NSI N.V. (N4RN.F) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for holding, and welcome to the Presentation of NSI Preliminary Results 2019. [Operator Instructions] I would like to hand over the conference to Mr. Dirk Jan Lucas. Go ahead, please.

Thank you. Good morning, everybody, and thank you for joining the NSI 2019 Full Year Preliminary Results Presentation. The presentation will last for about 30 minutes, followed by a Q&A session. On the call today, we have Bernd Stahli, Anne de Jong and Alianne de Jong. Bernd, over to you for the highlights.

Thank you, DJ. Good morning, everyone. We have a great set of results to present to you this morning. But before we go there, you can see on Slide 2 our new updated mission statement. It's completely different from the one we had before, but it fits with the next phase for NSI that we're planning for in the coming years. The restructuring is fully behind us, and the statement puts the customer front and center. It's an ambition, but it's one that will guide us in our choices for the coming years. If you go to Slide 4, you can see the main KPIs. The numbers reflect the efforts of the team and the strength of the market in recent years. We are particularly pleased that the vacancy is now at 7.1%, which is below the market average. This was one of our goals when we started out with the restructuring in early 2017. Slide 5 shows the improvement in like-for-like net rental growth at 5.2%, a number we were very pleased with. It also shows that we've got a very comfortable loan-to-value at 27.4%. Slide 7 shows the map of The Netherlands and where we now have concentrated our assets. Compare it to the map 3, 4 years ago, it's completely cleaned up. It highlights the concentration of our assets in the markets where we want to be, which for us is the [ ramp starts ] and mostly the G5 in The Netherlands. Slide 8 confirms that we're now up to 90% in the markets where we want to be. There's 10% to go, and that will happen in the coming years where we will manage the assets in an appropriate way until we find solutions or opportunities to sell them at the right price. If you go to Slide 9, you can see that the turnaround that we've had is about EUR 1.2 billion of deals over the last 5 years. If you compare that to the EUR 1.3 billion portfolio that we have today, it shows that we basically turned over our entire portfolio, and it was necessary to get us where we want to be today. Slide 10 shows the efficiency gains that we've made. We're down to 65 assets with an average asset value of about EUR 20 million an asset. And it shows that we're running a more efficient portfolio of larger assets. In fact, where we stand today, the team has capacity to run more assets. If you look at Slide 11, you can see the turnaround over the 3-year period. There are lots of numbers on this page. I think we're proud of all of them. But particularly the vacancy, which we managed down from 21.4% to 7%, and the LTV, which was 44% and now it's 27%, are numbers that give us good confidence with respect to the years ahead. Slide 12 shows that as an investor looking at NAV growth and dividends, the return last year was 26%. And over the last couple of years, the returns have been generally positive, again, a number we're very proud of. Slide 13 shows where we're going to focus our efforts over the coming years, further portfolio optimization, developments. Anne will talk about that later in more detail. And we will increase our efforts with respect to Space-as-a-Service, the services that we think our customers nowaday needs and will pay for. Slide 14, my last slide for the moment. There is more emphasis on ESG. We recognize that we fully believe in ESG. It's a part of the business that is now basically integral to our business. It's a hygiene factor to our business. If you look at our scorings today, we have our first GRESB score at 71 points, which is not where we would want it to be but the direction of travel is clear, it's getting better; and also with EPRA, Most Improved Award, we're not yet where we want to be, but the direction of travel is clear. Give it another year or 2, and we will be up there with everyone else in the market. With that, I would like to hand it over to Anne.

Thank you. Good morning. Anne de Jong speaking. As usual, I will start with a slide about the Dutch office market, and then I will go on to the details about the portfolio. Slide 16 is about the Dutch office market. It shows that markets remained strong across the board. We see fewer transactions realized in '19 compared to the year before. This has to do with the fact that few [ establishments ] want to sell as they are not sure what to do with the money, and supply was limited. Yields are pretty low. And looking at the occupier market, we concluded in all G5 markets, prime rents are now above the previous peak, let's say, 12 years ago. Vacancy rate for Dutch office has declined further and now equals around 8.5% for the total country. More importantly, Slide 17, which is about our own vacancy rate, this has fallen below vacancy -- below market average now. From the peak in '15, the vacancy rate is down 17%, and this is caused by a mix of disposals and letting activity. And we are very happy that, especially last year, the impact from letting activity is very strong. This means that the new team has paid off, and we can show this by the occupancy growth which had been increased with nearly 6%. We expect more to come in the coming year. More details is on Slide 18. There, we see that office vacancy is now down to 4%. We were very successful in Amsterdam. Vacancy is now down to 1.5% there, which is also below market level. HNK still performed well. Vacancy rate is below 15%. And we think that further improvement will lead to, let's say, 10% at the end of the year. Let's go to Slide 19. The impact of strong operational performance is strong. And we see that further yield compression, combined with this performance, leads to positive revaluations. Values are up by EUR 146 million. That equals 11.6%. Revaluations are positive across the board for offices and HNK, while, let's be honest, retail remains soft. As with occupancy, Amsterdam continues to outperform, and capital growth is accelerating there. A similar trend is seen even in the other partner cities. We see that more investors are starting to look outside Amsterdam. And even outside Amsterdam, yields are going down and driving up prices. My next slides are about our developments. Slide 21 is about Bentinck Huis. We are progressing well, and we expect to deliver this building in April 2020, in a few months. Several tenants are looking at the building, both single let and multi-let. We are looking at what the best option is for NSI. And to be honest, in a multi-let strategy, it will take a bit longer, but we think we can add [ surprises ] there that we might be able to create some additional attention, which will help drive future cash flow. We have to make choice there as we have several different potential tenants at the moment. As Bernd said before, sustainability is core to the business, and this is what we're going to do with slide -- with the Bentinck Huis. And we show it on Slide 22 what we plan to do here. We are investing EUR 8 million to get state-of-the-art building. And we try to combine energy efficiency and well-being and are upgrading the building to the highest standards. I'm pretty proud of the aim for a BREEAM In-Use Excellent rating, combined with an A label, and this is quite an achievement [ for moment ] at this age. My last slides are about [ 2 of our developments ] in Amsterdam, and that's why we present again the development pipeline on [ 23 of the total Amsterdam ]. The developments in Amsterdam have picked up compared to a year ago with some additional projects, in particular, in 2022 and 2023. But we don't see this as a major concern. Vacancy rate is below 4% for overall market, and there's still a very strong demand and a lack of high-quality supply. In the next few years, no more than 4% stock added in a single year. Hardly enough to modernize [ existing stocks ] with a lot of large occupiers. One is Vitrum. We are very happy with our development pipe that we have in Amsterdam. On Slide 24, we show our own NSI development pipeline. And as said before, 2 projects are progressing very well: Vitrum, close to the South-Axis; and Laanderpoort, the building for ING in Amsterdam Southeast. We also show on this slide 2 projects still on the drawing board, Centerpoint and Motion building. Here, we are working closely with the municipalities to see what's possible on these sites. And with strong, impressive demands of prime offices in Amsterdam and yields falling across the market, we feel the yields on cost for these projects remain attractive. My last slides today are about a project we are making -- where we are making very good progress, Laanderpoort and Vitrum. Slide 25 is about the Laanderpoort redevelopment. We signed a cooperation and a lease agreement with ING. And next steps include planning and lease-out agreement with the municipality and the appointment of an architect. We are very positive about this project. This has to do with the location and the fact that it's pretty much pre-let to ING, 87.5%. However, there are still a few things that still can go wrong, but we have added capacity to the team to reduce these risks as much as we can. Last but not least, Vitrum building, Slide 26, a building very close to the prime part of the South-Axis. We acquired this building in 2017 knowing that it was ready for an upgrade, that it was necessary. And we expect to start this renovation next year after the current tenant leaves in the summer. We are finalizing the design, and we'll create a fully, more modernized asset. We expect a substantial increase in the rent from, let's say, EUR 275 per square meter today to around EUR 400. I'm happy to conclude [ the dispute itself ] in a healthy profit and cost. With that, I will hand over to Alianne, who will explain more about the financials.

Thank you, Anne. So on Slide 28, you can see that the EPRA EPS is EUR 2.64, is at the same level as full year 2018. Significant lower financing costs and strong positive like-for-like gross rental income of approximately 8% helped to maintain a stable EPS level. And on the next slide, 29, we showed the EPS bridge. In 2019, due to the net disposals of assets in the period 2018 and 2019, our total GRI was 1% lower on an absolute basis. And as mentioned before, on a like-for-like basis, gross rental income was up by 8%, and net rental income was 5.2% positive. The slightly lower growth on a net basis is mainly a consequence of higher maintenance costs, in line with our guidance at the beginning of this year. And the lower net financing result of 5 -- EUR 0.15 is mainly a consequence of the EUR 2.1 million negative one-off. And this one-off was caused by the IFRS 9 impact of the refinancing of our debt during 2018. On Slide 30, you can see the EPRA NAV bridge. The EPRA NAV increased with 20.7% per share to EUR 48 per share. The main driver of the EPRA NAV growth is the strong, positive revaluation of our assets. And Anne has mentioned earlier that in 2019, capital values were up by 11.6%. On Slide 31, on the left, the development of our LTV is shown. The LTV of 27.4% is down 9.4 -- 9.5 percentage points compared to December 2018. And this further decrease is the result of the positive revaluation and lower net debt due to the net disposals during this period. At the end of December, the LTV level is below our indicated target range of 35% to 40%. And given the size of our development pipeline, we feel comfortable in this position. As we mentioned earlier this year, the development pipeline could substantial be in a specific period relative to our balance sheet. And we still can -- we still confirm the start of the individual development projects depending on our view on the cycle or our view on specific project risks. But it's very important that when we decide to start a project, we are certain we can finance the project up and until the delivery date without going above our internal 40% LTV limit. And in the short term, after the plan to have EUR 60 million assets held for sale as per today, our LTV will fall to circa 26%. And the cost of debt is almost at the same level compared to December last year despite repaying some bank facilities which was below average cost of debt. So we conclude that our balance sheet is in great shape. And given this strong balance sheet, we were able to fund our developments and potential acquisitions. On Slide 33 -- 32, you see the maturity of our loan portfolio. This year, we succeeded in the further extension of the maturities and the further diversification of our funding sources. And this is a result of repayment of our term loan by EUR 100 million, combined with issuing an unsecured 12-year EUR 40 million notes to Athene Asset Management. And there won't be any major maturities in the near term. The EUR 250 million undrawn RCF facility provides us maximum funding capacity for investments and capital to pay the small, secured EUR 25 million loan expiring in July this year. So to conclude, in our view, our balance sheet is well prepared and fully supports our strategy. On the next slide, 33, we have presented an indicative EPS development for the next 5 years. The main reason we really felt the need to present this is the fact that the EPS level has been quite stable until now. It's very important to mention that these EPS projections are indicative and based on the current assets portfolio, so no further disposals or acquisitions have been taken into account. For this year, we expect a strong operational performance again. But due to the lower gross rents, we expect EPS to be in the range of EUR 2.30 to EUR 2.40. And by completing our asset rotation and given our net disposals in 2019, we can't maintain an equal EPS level in 2020. This is mainly the result of a lower LTV we aim for to prepare the balance sheet for developments. As the consequence of the decline in gearing, revenues will be lower. And for the next years, for the period after 2020, we foresee a further temporary negative impact on EPS. And this lower EPS is mainly due to the income loss of 2 buildings where tenants need to leave before developments can start. And this concerns the Vitrum building located on the Parnassusweg close to the South-Axis, where the Court of Justice will leave as of mid-2021. And the other one is the Laanderpoort building, where we expect to develop for ING. At this moment, we expect that the start of this project will be in the first quarter of 2022. And by finishing these 2 projects in 2023 and 2024, the total revenues will increase and will lead to EPS growth. Furthermore, the quality of our portfolio will improve. And we expect capital gain on these development projects. We strongly believe that in the long run, these development projects will drive a healthy total return for our shareholders. During the development period, we assume that the capital growth will compensate for the EPS dip. So finally, after 4 to 5 years, we expect NSI will end up in a much stronger position with a higher, sustainable level of EPS. So I would like to hand it over to Bernd again for some final remarks.

Thank you, Alianne. A great set of results, we're pleased with the work we finished. And we're going to keep on driving returns for the coming years, and the pipeline is one of the obvious ways of delivering that. We had a strong operational performance in 2019. We expect again a strong operational performance in 2020, much of that already is baked in given the activities that we had last year. So we're comfortable to predict a like-for-like NRI growth in excess of 3% for 2020. The balance sheet is in great shape. We can fund our developments. We have room for acquisitions. Time will say if and when these will happen. Then I'll refer to the acquisitions, not the developments because we're pretty confident we can make progress there. The guidance is EUR 2.30 to EUR 2.40. That is difficult to project because if we buy one asset and we don't leverage it, it is easy to acquire earnings. That is not our game. But based on the portfolio as of today, this is the sort of level in terms of earnings to look forward to. It's difficult to project 5 years out. But anyone who will look at the bridge will realize that our ING project will really only complete in 2024 at the end, and actually, the main contribution to earnings will come in 2025. That's 6 years away, so I wouldn't put too much emphasis on it. But anyone that sees EUR 2.75 for 2024, and we can see an increase after that for 2025, you can see that we're pretty comfortable to maintain the dividend at $2.16. And if and when we get through the coming 2, 3 years with the earnings dip that is projected, we'll see what we'll do with the dividend afterwards. So the statement is at least $2.16 in dividends. We reckon it to be flat for the next 2 years, and we'll see thereafter. With that, I would like to hand it over to the operator for Q&A.

[Operator Instructions] First question is from Mr. Niko Levikari, ABN AMRO.

Okay. I've got a couple of questions regarding the results. Let's say -- you mentioned in the pre-Q4 results that there would be one potential acquisition that you're looking at. Can you provide a bit more color on that? What sort of yield level are we looking at? And if it's the sort of a value-add project or more of a corporate -- like to say core-plus type of a project?

Unfortunately, we can't. Sometimes, these processes take longer than we want, but rest assured, we'll try and do these deals as quickly as we can. If and when we can tell you more about this acquisition, we will. We have indicated, though, that the sort of yields that we've been acquiring on in recent years may not be the yields that we can acquire on today. So it would be lower than previous deals. But if and when you see the acquisition, you'll understand why.

Fair enough. Second question about the Bentinck Huis project that has seen a little bit of delays with the expected Q2 completion. Has that had an impact on the yield on cost of the project? Because I remember earlier, you've guided it to be at least [ 7% ]. So is that now going down? Or is that expected to stay the same?

What we have started to do this year is to start capitalizing interest. Had been a bit of debate whether or not we should capitalize interest on a project like this, but we wanted to be consistent. And certainly, for the development pipeline that is upcoming, it's important to have the capitalized interest. So that's why it's in this project as well, which is why the CapEx has gone up a bit. So yes, a couple of months of delay will increase the capitalized interest, will reduce the yield on costs a little bit. The delay had to do with some fire safety issue that was unforeseen but not entirely unsurprising when you look at it, I mean, when that is that old. It's being addressed. It takes a month, which is pushing it from March to April.

Okay. All right. Let's say, the last question that I have is about the HNK locations that you have outside the target cities. Given that you're going to do the strategic review on the whole service, is there something we can expect with these sites? Could they be on the potential disposal list? Or...

I think, actually, at the beginning of last year, we already signaled that we're reviewing our locations for HNK. For us, HNK is a product service level that we're comfortable with but we need to [ decide further ]. But as an FPI, we have to own the underlying assets if we provide the services. So the decision to invest in a city like Groningen, for example, is not a decision to offer services, but it's also a decision to allocate capital to the city where we actually don't think longer term we can make the economic returns on the real estate. Then you can decide to invest in that market to provide the services, but if their services don't generate the additional profit to compensate for what may be an underperforming asset, then the total proposition may not be attractive enough. And so these sort of assets in those locations may ultimately be sold off. It doesn't mean there's any urgency because I think in Groningen, I think the occupancy is like 96%, 97%. But as we progress, these sort of assets may eventually end up disappearing.

Next question is from Mr. Jaap Kuin, Kempen.