Vastned (VASTB) Earnings Call Transcript & Summary

Hello, and welcome to the Vastned Half Year Results 2023. My name is Jess, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over to your host, Reinier Walta, CEO of Vastned, to begin today's call. Thank you.

Dear attendees of this analyst meeting and webcast, my name is Reinier Walta. I am the CEO of Vastned, and I have the pleasure of hosting this meeting and talk you through our half year results. In addition to presenting the half year results, I will also dedicate time in this call to inform you of the outcome of our strategic reorientation. I will do this by going through the slides, which now also are made available on our website in the section, Investor Relations, Publications & Reports. Now after presenting my prepared slides to you, the line will be open to ask questions in a Q&A session. In the first half of 2023, Vastned has maintained a strong operational performance. We have a continued high occupancy rate that's currently at 98.2% and have been able to pass through the contracted indexation rents to our tenants. The high level of new rents and rent renewals that, on average, have been executed against rents higher than market rent, and, on average, 1.4% higher than previous rents, also indicate the health and resilience of the high-street retail landscape for our properties. With a collection rate of 98.8% for the first half of 2023, we very well succeed in collecting our rents from our tenants. A stable high occupancy rate, high like-for-like rental growth and positive development of the rent on our new rents and rent renewals have been offset by higher interest expenses, which brings a direct result for the first half of 2023 at EUR 0.95 per share, in line with our direct result of last year. The indirect result is impacted by decreased value of the property portfolio of 1.8% and a lower valuation of the financial derivatives. As the increase in market interest rates eased, the time to maturity became shorter and payouts have been received. Based on a maximum payout ratio for the first half of 2023 of 60%, as defined in the company's dividend policy, Vastned will pay out an interim dividend of EUR 0.57 per share. Today, we also present the outcome of the strategic reorientation as announced in February of this year. With the presentation of our full year 2022 results, we announced a strategic reorientation, in response to the combination of rising interest rates, increasing yields on real estate properties and the expected abolishment of the FBI regime as of 2025. After thorough and diligent process, we concluded the divesting specific parts of the real estate portfolio will create the most value for our stakeholders, including the shareholders. At the same time, we will also explore a new structure that fits the size and nature of Vastned on the one hand, and will also mitigate the impact of the announced intention for the abolishment of the FBI regime in the Netherlands. I will get back to the strategic reorientation in more detail later in this presentation. Now I, first, like to take you through our key figures on the next slide. In summary, stable direct results in line with last year's half year performance. This year, we see strong like-for-like growth rental growth across our portfolio, with a negative indirect result based on lower valuation, which impact our net asset value and EPRA NTA. The increase of the average interest rate was 60 basis points from 1.9% to 2.5% as a result of the increase in market interest rates. This impacted the part of the loan portfolio that has a floating interest rate. The remaining part of the loan portfolio, which represents 71.6% of the total loan portfolio, has a fixed interest rate. The increase in loan-to-value is driven by lower valuations of our portfolio. And with an LTV of 44.7%, we operate well within our banking covenants. And I will now take you into more detail on our operational and financial performance. The occupancy rate remains at a high level of 98.2%. For the Netherlands, there have been some new vacancies after Ziggo in Amsterdam and Vinted in Utrecht made strategic location changes. But we also have seen new lettings from other units. And for example, Elbenwald on Kalverstraat. In France, we have previously seen a temporary dip in the occupancy rate due to the timing of bankruptcies of some fashion retailers, like Camaïeu. The quality of the French portfolio has ensured that the properties were relapsed relatively quickly and combined with new lettings to Tezenis in Nice and Rue des Rosiers in Paris, we have seen that the French occupancy rate has also picked up again to a level above 97%. In Belgium, the occupancy remained stable at a very high level of 99.3%. In the Spanish portfolio, we have seen a rotation on our asset in Calle de Fuencarral 23 in Madrid. Our previous tenant left location, which drew significant interest from retailers and resulting in a new letting to new balance. As a result, we have ensured that the Spanish portfolio continues to be fully let. Leasing activity was significantly higher than in the same period of the previous year and already exceeding the number of new leases over the full year 2022, both in number and value. We negotiated 44 leases, with annual rent income of EUR 9 million, compared with 19 leases in the same period last year with EUR 2.1 million annual rental income. In line with the numbers that we have reported on Q1 2023, we continued to secure new rents and lease renewals at higher rents. Therefore, we see a positive rental change on average of 1.4%. Given the high occupancy rate, most of the leasing activity are lease renewals. Among these deals, we see, for example, Jimmy Choo in Calle Ortega y Gasset in Madrid and Pull & Bear on the Kalverstraat, Rokin to renew early and extend the rental period for at least another 5 years. In some cases, we had to give away some of the overrents. In the case of H&M on Bondgenotenlaan in Louvain, we have agreed an extension for a lower rent, but still above market rent. The high amount of activity with 11.7% of a theoretical annual rent renewed indicates that the retail market still shows a high level of activity for rent transactions in the attractively located properties of Vastned. The like-for-like rental growth continues at a high level of 7.4% on average for our full portfolio. This is mainly the result of contracted indexation rents that we can pass through to the tenants. In general, we are able to pass on the contracted indexation. In all the countries in which we operate, we have seen high levels of inflation. The effect of indexation on rents might vary per country based on accepted marketing practices in that country as well as government regulation in place. The impact of the indexation of the rent is based on the inflation in the previous period and is usually adjusted once per year. As the timing of the indexation date is spread out throughout the year in our portfolio, there's a lagging effect on the rental growth. New lettings and rent renewals against higher rents and previous rents have also contributed to the growth of our like-for-like rents and will have a lasting effect for the coming years. Increasing yields continued to put pressure on valuations in the first half of 2023. We saw lower valuations of EUR 25 million in total, or 1.8% on a total portfolio, that amounts to almost EUR 1.4 billion at the end of the first half of 2023. Although Vastned is able to pass on the contracted indexation rates, and we see a significant rental growth, this has not always translated into higher market rents, which are used by the appraisers for the determination of the valuation -- the values. So whereas one effect of the current high inflation environment, indexation is not so much considered the effects of the ECB increase in the benchmark interest rate is taken into account by the appraisers. The higher interest rates are reflected in higher yields used in the calculation for determining the valuations. It is too early to say where valuations are likely to go next as the market interest rates increase appear to ease, while Vastned is still successful in increasing rents by applying contractual indexations. On this slide, the direct result development is shown, including its major components. The like-for-like rental growth has been very strong, but is offset by the increase in cost of debt as the market interest rate increase impacted the part of our portfolio that has a floating interest rate. The increase in general expenses is mainly due to higher consultancy, legal and audit costs, amongst other matters related to the strategic reorientation, price indexations governance matters and a consequence of the possible abolishment of the FBI regime of 2025. We would like to know that part of the general expenses are one-off costs. The loan-to-value ratio slightly increased to 44.7% as a result of the lower valuations and a final dividend payment on the 4th of May 2023. This compares to 43.4% at the end of the first half of 2022. The average interest rate increased significantly with 60 basis points from 1.9% to 2.5%. The increase is related to the floating part of our loan portfolio. Over the past few years, the low interest rates enabled us to reduce our average cost of debt. But since the ECB has started battling inflation by increasing interest rates from minus 0.5% exactly 1 year ago to 3.5% today, the floating part of our loan portfolio has seen an increase in interest charged. We are currently working on a financing plan for refinancing our credit facilities. The discussions with lenders on refinancing the outstanding debt will be done in parallel to the strategic actions that come forward from the outcome of the strategic reorientation. And we will now go to the strategic reorientation for more detail. With the presentation of our full year 2020 results, we announced a strategic reorientation due to the combination of rising interest rates, increasing yields on the real estate properties and the expected abolishment of the FBI regime as of 2025. Since February 23, we have gone through a thorough and diligent process of analyzing and evaluating the different strategic options. As a first step, we mapped out the different options to realize our objectives within the context of the current portfolio. Together with our financial advisers and in consultation with external experts, we analyzed the impact and the feasibility of the strategic options. Included in this process were a wide variety of strategic alternatives, which we have grouped in the following categories. And the first is continuing as is; secondly, divesting part of the reassert portfolio; three, a significant financial transaction with other real estate companies; and four, adapting the structure of Vastned, considering dual listing and the intention of abolishing the Dutch FBI regime. And subsequently, the different options have been scored against criteria, such as value creation for Vastned and its stakeholders, including shareholders, improvements of the balance sheet of the company and feasibility of execution. Ultimately, this process resulted in the outcome that divesting specific parts of the portfolio at the right price will create most value for Vastned and all its stakeholders. At the same time, we will also continue to explore how to create a structure that fits the size and nature of Vastned on the one hand, with a preferred single listing, and will also mitigate the impact of the amount intention for the abolishment of the FBI regime in the Netherlands. What will be the impact of these strategic actions? On the one hand, this will unlock immediate value and at the same time, improve the balance sheet and financial ratios, which will then create flexibility to size future opportunities in the market, while, on the other hand, making Vastned future-proof, delivering stable and predictable returns to its shareholders. The Executive Board has decided that we will start a divestment process in the coming period, with a tailored and pragmatic approach. We have already identified properties that can be considered for divestment across our portfolio and across the countries where we operate. As a next step, we have started the selection process of brokers in various markets to explore the divestment opportunities. I would like to add here that we don't have specific targets regarding the total amount of properties to be divested, neither an exact time line. It goes without saying that this should not take years. In the meantime, we will continue to explore how to create a structure that prepares itself for the future. That means, we expect the structure to fit the size and nature of Vastned, moves us to a single listing and can also mitigate the impact of the announced intention for the abolishment of the FBI regime in the Netherlands, which is currently intended to come into effect as from 2025 onwards. Notwithstanding the uncertainty that has been cast over this intention by the recent collapse of the Dutch government, we believe it is prudent to prepare ourselves for the legislation to be enacted in the future. In parallel to these strategic actions, we are in discussion with lenders on refinancing the outstanding debt, taking into account the potential strategic scenarios. I will now discuss the outlook and the interim dividend. Vastned will pay an interim dividend of EUR 0.57 per share. This is in line with the dividend policy. And this interim dividend is equal to 60% of direct reserve in the first half of 2023. Our stock will quote ex-dividend on the 1st of August, and a dividend will be paid on the 16th of August. With respect to the outlook, we expect strong operational performance to continue this year, and therefore, barring unforeseen circumstances, we reiterate the expected direct full year 2023 results of between EUR 1.95 to EUR 2.05 per share. Vastned's focus is firmly on maintaining excellent operational performance and executing the actions that have come forward as the outcome of the strategic reorientation, being -- starting the divestment process for specific parts of our portfolio and exploring a new structure. When these actions will result in specific transactions and/or structure changes, we will inform the market at that time. And this will now bring us to Q&A. Thank you.

[Operator Instructions] The first question comes from the line of Steven Boumans from ABN AMRO ODDO BHF.

Obviously, you got a lot of questions on the strategic reorientation. So I was hoping for a bit more color. Maybe to start with, what can we expect you to divest? Are you looking to divest lower-yielding prime assets like Madrid? Maybe assets that do not fit the high-street strategy, like [indiscernible] or maybe Dutch assets given the FBI regime abolishment? Maybe to start with that?

Steven, thank you for the question. I think we have looked at different criteria to see what we would sell. And what is really important for us is that we sell assets that directly create value and also make sure that our balance sheet and the financial ratios are being improved. That's, I think, the way we create flexibility. We have already selected assets, which we could sell. And we are now in the process of selecting brokers to see how we could do that and what the process should be. And as you are used [indiscernible] we will be a little pragmatic and in a rational way. And if and when we sell something, we will, of course, bring that to the market and inform the market.

Okay. Reiner, can you please give me a bit more -- the second question, provide a bit more idea of the size that you're looking at. So we also have an idea where LTVs, for example, can go after these deals are done.

Yes. We have not really set a certain amount. It is also, I think, too quick -- too early to say that. We were really focused on getting the process started to sell assets. And then -- and maybe also because I think this also reflects to your -- the other point is, at the same time, in parallel, we look at refinancing and that's a parallel track where we aim to refinance everything. And if we would sell, then we would, of course, take that into consideration with what we have to refi. So we have, on purpose, made it 2 different tracks. And so at this stage, it's difficult to say what the total amount is going to be.

Okay. Clear. Then maybe one follow-up on that. You always had the targets to have an LTV below 40%, and that target remains in place, right?

Absolutely.

Okay, clear. Then maybe my last question on the strategic changes, and then I'll leave the floor to someone else. You mentioned looking at the new structure to optimize for the post-FBI regime. What can you expect there? Can we expect the early indicated 5% to 10% impact on EPS to be materially lower due to this?

I think that's a little bit too early to say. What we are doing is really exploring that and see, of course, whether we can optimize and have a lower impact than what we have indicated so far.

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

So first question is on the strategic reorientation. You highlight 4 different options to address the current environment, and one of them is a significant financial projection. But based on the outcomes, I understand that you have ruled that one out. Could you please highlight why? And whether it's because we didn't find a suitable peer? Or is it something else?

Now we have looked at all the options, and we did a thorough process. And the outcome was that selling specific parts to portfolio would create the most value. So that's why we are focusing on that part of the strategic reorientation. And the other ones, we have looked at that, but this one is -- seems to be the best for us.