Warehouses De Pauw SA (WDP) Earnings Call Transcript & Summary

Good morning, everybody. Good morning from Wolvertem. I think I can start with the headline of our new annual results book of '23: confident in what lies ahead. And I would say very confident in what lies ahead. And I think we can say that it is proven by our results. You can see, I mean, we are able to add EUR 200 million direct income-generating assets into our balance sheet and let the portfolio grow to the round figure of EUR 7 billion. Besides this, we still have a very nice investment pipeline of EUR 500 million; and the combination of developments, acquisitions, energy investments, so a very nice further deployment of our capital. And all of this is indeed based on a unique balance sheet with a loan-to-value of 34% and, more important, a net debt-to-EBITDA of 6.6x. By and with all of this, we can confirm our EPS growth for '24, growing up to EUR 1.47. And I think very important in this stage and for the first time since 5 quarters, we see an uplift in our portfolio value of 25 million on the EUR 200 million extra new investments, so I think and I see spring in the air. I see spring in our results even when, outside, spring is not there yet. And we blended well. I think we can say that blend '27 is well received internally, externally. I think we started the year with a very clear, new plan building further on our strong fundaments. And not only the strong fundaments of WDP, but very important, it is based on build and disciplined, built on indeed very strong and good structural demand drivers and sound market dynamics. Yes, there is still good demand. It's normalized. And let's say we have to work again when a building becomes free but we are used to work for it. And that's our main and basic knowledge, so we know to do that. And besides this, we see indeed further very nice negotiations with our clients on our land bank to -- let's say, to do further new developments, but indeed in those -- in these times of an economic downturn, it takes a little bit longer. But we can -- we still see a lot of very positive negotiations within our different teams and different regions. And like I said, we could load our balance sheet with EUR 200 million direct yielding assets at an average yield of 9% besides the EUR 500 million investment pipeline that is running. And above all this, we have almost 2 million square meters of development potential within the balance sheet, but even there I think the most important is that we planted our flag again in France. And by, let's say, finalizing and realizing the investment of 75 million that we announced [ in ] the ABB, we could let the portfolio grow towards EUR 250 million again, so I think this proves also to the market, to the brokers, to our colleagues that we are, let's say, active again. And we feel that in France the market is open and that we can grow. We see again possibilities, while on the contrary, for the moment, Germany is still too expensive. There, let's say, a lot of people are still thinking below cost -- the cash costs of capital. And then also very important, we could extract value out of the existing portfolio with an indexation of the leases by more than 3%. And we could get a positive rent reversion for 100,000 square meters of 15% in the existing portfolio. And even after an indexation of 3% and 15% higher rents in a small part of the portfolio, we still stay far below market rents; and the reversionary potential is still 13%. In the meantime, of course, permanently, we stay neutralizing. And we keep on investing in our PV capacity and further on in our energy infrastructure. All of this, based on the balance sheet. Like I said and important is there, that we still have almost EUR 2 billion of free credit lines, so we have the capability to grow further. We have the moneys to realize our blend program. And we could already use and, let's say, directly invest more than 50% of the ABB of last December. So let's say we could let the work and the money work for us, so I think this is indeed a perfect start of the year. Yes, Q1, it is only the start. A lot of things are in a start-up modus, but I think it's a perfect start of the year. And to show a little bit how we can create value and before answering all your questions, I would like to give some color on a very nice project and using it -- using this example of the way how WDP creates value. After 2 years of negotiation with the seller, local authorities, public authorities, we could finalize this deal, [ the Wille ]. For the Belgian online, let's say, it is the famous Chinese -- it is the place of the famous Chinese trademark of Mr. Kris Peeters more than 10 years ago. It is [ old ideas ]. And it is an old brownfield and not used piece of land for more than 30 years, but it was very complex soil remediation, a soil remediation which is 18 million and which will take 1.5 years. But if you calculate, you will see that, the soil remediation, the cost of more -- is more than the land value, so we have to find solutions. And therefore, we could also add some extra investments to the portfolio, but important is that, by the end of '25, we will be ready for a new unique development and the hotspot of logistics in Belgium: Willebroek, along the logistic highway, the A12, in the middle of the big cities Antwerp, Brussels, Ghent and Leuven. And we even launched by -- on LinkedIn a request for innovative ideas to get all the ideas out of the market to create unique projects. And in the meantime, let's say, by taking over this difficult brownfield redevelopment, we could also add 3 small units to our portfolio but very nice ones, to our 3x high-value logistics: one, art logistics, top class art logistics; pharma logistics; and tech logistics. So really high-value logistics at the right place, generating direct income. And another advantage of brownfield developments is that you don't have to pay the land directly. Let's say you can pay the land step by step during the remediation. So let's say very nice, complex deals; value creation; I would say, developments, projects [ with brains ] for the future. So this is one of those little examples on where we try to create value every day with our different teams and the different countries, but [ I've told enough now ] and, let's say, let's go to the questions.

[Operator Instructions] And we already have the first question coming in from Frederic from Kepler.

I appreciate the new deal you just presented, which looks very exciting for you. I'm just curious, if I look at the Q1, in terms of new project that you found. In Q1, you had EUR 10 million in Romania. To me, from an historical point of view, it looks relatively limited. How do you see that evolving through the quarters?

Well, I think I answered that, let's say, indirectly, Frederic. Yes, indeed, it is only EUR 10 million in Q1, but I think that is also normal. Q1 is always the start, let's say, people starting to negotiate, to discuss with us about new projects, but most of them -- let's say the 2 most important finalizing moments are before summer and before the year-end. And there, Q1 and Q3 are always the most -- let's say, the moments when we [ work the hardest ] but when you don't see the results yet, but I can say that there are -- indeed that we are in the different platforms, negotiating different, very nice project. And I would not say less than last year, on the contrary.

Okay. Maybe a second one: You mentioned that you have to do more work when it came to attract tenants, versus maybe 2 years ago, 1 year ago. Can you describe a bit what you do? And is it through higher rental incentives? Or how can we read that?

No, it's not, let's say, but at a certain moment 1 year, 1.5 years ago, let's say, even when a building becomes, became free, you knew there was -- and somebody called directly even before it was empty. And now, let's say, we have to put it on the website again to speak with the brokers, to do the normal job, but it's not -- let's say you can still rent it at the new rental levels, at the rental levels we wanted. And it's not that, let's say, we have to give more rental incentives, no. It is just, yes, you need to communicate that you have a possibility [indiscernible] the normal work...

The normal -- you'll only have to do the normal work of letting up a building in a scarce -- in a market characterized by scarcity, with [indiscernible] prices, but in the last couple of years, it was also crazy because the building was already let before it became empty and there was no friction or vacancy. Now it's just the normal letting process in a scarce market.

But without price discussion and without any negative price discussion.

All right. And then a last one for me. I see you signed a EUR 300 million package with IFC. Can you comment on the level of spread of the loan?

Yes. So it's deal with IFC to deploy to Romania and it is -- so it's a term loan which we will gradually take up over the next 18 months. And it comes at a spread [ over ] Euribor just below 150 basis points, but I need to add that this is the pricing level for big tickets mid last year when prices were still higher. And it's a big ticket with IFC. And it took some time to close, which is normal for this kind of procedures. If we would do it now, it would be 25 bps lower.

But you said 100 bps, right?

Just -- in the margin, the credit spread is just below 150 bps...

150, okay...

But if it were today, it would be 25 basis points lower. And it was just at the price of mid last year.

Next question, from Wim Lewi, KBC Securities.

I hope you can hear me.

Yes.

Yes.

Okay, fine. I've got 2 questions. One is also going further into the Willebroek brownfield. Very interesting. And you explained that the cost remediation was even more than the land value. Can you just explain a little bit what the issue exactly was with the seller? And I'm not that familiar with the A12.

Well, let's say it is a fully analyzing the soil and together with a very specialized but internationally known soil remediation company. They may also quoted the dredging group. Let's say we came out at, [ and are proven ] by OVAM, soil remediation of 18 million. And if you then divide 18 million by 50,000 square meters, you come up EUR 360 per square meter, which is more than land value. So the seller had to compensate it by adding those very -- small but very interesting value-added and high-value logistic buildings in order, let's say, to get to a neutral result.

And just to add because you mentioned, "I'm not familiar with the A12." It is just on that site there. There is a problem with that site. It's just that site, on which there is a pollutive material, and it need to be removed. We made the assessment. And we deducted it in full from the price of the other buildings we acquired there. So we will just -- in the end, for us, it will be economically -- after the soil remediation, it will be economically as if we buy the land at market value and deducted the full soil remediation off the overall price of the transaction. And it is covered by -- it is backed by specialists in soil remediation.

So for example, Wim: We got this all for free, but now we have to invest in the soil remediation.

Okay. And you referred to Kris Peeters. Is the Flemish government involved at all in this project?

No, no, no. It was 10 years ago, for those with good memory. 10 years ago, Kris Peeters announced a big, new Chinese trademark on that piece of land, but nobody ever realized it and nobody -- because nobody could overcome the soil remediation. And we did. And we realized, let's say, in a tri party between OVAM -- or four: OVAM, the community, the sellers and we [indiscernible].

[indiscernible], [ as a guaranteed ], okay. So that's all clear.

Yes, yes.

Okay, my second question was on the cost of debt. You explained in your results that the proactive hedging pushed down the debt -- cost of debt to 1.7% from 1.9%. Is there more potential for that? Or is that -- kind of that potential used up now?

Yes, it's we didn't sign any new hedges. This is based on the hedges we signed predominantly in early '22, where we -- in early '22, we signed 1 billion of hedges at almost 0%. And we still benefit from that. It's also a bit a technical effect because we are slightly overhedged today after the ABB and because you'll then -- technically you reduce the amount of debt and save your interest costs on the variable-interest-rate loans. And the benefits of the hedges which are in the money is still there. That's why technically the cost of debt came down a bit Q-on-Q with 20 bps to 1.7%. For the remainder of the year, it will increase a bit as we draw again on the floating-rate credit facilities, but it will still be, this year, below 2%.

Right. And is it then pro rata? As you spend like 2/3 of the capital increase, that 2/3 of the hedge -- overhedge has been used up. Is that a fair assumption?

Yes. I look it more, we look it more at a global level. And the hedge ratio came down from 120% to 112%. And by summer, it should also further decline; and by the end of the year, should revert back to 100%.

Marios from SocGen.

Marios here from Bernstein. Just a couple of remaining questions from my side. I noticed you've mentioned a few times about negotiating leasing and the development pipeline. I noticed that it was the pre-letting progress was pretty flat in the period, hovering around a 70% level. Any comments you can provide on how quickly we could expect this to advance over the coming quarters, and the negotiations you're having? And then secondly, just on your operating margin, I noticed that ticked down year-over-year. Again, any comments you can provide there and what you expect in terms of trends throughout the year?

The first one, yes. So the -- let's say the pre-leasing ratio of 17% was indeed, let's say, not that we changed our strategy to start developments unlet, but it was due -- like we said in the year results, it was due to some specific reasons. Let's say, in Grimbergen, it was there we won a tender and could, let's say, get the project, but it was with a promise also there to do the soil remediation and to realize that -- brownfields developments. And then the promise was there that we had to start also with the development. The other one was in Schiphol. And so let's say it's not a change of strategy. It's a little bit more specific -- due to specificalities of some projects.

But we are confident that it will be leased up by completion.

Yes, yes, absolutely.

And then the second question, on the operating margin which is indeed down year-on-year to 89%, but that has a specific reason because in -- last year, there was a one-off of EUR 2 million in the G&A expenses and -- a positive one-off. And that's [ valuate ], so that's why, year-on-year, the margin has dropped. And also know that in Q1, because of the fact that we need to reflect, as a result of IFRIC 21, all the property taxes which are net at the charge of WDP. We need to reflect that in our results, that Q1 is always the quarter with the lowest operating margin. And it was perfectly in line with the budgets, with our internal budgets, for which the full year budget is in our annual report. And the full year budget has an operating margin target of just over 90%, so it's in tune with that year figure.

Okay, very clear. Just on the pre-letting, I take your point on the specific reasons, but should we expect this to continue to tick up over the year but probably remain a bit below prior levels because of these specific reasons?

Yes, yes, yes. It will gradually be leased up towards completion, exactly. And in the meantime, when we have projects, they should normally be preleased to conform our strategy.

A question from Inna from Petercam.

Two questions from my side just to come back on Marios's question on the operating margin. The main increase, from what I see, is related to the G&A expenses. Is it fair to assume that the one-off was related to that specifically, the one-off from last year?

Yes, yes, it was in the G&A expenses. Plus EUR 2 million was a one-off in the G&A expenses of last year.

Okay. And the target margin for 90% that is communicated for 2024, should we assume that this is something that you will be targeting also going forward?

Yes, absolutely, yes. We strive to copy the profitability of our existing business model as we go further, and expense. And that is an operating margin of at least 90%. Yes, that's our assumption.

Okay, that's clear. And then just a last question on the markets because we started to see quite an uptick in terms of transactions, certainly in France. And I think some of your peers have commented that they're seeing quite a few more potential acquisitions opportunities. Could you perhaps comment on how you experience this; and also if -- yes, if there are any particular markets that really stand out?

Well, like I said, Inna, I think, yes, we see an reopening of the French market. I think people accept the new cash cost of capital being, let's say, at least 5%, so there you see, let's say, step by step, new files coming to the market, while on the contrary, in German, it's still difficult to accept that the cash cost of capital is 5%. And I think the -- or I would say the German market is still more frozen by NAV and the fact that they are still at 4.5 in their valuation. They don't want to move because, if they do something, it would change their NAV. And that is still at 4.5, so that market is still frozen...

Okay, that's clear. And is there any particular background in terms of sellers that are looking or are placing the assets on the market?

No. [ They're ] different from small to big ones; people who waited, of course, the last 2 years...

[ Because with ] rotation [indiscernible] let's say that, if you would look at [ distressed or whatever is bought ], rotation in France, people who have waited to sell and need to sell -- because they have a mandate [ in their funds base which have ], for example, [ a finite lifetime ] or some optimizations in there...

Yes, but it's not one sector or one niche specifically, no.

But there is more liquidity in the market and more things opening up gradually in France.

Yes.

Steven from ABN.

Besides France, you mentioned that Germany is a bit more closed, but we see peers acquiring land and brownfield sites in Germany, so apparently they disagree with you that Germany is closed or too expensive. Do you have any idea why this is different, why you see this different than peers? Or could you comment on the availability of land and land prices between France and Germany?

It's a difference. What I meant, Steven, was on acquisitions. What I said was on the acquisitions side, where you say it's about land and brownfields redevelopments. There indeed we have seen some transactions of our colleagues, let's say, who are deeper in the market and who are, let's say, deeper in those markets. And like we can realize here in Belgium those kind of deals, they were able to do that. They have bigger teams than we have in Germany, so there's a difference between land and acquisitions. And the difference between land price: I think that Germany is very -- has very high land prices, depending on the regions. It's also, of course, very -- the difference between, let's say, Eastern Germany or Leipzig versus Munich. And that's totally different or different worlds. It's a big country. In France, land values, except around Paris, are still lower, yes, versus, let's say, the Benelux and Germany. There you still have -- land stays cheaper, but you -- even when it's cheaper, it's difficult to find.

Okay, clear. Are you expecting to increase your presence then in Germany and just maybe invest more to build teams there? Or is that not in the plans?

Yes. We really have the intention to build out France and Germany. Let's say, by '27, we want to have 2 very nice portfolios with 2 teams -- with 2 local teams and an extra so that we can grow from 3 platforms to 5 platforms, let's say, by '27. That's one of the main goals of blend '27.

Okay, very clear...

Important, Steven, that we want to do it profitable. We want to grow. We like to grow, but we want to do it profitable so that -- and of course, depending on how strategic it is, we can do something extra, but in the end, we want to grow from 3 platforms to 5 platforms in a profitable way.

Yes, okay. That is very clear. Then my final question, more broadly on the markets. So could you comment on the Dutch, Belgium and Romanian markets; what vacancy levels are; and how speculative developments are going, if they decreased or not?

Steven, so in general when you compare what's in European markets [ in place, it is rather ] the same when you're looking at Belgium or the Netherlands. We are looking at vacancy rates at below 3%; and on micro markets, even lower, for example, [indiscernible] between Antwerp and Brussels. In Romania even, when you're looking at vacancy rates, you're at [ sub-5 ] level, which is historically one of the strongest markets over there. Even in the Bucharest region, you're at 4.5% and where typically the peers are developing more on a speculative basis. When you're looking at new speculative supply coming on the market, it's actually quite limited to around 10% to 15% of annual data. And supply has actually come down and has been pre-let approximately 70% to 80%, so the risk on any supply overhang in the short term is relatively muted.

And then we have another question, from [indiscernible] from Barclays.

Just looking at your acquisitions during Q1, I see very profitable kind of 6.6% gross yields. When you compare it with your pipeline -- development pipeline yield and also the fact that pre-let is kind of flat, how would you still kind of balance your property additions, still more towards development? Or would you take a different stance today?

No. It's a function of the opportunities. We have always historically been, yes, opportunistic in there in what is profitable. So in some cycles, you can -- you need to develop more, other times. In other times, you can again acquire more. Now in recent years, we were full-fledged developers because the market was too expensive. Now we live in a different world and we think we can acquire more. It's just in function of the opportunity; and function of the specific location, assets, if -- and if it's an addition, a good addition, to the portfolio and whether it's profitable. The bulk of our investment plans, blend '27, it's still the bulk of the CapEx is still built on the new pre-let development projects and then supplemented by selective acquisitions. And we have never been there the market makers, but if we do -- can do some interesting off-market deals or buy out the neighbors on some locations, then we can do it. We have the money to grow further and to capture and snap up some deals.

Frederic, do you have a follow-up question?

Yes. I just wanted to rebound on your comment, Joost, on Germany where you said that yield would be a bit considered too low today at 4.5% and needs to move up to -- for you -- to really be considered as attractive. But then how [ can we interpret ] your net initial yield of 4.3% in your portfolio for Germany?

This 4.3% yield in our German portfolio needs to go up. That's for sure. Sorry, but yes, it's ridiculous. That yield on 4.3% is just based on the valuators. And they themselves based themselves on no transactions. On the historical transactions, there has been almost no liquidity in the German market because it is [ penalized ] by the NAV dilemma. If they sell at the higher yield, then they need to mark down their assets. We have already done that for the bulk of our portfolio. Germany is only small, but it will go up and converge toward the rest of Europe. We don't see a reason why that should be materially different.

That's why I say that -- and I think it's proven also in our balance sheet, that Germany is frozen by NAV.

Yes. And specifically also, you have in -- for our portfolio in Germany, there is also -- one important comment is that it is also substantially [ under-rent too ], but I need to...

Yes, substantially [ under-rented ].

It's substantially [ under-rented ] as well, but in any case, it will go up.

Yes, yes.

Okay. So the reversionary yield is actually much higher than...

Yes, yes, yes.

Yes, yes.

Yes.

Okay, but then -- I appreciate that Germany is very small, but can we say that -- for the rest of the country, that our prices are now in line with the market or...

Yes, absolutely.

Yes. And in Germany, it is in line with all the valuations.

Yes, yes. It's just our humble opinion that it should increase because we see the market as blocked as a result of it, but it is based on the valuators in each country. But we -- it's going to go up...

And there are files today, Frederic, where people say, "If we don't have or we don't get a 4.5% net initial yield, we don't sell because this is our valuation is at 4.5%."

Good...

Yes. It is what it is.

It is what it is.

[indiscernible].

Another question on that valuation. So SEGRO yesterday said that we have reached the bottom and that there is a turning point nearing. What can you say that -- about that, apart from Germany, of course...

We follow that reasoning, absolutely. We see, you see it also in our results. Let's say the bulk of our Western European portfolio is -- it's valued at a net initial yield of 5%, which will also automatically already expand over the next 12 months by around 20, 25 bps because of the reversion and the indexation. And that's perfectly in line with the market based on also the fact that we have a reversionary yield [ over ] 6%.

That's why I said spring was in our valuation.

Yes. And for the first time, you have now seen, since Q4 '22, the underlying values of the existing portfolio have been flat in Q1.

All right. And there was also specific talk about the -- a renting or lease contract in the region of Liège at EUR 80 per square meter. It was not signed yet, but what can you say? Is -- that EUR 80, will that become the new normal? Or is that a wet dream of some people?

Liège is a specific region. And Liège will never be a normal market. And let's say it's never -- it will never be, let's say, the example for the rest of the markets. And of course, you cannot, we cannot speak about what is going on in the market, if it's not signed, but be honest of -- let us be honest. EUR 80 is not the new normal in Belgium.

Okay. Then a small remark: I would like to thank you for the extended reporting here on Q1. Some foreign competitors are reporting less, so maybe you should also do that in order to further improve your margin.

Perfect. And then we have a follow-up -- no. Sorry. Another question, coming in from [indiscernible].

Just a quick question on the -- I think the general market consensus might be 4%. Perhaps it's 5%, but I think sellers want to sell at 4%. Buyers -- sorry. Buyers want to buy at 4%. Sellers want to sell at 5%. And how you're seeing that [ to kind of -- in your ] transactions generally and how you're seeing that play out in your interactions with buyers and sellers.

So yes. I think there we said in Germany it's difficult to make a deal. There are also less deals in Germany [ because of this ]. And in France, it's more opening up. And you have seen...

I think indeed in France the market is now -- let's say, in France, also brokers accept the fact that the cash cost of capital is 5% and, let's say, doing development is at 7% so that -- depending on the location, the quality, the reversionary potential, that the acquisition market needs to be between 5% and 7%. And that is also what brokers are advising to their clients. And there that -- let's say that range is accepted, while in Germany, also the brokers, a lot of the brokers, say, "No. We don't want to see and we don't accept offers starting with a 5% because our market in Germany is still below 5%." And so -- and then the sellers say, "Yes. Our NAV is at 4.5%. If you don't offer 4.5%, we don't sell." And so we see portfolios that are already more than 1 year, 2 years on the market but who are not sold because people still hope, [ mid causes ] the strategy of the hope, that they still hope to get 4.5%. And so they wait. And if you don't have to sell, you can wait. And then yes, sometimes you see a small deal for somebody who absolutely needs to buy. And then you see sometimes 4.5%, 4.77%, but that's not a real market. There the people that -- in general, the market does not accept the cash cost of capital of 5%.

Yes. And I think baseline is the reason why the French market is open is because sellers are cognizant of the fact that any yield should rise with a 5%.

Yes.

And then we have final question, from [indiscernible].

I had a final question, on the [indiscernible] of your company. I was reading in your annual report that the Netherlands, from 2025 onwards, now have established its abolishment. And as far as I know, you also have the status in Belgium and France. And could you maybe shed light on the position in these countries, if in the future also this can be expected there or if this is not expected?

No, we don't expect any changes there. And of course, the main one is the Belgian REIT regime, which is functioning well and for -- which is the very important segment on the Brussels Stock Exchange. And there are no specific talks or issues...

I would say, on the contrary...

To the contrary, it's performing very well; and very good -- considered as very good regime, one of the best ones in Europe, in terms of design and success. And I think that the Dutch situation is a bit, yes, specific. And it's -- it actually is opposite to the trend in Europe, where more and more countries are adopting a REIT regime because they are aware of what it could bring, a stable, listed REIT regime for the country, for investments in infrastructure, for public savings through REITs. So there, no issues expected, to the contrary. And in the Netherlands, there is a bit of a busy situation, and it will indeed be abolished as from '25.

But in the Netherlands, it's not, let's say, the REIT regime which has been abolished, but it was a broader regime of which the REITs were only a small part of it. So it was a slight damage.

This concludes, so far, the Q&A unless anyone has another follow-up question. And in that case, I'd like to hand the word back to Joost.

So thank you for the questions. Thank you for listening. And I would say, yes, spring is coming. We are confident and we are, let's say, looking forward to realize our blend '27 projects. We see a lot of possibilities and opportunities before us. And we are supported by a very good and liquid balance sheet that we can use the coming period in order to realize our plans. Thank you and see you soon.

Thank you.

Thank you.

Thank you. Bye.

Thanks.

Thank you.