Klépierre SA (LI) Earnings Call Transcript & Summary

Hello, and welcome to the Klépierre 2024 Full Year Results Presentation, hosted by Jean-Marc Jestin, Chairman of the Executive Board; and Stephane Tortajada, CFO. My name is Ben, 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-Marc Jestin, to begin today's conference. Please go ahead, sir.

Good evening, everyone, and thank you for joining us. I'm delighted to present Klépierre 2024 full year earnings. Once again, 2024 has been an exceptional year for our company. We delivered expansion from top line to bottom and generated EUR 2.60 in net current cash flow per share, a remarkable 5.3% year-on-year increase. Crucially, it is also 5% above our initial guidance of EUR 2.45 to EUR 2.50 per share. We served our shareholders with a total accounting return of 15% with an NTA growth of 8.9% on top of 1 of the most attractive cash dividend yields in the EPRA space. We have delivered a 6.9% EBITDA increase, a jump of 2 percentage points compared to last July guidance. This performance was underpinned by a 70 basis points improvement in the EBITDA margin and the like-for-like net rental income growth of 6.3%, representing an outperformance of 350 basis points compared to indexation. This achievement is a testimony to our ability to unlock embedded value through multiple performance drivers. On the back of high pent-up leasing tension across the entire portfolio, we have further improved occupancy, rent collection, and we are also benefiting from the tailwind of positive rental uplift on renewals and relettings. We are also capitalizing on our more than 700 million annual visitors to generate sizable extra revenues. These additional revenues grew by 8.4% on a like-for-like basis over 1 year, driven by more income, media revenues, turnover rents and car park revenues. Our key demand drivers are solid, and we are operating in a supportive private consumption environment. Unemployment is standing at historic lows, enabling real wage growth and in turn feeding private consumption. And this proves that our business footings are robust. Moreover, we are benefiting from highly favorable long-term supply and demand trends. Structural forces shaping our industry include urban population growth and increasing purchasing power. As accessing downturn areas become more complicated, the one-stop shop destination mall is the most accessible, comfortable and comprehensive way of shopping, dining and entertaining. In addition, while e-commerce growth is less prominent in Continental Europe and more and more online return fees are being passed through, prime malls are profitable places targeted by omnichannel retailers as part of their highly selective expansion plans. Our conviction is that retail bifurcation is clearly ongoing with banners focusing on fewer, larger and better stores, and it is precisely what we offer them. Lastly, the absence of new supply in prime retail in Europe is another strong positive differentiator. We are benefiting from the scarcity of physical retail with close to 0 greenfield projects, very high barriers to entry and increasingly stringent ESG constraints. In this landscape, Klépierre is set to play a crucial role and thereby secure long-term income growth. We currently operate 70 top quality malls located in the largest European cities, with the best forecast in terms of consumption. They attract more than 700 million visitors annually and generate more than EUR 12 billion in retailer sales in our stores every year. Our unique asset management know-how meets retailers' needs and our platform brings them profitability. This long-standing clear and consistent strategy, coupled with favorable long-term trends, are translating into market share gains as reflected by the sharp increase in visitor numbers during 2024. Footfall was up 2.5% year-on-year and by 7.5% since January 2023. Similarly, retailer sales also increased markedly by 4%, more than doubling domestic growth rates. And as a result, leasing momentum has been strong with tenants demanding more space in the best shopping centers. which is driving solid occupational performance. We signed 4% more leasing deals than in 2023 and generated 4% rental uplift on renewals and relettings, while occupancy grew 50 basis points at 96.5%. We are continuously improving the retail mix of our venues to offer the best shopping experience and support the expansion of the best-performing segments and brands. We are retenanting towards health and beauty, sportswear, restaurants and leisure while promoting leading fashion retailers. As such, JD Sport and New Yorker have respectively expanded the total area they occupy in our mall by 62% and 102% since 2019. The same goes for Rituals up 188%, Normal up 274%. Primark up 111%, while Inditex grew its footprint by 14%. Occupancy cost ratio has been sequentially improving over the past several years and now stand at the low level of 12.6%, thanks to the strong increase in retailer sales. Our laser focus leasing initiatives have clearly translated into growing revenues over the last 2 years, 15% rental income growth, 17% EBITDA growth, 16% net current cash flow growth. And based on the strong operating and financial results, the Supervisory Board will recommend that the shareholders at the forthcoming Annual General Meeting to be held on April 24, 2025, approved a cash distribution of EUR 1.85 per share, up 3% compared to last year. Looking at the current trading, this very solid trend is still undergoing with operations well oriented in the fourth quarter characterized by retailer sales up 3.3%, while footfall grew by 2.7%. Early 2025, we also continued to gain market shares with retailer sales and footfall together up 2% in January and leasing demand still very high, translating into a 4% positive rental uplift in renewals and relettings. In this context, we are confident of continuing to deliver net rental income and EBITDA growth in 2025, especially our sensitivity to financing cost is limited with the 2024 average cost of debt remaining low at 1.7%. We have a well-spread debt schedule with average maturity of 5.9 years, and only EUR 255 million to refinance in 2025. We entered this year as fully hedged along at a time of consensus on declining rate cycle in Continental Europe. Consequently, we expect to generate 3% EBITDA increase in 2025 and net current cash flow per share of EUR 2.60 -- between EUR 2.60 and EUR 2.65 per share. Last year, I announced to you that value stabilization should pave the way to a bottom out. And here we are. For the first time in more than 5 years, EPRA NTA grew by 8.9% to EUR 32.8 per share in 2024, marking the beginning of a new expansionary cycle. This performance was fueled by a strong cash flow effect that drove valuations up 4.1% on a like-for-like basis. In the meantime, the average EPRA Net Initial Yield of the portfolio has remained stable at 5.9%. Over the period, the investment market has turned more positive, thanks to the recognition of strong performance of retail assets. Investment volumes in retail were up 21% compared to 2023. We also managed to close EUR 144 million in disposals, 38% above book values, with institutional investors back and participating in some major shopping center transactions at middle and mid-single-digit Net Initial Yield in Continental Europe. Contrary to common predictions, retail real estate in Continental Europe has coped with all crisis and structural transformation, e-commerce COVID-19 inflation, high interest rates and a muted investment market. Cumulated risk premium are at all-time eyes and way ahead of any other asset classes. Positive market effect should be the next tailwind for capital appreciation. This is our conviction. Now turning to capital allocation and the balance sheet. In 2024, we invested into 2 very attractive acquisitions for a total amount of EUR 237 million. O'Parinor and RomaEst, 2 super regional shopping malls are the perfect illustration of our investment strategy. We focus on high-quality and dominant properties in large cities where we can implement our best practices and create value. These 2 acquisitions are accretive to NAV and accretive to earnings. Similarly, we believe in a disciplined approach to development and exclusively focused on extensions of existing assets. We only commit limited amounts ensuring a controlled level of risk. We target a threshold of at least 8% yield on cost, guaranteeing high returns given current funding costs. We have a proven track record with all our projects delivered on time with no cost overruns. In 2024, the highlight was the opening in July of the Maremagnum extension in Barcelona with a yield on cost of 13.5%. We also launched an extension in Odysseum in Montpellier that will host a Primark megastore and a fully rejuvenated food offering. Yield on cost of this project is 9%, and delivery is planned for the fourth quarter of 2025. Our capital allocation strategy is underpinned by sector-leading credit metrics that position us optimally in the current cycle. Our financial risk profile is the best among European real estate industry with a net debt-to-EBITDA ratio reaching a historic low of 7.1x and interest coverage ratio at 7.4x. Meanwhile, the upward revaluation of our asset portfolio contributed to the improvement in the loan-to-value ratio standing at 36.5%, down 150 basis points over 1 year. The robustness of our balance sheet has also been acknowledged by the rating agencies. Standard & Poor's reaffirmed our BBB+ rating and upgraded Klépierre outlook from stable to positive. Fitch also confirmed its A- senior unsecured rating with a stable outlook. Before concluding, let me add a few words about corporate social responsibility. In 2024, Klépierre was ranked first worldwide in the listed retail category by GRESB. Besides this remarkable achievement, Klépierre is also #1 in the European listed real estate category. The group obtained a total score of 95 out of 100, up 2 points compared to 2023 and maintain its 5-star rating, which is awarded only to the top 20 best-performing companies across all categories. I'm also proud to announce that Klépierre has once again been recognized for its leadership in transparency and performance in the fight against climate change by CDP. The environmental NGO has included the group for the fourth time in a row on its annual A list. And this reflects the consistency of our efforts and our commitments to build the most sustainable platform for commerce by 2030. Let me conclude. Klépierre has a highly distinctive positioning. We offer high-quality earnings to shareholders, characterized by an uninterrupted growth from net rental income to net current cash flow, high revenues, predictability and a very cautious risk management approach, coupled with solid returns. This is putting an end to my remarks. And now I open the floor to questions.

[Operator Instructions] But first off, we are going to take some questions from the webcast. So I'm going to hand you back to your host to take questions from the webcast. Thank you.

Yes. The first question from the webcast is from Philippe at the French Asset Manager. What is the outlook for indexation and like-for-like rental growth in 2025? So we see indexation at around 1.5% across our portfolio for 2025. And rental growth in our guidance is 3% which is exactly the same level of EBITDA growth we gave 3%. If we don't have questions on the phone, I will take another one from the webcast. Another one is from Daniel on the Credit side. Could you give us the average cost of debt for 2025? So basically, we have very limited refinancing needs in 2025 with only 1 bond coming to maturity in October for EUR 255 million. And we are fully hedged for interest rate in 2025. So basically, we see the average cost of debt below 2% between 1.9% as we say and 2% in 2025. Okay. So and another one from the phone. Yes, we have one from the phone.

The first question comes from the telephone line come from Pierre-Emmanuel Clouard from Jefferies.

So the first one is on your capital allocation. So I know that you are never giving any guidance on acquisition or disposals, but maybe it would be useful for us to give us more color on your view on the investment market currently? And do you see similarities happening like [indiscernible] to happen in 2025. And maybe can you give us our firepower today keeping, let's say a BBB+ rating or A- rating. And again, on ratings, can you remind us what are the main criteria to be operated by S&P in 2025? And are you making those criteria today?

So thank you, Pierre-Emmanuel. This is Jean-Marc. You're right. We never and we will never give any guidance on acquisition and disposals. But we have been quite active, and we continue to monitor the market. Sorry, I was interpreted. So Pierre-Emmanuel, thank you for your question. So as I just said, maybe I repeat, but the micro was off. We never give any guidance on acquisition or disposals, and we will never do. So -- but the investment market has significantly improved compared to the last 2 years. We have seen a significant transaction in Spain, in Portugal, in Central Europe, and a bit in France. There are quite interesting transactions when we compare it to valuation. We are -- we continue to monitor carefully special situations and looking at different opportunities. But for the timing, there is nothing we can comment on. The -- when it comes to our firepower to keep our rating, I think we have been quite vocal about it. So it's around EUR 700 million. And that's it. So maybe on the rating, Tortajada?

So basically, we are currently A- at Fitch and BBB+ positive outlook at S&P. The rating criteria to be A- is a debt to debt to equity well below 45%. And debt-to-EBITDA max 7.5%. Today, we are within the 2 criteria.

Okay. And maybe a quick follow-up question. Would you be open on -- open minded on contribution on acquisitions? And do you have a view on the equity raise today looking at our current valuation?

That's -- Jean-Marc. Pierre-Emmanuel, that's a very generic question. So what we are looking at and we have always been looking at, it's high-quality properties, big asset, dominant in the catchment area in big cities. And the way to finance it, I would say, everything is on paper is open, but depending where we trade. I think we have enough capacity to use our balance sheet to finance any acquisitions. So your question is quite theoretical today. And when it comes, the Board will see what to do. Our share price has been doing quite well over the last 18 months. So this is a positive.

Next question comes from the line of Florent Laroche-Joubert from ODDO BHF.

Congrats for the results. Actually, I would have a first question about the guidance. So for 2024, we have seen that you have been able to outperform significantly your initial guidance. So for 2025, you have a first guidance that is quite close from your recurring EPS in 2024. So how conservative is this guidance and in the same -- in some way. So how have you been able maybe to beat so much your guidance in 2024, notably from Q3 to Q4?

Thank you, Florent. Jean-Marc taking that question. So I think I have the reputation and probably Klépierre also has the reputation to be prudent when we are providing the market with the guidance. We prefer to provide good surprises to our shareholders. I think we enter into 2025 with a very optimistic view. The trading in 2023 and 2024, including Q4 and January, it's very encouraging. So we have provided this guidance, which takes into account a 3% EBITDA growth with only 1.5% indexation. So we are -- we think we can generate outperformance on top of indexation as we have always done. So this -- we feel very comfortable with this guidance. So I would say we see 2025 as a good year for Klépierre. And we are confident to meet the guidance and probably at the top of the range of the guidance.

Yes, maybe to answer your question, or did you beat -- sorry, Florent, just to follow up because you also asked, how did you beat for 2024? Basically, you can see that we have increased occupancy because we are 96.5%, up 50 basis points over 1 year. We have also increased on collection rate we had very strong growth in additional revenue. So basically, when you add all these items, you understand we are able to beat the initial guidance in '24 and even to finish a bit better in Q4 because Q4 was quite strong also.

But Florent, maybe just to add. I think when we look at 2023 and 2024, our retailer sales have increased by 10% over the last 2 years. And I have to say also that the leasing demand from retailers is really -- is quite amazing. So -- and to a certain extent, we have been more than positively surprised by the quality of the demand. And this is why, in fact, we have constantly improved our guidance. And that's why I was just saying 2025, we see it also as a very strong year. We are currently in discussion with a lot of our clients to open new stores, to enlarge new stores. And most of the seeds that we have put in the ground in 2024 will have an impact on 2025. So there is quite a high insurance of doing it. But I have to say that the leasing market has been extremely good and even better than expected during the whole 2 last years.

Okay. And so that means that's a follow-up question. So I understand that maybe you could be positive also in 2025 for the valuation of our assets if we have a positive what that growth.

Well, I think the -- what we have tried to figure out is when the valuers will, one, recognize that inflation, retailer sales increase year after year will help to increase ERVs and we'll have a cash flow effect. And I think this has been done, and we -- and if we continue in that direction, this will continue. I think the next step is that the risk premium that has been accumulated through retail bashing, e-commerce, COVID, inflation, interest rate at some point of time, the retail assets should be treated a bit more like the other asset classes. So I think we can be positive on seeing those risk premium in the discount rate going down, and this will be a catalyst for further NTA growth in the years to come.

The next question comes from the line of Jonathan Kownator from Goldman Sachs. .

The first one, where do you see the reversion? I mean, obviously, reversion has been improving gradually to 4% in 2024. I mean if I listen to you, I mean, you're describing a really bullish picture, really exciting picture. And when I look at your guidance, I'm coming back a bit to the previous question, but even at the top end of the guidance, we're looking at 2% EPS growth for 2025. I mean, obviously, you had a very good 2024. So maybe you have taken it early. But help us understand perhaps what are the things that can change and reversion is 1 where effectively that strong momentum that you're talking about would materialize really?

Well, I think we will -- it's a bit too early in the year, but when we look at January numbers, -- they are -- we did -- we always do the guidance, assuming that retailer sales are flat. So January sales are going up by 2% all over the portfolio, which is a good signal. In a moment where -- as we are quite exposed to France for a bit more than 1/3, we could have imagined that it will be lower, but this has been quite strong in January in all the segments, all over the countries with some differences, but this make us very confident. I think we'll see how things evolve during the year and probably in Q1, we'll have a bit more of color. So we always start the year with quite a conservative view on what we are sure to deliver and our job is to outperform that. So that's our -- that's the way we do, and we think it's the right way to do.

And just to add, Jonathan, I will say, if we can -- sorry, just to add something for on your question. Footfall in January 25 is also up 2%. So it's also a very good signal. And reversion is fully in line in January '25 with the number we have seen in '24. So just to give a bit more color on this front.

Okay. So -- I'm sorry, it was a bit generic, but can we -- if we drill down into some of the metrics, right, you're saying, okay, so reversion is 4% right now, sort of retail sales, 2%, footfall 2%. If we think about occupancy, do you think you will stabilize at this stage? Do you have improvement opportunities? Do you have any risks outstanding? What about the revenues as well? I think you're highlighting that as a sort of stream of improvements. You have 8% growth 2024, which is good. I think you're guiding to more than that already. So help us understand a bit on all these operating metrics, how you think that trend all of them, please?

Okay. I appreciate your question, but I think it's itemizing the business is probably a bit difficult, okay? So -- but let's try to -- we have quite a numerous number of levers to continue to grow. I think reversion will be positive. I think occupancy, we can still increase it. I think we can also slightly improve rent collection. We can continue delivering more additional revenues. We can improve the ratio between net rental income and gross rental income by cutting cost. We can also be more efficient on our cost structure at the corporate level. So we have multiple levers of growth, and each of them is participating to delivering growth. So I think none of them will explain by itself the growth, but it's a combination of all this and reversion is also part of it.

Maybe 1 final question. I don't want to take the whole time, but is there something holding back the guidance. It's something -- a different way of asking, maybe something not operational, but is this something where -- that is holding back the guidance that is out there as well, we need to know.

No. But Jonathan, as I've mentioned earlier, we have an increase in the interest cost in '25 compared to '24 because I say the cost of debt should increase. So in terms of million, it would be up, obviously. And also because approximately half of our business units are taxable, everything except France and Spain is taxable. So basically, you should also have some a bit tax up. So if you have the positive 3% up, a bit more tax, a bit more interest costs, you end up to the guidance we have just delivered to you.

Okay. Quite clear. Perhaps one final one. Any chance of share buyback rather than acquisitions? Or you'd rather focus on acquisitions right now from a sort of capital allocation perspective?

For acquisition, we will tell you when it comes. So okay, Jonathan, we -- it's difficult to predict, okay? So we will only focus on what we think is right for the company where we can add value. And we will see what happens in 2025. The share buyback, it has always been an option to the Board to decide we did in the past. For the timing, it's not really on the table. We have strong organic growth. We deliver remarkable earnings. So for the time being, it's not on the table.

The next question comes from the line of Céline Soo-Huynh from Barclays.

Just one question for me, please. How likely is it for you to replicate the acquisition you have done last year. I mean, yields above the 9% mark? Or do you see the investment market coming towards your valuation yield closer to 6%?

That's a good question. And obviously, I'm not going to comment on what is our target. But I think what I can say is that the 2 acquisitions we have done, thanks to our strong balance sheet and to the fact that we are probably the only company which is buying and growing bottom line, okay? So we have seized those opportunity at the very right timing. Since then, the investment market has improved and probably those very fantastic opportunities are no longer available in those terms. But I would say that there are many other situations where we could be -- we could do acquisition, which can be accretive NAV and accretive for earnings for sure.

Next question comes from the line of Samuel King calling from BNP Paribas.

Another 1 on external growth levers, please. And picking up on your comments on institutional investors returning to the investment market, which potentially suggests the window for opportunity for high-yield acquisitions is now closing. Kind of any more comments just on what the potential pipeline looks like or even just the characteristics of assets in terms of size or yield would be helpful. And also thinking if the market is becoming more competitive, what the opportunities are internally? And any comments on perhaps the depth of opportunity in terms of the existing portfolio or extension projects where the yields on cost meet your return criteria?

So thank you for the question. And I apologize if I'm too generic on external growth. But I think the -- what we are going to look at is where we are strong, okay? So big -- large properties, big cities, high sales per square meter where we can deliver growth. So -- and the countries where we are probably very strong, it's France, it's Italy, it's Iberia, and that's probably the reason where we see more liquidity on potentially. We are not excited about Germany at all. We are not very excited about Central Europe, okay? So I would say that the strategy is always to try to reinforce our footprint where we are already strong. Scandinavia, it's small countries. The number of opportunities is limited. So let's focus on where 80% of our portfolio is. So France, Italy and Iberia, that's a big piece of it and the big shopping mall. So -- and the yields -- any acquisition has to be accretive to our earnings and also to NAV.

And maybe just a follow-up in terms of the depth of opportunity or asset management projects that are in your incumbent portfolio.

Yes. Basically, we spent around EUR 100 million a year in average in development CapEx, and we tend to launch a year. So basically, we have a pipeline of around EUR 700 million of retail project which are purely extension. It's not greenfield, it's not mixed use. It's really extension of our current assets, where we see some leasing tension and we have demand from large international retailer to come in or to expand. And we have a threshold of 8% yield on cost before committing a new project. And basically, we see a good opportunity to just invest in this pipeline going forward in the coming 3, 4 years. So in terms of development, we have this pipeline, and we are very committed to make it happen.

And do you have optionality to accelerate any of those projects if, for example, you wanted to launch 2 or 3 in a year as opposed to 1 to support some of the near-term earnings growth?

So Jean-Marc, I think we should just step back a bit. The -- I think the strength of Klépierre, okay, whatever we think is that we have never and we will never commit more than what we have as a cash flow post dividend, okay? And that's the rule, okay? And everyone who has tried to go over the rule, okay, they know what happens, okay? So it looks limited, but that's accretive to our earnings. And when it comes to accelerating, we will love to do that. But going through the permitting issue, it's long, it's complicated, but we always do it, okay? So next to come will be in Italy, where in some of our own, I would say, 2, 3 properties in the next, I would say, 18 months we will start doing something and very soon, 1 in France. So I think we have a reasonable time line to start doing something in the magnitude of Stephane. And we will -- as I said, we will never commit more CapEx, okay, than what we earn after dividend.

There are no further questions, so I will hand you back to host to take some questions from the webcast. Please go ahead.

Yes, we have another question. Are you planning further disposal going forward? So basically, we have disposed close to EUR 2 billion of noncore assets in the last 4 years. So basically, we have already made the cleaning, I would say, of the balance sheet. And today, we have maybe the best credit metrics in the industry. So we will continue to gradually divest very small noncore assets with a very opportunistic approach. In '24, we're able to dispose of EUR 144 million. Going forward, we think it could go from EUR 50 to EUR 150 million, let's say, an average of EUR 100 million a year we can dispose of. It's a collection of very small asset. But the good thing is that we are able -- and we were able in '24 to dispose them 38% above book value. We demonstrate also that we are a good seller and try to be a good seller.

No, that's a good point, Stephane. I think we are committing to 2 things, okay? The first one, which is the most important is to grow cash flow for our shareholders, okay? And the second is to constantly improve the quality of our portfolio. which is made of 2 sub-items. First one, we continue to invest in our malls to make them even bigger and better in their catchment area; and second, to streamline the portfolio. And we try to do it at the pace which is not -- which is consistent with the first, I would say, criteria, which is to continue growing the cash flow for our shareholders. We don't see any need to sell urgently or to sell because the assets are not good. We are just, yes, streamlining year after year the portfolio.

Okay. And the next 1 on the chat is, do you provide a guidance in terms of dividend payout ratio? And what is your own policy going forward? On this one, I would say that, as you know, Klépierre is really a cash dividend story, and we have never stopped paying dividend in the past. And we prefer to look at dividend not through payout ratio, but more like a cash dividend yield. And when you look at the cash dividend yield, we are among the top 3 in the largest EPRA companies. So basically, we think we are in a good position. But without giving you a guidance, if you look at the sequence of the last 4 years, in euro per share, it was EUR 1.70, then EUR 1.75 and EUR 1.80 and EUR 1.85. So I will not give you a guidance, but let you guess what could be the next point. And by the way, because we have also delivered on capital appreciation. When you add the dividend and the capital appreciation, you have a 15% total accounting return for 2024, which also demonstrate we are in a good position on this front. Okay. I think we have covered the point and it's time for us. Thank you very much for your question, for your time today and happy to follow up offline. Thank you very much.

Thank you very much, and have a good evening.

Good evening.