Covivio (COV) Earnings Call Transcript & Summary

Good morning, everybody. And Thanks to attending this call of the results of Covivio 2020. I'm here today with Tugdual Millet, our CFO; and also with Dominique Ozanne and Olivier Estève, our Deputy CEOs. So let's start Page 4. What -- 2020 was a year of great achievement in the context of crisis. The first 1 is reinforcement of our exposure in Germany. Today, Germany represents 37% of the total portfolio of Covivio. And in the year, the total portfolio increased by EUR 1.4 billion in group share to EUR 17.1 billion and EUR 25.7 billion in total. One of the big achievements of 2020 is the success of our disposal plan. We achieved, at the end, EUR 900 million of disposal -- roughly EUR 900 million of disposal, above -- strongly above the target of more than EUR 600 million, that we communicate in the market 1 year ago before the crisis. And what is also interesting to notice is the level of the margins that we are able to attack on this disposal to more than 8% compared to the total value for the end of 2019. 80% of the disposal plan was done on mature office building. One -- I have to say just 1 example or 2 examples of what we were able to achieve at the end of last year. We achieved 2 disposal of 2 office -- mature office assets. One in Issy-les-Moulineaux close to Paris, it's the headquarter of Transdev today and another 1 in Marseille in the Euromed Center Complex. These 2 transactions is really the result of the strategy of Covivio. It was 2 in-house development that was fully let at delivery and that we delivered between 2015 and 2017. And at the end, we are able to achieve 73 value creation since delivery on this 2 asset that was disposed by year-end above appraisal value. At the end, when I'm looking to the result of Covivio, Tugdual will comment all these figures later on. We achieved -- trends in July, EPRA earning is slightly above guidance that we give at EUR 385 million. LTV is going slightly down at 40.9%, despite the acquisition of the Hotel portfolio that was achieved last September. And the EPRA NTA increased by roughly 2% compared to the level that we reached at the end of June. At the same time, we also continue to make progress in our ESG strategy, in the main 3 aspects of this strategy, and that was Covivio, the best rating agency. Now moving to the portfolio and first to the office one. I'm now Page 11. We have clearly a new environment in the office portfolio with the polarization of the take up with first a conjectural and a crisis, which is the economic crisis, which is there. And also, the structural impact on the working from home adoption for most of the corporate now. What we consider is that this situation will increase competition and that will benefit with the best asset in connected location. What is the Covivio road map to outperform in this new environment? First is to concentrate new development now in central location. Third -- second is to accelerate deployment of service to clients. Third point is to transform and to accelerate transformation of obsolete office into Residential. And fourth is to continue to sell mature assets. First, reinforcing our portfolio in prime location. When I'm looking to the evolution of our portfolio during the last years, we completely transformed the portfolio of Covivio in the office sector. Now 63% of all office portfolio is located in top European cities and 28% in top business district in the Greater Paris best districts and in the top 5 French cities, and we keep 9% of our office portfolio, which are in non-core location, mostly in Italy with the Telecom Italia portfolio, but with a very long walt. So pipeline. We want to continue to work on the pipeline, but we have decided to adapt it in this new environment. First, we will, this year, commit 5 new projects, but only in the CBD of Paris, Milan and Berlin. Second, we will continue to follow the needs of the client. That's the example of the extension of the headquarter of Dassault Systèmes in Vélizy that will be launched this year. And third, we will push on conversion from office to residential. There's a new development project that will be completed this year. First, in Italy, we will totally redevelop Corso Italia asset, which I said that is in our portfolio that will be launched in this year. It's 11,000 square meter asset. We'll also launch the large Alexanderplatz project in Berlin, in the heart of Berlin. On this project -- we will share this project with 2 long-term partners of Covivio that we own 45% of this project and the development, the asset management and the property management in the future for this building will be done by Covivio's team. In Paris, 3 very interesting location will be vacated, asset will be vacated by Orange and will be redeveloped in fully completely new buildings, 2 in the in the heart of the CBD. And the third one is also in the heart of the CBD, close to At the end of 2021, our development pipeline will be at EUR 1.7 billion, mainly in the city center of main cities and with a target yield on cost of roughly close to 5% that will allow us to have a strong target value creation above 30%. Another big aspect of our strategy is to continue to work to transform obsolete office into residential. Today, we identified 150,000 square meters of future flats that could be developed by Covivio. The first committed project will be delivered this year and next year, they are today fully sold. And to say 1 example of the strategy of Covivio is in this area is what we are currently doing in Bordeaux. The north of Bordeaux, we bought through last -- back in May in 2004 with IBM, an office building that was let to IBM until 2018. During this period, the area changed, and it was more and more residential area. That's why we are working with the municipality before the end of the lease with IBM to obtain a new planning permission to develop residence in this area. Now we have the capacity to develop 46,000 square meters in this area, and we just obtained at the beginning of this year, the first building permit for the first pay for 15,000 square meters. At -- and I'm Page 21, owning the best assets in the best location is not enough now in the office sector You need also to put and to have the right service to the client. That's what we have done in Covivio. And since 2017, we have developed our own flex office value which is now a success with 5 opening in France and 1 in Italy. But during the last year, we also increased services to the client to more flexibility, and we are now also doing advisory. That's the example of what we have been able to deliver in the [indiscernible] with which is an asset that will be delivered this year. Today, fully pre-let with a dedicated operation with a specific tenant. And that's what we call now the capacity to have all-in-one concept. So that's the idea we sort of -- for some assets from the full-fix office offer to a normal lease contract. What are the operational result of offices in 2020 for us in a different country? At the end, positive figures in a not-so-easy environment. When I'm looking to Italy, which are slightly down in terms of figures, just these figures are only linked to the retail path of our portfolio in Italy. When I'm just looking to the office sector, the office sector performed very well also in Italy. Now moving to the resi portfolio. Situation is, I have to say, continue to be very strong. Fundamental are very good. Population growth in attractive cities and the offer is going down. When you are looking to the pricing, pricing for flats increased a lot last year, also in Berlin despite the midterm [indiscernible] regulation. And when I'm looking to the exposure in the German resi sector, it's increasing during the last year. In 2012, it was 9% of the portfolio, EUR 700 million of assets. Today, it's EUR 4.3 billion of asset that we own, and it represents 25% of the part of our portfolio, and we want to continue to increase in the future this exposure. What we have done in 2020 in this sector in Germany? We continue to invest in new buildings. We acquired for EUR 120 million asset at a decent 3.7% yield on the current and the passing rent. It was asset in Berlin, but also in the North [indiscernible] area. And at the same time, we continue to accelerate on development pipeline with the first deliveries, but also with new committed projects. On those projects, the target margin is above 40%. Also in terms of ESG, we continue to work in this sector, and we obtain, and we are happy to obtain, the Fairest Landlord Award in the Focus Money Survey that was delivered just a few weeks ago. In terms of performance. Performance, I have to say, the figures, Page 30 are enough, not need a lot of comment the growth on the rental growth continue. Also in Berlin, despite the first step of the regulation that was put in place last year. And -- but in terms of value creation, plus 8.2% was really strong also last year, and the occupancy remained very, very solid at 99%. Now moving to the hotel sector. The hotel sector faced last year a very challenge year, with an incredible reducing RevPAR for 67% in Europe, fair to say, in these vast figures, France and Germany have a little better figures. For us, what has the impact? Strong decrease in the like-for-like revenue, despite the fact that on the fixed lease, we are able to reach with 95% of our client agreement with a very limited impact on the like-for-like. But on the other part of the portfolio, really the fact that the RevPAR was given -- has a strong impact on the revenues. What is for the future of this activity? We continue to consider hotel activity as a good activity in the long term. So the question is when the recovery will start? And what we know is that what are the main drivers for recovery is domestic client, that will be first, for leisure also, also individual travel. And when we are looking to Covivio portfolio, we are really well positioned in these 3 areas for all our portfolio. And that's to say, for the main point I want to stress. And now I'll let the floor to Tugdual to comment the financial results.

Thanks, Christophe, and good morning, everyone. So I would like to start the comments on those financial results by giving a bit more color on the letting activity on offices for 2020. First, we've experienced an important drop in the take-up in our different markets. And despite that, we've been able to sign new contracts for more than 72,000 square meters in France, Germany and Italy, and we have renewed 180,000 square meter with a 1% uplift versus previous rent. If we go more into detail, countries by countries. First, in France, we can see that the most important part of the new letting has been concentrated on new or restructured buildings. In Paris, Chatillon and Bordeaux, specifically, which gives evidence that our clients are focusing more and more on a new and efficient offer. Second, in Italy, the letting activity has been concentrated on Milan and Turin. And specifically on Milan, we have achieved 8% uplift on the reletting, which is a good evidence of the good health of the Milan market. Last, in Germany, we've been active on the top 5 German cities, and we have seen an increase in the occupancy rates starting in Q4 following in leases that we've signed in Berlin and Munich. Page 37 provide interesting detail on the work that we achieved with Orange in 2020. As you know, Orange is our first client, and we have worked with them for the last 20 years trying to adapt our offer and to offer them tailormade solution. This is what we've done in 2020. First, by securing new leases on 20 buildings in midsized cities around France. This has enabled us to sell just after those assets with a significant premium versus book value. The second thing is flexibility that we are offering to Orange, together with reaching a significant uplift on the rent. So with the solution that we provide to them, we unlock significant reversion potential on [indiscernible] plus 90% on the rent in exchange for flexibility on early departure in an asset that they lease in Levallois. Finally, in this year, in '21, we will develop for them, and we will deliver a turnkey development project in Montpelier with 6.7% yield on cost. All those good news and achievement is obviously our positively participating to the overall good performance of our French office portfolio. Moving to our detailed revenue, Page 38. First, on office and resi revenue, we have seen a slight growth from EUR 535 million to EUR 541 million. The EUR 40 million decrease in France and Italian office has been more than offset by the strong increase in German offices revenue, and the German resi portfolio continued to regularly increase year after year. Then the overall decrease is mostly concentrated on hotels and also on nonstrategic part, where we continue to regularly dispose assets. On a like-for-like basis, office and resi again are posting a decent plus 1% increase in 2020. And Italian office being affected mostly by the high street retail part of the Milan portfolio. Hotel were mostly affected by the variable part of the revenue and the U.K. And then on occupancy rate, we stand at 94.8%, overall. The decrease in office is mostly explained by France and Germany. Because on the Italian side, the Milan portfolio is resisting quite well. And if we go even more into detail for French office, the decrease is mostly explained by the delivery of 2 assets that are currently let below 50%. And in Germany, the occupancy rate is penalized by the cancellation of the lease of WeWork that we realized during first half. Finally, a word on collection rates for the full year 2020 stands at 97%. It gives evidence of the solidity of our tenant base. Then Page 39, a few words on 2021 and our main challenges for offices. First, on the existing vacancy. You can see that the existing vacancy on offices is concentrated on 6 assets. 6 assets that account for 2/3 of the existing vacancy, 4 in France and 2 in Germany. What we can say is that all those assets have benefited from recent CapEx program and are well positioned in some business districts, which makes them attractive as an offer. The only asset where the -- I would say, the submarket vacancy is above 10%, is the one that we have in La Défense. Then on the lease expiry for 2021. It's a bit less than 10% of our total Covivio revenue. 40% of this lease expiry will feel the development pipeline for 2021 as it has been largely described by Christophe. On 25%, we know that the break option will not be exercised, so the tenant will stay. And then we are focusing our efforts on the remaining 35% of those lease expiry where discussion can move from either departure or renegotiation of the existing lease. On EPRA earnings, Page 40, the evolution illustrates the trends that we have commented so far, which means strong office and resi activity with a shift of revenue from France and Italian office to German office and a continuous performance on German resi. Then the impact, again, is concentrated on hotels for this year. And finally, some positive news also coming from the improved cost of debt. So EPRA earnings amount to EUR 385 million, it's a decrease of 15% versus last year and 21% on the euro per share, taking into account the script dividend. Moving to the portfolio, Page 41. Portfolio like-for-like value increase amount to 1.3%, which demonstrates the good positioning of our assets, and also it's a good reward of our investment choices. Starting with offices, plus 0.8%. The performance is driven by our development pipeline, which is boosting the performance together with the good dynamic of what we experienced in the Paris and Milan market. A small part of the portfolio is suffering from negative outlook in terms of rent and dynamic and particularly outside Milan and in La Défense and Péri-Défense market. German resi is among the important winner of this crisis, thanks to unique characteristic, resiliency and rental growth prospects that are untouched. Finally, on hotel valuation, the evolution shows 2 messages. The first one is that the operator consider that the long-term fundamental of this asset class is not challenged. And the second one is that the factor in also a longer recovery phase and the cost of carry of this recovery is -- recovery phase that can start from 2 to 4 years, explain the most important part of the adjustment of the values. Our balance sheet, Page 42, continue to offer solid characteristic with an LTV that stands at 40.9%. We continue to lower our cost of debt down to 1.29%, and we have very limited debt coming to maturity in the next 3 years. On our NAV. So we have changed following the evolution of the EPRA guidelines. So now we communicate on EPRA NTA, which is very close to EPRA NAV. Our EPRA NTA has increased by 4% to EUR 9.5 billion this year following the value increase and also the scrip dividend. And per share, our NTA amount to EUR 100, an increase by 2% over the second half of the year. Finally, on dividends, following the evolution of the EPRA earnings in 2020, we will propose to the General Assembly a dividend of EUR 3.6 per share, which represents 86% payout on the EPRA earnings.

One word on the outlook and guidance on our 3 sectors and the results. And in the office sector, we want to pursue this strategy on active asset rotation and client strategy. Just have in mind, we have today, and to incur EUR 500 million of future value creation that need to be captured on the project that will be committed by the end of this year. We will also, in the residential German resi continue to work and to invest in this area and the hotels. The question is when the recovery will took place. But we really consider that the long-term financials of this sector, this activity are unchanged, and we want to stay in this activity in the future. On the EPRA earnings guidance. Due to the pace of the hotel recovery, which is uncertain, this year, we gave a bracket between EUR 380 million to EUR 395 million. And in terms of disposal -- amount of disposal for 2021, we keep the same targets that we have last year that need to dispose more than EUR 600 million of assets, mostly, I have to say, on the mature office sector as we have done in 2020. So now with Tugdual, Dominique and Olivier, we are available to answer your questions.

[Operator Instructions] We will now take our first question from Florent Laroche-Joubert from ODDO BHF.

Congratulations for your very strong performance. So I would have maybe 3 questions. So my first question will be on your guidance for 2021. So what we can see is that your EPRA earning guidance is not -- in 2021, it's not certainly different from your performance in 2020. So maybe could you please give us some more color on how you have built this guidance in particularly for the hotels recovery? This would be my first question. Maybe second question. So would it be possible to have an update on the pre-letting process of assets that are not fully let on your pipeline? And maybe the third question will be on the valuation of offices in less attractive locations. So how do you think that this -- the new approval value can be resilient in 2021? So for example, in La Défense?

Okay. First, Tugdual on the guidance and then I'll take the 2 others.

So on the first question about the guidance, as it has been mentioned, the difficult part was to factor in the evolution of the recovery of the hotel. The lower end of the guidance is taking into consideration the fact that '21 could be comparable to '20 in terms of revenue. And on top of that, what we -- what you need to take into account also is the fact that the most important part of the disposal program that has been achieved in 2020 has been done at the end of the year or is, let's say, done during first quarter. So that explains the reason 1 on a full year basis. The impact of the disposal plan is a bit stronger and decreased the revenue on the office part. So that's the 2 main message that we factor in, in the guidance that we provide.

On the pre-letting situation, what we can say is that 2020 was not an easy year for letting market in all of the markets. What we see at the starting point of 2021. After month of January, what I have to say was very quiet, we see, since the beginning of this month, a lot of new discussions starting, I have to say, and both on the pipeline, but also on the -- what we have today in the portfolio. So we imagine that we will be able to achieve interesting letting in the coming months. But as of today, there is only talks, discussions and nothing is signed. And in terms of valuation, in offices, what is sure is that, that will be in 2020, you see that there was ups and down. And that will, I imagine, continue in the future with this new polarization of the market. We consider that centrality is really key. We see that in center in the CBD of Paris, Milan and Berlin valuation was really strong and continue to go up. In other areas, that really depends on the tenant situation, especially in La Défense. We see La Défense, CB21 down by 9% in 2020 or also assets that we have in La Défense where we see the evolution of these values this year that will really depend on the evolution of the tenant bucket. Next question.

We will now take our next question from Christopher Fremantle, Morgan Stanley.

I've got 3 small questions. The first 2 are just accounting questions. So the first is just on the cost to revenue I think on you recognize about EUR 15 million of additional cost between your gross and net rental income, looking at your release? And I wanted to -- so on Page 16 of your full year release, which is about EUR 10 million or EUR 11 million higher than last year. So my question is, is that figure -- that additional cost, is that a one-off figure? Or is it part of a recurring smoothing of rent that has not been paid that will recur through the remainder of the lease term? That's my first question. My second question is on the hotels, the U.K. hotels, where you've not recognized any rent and apologies if I missed it. Can you just explain how your guidance or what your guidance assumes for that item? Again, apologies if I missed that. And then thirdly, I'd just like to ask for a comment on your hotel valuations. I appreciate there's very limited transactional evidence, but I'm just interested what your values are assuming for the speed of recovery, any comments that you can make there so that we can assess the risk of further valuation decline if those assumptions are not met? So those are my 3 questions.

So I will -- Tugdual will take first one and after that...

Yes. So on the first question, the evolution, the increase in the difference between gross to net is mostly due to provision on unpaid rents that we book in 2020. We had a very conservative approach and this year, considering that most of the rents that were unpaid, which are in at very limited because, as I said, the collection rate was 97%. We fully depreciate the rent, and that was mostly focused on -- first, on hotels; and second, on the retail part of the portfolio in our Italian portfolio.

On the U.K. Yes, there is a [indiscernible] close right now and it's really clear. And what we imagine for 2021 is not easy to make an assumption of the speed of the recovery in the U.K. and elsewhere in Europe. So at this stage, what is in our figures and the 2 valuation is we imagine on total, I mean, for 100% of the hotel sector and not on group share, we imagine between EUR 10 million results on this asset class to zero, really the situation will remain very difficult in 2021. So -- and for us, that means between EUR 4 million to the overall contribution for the hotel, U.K. activity in our guidance. I hope it could be better if the situation will improve sooner. So Dominique, perhaps for the speed of recovery in the hotels and the risk of valuation?

So the speed of recovery and the hotel, of course, will depend on the vaccination process, but the appraisal take into account a recovery at the level of 2019, in 2023 in terms of revenue. So to consider we are going to come back at the same level of revenue in 2003. And after, they don't change any cap rate because at that time, we have, I think, in all the sale and leaseback, we see on the market such a good appetite from investors. So I think the recovery for the fixed rent will be very quick. We have only minus 3% this year on fixed rent. And on the other portfolio, as U.K., for example, we have a decrease of 14%. And on the EBITDA portfolio with variable rents, we have to take into account a recovery in 2023.

Thank you, Dominique. So next questions?

We will now take our next question from Celine Huynh from Barclays.

Just 1 question, please, on the dividend per share. Can you confirm if you have paid some premium on disposal into your 2020 DPS? And if not, if this is going through into the '21 dividend?

Could you repeat your question? I don't take it.

Yes. Can you confirm that if you have paid some premium on disposals into your 2020 dividend per share? And if not, if this is going into next year's dividend?

I don't -- Tugdual...

Sorry Celine, I'm not sure to understood on the -- yes, we had some premium on the disposal that we've made. Dividend is based on recurring earnings. It's not taking into account the capital gain that we could have. Capital gain is reinvested in the development pipeline.

Yes. No, I'm just wondering because according to the equation...

Okay. So it's -- yes, it's taking into account the, let's say, on the EUR 3.6 per share, EUR 2.9 per share is coming from the dividend. The most important part is revenue, there is a bit of capital gain around EUR 50 million, I expect, but it's fairly limited.

Some of the disposal will be completed in 2021. So we don't have in the accounts the capital gain on this disposal, but we distribute the full sic obligation in 2021.

We'll now take our next question from Alvaro Soriano from Bank of America.

Two questions, if I may? The first one, in terms of disposals, which regions and which asset classes are you targeting in 2021 for your EUR 600 million targeted disposals, please?

What I said during the presentation, we want to continue to dispose mostly mature office assets. And that would be the most important part of this disposal plan as it was in 2020. We will also continue to have some disposal in flats in Germany. But the most important part will really be on -- the office part. We have also, right to say, some hotels that are under disposals, and we expect to have some disposal also in this area.