Gecina (GFC) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Gecina Q1 2020 Activity Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Samuel Henry-Diesbach. Please go ahead, sir.

Yes. Good morning to everyone, and thank you for being online with us for this conference call related to our business activity in Q1 2020. I'm Samuel, and I'm here with Méka Brunel, our CEO; and Nicolas Dutreuil, our Deputy CEO, in charge of Finance. And a quick introduction by Méka regarding our performances in Q1 but also to highlight a few things about the continuation for facing the coronavirus. Méka, Nicolas and I, we will be happy to answer all questions you may have. And by now, I hand the floor to Mrs. Brunel.

Thank you very much, Samuel. Good morning, everyone. First of all, I hope that all of you and your dear ones are in good health and not suffering from this awful disease, and I wish it will go this way for the coming period. As you may have seen already in the press release published yesterday, our performance have been particularly strong in Q1 2020. Of course, in many different -- through different angles, it shows the strength of the markets but also the highlights. The strategic choices we made throughout these last years which today feel even more relevant, I mean, by that the realignment around central sectors of the Paris region, considering the -- our residential strategy by keeping the portfolio active, portfolio rotation, which we have continued during the course of the first quarter and value extraction on buildings with strong potential, et cetera. However, it is very important to note that the performance element presented in this press release are observed at the end of March and do not reflect, of course, the impacts of COVID-19 since this crisis emerged during the second half of March and at least, we have been locked down since. I would like to highlight though a couple of elements. Our model is proving its resilience, thanks to robust balance sheet with a loan-to-value of 34%, including duties at the end of '19, excluding, of course, the sales which have been completed since the beginning of this year. Further strengthened by its high-volume of undrawn credit lines, EUR 4.5 billion at the end of '19, enabling us to cover all the maturities of our loans through to the end of 2023. The second point is the resilience of the residential and commercial portfolio, concentrated and located in the Paris region's most central sectors, with over 80% of office rental income generated by key account customers. The third point is a very moderate exposure to very small businesses and SMEs from shut down sectors -- suffering from shut down sectors which represent globally less than 2% of the commercial rental base of the group. Thanks to this resilience, the group is now not using so far the business support measures of the government, such as furloughs arrangements, government-backed loans or deferral of costs. However, we are mobilized to support people and corporate to go through the crisis. We are offering payment facilities to close 13% of our office rental base to date. Rents will be canceled for the second quarter for very small businesses from shut down sectors and essentially, the retail. This represents around 1% of our income. These very small businesses, or particularly in the retail sector, as I mentioned, and are impacted by their reduced financial capacities which make their lives and their capacity to face the crisis harder. For the others, so the 12% remaining, we have agreed to defer rents or to set up monthly installments. For [ older ] rents, which exclude those are due, the recovery rates represent 84% to date, very close to what we have observed at the same time last year. And this percentage is growing every day. Our mobilization is not only for our clients, but also for employees. Widespread home working measures rolled out since the start of the lockdown. 100% of our administrative people are working from home, and we have only the building staff, superintendents, student residence manager, for some of them who are working on the ground. And we offer to these people EUR 1,000 net bonus under Apple Payroll. We also have a mobilization to support national solidarity efforts. Some of our student accommodations, which have been made available to -- due to the fact that universities are shut down, we offer then to women victims of domestic violence and health care workers, and put in place agreements with hospitals and foundations and associations. We lowered our dividend to EUR 5.3 a share versus EUR 5.6 a share we initially announced. A covering or redistribution requirements under the SIIC regime, Gecina has thus responded to the French government's appeal to moderate dividend policy. And also, I took the initiative to suggest to the Board of Directors, which has approved my decision, to reduce my compensation for 2020. Actually, my fixed salary, my 2-month salaries, as a solidarity measure during this period, an equivalent amount will be donated to the Gecina Foundation to support charities working to fight against COVID-19 consequences. The same approach, by the way, has been made by the directors -- independent directors for the compensation for Board meetings focused specifically on COVID-19. You understand that our confidence in our capacity to grow through this crisis is strong, but as the current uncertainties does not make it possible at this stage, to better determine the consequences of this crisis, Gecina Group has suspended its guidance for the year on March 30 this year. I would like to share a few elements regarding our business activity, and I will turn the mic to Nicolas Dutreuil to present the numbers. Nicolas, over to you.

Sure. Good morning, everyone. Thank you, Méka. So in a few word, if you focus on our Q1 2020, first, rental income is clearly in line with the target. And once again, reflect the performance -- outperformance, I would say, of the most central areas. Rental income is now up for Gecina by 2.4% for Q1, meaning that the effects of the disposal we've made in 2019 and 2020. And from vacating assets set to be redeveloped ahead for the purpose of value creation and transfer to a pipeline are now offset-ed by deliveries and organic growth. For office rental income, they are up by 3.7% for this Q1 and like-for-like in total 4%, largely outperforming indexation. This performance has been driven by capturing reversionary potential as headline reversion we've got during Q1 under re-leasing we've done and leasing is plus 22%, and mostly in transaction achieved in Paris City. Vacancy has also contributed positively to this like-for-like, thanks to the letting of vacant spaces during this -- during 2019, sorry. For example, it is a case for a BEC. And if we include the impact of the asset delivered coming from the development pipeline, the like-for-like now is for -- is up by 6.6%. We've been also very active on the disposal side. We have closed or secured almost EUR 350 million of disposal with a premium of plus 4% on the last appraisal values. And most of these disposals were already under primary agreement by the end of 2019. This disposal are including, of course, the building that we've made some announcement on them. I'm talking about Le Valmy, on the border of Paris and Montreuil. And the Avenue Pierre 1er de Serbie building in the CBD, which was part of an asset swap to a French corporate -- with a French corporate, and enabling us to complete the owning of the building. In addition, we've done some additional disposals after end of March, and you've seen the press release we have published with a building in Boulogne for EUR 37 million, a building located in 54/56 avenue du Général Leclerc in Boulogne, and which has also been in premium to the last appraisal value. Maybe one last point which is clearly for us, not the last step, but the beginning of a new story for the resi portfolio of Gecina, which has been the approvement by the AGM yesterday of the segregation -- subsidization, sorry, of this portfolio, following the announcement we made last December. So all the resolution related to this contribution has been accepted so we have transferred, yesterday night, all the assets to GEC 25, which is the name of our subsidiary which will, of course, change in the future of owning now our residential portfolio. And all the teams are dedicated to the management of this portfolio, meaning that we are now in position to capitalize on potential investment opportunities that we will see in the regional cap in order to achieve major synergies with our existing portfolio and benefit from the strong knowledge and know-how of our teams in terms of management of resi [ areas ]. And maybe to conclude, before giving you the floor for questions, I would come back once again on the guidance. As Méka said, of course, it's clearly too soon and too early to give you any estimate on the operational impact of this crisis. And so that's the reason why even if we are confident on our strength to be able to face this crisis, we have suspended our guidance for 2020. Thank you for your attention. And now the floor is open for the questions.

[Operator Instructions] We'll take our first question from Peter Papadakos from Green Street Advisors.

I have perhaps 4 questions. So I'll go through them slowly. But the first one is on the 84% rental recovery rate, so the 16% which hasn't been received, could you split that for us in terms of what's your best guess today? How much of that could become bad debt? How much of that could probably be collected over the next, say, 60 days? And how much of that would then go into the deferral category in the near future? Other questions I had were on the -- anything you can say on the 2% of the rent roll, which is occupied by a U.S.-based co-working company? Lots of press in London about them starting renegotiations of rents with the landlords. And then I had a question on student housing. Can you give us anything, any color there on the rate of reservations for the next academic year? How is that business progressing? My final question is just on the EUR 540 million of pending CapEx on your pipeline, how much is -- how much of that are you spending in 2020 and [ identify ] some of that CapEx into future years?

Thank you very much, Peter, for all these very good questions. Actually, I will, of course, will give you more flavor of the day on the details. But our goal is reach to 100%. And today, we are not -- except for the 3 months of the 1%, which are impacted by the shutdown, which represent a very small portion, we are aiming the full recovery, of course, of our rents. And so far, so good. By the way, one thing we didn't mention, we -- the shutdown in France was started 17th of March and on the 23rd, Valérie Britay, our Head of Office business, with Nicolas Dutreuil and Franck Lirzin, they've set a committee to start to talk to our tenants before that everybody is going to write you a letter, ask for this and that, and have a committee and start to help them to support our tenants where it was necessary. And this is probably one of the reasons we consider that we are almost on the same path we were last year and not in a very bad shape. Of course, the quality of our tenants also makes sense. Just -- again, I will let Nicolas to complete a little bit. On WeWork, I want to say, we do not have a renegotiation with WeWork and they paid the rent. So they are suffering, and we are in touch with them like with all other tenants we have. But there is no -- they didn't stop paying the rents. So we are -- we do not have those kind of concerns. And maybe this is because of the quality of the location and the fact that their top tenants, I may say, or their clients, are large companies. And for some of them, in the 13th district, they have Carrefour which is doing well in the period, it's is a grocery company. They have Sogaris, for instance, this is a logistic companies. And maybe this is just a coincidence, but so far, so good. So we definitely are in touch with everybody all the time. On the student housing, I will let maybe Samuel on the CapEx, Samuel, give you a flavor of the day. On the CapEx, just one thing, you know that the size of shutdown and it's not that easy to come back and restart the site. So we are fully dedicated and our development teams are -- we are having negotiations and conversations with general contractors or with contractors wherever they are, to see how we can safely restart the sites and with the lowest impact on the -- on our G&A on our CapEx numbers. The reality is, I think that globally, probably it's going to be delayed, definitely. I mean 2 months shutdown is 2 months. And probably more because the way the sites are going to reopen is not going to be the same way as before. Distanciation, for instance, and I'm just wondering how it can work on a construction site, but we are working on that items. But at the same time, I mean, the oil price going down and all the raw materials value is going down. We don't know exactly how it's going to match and come out, and we are working hard on that with everybody. So there's a lot of [Indiscernible] in the air and we don't know how it's going to impact. That's why we are still looking at all the consequences, and they are -- some are positive, some are negative, going one way or another way, we cannot give a real direction. And by the way, I think it's relevant, not giving any direction so far. Let's see if we are back to the office starting May 11 at some point, probably, we can better -- have a better knowledge of what is going to happen. Just for you, we have few sites to be delivered this year. So because you remember that our pipeline has been refueled by the end of last week, and we have delivered a lot of buildings last week -- last year, sorry. So it means that we are less probably under pressure, which would have been our case in the past, if we were, for instance, last year. Nicolas, Samuel, whoever wants to add something?

Yes. Maybe Peter, to come back to your first question. I would say that, first, what you have to keep in mind is that maybe compared with other geographies, it's -- I would say, it's traditional for French tenants not to pay their rent for a quarter in -- before the beginning of the quarter, meaning that when we look at what is the usual payment schedule that we have -- usually we have almost -- our tenants start to pay at the 1st of April for Q2. And we have, let's say, 60% of payments after 10 days and 19% after 20 days. So that's why we said that we are usually at 90% of the payments at this period of the month of the quarter usually. We are a little bit less today. To be honest, of course, we continue to get the payments. Every morning, we get additional payments, of course. And as Méka said, we are planning -- expect for the cancellation of rents, which is a very, very limited amount. We consider that we should get 100% of our rents. What we have also to keep in mind is that couple of corporates are a little bit disorganized by what is happening today. And we are getting some calls from tenants because they are not able or they were not able to pay their bills the way they were using to do it, because there is need to be at the office to make payments and it's quite disorganized. So everyone is not organized as maybe you are and as we are to be able to work from home. So it's not for us a big issue. Of course, that's something that we are monitoring, and we have started to monitor it since day 1 because we just wanted to make sure that there is no issue on this side, but that's -- it's not a worry for us. And as Méka said, the 12% that we have given -- granted to our tenant, it's payment facility for people who have their business closed and which are not getting any turnover. But it's not at all cancellations, so it's one that we should get in the coming months. And of course, for us, it's important to do so to make sure that we are contributing and helping our tenant in this very complicated period and make sure that they will still be here at the end of the crisis. Maybe on your third question on student accommodation, I would say that it's too early to say what will be impact for next year because of course, students are just waiting to see how the schools and university will be open next year and how they will be able to travel. Even if we still have in our portfolio a large part of French students, we are -- it's clearly too early for next year. What you have to keep in mind is that student accommodation is a very small part of our business. So even if it will be impacted and it should be impacted in a way or another, the impact, globally speaking, for Gecina should be quite limited.

We'll now take our next question from Florent Laroche-Joubert from ODDO.

Yes. Florent Joubert from ODDO BHF. So I would have 2 questions. So we see that your reversion level in Q1 for offices is at 22%, that means in line with the reversion potential that you gave us at the end of 2019. What -- how confident are you to capture your reversion potential in the next quarter? So that would be my first question. And my second question will be on residential. So should we expect now any future investment in the short term since the approbation of the general meeting of yesterday?

Yes. Thank you, Florent. Good questions. I start by the multi-res. By the way, it's -- this was a very important cornerstone yesterday, actually. You know that a couple of times in the past, Gecina tried to create this subsidiary, but the intentions were different. I'm glad that this time, we have been able to put together and create a subsidiary at -- so yesterday -- and we have been -- multiple times during the last 3 years. We -- remember, the goal of this creation of this subsidiary was to be capable to develop the multi-res. And again, if we go to our strategy, the fact that we consider that rental sector on multi-res -- on residential make a lot of sense. Today, when you see the lockdown and people working from home, it makes even more sense. So we are -- we have already started to consider some acquisitions in the multi-res sector, which are all over the place. In different places, whether it is brand-new construction or existing buildings. If you are referring to a couple of other portfolio, we look at many things, but we are focusing to redevelop also organically and continue to redevelop the portfolio. Today, we have 20,000 square meters of permits to develop our residential sector and to continue to create new multi-res units. So this is something which is going to continue to shift and also the transformation of couple of office buildings which were not bad, well-located into multi-res. By the way, we are in touch with the government and probably going -- will continue to facilitate. We have already done that by the past and continue to facilitate this capacity, which is a way also to convert some buildings into new capacity of use. As far as the reversion potential is concerned, maybe, Nicolas, you can say word, or Samuel, and I will conclude for you. Go ahead.

Samuel, you want to?

Yes. Yes, if you want, you're right that we have achieved quite a strong uplift in Q1. That's 22%. It's even more if you look at specifically the new lettings and the re-lettings. So it's something that, in a way, clearly validates the performance. The most central areas obviously, because most of this production have been achieved in the heart of the city. So the potential is much higher, obviously, in the city of Paris and in secondary areas. So that's totally in line with what we expected initially. The volume, however, is rather moderate because that's around 20,000, 25,000 square meters of renewed re-lettings connection, which have been achieved in Q1 because most of the new lettings have been signed with the new project on the leasing. That said, you're right that it clearly shows -- it clearly proved what we said so far this past year that there is a potential uplift in our portfolio mostly driven by the most central location. It's far too early to say, obviously, in what extent we can achieve this uplift tomorrow. What we can say, however, is that if there is pressure or not. But if there is pressure occurring in the market on the rental side, it's something which is, in our view, much likely to concern secondary areas where vacancy is already high. Then the best part of Paris, where vacancy today is around 2%. So no idea how we'll be able to grab further uplift for the rest of the year. What we believe is that the performance in each case is very likely to outperform things to more central areas and that maybe some issues will have to be assessed on the most secondary areas. It's really too early to say that something that we'll have maybe a better view in Q2 or in Q3. As of today, what we can say is a relative confidence. So we believe that the situation when signing new lease is much more comfortable for a note when you are located in the best areas of Paris region, the most central parts, than if you are really in secondary locations. So that's something that as of today, we don't have that much element to tell you about. We have relative confidence for everything. Actually we are pretty confident but in relative terms, which means that the absolute impact is difficult for everybody. But we have this relative confidence, which is not only thanks to the pipeline to the -- sorry, to the balance sheet, but also to the location of our portfolio.

Yes. Thank you, Samuel. Just to jump on this and make a final comment on that. Nobody can say that we know where we are heading to and what we are doing. What is important today is to be focused and to continue to be in touch with people and what they did for accompanying our tenants from day 1 in very -- at very early stage. By the way, the investments we made during the course of the 3 -- last 3 years enabled us to just switch from working at the office to working from home, with all the facilities and being capable to do it without -- of course, it's complicated. In our places. We were not -- we do not have the same kind of comfort we are -- we have at the office. But technically, we have been able to do so and to continue to do our jobs and to keep in touch with our tenants. And keep the contact with a couple of prospects, many things have stopped or delayed. But again, as Samuel said, relatively to others, we have still the capacity to face the period and to continue to do our jobs on all the kind of transactions, leasing, saving, arbitrage or whatever. So we are doing that on a very focused and quite busy, by the way, I might say. We are very busy from the beginning of the shutdown.

[Operator Instructions] We'll now take our next question from Celine Huynh from Barclays.

Just 1 question from me. Can you share with us any colors on your discussion with your valuers? Maybe how they see the values holding up in a post-COVID world?

Thank you, Celine. Good questions. Actually, we haven't yet started the compensation with the valuers in our portfolio. Actually, they will start in a couple of weeks from now. But we had a global conversation, as a profession and our federation with the valuers, actually a couple of weeks ago to understand where we are heading to. And of course, you know the valuers, they are very cautious, even more than usual. And of course, most of the time, valuers' fundamentals comes from transactions on the market. And where there are fewer transactions or no transactions, of course, it makes their lives more complicated. What I can tell you, general feeling is and I'm just saying what they mentioned and it's not going to surprise you -- surprises you. What they mentioned is that couple of asset classes, of course, retail, but they have started to suffer before. It's not going to improve. Of course, hotels and hospitality are going to suffer and to be impacted. As far as multi-res and logistics are actually more or less spared from these impacts, and they are consider, as far as the office sector is concerned, they will be much more higher key in terms of quality of location and quality of the tenants and the rating of the tenants, which is going to create much more hierarchy and differentiation between different values. This is what they mentioned. That's why we consider, of course, we're going to be impacted, everybody is impacted, but we consider that we are in a better position compared to other because of the quality of our location and the quality and the rating of our major tenants. I don't know if it answered your question.

We will now take our next question from Amal Aboulkhouatem from Banque Degroof.

I have just 1 small question on the development pipeline preletting rate. You mentioned in February that you were quite confident to reach [ 40% ] soon of a crediting rate. Can you update us on the negotiation ongoing for the building under development, please?

Yes. Thank you for this question. Well, it is delayed. We still are confident. We hope that we'll reach these numbers, maybe not as high as 40%, but close, but still under discussions.

[Operator Instructions] We have no further audio questions for the moment. Thank you.

Okay. If there is no more question, I would like to thank you for your time and attention. And please, be well. And hopefully, we'll come back to you for more conversation. And of course, Nicolas, Samuel and myself are 100% available for any further conversations beyond this telephone call. Have a nice day and enjoy your weekend. Thank you. Bye.

Bye.

Thank you. Bye-bye.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.