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

Ladies and gentlemen, thank you for holding, and welcome to the presentation of NSI half year results 2020. [Operator Instructions] I would like to hand over the conference to Mr. Dirk Jan Lucas. Go ahead, please, Mr. Lucas.

Good morning, everybody, and welcome to the NSI 2020 Interim Result Presentation. Today, we have our CEO, Bernd Stahli; and CFO, Alianne de Jong, presenting for you. After the presentation, there will be the opportunity to ask questions. I hereby hand over to Bernd for his part of the presentation.

Good morning, everyone. Q2 clearly was an unprecedented period for most of us, with coronavirus impacting lives and businesses. Coronavirus is still with us, and the implications will be with us for some time to come as well. Today, let's focus on the quarter just behind us. Slide 4 shows the key highlights of the business. The key focus this quarter was rent collection, and we ended Q2 with 95.7% of the rent received. We will discuss this in more detail later. Asset sales are down by 4%, reflecting coronavirus-related uncertainty in investment markets. This has resulted in an NAV of EUR 44.8 and a small increase in the LTV to 29.2%. Slide 5 shows the improvement in operating margin and the strong like-for-like net rental growth. The 4% growth is particularly pleasing as it includes all the coronavirus-related costs to the business. If we look at the operational performance, Slide 7 shows our only acquisition this year, 120 in Amsterdam. We agreed to acquire this asset in early March for EUR 34 million to add to our existing holdings in the Sloterdijk area of Amsterdam. The opportunity sits in leasing up the vacancy of these assets. We have proven in the past that we can lease up our vacancy in Sloterdijk with the acquisition of Q-Port and Motion with significant vacancy, and we're confident we can achieve the lease up of 120 over the coming periods as well. Slide 8 is about making the point that coronavirus has had an impact on our operational business in Q2. We introduced a program that allowed the safe usage of all our buildings, with clear signing, demarcations and sanitizers across the business -- of the portfolio of assets, and a very clear communication to all our users. We did spend EUR 400,000 on this during quarter which we absorbed as a cost to the business. The general feedback from our tenants has been very positive about our initiative in this respect. Slide 9 shows the makeup of our portfolio, with 51% of the assets now in Amsterdam. Only 10% of the portfolio is outside of our target markets, but even this still include assets in Amsterdam, including school boarding and student housing complex. Both offer longer-term redevelopment potential back into offices or alternative use. Retail today is only down -- is down to 5% of our assets. Slide 10 highlights that the letting markets unsurprisingly went quiet in the second quarter. As a business, if you didn't have to make a decision during the quarter, you did not, you postponed your decisions. That said, we have seen inquiries pick up again in June, and we've actually agreed a number of new leases during the month of June. The summer period will be quiet, and it will be interesting to see what happens post the summer. But confidence, in general, we see is returning to markets. Slide 11 shows our longer-term leasing track record. Like-for-like vacancy during the half year period was almost entirely flat. The increase in vacancy is almost entirely due to the acquisition of 120, which had a higher vacancy when we acquired it in March. Slide 12 confirms the effects of this in the market. Rents have leveled off and yields of margin have moved out. What is not physical in this graph is that we do see incentives increasing across all markets. The effect of this in our valuation is visible in Slide 13. The valuation of our assets is down by 4.1% in the first half, reflecting a marginal yield shift in the portfolio. The negative effects are asset-specific, but in the end, it washes out to ease everything being marked down a little bit over the period. Last but not least, Slide 14, sustainability. We are working hard on improving the sustainability of our portfolio. We think we've done a great job advancing this in our redevelopments, and sustainability is now integral to all our new developments. We're also working hard on improving the sustainability of our existing assets. It will take time for all of this to become visible to the outside world but expect us to continue to push on this front. With that, I would like to hand it over to Alianne for the developments and the financials.

Thank you, Bernd, and good morning, everybody. I would like to give you an update on the renovation of Bentinck Huis and the other development projects. First, the refurbishment of Bentinck Huis. On Slide 18 (sic) [ Slide 16 ], you can see 2 pictures showing the atrium before and after the renovation. This impression shows the transformation into the future with building for our tenants. On Slide 19, we present some more details about the Bentinck renovation project. The core and shell phase of the Bentinck Huis redevelopment was completed this quarter. We had 1 year delay in the delivery date of this project. There are different reasons for this. More time was needed to receive the proper renovation permits and the fire safety approvals. And furthermore, the project planning proved to be too ambitious by 2 months. Unfortunately, due to the outbreak of COVID-19, the project faced a further 2-month delay because fewer construction workers could work at the same time. We decided to increase the original CapEx budget of EUR 5.4 million with EUR 2.8 million to a total of EUR 8.2 million. The reason for this was to change scope of the renovation. We decided to create a formal second entrance at the other side of the building and another design for the central stairs. And additionally, upon acquisition, we did not foresee the possibility to achieve a BREEAM In-Use Excellent certification, so we increased the sustainability budget as well and this is rather unique for such a historical building. In June, NSI signed a 10-year lease contract for the whole building with Rijksvastgoedbedrijf, and based upon a request of our tenants, NSI coordinates the fitting out of the full building for them. These works were complete in November. So at the start of the lease contract in e 1st of December, Rijksvastgoedbedrijf can move into this building. The higher quality of the building is generating a higher rent level as expected with, as a consequence, a higher capital value, generating a total profit on cost of 20%. In our view, we succeeded in successfully and profitably upgrading this prominent monument in a future-proof sustainable building. On Slide 18, we present some more detailed data of the development pipeline in Amsterdam. This data shows that the starting point of the vacancy rate Q1 before COVID-19 was much better compared to the prior financial crisis. The vacancy in Amsterdam is below 4% compared to a 16% vacancy in the prior economic downturn. And especially in Amsterdam, the demand was not in line with the available supply of square meters. Given the pre-COVID-19 letting situation in Amsterdam, the scarcity of high-quality offices, it's our feel that even if there would be a decline or delay in demand as a consequence of COVID-19, there's still enough demand for adding new square meters, also given the specific demand for higher-quality offices in this area. The potential development pipeline in Amsterdam between today and 2026 is still low, approximately 600,000 square meters, and this is less than 10% of current stock. And of this pipeline, less than 50% of the projects have already been started and the 1/3 is already pre-let. Our current development project, Laanderpoort and Vitrum will be delivered in 2022 and 2024. And the Laanderpoort project is already pre-let to ING for 88% and the Vitrum building is a large renovation of an existing building next to South-Axis, and we believe that in this area, there would be room for these square meters. On Slide 19, we present again our development pipeline. We have reviewed our potential development program in light of the current and certain economic environment, and the outcome is that we remain committed to Laanderpoort. We have started the definition phase by preparing the sketch design. And for the Vitrum building, we recently started the design phase with the redevelopment of the Vitrum. We are still progressing with the feasibility study for the Motion building project, the additional square meters next to our current Motion building. But this project will only start if and when, in our view, the risks are acceptable, combined with the other projects and our balance sheet. And regarding the longer-term Centerpoint project, we have decided not to continue with the initial plans for the 60,000 to 90,000 square meter of a mixed-use redevelopment. The feasibility of these plans seems too marginal in relation to the potential scale and risk of this project. So we are back to the drawing board to [ adjust ] possible alternatives for this location. Of course, we will give you an update if we have new insights. The next slide, 20. This is the first time we can show a new picture of this redevelopment project. ING and NSI selected Paul de Ruiter as the architect for this project. It's important to mention that this image is only the first impression. In the second quarter, the design team was contracted and we started the sketch design phase. We continue the discussions with the municipality, and based on their requirements, ING and NSI are identifying the specific building program criteria. At this moment, the project team operates on schedule and the start date of the construction is unchanged and still foreseen for Q2 2022. The next slide is the update of our Vitrum project. The renovation of the Vitrum building is progressing well. We just started preparing the preliminary design, and we expect to finish the preliminary design before the end of this year. It's our ambition to realize an extension of the building as well, and the range of our estimated investment is between EUR 30 million and EUR 40 million and will depend on the final layout and the size of the possible extension. The current tenants will vacate the building during the second half of 2021. It's our plan to start the works in Q1 2022. These were my remarks regarding our projects. I would like to continue with a short summary of the financials of our first half year. In Q1, we promised to provide a detailed analysis on rent collection this year. On Slide 23, you can see the rent collection breakdown for Q2. We have received multiple rent payment requests from our tenants, mostly at the start of Q2. We have been working with all tenants involved to find a proper solution, and this slide highlights that we have received 95.7% of all Q2 rent by 30 June. This has further increased to 96% by the 10th of July. The maximum collectible for the second quarter is now 96.6%, with 3.4% uncollectible due to rent waiver for the month of May for all our flex contracts at HNK, and due to leasing restructurings, mostly in the form of an incentive to agree a lease extension. And the incentives impact near-term cash generation, but they have a smaller net present value effect on the business as it just brings forward some incentives in exchange for the lease extension. All in all, we are very pleased with the level of rent collection in the second quarter. On Slide 24, you can see the EPRA EPS of EUR 1.14 is 10% lower compared to the same period last year. This decrease is mainly due to the disposals in 2019, and this loss of gross rental income has been partly offset by lower operating costs and lower financing costs. On the next slide, 25, the EPRA EPS bridge is shown. In the first half of 2020, due to the net disposals of assets, our total GRI was 10% lower, minus EUR 0.27 per share, compared to the same period in 2019. And the lower net financing result of EUR 0.06 per share is mainly a consequence of the lower average outstanding net debt during this first half year, combined with a smaller positive impact on financing costs due to the capitalization of interest on our development projects. On a like-for-like basis, GRI went up by 2.6% and net rental income was 4% positive. On Slide 26, you can see the EPRA NAV bridge. The EPRA NAV decreased with 6.6% per share to EUR 44.8 per share, and the main driver of the EPRA NAV decline is caused by the 4.1% negative revaluation of our assets. Bernd has explained earlier some more details about these valuations. On Slide 27, on the left, the development of our LTV is shown. The LTV of 29.2% is up 1.8 percentage points compared to December 2019, and this small increase is mainly the result of the negative revaluation of our real estate portfolio. The loan-to-value level is still well below our indicated target range of 35% to 40%. And as we mentioned earlier, the development pipeline could be, in a specific period, substantial relative to our balance sheet. The balance sheet is still very strong. And even if property values continue to fall a bit further, it will enable us to start our 2 development projects, Laanderpoort and Vitrum, and we will maintain a comfortable balance sheet. And the cost of debt of 2.1% is at the same level compared to December last year. We have broken some swaps in line with our hedging policies, and this will also help us to manage the total cost of debt. The next slide is about our funding. This half year, we succeeded in a further extension of the maturities to 5.4 years and a further diversification of our funding sources. In March, we issued a EUR 40 million 10-year unsecured notes at 1.6% to MetLife Investment Management. And the EUR 270 million undrawn RCF facility provides us enough funding capacity for investments and capital to repay the small secured EUR 25 million loan expiring at the end of this month. There won't be any further major maturities in the near term. Thank you, again, and I will hand it over to Bernd for some final remarks.

Thank you, Alianne. Three more slides from me. I think the big question for everyone is today what is happening to office demand longer term as a result from all the working from home experiments that corporates are doing at this point in time. 2 slides from Leesman to give you some details on that. And you can read it yourself, some things were better at home, some things work better at the office. Lots of people have lots of fears with what will happen to office demand. We have our own experience, and we've seen that certain things work better from home. We also see that certain things work better from the office. We've also seen people having Zoom burnouts. It is still undecided how this will all play out over the coming periods. What we see on the ground is that we have some tenants actually requiring more space. We also have tenants who have asked us to see if they can give us some space back because they've decided that they can do with less space. It is going to have another couple of years of an effect on the market, and it's hard to distinguish between the structural effects as a result from working from home and the cyclical effects from what is a slowing economy. We mean -- for us, it means that we need to be on top of our customers or on top of our assets. We recognize that people need to be made to want to come to the office, and that means that the office needs to be an enticing environment and energizing environment where you can actually meet your colleagues, do the things that you need to do and then perhaps go home for some of the things that you'd probably better off doing from home. With our new customer excellence team, with our HNK product, with our flexible mindset, we don't mind shorter leases, that's just part of the job of running real estate business today. We think we'll come out stronger at the other end, but it will take time to prove all of that. On that, some final remarks on the business. Rent collection for Q3 and for the month of July is now at 90.4%. That's ahead of where we were the previous quarter, and we're comfortable with the rent collection where we stand today. The strong second quarter in terms of rent collection, in combination with our rent collection for Q3, means that we're comfortable also to reinstate our guidance at exactly the same level where we first indicated this with our full year results at EUR 2.30 to EUR 2.40. Where maybe at the start of the year, we would have been at the higher end of that range, today, we are more towards the lower end of that range, but we're still within the range. As such, with the cash flow secured, we're able to confirm the interim dividend at the usual level of EUR 1.04, and we've given another option to this quarter with respect to stock dividends, and the press release on that was out this morning on that as well. We see a strong balance sheet at this point in time as a highly valuable asset and one we shouldn't jeopardize. We will basically look at our asset portfolio. We will look at the deals in the market. And if and when we find the right opportunity, we may acquire assets, but we don't see any urgent rush to go into the market at this point in time. Having said that, market evidence in Q2 is -- in the second half, we see returning. Liquidity is returning to markets. There's a lot of pent-up demand. We see lots of buyers for assets, which are underpinning markets at this point in time. Finally, as I said, the working from home experiment continues. It means that as a business, you need to be flexible. We think we're flexible. We think we'll come up as strongly at the other end as a result. With that, I would like to hand it over to DJ for Q&A.

Operator, could you please open the floor for questions?

[Operator Instructions] First question is from Mr. Jaap Kuin from Kempen.

Two questions from my side. Obviously, you've mentioned your low LTV and the return of liquidity to the market. So do you see an increased challenge of doing more acquisitions versus the first half in the second half? Probably secondly, you've provided a useful update on rent collection. And obviously, the real hit of corona becoming more visible in the kind of the second half with government support potentially retracted. Are you kind of tracking tenants and the amount of exposure you have to tenants that currently are kind of floating along on government support and that might be in jeopardy towards the end of the year? Do you have any sense of the magnitude of that potential impact?

First, question on acquisitions. I'm going to do more or less next quarter or it's hard to do much less because we only did one acquisition in the first half. We're looking at stuff. There is stuff coming to markets. There are no forced sellers, and there's lots of liquidity. So we'll see how pricing evolves. And depending on where we see value or where we see a strategic fit to our portfolio, we may expand and acquire assets. It's too early to tell, but we expect more liquidity in the second half. With respect to rent collection, if you look at the sort of tenants that have had an impact mostly in the retail sector, there have been corporates on government support. Some corporates have had -- certainly, the food and beverage operators have had support. And there, we have already given a restructuring in -- for some tenants. And basically therefore, a rent-free for the second quarter. For food and beverage, we also sort of deferred rent. As it stands, we think, based on what we see today, that we are okay from here. But if and when there is a second wave, we'll have to revisit our assumptions.

[Operator Instructions] Next question is from Mr. Clouard from Kepler Cheuvreux.

Can you hear me?

Yes, we can.

Perfect. Yes, I just wanted to have more color on your valuation decline. It seems to be slightly higher in Amsterdam. Just is it due to particular buildings? Or is it a global overall average of just a yield impact? And just on your Q1 discussion that you might have with your appraisers, how do you see volume values in the H2, excluding, obviously, a potential second wave?

Okay. Maybe I can answer your first question. Well, the decline of the valuation, specifically in Amsterdam, is not fully related to the corona situation. There is an impact of one building, it's the Vitrum building, and that's having a huge impact in the valuation of the Amsterdam office portfolio. So that's on one side, it's having to do with the changed scope of the Vitrum project; and on the other side, because of the time factor. So the CapEx adjustment in the valuation is much higher due to the fact that start of the project will be sooner.

That's the first answer. The second answer -- the second question was about what we see with valuations, second wave of coronavirus and what the valuers will do as a result. The first half, the valuers had a bit of an issue because liquidity was quite limited. And it's very difficult to pinpoint valuations when there is limited liquidity in the market. What we have seen in terms of valuation in the market points to a decline in capital values that the values have more or less captured. What will happen in the second half will really depend on transaction levels in the second half. And we're optimistic in that respect that if there is an improvement in liquidity in the market in the second half, the valuers will have an easier job in pinpointing valuations come December. There will be more evidence to point to adjust valuations. If there is a second virus of corona -- second wave of coronavirus, well, the first wave wasn't positive. A second wave, it's hard to see that as a positive as well. So on that basis, if you say there is a second wave, we wouldn't be surprised if there's a further small markdown in asset values. But really, the valuations will -- the evidence will ultimately confirm this in the second half. Does that answer...