Klépierre SA (LI) Earnings Call Transcript & Summary

Hello, and welcome to Klepierre First Half 2022 Earnings Presentation. Please note this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Jean-March Jestin, Chairman of the Executive Board; and Stephane Tortajada, Chief Financial Officer, Member of the Executive Board, to begin today's conference. Thank you.

Thank you for joining us this morning. I'm pleased to present Klepierre half year 2022 earnings. We had a productive and successful semester. We recorded strong operational reserves and generated EUR 428 million of net current cash flow. This is EUR 1.32 per share, a 84% increase compared to 2021. This half year has demonstrated the strength of our business model, based on strong cash flow generation, limited cost base and clear focus on high cash returns to our shareholders. Coming off 2 difficult years, marked with multiple stores closures and various trading restrictions for retailers, our results are testament to the quality of our portfolio, our strategy and our teams. Despite the challenging global environment, our clients have seen their business drastically improved in the last 12 months with a strong momentum in the last quarter. Retailer sales and footfall confirmed their positive trajectory already observed during the second half of 2021. And let's remind ourselves that January 2022 was still impacted by the pandemic and notably the lockdown -- sorry in the Netherlands, the 2G law in Germany and mandatory face covering to visit stores in the other countries. But from February to June, the trend improved month-after-month with a sequential acceleration in the second quarter. Our retailers posting says above '19 levels, and footfall being at the highest since 2020 at 90% in May and June, but 10 percentage points better than in second half of 2021. This performance has been evenly distributed in other regions where we operate, as well as among other segments. Nevertheless, the pace has been especially firm in Scandinavia and in the Netherlands, which outpaced pre-pandemic levels. Fashion also posted an impressive rebound, reaching 102% of '19 levels in the second quarter, while Household Equipment has continued to outperform. Food & Beverage is also about to close the gap with sales at 96% of '19 levels in the second quarter. On the leading side, demand for space has been strong. We signed 700 leases including 516 renewals and relettings, which is in line with pre-COVID levels. Reversion uplift stood at 2.7% on average, with Iberia and Italy at remarkable 8.2% and 5.7% respectively. Strongly retailer demand, proactive asset management initiative and steady leasing activity led us to bring occupancy up 50 basis points year-on-year at 94.7%. This translated into an occupancy cost ratio of 12.4%, 20 basis points below the level of December, 2021. Among others, we signed multiple with leading brands in all segments such as Inditex, Primark, Calzedonia, H&M, Nike, Adidas, JD Sport or Saint-Lazare, but also with innovative retailers like Jimmy Fairly, Miniso or AliExpress. But your retailers like Normal, Pepco or HalfPrice also chose Klepierre to pursue their development. We were also pleased to accelerate our marketing and loyalty efforts to reengage with our customers through online and offline contents. We launched a new loyalty program in more than 30 malls across Europe, now gathering more than 130,000 new members. Social media is one of our strategic milestone to increase brand awareness has been accelerated. As of today, we count more than 5 million followers on Facebook and Instagram, an increase of 24% compared to 2021 and we plan 25 malls to be active on TikTok by year-end. Consequently on the back of higher footfall increasing sales, our valuable revenue generated by parking, specialty leasing and sales-based rent fell by 77% compared to 2021. Before turning to development and balance sheet, I would like to highlight that we pursued deploying our Act for Good CSR strategy. Daily how teams worked to make shopping centers more environmentally and socially responsible. As such, our global leadership in sustainability is widely recognized internationally, especially by GRESB, CDP, MSCI or SBTI that attribute higher scores and ranking to Klepierre. Since February, 2022, we have been deeply committed in providing support to Ukrainians and refugees. All our teams promptly organized clothing, food and healthcare products collections from retailers, visitors and association in all our malls in Europe. All items, thousands of packages were shipped to Sadyba Best Mall in Warsaw, which became a logistics hub to transfer these donations to Ukraine. Additionally, in the context of tension on energy supply and increasing related cost, Klepierre is also committed to further reduce its energy consumption. As a reminder, we have reduced our energy consumption by 45% and our carbon emission intensity by 84% since 2013. Turning to development, we are highly selective on capital expenditures, as you know, focusing only in attractive projects with a clear target to limit the cash outflow for Klepierre. The major highlights is a successful opening of Gran Reno extension in Bologna early July, which is a final step of a full makeover. It was 98% let at opening and delivered a 7.6% yield on cost, far above initial target. The flagship mall display 145 stores with an outstanding set of retailers such as all Inditex brands, Primark, H&M, Sephora, New Balance, Tommy Hilfiger or JD Sports. And such, I invite you to watch the movie available on our website, which showcase our first customer enjoying this new place of shopping last Saturday. The group also delivered 4 new Primark megastores in France and Italy. And in total, Klepierre will have developed 6 new Primark by end of 2023 for 36,000 square meter. Now turning to the balance sheet, we have been very active since January 2022. We have closed or signed EUR 470 million of disposal with the net initial lead of 6%, which is 0.4% below book value as at December last year. This is a further step in our asset rotation strategy. Over the last 18 months, we managed to close transaction for total amount of EUR 1.3 billion and these were made at an average yield of 5.6% near or at appraised value. Performance and disposals made in July is translated into a sizable decrease in net debt. We studied financing metrics, such as a net debt to EBITDA of 8.6x and interest coverage ratio of 10x. Our loan-to-value ratio reached 38.8%, stable compared to 2021 year-end. On top of a 6.5 year average debt maturity and a 1.1% cost of funding, the aging profile remains solid with 88% of net debt as hedged this year. The liquidity position stand at EUR 2.3 billion after EUR 400 million of debt repayments in the beginning of the year. And as a consequence, S&P confirm our BBB+ rating with a stable outlook in May. We have also paid in cash this year a EUR 1.7 per share dividend, which is 78% of the 2021 net gain cash flow per share. We therefore deploy our financial strategy of 2022 based on a combination of assets rotation, delivering best in class cash description to our shareholders, in order to make Klepierre the most resilient platform to face the coming challenges of retailers real estate in Europe. The solid set of results coupled with the ongoing positive operational trend, lead us to revise upwards our net current cash flow guidance of least EUR 2.45 per share, a 5.4% increase compared to the midpoint of our initial guidance. And this assumes that operations are not impacted in H2 2022 by any new COVID related disruptions, or no major deterioration in the geopolitical situation. It does include disposal closed to date and a EUR 0.12 profit per share book in H1 2022 relating to higher rent collection for 2020 and 2021. I would like to conclude by saying that since the outbreak of the pandemic, Klepierre was brought to service shareholders, paying EUR 1.4 billion dividends in cash, while reducing its net debt by over a EUR 1 billion. I think this proves readiness of our business model and the dedication of our teams to deliver value. And now we are happy to answer to your questions.

[Operator Instructions] First question comes from Stephane Afonso of Invest Securities.

I have a quick question on my side, if I may. So the first one on rents. Would it be possible to provide me of [indiscernible] in H1 without all the positive COVID effects. I mean by that, the impacts of depreciation of occupancy and reversion. Also could you [indiscernible] a bit more on the negative reversion renting trends? And finally, regarding the current climate of rising interest rates, do you intend to accelerate your role or be a more cautious on your committed and uncommitted pipeline?

Okay. Thank you very much. As you know, we do have an exercise to do a comparison between H1 2022 and H1 2021. And as you know, in H1 2021, we had almost 2.5 months off a stock closure, so it's extremely difficult to do a real like-for-like based on this fact. So unfortunately we cannot answer specifically to your question. But I think if we look at the other KPIs, the occupancy has stable at 94.7%, so we also signed a significant number of leases which as I said, put the retailer demand for almost at the 2.7% reversion. Indexation in 2022 is above 2.5% for the whole year of 2022. So, all in the -- and rent collection as we indicated is targeted to be at 96.7% very precisely, which is slightly 1.7% below the 5 year average before COVID. So, I think that the most of the KPIs show that the dynamic is positive and next -- second semester will be probably able to give a fuller and clear like-for-like comparison between H2 2022 and H2 2021. So on the negative reversion in France, you know, we don't really comment too much on country-by-country basis. But we -- I think on the presentation, it's on the page 19 -- yes -- no, on 10 sorry. Okay. So France is a -- yes, it's a market where we, as you also can see here, occupancy is a bit lagging compared to the other. So clearly, France -- its almost neutral in terms of reversion. I have no specific comment on that. I will probably more highlight, Italy, Scandinavia, Iberia and Netherlands, which are all positive. So all in, I think it's a good set of results. On interest rate side, I think the first takeaway that -- on the development pipeline, as you know, we are -- we have been always extremely cautious of never launching a big number of development pipeline projects. So we don't have a lot of CapEx committed for sales, so we think we're protected. And for disposals, we will -- we'll continue our strategy to refocus our portfolio to the best set of assets, so we expect to deliver further on transactions in the next 12 months.

And maybe one last question, how your average cost of debt is expected to evolve around the next 3 to 4 years.

You mean 24 months?

No, I mean 3 to 4 years.

We have as you -- you can - if you refer to the -- to, I would say, the December 2021 full disclosure of Klepierre, the hedging profile, this has not changed. We are 88% hedged for 2020. And if we look at 2023, we are 84%, so we are -- we will have to manage the floating interest. But we are acting on that. The level of hedging is very strong for 2022 and we are quite comparable for 2023.

And the next question comes from the line of Robert Jones from BNP Paribas.

Good set of results [indiscernible]. One comment on Slide 6, just your retailers sales and footfall slide. Obviously, strong H1 [indiscernible] June slightly down 10% retailer sales and, to a lesser extent, footfall. Am I being too negative in extrapolating this negative movement through part of H2? Or do you think you are still in H2 [indiscernible] position where retailer sales is roughly in line with 2019 levels and footfall is, say, 90% of 2019 levels?

When it's come to projecting sales and footfall, I think once more, we -- based on H1, even though we were in a very, I would say, challenging environment with the start of the Ukrainian invasion, sales have been extremely resilient. And footfall, I think, it's a very good element. We were -- when we -- if you remember, when we reopened in 2020 and 2021, we were almost at 85%. So here, when we see footfall at [ 80 ] at the very beginning, so footfall is very strong and I think this will remain in place. When it comes to sales, I -- even though we are a bit cautious about the outlook of -- for consumer spending, in all Europe for the rest of the year. We are most locating in the strong catchment area and the average consumer profile and a new per capita, probably our customer are a bit more protected against inflation. So we are reasonably confident that the numbers will be strong, but we will -- we never do a projection on sales. July, when we have the feedback from the retailers is that in almost -- it's stronger. So will report when have the number. So we are reasonably optimist about the resilience of our sales and footfall in our most and all over all Europe. And I think one of the most important element we highlighted is that, the improvement is all over Europe and all of the other segments which really show the global resilience of the consumer spending in our malls.

Okay. Agreed. And I wanted to ask a follow-up question, if I can.

Yes, yes. Sure, sure.

Great. [indiscernible] retail was pretty strong in July to date. In term of your discussion with retailers at the point of reletting or lease renegotiations, are you seeing any pushback to your legal ability to pass through the full extent of indexations to tenants. I appreciate indexation, obviously going to continue to ramp up over the coming months. But are you getting any pushbacks from tenants at the moment? And if so, are you offsetting that with longer leased duration or at the moment are tenants accepting those as it is.

We index our leases on the 1st of January every year, so all of them. So I think the indexation of '22 has been, I think it's about 2.5% for us and for our retailers. And plus and minus some of the countries higher than the others, but we have not noticed a real push back on the indexation for 2022. The indexation for 2023 will be probably at the higher level. The position of the company that, the index is -- indexation is contractually due, but -- and we don't see any real pushback from the retailers, so we will see in 2023 what is level of indexation. But we are of the opinion that the indexation is due and I think the retailers understand that.

Next question come in the line of Jaap Kuin, Kempen & Co.

2 questions from my side. First, on the risk of political interference with indexation in France. Could you maybe comment relevance for Klepierre and what do you think is going to happen? And then second question on vacancy, could you maybe share your vacancy targets for year-end, and especially in relation to fashion retailers, where there was a lot of worry in H1 about their ability to absorb cost increases. Could you describe what you see and what the retailers are telling you, how they are coping with this cost inflation?

Thank you very much for the question. I think on the debate, which is currently taking place at the French Parliament and at the French Senate, I will not make a specific comment. So there are discussions about capping the indexation for smaller entrepreneurs. So we'll know sooner what is the outcome for the -- as we know today, it has been rejected at the Parliament. It has been rejected at the Senate in the last round of discussions. So we'll see -- and we never comment political debate at the Parliament. When it comes to vacancy target, I think the -- I think what is worth being mentioning is that when we get out of the closure, we had a post-COVID recovery plan. The post-COVID recovery plan we had for Klepierre, we are more than on track. And when it comes to vacancy, the pre-COVID level of -- was 3%. We are at 5.3%. So there is still a road to go. And as we indicated, I think in the previous comments, we think this will probably more happen in 2023. So we -- occupancy is strong. The retail demand -- the retailer demand for our space is strong. As you know, many of the retailers have seen some of their geographical areas being closed in Russia, in Ukraine. And there is, to a certain extent, the flights to -- and China is also difficult. We see a clear flight to quality in the Continental Europe. And I think this is a good news of the geopolitical situation for us. Retailers are really seeing European big malls in big capital cities and regional cities as a safe haven, and this is the good news. So we think this will be a great support for keeping occupancy high and we expect to curb vacancy in the course of 2023.

And more specifically to cost price inflation that's facing the fashion retailers, do you believe they're able to pass that on to their customers?

So if you look at the public information on some of our key retailers, they have already passed a bit of inflation to their customer. They have -- apparently on the first semester, the elasticity demand also was doing okay. They have a bit more concern about second half, but it's not my job to comment the retailer business. But -- and so they will probably, in fashion, pass a bit more inflation to their customers. And there is no -- inflation is not always a bad element, so we'll see. But I think the -- yes, even in fashion, we'll see prices going up in the stores.

And maybe just to follow-up, the use of short-term leases is it still going down or could you give us a quick comment on that one?

No, we have no comment to do -- on the short leasing. We don't have a short leases. I think probably you referred to something else. We have disclosed our -- I would say, some average, some duration of the DCs and this has not changed from '19 to today. So we have, I think, on top of my head, we have 4.4 years average some duration, and this was almost the same in 2019. So we don't see an explosion of short-term leases at Klepierre.

And one question comes from the line from Rub Virdee from Green Street.

It's Rub Virdee from Green Street. Couple of questions, please. The first one on your outlook statement, it reads quite optimistically, particularly given all of the news I read on inflation and pressures on consumer discretionary spend. And a lot of global retailers are talking about perhaps having too much inventory. Are you seeing any of this in your centers, your retailers? Is there any pressure you're seeing on consumer discretionary spend? That's the first question.

I think what we can comment is, I feel there is -- in an environment where inflation was already there, we have seen sales being quite strong in our malls, I have to say. So there is a lot of narrative about what will be the impact on the consumer spending. I think this will probably depend a lot on the consumer profile, on the catchment areas. And I think we also have to probably have a different view on what we call discretionary and nondiscretionary on malls -- our real mass market malls. So I'm not sure we have the same split between what is discretionary and nondiscretionary from a customer perspective. But once we are -- we look at the numbers. There is a concern about consumer spending going forward. Looking at the GDP growth in our countries at the European level, it's 2.6% for 2022. So we are not ignorant of the economic situation, but we can only comment on what we have delivered. And for the time being, it's I think, pretty strong.

And second question is on the investment markets. Clearly, the Nordics have been quite liquid. You've done the transactions in Norway this time and a full year as well. How is the rest of the Continental European investment market looking? And I note in the release, you do say that you're streamlining the portfolio in a rebounding investment market. Is there any kind of specific countries in Europe that you can pick up to say, particularly strong or otherwise? Is there any distress you're seeing?

Maybe just for all, it's mining a bit. Every time we sell in Spain, we say Spain is liquid, what about the other countries? And then when we sell in Norway, what about the other countries? I think we have been, over the last 2 years, able to sell a bit everywhere, where we sold in Germany, we sold in France, we sold in Norway. And so, I think the markets are -- it really depends on the specific situation. So -- but when it comes to the investment market, as a fact, it has been -- the rebound has been strong until, I would say, March, April -- end of April this year. Clearly, today, we see a more wait-and-see approach from investors due to the hike in interest rates. So there is clearly a pause not only in shopping center asset class, but I think in all real estate asset class. So -- but once more, we can only comment on what we have done. We have delivered EUR 1.3 billion disposal over the last, I would say, 18 months or even shorter at good yields. So -- and in many geographies. So we will continue looking at pruning the portfolio, finding the good investors at good prices. And even though the market is a bit [ healthy ] today, we think it will reopen probably in the second semester.

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

I have 3 questions. First one, maybe I missed something just on the loan-to-value which is stable post the disposals. Can you just guide me quickly how this relatively big amount of disposals, so I think they have been stable. What has been compensating on the other side?

So maybe I can start with this one. We have sold EUR 290 million portfolio in Norway on the 1st of July. So we are providing a pro forma as of June taking into account what happened on the 1st of July. So the 38.8% LTV is pro forma, the July 1 disposal.

Yes, but the pro forma disposal -- versus December, what's -- what I don't understand is all the disposals.

Yes. Maybe you should go to Page 19 of the presentation we put on the website, you will see that pro forma the July disposal, the net debt stands at EUR 7.8 billion, which is down EUR 139 million versus last December because basically, we made a transaction closing very beginning of July, and that's why we give pro forma figure of this disposal made in the beginning of July.

We have stable asset values, but with all the disposals, your LTV should have been down versus the year-end '21.

Don't forget that we paid dividend in one installment during the first half of the year and the dividend was EUR 1.7 per share.

EUR 480 million.

EUR 480 million. So basically, we do not expect to pay dividend in the second half. That's why we have a big effect on the first half, but dividend will not be there for the second half. So there will be, I think, a very significant impact year-end '22, more than the half year.

Yes. Okay. No, that's clear, EUR [ 480 million ] payout. My second question is on the NCCF guidance for H2, which is around EUR 1.15. Do you have maybe the components in terms of what's the impact of disposals and also what indexation or like-for-like growth you assume for H2 for to get the EUR 1.15?

So we are not used to itemize the second half guidance. But what we can tell you is that, first of all, indexation is done on January 1, okay? So it's done, okay? It's done. It's not going to be reindexed in the second half of 2022. We have in the guidance for the whole year, so here, you want to have a specific answer for H2, but in the whole year, EUR 2.45 cash flow, net current cash flow guidance, it includes the impact of the disposal, which has been done so far. And it's around EUR 0.07 to EUR 0.08, I think, on the full year, and that's it.

The next question comes from the line of Florent Laroche from ODDO.

Its Florent Laroche-Joubert from ODDO BHF. I would ask 2 questions. So first question is, I would like to understand how your guidance for the whole year can be conservative? So because if you look at your guidance for at least EUR 2.45. So we understand implicitly that you expect maybe net recurring cash flow per share at EUR 1.13 in H2. So compared to EUR 1.20, excluding the one-off effect of the collection of rents of 2021 and 2020. So could we see it at a conservative? And maybe my second question is more on your strategy at a medium term. So we understand that you want to continue disposals. In the meantime, you are very cautious on the pipeline. So what is your strategy from a mid-term standpoint on the cash -- on the growth of the cash flow?

Thank you very much for the question. We give a guidance. So I'm not sure we have to qualify if it is conservative or aggressive. But to please you, I would say, it's probably more conservative than aggressive -- and by nature. And at Klepierre, we prefer to beat the guidance than not. But the set of the H1 has been strong. The push from 2020 and 2021 also proved the extreme resilience of the company. We are collecting. So we are collecting rents for 2022, but also we see the retailers setting the dispute for 2020 and 2021. So I see this as a very positive signal of the strength of our customers. When it comes to -- but to conclude, we are not ignoring that the situation may be a bit complicated for the second half. So we have made a guidance which takes into account the current situation. For disposals and pipeline, we -- the disposal strategy has always been to continue steadily to prune the portfolio and to reconcentrate on the best assets, and we are seeing what we may call noncore assets and concentrate on large cities, large catchment area, more than 1 million inhabitants with a revenue per capita higher than 20% of the national average. So we stick to the strategy. It's a medium, long-term delivery for us, but we are doing it. So we'll continue. The -- and we have been successful, I would say, over the last 12 months. For the pipeline, we do have some pipeline. We have EUR 2.5 billion pipeline. But in the current environment, we were a bit on wait and see, but we will continue to deliver the extensions for our best assets as we did for Gran Reno, which is extremely successful. So we will continue to deliver value to our shareholders through, I would say, a very well-controlled pipeline stream.

I think we have a question from Inna Maslova from Degroof. Can you please elaborate on the indexation that has been secured over H1? Are you able to pass on full indexation?

Yes. I think it's a bit of repetition of a question that I already answered. The -- I would say the -- almost 100% of our lease is by contract, they are indexed on the 1st of January. So we have charged the indexation for 2022, the 1st of January, 2022, it's done. It's paid. So it's over, okay? And we pass the full indexation. And we will do the same January 2023. On the 1st of January, we'll pass the indexation to the retailers. Contractually, it is due. And for the time being, we don't expect any major concern.

And we have another question from Jonathan Kownator from Goldman. Can you please comment on your ability to pass on inflation to retailers? Are you able to pass it through or are some reluctant? And second question, do you expect reversion to turn negative as a result of high inflation, I think it will be the same?

Well, I think we look at the inflation impact on our business as Klepierre. So we have a cost base of G&A administrative expenses, which is around EUR 100 million. So we -- for 2022, this is under control, and we will like many corporations, we'll have to deal with the wages increase and for 2023. But I think this is at the level of Klepierre for the -- this is clearly manageable. I think the most important element is the level of service charge we pass to our customers. We roughly charged to our tenant EUR 350 million of service charge for security, but also property taxes, cleaning and many other services and energy. Energy is clearly going up in 2022 by 40% as you know. And this, we are working hard to continue saving -- reducing energy consumption. But clearly, in the whole package of service charges, energy consumption is on the rise. But on the other element, most of the contracts for cleaning, security and maintenance, they were secured for 2022 and some of them for 2023. And there are more wages related index. So -- and probably this will be much softer than the global inflation in all the countries, which is pushed by the energy. So I think when we look at the -- and we don't have a lot of projects under construction, we don't have a lot of renegotiation to do with construction companies because of inflation. So I think the -- for 2022 and also going forward for 2023, we see it as manageable, but we will report in due time for 2023 when we will have contracted all the service charges to our tenants. And once more, they are passed to the tenants at 100%.

Another question from Sander Bunck from Barclays. It looks like the total pipeline has increased from EUR 1.2 billion to EUR 1.8 billion group share over the first half. Can you give a bit more color on the type of developments that have been added, or likely, it is additional development will be executed and what level of return you would expect from the incremental development pipeline?

I'm not sure to get exactly the question. I understand the question perfectly, but don't -- we miss group share and total share here. So what I propose is that on the numbers, we take the question off and then we go through the explanation. But the pipeline has not really changed from last year to this year. So I propose you to see it off and to clarify the -- your understanding. So thank you very much for attending this call, and thank you very much for your question. And we are looking forward to see you soon. And for those who are taking holidays, please enjoy your summer break. And this is ending the call for today.

Thank you for joining today's call. You may now disconnect.