Covivio (COV) Earnings Call Transcript & Summary

Good morning, everyone. I'm happy to welcome you to this conference call to comment Covivio's '23 results. Let's start Page 3 with a recap of this year '23. It's in a challenging market for real estate. I'm proud of what we achieved and how we are able to exceed in our 2 priorities you see in the left part of the slide, execute our deleveraging plan and capitalize on rental growth. Look at the achievement. First, we reinforced balance sheet with EUR 720 million of disposal, EUR 700 million of net debt decrease and a double liquidity. Thanks to that, we are able to keep a contained LTV ratio at 40.8% despite minus 10% in our asset value. Second, the operating activity was really dynamic on hotels, on resi, and on office, where we increased significantly the occupancy rates all during the year. Thanks to this activity and the portfolio quality, we recorded a 96.7% occupancy rate and 6.4% like-for-like rental growth. And in the end, recurring net result was up plus 1% despite deleveraging and is 6% above initial guidance. Let's enter into more detail on our achievements, starting with the balance sheet. First, Page 5. Disposal activity was a challenge in '23 considering how can -- the investment market was. In this context, we are able to secure EUR 900 million of disposals in total and EUR 720 million on a group share basis. We did mostly 2 kind of disposal, some to crystallize value creation at good price, for example, one central mature office asset in Paris under development with a 3.5% yield at delivery, but also in German resi, with privatization at 46% margins. Second, to improve the average quality of the portfolio. We sold peripheral office, such as Majoria and Montpellier, our vacated assets to be transformed such as Charenton at the end of last year. We also some -- we also sold some business hotels at good conditions. All-in-all, and moving to Page 6, we are in advance on a EUR 1.5 million disposal program since we announced this plan in the Capital Market Day of December '22, EUR 920 million of disposal were secured which means 61% of the plan and with a progressive acceleration as you can see. And we have today EUR 250 million under advanced negotiations. These disposals, together with the cash flow of the year enabled us to accelerate the decrease of our net debt, look at Page 7, minus EUR 700 million over 1 year and EUR 1 billion less, including the disposal agreements to be cashed in soon. In parallel, '23 was a really dynamic year in terms of financings, as you see in the left part of the slide with almost EUR 2 billion across with the whole kind of counterparts. This deleveraging and refinancing activity enabled us to double the liquidity at EUR 2.4 billion now covering debt expiries until Q1 '26 and to secure a low cost of debt for longer below 2.5% until end '28. Now let's move to the second priority and how we increase the quality of the portfolio and extract rental growth. Starting by Page 9 with hotels. And this deal ongoing with AccorInvest in order to swap assets. As a reminder, hotel portfolio is owned by our dedicated subsidiary Covivio hotels, which we own at 43.9%. The Covivio Hotels portfolio is valued EUR 6 billion. Among this portfolio a bit more than EUR 1 billion is fully let to AccorInvest on a variable basis. It's a 54 hotels portfolio for which we own the PropCo, AccorInvest owns the OpCo. Through this deal, we will buy 24 OpCos for EUR 260 million with a 12% yield while selling EUR 210 million of Propcos at 5% yield. This deal is expected to be closed in H2 '24. On the right side, you can see the major OpCos we plan to buy focused on Paris and Brussels, Dieu and Nice, great tourist destination with high potential. Moving to Page 10, Page 10. This deal will bring us greater agility and higher returns. First, it's a win-win deal as owning both OpCos and PropCos, create values and provide more flexibility and profitability on hotel management. For Covivio, it's also a new growth phase as we are selling mature PropCos with low yield, for OpCo with much higher EBITDA yields. It will return the exposure to AccorInvest to reduce our exposure to AccorInvest and diversify further our hotel operator partners, and it will enable us to extract the full value of those hotels while we were passive with variable rents. Main impacts will be an accretion on earnings from year 1, highly profitable CapEx plan and still a balanced mix between fixed and variable hotel revenues. We also have asset management opportunities on other parts of our portfolio. Look at Page 11. On the left side, we signed a new lease in Spain with plus 15% to 30% increase in rents. On operating properties on the right side, we launched a EUR 70 million CapEx program on 6 assets with yield on CapEx expected above 15%. In offices, also we see significant potential, Page 12. Look at the left part of the slide. The share of core assets increased by 3 points year-on-year to 94% of which, plus 4 points in city center to 69%. Meanwhile, we launched 2 office projects this year in Paris CBD. There are former Orange assets in an area with barely no vacancy for quality buildings. We will make state-of-the-art building for EUR 135 million CapEx and an yield on CapEx of 6.5%. Through these deals, we will further increase portfolio quality, increase rent levels, and create value. We have lots of further projects of this kind in Central Paris for the future. Accretive asset management deals also in German resi, look at Page 13. First, we optimize our land banks. We delivered EUR 60 million of assets with high margin. Second, we keep on investing in profitable modernization program to improve asset quality, reduce energy consumption and increase rents. Third, we crystallize value creation to privatization. We sold EUR 53 million of units with 46% margin on average. I now let the floor to Paul for the operating figures and financial results.

Thank you, Christopher, and good morning, everyone. So what Christopher mentioned, participated to our strong operating performance across the portfolio. Let me start with offices, Page 15. In the Polarized market, it has been a busy year for us. We demonstrate how our portfolio fits the demand. As a reminder, 94% of our portfolio is located in city centers and centers of the major business hubs. And thanks to the client centricity we put in place since years, we show strong client satisfaction, as you see in the slide, with the Kingsley Survey. This leads to almost 131,000 square meters let or renewed, of which close to 80,000 square meters of new lettings. Let's go more into details, Page 16, with some examples, which show 50,000 square meters in total of new license. The first one is Maslo. It has been delivered early 2023, 28% occupancy rate at this time. And today, we are at 87%, and further discussions are ongoing on this asset. Atlantis [ Urban Garden ] in Issy-Les Moulineaux, it was vacated early 2023, and it's already 70% relate. So Pop also in Paris Saint-Ouen, we were at 36% 1 year ago, today, we are at 71%. Finally, Zeughaus in Hamburg, we are now at 96%, 14 points improvement over the year. We also have enabled in parallel to extract the reversionary potential of our core portfolio. Look at the example of Silex2, in Lyon or of our 2 Milan buildings on the right part of the slide, with plus 21% and plus 28% uplift in the rents. All these strong letting activity leads to a catch-up in occupancy rate since Q1 2023. You can see that on the next slide, Page 17. Remember, in Q1 2023, occupancy was down by 2 points due to asset delivery into 1 departure in Issy-Les Moulineaux, as I mentioned. And since then, we recorded a progressive rebound quarter-after-quarter, and we finished the year above 2022 at 94.5% occupancy rate. The second great achievement of the year for the office is our capacity to pass inflation to our rents. Look at the right part of the slide, plus 5.2% like-for-like rental growth mostly driven by city centers where occupancy and uplift are the highest. And thanks to the letting successes, we expect like-for-like rents to stay high in 2024. Let's now look at the hotel revenues on the next Page 18, plus 13% like-for-like revenue growth, plus 9% in fixed rents, plus 19% in variable revenues. This is thanks to, of course, the market dynamic, but also thanks to the quality of our portfolio, as you can see the details on the left part, this quality makes this portfolio strategic for hotel operators, and that explains why our hotel revenues are significantly above 2019 as of today. We put a few examples and details on the Page 19. First, to look at the left part of the slide on the variable rents, which are mostly in France and in Belgium, they benefited from the market dynamic, but also from -- especially the large cities where we have our hotels, see the example of our hotel in New in Paris and Brussels, where we recorded plus 20% to plus 35% increase in the rents. On operating properties on the right part, performance were also strong despite rising costs due to inflation. For instance, we recorded plus 16% EBITDA growth in Le Meridien, Nice or plus 15% as well in Park Inn in Alexanderplatz, in Berlin. German residential also has been quite of a success in this year -- last year, '23. And moving to Page 20. We observe, you know that a very prime portfolio, mostly located in Berlin. And thanks to this positioning, we were able to maintain occupancy rate above 99% and to record a plus 3.9% like-for-like rental growth in '23, showing an acceleration compared to 2022. A strong performance across all our locations in German residential, as you can see, Page 21, performance driven among others by the reversionary potential, we are able to catch. And interestingly, this year, we have seen an increasing uplift on our relatings across the portfolio, look at the figures on the right part of the slide. We had uplift of 16% in Berlin in '22, in '23, we were at plus 31%. So all-in-all, what does that mean for our revenues and going to Page 22. Well, at the end of the year, we recorded a EUR 1 billion consolidated revenues, EUR 648 million group share. And a few numbers that I can stress. First, the like-for-like revenue growth, 6.4%. It's among the best historical performance for Covivio. It's explained by indexation, 3.5%, but not only also rental uplift and variable revenues in the hotel side. Second number, it's a strong like-for-like growth, which enabled us to more than offset the impact of the disposals and to record a plus 2.4% growth in our revenues on a current scope. And then third number is, it's the occupancy rate. We slightly increased it at a high level of 96.7% with a yield maturity of 7 years on average. Let's now look at the financial results. First, moving to Page 24 on valuation. So as you know, real estate market has been impacted strongly by the increase of interest rates and our portfolio recorded a significant value adjustments linked to that, as you can see, minus 10% on average on a like-for-like basis. In offices, value decreased by minus 11.7% for -- and now has a yield of 5.5% on average. As you can see, the centrality of our portfolio enabled us to limit a bit the yield impact on our office portfolio. Then in German Residential, it's 31% of our portfolio. Like-for-like value was down by minus 10.8%. Interestingly, after a minus 7% in H1, the value decline decelerated in the second part of the year with a minus 3.7%. This is thanks to the low average value per square meter, you can see in the slide, the yield is up at 4.1%. Just as a reminder, our portfolio is valued at block, whereas half of it is already under condominium and you have seen with Christopher comment, the privatization margin we got on our portfolio. Then on hotels, 17% of the portfolio. This part of the portfolio resisted better with values down by minus 4% in '23. The yield impact has been mostly offset by the strong increase in revenues, and we have now a yield of 5.9% on our hotel portfolio. So in this context, and as you can see, Page 25, risk premium is being rebuilt on our asset classes, risk premiums here on Paris CBD offices is today at around 150 bps close to its 20-year average of 170 bps. The value decrease of the portfolio has a direct impact on our net asset values. As you can see, Page 26, our EPRA NTA is down by minus 21% at EUR 94.1 (sic) [ EUR 84.1 ] per share, the same evolution also for NDV and for the EPRA NRV. But despite this value adjustment and as you can see, Page 27, we managed to keep a healthy debt metrics in '23. LTV was contained at 40.8% at the end of '23. ICR is high at 6.4x. Debt maturity slightly increased, and it's close to 5 years as of today. Net debt-to-EBITDA is down significantly at 12.8x. And finally, our cost of debt stays low at 1.5% and will stay low, thanks to the strong hedging ratio that we have in our portfolio, 92%. So that's for the balance sheet. In parallel, operating performance are strong. You have seen that, and that leads to a net recurring results, which is up by 1% despite the deleveraging, as you can see Page 28. We finished the year with a EUR 435 million adjusted EPRA earnings and EUR 4.47 per share. This result is 6% above the initial guidance and 4% above the revised guidance that we gave in July. This increase mostly realized to the operating performance, we have seen that just before, also to a positive pipeline contribution and to the management of our cost structure, which enabled us to more than offset deleveraging impact and the increase in interest rates. Thank you. I'll now hand the floor to Christopher.

Thank you, Paul. On ESG, also, we are able to deliver. As a reminder, and as you see, Page 30, ESG is at the heart of our business model based on 4 main pillars you see on the left part. This ambition was once again awarded by the main rating agency in '23 with improved rating, for instance, plus 2 points from GRESB in '23 with a 5-star status or the A rating of CDP we received a few weeks ago. The E part of the ESG is a big challenge for our industry, and we gave ourselves ambitious target to decrease by 40% of carbon trajectory for 2010 to 2030. How do you plan to reach it? First, we have low carbon development; second, by reducing the energy consumption for existing buildings. Thanks to the wind CapEx plan we put in place, a profitable one with 6% return on investment. Thanks also to an Energy monitoring program. Third, increase the part of green energy for the portfolio. Already 79% of our managed portfolio has been green electricity, and we developed photovoltaic panels on 47 buildings in Germany. And on water consumption savings reached minus 35% between '19 and '22, and we recently launched an Ecowater Program for French offices portfolio. A showcase of our ESG ambition and now is letter G. See Page 32. The refurbishment we did for this asset in Paris CBD enabled us to divide by 2, the CO2 emissions compared to new construction. CapEx are also 100% aligned with taxonomy, and we created 1,000 square meters of green areas. All-in-all, energy consumption will be reduced by minus 44%. But this building is not only about sustainability. This is the showcase of all our real estate now. It will be operated by our own Flex brand value starting at the end of this month and will welcome our new headquarter. It's a perfect illustration also the way we see the use of real estate today and tomorrow. Let's now talk further about our confidence of '24 and the outlook, Page 34. First, let's have a quick step back. '23 was a really special year for real estate. In this context, we had a very positive achievements, proof of the relevance of our positioning and strategy, high operating performances, growing recurring results, balance sheet improvement despite value declines. In '24, our feeling is that we are near the low point of the cycle with interest stabilization in Europe and rebuild risk premium. In this context, our priorities are: first, maintain financial discipline; second, to pursue earnings growth. Dealing with financial discipline, Page 35. First, we want to limit the cash outflow linked with dividend payment. Historically, our dividend payout ratio was between 80% to 95%. This year, we intend to propose a EUR 3.30 dividend per share with the scrip option. These 2 decisions will enable us to keep between EUR 185 million to EUR 375 million of cash. This level of dividend will imply the 74% payout ratio below our long-term payout range. It's an assumed decision to maintain cash in the balance sheet and will clearly leave room for further growth. The second driver to maintain cash will be the achievement of a disposal program with a target of EUR 580 million of disposal for '24, which will enable us to finalize our EUR 1.5 billion disposal plan for December '22 to end '24. The second priority will be to continue to extract growth potential. We are well positioned today, thanks to an intense refocusing of the portfolio since the end of 2020. Look at the left part of the Slide 36. We start to rebalance the portfolio with less office and more centrality located. 69% of our office portfolio is in city center today versus 59% 3 years ago. Hotel and resi are also increasing in our portfolio split. And the quality of the portfolio keep on increasing, as you see, for example, with the certification level. In parallel, we have a stronger balance sheet, reducing debt, improving net debt-to-EBITDA and keeping a content level of LTV. This portfolio will enable us to benefit for the new market trends in office and in resi [indiscernible]. For '24 guidance, Page 37, thanks to a strong like-for-like revenue growth expected this year, and asset management operation and despite the impact of disposals, we target a continued growth in net recurring result to EUR 440 million in '24. We also want to come back to a full cash dividend next year with a payout ratio above 80% of the adjusted EPRA earnings. To conclude, as you can see on Page 38, the main key takeaways we see from our full year results publication. To sum up, in '23, we did better than expected, and we expect '24 to be also a strong year for Covivio. We are now ready to take your questions together with Marielle, our Head of Operation in France; Olivier, our Deputy CEO; Tugdual Millet, Hotel CEO and Paul.

[Operator Instructions] Florent Laroche-Joubert from ODDO.

Florent Laroche-Joubert from ODDO BHF. So maybe I would have -- we have 3 questions. So maybe the first question on offices. So could you please tell us a little bit more on your challenges in leasing for 2024? And maybe most specifically in offices in Germany. So we have seen a change in the organization. So what can we expect? Maybe my second question on the investment market and valuation. So I said that you are near at the low point of the real estate cycle. In the meantime, you are quite active in the investment market. So what is your feedback on the current situation in terms of liquidity, appetite of investors, and maybe how you see as maybe the valuation of the asset? And maybe a third question. So on disposal office, are you open to structure deals such as Vonovia with Apolo as part of disposal plans?

So on the challenging of the leases first topic, on the office market. First of all, I have to say that we have a really good year in terms of leasing in '23. You've seen the positive evolution of the occupancy rate we have. Today, we have close to 99% occupancy rate in Italy with continued strong demand and evolution positively in the like-for-like situation. In the French market, we have been able to let a lot of our buildings during the last months, especially in Q4. And I have to say what I see today in the market is really positive. We have a lot of other discussions, and we are really positive on the occupancy rate we will have in the coming months in France specifically, which we expect a new increase in the occupancy rate. Thanks to the current discussion we have with a lot of potential tenants. In Germany, we also increased the occupancy rate last year. We have this example of Hamburg that we explained before. But today, we are still below our target in terms of lettings. We have some discussions. We have also -- that's why also we have decided to change the organization as it was written in the press release, and we are sure that we will be able progressively to improve the situation also in Germany this year. That's on the first topic. On the second question on investment and valuation. That's big question of today for a lot of people, as you imagine, what we see. First is that on current valuation, the risk premium is really being rebuilt. You see with the evolution of the valuation and what we see in the market. The second end, we have some discussions with different investors, and my feeling in some of them are starting to think that you are really close to the [ 2 ] of the market, and they don't want to lose the window to be able to catch it in the coming months. Despite that, what I see in the market remain quite investment market. I don't expect a strong increase in the volume of the investment in the first half. I rather expect that will start to increase in the second half of the year when short-term interest rates, as we all expect, will starting to decrease. In terms of structured deal and so on and operation, we don't want to do deal like the Vonovia one, because we are working on different potential transaction with investors, also in German resi, but with the idea to share or to sell at appraisal value without any structure, premium for a co-investor.

Our next question comes from Ms. Jacob of Societe Generale.

I just wanted to ask a couple of follow-up questions on the guidance. The first one is you say you want to come back to growth. And I just wanted to clarify that this is not on a per share basis. And my second question is about the dividend. You say you want to come back to a cash dividend next year. And I just wanted to understand your thinking what happens, for example, if asset values go down more than you expect or if you cannot meet your disposal target, would you review this statement in that context?

Yes, indeed, in terms of a per share basis, after that, it will depend on the number of shares that will be created after the dividend. So -- but what is key for us is really with a strong decrease in the debt side, the fact that we are deleveraging the business, the capacity we have to increase our EPRA earnings in '23 and in '24, I think it's really a positive signal of the capacity we have to continue to extract growth in our portfolio. In terms of cash dividend, it's a statement we never take. I have to say this one was, what we said this year. After that, if there is a big, big trouble everywhere, we will see, but it's clearly -- really, really not where we imagine to be next year. We are -- we consider that we are not so far for the [ 3 ] of the value, we don't expect in '24, the same decrease of the value that we had in '23. We are really more positive on the evolution of the Vonovia. So that's why I have to say today, really we are clearly comfortable of what we write in the press release to come back to full cash dividend next year at minimum 80% of the EPRA earnings that leaves room to grow compared to the EUR 3.3 of dividend we will pay this year.

Our next question comes from Ms. Dossmann of Jefferies.

And just to come back on the guidance, will it be possible to give us some colors in terms of drivers? Because I suspect the guidance was slightly above consensus and just trying to understand what is driving more growth going forward? And second question on disposals. As you as you are ahead of the plan over the '23, '24, would it make sense to make more disposals as the debt-to-equity ratio remains quite high compared to rating agency thresholds?

Paul, you take the first one?

Sure. On guidance, well, the main reason is basically what we get in 2023, meaning we expect rental growth to continue to be strong to be above index inflation. So mid-single digit, I would say, like-for-like rental growth, thanks to some indexation contribution, thanks to increase in occupancy rate in office, thanks to continued growth in hotel and to a solid like-for-like growth in German resi. So that's the main explanation, which enabled us to more than offset the impact of the disposals. We also don't expect an increase in the interest rate cost in 2024, thanks to our hedging level.

In terms of disposal, we are happy with the plan. I have to say, as we consider that we are not so far for the show of the market, but it's not the time also to sell the best asset today. We want to continue to dispose assets that are non-core, mostly or in peripherical area. That's what we want to do and also to continue to same also to push perhaps more on disposal on the office sector than on the other sectors.

That was the last question from our callers. Thank you very much.

So we have questions just on the script. Well so the first one is, can you please share your view on the valuation expected for '24 by asset class, apart from that, when do you see investment market to gain traction again? I think it's what -- exactly what we tried to explain before. It's not all people can do expectation, but what we say and what I said before is that really we could expect perhaps a small decrease of the valuation in the first half and after stabilization of the market, that perhaps what could arrive this year, and that's what we today expect. Second question is in French. [Foreign Language] So just in terms of dividends, the question is why EUR 3.3 and why not another level? For us, EUR 3.3 is really a good compromise between to keep the cash in the balance sheet and but also not putting a too high number creating additional share with scrip, but also to have a sustainable level that will leave growth for the future. That was the it. And the last one. Could you comment on the valuation of office and hotels, accelerating [indiscernible] in H1 and H2, where you have been selling quite a lot actually versus the German resi value revaluation decelerating in H2, where very little has been sold? Yes. Okay. Really it is not linked to disposals, I have to say this equation of valuation is really linked to the market, what I can say just in terms of evolution of the values. We have this all discussion with Appraiser in each asset class. What we see really today is that we have really no specific topics to continue to do disposal at appraisal value that's EUR 250 million disposal we have already under discussion are at their value, close to the value at year-end, what we can say. So what is -- was sure is that the investment market in total was not very active in '23. So each disposal was a specific discussion with the buyer. Paul, if you can continue because I don't read the questions. What is the next one?

Can you confirm that you think you can sell German residential portfolio at a present value without the buyer keeping access to place debt at low rates? Can we sell German residential portfolio at appraisal value basically?

We will see, I have to say, that will be the question of the '24. We are really happy with the German resi activity, just to be clear, today, this sector, we have long-term growth in strong occupancy that's what we see, and that's why we like release the asset class. We have some discussion today. We have to say with investors at appraisal value and we will see if we will be able to conclude or not in the current discussions.

And then the other question relates also to German residential. It seems like your peak to trough revaluation on German residential is lagging behind peers, especially for H2. How do you explain that?

I think peers don't give them an appraisal for H2. So I think it's difficult to compare with peers that do not communicate today. What we see today really in terms of market. First of all, we have a really qualitative part portfolio, mainly in Berlin, with 50% of the assets that are today divided with, as we said, CC today, when we are selling this asset and on a privatization way, we are more than 40% margin on the disposals. So we are -- I don't think that we are lagging behind or something ahead. And as of today, the appraisal is the same for all this management company. So I imagine he's doing the same type of appraisal with the same methods.

We have a new question from Ms. Celine Huynh of Barclays.

No, I think she is not with us. So are there other questions? So if there are no other questions...

This is Florent Laroche-Joubert from ODDO BHF. Can you hear me?

Yes, we can hear you.

Yes. I have an additional question actually on our German residential. So we are able to see that you can dispose with the onshore block deals with a significant margin. And so my question will be as follow. Are you paying transfer taxes or the fees maybe to get this deals over the line?

I don't understand. In '23, we don't have this transaction in the balance sheet. So this is not something that is there. And so I have to say so for me, there is no question for that. And so for me, there is no specific topics into that. If there is structural transactions that will come back in the future, and we will see the way they could be structured. Okay. No more questions this time. Okay. Thanks a lot, everybody, and see you soon. Bye-bye.

Thank you. Bye-bye.