Vastned (VASTB) Earnings Call Transcript & Summary

Hello, and welcome to Vastned's Annual Results 2022. Please note, this call is being recorded. [Operator Instructions]. I will now hand over to your host, Reinier Walta, CEO, to begin today's conference. Thank you.

Thank you. Welcome everyone to the presentation of our 2022 annual results. We are here today to guide you through the operational and financial results of Vastned. First, I would like to inform you that it's the last time I will do this together with Simon Theeuwes, who will leave us at the end of February. Simon, I would like to thank you for all the hard work in the last couple of years. And his role will be taken over by Remco Vergeer, who is also present here today. Next slide. The year 2022 has been a strong year for Vastned on operational and financial performance. Vastned is satisfied with the achieved results. The quality of the portfolio is confirmed, which is also reflected in a proper devaluation that only showed a slight decrease of 1.2%. With an increasing occupancy rate to 98.6% at the year-end 2022, and a collection rate of 98.2%, the quality of our tenant base as well of our organization is confirmed. Throughout the year 2022, a limited number of mutations occurred within the Vastned portfolio. The new lettings were limited, but all close are above market rents. The number of divestments, 5; and investment, 1, were very few. The like-for-like rental growth increased by 7.5%, driven by the higher occupancy rate, indexation and less waivers. And the waivers, that was for a 4.1% change. With low vacancy in high streets and tourism in the main cities rebounding, Vastned feels that the operational foundation for high street retail is robust. The increase in the direct result to EUR 2.05 per share, which is on top of our indicated range of EUR 1.95 to EUR 2.05 reflects all of this. This allows for a dividend proposal of EUR 1.85 per share to our shareholders. With an interim dividend of EUR 0.59 per share already paid, the final dividend to be paid will be EUR 1.26. This implies a payout of 9.2% of our direct results. Our portfolio has proven to be robust and high street shopping getting back on track. It is, however, important to remain vigilant. Also, Vastned is not immune to rising interest rates, geopolitical and other economic uncertainties. Therefore, Vastned does not provide guidance on the direct results for 2023 at this stage. The next slide. Considering the current context of rising interest rates, increasing yields on retail real estate properties and the expected abolishment of the FBI regime in 2025, we will conduct a strategic reorientation with the intention to unlock value for Vastned and all of its stakeholders. In this reorientation, we will consider all strategic options for the company, including their feasibility. The next slide. As already indicated, the like-for-like rental growth and a significant reduction in COVID-19-related lockdowns are the main drivers for our growth and a direct result per share with EUR 0.07 and EUR 0.30 per share. Furthermore, we continued our cost control despite upward pressure from price inflation with a limited increase of EUR 186,000 in 2022, which was mainly due to additional consultancy costs, higher IT costs and increased audit fees. There's still a reduction of almost 16% realized in general expenses since end of 2019. The number of full-time employees remained flat at 32, after filling 4 vacancies in 2022. The occupancy rate increased in all countries compared to 2021, demonstrating robustness. The high occupancy rates across our portfolio reflects the high quality of Vastned's real estate, which enabled to keep most of our properties fully let with attractive and resilient tenants even in uncertain times. And this was also demonstrated during the COVID-19 pandemic years. In 2022, Vastned concluded 43 new leases for a total amount of EUR 6.4 million. This was less than last year, when 92 new leases were concluded for a total annual amount of EUR 12.4 million. The rental change was driven by a limited number of new rents of properties that were previously over rented. Vastned has been able to secure all lettings close are above market rates with existing and new long-term tenants that we consider well suited for these properties and locations. On average, new rents are about 2% above market rent. The EUR 800,000 rental change was mainly driven by 2 large contracts and previously over-rented situations in The Hague and Antwerp. We were happy to secure JD Sports in The Hague on Gravenstraat well above market rent. This large property in The Hague was previously rented to H&M and significantly over rented in 2021 and before. In Antwerp, we secured Etam in the Meir 99, which was previously rented to Massimo Dutti, also well above market rent levels. The strong like-for-like rental growth was driven by higher occupancy, indexation and less waivers. Like-for-like rental growth is positively impacted by indexation. The effect of indexation gained significance mainly in the second half of the year, in line with the increasing inflation rate in all our markets. Indexation of rents is linked in various ways to the level of inflation and depends on the anniversary date of our rental contracts. This lagging effect of indexation was gaining momentum, especially in the final moments of 2022. In 2022, Vastned was only in the Netherlands confronted with some rental waivers related to lockdown measures, which impacted rental income in January with a total of EUR 0.5 million. Vastned believes that diversification is key. Currently, Vastned is seeing signs that fashion retail is in better shape than before. This could slow the shift in tenant mix as we see demand from fashion retailers holding up better than expected. Our current share of fashion retail was further reduced to 45%. The valuations of Vastned properties have decreased slightly with 1.2%. This limited revaluation confirms the strategy of Vastned to focus on high-quality properties. Vastned continues to operate with a loan-to-value that is above its own long-term target of a maximum 40%. At the same time, Vastned operates well within the financing covenants, which mainly address solvency, which needs to be above 45% as well as an interest coverage ratio, which needs to be above 2%. The average rate -- interest rate saw a slight increase over 2022. As a result, 27.5% of the debt portfolio that has a floating interest. While the interest rate in the first half of the year was lower than prior year, the higher interest rates in the second half of the year are also expected to last and will have an impact on 2023. The average interest rate in 2022 was 1.9%, still flat compared to the 1.9% in 2021. During 2022, we have been able to an extent EUR 200 million of our syndicated facility by another year from September '24 to September '25. This was done at attractive unchanged conditions. As you can see from the graph on this slide, our largest maturities are in '24 and '25. As this is on a relatively short term, the refinancing will be an integral part of the strategic reorientation. We also want to point at the increased eligible asset value of the green finance framework from EUR 130 million to EUR 354 million, which is 25% of our total portfolio. This is only based on the value of the EPC-labeled properties in the Netherlands and Spain. Properties need to have a minimum of a C label in order to be eligible under the current green finance facility. More than 80% of these properties have an A label or even higher. This provides the opportunity to have increasingly into the growing market of green financing instruments. Vastned will take this into account in its plans for refinancing. Vastned proposes to pay a total dividend of EUR 1.85 per share, an increase of EUR 0.12 compared to 2021. This implies a payout ratio of 90.2%. And yes, this is the presentation. So I would like to hand back to the operator and also see whether we have any questions.

[Operator Instructions] The first question comes from the line of Gerardo Ibáñez Herrero of ABN AMRO ODDO HBF (sic) [ BHF ].

So my first question comes a bit on the outlook. So why do you refrain from an outlook? Basically, you know which contracts are going to expire. You know what debt you need to refinance and broadly the incremental cost of debt that, that would imply. You normally know your general expenses and can assume a range of indexation. Are we missing something here? And if maybe you can provide a bit of outlook on -- at least on these numbers.

Thank you for your question. I think the best answer to your question is that we want to be cautious and vigilant on this one. If you look, we had a good 2022, we started also 2023 with confidence. However, if you look at the short-term interest rates, which are still rising and also with some uncertainties, what's going to happen now is consumer confidence staying like it -- like that. So that we said, we think it's too early at this stage to give a forecast. And of course, we will come out with a forecast at a short moment in this year when we have a better visibility and maybe some uncertainties are gone. So that's the way we look at that.

Okay. Also I have...

Does that answer your question?

Yes, yes, yes. Also I have a few questions on the strategy. You also mentioned that you're going to be focused on more on winning cities. This implies more divestments, right? What can we expect for 2023? And in terms of the improvement of the mix, does it mean less fashion and more residential and offices? And what can we also expect for 2023?

I think if you look at our strategy at the moment, our strategy is focused on mixed use and really also reducing our fashion to get a better diversification in our portfolio. So that strategy wouldn't change. So we were still working on seeing whether we can create apartment, see whether we can get the right tenants in and get the right tenant mix. Next to that, we also announced that we are going to initiate a strategic reorientation. And the main reason for that is that we see interest rates rising. We see yields of retail property going up. And we also have, of course, that the proposed abolishment of the FBI regime in the Netherlands. And so we are now -- so we're now really going to focus on how we're going to unlock value for Vastned in the long term. And that's also -- our financing will be a part of that. So our current strategy of mix use, of adding other meters to our properties and also to get the right tenants in that will not change as long as we have not come out to the market with our strategic reorientation. Any other questions?

The next question comes from the line of [ Ventsi Iliev ] of Kempen.

Could you provide an update on the maturities for the debt maturing in 2024? Or could you indicate whether there is a possibility that it could be extended as well?

If you see in our maturity loan facilities, EUR 334 million of our loans will expire -- mature in 2024. We have extended EUR 200 million to 2025. So what we are going to do is, of course, also do that strategic reorientation -- reorientation and also look at how we're going to refinance and what will be the impact of that? And how do we want to be refi-ed. That's where we are at the moment, and that's also the plan we have to develop this year also, especially around financing.