Montea Comm. VA (MONT) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for joining our webcast this morning. The first half of the year demonstrates that Montea's strategy is working exactly as intended. As momentum picks up across our markets, we see our clients taking strategic decisions, translated directly into leasing activity, investments, developments and earnings growth. As in every quarter, I'm pleased to present these results together with our CFO, Els; and our Investor Relations Manager, Inna. Els and I will take you through the results, after which Inna will lead the Q&A session. Our EPRA EPS remains fully on track with 5% year-on-year increase, underpinned by a strong 2.8% rental growth. Our portfolio as well as our development pipeline have seen exceptional leasing momentum with 255,000 square meters let, relet, securing an average rental uplift of not less than 16%. This progress means that we have now secured 95% of Track27, bringing us within reach of the EUR 1.15 billion target we set ourselves. At the same time, we have fully secured the funding required to deliver this growth. With both investment and financing largely locked in, we have a clear runway for future earnings growth and confidence on future execution of our strategy and our promised value creation. Before diving into results, I would like to give one slide on the market update. And what we see is while geopolitical uncertainty remains a reality that is unlikely to change soon, we see that occupiers are starting to look through that. 51% of occupiers are now looking to expand in the next 3 years, an increase not seen since 2023. Businesses have increased their confidence with the 3PLs, post and parcel delivery and e-commerce being most optimistic, along with Chinese occupiers that are increasingly active across Europe. I will come back on that later on. And last but not least, we see that occupiers are concerned because of the lack of good quality product. Also on that topic, I will come back later in the presentation. As said, 255,000 square meters of letting and reletting, 145,000 of that is in the existing portfolio, but 72% of that 145,000 square meters is leased to new tenants. And we were able to increase the rent by 16% on average in line with our ERV. When we look at the kind of leases we signed, we see that more than half of them were big box above 25,000 square meters with nice names like JD.com and CRG. Going into detail on some of the deals, the JD.com deal is a deal we did on the former Decathlon site. You remember, we developed that building in 2017 for Decathlon. The lease was expiring in 2027, and we were already closing this deal today, derisking the 2027 lease maturity profile already in 2026. Another nice deal we did over the last months was with CRG, the Claes Retail Group. You remember that 6 months ago, we bought this building empty after the bankruptcy of Euro Shoe. We renovated the building and at delivery, it was leased to CRG, a nice deal on a core location. We continue to sustain near full occupancy in our portfolio, outperforming the market by no less than 500 basis points. 95% of the leases maturing in 2026 have now been let or relet, only leaving us 0.6% to renegotiate over the last half year. And as I said, the tenants are struggling with the lack of good product, and this is something you see in my opinion, in this graph where you see that for good product like our portfolio, you still have an occupancy rate of 99.4%, where the average of the market is now roughly between 94% and 95%. We also see that we are able to catch rent reversion with an average rental growth of 4% since 2022, clearly demonstrating the capturing of the reversionary potential to both indexation and positive reversion. As of today, we still have 7% of rent potential to capture, meaning future rental growth potential. Let me now focus on Track27, our growth plan. As already mentioned, 95% of the EUR 1.15 billion we want to invest is now secured. More than EUR 800 million has been invested. Another EUR 90 million is under execution today and another EUR 180 million is under exclusive negotiation. A part of these are the remaining directly yielding acquisition we announced in Q1, which we expect to close in the very near future and at an average yield of above 6.5%, on average, 6.6%. You know our 4 growth pillars, but I always want to repeat them, development, acquisitions, partnerships and green investments. Developments, 130,000 square meters of new leases signed. I will come back on that. 33,000 square meters acquired in Brussels and of course, our ongoing partnership with the Weerts Group in Liège. Going to the first pillar, the developments, we were able to win a tender in the Port of Antwerp for the development of a new building for DP World. We were able to sign a lease with Bosch Siemens households for development in Tiel, where we were able to sign a lease for 70% of this building. So 30% is still on the market, but there are advanced discussions for these developments. And this is for me nice momentum to give you an update on the total development of Tiel. As you know, in 2018, we bought 48 hectares of land, which is the former Glassworks site. We remediated the site. We developed, and I start from the right-hand side, we developed for Intergamma last year, 95,000 square meters GLA, both logistics and cross-dock platform. In the back of the site, we have a land lease with Struyk Verwo for another longer period for the exterior storage of building materials. The one in blue next to Intergamma is the one we are starting now, the 67,000 square meters, of which 70% is pre-let to BSH. The one in green is the one we still have on the market on the commercial process where we are looking for -- actively looking for tenants. Then the 2 purple ones we developed for Overdie and are starting a development for Arjo. And the one in the back, the small one, the yellow one is a very interesting one. We leased it out. It's a land lease to Milence, and Milence is building a trans-European charging platform for truck charging. And this is nice because we will be able to use the energy we produce on the roofs of this park to develop or to charge the trucks that come to the park. So this is really sustainability in action. In short, we have 188,000 square meters now under development in Halle for the Colruyt Group, 2 projects in Tiel and of course, our 40% in the JV with Weerts in Liège, which gives us another 220,000 square meters in a near-term development pipeline and after that, even 1.4 million square meters of future development potential in portfolio. Second pillar, acquisitions. We did a very nice acquisition in Brussels, really at the entrance of Brussels. We know that Brussels is struggling to organize the last mile logistics. You know that we have had great experience in Antwerp with the Blue Gate project, and we really intend to do the same in Brussels. The building is now leased for a long period to bpost, but this strategic plot will only become more strategic in the upcoming years. Talking about the partnerships, the beautiful Skechers project we developed together with Weerts, and we're really proud of the successful partnership the first 3 units of 5 have now been delivered to Skechers who have now started the automation works in the building. Remaining phases are fully on track for this beautiful ambitious development. Looking at the pipeline of the project beyond the successful execution, what makes this project particularly attractive for us, it's the earning profile through our joint venture structure, Montea has been generating a return on every euro invested from day 1, resulting in an immediate positive contribution to our earnings. Last but not least, and you know this is a very important one for me. I always emphasize on it. It's our land bank where we think it is our most important competitive advantage. We were able to add another 500,000 square meters of land under option in Q2, mainly in France. So we continue to secure strategic land with now close to 4 million square meters under control. Now in Montea, you know that we always plan with a long term in mind. Our first priority today is the execution and remains the execution of Track27, but we are already preparing the future beyond Track27. One of the key growth drivers will remain this land bank and the in-house developments we can realize on them. And with the French land bank now as an anchor where we are in the process of securing 500,000 square meters of permits. We intend to continue the growth on this land bank beyond 2027. And to make this very concrete, in our land bank, we see another 75% of rental growth in the upcoming years. But of course, growth just for the sake of growth is not really the game we're at. We want to create value, and we think that there is around EUR 350 million of additional value remaining to be captured through these developments. This, in our opinion, highlights the unique strength of the Montea platform. A substantial portion of our future earnings growth and value creation is already embedded in the assets we own today. And with this positive message, I would like to give the floor to Els.

Thank you very much, Jo. All of our growth is backed by a very strong balance sheet. During the first half of the year, we secured and refinanced EUR 207 million of funding. This means that we now have all the means in place to execute Track27. At the same time, we further improved the quality of our financing. We refinanced all debt maturing in 2027 well ahead of time while keeping our long-term, well-diversified financing profile with long-term interest rate protection. We also continue to maintain the cost of debt at a very low level of 2.2% on average, well below our maximum guidance of 2.5% under Track27. In short, we have the funding, the balance sheet and the flexibility to deliver our growth plans and take new opportunities whenever they arise. Our funding position has been strengthened further. With the refinancing done, we now have no debt maturing before 2028. At the same time, we extended the average maturity to 5.5 years, creating a well-balanced repayment profile. The funding platform has been strengthened by adding 3 new lending relationships. Overall, our funding is well spread over time, supported by a broader group of financing partners and fully aligned with the execution of Track27. Our financial strength is not only reflected in our funding profile, it is also recognized externally. Fitch reaffirmed our BBB+ investment-grade credit rating with a stable outlook, recognizing both the resilience of our portfolio as our disciplined financial management. For the first time, we also obtained a strong F1 short-term credit rating, all while keeping our leverage and coverage ratios within the expected levels. We continue to operate within a resilient financial framework. All remaining Track27 investments are fully funded and covered within our around 8x adjusted net debt on EBITDA barrier. We maintain our financial discipline, and we continue to protect the strength of our balance sheet while keeping the flexibility to capture new opportunities and, of course, market momentum. Based on this strong first half year performance, we reaffirm our guidance for both '26 and '27, keeping us firmly on track to deliver the 7% annual EPS growth ambition of Track27. We have our 2027 EPS target of EUR 5.60 in sight, thanks to the strong performance of our existing portfolio, the continued like-for-like rental growth, additional income from recently completed projects and of course, from new directly yielding investments. With our growth pipeline secured, funding in place and earnings Vishaysibilities continuing to improve, we remain confident about the road ahead. I will now hand back to you, Jo.

Thank you, Els. So in conclusion, we see strong leasing momentum with 255,000 square meters signed over the last 6 months. We see significant progress on Track27 with 95% now secured and with a fully funded investment pipeline, as Els mentioned, that provide us confidence in the earnings trajectory ahead with a 7% earnings per share growth over the next years. Backed by a strategic land bank, sorry to repeat it again, but backed by a strategic land bank, deep local market expertise with our local teams and a high-quality portfolio, Montea is well positioned to translate future market demand into sustainable long-term growth. And with this message, I will now hand over to Inna for the Q&A session.

Thank you, Jo, and good morning, everyone. [Operator Instructions] Our first question is from Suraj at Green Street.

Just a couple. First one is on the EPS. It just looks like it's lagging a little bit in 1H. I know you reiterated your 2026 EPS guidance. Is it possible just to help us understand how you bridge the gap? Maybe I'll ask the second question afterwards.

What you mean is actually that we are currently at the 5% growth, while the guidance is 7%?

Right. Yes.

Yes, that's clear. Yes, of course, the 2% remaining is the recognition of Montea in the Netherlands as FBI for fiscal year 2024. So we are still awaiting that recognition, which will represent roughly EUR 0.08, the 2% that is missing.

Okay. And then the second one was just on France. You still, I think mentioned that you're trying to aim for the 500,000 square meters of committed land by end of '27, have 150,000 secured today. Just wanted to understand, is that still sort of the realistic goal by the end of next year? And is planning maybe the main constraint to accelerating in France right now rather than occupier demand?

Well, as in every country, planning and permitting is the main challenge in our projects, but we are well on track. We see that when we make that message, it's because we have the visibility to get the permits in place. Let's not forget that a lot of the land in France that we buy is subject to obtaining those permits. So that also means that we did not have to invest in the land prior to obtaining the permit. So we are well confident that we will obtain these in this year or the beginning of next year. But in the meanwhile, they are less difficult for us because we don't have to buy the land until they have the permit.

And Jo, maybe to add, as of today, we've secured the 150,000 square meters already of the GLA that we are planning to do until the end of 2027. So we definitely have work ongoing there, and we're confident that we can reach the remaining 350,000.

Absolutely.

Our next question on the line is from Lynn at KBC Securities.

I have 2 questions. My first question is also on France and the development potential that you have there. I was just wondering if the WDP-Argan combination changes your perspective on the French market given the potential increase of competitive pressures? And if you would maybe target a bit of tenant or building type in the future going forward?

Well, thank you, Lynn, for your question. Let's say that WDP was our first competitor in the Benelux, and Argan was our first competitor in France. So them joining forces doesn't really change the needle for us. It's just the same people. It's the same that we were encountering on the current market. So no, that doesn't really change for us the dynamics. Of course, it's the DNA of Argan, the DNA of WDP and the DNA of Montea is, in that sense, comparable that we all try to capture value by in-house developments. In that perspective, I think Montea is well equipped, as we already mentioned, by the land bank we developed, if you compare it relative to the total portfolio side, we have the largest land bank of all players in the European market. So we are really confident that we are able to continue our growth plan on our own land bank and the merger of Argan and WDP doesn't really change for us on the French market.

Okay. Perfectly clear. And then second question is on your operational margin or EPRA cost ratio. Your guidance for 2027 is 90% operational margin. But if I see it, it actually comes down a bit. And I understand there is some seasonality. But maybe could you elaborate on why it's been coming down and how comfortable you are in reaching that 90% next year?

Yes. Comparing to last year, it's more or less in line. So indeed, we have been speeding up in investing in the teams in the different countries to get the growth done, which has a slight impact on our operating margin or the EPRA cost ratio. But this being said, I think with this cost ratio, we are in the top 10 of the EPRA universe with the best performing or the highest occupancy rate. And indeed, the target for 2027 can be reaffirmed to 90% operating margin for 2027.

Our next question comes from Steven at ABN.

I have 2. I'll ask them separately. So first, looking at your recent leasing track record, large-scale occupier demand seems to be improving and being better than stated in Q1 and before. What changed most during the quarter? Is it tenant decision-making, pricing, sector demand or anything else? And also, how should we reconcile your leasing and comments with the rising market vacancy that you show on Slide 9?

Thank you, Steven, for that question. First of all, it's not repricing. Let's be very clear. If we were able to increase the rents by 16%, it shows that we have this -- when we say there is rent reversion potential in our portfolio, we really show that it is there. So it's not about lowering the prices. So let's be very clear on that. I think what a lot of the deals we did just take much longer as they did in the past. We all remember those, I would say, '21 after the Corona crisis, '21, '22, where parties needed to decide within 2 to 3 months because otherwise, there was competition and somebody else was taking the space. Now we see that they take their time. It's taking longer to take a decision. So that's why there has been a bit of a delay. I think that uncertainty is the new normal. It's a bit of a catch phrase, but I think it's true. Uncertainty is the new normal. Those who said we are going to wait until we have more visibility in the market, they now understand that it's not about to come. Operationally, they were stressed and they needed to take a decision and now they start acting again. Maybe last point I want to make, and it's a repetition of what I said during the presentation, we see the clear distinction between the A product, A product being a sustainable new product compared on an A location, on top location compared to everything else. And you see that on that A product, there is still a lot of competition. It's much more difficult if you have B product, this can be on B locations, it can be a bit of older buildings, not really in line with current demand, then you are struggling. But luckily, we have this strategic well-positioned portfolio. We did a lot of -- a lot of people forget that, but 10 years ago, we already did a lot of asset rotation in the portfolio. I've always said that we focus on those strategic long-term leases. If you look at the first break dates on average in our portfolio, it's above 6 years, which is quite unique in the market, but it's really because we focus on that prime product. So I think that is, in my opinion, the main reason why you see that difference between our 99.4% and the average in the market, which stands around 94.5%.

Okay. Very clear. Maybe a second question, if I may. If I recall correctly, you have started some small speculative developments, something you didn't do that much before. Can we expect more of those speculative development starts going forward and to what extent?

Well, we've always been very clear, Steven, that for our developments, we would start based on a 50% pre-let. We've done that in France. We've done that in Holland before. And we are doing that now in Tiel. It's 70% pre-let. So we feel confident that we are -- there are already ongoing discussions for the remaining 30%. So there, our strategy is unchanged. Speculative development is part of our scope, but only if there is 50% pre-let. And on that, if I can assure you, every time we've done that in the past, we were able to lease out the entire building before the delivery date. So we have a very strong track record on that topic.