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

Good morning, everyone. Thank you for joining our 2024 preliminary results analyst call. Today, our CEO, Bernd Stahli; accompanied by our CFO, Elke Snijder, will comment on the result presentations published this morning on our website. At the end of the call, you will have the opportunity to ask questions. For now, I would like to hand over to our CEO, Bernd Stahli.

Good morning, everyone. We have a solid set of results to present to you today, and we know your time is valuable, so let's go straight into the presentation. Slide 4 shows our strategic priorities. These guides our decision-making in all aspects of our business, and we'll come back to them in a lot more detail when we talk about the outlook for '25, where we discuss them in a bit more detail. Slide 5 shows the highlights of the results. We've got a strong 5.2% increase in like-for-like net rents, and that is basically the main driver of the increase in earnings to EUR 2.09. This also explains why we've been able to increase the dividend to EUR 1.57, and as we have committed in the past, to pay out at least 75% of EPS. Finally, one point to make for this slide. 2024 saw a small decline in the values of 2.7% overall. But the NAV has been stable due to the share buyback that we did during the year. Slide 7 shows the strong concentration of our portfolio to Amsterdam, which at year-end makes up about 55% of our assets. That part of the portfolio continues to sort of be the bulk of our assets and continues to be the backbone of our activities. And our activities in respect to disposal continue to basically filter through in that as we do our asset rotation, Amsterdam will continue to grow going forward. Slide 7 shows the strong concentration -- sorry, Slide 8 shows the asset rotation that we've done in 2024. We already talked in a lot more detail at the previous results release in full year '23 about the sale of Amsterdam Laanderpoort, the project that we sold to ING. We had 2 asset disposals in the second half of '24, one in Den Bosch, one in Eindhoven that we both sold to -- one to the municipality and one to a group of private investors. In total, over the last 8 years, since 2017, we've sold for over EUR 700 million of assets, EUR 729 million to be precise. That is a lot when we set it against the total portfolio value of about EUR 1 billion overall. The only acquisition that we did during the year and the first acquisition that we did in the past 3 years, basically signaling that we see the market starting to shift more favorably and that this is the time to start buying assets, was the Sypesteyn building in Utrecht. And interestingly, the disposal price of Den Bosch was more or less the same price as we paid to buy Sypesteyn in Utrecht. And once this is fully let, it will trade with a better cash flow than we sold in Den Bosch. And at the same time, the building is in a much better location. It does have rental upside and substantially more potential longer term. So generally, a good trade from our perspective. Over the last couple -- or last month, we've already been able to improve the label to A+, and we basically gave the go ahead to invest EUR 300,000 in the coming 2 months to help the leasing of the remaining vacancy for which we know there already is interest from the markets. Slide 10 shows again how prime the location of our portfolio is -- of this asset is. It's next to the station, and it may not be in Amsterdam, but in all fairness, this is the second-best location in the country after Amsterdam. Slide 11 shows that over the last 5 years, discussions around COVID and working from home have not had an impact on the way we've managed our occupancy. Yes, there may have been an impact on sentiment with respect to offices, but for all that negative impact, we have been able to lower our vacancy over this period. We're now at 5.1%, and it would have been 4.5% if we exclude the December acquisition of Sypesteyn. It shows to you that there is still good demand for offices. If they're in the best locations, they're sustainable and offer services, there will be demand for customers. It therefore is -- this vacancy number is testament to the quality of our portfolio. And it also confirms that our disposal program of provincial assets was definitely the right course of action over the last 8 years. Slide 12 shows the improvements in our operating metrics from a rental point of view, and again, confirms the strength of our portfolio. GRI out -- growth has outpaced both CPI and ERV growth over the past 6 years. And whilst the reversionary potential appears to be slowly eroding, in 2024, we have been able to lease well ahead of ERV. We will see if 2025 will indeed confirm that our ERVs are lagging the market a bit, which is what we expect. Slide 13 shows how we get to rental growth. We invest in our assets and in our services that we create for our customers. HNK Sloterdijk in Amsterdam is very well regarded by the wider markets for the product that we've created. And the impact is clear, as you can see from this slide, with a strong increase in rents, a good return on the investment made and ultimately, customers that like the product that we've created. Elke, over to you.

Thanks, Bernd. Okay. We're going to have a look at our revaluations. Over the full year, as said earlier by Bernd, revaluations were slightly negative. On the sheet, you can see on the left-hand side, the euro amount and the split between the positive and negative revaluations; and on the right-hand side, that same split but then in number of assets. As you know, '23 was a bit of a tough year looking at valuations. But looking at '24, our outlook on values is much more positive. We see a nice number of revaluations at this time, 17 in total, showing positive revaluations. And we believe that this can be seen as that values are bottoming out. Okay. Moving on to the next topic, sustainability. We remain a leader in the industry with respect to sustainability. As you've seen earlier, we have a strong performance on all indicators, like GRESB, but also on this sheet on the bottom right, you can see the BREEAM values. A whopping 44% of our assets are in the excellent buckets where in general, the Dutch market, about 10% of those assets are in the excellent buckets. Strong focus remains on improving our energy usage. This can be seen as one of the most important contributors to our sustainability journey. On the top right, you can see our EPC, energy performance certificates. And you can see we've been moving steadily towards more and more A or better. This is almost not for us an incredibly interesting thing anymore because we're already scoring so well. So we've moved our focus internally to really looking at energy intensity. So just actual kilowatt hours per square meter per year, which we follow with the CRREM performance that you can see on the left. Here, we have to put effort into both the performance of the building itself via our own investments but also in supporting the energy mindful behavior of our tenants. To date, our CRREM performance is far ahead of the pathway set for Paris Proof, where we want to be at 85% by 2035, and we strongly believe in continuing our sector leadership here. Okay. Let's then move on to the financials. On the first sheet, you can see the EPRA earnings. So this is the rundown from gross rental income to net rental income to our EPRA earnings, so our direct investment results. Quite noticeable, I think, are that costs are really in check. Both OpEx and administrative costs are lower than in '23. The latter, so administrative cost, is mainly related to the cost of our employees. And we have maintained the core of our staff, as I think I've said at the half year, to plan and be ready for growth. But in some areas, we've kept open some vacancies to observe wage increases. So even though we are not focused on cost minimalization, we, of course, still keep our eye on being smart about costs. Financing costs are higher, as you can note, than in '23, but we'll come back to that just a little bit later. We also see corporate income tax as a result of the internal structuring we did in '23, following the announced changes in the Dutch REIT regime. We show a direct corporate income tax rate of a little below 4%. Okay. Now I'm going to talk you through 2 bridges, the first one being the EPRA earnings per share. This slide shows the bridge from the '23 EPRA EPS to the '24 EPRA EPS. From left to right, to keep it a little bit structured for you, you can see that we have no impact on the acquisitions. And you might think, hey, you have acquired Sypesteyn, but of course, that didn't come in until December. So no impact yet visible in this chart on GRI of this acquisition. Of course, we'll see -- we will see an impact in the '25 bridge. The margin of disposals impact that you see includes the missed rent on Laanderpoort, which was a building that we sold to ING beginning of the year, HNK Ede and HNK Den Bosch that we sold in '23. And in '24, as Bernd said, we had the disposals of Binnenhof, Den Bosch and Fellenoord, Eindhoven. And all of this together led to a marginal negative impact on GRI disposals. Practically said, we just have fewer square meters to rent out. Big positive impact on GRI like-for-like, and that just shows the impact of indexation and managing our vacancy well. Very marginal negative impact of service costs not recharged, and so I'm not going to go into that. And then you see the 2 cost buckets that I mentioned earlier, where we're performing well. Both OpEx and administrative costs are lower. So that has a positive impact on our EPS. Financing has become more expensive due to both higher variable interest rates and a lower income on our swaps. We did redeem one of our loans early. That was the BerlinHyp loan, and we had to accelerate the depreciation on some initial costs for taking up the loan. And of that EUR 0.11 that you see as a negative impact on this chart, EUR 0.02 was due to that early redemption. Direct income tax is EUR 1.5 million now, and that's EUR 1 million higher than it was in '23, leading to the EUR 0.05 drop there. And in total, then we have an EPS of EUR 2.09 over the year per share. If you might wonder, the share buyback, you don't see explicitly in this graph, but the impact is about EUR 0.06 and is divided over all of these components that I've mentioned before. Okay. That was Bridge 1. Now moving on to Bridge 2. That is the EPRA NTA per share. Again, moving from left to right, going from '23 to '24. The dividend, you must recognize, is EUR 1.52. You also recognize the EPS of EUR 2.09. And the impact, now we're moving into the indirect impact of the revaluations, about a little bit below EUR 1.50. Then we have some profit on the book value of the sales of Laanderpoort to ING, Fellenoord in Eindhoven and Binnenhof in Den Bosch, all combined delivering EUR 0.12. And then 2 small impacts, deferred tax related to an indirect result on taxes, corrected for movement in the deferred tax liabilities. And we have another impact that is composed of a number of also indirect items such as, for example, the own use of a floor in one of our center buildings as our own headquarters. The additional effect besides the effect that's included in the EPS on the -- of the share buyback is EUR 0.84 as the denominator, simply put, is becoming smaller with less shares freely floating. Now all of this results in NTA that is at par in '24 with the level that we had in '23. Okay. Now moving on to the final 2 slides with respect to financials. Looking at our balance sheet. Top left, cost of debt, a tad bit lower end of '24 after having gone up last year at the time due to rising variable interest rates and a reset on our swap rates in the first half of '23. Top right, loan to value, quite comfortable, very well within our external hurdle of 60% in our bank covenants but also at the low end of our own internal guidance. At the bottom left, interest coverage ratio, it is due to an average higher variable rate over the full year of '24. And by the end of the year, it was lower, but on average, a bit higher. Hence, the movement in interest coverage ratio. Net debt to EBITDA. Final chart on this slide. It's on your bottom right. It looks improved, and that's on the back of about EUR 3 million higher EBITDA and a lower -- slightly lower debt of about EUR 6.5 million. Okay. Final slide on the financials. A very important topic for us. We're looking at our financing, sound maturity and hedging profile. As we sold Laanderpoort development to ING, we were in less need of capital throughout the year. Thus, we reassessed the loan book at the half year mark. We did discuss it with the half year results, but just to reiterate, on July 5, we paid down on the BerlinHyp loan by drawing down on our existing RCF facility. The impact, twofold. One of them, loan maturity profile changed as the RCF's maturity is heavier, shorter than the BerlinHyp loan was. That's obviously also impacting the average maturity that you see on the top right. In addition, we now have all of our lending fully unsecured. So none of our assets are collateralized, leaving tremendous funding flexibility for the future. We are mindful of leaving enough time to arrange financing. As all of you can see that we have some work to do for the '26 loan book, and we are starting up further conversations with the banks this quarter. As interest rates have risen since the point in time when these loans were taken out, we are expecting all-in financing costs to go up upon refinancing. Okay. So that concludes our slides on the financials. Now moving back to Bernd for the outlook.

Thank you, Elke. The final slide is the outlook for 2025. And then let's go through our strategic priorities. Amsterdam specialist. You should expect to see more asset rotation away from our non-focused markets and preferably into Amsterdam. But as we showed with the Sypesteyn acquisition, if we find the right asset in another location that makes perfect sense, we will certainly pursue that as well. Sector smart. Today, the majority of our assets are offices, and it doesn't have to be going forward. We'd like to be flexible about it. We've appointed someone internally that will look at new investment opportunities other than offices. We're willing to pursue the right opportunities if they're attractive and logical in the context of our business. So in that respect, we'll see if 2025 is a year that is going to bring something, but it's something that we certainly have in our perspective. In our results release, if you go through that, we talk in a bit more detail about the further operationalization, it's a hard word, of the office sector. 2025 will see us embrace this further with the rollout of turnkey solutions and services beyond HNK. We're finding that if you're a tenant in search of less than 1,000 square meters and your contracts are going to get shorter, that a lot of tenants can't take the cost of fitting out their entire space themselves. So this is going to be more of an opportunity for the landlord to take further in return for higher rents. We see a clear opportunity in this market, and we'll pursue that beyond HNK for the wider portfolio. Sustainability is a multiyear process. The aim is still to be Paris aligned by 2035. And this year, the most visible contribution to this will be the delivery of HNK Rotterdam Alexander. This is going to be a Paris Proof asset on delivery. And so far, the interest for this type of product already is turning out to be quite good. Our initial leasing is already ahead of budget. Finally, growth. We have been very careful deploying capital in recent years. And as I said, Sypesteyn was our first acquisition in 3 years' time. So we are very careful how to deploy capital. We see in this market the potential for more deals, and whilst we would like to grow to improve liquidity for shareholders, to improve cost efficiency and because there are other benefits, we will not pursue this at any price. Every deal needs to make sense. If we find them, we will bring them to you. It's still early in the year. We'll see what comes from that point of view. But also from timing perspective, it's still early in the year with respect to guidance. Based on the portfolio we have today and what we know now, we're comfortable to provide EPS guidance for this year of EUR 2.05 and EUR 2.15 and basically a stable level of earnings for this year. There's a small negative from the disposal of 2 assets at the end of last year. That is not entirely offset by the acquisition of Sypesteyn, and we're penciling in a small increase in taxes. And that, as a negative, offsets the like-for-like rental growth that we're penciling in for this year. Therefore, more or less stable at this point in time. With that, I would like to hand it back to Martijn for Q&A.

Okay. Great. So let's see. Okay. I see the first question coming in from Vincent Koppmair from Degroof Petercam.

Congrats on the solid results and beating the estimates and your own guidance as well. For this year, you already gave a little bit of guidance and a little bit of granularity. But Bernd, just coming back to what you ended on the note on the EPS guidance, you mentioned at this time, you see it more or less stable. But what would be some of the assumptions behind the EUR 2.15 EPS growth, mainly?

Obviously, what could possibly help is we have, as you can see from the presentation in the appendix, a number of leases that are coming to maturity this year. And we automatically assume that we have an element of tenant retention, typically somewhere between 60 -- somewhere between 60% and 85%. It's always hard to predict which tenants are going to stay, which tenants are going to leave. So we've made our assumption that some tenants will leave this year. If that ends up happening, but we immediately re-lease, then that is a positive because we automatically always assume a small element of vacancy for an intermediate period of time. Or if some of the tenants actually do extend and only just gave notice to try and renegotiate, then obviously, that is also positive.

Very clear. I have a follow-up question on the other main topic, and I will say that your general tone being very optimistic, at least at the beginning of this year, which is also very appreciated. And you mentioned some reopening on the market and potential acquisitions at the right price, as you have mentioned. But what would be your ideal scenario for 2025 in terms of growing or acquisitions?

We may want to acquire, but obviously, we're very much dependent upon what the other side of the transaction wants. Rising interest rates or still high interest rates, there are a number of investors that held out, we think, in anticipation of a fall in interest rates to make their refinancing easier or to basically expect a small bump up in prices. Some of those people can't wait much longer because they've got a finite life funds, and there will, therefore, be more transactions. And even though we are now starting to see deals, there is my best guess, a pent-up potential volume of sellers that may want to come to the market, but we're not sure that the depth on the buying side is there, which means that it may well be the right opportunity to buy at this point in time. We've seen a number of deals of good assets at relatively high yields that could well be of interest to us if they happen and materialize in the market that we focus on. So ideally, high-yielding assets in some of our core markets.

Very clear. And do you have a potential size of growth that you would aim or like to aim to for this year depending on the assets?

No, because once you put a number out there, you become a slave to the number. Let's just take every individual deal one at a time and see what ultimately makes sense. Even though we may want to grow, we still are a relatively small company. And that means that with our low LTV, we have room to grow, but the potential to grow without raising equity is constrained by the size of the business and the balance sheet today.

Very clear. Very clear. I have 2 last questions, if possible. So you mentioned, of course, cost of debt as well. What is currently your -- what is the current spread on your marginal cost of debt currently to do a new acquisition because you mentioned that on the bank side, it might be a question mark?

Elke, do you want to take this?

Yes. So obviously, our projected cost of debt is going to be higher than our current cost of debt. Over '24, we were at an average of about 3.5% over the year, but we do expect to go above 4%.

Yes. So the bank margin is going to be over 150 basis points but less than 200.

Okay. Clear. And then my final question, and then I'll leave the floor to your other questions, is you have mentioned, of course, with the hiring and the -- similar to the last couple of press releases on potentially entering new segments, especially for example, residential or reconverting office assets to residential assets. Could you give a little bit more detail? Or is it still all open to investigation on your end itself to look at what you would like to do?

Let's talk about it when it becomes more clear what actually comes our way and what we think is the most sensible. So I think it's too early to talk about that in more detail at this point.

Okay. Clear. And congrats again for the good results.

Now going on to Francesca Ferragina from ING.