Icade (ICAD) Earnings Call Transcript & Summary

Hello, and welcome to the Icade Results as of March 31, 2024 Call. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] Today, we have Nicolas Joly, Chief Executive Officer; and Christelle De Robillard, Chief Financial Officer, as our presenters. I will now hand you over to Nicolas Joly to begin today's conference. Thank you.

Yes. Thank you. Good morning, everyone. This is Nicolas Joly speaking. Well, thank you all for being here today on this call. I'm with Christelle De Robillard, our new Chief Financial Officer. And this morning, we are very pleased with Christelle to present the main figures and events for Icade for the first quarter of 2024. This presentation will, of course, be followed by a Q&A session. So to start, the key takeaways of the first quarter were as follows. Firstly, at our Investor Day on the 19th of February, we announced our new strategic plan for 2024-2028, named ReShapE. For the record, ReShapE is based around 4 priorities: first, continue adapting our office portfolio to new users by leveraging on our portfolio of well-positioned office assets, which account for 86% of our offices; second, accelerate diversification by focusing on 3 asset classes with growing markets and a solid track record for Icade, light industrial, student housing and data centers; third, develop and invest building 2050 city, a mixed-use and sustainable city; fourth, maintain a solid financial policy by adapting the pace and volume of our investments to our financial KPIs. In terms of business activity, real estate markets remained pretty calm over the first quarter, in line with 2023. Against this backdrop, the Property Investment business reported a 3.8% increase in revenue driven especially by the effects of indexation. The Property Development business also reported a 14.4% increase in economic revenue, thanks in particular to the residential backlog built up by the end of 2023. Besides, it should be noted that the Annual General team was held last Friday on the 19th of April, at which the following items were approved. The proposed dividend of EUR 4.84 per share paid in full in cash and the Say on Climate and Say on Biodiversity resolutions, and we will come back to this later in the presentation. Finally, we will confirm the 2024 guidance and give you a brief update on the first ReShapE project announced at the Investor Day. So let's dive into the performance by business line on Slide 7 and start with the Property Investment activity. While the leasing market has got off to a mixed start in line with last year with a take-up of 450,000 square meter in Paris region, the dynamics reflect continued polarization and the need to focus on asset that meets the highest standards in terms of location, services, flexibility and, of course, ESG performance. The investment market, meanwhile, is still at a standstill with only EUR 900 million invested in Paris region, which is minus 64% compared with the same period in 2023. In this environment, the Property Investment teams have signed or renewed 23 leases covering more than 14,000 square meters worth EUR 3.8 million in annualized headline rental income, with a WALB of 6.9 years. Among the 11,000 square meters of new signature, Schneider Electric signed an additional 3,700 square meter in the Edenn building, currently under development, bringing total prelet space in the building to 71%. The main renewal was for an office space of over 2,000 square meter in Rungis. The financial occupancy rate stood at 87.8% as of 30th of March 2024 (sic) [ 31st of March 2024 ], stable compared to the end of December 2023. Q1 2024 confirm the stronger operating momentum of well-positioned office and light industrial assets, whose occupancy rate is above 91%. These 2 asset classes accounted for more than 94% of revenue secured by rental activity in Q1 2024. As for the Property Development market, continuing the trend seen in 2023, it was marked in Q1 2024 by a further slowdown in activity, with orders from individual buyers down by around minus 30% compared with the same period in 2023. Against this backdrop, Icade continued to outperform the market, with orders from individual buyers down by 21% in volume. These orders were supplemented by institutional orders, the proportion of which was higher than at the start of 2023 with a 50% increase in volume, although the number remains relatively small at this stage. In this context, we expect margins to be negatively affected because of 2 main effects: firstly, this higher part of block sales, given that they traditionally have a lower profitability than individual sales; and secondly, the decrease in prices, as highlighted in this slide, through the difference between the volume and value effect. Globally, the total volume of orders fell by a contained 6% in volume and 16% in value. As expected, the backlog is down by 6.5% to EUR 1.7 billion compared with December 2023. In these conditions, as already explained during our full year results, we will remain cautious in our Property Development business over the coming months. Firstly, we continue to target total order rate at 70% before launching new projects. Secondly, we are continuing to review our operations in order to confirm their economic viability, canceling certain operations if necessary and selling some land if needed. This rigorous management of new operations is reflected in a decrease in the volume of started projects of minus 63% and a reduction in the inventory of homes for sale of minus 19% in volume compared with the same period in '23. This quarter, Icade once again demonstrated its ability to be a forerunner committed to climate and biodiversity issues. In the first quarter, Icade set itself apart by having 2 separate resolutions: Say on Climate on the one hand and Say on Biodiversity on the other hand, voted on and approved by the general meeting last Friday, respectively, at 99.3% and 98.7%. We are the first company in France to have 2 separate resolutions voted on, allowing us to commit with our shareholders and present the results of our low-carbon and biodiversity actions in relation to our objectives for 2030. In addition, Icade has confirmed its commitment to the energy efficiency program, which has enabled to reduce the energy consumption of the Property Investment portfolio by a further minus 5% over the winter 2023-'24, following a minus 20% reduction over the previous winter. Lastly, in the first quarter of 2024, Icade was awarded a Cube d'Or for its Hyfive building in La Défense by the French institute for the energy performance of building, with energy savings of more than 36% achieved between October 2021 and December 2023. Hyfive, which offers an excellent level of services and outstanding environmental performance, will become the group's new headquarters from December 2024. I'll now hand over to Christelle for a detailed update on the development of our business revenue.

Thank you, Nicolas. Let's move directly to Slide 12, in which we present the trend in consolidated revenue in Q1 2024. Despite markets remaining under pressure, total IFRS revenue rose from EUR 286.7 million to EUR 322 million, representing an increase of 12.3%. This EUR 322 million comprises mainly EUR 94 million of gross rental income from Property Investment activities and EUR 223 million of consolidated revenue from Property Development business. Moving now to Slide 13. Gross rental income from Property Investment amounted to EUR 93.7 million for the first quarter 2024, up 3.8% compared with the same period in 2023. On a like-for-like basis, gross rental income rose by 1.7%, driven by indexation represented 5.1%. As highlighted in this slide, increase in gross rental income on a like-for-like basis was more marked in the well-positioned office and light industrial segments at 5.1% and 7.1%, respectively, illustrating the relevance of our portfolio segmentation. Let's jump directly to next slide presenting the results of the Property Development division. You can see here the economic revenues, which are made up of consolidated revenue plus the share of revenue from jointly controlled entities. Economic revenue from Property Development rose by 14.4% from EUR 227 million to EUR 259 million. This growth was driven by the sale of EUR 25 million of the residential backlog built up in 2023 and EUR 8 million of land sales. This increase in land sale is a good illustration of the adjustment of our portfolio that Nicolas was just mentioning earlier. It should also be noted that the first quarter of 2023 used as a benchmark was marked by a particularly low volume of revenue. Indeed, as you can see in this slide, sales accounted for just 17.5% of total annual sales compared with a historical level over 20% in 2021 and '22. Let's finally have a look at our financial structure on Slide 15. As you can see, Icade has a strong balance sheet, which was further strengthened following the completion of the first stage of the disposal of the Healthcare division in July 2023, generating EUR 1.45 billion of proceeds. In particular, Icade benefits from a very strong liquidity position at EUR 2.9 billion at the end of 2023, including cash and undrawn credit lines. So we do not have any short-term refinancing risk, bearing in mind that the next bond maturities are in November 2025 for EUR 500 million and in 2026 for EUR 750 million out of EUR 1.1 billion. I'll give the floor back to Nicolas to conclude on the outlook for 2024.

Thank you, Christelle. Well, to conclude, I wanted to share with you, firstly, the progress of some of the projects we presented at the Investor Day as part of ReShapE. While the market remains calm, our teams are fully mobilized to implement the new plan. So this slide illustrates the progress recently made on every operational pillar of ReShapE. On the first pillar, adapt office portfolio to new demands, we focused there on the Champs-Elysées project, which is composed of prime offices and retail. This project is a very good illustration of our capacity to provide adapted services to our customers. This building will offer, indeed, best ESG labels with aim of reducing energy consumption, access to outdoor spaces through [ our ] rooftop dedicated to tenants and large bicycle storage areas. This project is progressing as planned, with work scheduled to start in 2025. In the meantime, we are creating value through short-term leases with EUR 3 million revenues over an 18 months period. On the second pillar, accelerate diversification, while the Ottawa project is a good example of developments on light industrial segment. Here, also project is progressing as planned, with work scheduled to start in 2025. Another example is the project called City Park in Levallois, a mixed-use program emerging from an obsolete and monolithic tertiary building that will be converted into student housing. Since our Investor Day, we managed to obtain building permits in March 2024. Finally, on the third pillar, develop and invest in 2050 city, I'd like to mention the project Time consisting of housing development in Saint-Denis on one of the group's historic land reserves. This project also reached a milestone, with building permission filed in March and expected to be granted later this year. With regard to guidance, based on the activity at the end of March 2024, Icade confirms that it expects net current cash flow from the group's strategic operation to be between EUR 2.75 and EUR 2.90 per share at the end of 2024. In addition, the residual nonconsolidated interest in the Healthcare business should generate additional net current cash flow of around EUR 0.80 per share based on the current shareholder base. Regarding the next milestones, I confirm the payment of the remaining part of the 2023 dividend on the 4th of July 2024, after ex-dividend on the 2nd of July, and of course, the presentation of Icade's half year results on the 22nd of July. Thank you very much for your attention, and we shall now open the floor to the Q&A session.

[Operator Instructions] We'll now take our first question from Florent Laroche-Joubert with ODDO BHF.

I would ask 2 questions, if I may. So my first question would be on the leasing activity in offices, how your visibility has evolved during the quarter, both on the well-positioned and to-be-repositioned offices with regards to the leases that you have signed in Q1, and so leases that you're going to still need to renew in 2024. And maybe my second question would be, how confident are you now to meet the requirement of S&P in terms of net debt plus equity of below 40%?

Okay. Thank you very much, Florent. Well, as for the first question on the leasing activity, well, I'd say that there's no major changes regarding the expiry schedule in 2024 from what we've shared with you in February. We tried, at this time 2 months ago, to give you as much visibility as we could. So I would say that out of the EUR 78 million of rents concerned by potential expiry this year, we are still expecting roughly EUR 40 million of certain departures that come mostly from the 1 asset that needs to be repositioned and from the exception of the Pulse building on the well-positioned asset. The Pulse building are hosting the Olympic Committee, as you know, and accounting for EUR 10 million out of those EUR 40 million. So globally, there's no major changes from what we've seen during the first quarter, seeing also that a large part of those rents concerned the Q4. As for S&P, maybe, Christelle, you want to take this one?

Yes. So regarding your question on S&P, so maybe it's worth reminding that there was a recent disclosure S&P in which you also that there is now a negative outlook. This negative outlook reflects both difficult market condition in the Property Development and office segment. Over the next 12 months, by the way, S&P has already taken into account the additional slight deterioration in the group ratio. But at the same time, as you was mentioning, there was quite good news since S&P revised the target of debt-to-capital ratio below 40%, whereas it used to be towards 35% previously, factoring actually the positive influence of our main shareholder, Caisse des Dépôts et Consignations. So clearly, yes, we are confident in our capacity to reach this target. And so far, as we mentioned in ReShapE road map, we have a pillar per se to keep a rigorous and prudent financial policy. So this slight upwards of the ratio will help us to be in line with these guidelines.

And it's also worth noting, Florent, that there was absolutely no finance impact in the short term because for us, there is no need of refinancing. As you know, the next bond maturity is at the end of 2025. And if you look at the bond market, there's already a premium if you look at Icade in comparison with the other BBB+-rated companies.

And we'll now move on to our next question from Veronique Meertens with Kempen.

Also 2 from my side. I was wondering if there's any update on disposals or any discussions ongoing there. Obviously, still the investment market in Paris seems to be very muted, but happy to also hear your take on the current situation.

Okay. Well, as you say, Veronique, while the investment market is definitely at a standstill, I think we have never seen a first quarter like this one since 2010 maybe. So as for what we are concerned, if we talk about the Healthcare disposal, there's no major changes from what we've shared 2 months ago. Once again, there are some interest from third-party investors, but we want to stick to our policy, saying that there's absolutely no rush for us to sell some assets to opportunistic buyers with large discounts definitely. But if we take a look at the investment market, indeed, during the past months, there were only a few transactions, if not outside of Paris, as we already shared in the presentation. So pretty calm indeed.

All right. And then we're obviously looking towards the half year revaluations being almost May. Can you maybe shed some light on current discussions? Is there still a significant haircut to come in your view?

Yes. Well, about that, maybe firstly, as a reminder, as you know, over the past 12 months, the adjustment was minus 17.5% for us. So that leads from the peak in June 2022 from a global adjustment of minus 23% over the past 18 months. So the global yield of the portfolio, as you know today, is 7.5% and 6.7% on the well-positioned asset. So definitely a large part of the risk premium has been restored. We will be getting the first feedback from the appraisers in the coming weeks regarding the valuation that has to be made in June. So given the fact that we just mentioned that the investment market is totally frozen at this stage, we remain cautious because of the fact there was only a few, if none, transactions. So maybe there's room for further value adjustment. But definitely, in our view, most of it is behind us now.

Okay. That's very clear. And maybe one last one from my side. Looking at the occupancy level of the light industrial, it did come down a bit. Is that more of a one-off? Or I guess, obviously, the like-for-like was on the positive side. Curious if you expect to restore that towards the end of the year.

Yes. Well, I'd say that on the light industrial, I mean, on the first quarter, it's not necessarily representative. As you know, it's -- we have already 11% of the portfolio compared -- composed of light industrial asset, but it's still a small perimeter. So it's one small effect, which can be structural but not necessarily meaning that there's an issue on the light industrial part.

[Operator Instructions] And we will now move on to our next question from Celine Huynh with Barclays.

Nicolas, I got 3 questions. So I'm going to say them all at the same time. On the first one, Icade Promotion, can you explain how much inventory you are currently holding in units? And by that, I mean units finished and unsold and how many units you're planning to build and the presale for these. My second question will be for Christelle. Now that you've joined the company, you've joined before -- after the plan was announced. I would love to hear if you think it is sensible and whether you are planning to make any changes on it. And the third question, a more broad one, but your shares have strongly derated post the announcement of the strategic plan. So I'd be interested to hear what you think did not go into the market in your view.

Okay. Well, maybe I'll take your last question from a start, Celine. Well, I think regarding the market, there are 3 things to have in mind. First one is about the real estate sector. Second one is about subsectors, I would say. And the third one is about Icade catalysts and strategic plan. Well, the first point about the real estate market is definitely, the real estate market globally is struggling. Everyone is waiting for the major catalyst and the start -- the interest rates start decreasing. Hopefully, it will come in the following months. If you take the second point about subsectors inside the real estate sector, some subsectors are struggling more than others. And definitely, offices is struggling and also Property Development. So that's not an easy one for us. And on the third point, as for Icade, as I say in the short term, I think we are penalized by our operational profile, as I just said. And about the strategic plan, well, globally, we got good feedback on the strategic plan, saying that it's consistent with who we are, what we intend to do, but it's definitely a mid/long-term plan. So as everyone is focusing on the short term, everyone is waiting for catalysts before diving in. The main conclusion is that people think we are cheap at the current stock level. That's the feedback we've got. But people are waiting for catalysts. Catalysts being macro catalysts, as I just said about interest rate, but also catalysts at the scale of Icade about achieving concrete step in the disposal and the proceeds and also achieving concrete operational steps in the main pillars of ReShapE. And as you saw, all the teams are now committed to deliver those concrete steps, as we just shared during the presentation. So I think that for the -- your question about our view on the market, but also happy to have your feedbacks when we meet next time. And as for the first question about Icade Promotion, so as you see, we are quite cautious on the new development we have. We still have a strong backlog that will help deliver the activity in 2024. But the main question is more about the pipeline in 2025. As you saw, we've postponed, once again, some works launches in order to be more and more cautious. So -- and we think that indeed, yes, 2023 was quite a year. 2024 will still remain full of uncertainty. And we expect some pressure, of course, on both the revenues and the margins. And maybe the last one was for Christelle.

Thank you for this personal question. So indeed, as you all know, I took up my position at the beginning of March, almost 6 weeks ago now. But luckily enough, I had the opportunity to exchange beforehand with Nicolas on the strategy that was disclosed at the Investor Day, at which I have the opportunity to take part actually. Since my arrival, I have been pleased to note many, many things in the company but, in particular, committed and mobilized team in a challenging short-term environment; a real culture of innovation and the longstanding know-how in terms of ESG; and last but not least, a customer-oriented approach with a strong willingness to position customer at the heart of the business, with aim to offering the best experience possible. So clearly, to answer directly your question, no, I don't intend to change the strategy. And I'm fully in line with the strategy that we presented in ReShapE. My real priorities will be twofold: first one, to position the financial direction as a business partner so as to bring full financial support to our 2 divisions to achieve this ambition and objective that we set out in this strategic plan; and secondly, of course, at the same time, my role will be to ensure to maintain a solid balance sheet and the present financial policy, which is, as you know, the fourth pillar of ReShapE.

And we'll now move on to our next question from Adam Shapton with Green Street.

Just a quick one on the Property Development division. So unusually high contribution from land sales, EUR 9.5 million. Is that -- do we see that as a one-off? Or are we likely to see more significant land sales supporting the revenue line throughout 2024?

Yes. Well, about that, it definitely illustrates that we want to be opportunist. In order to protect the balance sheet, we pay a strong attention to our working capital. This EUR 8 million land sales were mainly supported by 1 sale in Bondy of a historic land sale. So it illustrate the fact that we are keeping on being opportunistic, and we want to have a strong focus, as Christelle said, on our balance sheet and protecting the working capital. So that said -- yes, we've been opportunistic. But we keep on reviewing our options.

Just to be clear, that flows into the net current cash flow, am I right, as income effectively?

Yes.

So I'm just sort of wondering on the guidance on net current cash flow, are you able to say what's assumed in terms of land sales and we see sort of EUR 8 million a quarter for the rest of the year or not?

It's been already included. I mean it does not impact the view we have on the guidance.

And we will now take our next question from Marc Mozzi with Bank of America.

I have 4 questions, which are relatively straightforward. The number one is, what would be the like-for-like rental growth if we were looking at the net rental income, not the gross rental income?

Well, I don't think that's a KPI people are used to share, Marc, on this one. What's your question behind that, to be straightforward?

Is it above or below the plus 1.7% like-for-like or plus 3.8% overall?

We haven't made the exercise so far. We...

Yes, we'll check that. What's your question beneath that, Marc?

Well, gross, it's one line, and net, it's another line, which is after some costs. And I just wanted to know if the cost has increased or not. And therefore, if the plus 3.8%, it's plus 3.8% at the net level or if it's above, below?

No. There is no significant major change in the cost. And we also shared the information about the cost. So about the cost, what could be -- could impact in the months and years to come might be maybe the rise in vacancy on the to-be-repositioned asset. But apart from that, if the occupancy ratio keeps steady, there are no major impact to be expected. So we still think that like-for-like on the gross rent is relevant as a KPI, but we'll look closely to that, if you want.

And clearly, this will be part of our H1 results when we disclose the full results. But at the end of March 2024, we only disclose revenue at this stage. So that's why we haven't had a look on that.

My second question is about what is the leasing spread you've been able to achieve potentially for well-positioned, light industrial and other for -- in Q1 leasing spreads, so meaning the difference between new rent compared to passing rent.

Yes. Well, as for that, it's pretty in line with what we've shared during the Investor Day. I mean when we are relating the asset, we usually stick to the ERVs. I think in the Q1, I have in mind 1 or 2 deals that we were slightly even above the ERV. So globally, we are at the ERVs. And by doing so, we are crystallizing, lease by lease, the negative potential reversion that we've shared globally during the strategic plan presentation, which is, for the record, on the well-positioned assets, on average, a global minus 8.7%.

That's for the well-positioned offices?

Yes, yes, exactly because reversion does not make sense for the one asset that needs to be repositioned. As we've already said, I mean, those won't be offices anymore in the mid/long term. So it does not make sense to compare the rent. And for those ones, we are fighting for every euro basically, protecting the cash flow basis as long as we come with the repositioning scenario and secure the plan by obtaining some building permits with the local authorities. So in our view, reversionary potential only makes sense for the one asset that remain in their own asset class.

Okay. So my third question is about the repositioned -- to-be-repositioned offices. Is that essentially assets moving from being let to being empty? Or there is an element of reletting as well into the market, [ this ] EUR 2.7 million?

No, no. On those assets, it's -- the strategic view we have is turning those assets from offices to anything but offices. And as you know, this can be student housing like Levallois. This can be residential like the Renault headquarters in the Plessis-Robinson. That can be hotel like Helsinki, Iéna. And in the meantime, that does not necessarily mean that those assets will remain empty. On the contrary, we are having some really pragmatic discussion with the tenant in place in order to secure as much cash flow as possible. During the interim period, we need to obtain the local -- the building permit from the local authorities. And basically, I have in mind that as we've shared 2 months ago, the average WALB is roughly 2 years on those assets accounting for EUR 53 million per year.

Okay. And my final question is around your development business. What sort of embedded EBIT or EBITDA margin do you think you have based on Q1 numbers?

Well, of course, in Q1, we don't share those figures. We'll give you more details, of course, during the half year results. What I would say that, as you saw, the Q1 is historically quite a low part of the revenues compared to the year. What we say about that is that we are cautious about the Property Development business this year after the year 2023, even if the revenues are backed mostly by the strong backlog we have from 2023. We want to remain cautious, expecting, as I said, some pressures on the revenues, the margin and, of course, the cash flows.

And put it differently, is your margin still positive? Or it has moved into negative territory? Because backlog is one thing, but the margin is [indiscernible] on the remaining 5%, 10% of the units [ for ] selling?

Of course, as I said, there are some pressure on the margin due to the fact that with block sales -- with the part of block sales increasing, the part of sales for which the margin is lower is increasing. And there is also the decrease of price, as you saw in the presentation. So that's the reason why we expect pressure on the margin. And be happy to share some more details in the half year results.

There are no further questions in queue. I will now hand it back to Nicolas for closing remarks.

Okay. Well, thank you, everyone. We were happy to start the week with you. Looking forward to seeing you in the next weeks or months, continue sharing. Until then, be sure that all the team are focusing on implementing ReShapE at every level of the company. So looking forward to seeing you again. Have a nice day. Have a nice week. Bye-bye.

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