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

Good morning, everyone. Can someone please confirm if you can hear us right now? Okay. Apologies. Thank you. We had a small technical issue. So this is solved now. Joost?

So yes, I will restart my explanation as you did not heard it yet. So I would say, let's dive directly into our results. And I think, yes, we can say that we had a very strong Q1 with more than 150,000 square meters of new leases and more than EUR 300 million investments secured. So yes is the answer on the question, is there still demand for logistics real estate. And even more important is the fact that we, as WDP, are able to capture that demand. That's one of our long-standing core competencies. So we signed 165,000 square meters of new leasing contracts in Q1 across all segments and countries in the existing portfolio, in the pipeline in execution and new developments. And above that, we see a normalizing retention rate, which is reflected in the higher renewal rate year-to-date of already 80% versus 65% normally. So this shows early signs of recovery and reinforce our statement of the full year results. We are bottoming out and have reached an inflection point. But of course, today, we live in a very volatile geopolitical and macroeconomic environment, so making predictions remains difficult. But it looks like during COVID we are seeing an acceleration of existing trends, the continentalization, which reminds me to the Brexit with the unbundling of goods flows between the U.K. and Continental Europe with finally a limited impact on the need of warehouse space in Continental Europe. And all this is a unique opportunity for Europe. We have long time outsourced our security to the U.S., our energy supply to Russia and our production to China. Now it's time to in-source it back within one of the biggest consumer markets in the world. And in the meantime, it's all about the importance of the global supply chain in the public and corporate agenda. And if we look more into detail into our portfolio, we mainly see local European distribution activities instead of real transatlantic operations. And above the leasing activities, indeed, on top of that, we have secured more than EUR 300 million new deals, which makes that our pipeline of exclusive negotiations is almost fully colored in, all unique, complementary, profitable deals over the different regions and value drivers. So it's all about #BLEND2027, multiple drivers in multiple markets. And one example probably of the value and the power of WDP is indeed our last deal with KDL and Lokeren. It's not about leasing a space, not about the development, it's about offering total solutions. Then we could help KDL in their growing business and we could offer them a total solution by offering our total package. Yes, we could rent a temporary space in order to make a new development possible for him and in order to prepare it and to prepare his growth and in order to make it financially possible, we did a sale and rent back of this existing space so that KDL can grow further with a total new combination of its existing, fully automated high bay and a new normal warehouse development. The combination enforces the total possibility to offer solutions by KDL, all of this helped by renting out an existing space. So in order to realize that, you need an existing portfolio, you need land to develop and you need the capability to do sale and rent backs, and that's all in existing clusters, close to each other. So that's the real difference and the real USP of us. And of course, this pipeline is fully funded and generates now a fully funded balance sheet neutral investment pipeline of EUR 800 million, more than 80% pre-let at an NOI yield of 6.7%. Execution and letting will be key in order to realize #BLEND2027. So it's all in our own hands. We just have to do it. And now we are open for Q&A.

[Operator Instructions] The first question is coming from [indiscernible].

Just two. I appreciate the world is full of unknowns at the moment. But can you comment on any change in occupier sentiment that you've seen following, obviously, the Liberation Day tariffs, particularly as it relates to taking up incremental new space or pre-leasing? And then as a second question, did you foresee any noticeable impact to your business, whether it's the automotive sector or elsewhere when tariffs go back online in July? And is there any ways that you're thinking that you can mitigate this?

Well, first, I can say that since Liberation Day that has, for the moment, being no difference. And I think after the Liberation Day, we were able to finalize our two new developments and the KDL deal. So up till now, we cannot say that anybody stopped negotiations or stopped, let's say, signing of a contract. Yes, you can say that, in general, with the new atmosphere, we have had one small, let's say, American company who said, look, I will think about -- it was an add-on, on an existing site. And they said, we are -- we have -- we need more time. But that was even before Liberation Day. So until today and looking also, let's say, forward on the running negotiations, we cannot say that we have seen really change and behavior of our clients. And concerning the automotive sector, well, indeed, and that's not new, even before Liberation Day and before the tariffs, with the change towards more electrical-driven cars and the electrification of the automotive industry, that industry has difficulties, is in a changing process. And that's also not new. And for us that -- there is, let's say, we are -- we have some clients who are subcontractors to the automotive sector but that's a limited part of our portfolio. And let's say, so -- and for the rest, it's also a bigger part is spare parts and so on. So there are difficulties in the automotive and, I would say, more general in the industry but also that did not went worse the last week. That's already from last year. And on the contrary, I would say that now that there is a new German government and with the new investment plans in infrastructure in Germany and the defense industry, that will help the industry globally. And so I think there is a call of urgency in Europe with the politicians that, let's say, we have to help and to safeguard our industry. So normally there also, all those plans would help industry to recover in Europe.

Vivien, the floor is yours.

Can you hear me?

Yes.

Yes. Perfect. Two questions on my side. First, I think that we had some positive on the retention rates, and I would say the letting is going quite well. I believe that in your guidance, you assume occupancy above 97%. Could you -- is it fair to say that there is upside potential to that? Or is there any planned departure combined with the delay arrival for new tenant that we should take into account that might drive occupancy down? That's the first one. And I'll wait for the second one.

Well, there is always upside potential, of course, until you have 100%. But let's say, we have taken in general into account for all the leasings in the existing portfolio in the pipeline and execution. And for our developments, let's say, there, we have taken a period of 1.5 year or, let's say, almost 2 years until '27. So we have taken for ourselves the time to pre-lease. And of course, if we can do faster and more, we will do. And today, like I mentioned, we have seen very nice activity and we still see very nice activity in Q2. But it's too early to say that we will be, let's say, that we will -- that we can do better. Of course, we are working very hard on that. But in Q2, there we can say almost for sure that we will go to the 97% occupancy due to the fact that the 100,000 square meter that we had seen coming free at Q3 will now really, during Q2, become empty. And so yes, we will go to the 97%. But indeed, as from there, there is always an upside.

And it is fully as foreseen that the occupancy will make a bottom at in Q2 at 97%, and then we are working to recover that to the previous levels. And we have given ourselves 2 years to do that to then have the impact by '27. That is included in the business plan, #BLEND2027.

And then a second one on investments. I mean, you have executed a lot of the EUR 400 million of the deals in the exclusive negotiation that you had, only EUR 80 million remain, I think. Are you still looking into opportunities there? And what would be your criteria to pull the trigger in that your balance sheet? I mean, you are fully funded on your plan, but assume any large new investment will make it more complex. So what will be the criteria for you to, I would say, seize new opportunity outside of the one you have already in your pipeline?

Well, of course, like I said, the biggest value now is in finalizing the EUR 800 million investment pipeline. And there is still a nice work to do on the letting side and on timely execution, so that all the investments and all the buildings are ready and let, let's say, the end of '26. There we can really make the difference. We don't need any new investments. And that's really the most important thing. But of course, if there are opportunities, we will look at it. But the big advantage is that, yes, we can do them but we don't need them. So -- and yes, there is still margin in our balance sheet to do further investments.

John, the next question is for you.

Hope you can hear me well. Joost, you just mentioned also good activity and then gradual recovery in demand. Could you provide a bit more color on this? Are you seeing new letting discussions? Or are these still discussions you had previously, but occupiers are now actually taking decisions?

Well, like I said, we see activity like in the existing portfolio. We said during the year -- the full year results that it is more in the smaller sites in the existing portfolio because there, it's easier to jump. It's not -- on the negotiations we have, it is not a question of pricing. It is, am I ready to jump? Do I want to sign and take a step of belief in the future and go forward? And there, we see more activity in the smaller units. But besides that and the existing portfolio in the development -- in the pipeline in development, that's also -- there, we see the same activities. And indeed then -- but besides that for the bigger lettings than we have seen two bigger lettings in the development part, where we have had a big one in Romania and the big one in the Netherlands in the more defensive industries like food. And we will always need food and we'll always eat. So it's in food industry. And in Romania, it was in the more consumer-driven area because, indeed, their economic growth is the double than in Western Europe. And there, they still have a long way to go. And so there, you see that, yes, there is still growth in consumer needs. And there then you see those bigger demand, and then it is faster going into a new development since there were also nothing available that fits with their needs. And I think we can say that for Q2, we still see the same trends and we have the same kind of negotiations running across the border.

Okay. That's clear. And just on your average cost of debt, I saw it went up by 40 basis points over the quarter. What has exactly changed there? Could you highlight that?

Yes. It's Mick here speaking. It's -- so last year, the cost of debt was 1.9% on average. And the underlying cost of debt has not increased on an organic basis. It's simply the effect of adding more investments funded through debt. And that's the effect -- the mechanic effect of adding a higher incremental borrowing rate and sort of the mechanical effect and where it is right now, the 2.3% is where it should be for the remainder of the year, and it should stay below in the business plan when we execute below 2.5% until '27.

Fred, the next is for you.

Two on my side, mostly on the market. Just in the presentation and in the press release, you mentioned 1.8% organic growth, which was driven by a combined effect of indexation and rental growth of 3%, but partly affected by temporary vacancy of 1.2%. If I'm not mistaken, you're considering 3% of organic growth by the end of this year. I'm just wondering with what you described in terms of additional temporary vacancy in the portfolio in H1, is your outlook at risk on that -- with that regard?

Frederic, it's Mick speaking here. This is actually fully in tune with what we have guided for at the full year results. Because at the full year results, we said that the combined impact of indexation and rent reversion was 3.0% of the outlook for '25. And that, you could see that in the bridge with the earnings per share, it's still also here in the presentation, that around half of that would be offset by a temporary increase in the vacancy rate and what we show now is consistent with that guidance.

Okay. So you mean that organically, from a like-for-like point of view, the guidance is actually not 3% but more 1.5% for the full year.

Yes, yes. As you can see on the slide, so apart from occupancy impact, the organic growth is 3%. And then you have also a drop foreseen in the occupancy rate to a minimum of 97%, which will offset around half of that, which you can see in the bridge -- in the EPS bridge.

That's clear. And another question...

And that's a temporary impact which we expect them to recover by '27, of course. That's not lost.

Okay. And another question. I noticed that you didn't give -- so you mentioned that you signed 165,000 square meter of lease. But in this time, you didn't mention the uplift that you achieved on previous rent. Is it on purpose? Or...

Yes, I understand the question, but it was not relevant, that number, because it was, in the 165,000 square meters is rental activity across the board. So not only in the existing portfolio but also for new development projects and for development projects which were on course and is still unlet. And we can confirm that all these lettings have been done at the ERV. That's why we phrased it like that, that all these lettings have been done at the ERV and without any incentive for the record.

So it were new leases and then there is no higher leases. But for example, for Breda and the Prinsenhil site, there I can say...

That's in the development pipeline.

In the development pipeline, that more urban driven redevelopment side of this, there, 2 years ago, the first lettings were at EUR 70 per square meter. And now the last one is done at EUR 90 per square meter. But of course, it is a new one. It's not a higher rent. But indeed, there, you see also the positive evolution of the rents.

Okay. But on your existing portfolio, on lease which were achieved on existing ones, you don't have the figure?

Yes, that's on average plus 10%.

Yes, on average, it's plus 10%.

Last year. And also what we guided for in #BLEND2027 is that we believe we can -- and we target that. We can capture above indexation EUR 1 per square meter across the entire portfolio within this plan, which should translate into around 40, 50 basis points rent reversion on top of indexation throughout the 4-year plan. And we are performing consistent with that.

Okay. And maybe just quickly and last one. You mentioned you give no incentive. I guess this could be more due to the fact that it was due to Netherlands. I'm hearing that in Belgium, it's becoming back to market practice to give actually a bigger incentive on some projects. Can you confirm?

No. There are no new or no more incentives than before we have not discussed. Sometimes for a new development, Frederic, as always, yes, the client sometimes need 3 months or something like that to install and to organize its warehouse. And that is normal, for example, for a new development that you give them the capability to organize their warehouse. And then they can start paying rent as from the moment that they use it. But that has always been the case and that shall always be the case. But not more than those, let's say, some months. But for the rest today, like I said, it's not a price or an incentive discussion because that's, for me, the same. It is really, do I sign, do I jump or do I wait a little bit.

The next one in line can unmute himself.

Yes, it is Paul from Barclays. Four, but should be relatively quick. I see that the yield on cost on the completion development was only 6%. Just wondering if there's any specifics in there, specific projects that were particularly low or why that's come in obviously below what you would probably guide to or target. Should I do them one by one?

Can we take them one by one? Yes, it's Mick speaking here. Yes, you noticed that very well. And the overall investment pipeline is at 6.5% to 7% on NOI yield. And it's true the projects which were now completed, delivered and transferred to the existing portfolio were at a bit lower yield, especially in the Benelux area. And that was simply the result of projects that were commercially signed at the peak of the market, which have now come online and but which were also still funded at the old cost of capital, of course, with the three hedges we signed early '22. So that's the result of that.

So the yield was a little bit lower, but the margin was the same.

Yes. And we're hearing that there's more portfolios sort of coming into the market, particularly as some of the existing low cost of debt starts to be refinanced. Just wondered if you're seeing an increase in attractive opportunities. I think there's a large Brookfield portfolio out there at the moment. I was just wondering if you could give any color on that, would be great.

Well, of course, we cannot say something about running tenders because if we look at it, we are -- we have to sign an NDA. But in general, I think, yes, there is -- that's public. The Brookfield one is a public name that's -- that indeed, there is a tender running. And we will see where it ends. And for the rest, I would say there is the normal activity and the normal kind of deals, but not more than that today. I would not say that there is more activity and, for the moment, absolutely not, due to the fact that there should be financing or refinancing problems. So we are -- probably are waiting a little bit for that, but we don't see it yet. It's just the normal activities.

Okay. You mentioned a few times the leverage neutral investments. However, leverage does continue to tick up quarter-on-quarter. I think that's been for the last few quarters. And debt funding acquisitions and investments will see net debt-to-EBITDA increase. I don't think there's any way you can easily offset that if you're debt funding those investments. So I just wondered on that debt-neutral investment strategy, is that just on an LTV basis that you're looking at that? Or do you see some offsetting factors, some payment in kind, some equity funding to fund the -- to ensure the net debt to EBITDA doesn't increase?

Well, there, to fund the plan, to give you the big picture and the plan -- the business plan, BLEND27, which, from the perspective of 31st of December '24 with EUR 1 billion incremental investments still scheduled, that is capital structure neutral on LTV and on the debt to EBITDA with the EUR 1 billion put to be seen against EUR 600 million of auto financing to redeem the earnings and scrip dividend, which is EUR 200 million per year. And technically, yes, it's a bit more debt loaded in the beginning of the plan because now we had a very strong quarter in terms of investment, in terms of timing coming together. But then the cash flow will come online and onstream. And then over the 3-year horizon, the net debt to EBITDA will be -- will stay below 8x. And our LTV will trend downward again towards 40%. So that's capital structure neutral. And also to add further on that, how we look at it is that -- and our policy metrics, our overarching metric is a net debt-to-EBITDA of around 8x. And our loan to value, which stays, structurally whatever happens across cycles, below 50%, which means, in practice, you operate between 35% and 45%. So we have the room on both metrics. And for example, it would take us EUR 500 million debt-funded acquisition, for example, to get towards the 8x. So yes, there is a room. But important, it's also not needed for the growth plan because the biggest value, as Joost said, is execute and lease, which will give us a 15% cumulative EPS growth by '27.

So just to confirm, it's neutral versus your policy as opposed to neutral versus the existing 7.2x net debt to EBITDA. Because I think it was -- it was below 7x when you started. So it's the same. Versus our policy of 8x, it's neutral, but leverage will increase.

Yes. It's even -- it's in between. It's in between because BLEND27, through the execution of this plan, net debt to EBITDA will be below 8x and LTV will be below 40%. So it's in the middle of that.

Yes. Perfect. And sorry, just last one. I think reversions were reduced over the last few periods. So can we assume from that, that market rental growth remained pretty much around 0% at the moment.

Yes, in Q1, ERVs were stable. Also note that it's also more like a desktop review valuation. But in the short term, ERVs are stable. And we expect them to grow in line with inflation for the foreseeable future. And we can also capture them, and that is confirmed by our letting activity.

Yes. And we are still, let's say, 10% under-rented. So there is still -- we still have some time to capture those higher rents. But for every building which becomes free, we can indeed relet them at the market values, which are at least 10% higher.

Jonathan, the next question is for you.

Yes. Just two questions. One, just to bounce back on this one, just to reconfirm because I'm not sure it was entirely clear. The letting that you've done on your existing portfolio, the 165,000 but the part for the existing, that was done at plus 10% this quarter. That was done at the same...

Yes.

Okay. That's good. I wanted to dig also a bit further into the different industries that you have in your portfolio. We talked about auto on the one hand. We've talked about consumer-type industries in the EU. What is the behavior of the other industries right now in your portfolio? I'm thinking of 3PLs, perhaps in particular. Are they more takers of space? Are they more -- would they more release space? What is the behaviors of the different industries that you have in the portfolio at this stage? Who is taking space, who is releasing space?

The one that are taking space that are active in food and food e-commerce and successful consumer brands, I would say. And in FMCG, but then there is more like, say, no net increase in FMCG.

Yes. But it's more driven by smaller -- it's indeed driven by smaller transactions instead of real -- there is no one sector or two sectors who are doing much better or much worse. It's more that today, people jump for smaller -- in existing -- for existing buildings in the smaller units. And then indeed, for the bigger sites, that there it is indeed food and consumer driven.

And it's also important to point out that almost 2/3 of the portfolio is really in very stable sectors like food, pharma, post parcel, FMCG.

And what about 3PLs? Is that -- because they were -- at some point, they had perhaps too much space and they were releasing some or subletting some. Is that something that you're seeing at this stage as well?

I think they stay -- at indeed the 3PLs, I would say they stay stable and they get also stable utilization decrease, no further decrease in their utilization, I would say stable on a little bit lower level, but stable. And also looking forward, who knows that we will see some tenders, some bigger tenders in the coming months within the 3PL world.

Okay. Good. And subletting, is that something that is changing at the moment? Is there decreasing, increasing depending on the, I mean, your...

No, not really. I would say there is no change. No, there is no change in that.

Next question from Pierre-Emmanuel.

Yes. I just wanted to have quick follow-up questions on your like-for-like, just to fully understand. Should we consider that you took a 10% reversionary potential or reversion to EBITDA guidance in 2025? And looking at the potential impact on your like-for-like growth on the increasing vacancy rate, should we consider it would be 150 basis points negative or it could be higher than that?

Yes, that's around that level of around -- in the guidance around 150 basis points negative impact from occupancy in '25, which we then can afterwards recover. And in the 4-year plan throughout '27, we take at the end a recovery in the occupancy rate, of course, like we have mentioned. And apart from the changes in occupancy, the trend in there, we take the indexation CPI plus 40 bps. And the 40 bps is then coming from renewing each year a number of contracts, which are at their very end at plus 10%. But that's the impact of 40 basis points above indexation because we cannot just each year reset upwardly all contracts that come to a break. Because there, you can only do it at the very end of a contract, legally speaking.

But should we consider that it will be 40 bps as well in 2025? Or it will be more -- would it be more...

Yes, yes. It's in guidance, it's in guidance.

Okay. And it's 10% reversion to the...

That's 10% reversion on a part of the portfolio, yes.

Okay. Understood. Then in 2026, can you remind us how many rents you have to renegotiate in 2026? And do you have already received any potential departure? Or is it too early?

People are now fully concentrating on '25. And we are now speaking and talking the last part of '25 and the year-end. But it's too early to say something yet about '26 now, people are concentrating on '25 and the year-end leases. And for '26...

Okay. But you did not receive any departure announcement so far?

No, not specific, not others than normal.

Okay. And maybe a final question but it's more, let's say, a industry question on what is going on today. Do you have a view on inventories of your tenants today? And if you have one, any idea on the change in inventory that is currently happening today due to the trade war? And is there any less containers arriving into Europe or not? Do you have any color on that or not at all?

I think that's too difficult for us really to ask to the Maersks and DSVs of this world, the container shippers. Yes, we have, like you have read in the press, that some people changed some stock from Europe to the States or vice versa. But that are, let's say, temporary movements in order to look and to see if they can, let's say, mitigate some temporary but that's no structural elements and -- but that's difficult for us to give a real view on that. Therefore, you need to be with the shipping liners.

And that's also not a phenomenon in our portfolio because our portfolio is really there to supply the European economy and consumer.

And we have a final question coming from [ Bruno ].

Happy to hear that you are on track with #BLEND2027. I was wondering about Sweden and Germany, on which I have nothing read in the press release. In 2022, you made a cooperation with a tenant for Sweden, and you took over your development partners in Germany. I have the impression that they are not generating a lot of projects. Is this also your appreciation? What do you expect from those countries? And which will probably be your actions to improve their contribution to the result of WDP in the next years?

For Sweden, it's very easy, Bruno. There, you have to wait until the first quarter results of Catena next week, which they will publish next week. So I cannot say anything about the Swedish market for the moment since I am -- we are in a close period and we have to wait for their results. And Germany, yes, there, we are building further. We did less than initially foreseen. But like mentioned already sometimes before, that's due to aggressive pricing. And indeed, there, the German did not accept the new market reality with the higher cost since -- with a higher cash cost of capital since '22. And they still try to sell below 5% yield. And there we always said that we want to do something extra if needed in the new countries but we don't go below our target of 5%. So Germany, we see -- we wait and we see until, let's say, the moment is there that we can do good deals. But last year, don't forget, we did a very nice deal with Fiege in North Rhine-Westphalia. So -- and we are spotting the market in order to do new deals and to grow further in Germany after we did major steps in France. But -- and on Catena, I can say that they are performing very well and they did -- they have grown very hard last year. They invested, I think, my head, more than EUR 500 million also, and they invested in new deals. So they are doing very good business. And you can read the news next week.

And then Nadir, a final call. And then we have to conclude for people to join the Cofinimmo call.

Nadir from UBS here. Just a quick question. I'm looking at Page 4 of your press release. I see you see indexation of EUR 6 million in 2025 and then EUR 19 million between '26 and '27. Are you therefore seeing an increase in inflation in your base macro case going into the coming 2 years? Or is that just because the rent roll has increased between the 2 years?

No, no, that's simply the contractual indexation, which is foreseen based on the inflation assumption of 2%. That's the effect of that.

So the 2% hasn't changed going from '25 to '26, '27 given the current macro situation? You're still assuming a flat 2%.

Yes. To be honest, let me give you the assumption on which it is based, but I think we can all say that it changes every day. So we will have to look what it gets to. We can only say that we are fully CPI-linked in our contracts.

And this concludes our Q&A session. And Joost, any final remarks?

Yes. So I think, indeed, we can say -- as a concluding remark, I can just repeat our forward-looking strategic pitch. Since the beginning of the year, I think we are well on track to create a unique EUR 10 billion-plus logistic real estate developer and investor in Western Europe with an add-on in Romania, which is good for you, the investors community, the big safe and liquid play in Western Europe; but also good and important for our clients because we can offer more and more cross-border and better integrated solutions for them. And we can realize this not only by growing but with profitable growth, with a foreseen 15% growth in EPS up to '27. And today, that stays at an interesting entrance point at 7% earnings yield. And all of this is only possible thanks to the structural long-term good fundamentals of the logistics real estate sector. And yes, there is a limited cyclicality in our business, which we can handle, as you can see and as we showed in this Q1 report. And the recent weeks has shown really the importance of the worldwide supply chain infrastructure. Everybody speaks about it. So supply chain is key and future proof within the continentalization. Thank you all for listening to us. And I would say good luck with our colleagues of Cofinimmo at 11:00.

Bye-bye.

Thank you.

Thank you.