Inmobiliaria Colonial SOCIMI S A : Transcripción Presentación Resultados 1r. Sem. 2023

Transcript of Inmobiliaria Colonial Q2 2023 Results Webcast

Moderator: [00:00:00] Ladies and gentlemen, welcome to the Inmobiliaria Colonial Second Quarter 2023 Conference Call. The management will run you through the presentation, which will be followed by a Q&A session. You can request to ask a question at any point during the presentation by dialling star one on your telephone keypad. I'm now pleased to introduce Mr Pere Viñolas, CEO of Inmobiliaria Colonial.

Pere Viñolas: [00:00:28] Thank you, good afternoon. This is Pere Viñolas speaking. We are very pleased to introduce you today the results for the first half of the year. I'm on page 3. The way we are going to structure this presentation is, first of all, I'm going to deliver some views on the highlights of this first half of the year. Then afterwards, Carmina will step in with information on the financial performance. Carlos Krohmer will provide additional details on the portfolio performance and on the progress that we are having on the pipeline. And finally, I will go through some comments on the future growth of the company and some conclusions to summarise the presentation.

[00:01:24] The highlights about our performance. On page 4, we wanted to highlight five outstanding topics for our performance so far this year. First of all would be to say that the first characteristic of our performance is a very powerful delivery in terms of cash flow, EBITDA and EPS. We are finishing June with an EBITDA that grows 18%, reaching €152M compared to 129 of a year ago. If instead about EBITDA, we talk about EPS, our EPS in June would equal €0.16 cents per share. That is 14% more than a year ago. What's behind this outstanding performance in terms of cash flow is, first of all, the strong letting volume: 0.2. We've been finishing June with close to 100,000m², which are more or less equivalent to 43M of annualised rents.

[00:02:48] And this strong letting volume means an outstanding occupancy. This occupancy is now at 97%, in excess of 97%. So it's practically a full occupancy. In fact, what is exactly fully let is everything that we own in Paris. So I think that results cannot be higher: 100% in Paris, 97% for the group.

[00:03:19] And we would like to emphasise that it's not only about volumes, it's also about quality. What more and more is providing colour to our occupancy is that it is based on international consultancy firms and luxury brands as leading tenants demand. Besides EPS and EBITDA growth, growth is not only volume and occupancy, it's also rental growth. Rental growth remains a driving force. We've been signing contracts which mean a 7% ERP growth compared to the ERP for December '22. And that means not only a very good number, but it means also an acceleration of rental growth that is happening. And of course, one of the driving forces -- not the

only one, as we will see -- is the solid capture of indexation, which is happening there. And again, here the comment would be also on quality besides or behind these numbers. I think that it is also the driving force of the ESG characteristics of our assets that are also playing a main driver, playing a main role in this capacity to attract the interest of tenants.

[00:05:00] As a result of that, we finish the first half of the year with what we believe is a resilient valuation. Gross asset value goes down 3% like for like, so in relative terms, we believe it's outstanding. It's on the high end. It's a negative number, but it's very good in relative terms. And that is because value creation through projects, the ERP growth that we've seen, this is offsetting the fact that, of course, yields are going up. In fact, we would like to highlight that after this figure of NAV that you will see for 2023, June 2023, there is already 57 basis points of cumulative yield expansion. So let's say we are a long way into this repricing of the assets with a certain work done while the valuation becomes quite resilient.

[00:06:11] And the final point is about discipline and the capital structure. We've been able to deliver in the six months a relevant amount of disposals, 550M. This divested around appraisal values, which means that the ratios like a net debt on EBITDA are improving significantly. But we remain in any case with a very important hedging strategy that ensures our interest rates remaining below 2.5% in the long term.

[00:06:50] In this first section, maybe what I would like to do is also to provide a little bit of our views on the framework where our activity is happening, in a moment that everything related to real estate and in particular to offices is quite challenging. We feel we have to emphasise a little bit the obvious. One of the obvious remarks to be made is that we are benefiting from fundamental differences happening in the performance of Europe versus USA. And despite the fact that the, let's call it the American view is dominating the scene, particularly in capital markets, the actual data are what they are. And what we can see in this slide, for example, is the difference between post-pandemic office re-entry rate, which remains very high in Europe, particularly high in Paris and in Madrid. Nothing close to what may be happening in the US.

[00:08:04] Also, we could make some comments on the net absorption in Europe and the US compared to a ten-year average, which is quite positive in Europe, as it remains very negative to the US. You can look also at how the performance is doing, comparing the number of quarters with positive net absorption since 2020. You can see here the difference or simply the vacancy rate that you can see in Europe, a single digit compared to USA. And obviously, I'm just mentioning data that apply to the whole market, not to the high end or to Colonial's numbers. So that would be a first comment.

[00:08:56] Another maybe comment on this very general framework, I think that we are benefiting in continental Europe from the fact that European offices remain attractive for employees and with an increasing momentum. You can see on page 6 some comparisons on the office re-entry path in different cities around the world and you can spot the difference. And some comments also that we are providing on companies and what they're stating about their return to the office.

[00:09:33] And on page 7, maybe a comment more related to Colonial itself. As you know, we have a long-term strategy of being very much concentrated on the prime CBD assets. We want to outperform based on the polarisation trend that is happening everywhere. And certainly, you can see something happening in Colonial when you look at the high activity that is happening in our markets and what's happening to the office prime ERVs about the scarcity and demand from Grade A assets and about the trends regarding international employers in their path to return to the office. In our case, this means high quality kind of tenants entering into our office buildings. And that means not only very good letting performance, very good annual rents, very good growth, it's a kind of exposure that we like.

[00:10:42] Page 8 is a simple picture that illustrates here for Paris and Madrid what's going on with our buildings in terms of occupancy. The very small information regarding the market is comparing that in Paris are 100% compared to 97% in the CBD market, 84% in La Defence market or in Spain, 97% Colonial occupancy rate compared with 95 in the CBD market, 82 in the outer M30 market.

[00:11:22] Page 9 reminds us of where the buildings of our group are and what kind of performance are we achieving in terms of rental growth -- 11% in Paris, for example -- or the rental level in euros per square metre in Paris, Madrid or Barcelona, which are very much in the high end. Because of everything I said, because of what are the megatrends in our markets, what are the megatrends in our specific focus, our strategic approach to the market, basically, what is happening to our valuation - page 10 -- is that it is quite resilient. You can see here a 3% like-for- like impact on our 13B valuation as of December 2022. That translates, including some disposals, in 12.2 in June '23. You can see here that, of course, what's happening to our assets is that they are being impacted by a 57 bips yield expansion so far, which means that during this first half of the year, you have a significant impact in the valuation of our assets downwards. But you can also see to what extent rental growth, indexation, project delivery is offsetting partially what's happening to the valuation of our assets. So the conclusion, it is quite a resilient performance, outperforming in relative terms the market as a result of these underlying megatrends that are benefiting the positioning of our company. These will be my introductory remarks. Now I will ask Carmina to step in to talk about the financial performance of Colonial.

Carmina Ganyet: [00:13:30] Thank you, Pere. In this section, as usual we are going to detail the main indicators and the keys that underline the strong evolution of the results. The results of the first semester, as I mentioned, are described in the first place by a strong growth of the cash flow, revenues increasing 10% like for like up to €183M as well in the same strong direction, the EBITDA growing 18% and 23% considering the continued operation, recurring net profit increasing 14% year on year, 25% without considering the asset sales and the same growth year on year up the EPS up to 16.1 cents per share.

[00:14:21] Secondly, the first semester with the evaluation update, it's also described by a strong resilience in the valuation of our portfolio: a decrease of 3% like for like in six months, €12.2B, at the end of the first semester and the NTA per share at €12.88 per share, 6% decrease in six months considering the dividend per share. Additionally, we have demonstrated as well the ability to undertake investments in a very narrow market, confirming valuations for a value of almost €550M euros, updated with recent sales executed in July recently, for an amount of €75M. And finally, due to an active management of the balance sheet carried out on a permanent basis, the debt has been reduced of more than €300M. We continue as well with a very strong liquidity position, removing any financial risk, and we maintain, as you know, a fixed cost of debt with low market levels at 1.69% at spot and as well for the following years well below market levels, which ensures definitely debt coverage ratio according to credit rating.

[00:15:41] In the following slide, you can see the most relevant indicators more visually that show the growth of Colonial cash flow and as well the resilient profile of our portfolio. If we go to page 14, we analyse the recurring results. We see that it increases by 14% and without taking sales into account, the increases would be 25%. You can see in the building blocks the positive contribution of the continuing operation portfolio, €23M. On the other hand, the negative impact of the disposals of non-strategic assets, €4M and on the other hand, the negative impact of the financial costs of only €8M, basically due to the rate effect. Remember that in June 2022, the financial cost was 1.3 for our debt compared to the current 1.69%. The market has increased by more than 300 bips, while the cost for Colonial has only increased less than 40 basis points. Consequently, the EPS increased by 14% year on year, up to 16.1 cents per share, confirming the upper range of the annual EPS guidance. This strong EPS is based on a strong growth of gross rental income year on year. The portfolio in operation adds 14M, 8%. The entry into operation of the project has also a positive impact of an additional €20 million, 12%.

[00:17:18] Important to highlight that the Alpha strategy represents 22% of the growth of our gross rental income for this first semester. In the opposite direction, the sales, as you can see in the building blocks, of non-strategic assets, had an impact of 20M, and as a result of all, the portfolio with a higher quality has shown year on year a total increase of the gross rental income of 8%.

[00:17:49] And where has been this growth and why? I'm on page 16. It should be noted that the 8% rental growth has been positively impacted by a great performance in the Paris market with 14% rental growth. In comparable terms of the portfolios, the three markets have performed very positively, with an extraordinary evolution in Paris and Madrid. This extraordinary like-for-like growth of 10% is basically due to the combination of rental growth due to the lack of product in the markets where we operate, as well as in the indexation effect, as you can see here in the split of the price impact, thanks to the quality of the contracts and clients. And finally, thanks to the improvement of the occupancy, adding 12% of the growth of this like-for-like increase.

[00:18:44] And this rental growth is being accelerated. On this page, page 17, you can see the extraordinary year of the rental growth compared to the last three years. But above all, you can see the growth capacity of rentals beyond the indexation effects. Basically, based on the scarcity and quality of profile of our portfolio, as you will see later in the following section led by Carlos.

[00:19:13] As you all know, Colonial is characterised by a very active portfolio management in order to recycle capital and strengthen the capital structure. In a market as narrow as the current one, we have been able to sell almost €550M confirming valuation. The operations carried out in the month of July have reached 75M more, including a plot of land and a secondary asset with 17% vacant, both assets outside M13 Madrid, with an average premium of 13% to gross asset value, June 2023. I would like to highlight that the blended yield of the total portfolio sold achieved with the prices that have been signed and gross has been at 2.7%. This is the implicit yield at the pricing levels of the total portfolio, the total asset programme, of €550M. With this new disposal, we have been expanding the divestment plan that we have shared with you in the last presentation of results.

[00:20:25] As we commented previously, the updated valuation of the portfolio shows a clear sign of resilience with the valuation correction resulting from the expansion of yields of only 3% in the last six months, in comparable terms since December 2022. Basically, the negative impact of this expansion in yields has been offset by the increase in rents and the delivery of the projects. In the table on the right-hand side, you can see the yields resulting from the valuation at June. Bear in mind that in Paris, the yields are net and in Barcelona there are gross yields, and the cumulative expansion to date, 67 bips, almost 70 basis points in [inaudible] portfolio and between 36 and 39 basis points for the Spanish portfolio, with a total average yield expansion for the portfolio of circa 60 basis points.

[00:21:20] As we have been sharing in each quarterly presentation, Colonial has carried out a very active management of the capital structure and therefore of the debt and above all,