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

Good day, and thank you for standing by. Welcome to the NSI 2022 Preliminary Results and Webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to hand over to your first speaker, Mr. Bernd Stahli. Please go ahead.

Thank you, and good morning, everyone. Notwithstanding the challenging economic backdrop we've had in 2022, we've had a very good and productive year at NSI, and it shows in our full year results. If you go to Slide 5, we show you the main KPIs, and it shows that we've had EUR 2.15 in earnings. It was down compared to last year, mostly because of disposals. We've had a small decline in capital values. The balance sheet is strong at 28% loan-to-value. And more importantly, we've spent a lot of time this time around on all our nonfinancial KPIs, and we'll talk about that more later, especially on the CRREM methodology. But if you look at EPC labels, 88% label A. GRESB score, 93. We're feeling very comfortable there. If you go to the portfolio on Slide 7, you can see the map of our assets and the concentration of our assets at this point in time. It's getting increasingly concentrated. We now show 3 gray dots. One of the gray dots has already gone since the start of this year because of the disposal. In 2 other cities, we're down to 1 asset just now, and they have become insignificant in our activities and eventually will disappear in time. The vacancy rates on Slide 8 is 6.2%. It's slightly up on last year with a good result overall, in our view. The top 5 in terms of vacancy has hardly changed over the past 6 months. We are in conversations for the first 2 assets. But as we would like to say in Dutch, [ flowers at the finishing line ]. The vacancy at Alexanderpoort is strategic and will remain in place until we continue our building works, which is probably in early 2024, as getting the permits has been slow throughout 2022. The revaluations, you can see on Slide 9, show what we believe to be 35 basis points of yield expansion, the remainder coming from rental growth. Our values are down 5.6% overall with a small increase in H1, followed by circa 6% fall in H2. Amsterdam was mostly hit due to the lower yields to begin with and due to the value declines in the assets in particular on our South-Axis assets. The overall yield is now a 6.5% level. We believe it [ doesn't distract us ], and it's before the indexation that is still to come in 2023. More on the indexation later. In all our key markets, we show the yield shifts we have seen over the year as a combination of value declines and income growth. The overall yields for the portfolio is higher than what the market shows to be the yield for prime assets, i.e., the best assets in each markets. For high yields -- for our portfolio, the yield is not based on one effort, but it's an effort for all of our assets in these markets. For what we believe is a high-quality portfolio, we now have a very comfortable and maintain a very comfortable margin over the prime yield in these cities, that is that our valuations are sensible is also shown in our latest transactions. On Slide 10, we show what we've done in the last couple of months. We sold 2 assets in H2 and only a small discount to our 2021 book value. And in January of this year, in fact, just 2 days ago, we sold 2 further assets at a 12% premium due to 2021 valuation, and that's in an investment market that is perceived to be difficult, especially for non-prime assets. We appreciate the concerns over valuations. We've seen our own value declines. But to be honest, it's not something we lose too much sleep over at this point in time. If we look at the initiatives we deployed in 2022, we've been talking about HNK for some time. We've completed the brand update that we envisaged for this year. We have revitalized the brand. We've made several improvements to all aspects of our business. That -- as a result, our customers have a booking tool that is new. There's a new food concept. And the initial feedback we've had from our customers is positive. And there is more to come in 2023, in particular, with the opening of HNK Sloterdijk in Amsterdam later in this year. The other big initiatives in 2022 was our efforts with respect to sustainability. This is a big topic for everyone and one we spend a lot of time on in the year. To make clear, the minimum regulatory requirement in the Netherlands for offices to be rented out is label C. At this point in time, all of our assets are label C. And in fact, 88% of our assets are label A or better. We also have now over 60% of our assets at BREEAM excellent or very good. That is a significant process during the year. And it reflects the great work by our technical team over the last couple of years, including last year itself. We also show the results of our initial EU taxonomy assessments, and more on this in our annual reports due to come out in March. More importantly and something that will drive the business structurally over the next coming years, we have now got a complete road map to align our portfolio with the Paris Agreement. And the details on that, you can see on Slide 14. This is not about EPC label C or A. This is about the actual energy intensity of our buildings. EPC is about theoretical energy usage and ignores the tenant energy usage. And more importantly, investors -- we're now in a world where everyone looks at the actual energy intensity of a building with the increase in energy costs we've seen over the last couple of months, and I think that is only going to become more important. We use CRREM. It will become the industry standard. And to align our portfolio with the Paris Agreement, we need to get the intensity of our portfolio down to 85-kilowatt hours per year in 2034. We are at 20 -- 129 today. We've worked out a plan for all our efforts, and we're going to start executing the plan for the first 30 assets, the so-called straightforward assets you can see in the table. We say straightforward to you. But if we say and we talk to the technical team, they're not really happening on the sites straightforward because it's not that easy to do. That's why it takes a 10-year period. And it is quite an initiative because it's going to cost us EUR 58 million over the next decade. When we say cost, it's not a cost. In fact, it's an investment because there will be a genuine return on the investments that we're going to make. There is the immediate savings in terms of energy costs by simply using less energy in the portfolio. But more importantly, as we see the demand shift increasingly to more sustainable buildings, there will be structurally higher rents, lower vacancy and, ultimately, in an investment market that will recognize these lower yields. It's not an expense nor a cost, it's an investment with a genuine return. If you go to Slide 15 and 16, you can see 2 examples of this of what we've done already in the last 2 years. We've made significant strides at HNK The Hague in Q4 in Amsterdam. You can see some pictures of stuff that you normally wouldn't see in a building, you will have to see more and more over the years to come. This will become probably as important as well as the other space. You will typically see nice pictures of in buildings. What you see is that we've been able to get the energy intensity of buildings down by spending EUR 800,000 in The Hague and closer to EUR 2 million in Q4 in Amsterdam. Q4 is a very interesting example because actually, what we say here is mostly paid for by the tenants. We've got an agreement and a structure that we've relatedly agreed with the tenants that they are paying for the upgrades and they're getting the benefit in terms of lower energy costs. We're going to see more of that over the years to come. And this is also an example of a building that already is pretty much aligned with the Paris Agreement at 891-kilowatt hours a square meter per year as well today. More detail on that. I'm happy to discuss that with you as we start to go on the road over the coming weeks. That's all for me for now. And I would like to hand it over to Alianne to talk about the developments and the financials.

Thank you, Bernd, and good morning, everybody. On this Slide 18, we included an overview of our development projects: Vitrum, Laanderpoort and the Well House. The current total estimated cost is circa EUR 435 million to EUR 475 million, and this includes the book values of the existing buildings. So the volume of the total CapEx will be between EUR 320 million and EUR 340 million. And this CapEx estimate is circa 10% higher than the figure mentioned earlier in 2022, and this is mainly due to the assumption of higher building cost levels as per today. The estimated average yield on cost is 5.4%. Earlier in 2020, we communicated the yield on cost of circa 5.5%. The projects are profitable with a reasonable yield on cost even in the life of the latest market adjustments today. And longer term, these are assets that we still are convinced that this is the quality that we need and that's also the quality that is needed by our customers. I would like to give an update first on our development project, the renovation of Vitrum. First, on Slide 19, an update of this renovation. The final design of the Vitrum renovation has been completed in 2022. In 2022, we also have experienced an additional delay, mainly due to the approval needed from the owners' association. Vitrum is part of an owners' association, and therefore, the redevelopment requires an amendment of the [ de-subdivision ] by the 60 individual residential owners located on top of our Vitrum building. So far, this has been quite a demanding process. In 2022, all owners have been consulted individually. And the next quarter, we will continue this. We do not have their final approval, but we aim for a mutual understanding and approval in H1 of this year. We have obtained agreement with the municipality on the other relevant topics regarding the extension of the building and the environmental procedures, except for the new land price. This discussion is still ongoing. It's our ambition to settle the agreement letter, including the final price for the land in Q1 of this year. In February, we will start the tender process, and we will start preparing the technical design phase as well. We could start these activities in the meantime, but we only could start the construction works if we have obtained the final approval of the owners' association. For now, the start of the renovation works are foreseen for the second half of this year. On Slide 20, you can see the current artist impression of the Laanderpoort project as the outcome of the design -- final design phase. This building is 80% pre-let to ING for a 15-year period. The agreement letter of the municipality, including land prices, was signed in December. And last week, the final design has been approved by both ING and NSI. So in February, we will start the tender for the selection of the contractor. The outcome of this tender should as well confirm the business case for this project. And as we mentioned with our H1 results, we agreed, per the request of ING, a new delivery date for Laanderpoort in mid-2026. After a successful completion of the technical design phase, including the mutual agreement on building costs with the contractor, the start of the demolition work is foreseen to start at the end of this year. Let's continue with Slide 21. Although at the end of 2022, we were fully ready to start the Well House project, we have decided not to start this project right now. We have obtained the irrevocable building permit. And in November, we have received the final building price from our contractor as well. As mentioned earlier, we obtained a higher final growth from our contractor for the development of Well House. Of course, to some extent, we were expecting a higher price growth in line with the higher building price index during this year. Due to the higher-than-expected building costs, in combination with increased overall market uncertainty, we were not comfortable to start and we decided to postpone this project. So we prefer to obtain more comfort on for the financial viability, be it through lower building cost, more clarity on current and future capital values or higher rent levels before starting the project. The next period, we will actively monitor the market conditions, taking into account all the mentioned aspects. With respect to the 20% pre-let situation with spaces, I would like to comment that we have extended the agreed conditions regarding the start of this project. And on a regular basis, we are having conversations with them. This was my update on our development projects. I would like to continue with presenting the key highlights of the 2022 full year financial results. On Slide 23, you can see at the bottom line that our EPRA earnings per share is EUR 2.15. This is 9.6% lower compared to the full year 2021 figures. This lower EPRA EPS is due to a lower GRI of 8%. This is mostly due to our net disposals and the lower income due to the redevelopment of Vitrum, combined with a higher rental income in 2022 on the existing Laanderpoort buildings compared to prior year. The operating costs were almost 14% lower, mainly due to lower maintenance costs compared to prior year. And we had a 12.5% higher administrative cost due to some higher depreciation costs related to the move of our headquarter to Amsterdam in Zuidoost and some higher consultancy costs and higher travel and employee training costs due to less COVID restrictions this year compared to prior year. And almost 14% lower financing costs, mainly due to lower swap costs and higher capitalized interest on the development projects. Slide 24, we have prepared the same -- in the same way as we prepared it in H1 2022, providing some more details on the impact and composition of the indexation with respect to our rental income. For the full year 2022, the financial impact of leasing inflation was circa 2.6%. So this was one of the drivers of our like-for-like GRI growth of 5.8%. This might seem to be quite low compared to the index figures shown in the table at the bottom left, but this is due to the way the index mechanism works. The yearly indexation date for every tenant is based on the start date of the lease and the actual indexation rate for specific months based on the CPI index of 4 months earlier. And because of this delayed effect, the indexation will be captured over a 2-year period, so the year 2022 and this year. So for the year 2023, based on the indexation levels, which are already known, and the latest form or current CPI index assumption for the remaining period of this year, we assume an additional circa 6% indexation of our rental income for this year. And in the left graph at the bottom, we show the actual CPI indexation percentages for the specific months. And in the graph at the bottom right, we present some more details about the percentages of our total contracted rent, which will be yearly indexed in that specific month. The EPRA EPS bridge is shown on Slide 25. And the EPRA EPS was EUR 0.23 lower compared to the full year 2021. The total GRI was EUR 0.40 lower, and this is the total of the 4 orange buckets. And this can be explained by a positive impact of EUR 0.08 due to the acquisitions we did in 2021; a negative impact of EUR 0.45 due to the disposals, the disposals in 2021 that were mainly concentrated in the second half year; and a negative impact of EUR 0.15 related to the transfer of the Vitrum building to the developments. In addition, a positive EUR 0.12 was due to a 5.8% positive like-for-like GRI growth. As I mentioned earlier, circa 2.6% is a result of the earlier high lease indexations and circa 2.2% due to the higher rental income of the current Laanderpoort buildings and the remaining part by new leases and lease renewals during the year. Furthermore, we had EUR 0.10 lower operating costs, EUR 0.04 higher admin costs and EUR 0.07 lower financing costs, as explained before. On Slide 26, the EPRA NTA bridge is shown. In 2022, the EPRA NTA decreased with 8% with EUR 4.06 per share to EUR 44.17 per share. And the main driver of this decrease is the negative revaluation of our efforts during the second half of this year. On Slide 27, we show our 4 main balance sheet KPIs. At the top left, you can see that the cost of debt is, for 2022, is slightly lower at 2%. The small decrease is mainly due to the lower cost of our swaps. And the LTV level is shown in the graph at the top right. The LTV is 28.6%. The slightly higher LTV compared to the year-end 2021 is mainly due to the negative revaluations of our real estate portfolio, and it's partly offset by the lower net debt position due to our disposals. On the bottom left, you can see the interest coverage ratio is 6.3, and the small decrease is mainly the result of the lower NRI during 2022 due to our disposals. And we show our net debt to EBITDA as well for a complete picture of our financial leverage. This brings me to my last slide, 28. And at the end of 2022, we extended our term loan from April 2023 to December 2026. The volume of the term decreased from EUR 80 million to EUR 50 million because the extra funding was not needed, certainly not in light of the current higher margins. And as I remain comfortable with its overall liquidity position, especially given the flexibility of the EUR 283 million undrawn credit facilities, we have now funding capacity to fund our development projects and/or selective acquisitions. The amended term loan includes a sustainability-linked interest margin mechanism, and this is fully in line with our RCF facility that we extended in December 2021. The average maturity of our loans is now 4.7 years, and only the EUR 66 million secured loan will mature at the end of June this year. We have started conversations with [ Bellini ], and they have already expressed their willingness to extend this loan. We expect, as we mentioned before, that our cost of debt to increase from 2% to circa 3% by year-end of this year, mainly as a consequence of the new higher term loan margins and the assumption of closing some new swaps. So to conclude, with an LTV of 28.7% and limited upcoming debt maturities, NSI remains in a really solid financial position. Thank you for your attention, and I would like to hand it over to Bernd for some final remarks.

Thank you, Alianne. Slides 30 and 31, the action plan for '22, what did we want to do? What did we achieve? Quite a few things were achieved. We were expecting an economic recovery post the end of COVID. That didn't materialize to the extent that we expected, which meant that we didn't meet our own internal vacancy targets of -- to end up below 5%. In this market, 6% felt actually quite a good result to our view -- in our view. The HNK Sloterdijk and HNK Rotterdam Alexander, one was problems in getting the contractor, the other one was problems in getting the permit. Sloterdijk, actually, the work has started last week. Rotterdam Alexander will probably be finished early next year. Take a final decision to start the construction of Well House. Well, we did take a decision, but we didn't make the decision to start. So that didn't necessarily mean that we've got there. And some of the others will be postponed into 2023. If we look at '23, the action plan is slightly different. We need to resolve the FBI regime discussion from our perspective. We're still lobbying government. We're broadening the lobby, and we're working still internally on mapping out the alternative scenarios from a taxing point of view. The other thing is that we need to make sure and continue to manage the LTV to make sure we have the capacity for the developments to come and/or any opportunistic acquisition opportunities that may come along. This year, keeping the overall portfolio vacancy rate stable at 6%, again, in this market, it looks like a good result. And probably most importantly, we did say the indexation this year looks to be circa 6%, but we still need to manage that. Whereas because of the high level of indexation, much higher than what we've normally had, we will -- we do expect to have some conversation with tenants about the affordability of that level of indexation. And we will update you on that as the year progresses. And the other targets are for the developments, the main targets, starting Vitrum, starting Laanderpoort and reappraise Well House to see whether or not we can start with later this year, depending -- and that depends on how the marketing falls from the areas Alianne described. With that, I would like to hand it back to the operator for Q&A.

[Operator Instructions] We are now going to proceed with our first question, the questions come from the line of Kai Klose from Berenberg.

I've got 2 quick questions, if I may. The first one, you mentioned that maintenance costs were somewhat lower in '22 compared to last year. Was it mainly due to this process? Or have you also postponed some maintenance work due to higher material costs happening then in '23? And could you indicate, for 2023, what will be the kind of normalized cost -- normalized levels for the admin cost after a slight increase in '22?

Maintenance, if we look at that level, it's always ending up a bit volatile in our business. Certain years, it's higher. Certain years, it's lower. Last year, it was lower, and not because of the disposal really, but more because it was a challenge to get the contractors to do the work. So some of it is slipping over into '23. And likely, with some of the discovery plan we do in '23, it may well end up slipping into 2024. But yes, work on the assumption it's going to be slightly higher this year. Your other question was on normalized admin levels. This year, we expect higher salary costs to reflect the inflation that we're seeing in the world around us. We do expect higher consultancy costs because of the FBI situation. Getting tax advice is not cheap. So that is going to stay slightly higher than what we normally have. I think that's probably the best guidance I can give you at this point in time. So maybe the level you saw last year is the new normal level going forward.

We are now going to proceed with our next question, and the questions come from the line of Gerardo Ibáñez Herrero from ABN AMRO and ODDO.

It's good to see some disposals in the current environment for noncore assets. But can you give us an outlook on potential coming disposals at this stage and if you have any discussions at the moment? And on the other hand, are you looking at other potential acquisitions at this point, given your well-positioned balance sheet? And what yields would you be interested by?

In the presentation, we did point out that we have 2 assets left, one in Hoofddorp and one Den Bosch, as we don't regard as long-term core cities in our business. So something will happen in due course. No guarantee it will happen this year. We also look at 1 or 2 other assets for potential disposal, one where we've maximized its value, another one where we see an opportunity to get a good price to get out. We don't need to dispose assets because I should say, the permitting is in good shape. Acquisitions from here, we look at stuff, but everyone is talking about sort of the risk to values, the uncertainty in the markets, the limited liquidity. There is no distress. And the stuff that we see being offered to the market typically is the lower-quality stuff, people will hang on to their better kits. And yes, we can buy assets that are maybe slightly lower quality if we can see an economic case to upgrade into better-quality space, but just manage out lower quality kit doesn't fit our business at this point in time. Because in every acquisition now, they consider the upgrade cost for sustainability, it goes in, in full, and we're not getting a world where owners are willing to accept the price cuts that are needed to make that happen. So maybe not complete for you, a complete answer, but we're looking at stuff with no certainty that any of that will come true.

Okay. And I also have another question on the EPS outlook. Why did you not decide to provide an outlook for 2023? Is it more of the uncertainty for new divestment, investment? Or is it a bit on the contractual rent increases?

It means you, as an analyst, have to do your own work rather than us telling what the number is going to be. But the components to consider, we've set 6% indexation. On a EUR 70 million rental, that's EUR 4 million of rent, that's EUR 0.20 a share. Take off the impact of Laanderpoort, which will become [ savings ] at the end of this month in preparation for the developments, take off the higher funding costs that we will have this year as we refinanced some of our debt last year and take off the effect of disposals and, net debt on balance, you'll end up slightly lower. But as I said, there are too many moving variables. If inflation ends up staying high throughout this year, we expect we'll remain positive. If inflation does slow down further, maybe we were a little bit optimistic with the 6%. It's a bit hard to judge at this point in time. And as I said, we've potentially got more disposals. We may have more acquisitions. It's hard to judge at this point.