha V program. The second asset in Paris, it's Percier. I am in Page 9, it has been sold of EUR 143 million with a capital value -- increased capital value of more than 24,000 square meters -- sorry, EUR 24,000 per square meters, which represents 34% premium on our average capital value for our Paris portfolio. It means 1.8x on the total investment costs, resulting in 80% capital gain on total cost. This asset was acquired from SIIC de Paris in 2015. As you know, when we bought SIIC de Paris and after including these assets in our portfolio, we went through a progressive refurbishment process, floor by floor, stabilizing these assets and going to the market, uplifting rents and then disposal with a significant premium, achieving 13% and gear IRR for this fixed period of time that we have been able to manage these assets. And again, a very successful execution process, with 50 investors were receiving more than 50 interest from investors. Final bid were concentrated in 8 institutions and, again, long-term profile of investors. And finally, Deka has been bought or has been achieved the asset. So very proud of this process that has -- of how have been executed. The third asset is located in Madrid, in the north of Madrid, in a secondary asset. This asset has been acquired from Axiare in 2018. And again, often putting these assets in our machine of [indiscernible] a very active asset management, we were able to full redevelop to full let with a long-term contract at the maximum level of rents and has been disposed on a very interesting levels achieving a premium on the last reported GAV. That means that we have obtained 1.8x on total investment costs, resulting with a 80% capital gain on total cost. But this transaction has been executed in a lost market transaction with a private investor with the same profile of long-term oriented strategy, and proud of again to obtain this premium and this significant capital gain on the investment cost. The other assets in the non-core assets, which are retail, you know that from Axiare, we cavitated some units of retail. And this has been also executed with a very interesting levels. It has been signed, by the way, yesterday. So we told, of course, it's non-core. It's something that we anticipated in certain occasions that we wanted to sell, and this objective has been achieved yesterday. And the last one is the settlement, the final settlement of the logistics. You know that we were executed the logistics disposal in different steps due to some conditions to be achieved. The large one has been achieved successfully, and it's part of this Alpha V, the final part of the settlement of the logistics for EUR 64 million.

Thank you, Carmina. We'll now skip to Section 2 of the presentation, which -- the goal is to provide a wider perspective on the matter that we are discussing today. So what is this all about? First of all, you know what is a value proposition of Colonial. So first of all, we believe in prime positioning as something that is better for investors in terms of risk-adjusted return. We believe in alpha value creation in relation of the assets once this alpha value is created. And in doing this, always within a framework of a healthy investment rates company. So what we have done is a divestment strategy, which the goal is to enhance the prime positioning of the company, to rotate assets that we consider either nonstrategic or mature and to achieve with this even a healthier capital structure for the company. The final goal with this, it's always to prove the fundamental value of what we own. And also, and most importantly, in the longer-term to be able to prove that the strategy delivers excess returns compared to our benchmark for shareholders in terms of better stock price performance. This is the overall logic. So in Page 14, what we are saying is that during 2020, we sold in excess of EUR 600 million of assets, which is relevant. It's about 5% of our assets under management, and we sold not the best. We've sold what we consider non-core, what we consider secondary in terms of location, and we consider mature in terms of value creation in a word, not the best, and moreover, as everybody knows, in challenging market conditions, not in the midst of a super hot market environment. And the results are that we've sold this in time. So during 2020 and execution in this first 2 month of 2021, we have sold this in time. And we've done it with an 11% premium on the GAV pre-COVID and a 13% premium on our valuation premium pre-COVID, if we only concentrate in offices. So I think that the overall conclusion is that the results of this divestment, the result of this process achieves what we wanted to do, which is to prove the fundamental value of the company and the comfort that we have the kind of strategy that we embrace in the field of prime and Alpha. In Page 14, on the right-hand side, the profile of this non-core mature product that we sold, of course, is not very different of what you heard from Carmina regarding second half of the year. We've sold 83% in Spain, 17% in France. And we sold a combination of assets in secondary locations, 45%, 18% mature offices, 37% non-core assets, this breakdown in terms of square meters. Page 15, I will not go into this one because you just saw this in the previous part of our presentation, just maybe to remind you that logistics play an important part of our disposal program in the first half of the year. Page 16, to highlight this point about fundamental value, we cannot be specific about the details in Madrid and Barcelona because of confidentiality commitments. But you can see, for example, that in the case of Paris, the disposals have taken place at an average of EUR 23,000 per square meter, whereas our average capital value per square meter is 17 -- well, EUR 17,800 per square meter. So I think that the premium is quite relevant. In the case of Spain, even with more challenging assets, the situation is not exactly the same, it's not so different. To the extent that, as you see, the overall disposal program has been done, as we said, at an 11% premium for all. We sold at a 13% premium if we only consider offices. Page 17, as a result, the financial situation of the company becomes even stronger. Our -- the debt has been reduced from EUR 4.6 billion to EUR 4.2 billion, 10% less. Our LTV from 36.5% to below 35% in terms of LTV. The proceeds of this cash will be basically to fund the ordinary CapEx that is already expected, but it's already disclosed and to strengthen further the capital structure of the company. Page 18 needs to highlight, as we said, that this Alpha V, it's not the result of a decision taken in the midst of the crisis of 2020 of the COVID environment. But part of a longer-term kind of strategy, you can see here what we basically were net buyers for a certain period of time through the first Alphas. We started to be net sellers 2019, and we've been only sellers in 2020. And basically, everything we've done on the acquisition side has been reloading prime, and everything we've done, or the vast majority of what we've done on the selling side has been offloading non-core together with some mature assets that we wanted to sell. In this pie chart at the bottom of this page, you can see the percentage of disposals of secondary assets outside of CBD compared to the total disposal program you can see to what extent this is relevant. This long-term strategy, I'm now in Page 19, we believe has a relationship with the return that, in the end, we expect to deliver to shareholders. If we enhance in prime and we focus in creating value through Alpha and then rotating, we believe this should deliver a differential return for shareholders. At the very least, this has been the case in the last 5 years, where you can see that Colonial stock price has been beating the EPRA index substantially during these 5 years. And you can see where the value is coming from. So that's the overall logic. I will come back to this strategic wider rationale and conclusions, but we also wanted to take advantage today just to keep you informed about the evolution of project pipeline -- projected pipeline, which is another source of value creation. I will ask now Carlos Krohmer to step in and provide us an update on where we are regarding this. Thank you.

Thank you very much, Pere. Well, at the end, the project pipeline, is one of the relevant parts of the prime factory capital recycling were part of the capital closing to, as you know, the main news is what we show on Page 21. We have just recently finished the full pre-let of the Marceau building. Just to remind you, it's a building 150-meter from Place de l'Étoile with very high energy standards and very good decarbonization footprint standards. And what you can see here on Page 21, that in every single quarter of this pandemic year, Q2, Q3, Q4, we have had activity on this building. We started with a contract for the headquarter of Goldman Sachs, then we completed the amenities area with a contract with Sodexo, and we closed the year with the final square meters with the last 4 to be pre-let to another investment bank, a boutique investment bank. In France, important -- no highlight about this first, a full pre-let in the middle of the pandemic. This shows the resilience of such a type of assets. The second element, that the rents have been higher that we had in our internal target for this asset, so we have been exceeding the target. And it's a strong pricing. The Paris CBD market is confirming with this quite strong pricing even in the situation of the pandemic. On Page 22, it's just to show that we are progressing now with the project, the idea is to deliver it at the end of 2021, more specific during the third quarter. We then look beyond and look at our current project pipeline as a whole on Page 23. Here, you see the 10 projects in Spain, one is delivered Castellana 163, we have delivered this year. So one will be one less on the project pipeline, all the work done. It is let -- it's delivered. We have gained a lot of reversion, remind that we were at a rent of EUR 14 per square meter month. Now we are more than double. And then on the right hand, and Diagonal 525 is also fully pre-let, it will come into operation during the first half. It's the new headquarter of Naturgy. And then important element. A big part of the value is concentrated on the Paris portfolio, more than half of the total value out of the Paris portfolio. 2 out of 3 assets are 100% pre-let as of today, and beyond will start the marketing and commercialization process during this first half 2021, more specifically in the Q2. So we are quite happy with the achievements year-to-date, and the project calendar is on track. And last but not least, on Page 24, what we also want to show is that at the end, the strong leasing success and also the attraction of the buildings, it's because we are really focused on the client. To be focused on the client, you have to offer the best location with the best characteristics, low commuting, low carbon footprint, corporate branding, the best product in terms of quality, we concentrate on low-rise buildings with efficient flows. And at the end, this has a payoff, and this is what we see here on Page 24, we have extremely high loyalty of our clients. 75% of our client base is more than at 5 years with us. We have even a lot of clients that are 10 years with us, on average, the loyalty is 7 years. So we are quite focused on the client to give him the best product.

Thank you, Carlos. This last point is important because we, in a simplistic way, say that our strategy is to remain competed to prime positioning. As we discussed in previous presentations, we want to emphasize that this is not a simplistic old fashion view of, let's say, stating a real estate strategy only based on location. And without any, let's say, respect for the challenges that we have in front of us, we believe that the challenges that we have in front of us, which have to do with efficiency, flexibility, experience, providing the best experience sustainability. Many of these things has to do -- the things have to do with customer loyalty, which is one of our strong points in Colonial. We do have a vast -- a very important percentage of our client who have been with us for many years, 50% more than 10 years, 75% more than 5 years. So to have all of this rationale of being pursued in prime is not because of a simplistic rationale based on location, it's because of a more sophisticated rationale of customer-centric strategy. So that remark was important. So conclusions on Page 26 are simple. We are presenting today, the outcome of a divestment strategy that has taken place in the last 12 months. We have been disposing of more than EUR 600 million of assets, which represent 5% of our assets under management. As I said before, not the best to say the least, so we've been selling mature assets in secondary locations and assets that are non-core because they were inherited and were not close to our strategy. And we've done this with a double-digit premium in excess of 10% on average. We've been selling, as I said, non-core secondary and mature, and that means that there's a rationale on what we do. We don't sell just to make money and to prove the value. We go beyond that. We want that this falls under a rationale of enhancing the prime quality of that portfolio. What we call the flight to quality, that is a long-term strategy of Colonial. And obviously, this has a consequence in the balance sheet, providing more strength, to be specific, reducing the LTV below 35%. So that's basically what we wanted to share with you today taking advantage of this also to share that our project pipeline goes as expected, the execution is on track, and that's basically the purpose of today's presentation. I will share with the presentation, and now if there is any question, we will be glad to answer, if possible. Thank you.

[Operator Instructions] The first question comes from Max Nimmo from Kempen.

Thanks very much for the presentation, guys. You mentioned that the capital recycling was around 5% of the portfolio. What kind of level of ongoing capital recycling should we expect? Is 5% roughly what you think you'll do because you'll always have a tail of assets. And if you want to continually improve that quality, you'll always need to keep recycling that. And in line with that, are you guys happy here at sub-35% LTV or would you want it lower? And then the second question is, have you had any early occupier interest in biome at this stage. I know the marketing hasn't started yet, but has anyone registered any interest at this stage?

Look, on the first part of your question, we believe that we've done the bulk of what we wanted to do. Because, let's say that the vast majority of what is -- what we consider a secondary non-core of mature has already been executed. There may be some additional things that could be done either because they are mature, secondary or non-core, but they would be more marginal compared with what we have done so far now. As a consequence, talking about the LTV, well, we may enhance further the LTV of the company, but it won't be because we disposed of a substantial amount of assets. What is non-core, it basically comes most of it. When we bought Axiare, there were some assets that were included there that were clearly non-core, from the beginning, there may be something left, but not relevant. If we talk about mature assets, as you mentioned, this is a concept that it's never-ending because everything can become mature at some point. But let's say that when we did a strategic analysis of each asset in the last 12 months, we basically identified what we identified, and we have executed it. So we don't see in the short-term additional assets of a comparable size that would fall in this category of they are mature, we have to sell them. We don't believe that this should be meaningful in the short term. The second part of the question, sorry, I forgot that -- Carlos might fit in...

It was a question on the beyond asset. We're going to start now the marketing process, it has not yet started. So no relevant news on these assets in that sense.

The next question comes from Marie Dormeuil from Green Street.

Just a few questions on maybe the bidding penchant that you observed for the Paris asset. So I just wondered first is Aviva or Deka, was it far ahead of all the bidders? Or were all the final bids pretty close together, if that's something you can disclose? And then just on Wagram, I know there is a kind of ground floor retail element. So would you be able to just give us a sense of pricing of the office element versus the retail element?