Mercialys SA (MERY) Earnings Call Transcript & Summary

Hello, and welcome to the Mercialys half year results. [Operator Instructions] I am now handing you over to your host, Mr. Vincent Ravat, CEO, to begin today's conference. Thank you.

Good morning, and welcome to this financial communication meeting of Mercialys. For this presentation, Élizabeth Blaise, our Deputy CEO, is with me. It is in a very special context that we are publishing these results after a first half year marked by an unprecedented global health crisis, which unfortunately seems far from over. It has led most countries, including France, where we have all our business, to take drastic lockdown measures. And this crisis has highlighted for us all the basic everyday needs which cannot be met online and has also shown how much consumers were attached despite restrictions to the exceptional opportunity to be able to count on open, safe, busy, well equipped and close to home shops, and above all, on women and men, who for many, embody the ultimate and indispensable social link. It is not a -- the final blow. This crisis, in fact, has proven the general interest function of physical retailers and is -- the more close to home retailers. The specific model within this Mercialys business -- real estate business showed that Mercialys perfectly remains relevant in such periods. As you know, in France, the pandemic led the French government to order the closure of all nonessential establishments from 15th of March to 11th of May 2020. The government decree has enabled -- allowed rather the pursuit of essential activities, including stores representing nearly 40% of the rental base of Mercialys. This pursuit of the business was allowed for food, mobility, information, health, hygiene, press, tobacco, construction and financing. Systematically anchored by a food store, all of the Mercialys sites remained open during the national lockdown period. On 11th of May 2020, following the permission to reopen stores and the lifting of the lockdown, shopping centers, managed by Mercialys, were able to once again welcome the public in the entire surface area. And therefore, sit-down restaurants and leisure venues were, however, able to reopen only on 2nd of June 2020. This integral reopening of centers led to -- carried out rather under optimal health and safety conditions. Up to mid-March 2020, business was good, with a very satisfactory level. On the 12-month rolling period, as you will see on Page 6, the very satisfactory recovery level was at 96.5%. As the closure obligation of the second quarter may have weakened the profitability of the brands concerned and their liquidity, Mercialys carried out case-by-case basis discussions with all of its impacted tenants to adapt the recovery of their second quarter rents in accordance with terms and conditions that Élizabeth will detail later on. These measures have impacted the LTV debt ratio, excluding transfer taxes of Mercialys by June 30, which stood at 41.1% against 40.9% at the end of June 2019, due, in part, to a low recovery rate of the second quarter 2020 for billing amount. Other things being equal -- I should say that there's been much controversy in the media by the payment of rent over the -- and the mediator appointed by the government at the end of May and more simply, the Paris Court of Justice and its ruling of 10th June -- July of 2020 emphasized that the exceptional orders, I've just mentioned, issued in March, were only done to enforce forced execution of the leases during the confinement period, but in a way to suspend the contractual payment of rents. So the release, therefore, invested by -- according to the individual circumstances of each tenants must be accompanied by complementary measures that are currently under discussion. For its part, the current financial vacancy rate at 30th of June 2020 remains stable, compared to 2019 at a low level of 2.5%. The EBITDA margin remained at a high level of 84.9%, compared to 85.3% compared to the same half year of last year. These figures tend to prove the interest and resilience and the business model -- business model of Mercialys and on "day-to-day purchasing." And as you can see on Slide 7, this anchorage looks like it's come from a historic choice to have a mixed retail store. And the rents received from -- come from a wide variety of regions with the exception of Casino Group and H&M Group brands to 20%, another 10% representing [ 1% to 2% ] of our total rent. Since 2016, we have also begun to rebalance our rental exposure by business sector, reducing the share of closing free distribution in favor of virtually all other everyday consumer sectors as sports culture, restaurants, health and services. And in this unprecedented context, which leads everyone to question their own habits, shopping centers with a retail mix, managed by Mercialys, focused on satisfying essential consumption needs at affordable prices, have remained an integral part of the communities' habits. We therefore see on Page 8 that these habits resumed at the end of the lockdown period. After an average decline of 76% compared to 2019 during the period of 17th March and 10th of May 2020, there was a quick normalization of the shops. They returned to normal once the locked was lifted over the period of 11th of May to June 25, the decline was limited to 12.5% compared to 2019 compared to minus 25% for the French perimeter -- France panel that is. In the last few days of June, the footfall was negatively impacted by the deferral of the sales period, which began on 26th of June 2019 and only on July 15 this year. In the end, the cumulative shopping center occupancy over the first half of 2020, as a whole, was down 27.4%, compared with the first half of 2019, which outperforms the CNCC National Benchmark Index by 640 basis points. The current situation continues to be more favorable for outline shopping areas as Mercialys, which depends on private carriages and where drive-throughs have been increasing since the beginning of the pandemic. Conversely, the more urban areas that are more dependent upon public transit and which we have a little of remain today are amongst the most penalized. The anthropologist, [ Dominique Bijur ] recently reminded us that the consumption changes has more to do with constraints and with PAT desires, which we can fully see today. On Page 9, the assessment of the development of retail sales over the first half of 2019 is a little irrelevant. The closure of majority of shops between 15th of March and 11th of May rendered the analysis for the second quarter ineffective. Nevertheless, we have noted that as of the end of a lockdown, the retail performance was better than initially expected. Mercialys notes, therefore, a good performance of retailers in its shopping centers over the period of 11th of -- to 31st of May. The decline in retailers' sales for the month of May 2020 remain limited to minus 33%, compared to May 2019. This would correspond to stable business if the centers had not had to operate in a deteriorated fashion over the first third of the month. The turnover in June 2020 confirms this trend with an increase of 0.6% compared with June 2019, despite a deferral of the sales period. For the outlook now, the strong growth in the household savings rate already very high at the beginning of the year, should continue to support household consumption, which could be adversely affected by economic and health risks in the second half of 2020. So unlike what could have been commented upon, the graphs on Page 10 show that the closure period imposed on physical in shops does not seem to have generated a structural shift towards e-commerce. Outside of major cities, the increased sales made during the lockdown period were more a result of consumers' default purchasing reflexes than the major change in preference. It is difficult to draw a definitive and final conclusions at this stage, but we can still draw 2 main trends. According to Knight Frank, on the one hand, the growth of online sales has limited, but not compensated for the loss of in-store sales proves that the online e-commerce complements physical conversation instead of replacing it. And according also to -- on the other hand, FEVAD, the federation of e-commerce and remote selling, online sales were more sustained for retailers with a network of stores and for pure players. This is why 66% of pure player sites had to resort to furlough measures to compensate for their loss of business. Again, according to the FEVAD federation, e-commerce has also faced very strong operational constraints during the lockdown. And that led to a logistical inability with 45% of items delivered within more than 10 days in April this year and operating costs that have often made it very unprofitable. Also, in addition, the massive drop in consumption in the tourism, transportation, leisure and certain nonfood product segments led to an unprecedented slowdown in overall growth in e-commerce, down to plus 1.8% in quarter 1 of 2020. I'd like to remind you that in the first quarter of 2019, it was a plus 12%. So these figures remind us how much the bulk of purchases on the Internet remain very sector-based, sector-specific, and are focused on the service sales. Now the health crisis has also highlighted some underlying trends that were already present on the supply side, as you can see on Slide 11. Restrictions on the movement of goods have highlighted the limitations with models using low -- very far away locations. Supply disruptions and their impacts in terms of product availability, longer delivery times, higher costs and increased customer satisfaction call into question the robustness of existing upstream and downstream logistics models. The findings of this deterioration in service levels linked to centralized logistics strategies are leading to the emergence of hybrid business models where shops use the Internet, both as a means of linking customers in living spaces through the delivery and click & collect. And use logistics, the first and last mile is organized locally from stores on a model called ship from store, under which, in fact, the pure plays and sales will be increased to open stores in the heart of regional areas. This is the entire challenge of the Mercialys strategy, which aims to increase our local anchoring and step up our multichannel approach at the national level by addressing local logistics in its shopping centers. The ship from stores service segment is still little addressed by logistics specials. And it is set to grow strongly. And Mercialys is already seizing this opportunity. As you can see on Page 12, this diagram shows is how we structured our ecosystem. These developments help us offer consuming customers products sold by retailers in our centers and just a few clicks and with a single order, and they can also receive these either at home or pick them up in stores. Our Ocito ecosystem also feeds off from the company's progress in terms of increasing personalized interactions with our retailing customers, such as with our end customers. As such, Mercialys in our last semester of 2020 launched the latest proprietary version of its 100% digital loyalty program, which is now operational in 24 shopping centers with more than 900 retailers. It feeds -- I'd qualify that the retailers now cover more than half of the unique clients of our shopping centers. Now it is called Ocito. It is our unified, local business offer described in Slide 13 and consists of 3 solutions offering of retails and new sales group through a complementary online sales channel and the opportunity to streamline the logistics costs. Those 3 solutions are as follows: Ocito.net, a web and mobile marketplace, property of Mercialys and allows consumers to easily access the offer of retailers presented in shopping centers; then you have Ocito.logistique, it is a range of services facilitating consolidation and shipments of parcels from the shop and allows retailers solutions for the last-mile logistics, suggesting solutions to enable customers to receive their products even more quickly. Immediate delivery, home delivery and -- in 2 days, plus click and collect, drive-through and parcel collection lockers. Ocito.net is only operational in the shopping centers in Angers, Rennes, Istres, Toulouse Fenouillet. 10 new sites will be operational during August and March, in Marseille Canebiere, in Aix-en-Provence, Besancon, Brest, Quimper and Clermont-Ferrand. And then Ocito.net is currently embarking on diversified offer with more than 100 contracts signed with retailers in the food service sector, such as Grounder Café and Steak and [indiscernible] for the food or for jewelry with Pandora and for Optic 2000. Despite these rapid deployments, current investments in digital infrastructure and logistics -- local logistics remain very measured in the order of EUR 1 million in this balance sheet. As a consequence, on Page 14, the company's maintaining a very limited amount of property investments for the 2020 financial year, mainly related to the retail site of the Port of Reunion Island, which is scheduled to open in November 2020. This project is fully preleased prior to its opening, has a rate origin of 6.8%. The resumption of investments going to the project portfolio or potential acquisitions outside the company's current scope will be subject to this -- in the first instance, with the completion of asset disposals. In this respect, discussions are currently underway with different types of investors, both for shopping centers and food stores more specifically. At the end of June 2020, the project portfolio for investments is still standing at EUR 480.7 million by 2027, representing a potential additional rental income of EUR 28 million with a target average yield of 7%. These projects, which concerned 27 sites out of the 53 shopping centers and city center assets, owned by the company, include both retail space projects, restructuring expansions, retail parks. But as shown on Page 15, restaurants, leisure projects and commercial activity projects, housing, health and coworking, amongst other things. Mercialys is already working on ensuring the multifunctionality of these sites, such as the coworking spaces opened on the Angers site and soon to open on the Grenoble site. We have 5 house division projects, including the one already completed in Ajaccio, Furiani and Corsica, which are in line with this project of diversifying the site functionalities at the Reunion Ireland, we are focusing on the restaurants and leisure facilities, just as in Nimes and Angers. The interest for the functional diversity has increased since the fight against urban sprawl and has become, together with the enhancements of diversity, a priority for the public opinion. By helping to then -- for the use of assets, we want to develop the cohabitation between shops, facilities and housing. And we are, in fact, currently working on this aspect with our land rights around Monoprix. It is, in fact, through partnership that we are developing these mixed projects -- those recent mix projects. So in the Paris, Saint-Etienne, we are carrying the project to a promotion entity co-owned with the Panhard Company. This project perfectly embodies the mix of urban and functional aspects of the latest prospect. As we can see on Page 16, it provides further restructuring of the Leader's Price Store, which will become [ LV ], the creation of a commercial lot and the development of 271 housing units. The building permit for it was completed on 19th of June 2020 and is expected to be delivered by the end of the year, taking into account of the way an appraisal process due to the health crisis. This should enable us to -- between April 13 and the first half of 2020 the sale of the building rights through which the promise has already been set for cash flow of EUR 2.8 million, net of the amount of the property development contract, which work is expected to start in the fourth quarter of 2021. And finally, on Slide 17, our restructuring project has just been approved by the city representatives on the basis of feasibility study showing a tree line to permagarden, investment should amount to EUR 19 million for an expected IRR of 9%. As in the case of Saint-Denis, we are partnering with a national developer for this operation, [indiscernible] .The overall investment amount forecast for us would amount to EUR 15.9 million, excluding tax within our target of 8%. The building permit application is expected to be submitted in December 2020. I would now like to give the floor to Ms. Élizabeth Blaise for a detailed presentation of our financial results first half 2020.

Thank you very much. Before I move to the detailed presentation of our financial results, let me say a few words about the impact of the health crisis, starting with Slide 19. As Vincent said, we had a conciliation procedure set up by the French government between tenants and landlords with the mediator designated in April 2020. The process ended in May was signed by the major federation of landlords as well as by some federations of tenants, but not all major stores. The principles as the result of this discussion are to have a maximum reduction of 50% of rentals for the second quarter for those shops that were obliged to close during lockdown, 3 months for very small companies. 60% of our rental basis has been affected by the obligation to close and 40% remained open, 26% being food stores. The very small companies represent 11% of our rental basis. The second principle of the agreement is that the second quarter fees must be paid. The tenants that were behind in their payments before lockdown are excluded by these measures. And we also have other measures such as lengthening the duration of the lease, anticipated renewal, for instance. We also have a recovery of rentals in the second quarter, suspended on June 30 until September 20, 24 shops that had to close. So we have some impact of all of this alignment of rentals, those small companies represent a total of EUR 4.7 million. This is an estimate. The shops that have been identified must, of course, be able to justify the legal status to be able to benefit from this measure. The EUR 4.7 million will be spread out throughout the corresponding leases according to IFRS 16. And this has an impact of EUR 1.2 million for Mercialys accounts. The impact of the second half 2020 would be EUR 1.3 million. That's a total effect of 2020 of EUR 2.5 million. Residual impact for 2021, 2022 and 2023 would be respectively, EUR 1.4 million, EUR 0.6 million and EUR 0.2 million. The total maximum of reduced rentals, including very small companies is estimated at EUR 13.5 million. This is about EUR 181 million multiplied by 60%. That is the rental basis obliged to close for 1.5 months. The difference between the EUR 13.5 million maximum and the impact already included for very small companies, EUR 4.7 million is -- also corresponds to potential measures for shops, other than those small companies. Discussions are underway, but they're not finalized, which seems -- which is why we don't have an accounted additional impact. These measures will also be spread out throughout the leases, including if the leases are extended, Mercialys will systematically request counterparts to these measures that are under discussion. You would also find on the slide, the recovery rate for the period per type. Over 12 months, by the end March 2020, we have a 96.5% rate, which is consistent with what has been observed over the past few years. The second quarter has been accounted to the tune of 45.8%. We have started no action for recovery and we will not before the end of September, according to the agreement under the mediation. And fees for the second quarter have been recovered to 70.2%. So recovery of rentals for the third quarter is 63.1% at present. This integrates the fact that certain tenants have unilaterally proceeded to pay a monthly, whether this was in the lease or not, Mercialys has carried out recovery actions over the third quarter, many shops having not been concerned by cash flow issues and have reassuring trends in terms of footfall and turnover within our shopping centers. We think of ourselves as a responsible actor in our country. And we think that the amount that we have allowed for our shops was reasonable. They now have a favorable evolution of footfall, as Vincent has pointed out. Mercialys believes in the strength of its leases and wishes to preserve the balance in its operational and financial model. As mentioned by Vincent on an issue not linked to Mercialys on the 10th of July, the Paris tribunal decided that the lease had only been within its rights by requesting payment of the rent. You also now have in Slide 21, the details of organic growth, satisfactory on the first quarter with plus 3.1%. The indicator reflects a different impacts of the health crisis at the end of June. The impact of the rental allowances spread out over the leases, EUR 1.2 million. That's minus 1.3%, a drop in the contribution of casual leasing due to the obligation to close shops EUR 0.8 million, that's minus 0.8%. Actions of minus EUR 0.2 million, integrating the spread out of rental measures due to lockdown and also a drop in variable rents, minus 0.1 percentage point, EUR 1 million (sic) [ minus EUR 1 million ], these effects are partly compensated by progression of point -- of plus 1.6% indexation, with the total rent of minus 0.8% at the end of June 2020. The indicator will be impacted in the second quarter by the reduction in rents for very small companies and also measures under discussion with other shops. So organic growth is no longer a relevant indicator in terms of circumstances for 2020. As you can see, we will, therefore, not update our objectives for 2020, but we will continue to give you all necessary elements to understand the evolution of rents for the next publication. Slide 22, the current financial vacancy unchanged. 2.5% total vacancy rate, including vacancy created and the framework of projects remains at the level measured at 3.4% as compared to 3.2% at the end of 2019. We have also had end of leases. And if we integrate this into pro forma 30 -- on 31st June without any lease, the vacancy rate would be 3%, and this is a sustainable level in view of measures taken closing down many shops. We cannot, as usual, give you the rate for end of June, which was 10.4% end of December 2019. Slide 23, you can see the detail of the evolution of rents, minus 3.6% rental revenues are therefore down 8.6%. Disposal of assets in 2019 has pro rata temporis, represented for the first half of 2020, an impact of minus EUR 2.2 million, which is minus 2.3%. Other effects, including strategic vacancy related to restructuring programs underway is minus EUR 0.2 million, which is minus 0.2%. You can also see the various impacts relating to organic growth, as I described previously. We then have a minus 22.7% with a delivery and extension of Lapauw, an operation on which the fees are significant as compared to existing -- to rental existing spaces. Let us move on to the FFO, which is on Slide 24. You can find the minus EUR 3.5 million drop in rental revenues. And we have structural costs unchanged, which shows the effort made in service charges by Mercialys, which has kept 84.9% EBITDA end of June compared to of 5.3% at the end of June last year. So then we have a financial charges, which are plus EUR 3.2 million. And this is the impact on the first quarter of refund at the end of March, EUR 480 million with the coupon of 4.125%. Mercialys also benefited from lower taxes by EUR 0.6 million. Finally, the contribution of equity associates is minus EUR 0.5 million, reflecting a disposal of assets in 2019 by SCI Rennes-Anglet as well as the impact of a reduction in rents due to the health crisis. Total FFO end of June 2020 is stable as compared to first half 2019. The financial structure, which you find on Slide 25 remains sound LTV, excluding taxes, 41% as compared to 40.9% end of June 2019 and 39.5% end of December 2019. This indicator reflects the relatively low recovery rate for rents in the second quarter 2020 as described at the beginning of the presentation. Mercialys has temporarily participated in the supporting the cash flow for our shops, but these credits should be repaid once discussions with our tenants have achieved their aim. We believe that pro forma LTV would be about 40% at the end of the second quarter. Fixed rate debt remains high end of June at 82%. Let's move to Slide 26. To complete the evolution financial profile, you can see that net debt of Mercialys in this year is EUR 1.2 million in bonds and EUR 372 million of commercial paper. So we have liquidity with EUR 181 million and undrawn credit lines of EUR 410 million. Short-term debt is, therefore, largely covered. And our next data for bonds in 2023, we have a cost of drawn debt at 1.1% that's dropped as compared to 2019, and this is through the impact of repayment of obligations at the end of 2019. The cost of debt will increase following the refinancing operation finalized in July 2020, described on Slide 27. Mercialys proceeded with new bonds with a 7-year maturity for EUR 300 million. And the cost is particularly high with a coupon at 4.625%. And this absolutely does not reflect the BBB rating of Mercialys. We've been penalized by the negative context around commercial real estate, which affects the bonds market as well as the shares market. We're also penalized by the low liquidity of our secondary bond levels with spreads that have moved significantly since March 2020. So this is -- has an effect on the pricing of new bonds. However, we have proceeded with this operation. We believe the lack of visibility on the overall macroeconomic context and medium-term bond market were not enabling us to wait for change in the spreads with strong inertia as the history demonstrates. So we have this relatively limited amount, which strengthens our liquidity, helps us to refinance EUR 181 million for bond maturing 2023. This financing makes it possible to extend our bond debt maturity to 4.2 years and 4.1 and overall debt maturity from 3.2 years to 3.9 years. Now let us move to Slide 28 with our portfolio value. EUR 3.3 billion, minus 3.1% over 6 months, minus 6.1% over 12 months. So like-for-like, we have a drop of 3.1% over 6 months. So the evolution of this like-for-like amount is affected by rent, plus 1.2%; a yield effect, minus 4.3%; and other effects, plus 0.1%. Average appraisal yield rate is 5.49% end of June 2020, as compared to 5.2% last year. We have an approach of site to site valuation according to intrinsic risk and commercial capacity. So we have a change in NNNAV EUR 19.9 per share, that's minus 0.5% over 6 months, minus 2.4% over 12 months. Main variation being dividend paid EUR 0.48 in 2019, FFO plus EUR 0.69 and then we have change in fair value, minus EUR 0.98, with the rent effect plus EUR 0.44 per share, minus EUR 1.60 yield and other effects plus EUR 0.19. We also have a change in fair value fixed rate at EUR 0.82 per share. Finally, the change in fair value financial instruments and other items, minus EUR 0.16 per share. And for NNNAV end of June 2020, has changed as compared to December translates the value -- market value of the debt as being lower the nominal. Conclusion. If you move to Slide 30, Mercialys had announced that its objectives 2020 were no longer applicable because of the health crisis. There remain many uncertainties due to both the health and macroeconomic environment, but also any repercussions on employment consumption and activity of shops present in our centers. Negotiations still underway. As I was saying, we are not updating organic growth forecast. This indicator no longer seems relevant in the specific context. FFO is now expected lower minus 10% to minus 15% as compared to 2019. And dividend will be established within the range of 70% to 95% of the 2020 FFO. This broadening range is a prudential approach with regard to any disposal or valuation of our assets. This is without any impact of any resumption of health crisis episodes. And I have now finished, and we are ready to take your questions.

[Operator Instructions] First question from Mr. [indiscernible]

Indeed, I'd have many questions. The first would relate to the current negotiations underway. So we've heard that negotiations are underway. Could you please tell us more about this as to whether you've managed to reach an agreement with some of the retailers? And also, I'd have a question on your guidance. So you -- if I have understood properly, you have a guidance that provides for a best of -- a decline of 10% to 15% of the FFO on the first quarter. What was the hypothesis that you used to arrive at this hypothesis of minus 10% to minus 15% decline in the FFO? Third question. How are the experts justifying the yield effect, which leads to a result of minus 4.3% in your valuation?

Well, perhaps if we start with your question on the growth, what are the hypotheses that we've used. Well, they integrate the scope that has already been included in the 2019 perimeter. The impact on the 13.5% -- EUR 13.5 million that we've negotiated, we used the hypotheses beyond or excluding very small businesses. It would lead to a spread of all the relief in rents for over EUR 7 million for 2020. And of course, we are taking into consideration the operation -- refinancing operation, which was wrapped up in July 2020. Those are the main hypotheses that have been taken into consideration. Now for the expertise. As I mentioned earlier, experts remain focused on a site-by-site analysis. So experts take into consideration the commerciality, the inherent risks of every business site. They look at the mix -- the retail mix and the competition positioning. And this is represented in the rent hypotheses and in the rates used by experts. Some impact of the health crisis were taken into account, for example, during 1 quarter when the rents were unpaid, we had to make those adjustments, and they translated into a loss of value on a like-to-like basis of minus 3% for the half year. As regards to negotiations with the retailers, as we mentioned, we decided, first, to wait for business to pick up again after lockdown was lifted rather than announcing a generalized support measure in an uncertain context before 11th of May. We also chose to wait because mediation had been called for by the retailers to the government. So the mediator needed to conclude and wrap up its -- her mediation before opening up discussions on a case-by-case basis with every rent tenant. So at the end of May 2020, we -- based ourselves on the recovery of business, which is rather positive before starting on -- to negotiate with every tenant on a case-by-case basis. Now why on a case-by-case basis? Well, because we have a wide variety of retailers, you have an international chain, which is integrated in the market. And then you have a national integrated chain. And then you have an independent local retailer in some sites -- in some of our sites. So we are faced with a variety of difficulties and challenges. We're also mindful of the fact that different business sectors will be faced with different impacts. The restaurants, for example, has been more -- hit hard than sports venues or leisure venues or the food sector. So that is why we've made that choice. Now of course, you can imagine that between the beginning and the end, the 30th of June 2020, we do not have time to finalize any negotiation whatsoever. So as part of this negotiation process, we have been following and monitoring the recommendations made by the mediator, including the support measures for very small businesses, which is a more general support measure, which gives us the ability to give more quantified figures. But in 80% of cases quantification is made in a very open fashion. Discussions are usually very fruitful with retailers, where, in fact, we can have visibility -- correct visibility over the situation. And this enabled us to present and prepare rather the figures for these communication meetings. Why? Well, because we see the first agreements emerge and also new support measures with counterparties for -- to have a win-win situation. We believe, indeed, that part of these negotiations might crystallize and be long-lasting. But this should be marginal relative to all the contacts we have had. And now we're currently progressing on the formalization of a great number of agreements, which should materialize during the third quarter of 2020 in a much more stronger way than was the case at the end of June.

Very well. Perhaps just one question -- a follow-up question. As regards discussion that could materialize or crystallize, does that mean that you would be ready to test a legal means to reach your goals or the negotiations could last even longer?

Well, that is not exactly the spirit with which we enter the different negotiations and discussions. Our position -- principle isn't that one. We feel in a strong position given the jurisprudence force majeure was not declared by the government. So we are fully excluded from these considerations -- legal considerations. In the context where our centers were opened, so this force majeure cannot apply to Mercialys. So we would like to -- and prefer to find a win-win agreement for all our tenants whom, as I said, our partners and with whom we want to work in the long-term rather than launch a legal proceeding. Now to address this topic with tenant accounts, we have until 31st of December this year to come to an agreement. This gives us some room to -- for negotiations. But as Elizabeth said earlier, we won't be as patient for the rent collection and service charges collections as we believe they are already long overdue. Are there any other questions on the telephone lines?

We have 1 question from the line of from the line of Rob Virdee from Green Street Advisers.

I have a few questions. If you could just take one by one, please. Number one, the omni-channel approach makes complete sense. I'm actually a little surprised that this has not been done earlier. So the question is, what is the headwind for centers acting as a last-mile logistics hub? I know in other countries, in Europe, it has been that some retailers just don't have the real time inventory. Is that the case with your tenants? And then the second part to that is, what are the CapEx implications for this omni-channel approach? And that's in terms of setup, but also in terms of maintenance and integration of that?

For the omni-channel strategy, in fact, it is a strategy that we have started working upon as of 2015. The necessary basis for us was to set up a client or consumer database, a B2C proprietary database non-dependable upon the GAFA, so that we can locally reach out to our customers and offer our tools and services. As I said, this database -- this customer database was set up by us in 2013 and today accounts for half of the clientele of our centers and allows us to interact directly with our customers and -- on a nonpaying basis, because we don't need to pay Facebook or Google to have those exchanges, our consumers, and to offer them our services. Then we set up our entire digital infrastructure and proprietary tools that enabled us to, in fact, operate as a marketplace, but also -- and especially as logistics services from the first to the last mile. So we produce locally and distribute locally. Headwinds. The main headwinds on this topic was the lack of desire that we know just amongst our tenant retailers to develop this approach, selling from the stores at the local level. Well, because -- except for the independent retailers, they -- most of them worked in a centralized way. And it so happened that the lockdown and the crisis proved in an evident way for those retailers and the need for them to work at a more local level. Now we make a digital and service offer, which is exactly meeting this need, especially in a context where there's still risks of having a new local lockdown measures, as we see in some countries. So those obstacles and to the adoption of the new measures is fully being lifted at a local level. As to the CapEx, I told you that the investments we are making is very moderate relative to traditional investments. It's standing at EUR 1 million. We are equipped. We have a functional system that has been set up, which we are currently improving in its functionality for the investment quantums. These are very limited and shouldn't be -- they shouldn't use up the envelope. We have local usage costs that will be offset by the cost of delivery, which will be borne by the customers using the services. The underlying logic is to balance -- to find the right balance in this use of the system, which ultimately shouldn't cost any operating cost to Mercialys. Funding was -- we provided for a number that's EUR 4 million to offset this approach, and this is provided for -- in the forecast of the year and will help us launch this business. So you can see the quantum and investment quantums are very significant. Now we have a question on -- in addition that adds to your question. There's a request to explain the agreements we have with Ocito to know whether we intend to take a commission on the sales carried out on the system. Now indeed, yes, we have invented a commission system, but only to offset the operating system costs and not for Mercialys to realize a profit on this service. This will allow the system to become extremely competitive because we will have very, very low marginal costs, much lower than other operators costs, who are trying to be -- to find profits. So this omni-channel system is -- will only be aimed to consolidate our physical local model. I hope I answered your question.

Yes, I do have some more, please. You've previously spoken about the national geographic dynamics in medium-sized cities that are helpful. In those cities, are you seeing a polarization towards more convenience-located centers away from those larger experiential centers? And are you seeing a convergence in yields between well-located convenience centers and prime experiential centers?

In fact, I wouldn't do a segmentation of centers in provincial cities as a large experiential center and a local center. What we see in provincial towns is a historic development over the past 20 years of peripheral development of housing, people who choose to live in individual houses around cities or in towns surrounding those medium-sized cities. This peri-urban development of housing is leading to massive use of cars, and population flows, which tend to be concentrated in these peri-urban areas. This means that people will use their car every day to move around and will go to 2, 3 commercial centers that are located in the peri-urban areas and who dominate these areas. And this is precisely on the sites that Mercialys recentered its business activities and centered its developments and investments. Any other questions by telephone?

Yes. We have another question from the line of Niko Levikari from ABN AMRO Bank.

I have, let's say, the first question regarding the recovery rate for Q3, which now stands at 63%. Could you elaborate a bit more what segments or what tenants are causing you the most problems with rent payments regarding that remaining 36.9%, that is still to be paid? Maybe we can kick off with that.

Well, there is no specific type or sector, activity sector with which we have any specific difficulty in terms of recovering rents as compared to others. We have discussions that are open with all tenants that were not able to remain open during the lockdown, and this covers quite a number of our tenants. And throughout all of these tenants, some for liquidity reasons or perhaps because of reasons of wanting to weigh more in discussions and that's for a game, as you say, have chosen to go monthly over the third quarter. So to date, this means we have a recovery rate that is slightly lower to what we would have expected. By August, it will have climbed substantially because most of those who didn't pay made that choice, and they will have paid at least for the month of July.

Okay. Second question regarding the moratorium for new shopping center developments in peripheral areas. Do you think that this could have an impact potentially to some of the, let's say, existing extension plans that you have in your uncommitted pipeline?

Well, mainly, we consider that the government plans in terms of moratorium would impact new creations of shopping centers. Since 2014 within Mercialys, we have been saying that our network on the territory is sufficient in terms of shopping centers across France with perhaps a few exceptions. And this is why Mercialys had chosen in 2015 to no longer develop any greenfield, but to consolidate and restructure existing shopping centers by recentering on our dominant assets in medium-sized cities, as I answered to a previous question. We believe that the moratorium will crystallize the situation that we described. And it will be positive premium to existing players with difficulties for new entrants and promoters, and it will not stop. And we've actually just received a few authorizations for small extensions, consolidations, transformations of existing shopping centers in cities that want to adapt their commercial offer.

Okay. And maybe just a very last question. Just to confirm. Did I hear correctly that the CapEx spending that you estimated for the Ocito rollout would be about EUR 1 million for 2020? That's the last.

Absolutely, that's correct. That's correct.

And the final question comes from the line of Jaap Kuin from Kempen.

I've had a couple of questions as well. Maybe start out with the kind of accounting question on straight-lining discounts and booking all the rents for H1 and kind of excluding any impact on FFO, which now includes a large amount of noncash items. So given also that some of your peers have opted for a different approach in terms of the way they invoice rents and discount this already in the first half, why do you believe this was the correct approach in showing results?

So for rent discounts that have been largely determined for very small companies and for other outlets, that's most of the EUR 13.5 million that we've estimated. We're applying IFRS 16, which notes an advantage related to the lease. And in that case, we have a discount that is spread out over the total length of lease. And this is what we've applied rather than the one-shot impact determination because as Vincent explained, we will look for a counterpart during our negotiation in order to create value for our economic model at Mercialys and this would include, for instance, a lengthening of leases, renouncing triennials and this will secure the future cash flow profile of the company, and it's the accounting [indiscernible].

And will you be able to provide some more clarity on kind of your guidance of FFO also includes noncash item? Are you able to kind of split the guidance out further in terms of what you expect in terms of cash rent collection for the full year versus 2019?

There is no noncash specific element that is integrated specifically. As I was saying earlier, if you look at the spread out effect through the negotiations for non -- very small companies with the quantum, similar to what we did with very small companies, the pro rata temporis effect of the discount would be slightly over EUR 7 million. And there is no noncash element in the estimate. We have reviewed provisions for doubtful debt depending on the different stages of the various companies. This is not related to discussions on discounts or specific recovery for the second and third quarters. This seems realistic and reasonable. But again, there would be no noncash effect specifically.