Vastned (VASTB) Earnings Call Transcript & Summary

Hello, and welcome to the Vastned Annual Results 2023 Call. My name is Karen, and I'll 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, Reinier Walta, to begin today's conference. Thank you.

Thank you. Dear attendees of this analyst meeting and webcast. My name is Reinier Walta, and I am the CEO of Vastned, and I have the pleasure of hosting this meeting and talk you through our annual results for the year 2023. In addition to presenting the results, I will also dedicate time in this call to provide you with an update of our strategic actions and our refinancing process. I will do this by going through the slides, which are now also made available on our website in the section Investor Relations, Publications & Reports. After my presentation, the line will be open for the analysts that follow Vastned to ask questions in a Q&A session. Year 2023 has yet again been a strong year for Vastned operationally. We are satisfied with the achieved results. The increase in the occupancy rate to 99% at the year-end and a collection rate of 99.1% reflect the quality of the tenant base as well of our organization. During the year 2023, the letting market has been strong. We have seen a high level of 79 new leases and lease renewals, which on average have been concluded nearly 15% above market rents. The like-for-like rental growth increased by 8.6%, driven by indexation and a higher occupancy rate. Consumer confidence was impacted by high inflation number, especially in the early stage of 2023, yet the impact on footfall for the high street has not been noticeable. Restaurants and historical inner cities continue to be well booked, showing the attractiveness of the full leisure experience in historical inner cities. Despite footfall, there are groups of retailers that are suffering with the increased energy prices and a repayment of government support packages that were provided during the COVID lockdowns. This means that Vastned needs to keep an eye on possible bankruptcies. Over the past year, we have seen a number of retail chains filing for insolvency protection. The impact on the Vastned portfolio was limited as we have been able to replace tenants relatively fast as a result of the good locations of our properties. The strong operational performance translates into a stable financial performance as the like-for-like rental growth is offset by the increase in the interest rates that we need to pay on our debt. This results in a direct result of EUR 2.01 per share, which is in the middle of our indicated range of EUR 1.95 to EUR 2.05. This allows for a dividend proposal of EUR 1.85 to our shareholders, equal to last year. With an interim dividend of EUR 0.57 per share already paid, the final dividend to be paid will be EUR 1.28. This is a payout ratio of 92% of our direct result, which is well above the minimum of 75% of the direct results set by our dividend policy. With this, Vastned continues to provide stable returns to shareholders. As you all know, Vastned is currently working to execute the actions from a strategic reorientation. This means that the coming year will be one-off transition. Therefore, Vastned does not provide guidance on the direct results for 2024 at this stage. I now would like to update you on the actions that we are taking following the outcome of the strategic reorientation. As a short reminder, we concluded that divesting specific parts of the portfolio will generate most value for Vastned and its stakeholders, and Vastned continues to explore a new structure that fits the size and nature of Vastned. The investment market is a challenging market at the moment. Last year, we have divested our properties in Almelo, Mons and Haaksbergen. Properties in Hardenberg, Harderwijk, Namur and Aalst were sold in the early stage of 2024 bringing total divestments to EUR 8.2 million, with sales on average more than 22% above book value. Vastned will continue the process of further divestments in 2024. We are currently working on various transactions, which we expect to close throughout 2024. Also good to note and probably not surprising, no investments were made in 2023. As the abolishment of the FII regime has been passed into law, there is clarity that this government measure will be effective as from January 2025. We currently expect the impact to be close to 10% of the direct result on the current portfolio from 2025 onwards. We aim to address the abolishment of the FII regime and the dual listing in the Netherlands and Belgium. Two listings lead to higher costs and are limited benefits to have both listings. We, therefore, investigate the options to come to a preferred single listing and to optimize the structure of Vastned without having an FII regime in the Netherlands. As already indicated, the like-for-like rental growth is the strongest contributor to the direct result per share. The growth is, however, offset by higher financing costs and slightly higher expenses, resulting in a slightly lower direct result per share in 2023 compared to 2022. The higher financial expense mainly results from a floating part of our debt portfolio. The divestments from the strategic reorientation will not only reduce our leverage and improve our financial ratios, but they will also firstly be directed to repay the floating part of the loan portfolio. Vastned continued to operate with a very lean organization. Currently, we have 31 full-time employees, which is in line with previous years. Higher consultancy costs, amongst other matters related to the strategic reorientation, price indexations and a consequence of the abolishment of the FII regime resulted in slightly higher general expenses. With a slight increase in income tax and an increase in the result attributable to noncontrolling interest, the direct result of 2023 was EUR 2.01 per share in line with the guidance of EUR 1.95 to EUR 2.05 that we have provided. The occupancy rate increased most notably in France and Belgium in 2023 and remained steady at a high level in the Netherlands. The portfolio in Spain remains fully let. This shows the quality of the Vastned portfolio in all 4 markets. In 2023, the leasing activity increased significantly. Contracts signed impacted more than 1/5 of our total rental income. We have previously mentioned new lettings to New Balance in Madrid, Tezenis in Nice and amongst others. The lease renewals with Jimmy Choo in Madrid, H&M in Brugge, Burberry [indiscernible] Amsterdam in both [indiscernible] UNIQLO located in our property between the Kalverstraat and Rokin in Amsterdam. In the fourth quarter, an additional 12 new leases and lease renewals were signed. These include, amongst others, new leased [indiscernible] in Brussels and to a new tenant, Mr. Marvis on the [indiscernible]. These renewals in the last quarter have been signed, amongst others with Basic-Fit in Montigny that is in Belgium, and Hunkemoller in Amsterdam. The impact of the rental change versus prior rent is mainly impacted by 2 contracts. The largest one was the lease renewal with H&M and Steenstraat in Brugge. The rents were at a lower level than the previous rent, but still concluded significantly above market rent. Like-for-like rental growth is positively impacted by indexation. The effect of indexation had a very significant impact in the first half of the year. Indexation of rent is linked in various ways to the level of inflation and depends on the anniversary dates of our rental contracts. In Spain, the rental growth was impacted by a one-off [ termination ] fee received for a property where a tenant left in the beginning of 2024. The letting process for this property is currently ongoing. We have confidence that we will be able to relet this property quickly. We believe the diversification is key. Our portfolio reflects a large diversification in terms of tenants, locations and categories. The healthy diversification reduces sector-specific or tenant-specific risks. Over the past years, a slight reduction has been visible in the share of fashion in our portfolio. Another trend that's becoming visible is a trend for traditional e-commerce retailers to open physical shops to find the right balance between online and physical shopping. An example of this in our portfolio is the upcoming opening of the store of Mr. Marvis in [indiscernible]. Online retailer, [ My Jewelry ], is also a tenant in our portfolio for a number of years and is sure expanding their feasible presence. It shows the value of having your shop in the right location. Let me now go over the value development of the Vastned portfolio. Valuation of Vastned properties have decreased by 3.2%, most notably in France, where there has been some pressure on the investment market in a relatively low number of transactions for similar properties, resulting in a downward adjustment of the value of our properties in the second half of the year. As our French portfolio is generally a lower yielding portfolio, the impact of higher yields had a larger impact on the valuation of our French portfolio. In the Netherlands and Spain, the valuations notably decreased in the first half year when inflation rates were high, with lower inflationary pressure and continuing improvements in our consumer confidence, the valuations for the second half year remained flat, which is a positive sign. In Belgium, the valuation for our properties remained flat over the year, confirmed by each quarterly valuation of our entire portfolio. The mixed portfolio of historical inner city retail locations and retail [ park ] location has proven to be a very strong and balanced portfolio. In order to finance the operations, Vastned operates with a diversified debt portfolio. There are a number of financial covenants, which mainly address the solvency above 45% as well an interest coverage ratio above 2.0. The interest coverage ratio ended lower in 2023 as a result of the higher interest rates. Nonetheless, Vastned operates well within the financing covenants. The average interest rate increased from an average of 1.9% in 2022 to an average of 2.7% in '23, mainly as a result of the floating part of our debt portfolio. During the second half of the year, also, the short-term interest stabilized, became slightly down, mainly as a result of the lower valuation of our properties, the loan-to-value ratio increases. With strategic action to divest properties, Vastned aims to be in line with its long-term target of 40% or lower. The amount of unused credit facilities decreased as we have opted to repay an outstanding revolving credit line of EUR 40 million with 2 relationship banks and a EUR 50 million term loan in Belgium during the year. We now have EUR 76 million of unused credit facilities available, which is sufficient liquidity to cover our operational needs. Our loan portfolio has loans maturing in '24 and '25. We have addressed the nearest maturities with a full refinancing in Belgium and a bridge financing arranged at holding level. In Belgium, all facilities previously in place to a value of EUR 125 million have been extended. We now have financing in place with new 3- and 5-year maturities to cover the Belgian portfolio. In order to execute the strategic action following the strategic reorientation, it is important for Vastned to maintain a certain level of flexibility. Therefore, we have come to an arrangement at holding level to obtain a bridge loan. The purpose of the bridge loan is to cover the repayment of the EUR 240 million loan maturities by September 2024. The facility will only be drawn upon in September at the earliest, and the magnitude also depends on the divestment made over the course of 2024. The backup provided by the bridge loan allows Vastned to shape the future portfolio while keeping the existing financing at attractive rates in place. When the strategic actions following the strategic reorientation are concluded, this allows for Vastned to establish a balanced longer-term loan portfolio that suits the company. Given the strong operational results that Vastned has achieved, sufficient liquidity available to finance our operations and project divestments to reduce our external debt, Vastned proposes a stable dividend payout of EUR 1.85 per share, equal to the dividend paid out over 2022. This implies a payout ratio of 92%. Final dividend payout is subject to approval by the Annual General Meeting, which is scheduled on the 25th of April. As a result of the strategic actions being executed following the strategic reorientation, the coming year will be one-off transition for Vastned. Therefore, we do not provide guidance on the direct results for 2024 at this stage. And then to conclude, Vastned achieved strong operational results for the year 2023, reflected by the high occupancy rate of 99% and 8.6% growth of like-for-like gross rental income. Given the good financial results, we will propose a stable dividend of EUR 1.84 per share. In 2023, the quality of our portfolio and organization remained robust. We also secured the financing of our business. First of all, we realized the refinancing of our Belgium portfolio. And secondly, we arranged a bridge loan to facilitate Vastned's transition to its future portfolio. We are confident that we can take the necessary steps in executing the various strategic actions following the strategic reorientation. This includes further divesting parts of our portfolio and a review of opportunities that structure Vastned to a preferred single listing and to be ready for the abolishment of the FII regime in the Netherlands. Thank you for your -- for listening. We're now opening the floor to questions. Operator, I hand it over back to you.

[Operator Instructions] We'll take our first question from Steven Boumans from ABN AMRO - ODDO BHF.

I have several, maybe to start with the refinancing. You mentioned the big difference between variable loans versus the rest. Could you provide some color on the difference on average cost of debt for the variable loans.

The variable loan -- we have, of course, the margins, which are the same as the fixed loans. The only thing is we pay the 3-month Euribor. We know 3-month Euribor is around 4%, would be a little bit lower and our loans are locked in at a way lower rate than that our long-term loans.

Okay. Clear. Maybe on the bridge loan, can we assume -- because you don't provide numbers there, but can we assume between 6% and 7% interest rates?

The bridge loan is -- we have concluded that against market conditions, of course. And why it's difficult to now give you numbers on that is, it's all going to depend on divestments. At the end, what's going to happen is in September, we have a backup. We look what -- how much we have sold to repay the loans then. And if we don't have sold enough, we could use the bridge loan as a backup at that stage, and then we can calculate what the average cost of debt would be on that loan.

Okay. Then maybe, let's say, you are successful in all the plans that you have in response of everything. What is then expected cost of debt that you will have after September?

That's difficult to say because we also need to then look at [ refinancing ] for the next year. So of course, the only thing I can say, at this stage, Steven, is that we will have of course a higher cost of debt. But if we are successful in selling our assets, then we have almost no short-term debt anymore, so on the short-term, it will help us in keeping the cost of debt under control.

Okay. Sort of clear. I think that's good enough for the refinancing. Then I have one question on the dividend, and I [ believe ] to the others. You decided to propose a 92% payout ratio given everything that's going on, earnings are likely to fall that makes sense, right? So you need to cut dividend anyways, why didn't you decide to cut it today?

I think that we are confident in our sales program that we will be able to sell enough to repay our debt and to get the financial ratios we want and to get the flexibility we're looking for. And as we had a great operational year, we are still -- we still took a decision to pay out the dividend on that. So it's at the end a reward for our year 2023. And we are confident that in 2024, we will be able to sell enough to get the balance sheet we want.

Okay. But let's say, you do the [ disposal ] in '24. You also have high tax rates. So earnings will likely drop. So likely dividend will also drop for next year, '24.

That's what we're going to see next year, Steven. We have not given a forecast at this moment. So let's also not then discuss now the dividend forecast for that year, of course, but here we have also mentioned that we only have a higher cost of debt, and we will have an impact for the tax.

Okay. It's still not pretty clear to me why you don't only pay out 80% payout, for example, this year, but okay, fine, I'll leave the questions for others as well.

Our next question comes from Ventsi Iliev from Kempen.

First one on the bridge financing. I mean you mentioned attractive rates, but then should we assume that the bridge financing is drawn on fixed rate and not floating rates? And then second one, could you perhaps indicate what the duration would be? Is it 1 year, 18 months or...

The idea, Ventsi, is that we have the bridge loan in place as a backup. So we try to use it as less as possible. Then what we have to do during 2024 is already look, of course, also at our financing maturing in 2025. In combination with looking at our structure, we will work already in 2024 to see what financing needs to be in place for 2025. So you can assume that the bridge loan is a short-term loan as a backup, which needs to be taken out also when we refinance in 2025.

Okay. And then you also mentioned the preferred single listing. Could you provide more color on that? If I'm not mistaken, the listing of the Belgian subsidiary has been unsuccessful in the past? And then is it just a delisting or also are you exploring other opportunities as well?

At the moment, what we are doing, we are exploring multiple alternatives in which we try to combine the fact that we have the optimal structure after we don't have the [ REIT ] regime in the Netherlands anymore and then in combination to see whether we also can get to on listing. And how that will look like if there is more around that, then we will come back to the markets and inform the markets about that. It's a small company for us, we think it's -- we have to be as efficient as possible, like 2 listing is just not that efficient.

Yes. Clear. And then on the FBI regime, you expect the impact to be 10%. Then if we compare this to one of your peers that is fully exposed to the Netherlands, they expect more 5% to 7%, your Dutch exposure is only 4% to 5%, let's say. So can you perhaps elaborate a bit more on the divergence?

Yes. For us, the 10% is based on how the structure looks like now if we will do nothing. And of course, we will also look into a new structure, as I mentioned before, that we will look and both as a dual listing and the FII regime, how to see -- how we could come to an optimized structure. And then we also have to see if we have chosen an alternative, what the impact would be. And this is, of course, also one of the drivers for -- to look at the alternatives. So that's the way we look at it now.

Okay. And then just last one. So you report the like-for-like rental growth at 8.6%. I didn't quite understand. Does this already include the termination fee? And perhaps could you indicate what the like-for-like would be excluding this and perhaps also what the direct result per share would be excluding this?

I think it will have some impact, but will not have a massive impact because it's about total amount. So I don't know what it would be without that -- and don't forget, the only thing I can say, we're talking -- we're not talking about termination fee of millions. So it should not have that impact.

Okay. But then could you indicate the total amount of the termination fee? So I guess, clearly less than EUR 1 million.