Vastned (VASTB) Earnings Call Transcript & Summary

Hello and welcome to the half year results 2020 conference call. My name is Rinkle, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Remco Vergeer, to begin today's conference. Thank you.

Thank you. Good morning. Welcome to Vastned's 2020 Half Year Results Presentation. My name is Remco Vergeer, I'm the Manager, Investor Relations. And with me are Taco de Groot, CEO of Vastned; and Reinier Walta, our CFO. Yesterday evening, you've received our half year 2020 results press release. Taco and Reinier will elaborate on the results in their part of the 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.

Thank you all for joining today in the half year results. We hope that you and your relatives have stayed safe during these turbulent times. Let's start with the highlights of the first half year on Slide 2. We have had a very busy first half of the year and second quarter has been the busiest of the last 8 years I've been with Vastned. The outbreak of COVID-19 has impacted our results, but thanks to the hard work of our team of 41 employees and the good quality of our portfolio, we have good grip on the continuity of the future rental income for maintaining the high occupancy rates. Normal business, as far as one can speak of normal business, continued with the occupancy increasing 40 bps quarter-on-quarter. Underlying like-for-like rental growth has been positive but turned negative to minus 6.3% as a result of COVID-19. The collection rate on July 24 was 84%. This has been a good achievement, driving by the tailor-made approach with our tenants. These figures are, firstly, the results of the quality and location of our portfolio, whereby high street retail in top historic cities in the Netherlands, France, Belgium and Spain, are significantly less affected than shopping centers. More importantly, the results are a reflection of the work done by our team, which, in a relentless approach has been in very close dialogue with all of our tenants. Being supported by the property management software that was installed last year, our team was able to have hundreds of individual discussions at the same time. On the cost side, we have reduced general expenses by 14% year-on-year as we are very focused on maximizing our direct results per share. We acknowledge that in certain periods, it's difficult to grow revenues. There are opportunities to lower costs. We have a strong financial position and have all our refinancing until 2024 covered. Normally, you are not proud of negative revaluations, however, a markdown by our external valuers of 2.5% in today's environment is clearly a reflection of not only the quality of the portfolio, but probably even more importantly, the liquidity of the portfolio. As a result of the revaluation, our loan-to-value came out at 42.6%, which is within our target range. The average cost of debt came down further to 2%. We anticipate a direct results of between EUR 1.70 and EUR 1.85 for 2020, and will continue to pay at least 75% of this result as a dividend. Despite the relative good operating results, we do see that there is significant shareholder value to be created and are committed as management and as shareholders to unlock the value dislocation reviewing all options. Moving to Slide 3. As Vastned been indicating for some time, the retail landscape is changing and the outbreak and spreading of COVID-19 has accelerated this development. In the interest of the company, the Executive Board and Supervisory Board, therefore, have started a strategy update process in which all strategy options are on the table. To summarize, after years of portfolio rotation, making a flight to quality, Vastned nowadays shows to be a relative safe haven. We have a EUR 1.5 billion portfolio, which is predominantly high street retail, but also includes 6% residential and offices. Almost all our assets are located in large historic cities with limited new supply in inner cities and increasing prices for all alternative residential use. Our portfolio compromises (sic) [ comprises ] of highly liquid high street shops, and it is incredibly concentrated with our top 10 cities accounting for 75% of the portfolio. The occupancy of our portfolio has been historically high, as you would expect from these residential companies with core portfolios. However, our CapEx is marginal since our tenants pay their own CapEx. During the last few years, our CapEx has been between EUR 2 million and EUR 6 million annually. As said, the collection rates are high at 84% and still increasing. We won't make it to 100% as we have given one-off waivers of circa 8%. The fact that our tenants continue to pay the rent shows the quality of our locations combined with the high liquidity of the assets resulted in a limited value adjustments. Although we are highly cost effective, we will continue to focus on cost efficiency, acknowledging that 21% of our costs are related to Vastned being listed. The implied net yields of 6.7% at H1 clearly shows the clear disconnect between the listed and the direct markets, whereby Vastned is affected by the sentiment around shopping centers, although owning a clearly different product as our first one 2020 figures show today. The upside potential for Vastned is significant, and we are clearly looking at how to unlock this value dislocation. Finally, it's worthwhile to mention that we have a very flexible debt structure, which should not trigger any breakage costs in events of change of ownership. We would like to come with the announced strategy update at the publication of the full year figures. Moving to Slide 4. The direct results, which reflect the cash flow from operations for the first half year are impacted by COVID-19 and came out at EUR 0.85 per share, the collection rate stood at 78% at midyear. The indirect results that includes the noncash items of our profit and loss statement, including downwards revaluation of the portfolio of 2.5%, came out at a negative euro of EUR 2.09, resulting in an EPRA NAV of EUR 43.76. Our loan-to-value at 42.6% is within the target bandwidth of 35% to 45%, and our average cost of debt further decreased to 2%. The implied net yield of -- let's discuss more on the operational performance on Slide 6. Occupancy increased marginally quarter-on-quarter to the extent possible to 97.4%. As you can see, Spain and France are both truly led whereas occupancy in Belgium increased again following some bankruptcies in the first quarter. We have proven to be able to find new tenants for our locations and in certain cases, we have even received inbound requests from potential tenants that would like to upgrade their location should tenants leaves due to COVID-19. Slide 7 shows more details about the leasing activity in the first half year. Apart from COVID-19 related discussions with all our tenants, we also continued our regular leasing activity. This resulted in 38 leases signed, including new contracts for a number of tenants in the Netherlands and in Belgium. In Paris, we signed an office lease at the first floor in Rue de Rivoli at higher rents than we would have done, if it was leased to a retail tenant. When signing the leases, we came out EUR 200,000 lower than the previous rent, which is skewed by H&M that took a large new lease in Utrecht. Slide 8. On Slide 8, you see the impact of COVID-19 on our portfolio in the first half this year. The government measures as a result of the global outbreak of COVID-19 were introduced as of the middle of March 2020. In the countries where Vastned operates as a result of which almost half of the property portfolio was confronted with closures in the final weeks of March, all of April and May and part of June of this year. But we are pleased that all of our stores have been opened again for the last month. Although the Netherlands, our stores were allowed to remain open, a significant number of mainly international chains closed their stores for a period at the peak of COVID-19 outbreak. France, Belgium are open for more than 2.5 months now, and Spain joined relatively recently, having been closed later and longer than other countries. In general, we see relatively strong footfall throughout the period since the opening -- since the open-air nature of high street retail has been preferred over close shopping centers and also recognize that conversion ratio has increased significantly. We also see that tourists have been avoiding the larger tourist destination, which resulted in a more significant drop in footfall, which we don't expect to pick up during the holiday season this year. Slide 9 explains more about agreements we have made with our tenant base. Slide 9. Our team has had intensively dialogues with all of our tenants. We try to anticipate as much as possible to changing situations and have always been in control. The investments made in our new property management system has proven to be crucial in securing as much rental income as possible. What is shown on this page are the successful outcomes of the negotiations with various tenants, including one that simply stopped paying rents and breached their contract, especially larger tenants that clearly were able to meet their legal obligations have been pointed to that. And in many cases, sometimes with legal pressure, continue to pay. Rents in total of EUR 3.1 million have been waived, whereby clear differences have been made based on the local COVID situation and, in many cases, also other local forms of support like in Belgium for small retailers. As expected, mainly the tenants in the sectors that have been hit hardest, being fashion and food and beverage, have received waivers. In some situations, waivers have been combined with extension of contracts and increases in rents post COVID-19, which was, in particular, in Spain, the case. On the next slide, we give details and the progress on the rent collection. Slide 10. On this page, we would like to provide you more details on the collection rate and receivables. Over the first half year period, we have sent invoices totaling EUR 40 million. These are predominantly rents but also service charges and VAT. We have negated the waivers of EUR 3.1 million, which are 7.8% of the total amount leaving a maximum of 92% to be collected. At July 24, we have collected EUR 33.5 million, up from EUR 31.1 million 3 weeks ago. As such, the collection rate increased by a further 6 percent points to 85% in total. We do expect this figure to continue to increase in the coming periods. Receivables, which is in the balance sheet item, you will be looking at in connection to the collected rates. The June 30 figures are video still and also here a significant progress has been made since. The receivables are a bit more complicated as it is included -- includes receivables over the rental period up to June 30 of this year and also includes receivables of pre invoices over Q3 sent out in Q2. Starting with the receivables over the period up to June 30, the EUR 8 million of receivables mainly includes EUR 5.4 million outstanding payments over the first half year and EUR 900,000 of deferrals. For bad debtors, we have taken a provision of EUR 2.5 million, resulting in a net receivable of EUR 5.5 million. On June 30, pre invoices for Q3 that were not paid yet, totaled EUR 8.3 million. Slide 11 shows like-for-like rental growth. Slide 11, please. Like-for-like rental growth would have come out at 0.3% in the first half year without COVID-19 impact. Including waivers, the like-for-like rental growth came out at 6.3% negative. France has been a positive outlier following the lease-up of Rue de Rivoli flagship store to JD Sports. Slide 12. On Slide 12, we see that a large part of the portfolio have performed stronger during COVID-19. In good times, a rising tide lifts all boats. However, today and going forward, it will be much more about quality and the locations of the portfolio. 83% of the value of our portfolio is located in cities with historical centers. We believe that our locations in these cities are irreplaceable whereby demand will remain for key high street locations. The 6% residential and office exposure of Vastned has proven very resilient. We further recognize supermarkets, personal care, sports, home & garden performing better than pre COVID-19. Fashion, accounting for 50% of our rental income, has been under most pressure and support has been provided to those tenants, which clearly needed it. Next slide. Management of Vastned is focused and committed to cost efficiency. Following the sale of our entire Turkish and Spanish shopping center portfolio, we have returned capital to our shareholders by means of share buybacks. The results was a reduction of less than 25% in the size of our portfolio, whilst improving the quality. At the same time, the costs have decreased by almost 1/3 when selling a portfolio, not all costs go down, and particularly, the cost to our listing that accounts for circa 21% of general costs get more weight. Despite the decline in size, the 56 basis points over gross asset value decreased to 51 basis points, which is a relative reduction of circa 10% adjusted for size. On Slide 14, we will go to our finance structure. The average cost of debt has come down another 20 basis points to 2% at midyear. This has been the result of refinancing of a more expensive private placement by cheaper debt. Vastned does not have mortgages, loan. So as such, as a fully unencumbered portfolio, which gives maximum flexibility. Moreover, we have no rated bonds and as such, also no related costs for credit ratings. Debt repayments are free of cost and the RCF and a change of ownership would have allow investors to put their more expensive private loans, however, thereby waiving their make-whole cost. On the next slide, we show that all debt maturities are covered until 2024. Next slide. Slide 15. Vastned has circa EUR 95 million of undrawn facilities, which could cover all the debt maturities until 2024. Although 2024 is still far out and shows relatively big spike, this is a large attempt relates to revolving credit facilities, which, by nature, have a shorter maturities and have been rolled over several times. We expect the cost of debt to come down further as we anticipate to refinance another EUR 37 million of private debt at 5.6% cost by cheaper debt. Next slide, Slide 16. As mentioned, we anticipate to refinance another EUR 37 million of private debt in October of this year. The retail landscape is changing and the outbreak of COVID-19 has accelerated this development. Management and Supervisory Board, as announced, started the process of a strategy update in order to evaluate all options not ruling out any options to increase shareholder value. It's important to take the impact of COVID-19 on the economy, the real estate sector and our portfolio into account. The results of the strategy update process will be presented during the publication of the 2020 results in February 2021. Residential and offices on top of our shops currently accounts for 6% of the rental income. After adding residential units in Amsterdam and Utrecht, we worked out a larger plan of just over 100 units in Eindhoven. Eindhoven is the fifth largest city in the Netherlands and also has a housing shortage. We have plans to extend in Albert Heijn and build more than 100 houses, creating value for our shareholders and adding value to our tenants. Vastned -- and now, I will hand over to Reinier to discuss our financial results more in detail.

Thank you, Taco. On Slide 18, we discuss our profit and loss statement. Gross rental income for the first half of the year came out at EUR 32.5 million, which is EUR 2.5 million lower than last year. This predominantly relates to the EUR 2.5 million waivers we have given at midyear. In the normal circumstances, the P&L would give a reliable view on the actual rent collection. The triangulation with the receivables on the balance sheet currently is more important as it shows how much cash is actually collected, which is a figure not shown in the P&L. As you can imagine, we are very focused on further increasing our 84% collection rate, bringing down receivables as much as possible, as shown on Page 10. Operating expenses increased year-on-year, mainly as a result of higher provisions for bad debt, EUR 1.4 million, increasing the total provision to EUR 2.5 million at midyear. Financial expenses declined by EUR 1 million as a result of the lower cost of debt and are likely to come down further as discussed. General expenses decreased by EUR 600,000 due to lower remuneration. Slide 19. Our direct result. The direct result per share increased from EUR 96 (sic) EUR 0.96 in H1 2019 to EUR 1.07 with major contributing -- contributors being the lower overhead cost and a lower interest cost. The COVID-19 impact has been EUR 0.22 per share, which is also partly reflected in the lower allocations from minorities being the 35% in Vastned region in Belgium, which is not held by Vastned. Next, Slide 20. Major changes in the balance sheet mainly relate to the EUR 38.9 million revaluation of the assets. The receivables we discussed in detail on Page 10 and have been reduced by almost EUR 8 million in the last 3 weeks. Slide 21 discusses the value movements of the portfolio. The 2.5% decrease in value is a reflection of the quality and the liquidity of our portfolio, where the number of shopping center transaction has been declining, we still see a good market for high street retail transaction and interest in Spain and France. In the Netherlands, Dillard's recently has sold several high street assets at high prices. As part of our 3-year rotation schedule, our external valuers have valued different assets, which has resulted in a renewed market -- in renewed market rent levels and prices accordingly. In the Netherlands, rents have been revised to 303 levels, which are reference rent for similar surrounding assets. And I'll now hand back to Taco again to conclude with the outlook for 2020.

Thank you, Reinier. In our Q1 trading update on May 6, we didn't give any outlook for 2020 being in the middle of the COVID-19 and having high uncertainty on the impact for our P&L in 2020. Less than 3 months later, all shops of our tenants are opened again. We have made tailor-made solutions for almost all of our tenants and have achieved a very good progress on rent collection rates. Footfall in our high street location have increased significantly. However, especially tourist locations are still lagging, and it will likely take some time until fully pick up again. We do not expect country-wide lockdowns, but see local lockdowns being happening, lowering the impact on the rental income for entire countries, as we have seen in the first half of this year. We will continue to be focused on keeping occupancy high, achieving high collection rates and cost efficiency. Although the number of bankruptcies has been limited in our portfolio, we do take into account that this number will increase in the second half of this year. Taking all this into account, we forecast a direct result of Vastned for the full year 2020 to come out between EUR 1.70 and EUR 1.85 per share. With that, I would like to hand back to the operator to open the Q&A session.

[Operator Instructions] And the first question comes from the line of Niko Levikari from ABN AMRO. Since we have no response from Niko's line, we'll go to the next question from the line of Jasper Jansen from VEB.

Jasper Jansen, VEB. I appreciate. I have a couple of questions. First, on the rent collection. Could you maybe give some color on how this compares to your own internal forecast? And maybe give some color or whether my math is correct that you actually expect over the long term to receive 92% rent collection when you actually receive all those rents? And then my second question actually relates to the negotiation with payment agreements, which I was actually impressed by the fact that you did it for virtual -- the entire portfolio. So maybe you could give a little bit more color on this and on the IT systems you use and how did you pull this off with the stated organizational capacity? And then my third question is just on the following results update [Technical Difficulty]. Existing shareholders are just, let's say, unhappy and frustrated with the current situation, and this is not only related to the remuneration, of course. So my question is have there been discussions with the shareholders? What has been discussed? And maybe we believe there is some merit in their criticism. And my final question relates to the planned strategy update for February.

The line is suboptimal. So parts of your question were not clear. So maybe we can go back and handle question by question. So your first question was regarding the rent collection?

Yes. So it improved in the last 3 weeks from 78% to 84%. And my question was, how did this improve with compared to your internal forecast? And is my math correct that you actually believe to receive over the long term, 92% of all the rents that were invoiced? Is that -- is my math correct in that way?

Yes. I think first, starting with the last question. If we would reach maximum, it will be 92%. But we have also increased the provision for debtors. So we also added another EUR 1.4 million to the provision. So what is still outstanding, we expect around -- we have net receivables of EUR 2.5 million, from which we expect to get back. And if we then go back to your first question, on our internal, how we look at that is, we work really hard with the whole team. We make -- as we have mentioned, we are having agreements with all tenants, and we are talking all day to our tenants. So yes, for our internal process, what we have shown here that corresponds with how we look at the collection rate. Does that answer your question?

Yes. That's really helpful. And then maybe on the AGM, of course, the voting results. It seems that at least 2 shareholders are unhappy and frustrated at the current situation, and this is not only related to remuneration, of course. So my question is have there been discussions with the shareholders? And what has been discussed? And do you believe there is some merit in their criticism?

Well, I think we always are in contact with our shareholders. We have read their comments in the newspaper. But today, it's about the annual (sic) [ half year ] results. So I'd like to focus on that. And again, we are always in contact with our shareholders. But on our website, you can see, within the presentation, there are some appendixes. And there you can see the cost breakdown of Vastned, and you can make an observation or you can have an observation comparing to peers. So that's all I have to say about this point.

Maybe I think market maybe would appreciate some more transparency in this regard. But I...

Well, let me, we never -- again, we are -- even yesterday evening after the presentation of our results, I spoke to a shareholder. So we are open for dialogue to -- with shareholders, and that is today the policy. And that has been the policy for the last 8, 9 years that I'm a CEO of Vastned. So that's it.

And then maybe on the planned update for February. Is there any thought about maybe bringing the date forward, given the current market situation? Or is there...

Yes. It's -- you are saying very correctly. Due to the fact of the current market situation, the current market situation, the COVID-19 made us decided to have this strategy update sooner than planned. It was planned later. So for now, it is February when we present our annual results. And because a couple of months ago, we were in the midst of managing a real crisis, and that made the decision to get the strategy update for next year sooner. So it will -- for now, it won't be sooner. And of course, we need to do to make an assessment of the effects and the aftermath of COVID-19.

Okay. And just to confirm, is it correct that average scenario is part of this update process also a full liquidation scenario?

If you look into the mirror, you see the whole picture. So the whole picture is all options are on the table.

Okay. And then maybe if I can squeeze in one final question because we have to ask at every real estate company, but an equity offering, is that something we could rule out completely? Or how should investors look at that?

Well, it's not applicable as we speak. And in our presentation, we don't have any need to do that. So I can rule it out for now.

We have our next question from the line of Niko Levikari.

Okay. I hope you can hear me now?

Yes, Niko.

Okay. Perfect. I've got a couple of questions, but maybe as the first one, we can kick off with, let's say, some of the negotiations that you've had with retailers. I was just wondering that how much do you see that retailers that have been impacted by lower tourism in major capital cities like Paris or Madrid? How much has this been reflected in the rent negotiations i.e. have these retailers demanded more rent waivers, or let's say, rent reductions from your side that have relied more on tourism? And maybe that's something that you can comment on as the first.

Yes. What we can see, let's take a city as Paris, for example. And of course, Paris, a huge amount of tourists are visiting Paris each year. And I think our observations are that visitors are -- the tourists that are walking and spending money are more visiting smaller neighborhoods like Le Marais where we have exposure. We also see the Parisians doing shopping and you see, for example, Château Rouge, which is more -- is probably the one street that is the most depending on tourism. There my view is that the effects for retailer are much, much higher than, let's say, the neighborhood kind of feeling Le Marais has. So even in a city, you see a sort of polarization that -- the location that are purely depending on tourism, like Château Rouge are doing worse than, for example, neighborhoods like Le Marais. And what you can see, the tourists today that you are seeing are more the younger tourists than the mature tourists.

Okay. Fair enough. I appreciate the comments that you made regarding the new office lease in Paris as well. I was just wondering how much more potential [Technical Difficulty] leasing type of office suite in your overall portfolio?

Well, this was the unit formally rented to Gap, which we -- proactive approach to ask them to leave the premises because we were not a believer of Gap. And now we have Skechers as a tenant, but Gap used the first floor for retail. And there was no interest, and we had interest for office user. Sporadically, you can't build -- it's a little bit like the residential units. Each year, you can create residential units, but it's very hard because the space available is relatively limited. And of course, you have some legal issues where you -- for example, if it's already rented out, you can't break the lease. So it's a limited opportunity to transfer retail space because we don't have that much assets where first, second floor is used as retail. A example in Amsterdam, a couple of years ago, when we rented out to UNIQLO, UNIQLO didn't need to have the upper floor, and we transformed that to offices as well because these are large floor prints and large floor prints in inner cities are highly in demand. Is that an answer, Niko?

Yes. That gives an answer. Maybe, let's say, the last because some of the questions obviously were already asked. But let's say, regarding the residential plans that you mentioned briefly on one of the slides and potential portfolio rotations. I was just wondering, is it possible that, if going forward, you recycle some of the existing retail locations? So I dispose them that you could consider acquiring some residential assets as well to the overall portfolio? And is this something that you will be more addressing with the strategy update, but obviously, if you can comment in any ways that would be appreciated.

Yes. We always have done and have a focus on residential as a, let's say, cherry on the cake for our shareholders. And looking to more residential is also on the table in the strategy update. And we just gave you a little bit of insight of the possibility of 100 apartments will be -- that will be rented in the, let's say, the mid rental segments of the market in Eindhoven. So we all -- it is all -- we've done it in the past, looking where can we add residential units. And if markets and cost allow us, we will execute that, of course.

And would this be -- just as a small follow-up. Would this then be the type of a case where you potentially sell the residential premises to a developer? Or would that be...

No, no.

You wouldn't retain it, okay?

Yes, yes.

We have our next question from the line of Herman from Degroof Petercam.

So this is Herman. So first of all, my appreciation for the transparency. You can believe me because I'm very quick to criticize and I had a problem with a lot of Dutch companies on that matter. So thank you.

We've listened to you, Herman.

And please go ahead with that because I'm sure the market will appreciate that. And I'm sure this is part of the difference between premiums and discounts between Belgium and Holland. So please continue on that. I've got 3 questions at this stage. The first one is on the rent collection. First of all, you mentioned 84%. 92% would be the maximum because you agreed on 8% holidays. Between 84% and 92%, are there difficult tenants where you have litigation or just agreements in the verge of conclusion or both of them? And on the 84%, again, are there already these nice guys of H&M and C&A included? Or are they still the guys that need to be a conclusion? That's my first question.

Sure. Shall we do it by question, Herman, otherwise...

Absolutely, yes.

Maybe on the first question, yes, of course, in the -- from going from the 84% to 92% is where the most of the difficult discussions are. And with some, we are -- quite some, we are still having discussions. And in some other cases, we have to be a bit more firm, and we are more into the whole collection procedures and also -- and seeing some legal procedures, but that's a combination of.

But -- and to add to that, we don't have any discussions, open discussions with the tenants, the retailers you mentioned. So we already have agreed payments with them.

Good. Then my second question, is it correct that if we make a rough calculation that 84% might translate in about 60%, 65% for Q2 alone because a lot of your peers gave figures for Q2?

It's not entirely correct, I think, you're close, but I think there's also a small part of the Q1 rents, which are still outstanding. So it's not 100% in Q1. Don't forget that the crisis started halfway in March. So we also have some discussion with some tenants on the March rents.

Okay. Then I have a question on the dividend, just a technical one. You -- the stock trades already ex-dividend, if I'm not wrong?

Yes, that's correct.

But the dividend has not been paid yet. Is it already in debt in your accounts? Or is it still core dividend?

No, but Herman, the dividend has been paid.

Okay. Because I see here... yes, but, I thought...

On 30th of July.

Yes, yes, but I mean, on the 30th of June.

On the 30th of June was not paid.

So you are referring to the interim dividend?

No, no, the dividend paid.

No, no, the final one.

Okay. So on the 30th of June, it was still as a debt in our balance.

But it was already...

Yes.

Yes.

Okay. So that was always ex-dividend, okay. And then my final question is on the -- well, obviously, I don't want you to spoil the pleasure to disclose the nice new strategy in February 2021. But you mentioned out resi, which is something becoming very fashionable in Holland. You -- to be clear, you want to keep this residential. You don't want to sell it and bother with co-ownerships. You want to become a partial residential landlord?