Covivio (COV) Earnings Call Transcript & Summary

Good day, everyone. Welcome to the Covivio activity at end September 2020. Today's conference is being recorded. At this time, I would like to turn the conference over to Tugdual Millet. Please go ahead, sir.

Thank you, and good evening, everyone. Thank you for attending this Q3 activity call from -- for Covivio. So let's directly start with some data and comments on our different markets. And let's begin with the office market. I'm on Page 4 of the presentation. So after a very quiet Q2 to the lockdown, the letting activities picking up slowly on the back of more site visit and decision, which have been postponed for a few months. We are probably entering in a new cycle, but entering with a vacancy rate at the end of 2019 that has reached its lowest level over the next 10 years. On the investment side, activity remains dynamic with new record in terms of yield in the gateway cities and particularly in Paris or Milan. Obviously, available money is eager to invest particularly on no-brainer asset even at stretched yields, and this is obviously supportive for the valuation. In German resi, on Page 5, this is more of the same for years with a continued housing shortage. In addition, in Berlin, as expected, we discussed that numerous times. The new regulation that has been implemented is putting away from the letting market, an important part of the stock. This puts prices and rents on new apartments up. Finally, on hotels, Page 6, the environment is obviously still difficult. On one side, July and August have been really encouraging, demonstrating the potential for recovery when restriction are lifted. And it has been particularly the case in France and Germany, where we have the most important part of our portfolio with an important share of domestic clients, but the recent shares in the number of COVID cases all over Europe has put an end to the progressive improvement of the occupancy and RevPAR, and we should expect a weak Q4 for 2020. Let's move then to the key achievement of this third quarter. So on Page 8 of the presentation. An excellent news has been the full letting of our 4,500 square meter development in Paris 5th district. The good news that demonstrate again the success of our pipeline made of excellent location and efficient restructuring programs. But most importantly, this successful achievement has been made possible, thanks to the value proposition that we made to our clients with a full-service offer. The building will be operated by our radio team with a 5-year contract signed with a large public institution. Our full-service offer, radio has been launched 3 years ago and is proving to be even more relevant in this environment. We are convinced today that selectivity will increase in this environment. As you see on Page 9, we are well prepared to provide to our clients the best product made of excellent location, new or redeveloped taking into account the need for efficiency, well-being and sustainability. And most importantly, the full range of real estate solution offering building as a service. This will be the key elements to differentiate ourselves. Moving to asset rotation, and specifically on our disposal plan, Page 10. We reached at the end of September, almost EUR 500 million, with still a target to be above EUR 600 million by year-end. The most important part of the disposal is made of mature office buildings and the overall margin of those agreements reached 12% versus last book value. In all of our strategic activities, we have been able to obtain significant positive margin on sales. Since the beginning of September, we've put other different asset for sale, mostly offices in Italy and France. When we talk about successful pipeline, it's also related to Berlin Resi, Page 11, where we start to benefit from the positive contribution of this activity. We have already generated 46% margin on cost on the first building delivered in 2020. And the amount to be delivered will be more than doubled in 2021 and double again in 2022. Finally, Page 12. As a reminder, we have closed the acquisition of 8 very nice hotels fully led to NH Hotel for a new 15-year lease on a 4.7% minimum guaranteed rent. We are fully confident that this portfolio will perform on the back of the future recovery of tourism. On the ESG side, 4 of the main ESG rating agencies have updated the rating in the last quarter and have confirmed our status of leader in our sector. This rewards our strong ambition in terms of carbon reduction and green buildings, but also our strategy, focus on the client and supported by best practice governance. Moving to those 9 months activity, Page 15. First, we deliver on our pipeline. It has finally suffered very few delays due to the lockdown and the impact on cost has been even lower than what we initially expected. To date, 6 office buildings has been delivered, and most of them are fully let with still 2 letting process ongoing. The first one is on Via Dante, our first full-service offer value in Milan, which is occupied at more than 60% just after the beginning in September, the opening. And the second one is IRO, our recently delivered building in Chatillon, south of Paris where we have signed a new agreement for 3,800 square meter, leading to an occupancy of 34%. Our letting activity has picked up a bit during Q3 with more than 125,000 square meters let or renewed overall at or above passing rent or less rent. I would like to comment 2 interesting examples. The first one is our achievement in Milan, where we will let 3,200 square meter with an uplift of 14% versus previous rent. The second example in the -- is a new successful negotiation with Orange, with which we have renegotiated leases at passing rent for a new 8-year lease in exchange for financing CapEx on per region assets. Page 17, rental growth dynamic in German resi continued to be strong on the back of a positive reversion and also modernization programs. More specifically, in Berlin, we have still positive evolution despite a lower path than historically due to the implementation of the first part of the Mid & Decker law in Q1 in Berlin. This negative impact should increase in Q4 with the implementation of the second part of the law. Moving to revenue, Page 18. First, rent collection have reached high level at the end of September, with 97%, including 92% in hotels. This is the illustration of the quality of our tenant base, very much focused on large companies and residential also. On the like-for-like performance. In offices and resi, we have delivered a plus 1.5% like-for-like rental growth during those last 9 months. This is a slight decrease versus H1, where we were at 1.9% due to increased vacancy on offices and additional impact on the Mid & Decker. Performance on hotel stands at around 50 -- minus 52%, aligned with the figures published in H1 and confirming our expectation that H2 won't be better than H1. Then before moving to the Q&A session. The key takeaways of this publication is first, operational results that are in line with guidance announced in July, with rental activity slightly picking up, delivering on the pipeline on offices and residential, and also disposal plan well on track to reach the target to be above EUR 600 million on a group share basis. Now I'm happy to answer to your question together with the IR team.

[Operator Instructions] We have a question from Alvaro Soriano from Bank of America.

Yes. Thank you very much for the presentation. Can you hear me well?

Yes.

Okay. Just three questions from my side. The first 1 on disposals. Can you comment or elaborate a little bit the margin achieved in Q3? We kind of feel that the margin is slightly coming down from 15% to 12%. So probably Q3 disposals have been executed at a lower margin. Then the second question is about the weak performance you expect in hotels for Q4. The company has confirmed the guidance, but the potential losses in hotels, I think EUR 70 million are expected can be huge than that figure, given the weak total performance you are expecting for these last 3 months of the year. And the third question is on dividend. I have to ask again, during H1, the company rejected the possibility of an script dividend. You were expecting capital rotation to be strong enough to pay a cash dividend. If you could comment on how the dividend for the year looks like? And if you can confirm that no scrip dividend will carry it out this year?

Yes. Thank you for those three questions. So on the first one, yes, mechanically, that means that there has been a smaller margin on disposal in Q4. But let's say, that's still strongly positive overall margin on disposal, which is, for us, good signal for valuation. It's always depending on the asset that you put on the market, et cetera. But for us, very good news to be able to confirm that. On the second question about the weak Q4. Yes, this is what we expect on the back of, let's say, recent announcement all over Europe. To be honest and we've been clear on that during H1, we were not expecting a huge performance during H2. We have been positively surprised by the performance of Q3, and specifically in July and August has been quite good. So we have been a bit in advance versus our initial forecast. And we will probably be a bit late in Q4. So overall, there should not be an important impact. That's why we are confirming our guidance due to these different elements. Last question about dividend. Obviously, our objective is well aligned with what we said, obviously, in H1. Our objective is to confirm the LTV objective. And for doing that. This is the disposal plan. As I said, we are well on track. So there's no reason for why we should change our mind on this aspect.

And our next question comes from Celine Huynh from Barclays.

Sorry, can you hear me?

Yes.

Okay. I just have more specific questions on disposals. The first one would be I have to feel that most of the disposals in Q3 were German resi. And there was a major drop in terms of margins from Q2 to Q3, I read something like 81% in H1, it's dropping to 19% in 9 months. So how do you explain that drop? That would be my first question. And then the second question would be on the French office disposal that has been delayed. Can you give a bit more color around this? And why have been delayed? And whether or not it's related to, I don't know, something like margins or could be?

Yes. Thank you for this question. The first one is on activity, obviously, as it has been commented, there's a slight decrease on margin. But again, still 12% margin on the overall disposal. An important part of the additional disposal is coming from German resi, correct? The portfolio made of [indiscernible] in lighting that we bought 3 years ago when we decreased vacancy from 50% to 3%. We consider it was fully mature, together with some assets in Berlin. So we delivered that with smaller margin versus the overall that we communicated. So on average, it has an impact on the overall margin. And the second question, I'm not sure I remember?

That was on the French disposal, French offer?

So on the French disposal, so we have effectively postponed an asset that was under our sales agreement in H1 because we disagree with the seller on the outcome of technical due diligence. So we are, I would say, fine-tuning the analysis in order to put that again on the market. Is it clear?

Does that answer your question?

Sorry, when you say you did agree with the seller, do you need the grounded price?

No. No, no, no. It was on the -- sorry, it was not clear. There's been a disagreement in the outcome of the technical due diligence so on the technician side. So we decided to fine-tune the analysis on the technical due diligence in order to put again this asset on the market.

And we have a question from Florent Laroche-Joubert from ODDO BHF.

Thank you for the presentation. So I would have a three questions for you, if I may. So what we can see today is that the sanitary environment is now worse than Q3 than the summer, and we are going to face more restrictions and more uncertainties? And at least until next December 2021. And so I would have three questions on -- due to this context. So first question, so what is your opinion today on the evolution of the investment market on offices due to this context? My second question on hotels would be, how do you see this activity worked in 2021 because we will have maybe more than 12 months that will be very difficult for hotel operators? And my third question would be, do you see any changes in wisest by corporates for the future, which is in terms of offices since we can see it today more home working. So do you see that the new needs, new wishes in terms of -- which is, yes, for that activity?

Yes. So first question on the investment market, I have to say that up to now, it has been quite dynamic as a market. We have all seen including just recently, 1 or 2 days ago, deals that have been closed on the office market in Paris, Paris region and also Milan, and we continue to see very good appetite for assets at even premium or at book value in the process that we are ongoing. There's -- so that's why we said we were confident on our objective and our expectation even to be a bit higher than that. The question on hotels is a bit more difficult because, obviously, we are, let's say, reasoning on the very -- we have quite limited view on what would be the future evolution of restriction and the evolution of the virus. What we saw -- what was encouraging is that if restrictions are progressively lifting up we have seen a very rapid recovery in the RevPAR and occupancy as it has been the case in July and August. So let's say, we need to be patient on that. It's obviously difficult to forecast so far for 2021. But I would say, we have, today, a revenue stream that is a mix of variable and fixed lease. We have so far been able to collect an important part of the rent in a difficult environment, confirming the quality of our hotels and also our counterparts. Then we all hope, personally and professionally, that this situation will progressively improve. It's again difficult to project ourselves, but we are confirming again that on the long term, despite this short-term challenge, this industry will recover. And let's hope that it could recover also probably faster than what we expect today in the -- really in the middle of the turmoil. Then on the third question, on the office demand, the situation is, as we described, a bit better than in Q2. We have seen some transaction, and we have been happy to deliver on some interesting transaction in Paris, but also in the first part of Paris. We see, in fact, 2 kind of -- this is, in our view, 2 good examples. The first one is the transaction in Golan, where we have been able to secure these clients because we have been able to be flexible and to offer a full range of service. And that was key for a rapid decision for this transaction. And the second one is the asset in Chatillon, which is a different kind of clients, which is also looking for a competitive solution. And obviously, this building is a very good opportunity for him because it's close to transportation, just on the very close to the ring. And then with rent around EUR 300 per square meter. It's very competitive, and it corresponds to probably an increasing part of the demand that will focus also on these kind of things. So yes. In this environment, clients are carefully looking to cost and particularly real estate cost. So the things that we need to do today is to focus on the quality of the offer. To be competitive and to offer probably something more in order to differentiate ourselves and to be among the first to be able to fulfill our buildings.

Okay. That's very clear. Maybe if I can, just a follow-up question on hotels. If we take the assumption that the situation will continue to be significantly affected by the crisis of COVID in the first part of 2021. Can we assume that you are confident to collect rents for this part of 2021, as you collected once in Q2 and Q3 2020?

During this first half, we have done a very constructive negotiation with our clients, our partners, the hotel operator. We are together in this situation and our objective is to have when the recovery will come back. To have a very efficient professional hotel operator to manage the hotel that we have. So that's why we have one solution with them in order to face this situation. As I said, due to that, we have a strong -- we continue to have strong relationships that enable us to collect the -- an important amount of the rent that we are due. And I hope that it will -- and I think that it will continue to be so. And if needed, we will, obviously, we will be happy to continue to discuss with them on a case-by-case basis in order to face this situation.

Our next question comes from Marie Dormeuil from Green Street.

I just -- I actually think you mentioned it earlier, but I just wanted to know for Aero. Did you -- did you manage to achieve the rent that you had in your disclosure, which is like EUR 325 per square meter? And then in the future...

Yes. Yes that was in line with our expectation.

And so maybe for the rest of the building or maybe if you start to have conversations for Alis, which is in Levallois. So it's further down the road, it's 2022. But do you start to see negotiations that are asking for lower rent than would you have in your business plan? Or this is not yet added?

So for Levallois, yes, I have in mind some discussion that we initiated, and we have done recently, some site visits as we have no launch the development, and we have a precise date for the delivery. It's probably a bit too early to go more into detail, but I would say the location is excellent. And the proposal in terms of building size on the metro station, et cetera, makes us quite confident on our capacity to let it. And in the competitive environment is quite well placed.

And we have a question from Christopher Fremantle from Morgan Stanley.

I just wanted to ask a couple of questions on the hotel business. I think you say in the release that, say, your RevPAR within the hotel business is down 55%, I think, so far. And yet your rent received is down 51%. And so my question was what proportion of your hotels have minimum guarantees? And if you can just clarify, if they are being triggered or not? And I know in some of your U.K. hotels, you have a material adverse change clause and you're not recognizing any rent for this year. But can you -- if you could just give some clarity on that, please? And then just to follow that. Can you just clarify that there is no risk of breach of your interest cover covenants within your hotels business, please, just some clarity on the test for 2020?

Yes. So on the REVPAR, I'm not sure if I got your question because the minus 55% that was in the presentation, it was for the month of August. So August 2020 versus '19. That was just to let's say the fact that summer was quite encouraging in terms of performance. And so the comparison with the minus 52% in revenue is on the 9-month basis. So taking into account the variable part of our revenue and the fixed part of our revenues.

Right. So what is the REVPAR down for the 9 months?

We don't have a statistic on the RevPAR and the hotels because we communicate on, let's say, rents and EBITDA. But I would say the minus 55%, you mean compared in August with our portfolio. I'm not sure I have the information.

Well, I think the point I'm just trying to raise is that your -- the rent received doesn't seem to reflect the fact that in many cases, there is a coverage that you have minimum guarantees within your variable rent clauses. And I'm trying to understand if those have been triggered or not? And if not, why not?

Yes, yes. Let's summarize like this. Apart from the -- as you mentioned, on the U.K. portfolio where we did not collect the rent due to this macros. All the other revenue are made of either EBITDA, either variable rent, and specifically again with Accor. And then the remaining part is fixed rent. And this is where, specifically, we report the amount of collected rent versus what we invoiced.

And you can't comment on the interest cover?

Yes. On the interest cover, so specifically on Covivio Hotel, we were at 2.5x at the end of first half. So Q3 we are in line with H1. So expectation is no material deterioration on that. So base case is that we should be okay with the covenant, which is at 2x. But in any case, we will closely monitor that. And if needed, we will ask for covenant holiday. It has been largely accepted in numerous hotel deals so far. So I would not see a major risk on this.

Okay. And I'm just going to sneak in one more, if I may. Have your hotel valuers provided you with any updated guidance on the valuation trajectory in this segment? I know you recognized 3% down only in the first half. Is there any more guidance that your valuers have given you that you can share with us?

No, not yet. It's a bit too early. We've seen some small transaction on the market, which are quite encouraging, I would say. On the other side, we've also hearing a lot of new fans that are raising, let's say, money to be prepared to invest on the hotel side. I think the discussion will start in the coming weeks. But so far, I cannot comment or give more details on that.

[Operator Instructions] We have a follow-up question from Alvaro Soriano. Please check your mute function.

Yes. Can you hear me now?

Yes.

I was on mute, sorry for that. Just a quick one to follow-up on Covivio Hotels and back to the dividend topic. Last year as well, Covivio Hotels made a capital increase through scrip dividend accepted by all shareholders, including Covivio. We can see that scenario this year.

It will be decided among the shareholders, of which, obviously, Covivio is an important part. The objective is to take decision in the interest of Covivio Hotel and Covivio. So we will decide accordingly, taking into account the situation, the balance sheet, the needs, LTV, et cetera.

So we can assume no decision has been made yet on that topic. Okay. Second question on your renewals for next year. In offices. I think you have about 31% of your income to be renegotiated or renew over the next 24 months in France. Offices and 18% in Italy. How those conversations are going, and especially with your largest tenants. With those tenants where you have partnerships, I mean, France telecom, Telecom Italia, EDF, SES are they willing to renew the same space or you start to feel that their office needs will change in the coming years?

All done, I'm just collecting the information, just a few seconds. Yes. So just there is probably misleading information because, let's say, in France office, we have, let's say, around 14% for leases that are expiring. I would say the discussion will come. An important part of this is coming from Orange, and specifically some asset that will be ready for redevelopment in Paris and the future pipeline where we are currently working on with, let's say, fine-tuning for the building permits as soon as it's fully vacated. And on the remaining part, it would be would say, an analyst on a case-by-case basis. There's no, I would say, big deals apart from the redevelopment part. There's no in this lease expiry situation that would lead to a strong increase on the vacancy rate strong decrease in the rental level.

Okay. But at this stage, you cannot share a number, especially on French offices that analysts we could use for 2021 in terms of vacancy rates coming from this is renewals. At this stage, it's difficult to happen now.

Yes, we -- it's a bit too early. And again, I'm taking, again, the example of what we've done with Orange recently. We have renewed the lease at passing rent. So there is really an analysis on a case-by-case basis. Depending on the situation of the clients. What we have with them, the flexibility that we could ask probably some of them will ask for late surfaces. I would expect that for some because of the economic situation. But again, overall, I don't see big deals in the lease expiry that we have for next year.

Do you need to for 2021 expiries, if you take into account the assets that we enter to the development pipeline, especially in Paris, as Tugdual said, the lease expires in total for Covivio represents 3.8% of the total revenues of Covivio.

[Operator Instructions] And it appears we have no further questions at this time. I would like to turn the conference back over to our speakers for any concluding remarks.

Okay. Then thank you very much for your attention and all your questions. Obviously, all the team is available to you to go more into details in a more specific question. Have a good night.

Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.