Klépierre SA (LI) Earnings Call Transcript & Summary

Hello, and welcome to the Klépierre 2021 Full Year Earnings Presentation. My name is Josh, and I will be your coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Jean-March Jestin, CEO; and Jean-Michel Gault, CFO, to begin today's conference. Thank you.

Good morning, everyone, and thank you for joining us this morning. We had a very busy and productive Q4, which ended a very successful year. 2021 has been challenging with most European governments implementing multiple trading restrictions to contain the outbreak of COVID-19. Our retailer stores have been closed for 2.5 months on average. I am proud of our resilience and the rebound we already noticed, notably supported by our unique operational and financial fundamentals. Before going through the main highlights of the year, I would like to pay a special tribute to Klépierre's team, all my colleagues, for their tremendous commitment at every stage of this crisis to serve our stakeholders the best they could and to prepare our platform for sustainable resumption. In 2021, Klépierre operation proved to be extremely resilient as we managed to generate EUR 2.18 per share in net current cash flow, outperforming our last guidance by 9%; collect at least 87% of 2021 range, despite 2.5 months of closure and collect more than 93.5% from July to December; posted 6.9% like-for-like increase in net rental income; reduce our net debt by more than EUR 1 billion, leading to a 38.7% loan-to-value ratio, down 270 basis points compared to 2020 year-end; and 8.8x net debt-to-EBITDA; and bring up letting operations back to pre-COVID levels with a signature of roughly 1,600 leases generating a positive reversion while occupancy increased by 50 basis points over the last 6 months. Beyond this remarkable financial and operational results, our teams have also delivered exceptional nonfinancial results, thanks to our Act for Good CSR strategy. We further reduced the energy consumption in our malls by 45% since 2013 and cut our carbon emission by an impressive 84% since the same date. 100% of our malls contributed to local employment through tailor-made initiative. And last but not least, we actively took part to the fight against COVID-19, contributing to vaccinate more than 1 million people in our malls. These actions made us gain worldwide recognition. GRESB ranked Klépierre first in the Global Retail Listed, Europe Retail Listed and Europe Listed categories for the second year in a row. CDP, once again, included us in the A list of the most advanced companies fighting climate change at global level. Klépierre was also selected by Euronext in the CAC 40 ESG Index launched in March 2021. And lastly, MSCI upgraded its nonfinancial rating from AA to AAA, the highest score achievable, demonstrating the group's ambition to make shopping centers more efficient and even more environmentally responsible. These scores are a testament to our Act for Good strategy, which addresses societal, social and environmental challenges. This being said, the second half of 2021 proved again that when our malls reopen, our retailers experienced a rapid business resumption. Over the last 7 months of the year when stores were reopened, retailer sales reached 95% of the '19 levels. Footfall also benefited from the business restart, albeit at a slower pace, coming out at 80% of '19 levels on average, still hindered by remaining restrictions in some countries. Overall, our malls posted robust performances, especially in Scandinavia, with retailer sales reaching 98% of '19 levels over the last 7 months of the year. France, we said at 95%, and Italy and Central Europe at 94% and 93%, respectively. Even in Iberia where our malls are more relying on tourism, sales reached 87% of the '19 level. By segment, Household Equipment did best and exceeded pre-COVID levels, up 3% compared to June to December '19, followed by Culture, Gifts & Leisure, which posted a sustained recovery. Fashion and Health & Beauty also recorded a strong recovery at 95% of '19 levels. And despite continuing trading restriction, Food & Beverage and restaurants proved resilient at 84% of '19 levels. Our leasing activity has been intense as the demand from pan-European and national brands for our assets has been remarkably strong. We have signed 1,570 leases in 2021, 65% above 2020 volume and matching '19 levels. Reversion is 0.9% above passing rent. At the same time, occupancy improved by 50 basis points compared to June 2021 and reaching 94.7%. Over the period, we widened the offering in our malls, especially with key accounts in different segments, but also with innovative players. Among others, deals were signed within Inditex, Calzedonia, Sephora, Rituals and Tommy Hilfiger. In the meantime, sports retailers continue to expand with the opening of stores with [ Foot Corner ], Adidas, Snipes or Sidestep. Klépierre also seized opportunity in best-in-class innovative retailers like Samsung, Action or the digital-native optician, Mister Spex. Another word on leasing. We have explored a new approach through an innovative partnership model with retailers in which we share investment through joint ventures. We have signed partnership with NOUS anti-gaspi, Lobsta, Von Dutch, Pataugas and Gémo Kids. Our strategy aims at enabling us to welcome new players to boost the appeal and competitive edge of our shopping centers. Let me now walk you through rent collection. We have closed our accounts with a target to collect at least 86.7% of our rents and charges. As of February 7, we had already collected 85.7%. Hence, only EUR 13 million are yet to be collected to reach our target, and this will be achieved before the end of this month. Based on our target, the 13.3% of noncollected rents in 2021 breaks down as follow: 7.5% of rent abatement, 3% of provision for bankrupt and insolvent tenants and 2.8% of provision for credit losses booked, pending the final outcome of negotiations. If we benchmark 2021 against 2020, we see that in terms of rent collection, despite a longer closure period, rent abatement in 2021 represent 0.9 months for 2.5 months of closure against 1.2 months of abatement in 2020 for 2.1 months of closure. In 2020, the ultimate bad debt provision for insolvent tenants ended to a low 3.3%. Let me now talk about balance sheet. 2021 has been an important year in terms of disposals as we managed to close transactions for a total amount of EUR 874 million. Deals were made at an average yield of 5.4%, in line with the preserves value in Germany, Scandinavia, France and Central Europe. 2021 has also been characterized by a stabilization in the value of the shopping center portfolio, which is up by 0.6% on a like-for-like basis over the last 6 months. This is the result of changes in a presale assumption, which factor in a 1.3% positive cash flow effect, partly offset by a 0.7% negative market effect. These valuations went to an average EPRA net initial lead of 5.2% for the shopping center portfolio, down 10 basis point compared to 2020 year-end. Regarding investment now. In 2021, Klépierre continued to carefully monitor its capital expenditure and to focus on its main committed projects. Overall, EUR 101 million were allocated to the pipeline, mainly relating to Gran Reno in Bologna and Grand'Place in Grenoble. The 17,000-square meter extension of Gran Reno is due for completion in May 2022. As of today, preleasing is progressing very well, with 77% of the extension already let and 22% in advanced negotiation. Exciting new brands such as Nike, Primark, Tommy Hilfiger, H&M and the Inditex banners will be added to the mix, bringing this leading mall to the next level. Everything is on track to reach our targeted return on investment of 6.1%. In Grenoble, Grand'Place refurbishment is soon to be delivered while the extension is scheduled on September 2023 to open. Pre-leasing is already high, reaching 82% with 56% of leases signed and 27% in the grid form. This complete remodeling will be the first Primark store in the region, 15 new boutiques and 10 restaurants with indoor and outdoor terraces, offering customer a great dining experience. We are confident in our ability to reach 7.9% of hidden cost for this project. Let's have a look on leverage now. Thanks to our strong cash flow generation of EUR 720 million and close to EUR 850 million of disposals, we sizably reduced our net debt by more than EUR 1 billion, down to EUR 8 billion. Besides, as you can see, these proceeds covered our distribution to shareholders and our capital expenditure. I think that these elements clearly showcase how solid our financial situation is as is our ability to preserve long-term performance while serving the interest of our stakeholders. Here are a few numbers to illustrate the solidity of our balance sheet. The loan-to-value ratio reached 38.7% below 2020 levels and was even down 390 basis points compared to June 2021. Similarly, net debt-to-EBITDA decreased to 8.8x. As of December 31, 2021, EPRA NTA per share was stable compared to December last year and amounted to EUR 31.2. And those sound results led S&P to confirm Klépierre current rating BBB+ outlook stable. Relying on these positive financial and operational figures, the Supervisory Board will recommend that the shareholders at the next Annual General Meeting on April 26 approve a distribution of EUR 1.7 per share. This represents a payout of 78% and a 70% increase compared to 2020. Lastly, in 2022, the group expects to generate a net current cash flow per share of 2.3 -- between EUR 2.3 and EUR 2.35. This guidance assumes that business recovery will not be impacted in 2022 by further COVID-related disruption of our clients' operations. It represents a 9.5% to 11.9% growth compared to the EUR 2.1 net current cash flow per share generated in 2021 after having restated the disposal impact. I will end my remark on this note and open the floor to question. Thank you for your attention.

[Operator Instructions] Our first question comes from the line of Rob Virdee from Green Street. Okay. So it sounds like Rob Virdee is no longer available. [Operator Instructions] Our first question comes from the line of Florent Laroche-Joubert from ODDO BHF.

Yes. I would have maybe 3 questions, if I may. So first question, so would it be possible to give us maybe more color on the rationale for financial strategy now? So because before COVID crisis, your financial strategy was characterized by a balance between disposals reduction of net debt and share buybacks. So what is your intention for the next years? My second question, so would it be possible maybe to have a first estimate of the collection rate in the Q1 2022? And my third question is more on 2023. So we can see that 2022 will be still a normalization year. And I can see that for 2023, the consensus expect maybe a natural recurring cash flow per share at EUR 2.50. So what do you think about this estimate? Do you think this is something that is watchable for Klépierre?

So thank you, Florent, for your 3 question. I think for the financial strategy, I think we'll keep following the portfolio strategy, which is to constantly refocus our portfolio to the large asset in the larger city of Europe. So we are disposing every year noncore assets. And this has historically been rebalanced by either pipeline investment or acquisition or share buyback. So we will probably continue to have the same financial discipline of keeping the leverage at the lowest level for us. And I'm sure that the disposal we have done give us plenty room of maneuver for the years to come. For Q1 2022, rent collection is starting faster than last year. So as of today, we are around 75%. So a bit lagging compared to what we were using in 2019, but far quicker than in 2020 and 2021. So 75%, that's a good start. And we expect to reach high levels, around 93%, pretty soon.

Yes. It's even higher in January where we are at 83% already. February is a little bit [ low ]....

Yes. I was talking about the whole quarter, so -- but January is already very high. For the consensus of 2023, we are here today to provide a guidance for 2022. I think as you have indicated, 2022 is a year of business resumption and is probably as the road to what was the cash flow before COVID. So we are confident in the trajectory, and I'm sure that 2023 will be also a good year after 2022.

Our next question comes from the line of [ Alvaro Soriano ] from BNP Paribas.

Just a quick one on one of the key topics, indexation, and how you can pass inflation into your tenants. It seems that for some countries and some retailers, it is going to be difficult to pass in full the inflation, the increase in CPI. I'm referring to Spain and France and also your key tenants. So what sort of conversations are you currently having with those groups of stakeholders, of retailers, in terms of inflation?

So all our leases are -- thank you for the question, [ Alvaro ]. So the -- all our leases are indexed to CPI or related CPI indexes. So contractually, index is due, and there have been charge to tenants at the beginning of 2022. It's fair also to mention that in some countries, indexation is at a very high level. So Spain is around 5.6%. So probably we'll have a conversation with our retailers. I'm sure we will find the good compromise. But contractually, indexes are due and have been charged to tenants. So globally, for 2022, we have an average in our forecast, we have an average 1.9% -- between 1.9% and 2% indexation in our numbers for the whole Europe.

Our next question comes from the line of Julian Livingston-Booth from RBC.

Yes. My question was exactly the same, really about the indexation. Maybe just a follow-up. If you're only going to get around 2% from indexation, are you likely to get other benefits from your tenants instead? And linked to that, I think your occupancy cost ratio is still only 12 to 13x across your portfolio. So you don't feel the tenants could pay that higher indexation?

Thank you for the question. So I think the -- let's make it simple. The indexation is contractually due. And the indexation will be, in most of the circumstances, paid by the tenants according to the contract. So -- and I will put an end to that discussion about indexation. So -- and I just -- we just indicated that in our numbers, we have taken the view that indexation for the whole year will be around 2%. It may be higher, we will see. But we have taken that assumption to. So once more, indexation is due, we will have probably some conversation in Spain with some of the retailers, but I'm confident this will be beneficial to us.

Our next question comes from the line of Markus Kulessa from Bank of America.

Coming by just on the question on indexation from [ Alvaro ]. What was the indexation impact in 2021? And maybe the like-for-like '21 if you exclude any COVID effect? So just indexation, plus your relettings and change in [ currency ]?

Thank you for the question, but I'm not going to answer to that question. I think the like-for-like NRI growth is the NRI 2021 versus NRI 2020. So 2020 was impacted by COVID. 2021 was impacted by COVID. So the like-for-like between 2 impacted years of COVID is 6.9%. And I can't give more information about this. For 2021...

Was less than 1%. Yes.

[indiscernible]...

[ 0.5%.] Yes.

Okay, less than 1%. Okay. And my second question is on your guidance for the net cash flow per share. Maybe you can walk me through. If I look at your 2021 numbers, the implied NCCF for H1 is around EUR 1.5 per share. So if I'm just taking a simple calculation, I multiply by 2. I take out your disposal impact you guide, I come around to EUR 2.8 NCCF versus your guidance of EUR 2.3 to EUR 2.35. Can you maybe guide me how you came to your EUR 2.3?

It's -- I think it's rather simple. I don't recommend you take H2 and multiply it by 2. So the second half has been better than the first half because we have better collected rents on H2 than in H1. So I think the guidance for 2022 is based on the net current cash flow of 2022, where we have excluded some COVID impact plus organic growth and then it reached EUR 2.30 to EUR 2.35. So I recommend that you don't take our second half and multiply it by 2.

Okay. So on why it is more EUR 2.3? And this has no COVID effect anymore? No more provisions of bad debt?

No, we have taken the view that we will have no severe restriction or disruption due to post COVID or COVID-related events. In our guidance, we have taken certain assumptions for our rent collections and for rent abatements, and they are included into the guidance.

Yes. We are not exactly back to the same high level we had before COVID in term of rent collection, vacancy and so on. So 2022 is not exactly the back-to-normal year.

Okay. What is a back-to-normal year with maybe the move in rents we have been in between. So if you didn't -- if you had 100% rent collection, would we come back to its pre-COVID level of EUR 2.8?

Well...

No. Sorry, if we take it by the other side and we look at 2019 which was the last undisturbed period where, you remember, cash flow was at EUR 2.82. In between, we have disposed for about EUR 0.22 in term of cash flows of disposal, cash flow provision. So we are at EUR 2.60. This is a fair comparison we should do with what we are saying today, EUR 2.30, EUR 2.35. And this is clearly the next target for us to go back at least to this EUR 2.60.

Okay. And EUR 2.60, excluding all the disposals impact, the EUR 0.08? Okay. Very clear.

Our next question comes from the line of Jaap Kuin from Kempen.

I guess the remaining question on footfall and retailer sales, and then I think one final question on rent reversion. So on footfall and sales, because we're still at -- especially if you compare it to maybe other companies that have reported in the 80s for footfall and in the 90s for retailer sales, could you maybe shed some light on the December and January numbers for those? And your expectations for, let's say, the first half of [ '21 ]?

Yes. I think when we benchmark Klépierre with the rest of the industry, we can notice that a bit everywhere in Europe, footfall is around 80% of '19 levels, while sales are closer to 95%, 96% of '19 level. So there is a lot of narrative about it. I think the number of visitor is less. We are still in a health environment which is not fully secured. And -- but the conversion per visit is higher. So I think it's -- they are solid numbers. We will see our footfall develop in 2022 and 2023 post COVID and we will report on that. For sales, December has been quite good everywhere, so around 93% compared to '19 levels if on top of my mind. January has been less good, okay? Sales has been quite deceptive. So I think we have January sales around 85% of '19 levels. We expect February to be better. And the feedback we have from retailers is February is better than January.

Right. That helps. And if you look at the reversion number you posted because I think at Q3, you still had a negative number for reversion. So it looks like you signed quite a bit of positive delta contracts in Q4. Maybe if there are any outliers worth mentioning, that would be great. And what's your expectation for reversion this year?

Well, I think the first important takeaway is that in that difficult environment, we have been able to sign a great number of leases. And it's fair to say that at 0% or, say, 1% reversion, which I think it's a fantastic achievement. So by quarter, it's difficult to say and to draw conclusions if a quarter has been less positive than the other. So on the whole year, it's 1% up. And I think it's a remarkable achievement. For next year, we expect 2 important things. First one is that tenant sales will be comparable to what we have experienced since reopening of the malls. And we also are very confident that the demand for our malls is strong and that we will be able to sign leases probably the same volume that we signed this year. And when it comes to reversion, we have taken some view in our forecast, and we'll keep it for us. But we think we can still expect to have a positive reversion next year.

Our question comes from the webcast.

Do you think you will pay a dividend in 2023 comparable to the one paid in 2019? And if not, when do you think it will be the case?

Well, I think we are paying a dividend for 2021. This is -- we are back to pay out very close to what we were used in the past. So I think the Klépierre strategy has always been to pay a cash dividend to shareholders, and we have been among the very few able to pay a dividend and a growing dividend in 2 last years. So for 2023, we'll see when it comes.

As you have seen, we are with about 80% payout ratio. So you know the guidance. You can probably build an assumption from there.

So our next question comes from the line of Stéphane Afonso from Invest Securities.

I have one question on my side regarding the dividend. So some of your peers gave a midterm guidance on their dividend, especially [ Camila ] with dividend at least stable for the next 5 years. And I think that part of the increase in the stock price is linked to that. So my question is why didn't you adopt the same communication strategy?

That's a good question. I think we -- I think in the past history in our industry, those who have provided midterm guidance has never been able to deliver that, okay? So we give a guidance for next year. We pay a dividend to our shareholders in cash. And I think it's -- and we have a loan to value which is decreasing. We control the balance sheet. So we -- this is probably the best evidence that we have the capacity to pay regular dividend in cash to our shareholders. And we will see 2023 when it comes. But the track record of Klépierre speaks for itself.

Our next question comes from the line of Pierre Clouard from Kepler.

Yes. Just coming back on your capital allocation. You always had the strategy of keeping a level of debt stable, around EUR 9 billion. So you are not now at EUR 8 billion. So can we expect an increase of the debt through the acquisition of share buybacks? On the other side, are you done with the disposals? Or can we bet on, I don't know, EUR 0.5 billion of new disposals in 2022?

I think the -- once more, the strategy is very clear, we continue step-by-step to dispose of noncore assets when we think that we cannot grow the cash flow any longer. So we do that, as you can see, almost every year. I have to confess that 2021 has been an exceptional year in a very difficult investment market environment. And when we started the year, we didn't expect it to be that successful. So for 2022, we'll continue pruning the portfolio. When it comes to the level of disposal we can achieve, I will be, like always, we will tell when it comes. We never gave any guidance about disposal. So we stick to what we -- I used to say to the financial market. There's another question, no? I don't know.

No, that's clear.

So over to the webcast for another written question.

Yes. The question is probably for me. Can you please elaborate on financing conditions? Well, as you know, in Europe, like in the U.S., long-term interest rates have increased quite sharply for a different reason, inflation, but also, probably the Ukrainian story also that has put a pressure on financial market. The move is about 50 bps on -- 40, 50 bps on long-term duration, 7, 10-year swap. Well, the Euribor 3 months, it's still quite stable, that is to say at minus 0.5%. When it comes to Klépierre, we are hedged or caps at close to 90% right now, 89% actually. So we are pretty well covered. So we don't expect any material change due to this. In term of refinancing, we don't have a refinancing this year. It's less than EUR 400 million coming to redemption. And it's about EUR 900 million next year. But we have EUR 2.8 billion of liquidity position. So we are not in the rush to go to the market now. Well, we will see -- and of course, we monitor the situation, but we don't see the cost of the debt being significantly impacted. I mean a couple of bps maybe, but probably not very much than this in the next coming probably 2 years. [ In terms ] of hedging, we -- it was the right level of hedging we have.

[Operator Instructions] Our next question comes from the line of Rob Virdee from Green Street.

Can you talk a little bit more about the capital allocation strategy? Really, what I want to say is how do you propose to close the gap between your share price and your NTA? And do you...

We don't hear you very well. I think you need to fix that. Otherwise, we don't answer your -- we can't answer your question.

The NTA. The gap between NTA and the share price. We can manage to fill this gap.

No, I think this is a question that you probably have to do -- you need to do your own work for that. I think the context in which we are releasing our earnings, it's an -- I think we have a very solid earnings. We have very solid earnings. The business is back. Sales are high compared to '19 levels after almost 6 months of closing in Europe. Footfall is strong. Rent collection is very high. Demand for malls are -- is fantastic. We are signing leases with a 1% reversion in the most difficult period of our time. We have been able to dispose assets at book value at a 5.4% net initial yield. We have a strong balance sheet. So the gap between NTA and the share price should be resolved at some point of time. So Klépierre is proving, I think, the extreme resilience of our cash flows going through the period. Our growth for 2022 is 10% above this year, back to, probably in 2023, to normal numbers. So I think the market is not recognizing fully the resilience of our business model. And I hope at some point of time, it will do it.

[Operator Instructions] It looks like we have a question from the webcast.

The question is about the tax treatment of the dividend paid in 2022. So first to say, we are not used to give tax advisers. No. So we would recommend you to have a look at it from your side. But the fact is that when it comes from equity repayment, they are not subject to withholding tax. This is what we can say. So the normal tax treatment of this, it correspond to a lowering of the share price -- of the price of the shares you had in your books. And the taxation will come when you will dispose the shares through the capital gain tax.

So thank you very much for attending. Thank you very much for your question, a lot about indexation. I will end on the good news. Once more, this has been, what I would say, an exceptional year in a very difficult period of time. We are exceeding our guidance. We are growing the cash flows. We are strengthening the balance sheet. So I think Klépierre has delivered exceptional earnings today, and we are looking forward to see you soon. And the agenda for Klépierre, the next one is a general meeting on April 26 at 8 a.m. in the morning -- or 9 a.m. in the morning. So thank you very much for taking the call and see you soon.

Thank you.