Covivio (COV) Earnings Call Transcript & Summary

Thank you. Good evening, everybody. Happy to welcome you on this call and to comment on our Q3 '24 activity. I would say it was a very dynamic Q3, as you can see on Page 2 of the presentation, with increasing revenue growth, plus 6.8% like-for-like, we'll go through it later on; with positive dynamic on all of our activities, in Hotels and German Residential in terms of like-for-like revenue growth; in Offices as well but also in terms of occupancy rate. And we continue to progress on our disposal program. Let's start directly with our revenues, Page 4. So we recorded EUR 509 million of revenue group share over the first 9 months of '24. It's an increase of 4.9% at current scope, when we were at plus 2% at the end of June, so an acceleration, which is directly linked to the reinforcement of our hotel exposure. And you can see on the table, the increase by 23% of the revenue at current scope, of course, of the Hotels business. It's also linked to the like-for-like rental growth. I will come to it later on. And those 2 news enable us to more than offset actually the decrease of the revenues at current scope of the Offices linked to the disposals of Offices we have made so far. Let's focus a little bit on like-for-like. So as you can see on the slide, 6.8% like-for-like rental growth, better than at the end of June, where we were at 6.5%. You see the 3 drivers: indexation still contributing for 2.8% to this growth. It's slightly lower actually than at the end of June, which is logical due to the reduction of the inflation. You all have it in mind. But in parallel, rental uplift and increase in occupancy is growing and accounts for 3% in this growth and variable revenues in Hotels is also accelerating and represents 1% of this growth. Finally, occupancy rate, 97.3%, increasing by 20 bps versus the end of June. Let's now look more into details by activities, and I would start with Hotels, Page 5. So the performance accelerated, as I said just before, for Hotels. We were at 5.2% like-for-like rental growth in June. We are at 7% revenue growth at the end of September. A few elements to explain this good performance, the main one is, as you see in the slide, the plus 10% growth in variable revenues versus 6% growth at the end of June, which is thanks to the catch-up actually of the activity in Germany, where we were also helped by the Euro Soccer Championship; thanks also to the portrait of a very good summer in the south part of Europe and Spain, especially. In parallel, in France, well, the strong performance of the Olympic Games basically enabled us to compensate lower performance in July due to the preparation of the games that we finished at plus 2% for France at the end of September. Finally, and in parallel, fixed leases, plus 4.1%. Here, we have the benefit of the indexation, of course, but also of the reversionary potential we were able to catch on the renewal of the lease with Meliá signed in 2023. Moving now to Offices, Page 6. So the dynamic of the letting activity we had so far in the first part of the year actually continued in the Q3 despite, let's say, a more quiet letting market in France in the context of the Olympic Games and in the context of the general election. That means that for us, basically, we let or renewed. As you can see on the left part of the slide, more than 115,000 square meters of offices, which means an increase by 27% compared to the same period last year. In Q3 only, we did 41,000 square meters of letting and renewal. We put in this slide the performance also by the different clusters that you know now well. Starting with city centers, the strategy here is to extract the reversionary potential, and we were able to extract, on average, 13% reversion on our reletting and renewal during the first 9 months. We put here two examples of the Q3 activity. The first one is Gobelin, an asset of 4,600 square meters in the 5th District of Paris, where we get a 19% uplift. And the second one is Percier, so 8,000 square meters in the CBD of Paris. Here, we renewed the lease for 6 years with 14% increase in the rents. And for both of them, actually, we didn't plan to spend any CapEx. Core assets in business hubs. Here, we slightly increased the occupancy, you see, 94.3%, mostly linked to letting in Munich in the Sunsquare building. And on the noncore part, which is 6% of the Offices portfolio, you know that we target to get rid of this part of the Offices portfolio in the short term. And here, we were able to improve significantly the occupancy of this cluster from 83% to close to 88%, thanks to the letting of 7,900 square meters in Fontenay to a public administration, which we did during the summer. This good letting activity, and moving to Page 7, lead us to a strong like-for-like rental growth, plus 8.3%, slightly below the H1, which is linked to the progressive decrease of the indexation component in the context of lower inflation. But you see on the right part of Slide 7 that the different components of the growth are at a very strong level. In parallel of the indexation, we were able to continue to increase the occupancy rate, and we now stand at 95.6% occupancy rate at the end of September. Finally, reversion in city center act also positively to the like-for-like rental growth by 0.6 points on this performance. Lastly, German Residential, here also acceleration of the growth, on Page 8. We were at 3.9% growth at the end of June. We are at 4.2% at the end of September, mostly driven by Berlin. You see on the map, 4.9% rental growth on a like-for-like basis in Berlin versus 4.5% at the end of June. We benefit especially in Berlin for better indexation and for the full effect of the reversionary that you see on the right part of the slide. We are able to relet 35% above the previous level on average on our reletting in Berlin. So that's for operating activity during the first 9 months, strong performance. In parallel on the disposals, and moving to Page 10, we continued our disposal program. We are at EUR 391 million of new disposal agreement at the end of September with an average margin of 3% above 2023 appraisal values. We put in the slide, on the right part, specific figures on Q3, so EUR 80 million group share and EUR 160 million on a total share basis of new disposal commitments signed during the Q3. In Hotels, we continue to dispose hotel alongside AccorInvest in France in order to streamline the portfolio. So it's actually hotels with variable rents. We sell the PropCo, and AccorInvest is selling to the same buyer the OpCo of the hotel, and it's hotels which are located in regional cities in France. In German Residential, we accelerated during the quarter the privatization. We did EUR 30 million on a total share basis of privatization during the quarter and, more importantly, with a 40% margin versus the last book values. And finally, we sold some noncore offices during the quarter. To finish this slide, as you can see on the bottom right part of the slide, we have EUR 300 million of disposals under advanced discussions as of today, which means that we are on a good track for our disposal plan by the end of the year. That's it for the Q3 activity main highlights, very dynamic, as I said. Moving just to Page 11, and before leaving the floor to your questions. As a reminder, we'll be very happy to welcome you to our Capital Markets Day, which will be on November 28 in Paris, in L'Atelier, our new European headquarters, for which we actually received last week an award from the ULI Europe for this building. Thank you for listening this call, and I'm happy together with Vladimir to answer your questions.

[Operator Instructions] Our first question comes from Valerie Jacob from Bernstein.

So I've just got a few questions. My first question is, it's been a strong quarter, especially on the hotel side. And I was just wondering if, given that, you feel confident that you can beat your guidance at the end of the year. That's my first question. And my second question is on disposals. It's been a slow quarter, as you mentioned, in Q3. So I was just wondering if there is any specific reason. I mean I know it's the holiday, the election, but I just wanted to see if you could make any comments on that. And maybe the last one linked to that, at H1, you said that you were relatively confident that your asset values were bottoming, I mean maybe apart from German offices. And I just wanted to see if you have any update on that comment.

Thank you, Valerie. I mean on the guidance, yes, it's a strong quarter which make us, say, even more optimistic on the quarters to come. But as you probably know, we are not used to update our guidance at every quarter. So let's say, we are very happy with this quarter, and we will make, let's say, an update or even more than an update with where we stand with the full year results in February next year. On the disposal side, as you noticed, I mean, of course, summer makes things, let's say, slow down the process. It's quite traditional. We continue to discuss with our potential buyers. We are, let's say, on a good track. And at the same time, I would say that the evolution of the investment market makes us, let's say, not in a hurry to push on disposals. So we'll do our disposal plan as planned. We are on a good track for it. We have the EUR 300 million under discussions, and we are not in a hurry. That leads me to your third question on asset value. Well, of course, appraisal campaign just started. So it's really early in the process to give you any guidelines or where do we stand on values. We will have, for sure, more visibility at our Capital Markets Day. So it will be also a good time to give you, let's say, more color on this topic. What I can share is that the signals are, let's say, encouraging when we see the evolution, the positive evolution, of the mood of the investors. The fact that our disposals year-to-date have been made above the appraisal values. All these are, let's say, positive signals. But again, it's early in the process. So no specific guidelines to give on the H2 valuation. Let's meet at the Capital Market Day for that.

The next question comes from Florent Laroche-Joubert from ODDO.

I would have two questions from my part. So my first question would be to know how sustainable can we consider the increase of variable revenues in Hotels for this quarter or should we consider some of them as a one-off. My second question would be to know if you could give us maybe some more color on your leasing activity in Q4 and your ability to increase again your occupancy rate in the quarter in Offices, for example.

Florent, thank you for your questions. I mean on Hotels, let's say, the activity of Hotels continue to be good and to be well-oriented. The Olympic Games, and I commented it before during the call, didn't add any specific one-off impact on the performance. It has created some negative performance in June and July and strongly positive performance in August. But all in all, we don't have any base effect. So I mean so far, the performance of Hotels continued to be on a good track. Letting activity in Q4 in Offices, we will continue to have, let's say, a good pipeline of letting activity. So let's say, we have discussions ongoing on this side, and the target is to continue the mood that we have so far on our Offices portfolio. We have a discussion more specifically also on some assets that will be delivered by the end of the year, one close to Milan and Rosano, for which the occupancy rate was 50% at the beginning of the year, 62% today, so progressively increasing. So this is going to the right direction, I would say, as of today.

The next question comes from Veronique Meertens from Kempen.

Maybe first, a follow-up on the Hotels business. I saw also the press release about the new platform, the WiZiU. Just wondering, do you expect any sort of margin improvement on the back of that or maybe initially some additional cost for the rebranding and the new platform? And then secondly, you're getting close to the end of your disposal program, probably more comfortable in terms of leverage and also values. Are you already scanning the market for new opportunities? And if so, is that particularly in hotels? Or do you also see interesting office opportunities, perhaps developments? Happy to hear your thoughts there.

Veronique, thank you for your first question. It gives me the opportunity indeed to talk about this platform. Maybe first, why we have this hotel management platform. So WiZiU is our, say, hotel management platform that, for us, the idea is to... [Technical Difficulty]

This is the operator speaking. Mr. Arkwright, we don't receive the audio from your line.

Can you hear me?

Now we can hear you.

Yes. Okay. So yes, what I just said is that the operating knowledge, we did it with Wellio on the office part a few years ago, launching our own flexible office brand, which brought a lot of flexibility, of course, for the client, but also a lot of knowledge for our own Offices portfolio. And I think the successes on the office part is also linked to the fact that, through this knowledge, we improved the service and we improved the experience and the quality of the building and, at the end of the day, the occupancy rate. But basically, for the hotels, it's the same approach. To have this platform, it's 9% of the value of the hotels. WiZiU is a way for us to, let's say, be stronger when we discuss with operators and when we discuss with tenants; have a better knowledge of the customers, of the market; be more agile, moving from management contract to lease or from lease to management contract; have a better control also of the asset management potential of our hotel, being able to do redevelopments, et cetera. A good example is what we did with Meridian in Nice. It's Promenade des Anglais, a great location in front of the sea. This asset, we changed the operator. We did a CapEx program, improving significantly the quality of the hotel. And the performance has been very strong. The EBITDA margin is actually above 40% of this hotel. And tomorrow, we'll take back from AccorInvest the OpCo of the Mercure, which is just nearby, in the same building block, and will create synergies in terms of running costs and will also improve the performance of the Mercure. So that's basically the story, what we want to do with this hotel platform. So to make it short, it's a way to prepare ourselves to the deal we will close with Accor by the end of the year, with AccorInvest, and to launch programs in order to create value on our Hotels portfolio. Then on moving to your question on acquisition. We are on track on the disposal side. Investment market, as you said, is improving. We are not in a hurry. We are also very, let's say, strict on leverage and on the balance sheet. But at the same time, we are monitoring acquisition opportunities, especially on the hotels, in order to continue to reinforce ourselves in this asset class.

Okay. Very clear. And maybe one follow-up, a bit on both questions, I guess. Obviously, you're now increasing your exposure to variable revenues there, making also a bit of a different risk profile, I'd say. Is there maybe an internal cap or maximum on where you want that exposure to go for hotels?

Actually, let's say, we changed the variable part of our revenue, but we don't increase the variable part of our revenue. The deal with AccorInvest is basically to transform variable rent into EBITDA from a variable lease to management contracts. So of course, there's a little bit more operating leverage on it, but it's still variable on both sides. Let's say that we want to keep a good balance between fixed revenues and variable revenues, as we have today a little bit more of fixed revenues and some kind of around 40%, 45% of variable revenues into our Hotels business, which is basically where we are today.

The next question comes from [ Yuji Kumar ] from Barclays.

Just a quick one from my side. Can you please help us understand the drivers behind the acceleration in the privatization in German Resi? And do you expect this material pickup in privatization going forward as well?

Well, thank you for this question. Well, basically, the rationale is to, let's say, to sell units at a very attractive price and to reinvest into a modernization program, into our portfolio, at yields between 5% to 10%. So it's a way to crystallize value creation on this portfolio at the best price we can get and to continue to improve the quality of our portfolio, to increase rental growth through the modernization programs and so to create value. In terms of pace of privatization, we want to accelerate privatization. I think we have said it before, actually. But we focus so far, the privatization, on empty units because we consider that this is really where the value will be at the highest level because we will sell most of it to private owners that will buy it in order to live in those apartments. And so this is where we are able to optimize the price. So, so far, we do privatization mostly for this kind of buyers.

The next question comes from Celine Soo-Huynh from Barclays.

Two questions, please. The first one is on values. So you're making a point on your return to the cash dividend after years of straight dividend, which kind of implies to me that you're not afraid anymore of any impacts of major drops on property values on your LTV. I know you don't want to comment on valuation as you're going through the valuation process right now with the valuers. But would it be fair to say that you're expecting fairly stable to increasing values in December? That would be my first question. And my second question is on the hotel portfolio yield currently at 6%. We've seen a strong pickup in hotel transactions this year. Some transactions are going below that 6% mark. So how do you feel about hotel values for December?

Celine, thank you for your question. On the dividend, yes, recall in the press release that we are targeting to come back to the cash-only dividend payment for next year with a payout ratio of over 80%. This is something that we actually communicated before in the year when we published the full year 2023 results. And for me, it's linked to the balance sheet. The fact that we have made and we are close to the end of the disposal program, of course, we are more, let's say, optimistic on the evolution of the business and the valuation of the assets. But let's say, more broadly speaking, our balance sheet, we consider that we are on the safe mode. And considering the good evolution of our operating performance, that confirms our will to come back to a cash dividend. So it's not purely and directly linked to the values itself. Moving to hotel, well, yes, this is where we see more appetite from investors on the hotel side. But as you have seen in the H1 valuation figures, this is where hotel outperformed the other asset classes. We could expect that it could be the same in H2. But again, appraisal campaign just started. So it's really early to say about the valuation for the second part of this year.

The next question comes from Adam Shapton from Green Street.

Can you hear me?