Covivio (COV) Earnings Call Transcript & Summary

Welcome to Covivio Full Year 2021 Results. I'm very happy to be with all of you today. Today, we will have a look to the very good 2021 operational performance first with an acceleration on all our activities. Afterwards I will stress the financial results and then see that Covivio continues to improve on the ESG side. Finally, we will see what are our levers to continue this growth trend. So first, I will do an introduction. Today, Covivio owns an EUR 18 billion portfolio in group share, EUR 27 billion in total. That's an increase of EUR 1 billion compared to 1 year ago. Over the last year, we increased our portfolio value and quality, while reducing our leverage. In 2021, we also reinforced our footprint in Germany through mainly residential activity. In each of our markets, the situation has strongly improved since last year and offers better visibility to our growth. First, in the office sector, the recovery of the take-up started, and the polarization between central location and secondary location has continued, leading to an increase in prime rents. In the resi sector in Germany, the megatrends of urbanization and structural lack of offer are really supportive, and that's why we continue to invest in this sector, mainly in Berlin, and we will continue to do so in the future. Finally, in the hotels sector, 2021 has demonstrated the capacity of the sector to recover quickly. You see that in this chart. So 2021 marks the year of return to growth for Covivio. We had successful operational achievement in all our businesses. Our financial results are solid and above expectations. And we also continued improved ESG performance. And finally, the outlook for 2022 is positive. Now I leave the floor to Paul to present the operating performance.

Thank you, Christophe. Well, I'm very happy to present you the operating and financial performance of the year. We chose this title of accelerating on all businesses to show the increasing performance of the second part of the year. First, in rental activity. You'll see in the Slide 9, the dynamics of our different activities over the year. Starting with offices, I would stress the rebound in the occupancy rate in the fourth quarter. In residential, you can see the acceleration of the like-for-like rental growth as well as the occupancy rate. And in hotels, you see also the acceleration of the performance in the second part of the year. Now if we focus on each of those activities. First, on offices, 2021 is a record year for Covivio in terms of letting activity. We have signed for 180,000 square meters of new letting this year, especially in the second part of the year, 2/3 of the performance. But what is also important to stress here is the lease duration 10 years on average firm and the quality of the tenant, top tenants as you can see in this slide. This performance illustrates the rebound of the market, but also the success of our development pipeline strategy. We wanted here to focus on this Slide 11 to do a focus on Milan, because 2021 is also a very good year for our activity in Italy. Remember, we have 3 main strategic priorities in our office portfolio and more particularly in Italy that we put it in place several years ago: increased centrality focusing on Milan; push on developments; and adapt our offer to the need of our clients. Look at the results in the right part of the slide. I will mention just 2 figures, 97% occupancy rate and 90,000 square meters of new letting signed during the year 2021. Moving to German residential. It's another year of strong growth, plus 4.5% like-for-like, especially in North Rhine-Westphalia and in Berlin. Look at the map, plus 4.7% in North Rhine-Westphalia plus 5% in Berlin. This is thanks to the reversionary potential we were able to catch and to the CapEx program we put in place, which also improves the quality of the portfolio. Then on hotels, recovery started in H2. We show it in the graph on the left part of the Slide 13 with variable revenues having a steep acceleration over the year. On the fixed leases, the impact of the crisis has been very limited thanks to the quality of the tenants and to the quality of our hotel. All this leads to a plus 27% like-for-like growth in our revenues and, as you can see in this slide, strong performance on the variable part. So in a nutshell, what does that mean for our 2021 revenues. Revenues stand at EUR 604 million, increasing by 3% on a like-for-like basis. What you need to remind here is, on offices, the decrease of the revenues is mainly related to our disposal policy on this activity. We have signed for EUR 1.4 billion of new disposals in '20, and in '21 you have part of the effect here in those results. So the like-for-like evolution of the offices is also linked to the decrease of the occupancy rate at the beginning of the year, but we have seen just before that the occupancy has recovered since then. In residential, you see the increase of the revenues thanks to our acquisition plan of 2020 and '21 and to the like-for-like rental growth we have just mentioned before. And in hotels, as we said, we benefited from the start of the recovery with plus 27% like-for-like growth. Asset rotation. If we focus on the good dynamic also on the portfolio, let's move to the Page 16. We show here the qualitative asset rotation of our portfolio. On the left part, the disposals activity, we have sold EUR 901 million of new disposals in 2021. This is more than the above EUR 600 million we expected at the beginning of the year. The office make up the bulk of it with above EUR 700 million of new disposals. More importantly, you can see the plus 4% margin above book value for those EUR 900 million disposals. I would stress 2 additional figures. So margin on the disposals on German Residential plus 26%, thanks to a plus 50% on the privatization. That gives you an idea of the gap between our current book value and the potential of the price in the market for the unit-by-unit value. And the second metric, plus 23% margin in hotels, which gives also an idea of the strong interest for investors for this asset class. This successful disposal activity enabled us to continue to improve the quality of our portfolio and focusing first on development pipeline. We have invested EUR 400 million of CapEx, mainly in the developments in the city center of Paris, Berlin, Milan, with an expected 30% value creation that we put in this slide. And also invested on selective acquisitions in German residential, you see the potential, plus 55% rental reversion potential on those acquisitions. We show in this Slide 17 an illustration of the success of our development pipeline through our deliveries of 2021. 112,000 square meters has been delivered with already 96% occupancy rate and plus 36% value creation. This improvement of the portfolio through asset rotation through development pipeline is at the origin of the plus 3.9% like-for-like value growth on our portfolio. In offices first, plus 1%, it is a mix of some decrease on specific assets in locations like Île-de-France. This is what you have in the bouquet Manage-to-Core 15% of the office portfolio. But on the other part of the office portfolio and most of it, we benefited from the good performance of the development pipeline and from the quality of our core portfolio. Residential then plus 14% like-for-like value growth. It's linked to lack of offer, as Christophe mentioned, to the rental growth of our portfolio and to the strong demand of the investors for this asset class. But look at the absolute metrics, EUR 3,400 per square meter for Berlin, it's still low. And in hotel, finally, after a significant decrease of values in 2020, values are stabilizing in 2021 on the back of the hotel recovery. Disposal activity. Value creation leads to a significant decrease of our LTV by 2 points, as you can see in the Slide 19, down to 39%. It's a good success of the year that gives us a secured debt profile. Let me stress 2 additional figures. Cost of debt, 1.2%, decreasing in 2021; and 84%, this is the part of our debt which is hedged as of today with a 6.8 years average maturity. All these reinforce our debt profile and our S&P rating. Let's now look at the financial results and the impact in the accounts of this good operating activity. I will start with the adjusted EPRA earnings, EUR 410 million, increasing by 6.6% over the year; per share, plus 3.3% due to the dividend payment in share in 2020. Three effects to highlight here, the first one is the impact of the deleveraging you see in this Slide 21, minus EUR 37 million linked to the disposals we have made. This is more than offset by the 2 other effects, the office development pipeline activity and the strong rental activity in German residential, EUR 11 million, and in hotels EUR 16 million. Recurring results are up. It is also the case for the NAV related also to the property value increase. Look at the Slide 22, plus 7% growth in our EPRA NTA and plus 10% growth in our EPRA NDV per share over the year. So the outcome of the good results lead us to propose to the next AGM an increase by 4% of our dividend per share to EUR 3.75 per share, which will be fully paid in cash next April. I now let the floor to Christophe.

Thanks, Paul. And so last December, during our Capital Markets Day, we took some time to discuss about our ESG strategy. We especially announced our new carbon trajectory, now validated by SBTi. Let me share with you key steps in each of our ESG pillars. First on environment, to reach this ambitious carbon trajectory working towards the greening of our portfolio. We target to have 100% of portfolio to be green by 2025, and we are well on track at the end of 2021. Just one example of what we are able to do to work in this area is the Silex 2 tower development in Lyon. That we saved, in fact, 18,000 tons of CO2 by redeveloping this former obsolete asset instead of demolishing it and rebuilding it completely. And I have to say, it's also a success for the tenant because it is already fully let at year-end. ESG is also about stakeholders. And Covivio is recognized as the best partner for its tenants. For example, 89% of our office tenants in France say they are very satisfied with the way we manage their office and our relationships. On the social part, we launched our foundation in 2020 with a will to promote equality of opportunities and to preserve environment. And today, we have 12 associations. Finally, on G, governance. We propose to the next AGM the nomination of Daniela Schwarzer as an independent Board member. Her professional career is impressive, and she has deep knowledge of Germany's economic and social environment. I'm sure she will bring a lot to the Board of Covivio. Our ESG performance is well recognized by rating agencies. We continue to increase our ratings in 2021 and maintain our best-in-class position. For example, with GRESB, as a global sector leader in 2021. Now moving to the outlook. Clearly, priority for us in 2022 is to continue to grow the growth initiated in 2021, by investing in the development pipeline, execute an active asset management strategy, and catching the recovery in the hotel sector. First, the pipeline. As of today, we have EUR 1.8 billion in the office development pipeline, which is committed. It will generate 30% value creation and EUR 90 million of additional revenues. One part, which is in blue in this slide, is composed of redevelopment of existing assets. They are 45% pre-let today, and we generate a 60% rent reversion compared to passing rent. The other part, in red in the slide, is composed of new development on our land banks. They are 51% pre-let today and includes The Sign, Symbiosis in Milan, or Alexander Platts Project in Berlin. Let's take the example of Paris Anjou in the CBD of Paris, one of our former Orange asset. We obtained the building permit in Q2 2021, even before Orange left, because Orange left at the end of last year. And today, I'm really proud to announce that we were able to fully pre-let this new project to a leading French luxury group 3 years before delivery. And when you are looking to the other asset we have for Orange in Paris, we continue to have a huge potential. And I'm sure that we will continue to deliver a lot of value on this future development. Another example is the Stream Building in Paris. It's a mixed-use trophy asset in front of the new Paris Courthouse. It's a mixed asset with a hotel and office part. The hotel part is already fully pre-let. And we have signed a binding term sheet for the full office part with a tech company. Our pipeline is also about resi development, which has grown a lot in 2021 and as you can see in this slide. And we'll continue to do so in the future. In France, we transform obsolete offices into resi with a target margin of more than 10%. In Germany, we take advantage of our land bank. The part you see on this slide will be sold with a target margin of 25%. Another part, the most important part, will be kept in our portfolio. In terms of asset management, what is key for us is to continue to work on our Manage-to-Core assets. You see in this slide that we have 9 assets with EUR 20 million of potential to be extracted of this asset today because the vacancy is high on those assets. We have some good news to share at the start of the year, especially in CB 21 in La Defense because we reached 7,000 square meter of new agreement on this asset that lead to a pro forma occupancy rate of CB 21 to 93%. Covivio is well-positioned also to answer the new needs of the clients. Clients want more flexibility. They want to be in central location with good accessibility, and they want more services. This is what we do through all-in-one offer, which is a success by attracting the best companies, as you see in this slide. Our last example is the success of Wellio Duomo in Milan. It's 90% booked 3 months before opening. And one example of this new client is E.ON, a leading international energy operator that signed a contract with us on 3 floors for 3 years. In German resi, our asset management work is focused on capturing the strong reversal potential of our portfolio, as Paul said before. Our CapEx program are key to do so. They also improve our portfolio quality, reduce energy consumption, and create value for our assets. In 2022, we will invest more than EUR 50 million such CapEx at more than 4% yield on cost. Finally, we will continue to work on capturing the recovery in hotels. But first, some news on U.K. portfolios. These 12 assets benefit from very strong fundamentals with excellent location and guest experience feedbacks. Nevertheless, the revenues has been strongly hit by the COVID crisis. Consequently, the current contract was no longer offering enough guarantees to us. That's why we decided to sign a new head of terms to amend the existing contract by adjusting the level of fixed rent and increasing the variable part to better benefit in the future from the recovery. More broadly, market expectation for the hotel sector are really supportive. We expect a strong growth in 2022 as we have EUR 54 million revenues remaining to be recovered in the next years. So all in all, we expect a EUR 4.5 per share adjusted EPRA earnings for 2022, and there's the assumption of the continuous recovery in the hotels. The key drivers of this guidance are: first, the recovery in the hotel sector, so rental growth in German resi, the positive like-for-like rental growth in offices, and the deliveries of the pipeline. This guidance takes also into account the full effect of deleveraging in 2021 as well as the asset moving to development. To summarize today what we said. First, 2021 was a very good year, better than expected in all businesses. And second, the outlook is really positive for 2022. So thank you. And we will now move to the Q&A session with Paul, but also with Olivier Estève, our Deputy CEO; and Tugdual Millet, our Hotels CEO. So we are awaiting the questions.

[Operator Instructions] We will now take our first question from [indiscernible] from Kempen.

For your high letting activity, how does it impact your occupancy levels for the offices? And do you think they will go up? Or disposals in combination with the assets just in the pipeline ensure that growth in occupancy levels is muted?

I don't get exactly the question. If you can repeat a little bit.

You reported quite high letting activity. How will it impact the occupancy levels for your offices? Are they expected to go up or will disposals in combination with the assets that are addressed to the pipeline ensure that the growth levels of the occupancy level will still be muted?

So the question is on the occupancy rate on the office portfolio, right?

Yes.

Okay. Yes, we expect an improvement in this occupancy rate in 2022, thanks to the future letting, some of them that we announced today, and also the discussion we had today on the other projects. And you see that in the slides that we showed before that it was a turning point in 2021 at the middle of the year. And since that we see a lot of discussion restarting and a lot of activity in our portfolio. We will continue to dispose assets also in the office sector. So that's something that will continue, and to put equity in the development part. But on the occupancy side, yes, we are confident to increase this current level at year-end.

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

Maybe I would ask 2 questions. So the first one is on the hotel recovery. So why could we expect maybe that the recovery in hotels could be better than expected in 2022? So that's my first question. And my second question is on share buyback. So we can see now that you have succeeded in deleveraging the company with an LTV ratio below 40%. So is the share buyback an open question at Covivio?

First, I will ask Tugdual on the hotels activity recovery.

Yes. So on the recovery on the hotel activity, what we expect is based on what we experienced during H2 '21, strong recovery that you see on the slide that has been presented. And based also on market expectation and market analysis, we consider that the trends that we've seen during H2 and specifically very strong in France and the U.K. ending in terms of RevPAR between minus 10% or minus 15% to 20%, below '19 is really encouraging. So that's why we expect '22 to recover probably twice the number that we've seen in '21. And this is the base case. Obviously, I share your optimism, and probably we could be able to do more. It's mostly based on the rapidity with which customer behavior will come back to '19 level. But again, last few months of '21 are really encouraging and supportive for this expectation.

Okay. On the share buyback question, it's a question that is regular. What we can say. First, yes, the discount today compared to the share price and to the NAV is huge. And today, we consider really that the share prices do not represent the value of the company. And second, what is key for us is to keep our LTV between 35% and 40% leverage. And third, what is also important for us is to finance our development pipeline, which is important and which will deliver 30% value creation more in the future. That's why we consider today a larger buyback as not a priority for Covivio. So there is a question. Paul, you can read the question?

Yes, sure. It's a question on the U.K. portfolio. Question about the value approach. Did they took into account this new contract in their valuation? Yes. So the valuation that we have at the end of the year on this portfolio is taking into account this change in the expected new contract. And then on the second part of the question, do you expect to change more of your contracts to this lower fixed higher variable. This is not the objective, but what we can share is that in the new opportunities for acquisition that we are seeing through lease, there is a strong push of operator to enter in this contract where we have a lower minimum guarantee, but better upside in terms of recovery. So we are seeing that, and we are keen on investing on those kind of opportunities.

Okay. There is another question. You mentioned that you wanted to do another EUR 5 million disposal in 2022, correct? The largest part coming from French office? Yes, we shared that we would like to continue the disposal plan around EUR 5 million in 2022. The largest part will come from the office, but not only in France. So we have also some projects in Italy and perhaps also in Germany. So there are no more questions. Thanks a lot for attending this Q&A session, and we will meet next time for the AGM. It will be on 21st of April. It will be also the day of the Q3 results. Thank you. Bye-bye.

Thank you.