Covivio (COV) Earnings Call Transcript & Summary

Good day, and welcome to the to Covivio 2021 Half Year Results. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Christophe Colman, CEO. Please go ahead, sir.

Thank you. Welcome, everybody. So this H1 result from Covivio, so I will immediately start by Page 4. The first half has been dynamic for Covivio on all fronts. On offices, we managed to sign 140,000 square meters of new contracts and renewals. Our value are slightly up. This is mainly thanks to our development pipeline. On German resi, we continue to reinforce our sales on the back of strong rental and value growth. Finally, on hotels, activity is bottoming out, and we see positive signal of recovery. On the financial front, Page 5, we had also a very good first half. Value-add, up as by 2%, EPRA NTA by 3% and EPRA earnings by 7.5%. Let's move on Page 7 and discuss our ambition in terms of carbon reduction. We have decided to do our part in tackling climate change early on more than 10 years ago when we first set up and underwent targets. In 2018, we had set up a CO2 reduction target of minus 34% between 2010 and 2030, in line with the 2-degree target of Paris Agreement and approved by the SBTi. This target applies to all scopes and includes construction renovation. Two years later, we are ahead of our target with a 20% reduction at the end of 2020. We thus decided to intensify our ambitions. Moving on Page 8, we describe our new targets. On Scopes 1 and 2, which relates to emission we have a direct control on, we want to be carbon neutral by 2030. That means decreasing even more remissions and compensating the remaining part. On Scope 3, which includes construction and renovation, we go further by aligning our target with a well below 2-degree scenario. That is more than the Paris Agreement target. We will do so by factoring low carbon construction and partnering with our tenants to reduce consumption and purchase green electricity. Let's move on office activity for the first half, Page 9. Market activity has been impacted by the lockdown of the Q1, but is improving since Q2, especially in Paris and Milan. At the same time, we see an increase in polarization between location and quality of buildings. In this environment, our strategy is performing well. First, accelerate asset rotation. Since the beginning of the crisis 1.5 years ago now, we have sold EUR 1 billion of offices at an average 5% margin compared to the last appraisal value. Second, to continue to reinforce centrality and new service offer to clients. We have increased our exposure to inner Paris and Milan by 5 points on average. Third, to pursue development pipeline on the back of its strong track record on high quality of projects. Two figures to illustrate that. Our 63,000 square meter delivered in H1 are let at 97%, and all of our commitments planned in the second half of the year will be located in the CBD of Paris, Milan or Berlin. Finally, accelerate on transformation of obsolete office into resi. Since end of last year, we have strongly accelerated our residential pipeline in France. To go more in detail on each part of our office strategy, let's start with disposal. We have signed EUR 334 million of new office disposal agreement in H1 with a 2% margin, above last appraisal value. We sold mature assets and noncore offices. Two examples. In France, we sold 2 offices in Lyon and near the suburb of Lille for EUR 94 million, which is a good example of [indiscernible]. On Lyon, [ 288 ]. For instance, we bought the asset in 2001 for EUR 16 million, did a full asset management work in 2018 with the CapEx program to improve energy efficiency and the renewal of the lease of the maintenance entities. With this disposal, we generate more than 60% value versus full investment costs. In Italy, we sold mainly Telecom Italia offices above last appraisal value. Those disposals contribute to improve our centrality profile. As you see, Page 13, we have a high-quality office portfolio, diversified by in terms of geographic exposure in the center of Paris, Milan and on the top German cities, are in the best area of top business districts of those cities. The office profile has been strongly reinforced in the past years. Other pier of our office strategy is a development pipeline. This is the best answer for the new office environment by offering new buildings well located with the best energetic standard and offering full range of services and flexibility. The success of the development pipeline is the best proof of the relevance of our strategy. We signed close to 40,000 square meters of new contracts in the first half with an average lease maturity of 10 years. Let's focus on the example of Snam, Page 15. So we signed an agreement with Snam, the leading Italian natural gas company, to build the new headquarter of 19,000 square meters in an area of Symbiosis in Milan. Lots of interesting outcome in this transaction. First, Snam did not reduce its surface need versus when we start the discussion in 2019. It's also a new illustration of the attractiveness of the Symbiosis area, which will come now Fastweb headquarter, LVMH and Boehringer. And finally, it brings value creation with 20% margin on this deal. Tomorrow, we have an additional value creation potential with 2 more buildings that we can build in Symbiosis and a plot of land in the North in Scalo Porta Romana. Moving to Page 16. Our development pipeline at end of June amounts to EUR 1.3 billion in Paris, Milan and Berlin. In H2 this year, we will deliver Silex 2 in Lyon CBD and Symbiosis in Milan, Two assets, 2/3 pre-let on average. The other projects will be delivered by 2025, and we'll participate to increase our portfolio quality and create value. In total, we target above 30% value creation, which means EUR 450 million, of which EUR 250 million are not in the account yet. Tomorrow, we will continue to offer additional prime project. I'm on Page 17. In the next few months, we will launch 5 additional projects all in the CBDs of Paris, Milan and Berlin. Those developments are expected to bring EUR 200 million additional value creation. In parallel, offering prime office development, we accelerate on the transformation of obsolete offices into resi. By the end of the year, we'll have multiplied by 7x of French resi post pipeline up to 1,500 units and EUR 250 million with 10% average margin sale. And there is more to come. We have already identified more than 200,000 square meter of future projects. This lead me to resi in Germany, Page 20. Few words on the market. The trends are well known. The lack of offer is driving rents and price up, and regulation is not helping to improve the situation. In this topic, the news of the first half has been the cancellation of the rental cap in Berlin, which has completely frozen the market last year. In this context, we continue to reinforce ourselves in Germany. I'm on Page 21. During the first half, we bought for EUR 140 million of resi units in Berlin. So price is in line with the average valuation of our portfolio for assets, very well located in the center of Berlin. The yield of 3.5% offer high growth potential with rents, 20% below the regulated rent and 60% below the market level. We also reinforced successful development, as you can see, Page 22. Our pipeline has continued to grow with now more than 1,000 units under construction, most of it in Berlin and 2,700 units that will be built in the future For this, we expect above 35% value creation. So strong market fundamentals, high-quality teams and strong platform to continue to grow as a basis of the very good results we reached in the first half. Rents are up by 3.8% on a like-for-like basis. Occupancy rate is close to 99%, and values are up by 7.4%. Of course, the situation is not the same in hotels today, but the growth prospect is large, and we start to see light at the end of the tunnel. Where do we stand on the hotel markets today? I'm on Page 25. The first half has been impacted by the lockdown in Europe. But as soon as restrictions are lift, the occupancy rates start to increase rapidly. The chart shows the RevPAR performance versus 2019 level. You can see that in the U.S., we already are above 2019 levels. This is very encouraging for the future in Europe. On the investment market, Page 26, the situation is improving since the Q2, and EUR 4.7 billion have been done during the first half. More interestingly is that we don't see any distressed price. You can see the pricing of fuel transactions mainly in France, Spain, Germany or in the U.K., all our levels in line with 2019. In this environment, we can rely on a very well-diversified portfolio as shown Page 27 in terms of geography, in terms of hotel scale, but also in terms of tenants. We work with all the major hotel operators in Europe. More importantly, today, our portfolio is strategic for hotel operators. We put 2 key figures, Page 28. First, the quality of location. Our hotels are ranked close to 9 out of 10 at bookings. Second, the capacity of the operator to pay the rents with an average 60% effort rate before the crisis. Our hotels are sustainable for hotel operators. This explains why our collection rate is high on operators, just need us to help them in their short-term liquidity needs. Finally, our portfolio is well positioned to benefit from the recovery, and I'm convinced we have reached the bottom, and the need to travel and meet is a primary need for people. So first clients to come back will be domestic clientele and for leisure. Our portfolio is well fit for this with 80% of the clients of our hotels that are domestic European people and close to 60% of leisure clients. Now I move the floor to Paul.

Thank you, Christophe. So I would like to start by the comments on our financial results by giving more colors on the office letting activity on Page 31. So despite the lockdown, H1 has been an active first half for us with 140,000 square meters of new contracts and renewals signed. On the new lettings, we have reached 9 years of average maturity. In France, the activity has been good on our development pipeline, but also on some assets like Carré Suffren in Paris, which is now fully let. We also have been able to renew the lease on the Eiffage headquarter in Vélizy, 33,000 square meters now let for 10 years. In Milan, the dynamic is very good. Christophe talked about the Snam transaction. We also signed close to 5,000 square meters in Symbiosis D to be delivered this year. On Torri Garibaldi, we have been able to relet 2,400 square meters with a plus 40% increase versus previous rent. And finally, in Germany, following a stricter lockdown, market reopening came later than in Paris and Milan. But nevertheless, we have been able to improve slightly the occupancy rate and sign new lettings in Hamburg and in Munich. Then Page 32, what does it mean for our revenues? So let's first focus on offices and residential, where revenues are almost stable on a like-for-like basis. The negative impact of offices is mainly explained by tenant departures of last year, having a full effect this year. In residential, the performance, as described by Christophe, is very good. And finally, our hotel portfolio has been impacted by the restrictions, but also suffers from a negative base effect as the performance in January and in February in 2020 were very good with no restrictions. So moving to Page 33 and to the P&L. Despite the impact of the crisis in our hotel revenues, we have been able to deliver a strong plus 7.5% growth in EPRA earnings in H1. This is mainly thanks to the good performance in the German residential business, but also to the growth in our property development margins in offices and in residential. And finally, this is also thanks to the improvement of the cost of the debt. On the portfolio side, Page 34, the plus 2% like-for-like value increase demonstrates the good positioning of our assets and is a reward for our investment choices. The plus 0.6% on offices is mostly driven by our development pipeline, which boost the performance together with the positive dynamics that we experienced in Paris and in Milan. A small part of the portfolio is suffering from negative outlook in terms of rental dynamics, particularly outside Milan and in La Défense and Péri-Défense. German Residential continues to perform well on the back of low price per square meters, as you can see here, and rental growth prospects. And finally, in hotels, as Christophe mentioned before, the investors' appetite for hotel real estate is large. And in this context, our hotels' valuation are stabilizing, except the specific situation in the U.K., which represents 13% of the portfolio. Just to show you 2 examples on Page 35 and 36 of our capacity to create value on our office portfolio. So first, Page 35. We put a delivery of the first half. Flow is an office building located in Montrouge in a growing area of the Greater Paris that will benefit from the arrival of the new metro line 15. We bought this obsolete building in 2015, managed to get a building permit with a plus 30% increase in the surface. Two years before delivery, we pre-let all the building to a subsidiary of EDF Group. And in total, effective value creation for this project has been -- has reached 78% versus 37% initially. Another example on Page 36, Jean Goujon in Paris CBD. So for those who remember, we bought this building in 2018 in exchange of our headquarters in Paris and in Kléber. We expected initially EUR 820 per square meter rent with a 20% value creation. Finally, we have been able to sign a first lease for 46% of the building before -- 1 year before delivery at a record developed rent, and our value creation target has now doubled to 40%. The disposal activity is another success of the first half on Page 37. With EUR 404 million new disposals agreement, we are well on track on our target to sell more than EUR 600 million by the end of the year. More than 80% of this disposal program has been made on offices following our will to increase office rotation. And more importantly, the margin of those disposals versus the last appraisal value is close to 4%. This is a strong support to our portfolio valuation. Our balance sheet continued to offer solid characteristics, as you can see, Page 38. LTV is stable at 41% despite the dividend payment that has been made fully in H1 and which account for 1.9 points of LTV. We also continued to lower our cost of debt to below 1.2%, and we have very limited debt coming to maturity in the next 3 years. Yesterday, we issued a new bond at Covivio Hotels level of 8 years and 1% coupon. This success with more than EUR 2 billion of demand will enable us to improve again the average maturity of the debt, and it shows the interest from investors for hotels. So moving to Page 39. The increase in property values and the EPRA earnings enabled us to increase the NAV by around 4% year-on-year. Our EPRA NTA, which is close to the former EPRA NAV, has increased by 3.4% to EUR 101.6 per share at the end of June. And now I now I let the floor to Christophe.

Thank you, Paul. So saying some word on outlook before answering your questions. So following this good start of the year and also what we have done in the first half, we have decided to increase a little bit our guidance between now EUR 319 million and EUR 400 million (sic) [ (EUR 390 million and EUR 400 million ] depending on the evolution of the activity in the hotels [indiscernible] because it's remaining a lot of uncertainties activity. In the medium term, we can really rely on growth driver on each of our asset classes, as you can see, Page 42. In offices, our committed projects will enable us to catch EUR 450 million of value creation that are not today in the NAV. In German resi, the low level of the rents and the value will continue to drive the growth in the next few years. Finally, in hotels, recovery is slowly starting. But when we compare our revenue with the level before the crisis, it is EUR 70 million of additional revenue that we can expect for the future. Now we will answer your question with Paul, but also Tugdual Millet, which is with us; and Olivier Estève.

[Operator Instructions] We'll now take the first question from Alvaro Soriano with Exane BNP.

Yes. Can you hear me well? Hello?

Yes. Hello?

Perfect. Perhaps, the first question is on your pipeline. You say in the results that around EUR 450 million should be expected in terms of gains coming from your project. So over what period we should assume those gains are going to come in? That would be the first one.

What we can say that it's linked to the pipeline, which is really close to be committed. So it's in the next 4 years, that's what you can say.

And yes, continue with this pipeline gains. I guess EUR 200 million should be assumed more short term. So yes, we should assume those first EUR 200 million coming in the next 2 years, right?

So they are linked to the projects which are already in the pipeline. But as -- the other part is really close to be committed in the coming months, I have to say. That's why it's -- you can spread that on average in the next 4 years.

Okay. Understood. Then the next question is on your revised EPRA earnings guidance. The obvious question is, what has changed for that 2% increase on earnings?

Well, first effect for us, it's -- we have the residential activity that is doing better with the Mietendeckel cancellation, obviously. This is the main explanation of this improvement of the guidance. At the same time, the hotel activity has been impacted in the H1, but we feel that we can see some recovery in the H2.

Okay. Yes. Probably the last one on my side. We've seen that on French offices, occupancy continue to be weak. As you said, also some tenants departed last year. Perhaps, when we can see the trough in terms of occupancy rate for your French office portfolio?

What we can say on this part is that we had a decrease of the competency thanks to operation that was linked to 2020 decisions, but really now what we see is really better trends in the discussion we have, and so we are at more than 92% occupancy rate. We expect to increase a little bit until year-end, but that will depend on current discussions that we have with some potential tenants.

We'll now take the next question from Florent at ODDO BHF.

Yes. So I would have first question maybe on the pipeline so because you insist on the value creation that you can have in the next year on the pipeline. And so would it be possible maybe to have an update on your pre-level -- on your pre-letting your level of your pipeline for '21 and '22, for example?

In the appendix, I think you have something to comment that. I'm looking for the right appendix. So it's on page -- let me see which page.

Page 52.

52, you have the detail on the pipeline and what is new. So what improved during the first half is what we say in Silex 2. Today, it's 60% -- 64% pre-let, and we hope to increase that before year-end to close to 100% because we have strong discussion on this part. Jean Goujon that will be delivered next year, today we have 36%. That's what we have today, thanks to the negotiation with Roland Berger. It will be delivered in mid next year. And on the other projects, So Pop and then to today, we have no pre-let situation. But on these 2 assets, I have to say, we have current discussions, and we hope to have good news to share before year-end. Lyon, Sévigné, just small asset in Lyon, so nothing dramatic. On Levallois, it's also a delivery of next year, I have to say. The market is less today attractive, and so we first hold, but I cannot say that we are close to a negotiation. And Dassault Systèmes expansion in Vélizy is fully pre-let. And on Bordeaux today, it's 51% pre-let and -- but it will be delivered only in 2024.

Okay, okay. So -- and on a general manner, you are comfortable to increase shortly as predicting as a result?

Yes, yes, we are covered. What is true is that just to go back to the value creation and to the potential value creation and the rent also linked to this asset, we review completely also the portfolio, thanks to the evolution. And we reduce a little bit the target range, for example, in So Pop or in Levallois, but we take that into account. It's the calculation of the potential value creation we just said before. So really, that's something -- that's why we are confident on these values and the capacity we will have to extract this value in the coming years.

Okay. So maybe now a question on hotels. So would it be possible maybe to have more color on when you expect the situation to come back to normality? And maybe also, when shall we expect that your EUR 70 million rental upside could be recorded in your accounts?

I'll let Tugdual. No CEO tell to answer directly the question.

I would like to answer to this question, but to be honest, what we can share on what we see today, the recovery is fairly encouraging starting in June. June has been, let's say, more than 2x better in terms of revenue than it was in May. And July seems to be quite positive. I would say even better than what we expected a few weeks ago. So to date, the recovery phase is quite good. The big question is around September, where you probably know that September and October are very strong months in terms of hotels and particularly on the business activity. So it will really depend on how comfortable our people to travel for business purpose. We have on the books of the hotel that we are closely monitoring some encouraging booking in France, but also in Germany. But as it is fragile, this is the reason why we still have reflected this uncertainty in the new guidance that we gave. So that's for, let's say, short-term comments. On the longer term, it has been described by Paul, the split of our customer mix. And let's say based on that, based on the fact that an important part of our portfolio is with the consumer mix that is mostly domestic customers, but also predominantly for leisure purpose, we expect the recovery to the pre-COVID level to be somewhere around 2023. Hopefully, that means in 2.5 years from now.

Okay. And maybe last question. So you have been very active, so in -- still in H1 '21 in terms of activity. So what would be your strategic priorities for H2?

A lot of things as usual because as we are diversified, we have a lot of things to continue to deliver. I think really, one of the key points for us if I stay on the hotel part is to work on the U.K. portfolio because as of today, we continue to book in our assumption [ 0 end ] in 2021 on this portfolio. So it's really something that we have on the table and then on structural table to manage for the future. One other point important is to improve the occupancy in the office in Germany. So where we -- with the lockdown, it was not so easy to manage the story and so on, so now it will be easiest. And we really, especially on the Dusseldorf Herzog Terassen asset, we want to clearly improve the quality of the asset, position differently in this very good market for the future. And I have to say, and we have to continue also to work on the tenant side because, as I expressed before, the letting challenge remains also important in the French office part portfolio. But that's I have to say for us. The 3 main challenges that we have that really what I can share in terms of mood, in terms of environment, we see really the things evolving well. No, we are always depending on the evolution of the sanitary situation. But what we see today in our direct environment is really better move for a lot of companies with a lot of talks that are going back for new leases. What Tugdual said also in the hotel sector when we are looking to the -- what is on the books today compared to what it was just 3 weeks ago is really better. So we expect that situation will continue to improve in the coming months, but that will also depend on the evolution of the sanitary situation.

We'll now take the next question from Christopher Fremantle at Morgan Stanley.

I just had a couple of small questions. The first is on the question that was asked before about the earnings guidance. I think you said that the reason for the difference was mainly in residential. I'm assuming that you mainly are referring to the impact of the Berlin rent decision. But if not, perhaps you could be a little bit more specific there, please. And then secondly, the value creation target that you highlight. How is that EUR 450 million different from where we were when you published your full year results? Again, I can go back and look, but if you had that number to hand, that would be helpful. And then the third question was just on LTV targets. I think previously, you had communicated an intention to target below 40% LTV. I wondered whether that guidance was still valid or whether you had changed your view on that.

Thank you for this question. The first one, yes, yes, what is clear is the main driver, thanks to this evolution of the guidance. It's linked to the cancellation of the Mietendeckel. Because in the initial guidance we get, we take into account the current law that was with the Mietendeckel. So the cancellation has roughly an impact between EUR 8 million, something like that in our accounts of 2021, so that's the main impact. And after that, compared to what we imagine initially really, hotels are less good because we don't expect a third lockdown and what are in the first half but -- and only offices is slightly better. So that's on the guidance. But we remain with the guidance with the brackets because there is -- really, we have still uncertainty in the hotel sector. On the pipeline, we review completely the pipeline, yes, in terms of value creation potential, taking into account really what we see in the market. That means continuing compression of the cap rate in the CBD location and evolution of the rent in terrific locations. So that's really what we take into account to adapt that. I don't have exactly the previous figures, but we can share that. And I -- Paul...

We announced a EUR 500 million. So today, we are at EUR 450 million. So we catch a bit of this value creation already in H1.

Yes, that's also one of the reasons of this evolution. And the third point in terms of LTV target, we don't change the target. The target is to be below -- the long-term target is to be below 40%, and that's what we expect to be soon in this target.

And sorry, one follow-up, if I may. Just to understand your guidance as well, you say it's dependent on hotel activity. What are you basically assuming for RevPAR relative to 2019 numbers within your updated guidance? I appreciate that's maybe an overcomplicated question. Maybe you need to get back to me on that, but it would be helpful to know what you're assuming so that we can understand if -- your guidance in the context of how RevPAR turns out in the second half.

Let's say that the high range of the -- in the high range of the guidance, we expect a strong recovery in the second part of the -- so in Q4, with occupancy rates, that could reach 40% to 60% in Q4 on our hotel portfolio.

40% to 60%. Did I hear that right? Sorry.

That's right. 40% to 60%.

[Operator Instructions] We'll now take next question from Pierre Clouard at Kepler Cheuvreux.

Just coming back on the guidance, just to make sure that 100% of those EUR 8 million coming from the positive impact of the several quarters on the Berlin cap rent is now included in the guidance. And just coming back also on the question of Chris, just to understand how will 2021 -- will compare in 2021 for the hotel segment. Is it okay to say that you are expecting total revenues slightly below 2020 in 2021 then, just to make sure we understand the guidance.

So Mietendeckel, yes, the full impact is integrated in this guidance. And then for the hotel activity in the low range of the guidance, that means that we don't expect any improvement of the hotel activity on the low range of the guidance. And again, on the high range of the guidance, we expect start of a strong recovery in Q4.

Okay. And then just coming back on your accounts. Just to understand, what is the detail on this income from other revenues that have been multiplied by 3?

This is basically what I said during the presentation, it's the property development margins. So we have some property development activity in offices and in residential, and it has improved by EUR 20 million in the H1, and you have this impact on this line.

Okay. And do you have a view for the full year?

I'd say we don't expect the same number in the full year than in H1. We could expect a little bit below what we had in H1.

And the last one on offices on French offices. I understand that there is a vacancy effect on your negative like-for-like growth. But also, can you give us more detail on the negative reversion that you achieved in H1?

I think there is very few impacts in terms of reality of rents. The most important is linked to the occupancy because occupancy especially in La Defense in CB 21 decreased on our asset, and that's the main effect on the like-for-like. And also the fact that we take in, renegotiated last year. It was in the lease, but it has an impact on the full year and this year. The main lease with Suez that was decreased in last September. So we have a full effect on this first half. So as we say to say today on the main reletting, we have all renewables that was made. That was more close to the passing rent. So as of today, we don't see an impact on the level of the rent in this like-for-like. It's really mainly due to -- except on the Suez situation for the evolution of the vacancy compared to where it was 1 year ago.

There are no further phone questions.

Okay. If there are no more questions, thanks, everybody, and see you soon. Bye-bye.