Vastned (VASTB) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for holding, and welcome to the Vastned Full Year Results 2019 Event Call. [Operator Instructions]. I would like to hand over the conference to Remco Vergeer. Please go ahead.

Good morning. Welcome to Vastned's 2019 Full Year Results Presentation. My name is Remco Vergeer, Manager, Investor Relations. Present with me are Taco de Groot, CEO of Vastned; and Reinier Walta, our CFO. Yesterday evening, you have received our 2019 full year results press release. Taco and Reinier will elaborate on the results in their presentation. The slides are now available for download on our website. At the end of today's presentation, you will have the opportunity to ask questions. Taco, please go ahead and start on Slide 2.

Good morning, and welcome, everyone. Let me start with the highlights of 2019. We are pleased with the results we presented today. The performance of our portfolio is solid in a challenging market. As already explained before in our 2019 half year presentation, results were impacted by the temporary vacancy of one of our large units in Paris. But we have a new tenant for this property and the occupancy rate increased significantly in the course of the year. Back to the high levels we reported in 2018. The value of our portfolio was virtually unchanged with decrease of 0.8% in 2019, which was mainly the result of the decrease in the value of one asset Rue de Rivoli 118 in Paris. There is enough market evidence to justify the value of our portfolio as we enter valuers regularly see transactions in the market for this type of assets we own. At the same time, CapEx for our type of assets is low. During the last few years, it has been between EUR 2 million and EUR 6 million annually. We are very cautious in making acquisitions as the yields are very low in the current market, and we will only execute transactions if we believe that we can add value. Nevertheless, we have expanded our cluster in Amsterdam with attractive assets in total of EUR 40 million in 2019. We also divested several nonstrategic properties in the Netherlands and Belgium to lower the risk portfolio -- to lower the risk profile of our portfolio. The direct results for 2019 was EUR 2.03 per share, in line with expectations. If you adjust 2018 for the nonrecurring items that we reported, the 2019 direct results are stable year-on-year. As a result, we proposed to pay a dividend of EUR 2.05 per share for 2019, in line with 2018. For 2020, we expect direct results between EUR 2.05 and EUR 2.15 per share, an increase compared to 2018, which is expected to be driven by the improved occupancy rate in 2020 compared to 2019 as a result of the contracting JD Sports for the already mentioned assets in the Rue de Rivoli. Now let me explain a bit more about the current market and the position of Vastned on the next slide. Although the retail market is challenging and the transition of the sector will expect to continue, Vastned is very well positioned. As mentioned, we are cautious in making acquisitions due to pricing. Our portfolio transformation is complete and 83% of the portfolio is now located in high street in the larger historic European cities. We recognize the trend that in this challenging retail market, retailers have become more selective in choosing the location of their shops and more inclined to move shops to top locations in city centers than open shops in secondary locations. The result is that we have a strong portfolio of good quality assets. Our portfolio is virtually fully let, and we have been able to attract good quality tenants in 2019 and in 2020 so far as well. We experienced that when we have a vacancy, we are able to relet it quickly at market rates, contrary to some peer companies. In order to improve the quality of our portfolio, attract the right tenants and maintain the occupancy rate high, we increased the use of data analysis where we monitor traffic and shopping behavior. Now have a look at our key figures. Please go to the next slide. The performance of the vast majority of our portfolio remained solid during last year. The like-for-like gross rental growth decreased 3% and the value movements were mainly impacted by the temporary vacancy of Rue de Rivoli in Paris. However, the lease of this property to JD Sports already led to the recovery of the occupancy rate at the end of 2019 to the high level of 2018, and this will also expectedly improve our results in 2020. The next slide will show our occupancy rate per country. Next slide. The occupancy rate confirms the success of our strategic focus on assets in selected European cities. Strong recovery of the occupancy rate during 2019, leading to a broadly stable year-on-year occupancy rate of 98% at year-end 2019. From June 2019, we have seen improvement for all our countries showing a very positive picture, as you can see on this slide. Next slide. In 2019, Vastned concluded 76 leases for EUR 12.4 million in total or 16.7% of the theoretical gross rental income. On these leases that Vastned concluded, a rent decrease was realized of EUR 1.6 million or a decrease of 11%, mainly due to the decrease of the rental income for the assets Rue de Rivoli in Paris. We also contracted Skechers as a new tenant for our other property on Rue de Rivoli after Gap left earlier in 2019. The rental income is the same as the previous -- at the previous level. In March 2019, Coolcat was declared bankrupt, after which Vastned terminated the lease for Vredenburg 9 in Utrecht. We have been able to sign an agreement with Jumbo for this location, demonstrating the trends that supermarkets are expanding their footprint into city centers. Now moving to Slide 7. Individual retail properties in the main shopping streets of European cities remain scarce. More and more investors realize the stable returns and the uniqueness of this type of property, which has pushed up prices. It is becoming harder to acquire new high street assets where we can add value to. We believe in quality, not in growth for growth sake. In 2019, we expect our high street clusters in Amsterdam for in total EUR 40 million. To lower the risk profile of our portfolio, we have also sold a number of nonstrategic properties in the Netherlands and Belgium for in total EUR 12 million. Please go to the next slide. Since the start of our high street strategy in 2011, we have rotated our portfolio for, in total, EUR 1.8 billion. The majority of our portfolio consists of retail asset in the most popular high streets of selected European cities with a historic city center. Let me now show you a bit more detail about the exposure to the various retail branches in our portfolio on the next slide. Next slide. Here, you see the split in type of retail tenants of our portfolio. When we relet any of our properties, we are trying to reduce the share of mainstream fashion in our portfolio since this is generally a weaker segment in the retail market. The recent agreements with JD Sports and Skechers for our assets on the Rue de Rivoli in Paris increased our exposure to sports to 10% of our rental income, while fashion decreased. Food and beverage is becoming increasingly important for the experience of the consumer. They more and more like to combine their visit to a shopping street with a lunch or dinner, and the exposure to these tenants has increased to 5% over the recent years. Furthermore, the share of supermarkets and personal care is 14.5% in our portfolio as we see supermarkets returning to city centers and expanding their footprint. We try to increase our exposure to the residential whenever we can by creating apartments above retail stores when there is an opportunity to do so. Currently, we have 284 apartments in our portfolio. Next slide. Other developments in last year. In January 2019, Vastned placed a new EUR 50 million long-term bond with Pricoa Capital Group, with a 7-year duration. In September, a new EUR 40 million loan with a 5-year duration was placed with Barings. The new loans were used to refinance the loans that fell due to in 2019, including the convertible loan agreements redeemed in April 2019. During last year, Vastned extended the duration of its existing EUR 325 million syndicated loan facility by 1 year to September 2024. Last year, Vastned settled part of its derivative portfolio of a notional amount of EUR 135 million at market value of EUR 5.3 million negative. New interest rate derivatives were then concluded with a notional amount of EUR 150 million based on the current market interest rates. On 19 October 2018, Vastned started a share buyback program of EUR 40 million maximum which, after extension, ran through April 2019 and which was financed from the credit facilities available to the company. Last year, Vastned bought back 742,000 shares for EUR 24.9 million, including cost. The repurchased shares will be held as treasury shares. Now I will hand over to Reinier, who will take you through our financial results.

Thank you, Taco. On Slide 12, you will find an overview of our key financial figures. We realized a direct result of EUR 2.03 per share and an indirect result of minus EUR 0.73 per share. The value of our portfolio, excluding acquisitions and divestments, decreased by 0.8% and our like-for-like gross rental income decreased 3%. The loan-to-value increased slightly to 41.6% due to the share buyback, but remain comfortable within our preferred range of 35% to 45%. And the average spot interest rate decreased to 2.2% from 2.5% at the end of 2018. Let's now go to the next slide to have a closer look at the direct result per share. Our direct result per share in 2019 was EUR 2.03. If you exclude the nonrecurring buyout payment and the related income tax payment that we reported in 2018, direct results were flat year-on-year. This slide shows the individual movements in direct result per share since last year. The main drivers were the like-for-like net rental growth impacting the direct result by EUR 0.60 negative and the effect of the share buyback adding EUR 0.11 to the direct results per share. Now let's move to Slide 14. The gross like-for-like rental growth was minus 3% for the total portfolio. The decline was primarily caused by the vacancy of Rue de Rivoli in Paris, which resulted in a 17.6% decline in France. Spain reported a growth of 17.5%, driven by the new agreement with Sephora after Ferragamo who left the property. The Netherlands increased by 0.4%, while Belgium decreased by 0.2%. Corrected for the 2 outliers in Spain and France, the total like-for-like gross rental growth in 2019 was 0.1% positive. The next slide illustrates the value development of our portfolio. The main changes were caused by our acquisitions and divestments and value movements. CapEx was around EUR 2 million and was spent on creating and renovating residential units. And let's have a closer look at the value movements. The value of the portfolio, excluding acquisitions and divestments, decreased by EUR 12.5 million or 0.8%. And The decrease is mainly due to the decrease in value of the property at Rue de Rivoli. Overall, France is stable as the decrease was compensated by an increase of the rest of the French portfolio. Spain increased by EUR 2.3 million. In Belgium and the Netherlands, the value decreased slightly by EUR 10.8 million and EUR 4 million (sic) [ 4.6 million ], respectively. Next, our financial position. The main financial indicators presented on this slide show that our financial position is solid. We have unused credit facilities of EUR 119 million. 78% of the loans have a fixed interest rate and the average interest rate decreased to 2.2% and the average maturity of our loan portfolio is 4.9 years. Additionally, the share of nonbank financing is far above the 25% minimum we set ourselves at 43%. Our loan-to-value increased to 41.6%, mainly as a result of the share buyback program that was concluded in 2019. Next, Slide 18. Here, we showed a different contract and interest rate expiries per year. In 2024, long-term loans have, in total, EUR 465.7 million expire. This is related to the syndicated credit facility, the private placement with Barings and a few credit facilities within Vastned, Belgium. I now hand back to Taco.

Thank you, Reinier. Let's move to Slide 20. Our outlook for Vastned is positive for 2020, driven by the expected improvement in occupancy rate compared to 2019. The direct result is expected to grow to a range of EUR 2.05 to EUR 2.15 per share. In 2020, we will focus on maintaining the high occupancy rate of the portfolio and the continued step-by-step execution of our strategy, optimization of the existing portfolio, cautious acquisitions in selected European cities, divestments of nonstrategic assets. With that, I would like to thank you for your attention. We will now open the call for questions. Operator, can you please open the line?

[Operator Instructions] The first question is from Rob Virdee from Green Street Advisors.

This is Rob Virdee from Green Street. Questions on the comment that you make about trying to reduce the share of fashion in the portfolio. Obviously, I appreciate why you're trying to do this. What type of tenants would you rather have? And then also, I would have thought sports apparel, like JD Sports or Skechers would be under similar longer-term pressures from e-commerce like fashion. So you've got those in your portfolio now. Can you just give me a little bit of your thinking behind that, please?

Yes. Well, I'm not saying that fashion is out of fashion. But in the whole arena of fashion retailers, there are -- what is needed is that a retailer distinguish themselves from others and that they have a clear signature. For example, Zara has a clear signature, Forever 21, didn't had a clear signature. So these type of fashion retailers, we try to avoid. Sportswear, it is still necessary for the whole -- it's basically the shift towards sports. It is not only sneakers, but sportswear. And of course, e-commerce it is across all the retailers, from food to fashion. However, the pure online players are not making money, and it is for the retailers and especially for the brands that are working, for example, with JD Sports, they are still demanding visibility on the high streets. Because with new models, they want to be in contact directly with the consumers. So we are happy to receive the retailers like JD Sports and Skechers. And it's also a little bit in general how retailers are opening new shops and the way they do it. And I can tell you that JD Sports, they were extremely disciplined and extremely professional by investigating the locations, talking to other retailers in the neighborhoods, footfall, all these items were investigated and researched by these tenants or retailers. And that is also a sign that these are doing their job very well, and they know what they are doing. And I think in the past, some retailers, they discovered that they have problems at home and they went to other countries, hiding the problems at home. And the best retailers, they have their house in order and then they move to another country to expand their business. And they do that together with, let's say, the online bid because JD Sports is also online active. So they know exactly what they are doing.

Sure. Okay. I have a second question as well, please, which is on capital allocation or your future dividend as well. So I appreciate you've kept the dividend flat for the last few years. If I look back, though, the AFFO coverage has been declining. And of course, this year is not even covered by FFO. So given the pressure we're seeing on re-leasing spreads, especially this year, how are you thinking about your future dividend or capital allocation?

Yes. Well, as said, last year was really -- and we said that basically in the beginning of last year that this would be, let's say, a dip due to the vacancy of door delivery. And that asset was also over ended. So it was -- we felt it's really hard. Nevertheless, we -- with the EUR 2.03, that was -- it was the only -- last year was the only and our proposal to payout EUR 2.05 is the only year that we are exceeding the 100%. But we are really confident for the next years that we are comfortable with the present level of dividend. And if my colleagues and I do our job well, our dividend is pretty much secured for the next coming years.

Sure. I'm just thinking more on the top line and re-leasing spreads, even if I strip out Rue De Rivoli, we've seen them negative for the year, and it looks like it's still under pressure. So would this not have the impact for future years?

What is under pressure?

Re-leasing spreads?

Well, it's -- if you -- let's stick to Rue de Rivoli. We have another asset in Rue de Rivoli, which Gap rented. We replaced Gap for Skechers and we received the same rent out of the property. So the pressure on rents, it's -- in secondary locations, it's true. But on the best locations, we have several examples in our portfolio in Utrecht in Paris, where we were able to increase the rent significantly. So it is part of the story that there is rental pressure when with rental new releases. But in a lot of places, we increased the rent.

Sure. Very clear...

It is really -- and I hope the market is seeing that this type of asset class, the high street assets in the largest city with historical city centers is quite other dynamic compared to, let's say, shopping centers. Our CapEx is much, much lower, and we create value if we invest in our property.

Sure.

Is that [indiscernible] answer, Rob, on your questions?

Yes, they are.

Okay. Thank you.

The next question is from Mr. Dennis De Jong from Kempen.

I have some questions. Let's start off with the CapEx. The press release mentions the continuing low CapEx, but also that you will have to spend a bit to extend the asset life span. Could you elaborate on that?

Well, in the past, we have only -- the majority of our CapEx went to creating new apartments above the retail assets we have like in Amsterdam or in [ Lille ] or in Bordeaux. So that's the majority. We don't have to -- it's basically facade and roof. And these historical buildings that it's -- we demonstrated the last 8 years that our CapEx in this asset class is way lower than, let's say, offices or shopping centers.

Clear, clear. So what do you see as the recurring lifespan of your assets in general? And if I may add to that, what is the percentage of GAAP or net operating income that you have to spend on the maintenance CapEx?

Well, the lifespan of our assets will exceed my life spans because the majority of these buildings were already there before I was born. That is one. And secondly, for example, sometimes, if you have, let's say, a 70 -- a building built in the 70s of the last century, you can tear them down on the location, but the location -- it's about the location. So even our UNIQLO building was built new, but on a very old location in the city -- bang in the city center of Amsterdam. So -- and maintenance, the percentage of maintenance, I think it's -- I'm looking to Reinier, it's very small. And if we do the [ maintain ] that it has sometimes the majority has to do with health and safety because if creating the buildings, the apartments above, you want also to have fire regulations and these kind of things in -- sorted out. And of course, the other is, let's say, some paints of the apartments and sometimes a new roof, but it's all relatively small.

Yes, clear. And if you say very small ballpark figure, 0.5% of [ guests ]?

I think it will be lower even.

But I think it's also a little bit difficult to say, Dennis, because it's also different per country because in some countries you can transfer to the tenants and these other countries not so I don't know the number from the top of my head.

All right. Then I have a question on the like-for-like growth. Given the lease on the Rue de Rivoli and the impact that we have seen on your like-for-like number, does that mean that for 2020, you expect some positive like-for-like rental growth?

Yes. We are expecting that, yes.

Yes. That was clear. So there was -- if I remember correctly, there was has 10 bps yield compression, is that right?

Over the whole portfolio, you mean?

Yes.

No. I'm looking through the number we...

Yes. You have looked at the [ EPRA ] yields. Is that correct?

Yes.

Yes. I think the [ EPRA ] yield is calculated a little bit different. So I think if you look at the pure value, do we really have a yield compression? I don't think so.

No.

No. Okay, okay. And well as a follow-up, are you comfortable with these book values at the moment? Or do you expect any...

Well, It's a very good question because there's a sort of elephant running around in the market about valuation. First, I'm not talking about other companies, I'm only talking for Vastned. First of all, this CEO is not interfering with valuers. That's to my colleagues who go through the leases, expectations. So -- because I like that it is an independent process. So that's one. Secondly, in every city where we have assets, there is market evidence of assets that are bought and sold. So compared to some other asset class in company, where there is lack of market evidence, if it's Amsterdam, Antwerp, if it's Brussels, if it's Bordeaux, there is market evidence. And therefore, valuers feel more comfortable, I think, when they sit around the table behind the desk, valuing -- writing the valuation report of Vastned assets because there's market evidence.

Now clear. That's clear.

So do I feel comfortable? I feel comfortable, and it is what it is. And I've always said because as you know, in the last couple of years, we have wrote down quite significant amount of money due to the fact that valuers were less positive about secondary locations, and we accepted that, and that's part of our life.

Okay, clear. Then my last question regarding the large discount to NAV. You recently had a share buyback. Do you have any further specific management actions in mind to address this and trying to close this gap a little?

Well, that's not on the table at the moment. So that's -- and of course, we like to maintain a conservative approach to our loan-to-value.

[Operator Instructions]. The next question is from Mr. Niko Levikari from ABN AMRO.

I've got a number of questions, but maybe a few comments afterwards, but a good set of results. But let's say, if you look at the ERV negative impact, that was about EUR 1.6 million for last year in total. Can you give me what was the total impact, excluding, let's say, the re-leasing of the H&M space the Rue de Rivoli? Was that how much more? Like how much was -- that was minus [ 0.5 ]? Or just to get a bit of a sense of if you exclude these few outliers.

You're talking about the like-for-like now?

When you were mentioning about the renewals impact with the reletting of the space. And it's mentioned minus EUR 1.6 million for overall for the year. So what was the -- can you give me the figure that would be excluding the French re-leasing of Rue de Rivoli.

Well, it -- that was EUR 600,000.

EUR 600,000. Okay. That's notably less. Okay. That's good. Maybe just looking at the NAVs of the Belgian entity and the Dutch one. Have you looked at potentially leveraging the Belgian entity a bit more going forward? Because it's obviously trading at a notably closer to NAV. So could there be some sort of contribution in current type of deals? Or -- I mean maybe even ABBs and things like that, that you could be...

Yes. It will have an impact on the total company if we decrease the LTV. So maybe Reinier wants to...

Yes. Niko, because we consolidate Belgium for 100%, if we increase the LTV in Belgium, that would mean that we have an increase in the total LTV.

Yes. No. But I was more asking in terms of if you buy something with a contribution in current type of deals. So you would be buying them against issuing some shares or what have you [ would use ]?

No. No. We -- no, we -- to talk a little bit more. Last year was a challenging year for Belgium. But our team there has done a great job in maintaining basically the majority of the tenants. And I think Belgium has -- there was a lot of uncertainties regarding certain retailers and certain locations. But our feeling is that the last -- the second half of last year, it turned a little bit to the positive side. So that's also the reason why our focus last year in Belgium was basically on the asset management instead of, let's say, in expanding the portfolio or other things?

Okay. Fair enough. And if you look at, let's say, the asset rotations, we've discussed quite a few times about the investment market. But do you think that during 2020 will be more of a net seller or a net buyer in terms of what's your current feel?

Well, it's very difficult to say because we are extremely conservative. What we see now is basically that some people are willing to pay extreme high prices. And that's -- I don't think in the long run -- it's nice that we can send a press release that we bought new assets. But in the long run, I don't think our shareholders will benefit from them if we buy these kind of levels.

Okay. Fair enough. And then if you look at, let's say, the change in incentives that you were reporting. It was slightly up on a year-on-year basis. But do you see, for example, that -- or maybe you can first comment, where was this mostly? Was it regionally across, let's say, the 4 regions you operate in? Or let's say, was it mostly in Belgium or the Netherlands?

Yes. Yes. The biggest part was, of course, Rue de Rivoli in absolute numbers in money wise. But there, it's very difficult because, for example, we had a unit in Utrecht, it generated EUR 400,000. It's -- the Coolcat was a tenant. We really reletted it on a temporary base quite quickly. And then a couple of tenants demonstrated interest in the assets. We let it without any incentives, no CapEx, and we've got 25% more rent. So it's difficult to say. It is -- and it is -- at sometimes has to do with the physical state of the unit. But in the majority, the whole fit-out is still being taken care of by the -- it's taken care by the tenant.

Okay. Fair enough. And you mentioned lastly about the residential, obviously, and that's something we've discussed as well. But is this something that could be more of the growth engine going forward? Is that something that you're more looking at potentially expanding as well? Or is it [indiscernible].

Yes. Well, first of all -- yes. First of all, what is important is we keep always our eye on the LTV number because we don't feel comfortable at the higher end. So that is one. But where we can add value by creating apartments, we are willing to do that. And we succeeded the last couple of years. But of course, we need to have the assets available to do that. But it is -- everybody in the group is aware of squeezing out the value that is in. Therefore, we are also creating residential units in Bordeaux or [ Lille ].