Covivio (COV) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Covivio H1 2026 Results Presentation. I am Myra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Christophe Kullmann, CEO of Covivio. Please go ahead.

Good morning, everyone. Thanks for joining us today. Paul and I are pleased to present Covivio's '26 half year results. Let me start with a quick reminder of Covivio's profile. As you know, Covivio benefits from a diversified business model built around 3 leading platforms on a high-quality portfolio concentrated in Europe's most attractive market. This provisioning underpins resilience of our portfolio and support our long-term value creation strategy. Let me now walk you through our key achievements and performance during the first half '26. We delivered a solid first half with 2.2% like-for-like revenue growth and a 97% occupancy rate. Our balance sheet further improved with LTV at 38.6% and net debt-to-EBITDA at 10.5x. This translated into strong earnings growth with recurring net result per share up 7.3% year-on-year and EPRA NTA per share up 1.6% since year-end. First, let me briefly comment on the current real estate market environment. As you all know, the first half was marked by geopolitical percent volatile financial markets, inflation concern and an evolving interest rate environment. However, beyond this volatility, the long-term fundamentals supporting our business remain firmly in place. In offices, occupier demand continued to concentrate on prime asset and central locations, reinforcing the appeal of our portfolio. In Germany, the structural housing shortage persist while recent regulatory development have reduced uncertainty. And in hotels, fundamentals continue to improve with RevPAR expectation revised upwards in the semester and limited new supply across key European markets. More importantly, Covivio is particularly well positioned to benefit from these trends and our strategy is fully aligned with the structural growth drivers. In offices, occupier demand continued to shift toward prime buildings in central location. This is lately where our portfolio is concentrated with nearly 90% of our assets located in city center and dynamic business hubs. Our strategy combining prime location, high-quality assets and the strong tenant experience, allowing us to capture demand when -- where is the strongest. In German resi, our portfolio is concentrated in major cities, particularly Berlin, where favorable demographic trends and a persistent housing shortage continue to support demand. And in hotels, we have still increased our exposure to a sector benefiting for attractive long-term fundamentals, particularly in Southern Europe. With that in mind, let me hand over to Paul, who will take you through our operational and financial performance in more details.

Thank you, Christophe, and good morning, everyone. So the first half has been active on asset management front for us, which has driven positive results starting with Page 10 on portfolio. Despite the muted investment market, we have been able to continue to improve both the quality of the portfolio and its profitability. Overall, what you see is that we closed for EUR 223 million of disposals in H1, 8%, 9% of it being offices outside city centers. In H1, we signed for EUR 124 million of new disposal agreements. In parallel, as you see on the right part of the slide, we spent EUR 312 million of investments. with a large part being in hotels, EUR 153 million of acquisition at more than 7% target yield and EUR 159 million of CapEx, mainly related to developments. . We will detail it later on, but we progressively increased the yield of our pipeline, thanks to the launch of new developments at more than 7% yield. In terms of investment and moving to Page 11, the main news of the first half relates to acquisitions. We bought through our dedicated hotel subsidiary Covivio Hotels, 4 hotels in Milan and 1 in Costa del Sol in Spain. Those acquisitions are very interesting for us for 3 main reasons. The first 1 is that we increased our exposure to hotel in the south part of Europe most dynamic market. The second one is we buy top located hotel at above 7% target yield. And the third 1 is that we benefit from very long-term income visibility thanks to 20 years average lister. On the development side and staying in hotels, we delivered in H1, the first redevelopment inside our value-add hotel portfolio, Let's see, Page 12. So we will talk more about this value-add hotel portfolio later on today. If you focus first on this delivery, this is a very interesting example of all the potential of our hotel platform. So we are in this top tourist city with a building where we own the Mercure Hotel and the Meridian hotel. As you see on the left part of the slide, we've innovated the Mercure hotel after having both the OpCo. We target a 12% sale on CapEx, and we are well on track to it. Thanks to a plus 32% growth in RevPAR after the reopening of this hotel in May. And we already booked EUR 22 million of value creation. The second interesting part is that we took over the management of the hotel with our own operating platform with you. With you is already managing the Meridian hotel and as you can see on the right part of the slide, this has been a great success since its repositioning in 2020. So by sharing the management of those 2 hotels, we do continue to optimize the profitability and to increase the results of both hotels. Let's move now to disposals into office, Page 13. We already communicated during our full year results on the signing of the agreement for this new JV on our Thales campus in Velizy. The deal has been closed in the first half in April, and the Thales third building has been delivered early July, and now we have a 12 years firm lease with Thales for 38,000 square meters. Then on German Residential, Page 14. The investment market has been particularly impacted by the geopolitical environment and by the expropriation risk in Berlin. In this context, it focus ourselves in improving the quality of the portfolio with modernization CapEx financed by the disposal of individual apartments. All those amounts are so far still limited, but we wanted to do more, and we will explain how later on. The yield gap between privatization made at 2.6% and CapEx spending at 7% is very positive for the profitability of the German residential portfolio. Finally, on portfolio, it is the evolution of the variation, Page 15. So what we can say is that the asset management work enabled us to slightly increase the value of the portfolio by 0.5% on a like-for-like basis. In office first, we benefited from the positive reversion on the rent in Milan to compensate further decreases in business hubs and our non-core assets. In German residential the rental growth by 3.4%, supported the valuation of the portfolio. And in hotels, the strong performance of the south part of Europe, as you see in the slide was the main driver of the plus 1% increase in value. So overall, a resilient portfolio in this semester, gaining quality. The performance has also been good on operating performance, and let me start with revenues, Page 17. So we recorded EUR 349 million group share in revenues in H1, so decrease at current scope is related to the fact that we recorded an indemnity from SEZ when we -- they vacated the CB-21 tower last year. So the full indemnity was recorded in H1 2025, and we also have the impact of the disposals. Nevertheless, on a like-for-like basis, you see that the performance has been solid overall with plus 2.2% growth, thanks to 1 point of indexation, increase in occupancy and also increase in variable revenue in hotel. As you see on the right part, we also gained visibility in our cash flow, thanks to an increase by 1 year of the lease maturity up to 7.4 years. Let's go now more into details and starting with hotels, Page 18. So strong performance in H1, variable revenue first accelerated their growth in Q2 and they end the first half with a plus 3.2% growth on a like-for-like basis. You see the split on the right side of the slide. The performance has been solid across geographies, exceptions made with Belgium due to a VAT increase from 6% to 12%. But on the opposite, Spain has been very strong and benefited from a flight to Europe of tourists in the context of the iron. Fixed rent are up by 1.2% in the context of flow indexation. You can see that, especially in France with 0.1%. But the good news is that indexation should increase next year with higher inflation. Good performance also in office. As you see Page 19. So the semester has been muted on the Latin market, with again a decrease in the take-up. But this adds a strong polarization of the office market in favor of central location in favor of grade buildings with top level of services. This is why in this market, our premium positioning is bearing fruit with 45,000 square meters of new lettings and with 58,000 square meters of renewal alongside EUR 17 average maturity and a plus 10% rent uplift on those renewals. On the releases for 18,000 square meters, Already 50% of it is relet or under exclusivities so should be signed in the coming weeks. This drive an increase of the occupancy rate by 50 bps, as you see Page 20, up to 95.6%, and I would say, a good 1.6% like-for-like rental growth despite a continued decrease of indexation, which should increase again in 2027. Then German Residential, Page 21, we recorded a positive semester with a plus 3.4% growth in a context, first of all, of lower indexation in Berlin and North inspire, which is temporary and another temporary effect, which is increase in vacant apartment for 2 reasons, modernization programs and privatization. You see on the right side of the slide that there is reasons to be optimistic for an acceleration of this growth, thanks to the new Michigan in Berlin which grew by 6.7% for our own apartment. So that's for the rent and the operating performance in hotel. You also probably remember that we mentioned our target to increase other source of revenues, and that's what we did in H1. First of all, and moving to Page 23. with asset management activity. We are not a third-party manager, but we like to partner with institutional investors in order to manage risk, to accelerate growth and to improve returns. Since the start of the company, we developed this model, we now have 10 partners, institutional investors in 31 JVs for a value externally owned of close to EUR 9 billion. You'll see Page 24 that this activity has created a recurring and a growing source of revenues over the years. We expect for 2026 full year around EUR 40 million of revenue, up by EUR 7 million versus 2025. We are keen to continue to develop this activity as it is recurring source of revenue with long-term contracts. It enables us to limit cash pending, and it's a diversified source of revenue with a multiple of JVs and partners. Second source of ancillary revenues is related to development margin and fees, as you see Page 25. And so development margin has been also a recurring source of revenue for Covivio despite its volatility. You'll see that on the slide, on average, EUR 20 million over the years. We have 2 kinds of development margins. The first 1 is build-to-sell program. The second 1 is when we develop in JVs such as for Thales and Velizy. Covivio acts as a sole developer and take the risk. In exchange, we benefit from a development margin when the JV buys a project about the development cost paid by Covivio. It's also a diversified source of revenue for us, thanks to projects that are in France, in Germany, in Italy as well in office, in hotel and in residential. You can see some example on the right part of the slide. This activity has grown significantly in H1 '26 with EUR 26 million of margin booked, and we expect the total level of margin to reach EUR 35 million for the full year. Let me now move to the results and first to the adjusted EPRA earnings, Page 27. So that leads to an increase by 7% year-on-year of our adjusted EPRA earnings at EUR 282 million and EUR 2.55 per share. If we focus on the bridge on the slide, first of all, Swiss departure for CB-21 has reached its highest impact -- negative impact in the H1 2026 as we were still receiving the rents in H1 2025, and they paid, as I said before, an indemnity last June 2025. This explains the minus EUR 18 million, you see. This impact, more importantly, will progressively be reduced in the next quarters, thanks to the good relating process of this tower. Secondly, the rental activity, excluding CB-21, has been very positive across the board, as we have seen right before. And we recorded a plus EUR 12.7 million of revenues and the rents of our companies accounted under equity method brings EUR 3 million of additional revenues as well. Asset Management revenues are up by EUR 5.7 million, thanks to new JVs and the results from other activities relates to property development margin and are up by EUR 15 million. In parallel, and again, this year, our balance sheet has further improved in H1, as you see, Page 28. Lower LTV down to 38.6%, lower net debt-to-EBITDA down to 10.5x, We also kept a low cost of debt, thanks to a debt which is hedged at 85%. And in this context, S&P has confirmed last April, its BBB+ rating for Covivio. Finally, on the results, let's move to net asset value, growing by 1.6% for the NTA over the semester to EUR 84.2 per share. Bear in mind that the second dividend payment has been made last July 15. Thank you, and I now let the floor to Christophe.

Thank you, Paul. Let me now turn to our key strategic priorities for the month end. First priority is to continue rebalancing the portfolio across our 3 health classes and increase zinc centrality. In simple terms, more hotels, more soon tenor more city center office. We are making good progress towards 2030 target with hotels now representing around 24% of the portfolio. At the same time, we continue to enhance centrality with 73% of our offices located in center and 92% of our hotels in top tourist destinations. Another lever to increase our hotel exposure is office to hotel conversions. A good example is Voltaire, a newly committed project in Central Paris, which will transform Notice asset into 165 room, 5-star hotel complemented by a sports club including our 3 other committed projects, our conversion pipeline now represents nearly 600 rooms with a target yield on CapEx of around 8%. As we work on the rebalancing of our portfolio, we remain equally focused on extracting value on growing profitability through active asset management. and this comes with our value-add CapEx program in hotels as shown on Slide 35. As a reminder, we have identified 20 hotel redevelopment opportunities, representing 12% of the portfolio, with EUR 400 million of CapEx, this project should generate around EUR 260 million of value creation and a 13% in CapEx. This should enable us to more than double EBITDA from EUR 50 million today to EUR 102 million by 2030. On the next slide, you can see that we have accelerated the execution of this value-add program. Following the 5 project launch in '25, we started 8 additional projects in '26. Beyond refurbish and work, several also include extensions or brand changes. We plan to launch 3 more projects in H2, bringing the total number of ongoing project to 15. Altogether, this project represents EUR 249 million of CapEx with a 13% target yield on CapEx. Another lever to enhance profitability and create value is active operator management. In Germany, we have just renewed 5 management contract and partner with operators with strong track record, including Radisson and Odyssey. At the same time, we continue to expand with you our in-house operating platform, which now manage 25 hotels and more than 3,400 rooms, representing around 10% of the portfolio. These initiatives give us greater control of asset performance, improve operational efficiency and support further EBITDA growth and value creation. Let me now turn to our office portfolio where we continue to focus on enhancing quality, profitability and value creation. The first lever is the selective launch of developments in our strongest markets, Paris and Milan, all targeting yield on CapEx above 7%. So the second lever is the value embedded in your land bank. notably at Symbiosis and Scalo Deportaromana in Milan. Together, this project propose nearly 100,000 square meters for future development potential. In German resi, we continue to drive profitability through a combination of privatization and rental growth. We are steadily expanding our private in pipeline while maintaining attractive disposal yields below 3%. On the rental side, we continue to capture upside through indexation, strong reversion on the relating, selective modernization program and supportive market fundamentals. Let me now turn to our third strategic priority, scaling our ancillary revenue streams, which represent an additional source of recurring growth. The first lever is asset management. We are benefiting from growing demand from international investors seeking for experienced partner with strong operating capabilities. With our track record and extensive network of partners, we are well positioned to further scale this activity. The second lever is development management. We have around 160,000 square meters of projects to deliver by 29%, which will generate attractive development margin. Beyond that, land bank provides more than 160,000 square meters of additional opportunities, creating further potential to partner with investors and generate revenue streams. Finally, our first priority is to develop hospitality led services building on our unique expertise in hotels and customer experience. Our ambition is simple, transform our buildings into destinations that people actively choose not just places where they work. A good example is CB-21 in La deface, where we are operationing the assets around a hospitality-inspired experience, combining workspace services, wellness and events. This approach enhance the attractiveness of our buildings, support occupancy and rental growth and that also strengthens tenant royalty. At the same time, we are strengthening the appeal of our assets through targeted partnership and increasing revenues generated by our shared spaces operated by Velo, our flexible office platform. Finally, operated resi is an attractive growth opportunity supported by strong structural demand in Germany. Building of the success of Covivio to share, which already managed 282 units, We are now scaling the platform through new Dino Berlin, our flagship mixed-use project in Berlin. With more than 200 operated apartments, Nondai Berlin is another example of how we leverage our operating expertise to drive growth, profitability and value creation. Before closing, let me briefly comment on the appointment we announced yesterday within our Executive Committee. We are pleased to welcome Aude Grant back to Covivio. Aude brings deep expertise in the French office market and will lead our French office business. Many of you already know Alexei Dal Pastro will successfully lead -- led our Italian and German office activity for several years. Together Aude and Alexei will serve as deputy CEOs and help drive the execution of our strategy. I would also like to thank Olivier Esteve for his outstanding contribution to Covivio during the last 24 years. Covivio is what it is today, thanks to his strong contribution. Let me briefly summarize the key message for this morning. H1 demonstrates the strength of our model. We delivered solid operating performance across all asset classes, grew our earnings and NAV and continue to enhance portfolio quality, disciplined capital allocation. At the same time, we are executing on our strategic priority and unlocking new sources of growth through active asset management, and ciliary revenues and hospitality led services. With a solid first half performance and clear strategic priorities ahead, we are confirming our '26 guidance of 4% growth in recurring net result per share and thank you all for your attention. We are now happy with Paul, but also with Olivier Esteve, Aude Grant and me to open the floor for questions.

[Operator Instructions] The first question comes from the line of Florent Laroche from ODDO BHF.

I would have 2 questions, if I may, and I can ask 1 by one. First one, on the guidance. So you have had a very strong performance. and so you confirm your guidance. So why today, your guidance is what plus 4% is the wide estimate for the year? And how this guidance could be a little bit conservative for H2?

Paul, on the guidance? Paul like to speak on the guidance .

Yes, Well, as you noticed, we recorded most of the promotion margin in H1 as the first element. So I would say that we are well on ride on this guidance. It's fair to say that we are a bit conservative, but we also have the effect of short-term interest rate increase for the second part of the year. So that's why overall, we have maintained this guidance.

Okay. And my second question on acquisition opportunities for hotels. So we have seen that you have been very active in H1. What to expect of H2? Are you looking for other acquisition opportunities? So shall we expect something or maybe now it's for 2027.

I think we have started the year quite intensively -- quite appear also of the attractiveness of the opportunity we have been able to size. And the idea is to continue with this trajectory still focusing on best opportunities in Southern Europe, mostly leased, but also other through management that could be also the other opportunities. And so continue with this objective to increase hotel exposure years after years. .

And just to complete, we are currently issuing new acquisition, mainly in Italy and Spain. So that's, I hope, we will be able to complete in the second half.

The next question comes from the line of Anand Akaska from Citigroup.

Two questions from my side, and I'll go 1 by one. The first 1 is just on the guidance again. So I see the negatives on the second half for the guidance are increase in finance expenses, low indexation and the CB21 SUEZ departure. I think my question is -- is it reasonable to assume that all these 3 drivers are going to have an equal negative impact on the second half earnings? Or could you just help us understand which is going to be the biggest driver? And then which 2 are kind of rate them, if that makes sense. .

Yes. Alua, Anand, the CB21 effect should be -- should start to be positive actually in H2, thanks to the relating Again, we had in H1 2025 this one-off of this indemnity. So we don't have -- we will not have again this negative effect in H2 2026. And on the opposite side, the fact that we relate most of the full existing part. So non-de of CB21, we start to have positive effect in H2. So the main negative is increase of interest rates. And lower property development margin in H2 versus H1. .

Understood. And the second question, just on the portfolio split. So pro forma hotels is about 24% at the moment as a share of the overall portfolio. Is it reasonable to assume that further growth from the 24% to 30%, we can expect it to be split broadly evenly between acquisitions and development/resea CAPEX and could you just remind us of the return profiles on each of these. So what I'm trying to ask is, what are the acquisition yields? What are the yield on CapEx or just refurbishments? And what the spread to the current refinancing rate is?

You gave us a lot of figures in the presentation, but in terms of target, in terms of acquisition yield, we are on average at 7%, including what is a variable part of the rent. So that's what we achieved in '26. And what we would like to continue to have in the future also in acquisition with some asset under management. So that's something that you could keep as a type of value. field of CapEx. We give all the details in the prediction. So on average, you are close to 10%, what I can say, perhaps some time they move. and on hotel and office to conversion, we are close to 7% also at the yield on CapEx you could take into account in your assumption. To go to 1/3 the long-term target we have in terms of exposure in hotels. it will be made like in this way, but also we know that 1 way could be an increase in our exposure in our subsidiaries. We are continuing to discuss with some shareholder for that. Today, they not willing to move, but it could change in the future.

The spread -- the current refinancing rates.

Current refinancing today cost is...

We are, let's say, around 2.6% on average.

Next question comes from the line of Anna Escalante from Morgan Stanley.

I have a couple of questions, please. The first 1 is on the pre-letting of your pipeline. How is that progressing, especially for the deliveries that you have in 2026, which I believe is this asset in Paris, any visibility on 2027, whether your conversation with tenants are being impacted by the ongoing uncertainty and therefore, they are taking longer to make decisions or whether you think that the operating environment remains challenging and maybe the pre-lets will not progress as expected. Any visibility on all around that would be appreciated.

Olivier?

I can give some color on the pipeline -- office pipeline. We have pending a lot of pending discussion. We are really optimistic on CB21 and that we consider we should reach 100% occupancy rate at the end of the year, Of course, for a lease taking start in '27. But I think we are really optimistic given the discussion we are ongoing. Also on Bec, we have recently signed a new lease at EUR 1,070 per square meter with incentive in the range of 16%. So we see that the market is still positive as long as you are able to propose the right , I would say, the right product, so meaning central office, as Christophe mentioned, but also with the right combo of quality sustainability performance and experience we are able to provide in the building and exactly what we are doing in our offices, putting the stress on the all -- the amenities and et cetera. So -- we also another project under development, but the deliveries at the end of '27. It's what we call Granular. And also in this case, we are really optimistic on the development. And we have launched already in Milan the Vita project with a significant level of preletting more than 70%, and we are also pending discussion on other potential projects. So I can say on the pipeline, really, a good really a good track record. After the last -- at least but not last, Berlin, our project in Alexander Platts. In this case, we have already 70% of the retail is pre-let. We have led to 100% on the residential part. And we have launched the marketing -- we have launched the marketing on the office, and we have a really interesting pending discussion on 10,000 square meter and a couple of prospects on 1,000 to 3,000 square meters. So really a lot of traction also on this project and with market in Berlin on the letting side, which is recovering.

Okay. And then my second question is on your comments regarding the booking pattern that you've seen for the hotels after the outbreak of the middle East is conflict. To what extent do you think that is going to generate a sustainable shift in demand because certain locations are not longer perceived as safe and therefore, demand shifts towards other locations? Or do you think this is just a one-off of 2026 and then in 2027, we will go back to pre-conflict patterns?