Vastned (VASTB) Earnings Call Transcript & Summary

Okay. Let's go. Thank you very much, everybody, for joining. I hope you see my screen in the meantime. So today, I will talk about -- a bit about -- the presentation itself will be in Dutch, but I will speak in English. First of all is what we will handle today is, first of all, the portfolio itself, the real estate portfolio, how it looks like, what is the spread over the different tenants; some major economic factors that have passed this year, some financial results; how is our outlook for the real estate market and the outlook for 2023. First of all, if we look to our portfolio, I think similar to prior year, we still look to inner city property located in the cities, Antwerp, Brussels, Ghent and Bruges. We have several retail parks on a good location. I think [indiscernible] is one of the good locations in our portfolio. Every retailer still wants to be there in [indiscernible] . We have [indiscernible] , but also on the [indiscernible] here in [indiscernible] , it's also a very good location. On the other side, we have our occupancy rate, which is 99.5% at the end of the year. Prior year, it was 99.3%. And overall, over the year, we always had an occupancy rate of more than 99%. So I think that's one of the topics which was very good and which we can be proud of, I mean, knowing that Inner-city retail still has a hard time what we read in the press. But on the other side, we still managed to get a good occupancy rate. In terms of valuation, the value of the portfolio decreased from EUR 314.5 million to EUR 312.6 million. That decrease is mainly in the second half of 2022 that it happened. So if you look to our half year results, we were then almost breakeven in the fair value of our portfolio. Of course, the spreads started to increase and the yields have been changed. However, the yields decompression was not that big compared to other sectors in real estate because, of course, we were hit already by COVID in the past, where we had already some yield compression in the past. If you look to it, it's in total, we have now 6.5 -- 6.05% of an average yield on our portfolio, which is quite high still for an inner-city real estate portfolio.

Sven, can I interrupt you?

Yes.

Can I just ask you, the value losses were quite small despite this yield compression. Can we say that it was very much compensated by higher ERVs?

ERVs have not yet been changed, [ Herman ]. Of course, the rental incomes have been increased due to the indexation. But the -- but on the, how would I say, the rental income increased, but the ERVs, they were kept stable. Only a limited number of ERVs have been changed. But all in all, we didn't saw big movements in ERVs, to be honest. So it might be in the future, of course, that they do some changes in ERVs. The total surface did not move. We did not do any sale nor any investment over the last year. So this number of units is still 155. The spread we have, this is an important one, is -- that is explained in terms of fair value. So you see that the 19% is -- 19% in Brussels is in fair value expressed. In terms of rental income, this represents 15%. That's also what we have in our press release that the impact of the potential ordinance that has been communicated in Brussels will be a maximum 15% of the rental income. I don't think I have to go too in depth in that one. In terms of spread to the different sectors -- segments, we still see, of course, fashion is quite big at 52%. I think last year, it was 51%. So just a small shift. Where possible, we try to move and decrease our fashion part. But of course, if we have 2 tenants and fashion pays a much more higher premium compared to a non-fashion retailer, we still like to go for a fashion retailer. On the other hand, not many contracts came to an end. So that also not a possibility to change, of course, our tenant mix. Major or the important factors that were there, the economic developments this year, I think, first of all, is the war in Ukraine which had a significant impact. So the war in Ukraine, we already had some problems with the delivery of raw materials just after reopening from the COVID period. We also have the ship in the Panama -- in the Suez Canal at that moment, which also, yes, had some problems in the chains. We had a decrease in consumer trust, and that resulted all in all in an exuberant high inflation. And so in October, we had in Belgium an inflation of 12.27%. The inflation figures start to decrease. So we have -- in January, we were at 8.05%. Important to note is that also the core inflation in January 2023 in Belgium was also 8.05%. So they are, again, leveling out each other. And yesterday, I saw the newspaper also that the gas prices also decreased to less than EUR 60 per megawatt. So also that one, we see that it's starting to decrease. But all in all, this high inflation ensured that there was a reaction from the European Central Bank. They increased, of course, a lot their interest rates, which had a significant impact on the real estate stock-listed companies. Vastned all in all was not that hit -- Vastned Belgium was not hit that hard. The reason is that we have a low debt ratio at this moment. And if I look to the article from the Dutch, which has been published in December, on a year-on-year basis, we had a 10% increase in our stock. So the analysis that the Dutch did was the stock price at the beginning of the year compensated for the dividend that has been paid out and for the stock price at the end of the year. So all in all, we had a much nice movement of our stock. Of course, this brings us to the indexation inflation -- also results in higher indexation. It became a big point of attention for all the tenants. Of course, all the tenants came and ask again if we could give some waivers or limit, put the cap on the indexation, whereas we said, okay, no, we will not give that cap on the inflation -- on the indexation. And the main reason why we would not put the cap on it is that, of course, a tenant can always increase their prices, whereas we as a landlord cannot increase our prices. The indexation mechanism is the only mechanism that protects us for a price increase. Of course, if the government would impose some measures, then Vastned Belgium would follow those measures. So first of all, the measure was put on the residential rent. Residential, as you saw in our presentation, is not that big. We have only 2% residential units. And all those units have an EPC value of A or B. So that means that we can fully index our contracts because the loss has an EPC value. A, B and C, you can index in full. For a D, you can only index 50%. And for an E or an F, you can't index. So we were not hit by that measure. The second measure is then for the Brussel region. The Brussels region there, the -- on the 15th of December, they approved an ordinance, which says that the rent of a commercial contract can only be indexed for a certain amount based on a consumption price index where the energy component has been removed, but they do it based on -- the base index figure is the one from July 2021. So there, you might -- it's a very complex calculation. But what is the main -- what is -- for us, why we said we can't calculate the impact is twofold, in fact. The first time is that we have, for example, now indexed from 100 to 110. If based on the new calculation it comes out that you have a value of 108, we can still invoice 110 to the tenant because all our contracts says that the new price cannot be lower than the previous price. So for a deflation, we will not be hit. The rent prices will remain the same. On the other side, we see that the price -- the consumer price index is almost equal to the new -- to the core inflation, so meaning the consumption price index without the energy component. So they're almost equal to each other. So that's why I believe the impact will vary -- will limit it to our revenues going forward. Also an important note is that there is some resistance and made some lawsuit will be launched for it from the landlords because it's not only equality principle, of course, because it's only for commercial contracts and it's not for the common law contracts. For example, a landlord from offices, they can recharge because that's responsibility of the federal government, so the Belgian government, whereas this one for the commercial rent is only for a regional responsibility. So the Brussels region can only imply that. And in fact, the nature of the ordinance was really to protect the small retailers like the butcher and the bakery store. But in the end, all the big players will benefit from this regulation. And because an H&M will have a bigger impact, of course, compared to a butcher or a bakery on the rent prices. So based on us, it might be the possibility that we can't charge the index, but at least, we will not decrease in value on a like-for-like basis. We still have the same amount of rent compared to this year. So that's, I think, one of the most important topics.

May I ask you a question, Sven, about this?

Yes. No problem.

I did not know it was only in Brussels. Are there also talks, for example, that under, I don't know if the rest...

Yes. No, in the Flanders region, no, they will not follow. We have set some contracts with [indiscernible] and BBS, and they said that there will not be a possibility to come in Flanders and in Walloon region. So there is no impact expected for that one. And also the fact that they are going into appeal for the equality principle might still be a possibility that they will remove the ordinance and that they say it's not legal, this ordinance. So in that term, we can still invoice the full amount.

Maybe a second question.

Difficult versus, yes.

It's the kind of 9 -- in the Netherlands, you have [indiscernible] you kind of left this city. I don't know if the same for Brussels, but okay. And you said -- it's in there. It's also temporary...

It's for 1 year.

it's for 1 year? Okay.

Yes. So after that one, you just calculate as of you did it in the past. So if that's your tenant, you will have the discussions again with your tenant in 1 year because then the index will increase significantly again.

And maybe then at the time you said also in your discussion, the gas prices will stay low again, and then maybe it's less.

Yes.

And then you are in your 3 years term again. Anyway, how you have to talk with your tenants?

Then in our 3 years' term, we always say that we have to battle with equal weapons, I would say. So if they want to talk about this one and they say, okay, we want to -- you need to decrease because otherwise, we will give our notice. Then we say, okay, give your notice, and then we can talk.

Do we have any idea about the OCR levels? Or maybe one step further, the revenues of your tenants at the moment, the cost...

No. We don't have that information. The reason is that we don't have any contracts except for one with a turnover component. So we always try to remove from the turnover component. The reason is also that what we see is now a lot of discussion with landlords and tenants about what is the size of the turnover, meaning online, which is picked up in the store. Does it include in the turnover of the store or not? So they remove it often from the turnover, whereas that turnover, yes, helps. And on the other side, you have some tenants that say, okay, the goods that have been returned from an online order, they -- when they will be returned, they will be deducted from the turnover of the store, yes, so that's not equal. So that's why we try to stay out of it as much as possible.

Or deducted from the stores which have turnover rents, I heard it.

Yes.

That's really awesome. Okay. Now -- Okay. Yes. So -- and maybe I can imagine you will not put it on the official slides, but maybe you also sometimes have informal talks with your tenants or you just visit the store. Of course, they will always complain. And as long they complain, I think, is a good sign. But do you have a gut feeling how they are doing or...

I think the big chains are doing quite well. I think Inditex is doing quite well. H&M is a bit difficult. They are always complaining compared to the other ones. The smaller still have some problems, but those are the ones who already had problems before COVID. So some of them are just not located on the best spot or they just want to be on a certain location, but they can't pay the price and they say it's too expensive, and then the store becomes not beneficial anymore. Those type of discussions you have, but it's very limited. What I can say is that the Walloon region, and we'll see it on our other slides where we compare the old rent and the new rent, the Walloon region has it a bit more difficult. And then certainly, for example, in malls, where with the shopping center, all the inner city stores have been removed. To give you an idea, [indiscernible] , it's just located next to our store, and that's in the high street of malls, I would say. So that gives already an indication and same in [indiscernible] . There, you also have some higher vacancy in those cities.

Maybe one last notice, and then I see [ Herman ] with a wave. From a personal perspective, I was in Brussels at [indiscernible] conference a couple of months ago, in June or July -- when was it, [indiscernible] -- September...

That was September, October, yes.

Yes. And what I did was I took my wife with me to stay at Brussels, but just let her go around without telling where Vastned's properties. And actually, then I got a text message from her, she likes bargains as a real Dutch lady. So she went to the action and your actual the nice on the [indiscernible] ?

[indiscernible] , yes.

Yes. And she told me, yes, I even walked out again because it was too crowded. So...

Yes. And that's one of the locations -- one of our top locations in Brussels, the [indiscernible] , that's performing really good. So I can confirm that one, for sure.

I visited myself as well the day after, again. And it was really -- I was really positively surprised. So...

Yes.

[ Herman ], sorry, you're on.

No. No. No worries. So Sven, I had a question. I can't make the rough calculation because you gave some indications. But could you say to us in 2022, what was the like-for-like? Or if you prefer, what was the effective indexation you applied? And for 2023, I know you don't want to discuss our guidance, but what kind of indexation are you budgeting? Is it 3, 4, 5?

Yes. I think, [ Herman ], on like-for-like, we did not mention the amount in our press release. But if you make the calculation, that is the only number, if you compare the rental income, if you count all the other ones, you come to the increase of the indexation. It was around EUR 800,000 to be indexed. So it's about almost 4.5%, 5% indexation on being invoiced.

And that is the maximum -- you applied the max indexation?

Yes. So we applied the max indexation. So we did not give any discounts nor we don't have any caps. We only have one contract where there is a cap, which is a newly negotiated contract. But there, the cap was set at 4% or 5%. So even that, I don't think we will come back to the regions where we have 10% indexation anymore, I hope, at least.

And you have maybe an additional question on what [ Herman ] was asking. Do you have also kind of -- you put there you increased -- you had 20 new contracts I saw in your press release, and you compared with ERVs. But I'd like to get some flavor about what was the old rent and new rent. So you have EUR 1.6 million...

Maybe we already go to the next slide. So you also want to see this slide in -- your favor of this one. So...

I love it.

So I think in total, we have new contracts. In new contracts, we gave a 13% discount. The main reason and the biggest impact was also the one we mentioned on half year numbers. It's linked to the old contract of Massimo Dutti. They were there already for more than 20 years. So the rental levels were not substantial anymore because there was a new market after COVID. They left. Then we had to pop up temporarily in it. And now we have a new contract with ATON. But what is important for that contract is that that building, if you ever enter it, I can only recommend it because it's a fully classified building, which means that also the interior is classified. So there are still some old closets from [indiscernible] in the past, and they need to be in the stores still. So that means all the wood you see in the building needs to be there still. And then it's, of course, difficult because you can't run it to everybody. It's only for a selected audience that you can use it. And that's the main reason why we had to give some rental decreases. If you -- I will maybe show you here. So this is the ATON. So this is this building. And then you see all this one is classified in the front. But also on the interior, so all this wood that you see in here, it's also all classified and we can't change it.

Monumental starts, you would say...

Yes, some monumental. So here, you also see the wood, the cardboards. And it all needs to be there. It all needs to be stayed in the building. And that makes it very difficult, of course, to let it out to another tenant. We had a lot of discussions with this. And then I think with ATON, we have now, again, a good brand in the store and a sustainable brand that fits the building. On the other side, we had the contract in the [indiscernible] , where we even rented out above ERV. So there, we had an increase of the contract 15% above ERV in the [indiscernible] , which we closed. You see also in the Walloon region, there, we have a small decrease. But all in all, I think we can say that most of the contracts which were overrented are almost out of it because we are now start from the beginning of the COVID till now, we have 3 years past. So either they use the break option or renegotiate it. I think most of it is out of it. And ERV levels, we always succeed to close to ERV levels. [ Herman ], you had a question?

No. Just for Massimo Dutti, you are actually paying the good years -- the nice good years, 20 last year. It's more a one-off. You can say that you are close to passing rents?

Yes, indeed. Passing rents and ERVs are almost equal to each other now. So we don't have any big hits anymore to come.

So that means that the prices will not be very keen or very hot to rise ERVs dramatically in the coming months?

Well, it depends because, of course, we have all the indexation on it. So there is now still a gap in between with indexation. I think if I look all in all to our portfolio, our rental income is still significantly higher compared to the ERVs. And then in the rent renewals, I think Flanders is almost -- we even had a small increase. Brussels was equal to each other, and the Walloon region was one store. But as I mentioned, in [indiscernible] , it's not doing well. So if you look into the street and there are 7 empty units and the tenant gives his notice and said, okay, either I will stop now or you give me a decrease, yes, then, of course, it's better to give the decrease and keep the tenant in than let him go because then we are just one of the other stores that are empty. And also that region is not performing well. I think, [ Herman ], if you come there in [indiscernible] , you will know it. It's not doing well.

No. It's really the municipal policy that is very bad because if you go to next door, [indiscernible] is doing super.

Yes, indeed.

So you're saying the rental income -- the current rental income is significantly higher than the ERV?

If I look to the total of our rental income compared to the ERVs, we still have a plus on it, yes.

Is there -- can you put a number? So is it EUR 2 million, EUR 3 million, I don't know, EUR 1 million?

I have to check on it. I will do it afterwards, if it's okay with you.

Yes. Yes, yes. No problem.

So I think here also -- maybe to go back on the previous slide, other important -- we had a collection rate of 98.6% of the rental income. That's almost 100% now. The reason why we had 98.6% is that we invoiced at year-end. Some property taxes to the tenants, and they just came due a couple of days before year-end. So they have been collected in the course of January. So it's not that there is -- that we don't -- that we see a delay on collection. I don't know if there are any questions about this one?

No.

Financial results. Okay. As mentioned, I don't know if -- how in depth you want to go. If there are questions, don't hesitate to just interrupt me and ask them. I think rental income, I already mentioned that the biggest chunk here is the indexation. As mentioned, we also had the sales last year. It's a EUR 200,000 decrease because [indiscernible] were still in it until June, July 2021. So they're now moved out of it. We have some new contracts. As mentioned, the Massimo Dutti has been changed by [indiscernible] . But on the other side, not a big movement. So I don't think we need to go more in depth into the rental income. Here, [indiscernible] , so that's mainly linked to, as mentioned last year, the reversal of our better provision for the rent -- COVID rental waivers. So it's just a classification because you book the credit note into the rental income and you deduct them here as a gain then. So -- but all in all, it's a 0 balance. The other rental-related income and expenses, just a decrease because here we had some one-off income. That's typically a site where you have a one-off income. In terms of property costs, you see a significant increase in the technical costs. The technical costs mainly increased due to the fact that we did some extra works in terms of sustainability. Sustainability becomes a hot topic. So we did some additional works in terms of stability studies for our out-of-town, where we looked if the building or the roof is suitable for putting solar panels on and put additional insulation on it. On the other hand, we also made some studies for measurement of the building in order to see the redevelopment potential for the buildings. And I think you just mentioned the building on the [indiscernible] . There is still a lot of potential for the redevelopment on the other floors.

Yes.

So we were in discussion with the party, but we didn't come to the conclusion. So now we are looking to other possibilities, and one of the possibilities might be, for example, a leisure concept to put on. But that's something we will see in the upcoming months, and then we will communicate if we have something concrete.

Did I understand it right that there was maybe a study with small studios or whatever, but that was a problem get away the [indiscernible]...

Yes. Yes, the emergency exits are a bit of a problem. We will also have it if we have a leisure concept. But on the other side, we don't get the -- how would I say, the revenue we will get from a residential concept is not that big compared to the revenue from our retailers. So if they do some construction works, they may not impact our commercial units because if they complain and ask some revenue loss here, then it's a bigger impact for us compared to the revenue which we get out of it. Also the discussions, they wanted to put some part of the -- how would I say, [indiscernible] . So the enterprise risk...

Yes, business risk.

The business risk towards us by decreasing if they can build less rooms, yes, for us, we just have the surface, we just pay a fixed price for the surface. If you now have put 50 rooms or 60 rooms, that doesn't matter. We just want to fix price for our surface we put there. So that's why we are now also looking to sort of leisure concepts to see because then if you put in a leisure concept, you don't have a lot of refurbishment works to do because they just want a dark space in it, if they put arcade games, bowling and things like that. So -- and then that's, of course, a big roof where you have 2,500 square meters. And there you can put also solar panels on that roof. The advantage in Brussels is that you can still get some green certificates. So if we can put that on, we will, for sure, do that also.