Eurosic : 2017 half-year results - Sharp increase in financial indicators following the acquisition of Foncière de Paris

Press Release

Paris, July 27, 2017

2017 HALF-YEAR RESULTS

Sharp increase in financial indicators following the acquisition of Foncière de Paris

• €121.0 m in net rental revenue (+72% vs. June 2016)
• €388.3 m for Group share of consolidated net income (+148% vs. June 2016)
• €71.7 m in current cash flow, up 78% (€1.51 per share, +10% over June 2016)
• Net triple NAV of €48.63 per share (+10% vs. December 31, 2016)
• LTV down to 45.4% (vs. 47% at December 31, 2016)

Assets under management of more than €8.1 billion

• Investment of more than c.€350 m in assets and projects: c.€250 m invested in the leisure and healthcare sectors in Europe, and c.€110 m in office assets
• Continuation of the portfolio rotation policy with more than c.€300 m in disposals, including c.€270 m from mature office assets

Significant potential related to development operations

• Delivery of 2 development operations in Paris and Lille over the period
• 20 projects under development representing an investment of €2.3 billion, with a strong potential for value creation and rents at delivery

Main Group indicators:

 ⁽¹⁾ Group share, ⁽²⁾ including transfer taxes, ⁽³⁾ Consolidated, inc. transfer taxes

The Board of Directors of Eurosic held on July 26, 2017 approved the half-year consolidated financial statements^[1].

"The first half of 2017 confirmed the exceptional performance of Eurosic in 2016 thanks to the full impact of the integration of Foncière de Paris over the period. 
All asset classes took part to the improvement of the Group's results.  The financial indicators are making strong progress. 
Once again, we must thank all Group employees for the work accomplished, before Eurosic is combining with Gecina. 
I have no doubt that the momentum of these past five years will contribute to the development of the new European real estate leader within the office market born from this combination. "

Yan Perchet, Eurosic Chief Executive Officer

Combination with Gecina

On June 21^[2], Gecina and Eurosic announced the signing of agreements between Gecina and certain Eurosic shareholders relating to the acquisition by Gecina of 94.8% of Eurosic's share capital^[3], acquiring in cash 85.3% of the capital at €51.0 per share and per OSRA and exchanging 9.5% of Eurosic's capital at an exchange ratio^[4] of 7 Gecina shares for 20 Eurosic shares. 

It is noted that on Gecina's request, Eurosic will sell its holdings in certain diversification companies that do not correspond with Gecina's strategy, to the Batipart Group for €463 million.

In accordance with the agreements of June 20, the Eurosic Board of Directors, in its meeting of July 26, 2017, took note of the report from the firm Ledouble^[5] that contained the following conclusions:

"On completion of a multi-criteria assessment and with the current status of our works, which we will complete in anticipation of the submission of the fairness opinion, we are able to reach a conclusion for the attention of the Board of Directors on the fairness of:

1. the terms of the disposal by Eurosic to Batipart of the diversification companies (€463 million sale price for the diversification companies) and on the absence of any unequal treatment of Eurosic shareholders resulting from the disposal of the diversification companies; and
2. the terms of the offer (€51 for the cash offer of the Public Offer, 7 Gecina shares for 20 Eurosic shares or OSRA for the share offer of the public offer) in view of a mandatory squeeze-out (retrait obligatoire). "

The Eurosic Board of Directors approved the conclusions of this report as presented and unanimously confirmed its support for the combination with Gecina.

The sale of the blocks of Eurosic shares and of the disposal of the holdings in diversification companies should be realized by the end of August 2017, once the other conditions precedent are satisfied (primarily obtaining the approval from the Competition Authority).  This disposal will be approved by Eurosic's new Board of Directors following Gecina's acquisition of the control of Eurosic.

It is therefore noted that in accordance with applicable stock market regulations, Gecina will file a proposed purchase and exchange public offer for all the Eurosic shares not held by Gecina (the "Public Offer"). 

Finally, it is specified that "the fairness opinion under the terms of Article 262-1 of the AMF general regulations will be established by the independent appraiser before the filing with the AMF of the draft information memorandum in response, in order to allow the Board of Directors to give its reasoned opinion on the Public Offer. "

Significant events of the period

In the first half of 2017, the Eurosic group continued to implement its strategy.
                   

• Following the acquisition of Foncière de Paris in 2016, Eurosic completed the mandatory squeeze-out of Foncière de Paris in January 2017, so that Eurosic now holds 100% of Foncière de Paris;
• Within the diversification segment, the Eurosic group acquired assets or initiated investment projects representing a total of c.€250 m;
• Within the office space division, the group acquired 11 assets for a total amount of c.€110 m (including fees and tax), representing rental surface area of nearly 54,000 sq.m located primarily in the French regional metropolitan areas;
• The group continued its policy of proactive management of its portfolio by selling 6 office assets with a total area of over 41,000 sq.m for a total of c.€270 m and assets from the diversification segment (main assets of the EDF portfolio) for c.€10 m;
• Finally, two office development projects were delivered: City'Zen in Lille (4,513 sq.m) and 14 Londres in the Paris 9th (5,537 sq.m).

The Combined Ordinary and Extraordinary Shareholders Meeting of May 23, 2017 approved a cash distribution of €2.30 per share. The pay-out was on May 30, 2017 for a total of €108.6 m.

Office Division Activity

As of June 30, 2017, the Eurosic Group managed a €6.0 billion portfolio of office space, consisting of 185 assets representing rental surface area of nearly 850,000 sq.m.

Characteristics OF THE OFFICE DIVISION at JUNE 30, 2017

Key data for offices

* Vacancy rate of 7.1%, including 0.3% in strategic vacancy (vacancy desired by the Group in order to complete a redevelopment program or a sale).

Office space distribution by geographic region^[6]

Distribution of office assets between operation and development⁶

RESULTS OF THE OFFICE DIVISION

The net revenue of the Office division amounted to €85.5 m at June 30, 2017, up from €53.4 m for the same period in 2016. Net revenue rose 60% over the previous period because of the acquisitions (primarily the acquisition of Foncière de Paris in 2016).

Diversification Division activity

The Eurosic Diversification Division consists of a €1.9 bn portfolio and holds:

• the assets of Eurosic Lagune, a long-term return vehicle dedicated to holding and managing assets, primarily in the leisure and health care sectors;
• the Group's assets, excluding office properties and finance leasing, mainly including the hotel assets for which the Group holds the buildings and manages the businesses (seven assets) and operating lease assets for activities other than offices. These assets come primarily from the Foncière de Paris portfolio;
• in addition, through its subsidiary Eurosic Investment Spain, the Group holds a portfolio of leisure assets in Spain, composed primarily of vacation residences and hotels operated by third parties.

The Diversification Division has a pipeline of nine projects in development, which represent over 222,000 sq.m of rental surface area.

Characteristics of the Diversification division at June 30, 2017

Key Diversification Data

* Vacancy rate of 3.7%, including 0.7% in strategic vacancy (vacancy desired by the Group in order to complete a redevelopment program or a sale).

Distribution of diversification assets by type^[7]

Distribution of diversification assets by geographic region⁷

Distribution of diversification assets between operations and development⁷

RESULTS OF THE DIVERSIFICATION DIVISION

The net revenue from operating leases of the Diversification Division totaled €35.4 m at June 30, 2017, up from €16.9 m for the same period in 2016. This revenue rose by more than 109% because of acquisitions during the period (primarily through Eurosic Lagune) and the acquisition of Foncière de Paris in 2016.

RESULTS OF THE HOTEL BUSINESS

The current operating income from the hotel business line amounted to €0.8 m for the first half of 2017.

Finance-leasing business

The Eurosic Group manages a finance-lease portfolio repaid with a total value of €0.3 bn as of June 30, 2017.

Characteristics of the finance-leasing portfolio

Key data for the finance-leasing business

Distribution of the finance-lease portfolio by lessee's business 

Distribution of the finance-lease portfolio by geographic region

Options were exercised on 9 assets under finance-leases during the first half for an amount of €27 m.

Results of the finance-lease business

Projects in development

The Group has one of the largest pipelines of projects under development in the sector, with a total amount of final investment at 100% of more than €2.3 bn of which €1.5bn already disbursed (respectively € 1.6 billion and € 1.2 billion in proportion to ownership).

The remainder to be disbursed of € 0.4 billion (in proportion of ownership) is divided between offices and diversification assets

It is composed of:

• 11 office properties representing nearly 150,000 sq.m of rental area;
• 9 diversification assets for more than 220,000 sq.m of rental area.

The Group expects an average property rate of return on the development projects of around 6% on the office spaces and 7% on the diversification segment.

In addition, the development projects in the Diversification Division are entirely pre-leased.

Consolidated results of the first half of 2017

The Eurosic Group recorded consolidated net income, Group share, of €388.3 m in the first half of 2017, an increase of +148% over the first half of 2016 (€156.9 m).

Net revenue from operating leases

Net revenue from operating leases includes the rents from assets with operating leases, and the management and administrative fees from which the expenses related to the buildings and land not reinvoiced to tenants are deducted.

In the first half of 2017, the Group generated net revenue of €121.0 m, up from €70.3 m over the same period in 2016, an increase of 72% (see Chapters 1.2, 1.3 and 1.4 for more details by division).

Property charges not recovered amounted to €-17.3 m

Current operating income on finance lease transactions

In the first half of 2017, the finance-lease business generated current operating income of €6.9 m.

Current operating income on the hotel business

In the first half of 2017, the hotel activity generated current operating income of €0.8 m.

General operating expenses

The Group's general operating expenses rose €9.5 m between H1 2016 and H1 2017 to total nearly €22.5 m, reflecting the Group's growth, particularly the acquisition of Foncière de Paris.

Current operating income

The Group recorded current operating income of €107.3m over the first half of 2017, compared with €57.6 m over the same period in 2016, a jump of +86%.

Operating income

Group operating income totaled €408.1 m, a 103% increase over the same period in 2016. It includes:

• the €297.5 m increase in the fair value of the assets over the period;
• the income of €3.3 m from the disposal of investment properties.

Cost of financial debt

The cost of net financial debt was €21.8 m for the first half of 2017 (after capitalization of around €10 m in financial costs related to the development operations), compared with €14.4 m for the same period in 2016. This change results primarily from the increase in the amount of debt following the acquisition of Foncière de Paris.

Share of income of equity associates

The share of income of the equity associates was €12.6 m over the first half of 2017.

Net income attributable to non-controlling interests

The share of net income attributed to non-controlling interests amount to €19.9 m over the first half of 2017 versus €14.6 m over the same period in 2016. This increase was primarily driven by the growth of Eurosic Lagune and the arrival of partners in the capital of Eurosic Investment Spain in December 2016.

Current cash flow

The Group's current cash flow is one of the key indicators monitored by the Eurosic Group and represents the Group results restated for extraordinary or non-recurring events.

This indicator is determined from the group share of consolidated net income, restated for the following items:

• non-recurring revenue (€-3.0 m);
• operating expenses for non-recurring projects under development, smoothing of property taxes not reinvoiced (€+8.7 m);
• real estate margin (€-2.5 m);
• effect of the business combination and other non-recurring operating expenses (€+0.4 m);
• income from disposal of property assets, excluding recurring sales (Garden portfolio) (€-1.5 m);
• change in fair value of the investment buildings (€-297.5 m);
• change in fair value of the financial instruments (€-12.3 m).

The share of income of equity associates and the share of income attributable to non-controlling interests (minority interests) are also adjusted for the change in fair value of the investment building and the financial instruments in the amount of €-8.3 m and €+9.6 m respectively.

Current cash flow is determined after taking into account the cost of the OSRA in order to determine the sums available for the shareholders.

Current cash flow Group share thus amounted to €71.7 m at June 30, 2017, compared with €40.2 m at the same date in 2016, an increase of 78%. Current cash flow per share was €1.51 versus €1.38 at June 30, 2017, an increase of 10%.

Financial resources

Marked by a charged political and macro-economic calendar, the financial markets remained volatile in the first half of 2017. In this context, the Eurosic Group raised and refinanced over the period a total of €440 m in medium and long-term debt, thus securing very attractive financial terms over the long term.

The Group's financing structure presents solid indicators as of June 30, 2017:

• the interest coverage ratio (ICR) by EBE remains stable at its historic high at 5.5x in H1-2017;
• the consolidated debt ratio (LTV) is down to 45.4%, a drop due primarily to the increase in the values of the assets at constant consolidation;
• the average maturity of the debt is 5.2 years, down from 5.4 years at December 31, 2016 (after allocation of the confirmed credit lines not used);
• the average spot cost of the Group's debt (including the cost of hedges and confirmed lines of credit) remains stable at 2.0% at June 30, 2017 (2.0% at year-end 2016);
• the Group holds €428 m in confirmed lines of credit no drawn as of June 30, 2017 (excluding authorized overdrafts).
   
   
   

Properties and NAV at 06/30/2017

Group property holdings

Net asset value

The net triple EPRA Net Asset Value (EPRA NNNAV) is determined on the basis of:

• consolidated equity under IFRS (applying the fair value method);
• addition of the market value of the fixed-rate debt;
• restatement for the unrealized gains or losses on the assets recognized at cost under IAS 2;
• adjustment on transfer taxes and fees: including of the transfer taxes and fees corresponding to the most appropriate method of sale of the asset (either sale of the assets or sale of the securities of the company holding the asset).

In addition, in order to measure the amount of equity necessary to reconstitute the existing portfolio, the Group determined a reconstitution Net Asset Value that is calculated from the EPRA NNNAV, to which are added the estimated transfer taxes and fees without taking into account the revaluation to fair value of the fixed-rate debt.

EPRA Indicators

Eurosic applies the EPRA recommendations regarding the indicators listed below. The EPRA best practice recommendations include, in particular, key performance indicators to promote transparency and comparability in the financial statements of real estate companies listed in Europe.

EPRA Earnings

EPRA Earnings is defined as the "recurring income from operating activities".

Passage from Group share of income to EPRA Earnings and current cash flow:

About Eurosic
Eurosic is a listed real estate investment company (SIIC) that manages assets valued at over €8.1 billion at the end of June 2017, primarily composed of office spaces, located in Paris, the Paris region and the major regional metropolitan areas.

Eurosic shares are listed on Euronext Paris, Compartment A under ISIN Code FR0000038200.

Investor Relations

EUROSIC
Nicolas Darius
Chief Financial Officer
+33 1 45 02 24 73
communication@eurosic.fr

Press Relations

DGM Conseil
+33 1 40 70 11 89

For more information:  www.eurosic.fr

Appendix 1 - Consolidated income statement at 06/30/2017

Appendix 2 - Consolidated balance sheet at 06/30/2017