Gecina (EPA: GFC), a leading real estate investment trust, reported a strong financial performance in the first half of 2024, with significant increases in net recurring income per share and solid growth in rental income. CEO Benat Ortega highlighted the company's strategic focus on improving its residential and office offerings, as well as its commitment to sustainability, which contributed to a 36% reduction in energy consumption at the MAP building in Paris. Despite some market challenges, Gecina confirmed its guidance for full-year funds from operations (FFO) growth per share of between 5.5% and 6.5%.
Key Takeaways
- Net recurring income per share increased by 8.4% in the first half of 2024.
- Valuation of Gecina's assets stabilized, with the company maintaining a strong balance sheet.
- Rental income grew by 3.1% year-on-year, with solid like-for-like growth.
- Gecina plans to invest EUR850 million in redevelopment projects from 2024 to 2027, aiming to generate an additional EUR100 million to EUR120 million in rental income.
- Energy consumption at the MAP building in Paris decreased by 36%, saving approximately €70,000 per year in energy bills.
- Gecina's NAV NTA remained stable, reflecting portfolio valuation stabilization.
- The company is an opportunistic buyer and seller, focusing on assets that offer the best returns in terms of NAV and cash flow creation.
- Operated offices and residential segments are highly profitable, with rents 20-30% above estimated rental value (ERV) in offices and double-digit profitability in residential.
Company Outlook
- Gecina confirmed its guidance for 2024 FFO growth per share of between 5.5% and 6.5%.
- The company is focused on enhancing its accretive pipeline and developing a fully amenitized residential offer.
- Gecina's strategy is aligned with current trends and tenant demand in Paris.
Bearish Highlights
- Some difficulties were acknowledged in La Défense during the first half of the year.
- Reversion outside Paris can be negative but represents a small portion of the portfolio.
- Tenant incentives are higher in the periphery, ranging from 30% to 35% for long-term leases.
- A limit to rental growth in CBD Paris City has been noted, particularly for larger spaces.
Bullish Highlights
- Gecina captured rental uplifts in central locations with low vacancy rates.
- The company's office approach on colocations and development projects are expected to increase rental income.
- Gecina's cost of debt is expected to remain stable, around 1.1% or slightly higher.
- The investment market in Paris is showing signs of increased buyer appetite and a lack of product for sale.
Misses
- No significant information on misses was provided in the summary of the earnings call.
Q&A Highlights
- Market rents and yields in CBD and La Défense are expected to have no significant gap in the medium-term.
- Gecina views its residential portfolio as a whole, targeting different clienteles for maximum growth.
- There is a complexity in finding tenants for higher-priced rents in CBD Paris City.
- The company bid farewell to Samuel, with his successor starting in September.
In conclusion, Gecina's first half of 2024 reflects a company with a robust financial standing and clear strategic direction. While the market presents some challenges, Gecina's focus on prime locations, sustainability, and strategic investments positions it well for continued growth. The company remains poised to capitalize on market opportunities and maintain its strong performance in the real estate sector.
Full transcript - None (GECFF) Q2 2024:
Operator: Hello, and welcome to the Gecina 2024 Half Year Earnings Call. Please note this call is being recorded. And for the duration of the call your lines will be on listen-only. [Operator Instructions] I will now hand you over to your host, Benat Ortega, CEO; joined by Nicolas Dutreuil, Deputy CEO in charge of Finance to begin today's conference. Please go ahead, sir.
Benat Ortega: Good morning, everyone. I would like to thank you for being with us this morning during this presentation of our H1 2024 results. Let's start with an overview of our financial performance. First. In the first half of 2024 we recorded continuous growth for the third consecutive year with a net recurring income up by 8.4% in Euro and per share. Second, valuation has stabilized notably, thanks to sound rental growth in central location, while yields have been more stable than six months ago. Third, with a broadly stable LTV and excellent hedging of our net debt, Gecina maintains a strong balance sheet that offers room for optionality and visibility. Fourth. During this first half, we have worked hard to position favorably Gecina for future growth by deploying our new approach on both residential assets and offices to deliver operational outperformance and by improving our accretive pipeline. As said Gecina is posting strong recurring net income per share growth. If considering our guidance 2024 this will be plus 20% recurring net income growth in three years. Four factors explain this outperformance; central locations, providing rental uplift above indexation and low vacancy rates; a strong balance sheet; and notably long hedging, securing low interest rates in our P&L. Note that all disposals achieved last year have been accretive. During this first half financial expenses at for instance, decreased by EUR8 million versus H1 '23. Third. An accretive pipeline made of centrally located projects positively contributing to our recurring net income growth profile. And finally attention to operating expenses and service charges. We have improved our process on these matters contributing to enhance our operating and rental margins. This outperformance is partially due to our portfolio location. This premium exposure has been built progressively these last past eight years through selling assets in secondary locations, so the red dots on the left-hand side map; and redeploying our capital into central areas, the green dots on the right-hand side map, representing acquisitions, development or M&A. This slide illustrates the so-called polarization of our markets in Paris region and the outperformance in central locations. Again this first half 2024 half of the take-up of Paris region was concentrated in Paris where only 13% of immediate supplier is. As a consequence, vacancy rates are close to all-time lows at 2.7% in Paris CBD as of June 2024. This translates into a very contracted picture when comparing both vacancy and market trends in central location and secondary locations. According to market data, rent after incentives went up by 25% in Paris CBD since 2018, while down minus 10% in secondary locations. Given this situation Gecina has been able to capture rental uplifts both on the residential portfolio, plus 15% in H1 but also on the office segment plus 14% in average and even 28% in Paris City. As a consequence of these polarized market Gecina is adapting its strategy. This means capturing rental uplift in central locations, where our portfolio is mostly located, with prime rents now in the range of EUR1,000 to EUR1,200 per square meter. You can see a few examples shown on the slide. The first pre-leasing deal on Icône building to be delivered in H1 2025 and relating Rue Royale, Place de la Madeleine, Boulevard Haussmann, et cetera. Outside of Paris and Neuilly, our priority has been to maintain occupancy and securing rental visibility by renewing leases or re-leasing assets and we suffer in certain cases, some downlifts. In average for offices, uplifts were plus 14% again at group level in H1. We have deployed in '23 a new office approach on colocations in Paris, providing 20% to 30% additional net rental income return for the group by offering ready-to-use offices in prime locations. This so-called operated offices offer is already deployed over 4,000 square meters, providing attractive returns, while requiring very limited amount of CapEx. We do intend to deploy further along tenant rotation on a floor-by-floor approach on circa 40 potential buildings eligible to this leasing process, targeting potentially 15,000 square meters by next year. On the residential portfolio as well, we believe we can build up a new fully amenitized offer. We've acquired thanks to our student housing experience, a strong know-how for operated residential that we now intend to deploy on part of our residential portfolio. Gecina has already started to operate 150 units that way with furnished apartments, including services and adaptive services. This could be raised to 600 units by 2025. As a result with supporting market trends and still high indexation, our strategy provides solid like-for-like growth with a significant contribution from rental uplifts. Like-for-like rental growth reached plus 6.3% in H1 and even 6.5% on office segments, showing Gecina's capacity to significantly beat indexation trends and we believe, in a sustainable way. Fair to say that our strong performance is not only driven by organic perimeter, but has also been supported by accretive pipeline contribution and low dilution from last year's disposals. As a result, total rental income is up by 3.1% year-on-year. During this first half, we have also worked to improve our capital allocation, so to provide growth potential for the years ahead. As we sold EUR1.3 billion of assets last year, we immediately paid back short-term debt to, of course reinforce our balance sheet by reducing our net debt by EUR800 million, but also to be able to fund accretive projects in the future. In total, EUR850 million of CapEx are to be spent between 2024 and 2027 through redevelopment projects in Paris City and Neuilly and those should deliver additional potential rents to the current situation of EUR100 million to EUR120 million. This EUR850 million CapEx requirement includes two new large projects to be launched in Paris and Neuilly. As we know, we expect important deliveries in 2024 and in 2025, with more than EUR150 million already spent in that pipeline and now other new projects to come and deliver between 2027 and 2028. Keep in mind that some of the assets to be restructured ahead will need first to be vacated, and we, therefore expect tenant departure by the end of 2024 for close to EUR20 million annual rents. As mentioned earlier, two new projects will be launched this year with the well-known Carreau de Neuilly located in the main axis of Neuilly-sur-Seine and Gamma in Paris facing Paris-Gare de Lyon transportation hub. These two projects will require EUR280 million of CapEx with an appealing net additional potential rental annualized contribution by 2027 likely to exceed EUR30 million. Some comments on those two projects. Carreaux de Neuilly is a 36,000 square meter projects to be delivered in 2027. We have designed it to be a new premier fully amenitized office building in the very prime market of Neuilly sur Seine. These very unique projects will include a great food hall in the ground floor following the recent acquisition of those surfaces, 4,000 square meters of high-end amenities on the first floor, very efficient and large floor place and more than 4,000 square meters of gardens and terraces as you can see on the picture. Gamma is in the very immediate neighborhood and directly connected to Paris-Gare de Lyon, one of the strongest transportation hubs of the whole Paris region. It will offer one of the most efficient office solutions in this part of the city by 2027 again. This 19 square meter project -- 19,000 square meter project with rare rooftop views in Paris, as you can see, will offer also -- will also be operated and fully amenitized. Obviously our balance sheet indeed enables us to consider and to accelerate our redevelopment strategy on the best locations in Paris region. Best-in-class balance sheet with ratings, A- and A3, recently confirmed by S&P and Moody's (NYSE:MCO) has been improved by an intense refinancing activity in the last months with bonds and renewed credit lines. Our view to redeploy our capital through accretive redevelopment projects is reinforced by the stabilization of our portfolio valuation on a like-for-like basis. Office valuations are even slightly up in H1 by 0.4%, following a strong adjustment seen these last years. [Ituna] (ph) valuation are now down by 13% as being the sum of significant impact from yield adjustments, minus 24% peak to now, stabilizing now and a globally positive rental impact of 12% on the same period of time. Note this rental effect is positive by 16% for Paris City and between minus 2% and minus 10% in secondary areas. This valuation stabilization came at a time where investment markets are still muted in terms of volumes. Volumes are down minus 57% in H1 '24 versus H1 '23. However, 80% of office investment transactions achieved in H1 were located downtown in Paris City, with transaction yields appearing to be around 4% and sometimes below. Paris City has therefore recovered a relative liquidity above EUR100 million for office assets which is a good news, although very few products are for sale downtown, where owners are not forced sellers. As mentioned earlier, the upturn in values in H1 was mostly driven by central locations. Paris City valuations are indeed up 2% like-for-like in six months, with a still negative but mid yield effect, minus 0.4%, and a positive rental effect by 2.2%. In secondary locations, however yield effect is still more significantly negative, driving valuation moderately downwards. Given Gecina's portfolio breakdown valuation are globally stabilizing with a moderate, but positive 0.2%. When talking about sustainable long-term growth, CSR is also critical. With 100% of our portfolio certified since the end of last year, we went further this first half delivering on our ambitious strategy. The energy efficiency plan launched end of 2022 was particularly efficient already in 2023 and is still proving successful in H1 '24 with a further decline in energy consumption of minus 3.4% per square meter. Such a performance is remarkable as already exceeding in six months the average annual reductions reduced in the last past 15 years. OTC's assets have been already fully audited by our task forces created internally to improve each assets, even if the maintenance is delegated to our tenants. As a case study, the MAP building owned by Gecina in the 16th [indiscernible] Paris and operated by a tenant delivered an impressive reduction in energy consumption this past year of 36% with a great collaboration with our client, reducing the energy bill by circa EUR70,000 per year without any CapEx. As a result, our main KPI clearly show leading performance per share. Recurring net income per share in euro are up by 8.4% in H1 to EUR3.2, as the combined effect of a strong like-for-like performance, plus 6.3%; a positive contribution from the pipeline plus EUR7 million. The improved EBITDA margin, plus 70 bps; and decreasing financial expenses of minus EUR8 million, due to a stable cost of drawn debt at 1.1% and a decreasing net debt by EUR0.8 billion. On the NAV side as well. Our NAV NTA is broadly stable in H1, minus 1% in six months, reflecting our portfolio valuation stabilization, share gain per share and in euro, while having the interim dividend in March paid in cash. The trends remain, therefore, favorable for Gecina with outperforming locations still supporting our performance combined with a solid financial structure that provides room for funding further growth, especially through accretive pipeline delivering growth and value creation wealth. Our leadership in CSR still continue to post improving performance, and we believe in our new operating and fully amenitized approach on service offices and residential segments to deliver outperformance. We can therefore, confirm and reiterate our guidance for 2024 FFO growth per share in euro between 5.5% and 6.5%. I am available with Nicolas and Samuel for any questions you may have.
Operator: Thank you. [Operator Instructions] We will take our first question from Florent Laroche-Joubert from ODDO BHF. Your line is open. Please go ahead.
Florent Laroche-Joubert: Good morning Benat. Good morning Nicolas, thank you for this presentation. I would have three questions, so if I may. My first question would be on the current environment. So we see now that the values of assets has started to stabilize. And as a result could you please tell us if now you have maybe a greater appetite to look for further acquisitions opportunities? My second question will be on student housing. We have seen some news in newspaper, meaning that you could be in a process to dispose this business. So I don't know what you can tell us about your willingness to keep this business in the company for the next period or not? So that would be my second question. And my third question would be on your cost of debt. We have seen that you have extended your hedging for the next years. And would it be possible maybe to have more colors on what could be your cost of debt, for example, at the year end of 2026? Thank you.
Benat Ortega: Thank you, Florent. Two questions around the same topics, which are investments, acquisitions and so on. Yes, it is a rather good news that valuations are stabilizing, obviously. As you saw, our first intention is to invest in our assets where we see the better return both in NAV and in cash flow creation. So that's a bit where we intend to focus our energy and our capital for the time being. Obviously, we are looking at acquisitions, but I have nothing specific to comment. On student housing, it's a bit the same. We never comment news and potential M&A deals in advance. The only stuff I could say is that we have worked to have a solid balance sheet and to be opportunistic buyers and sellers. So we are not forced sellers and we are not forced buyers, so we will keep saying that and being the same situation, but we are obviously opportunistic players on that. And maybe third, on cost of debt. As you can -- as you saw, we still have a strong leading position over the next 4.5 or 5 years with an average hedging above 90%. So obviously for the next year, it should be rather stabilized. The increase in the hedging position was mainly last year thanks to disposals. So it has mechanically increased the hedging by decreasing the quantum of debt, more than specifically putting in place hedging at a different price than before. So we have not specifically bought hedging in this market, it's more a mechanical improvement by decreasing the amount of net debt.
Nicolas Dutreuil: Maybe, Florent, you know that a large part of our hedging position is coming from -- or fixed debt coming from our bonds. And so of course, this runs at a negative of the issuance we've made in the past.
Florent Laroche-Joubert: Okay. So that means that now you are comfortable on the fact that cost of debt could remain in the range of 1.1% or slightly higher but not significantly higher, even if it is hedged?
Benat Ortega: Obviously, when it says that it doesn't move, it will depend on the quantum of net debt and your assumption on the remaining, so -- but yes the debt in place would not change its price or its cost in the near future.
Florent Laroche-Joubert: Okay. So maybe that's good news actually?
Benat Ortega: I think it was already a good news six months ago, but still there, yes.
Florent Laroche-Joubert: Okay, so thank you very much.
Benat Ortega: Thank you Florent.
Operator: We will take our next question from Valerie Jacob from Bernstein. Your line is open. Please go ahead.
Valerie Jacob: So I've got a few questions. My first question is about your guidance. We've got some deliveries in 2024. And if we look at what's happening in H2, it seems not much higher than what's happening in H1. So I was wondering if you could comment on that? My second question is on the investment market. I mean you've alluded in the presentation that it's been muted in H1, and I just wanted to have your opinion on if you've seen some changes lately? And my third question is a follow-up on student housing. It's a small part of your portfolio. So I was wondering if you would see that this is noncore for you? And also looking at disposals either other part of your portfolio or maybe if you could share how you're sort of thinking about asset rotation? Is it purely opportunistic, as you said, or are there some type of building or asset that you think you would be more likely to dispose off? Thank you.
Benat Ortega: Thank you, Valerie, for your three questions, which are maybe four. On guidance as we indicated, we plan to have a growth per share around 6% that's still the case. We had good news in leasing, obviously. I think on the H1 versus H2 there is always cut-off topics between H1 and H2. Have in mind also that the disposals met last year were dilutive already in H2 last year, and we had a significant amount of deliveries last year in H2. So obviously, the H1 is pushed by all those base effects, but we are quite confident in achieving our guidance for the end of the year. On the investment markets, I was quite prudent in February when we had that call. I'm still prudent in the quantum of volumes invested in Paris [indiscernible] offices. I think, there is a combination between lack of qualitative products in the market and a limited number of buyers on that. However recently we have seen more investors, some qualitative assets were for sale, let's say, in June and July, and apparently we were not seller of those assets. But apparently, there was a greater appetite than, let's say six months ago at pretty tight yields. So that's a bit the feeling we have is that there is a bit comeback of buyers and a lack of product for sale. I think that's very much concentrated in Paris City itself. Outside Paris, it's significantly more quiet. Maybe last on disposals. Again, we don't really like to comment on what we plan to sell. I think we like what we have, and we work out, in fact, to create value everywhere we are. And therefore, it depends on investment appetite and the return expected from those disposals. So nothing specific to say this first half. As you saw, we have not sold much one residential asset early in Q1.
Nicolas Dutreuil: We'll take a question that we have received on the webcast. Amal Aboulkhouatem, Degroof Petercam, is asking us, could you give us some color on the level of profitability you expect from operated offices and residential?
Benat Ortega: The profitability depend on the way you look at it. But for the time being, and we'll have to grow our knowledge on how far we can go, but we are achieving rents after deducting every type of cost on those operating assets on offices 20% to 30% above the ERV of those assets. And with very limited CapEx because in half of the situation, we take back all the fittings of the previous tenants, and we release it with very minimal CapEx. So the returns are excellent. On the resi, a bit the same pretty high profitability. That implies more CapEx because obviously, we need sometimes to reduce size of the flats. So a bit more CapEx, but still above, it's a 2-digit profitability and sometimes starting by year two.
Nicolas Dutreuil: And the second question we have [indiscernible] sale is asking us about the reversion spread on secondary location, in general?
Benat Ortega: Well, like you saw the -- we have sometimes flattish reversion and sometimes negative reversion. If you look at the evolution of the valuation of our portfolio you saw that we had, for several semesters, negative reversion. So obviously, yes, like I said, there are downlifts. So good news, it's a super small portion of what we own. Typically, in [indiscernible], we tend to be more flattish, flattish minus, and in the 1% or 2%, which is the worse of what we own, it could be 15%, 20% downlifts, yes.
Nicolas Dutreuil: A question as well on the phone from Adam Shapton. Okay, so maybe if it doesn't work, we can go to another question from Bruno Duclos, Invest Securities. He is asking; there is no huge gap in market rents between CBD and good quality location in the medium-term, like La Défense, the same applies to the yields. Does it change your views on the good location to invest in?
Benat Ortega: No, I think it shows the importance of -- those trends, in fact show the importance of transportation hubs, easy to access, quality of the buildings capacity from the investors to reinvest to propose collaborative, green, efficient building. So for the time being, it shows that where we have the vast majority of our portfolio, we are confirmed by the trends and the appetite from tenants. So that means Paris. But I think La Défense has shown during this first half, quite -- when repriced, quite a decent appetite from tenants. So several difficulties, during first half in La Défense. So the same goes for [indiscernible]. So I think when it's well located, I think it works. Question is, can you deliver the same growth like we can show where we are mostly exposed. So for that, I mean not a dramatic change in our views on where the market goes. I think it's more confirmation, but we'll have to track it properly over the next quarters.
Nicolas Dutreuil: Come back on the phone with Adam.
Operator: We will take our next question from Adam Shapton from Green Street. Your line is open. Please go ahead.
Adam Shapton: Hello, can you hear me.
Nicolas Dutreuil: Yeah.
Adam Shapton: Two quick questions. I appreciate that you are not going to comment on the student housing sale what's been reported. But could you give us a sort of guidance on what hypothetically would happen to the rental margin for the residential segment if you did sell student housing? So how much of the operating costs, how much do they overlap, how much they're integrated, so anything you can say on what the effect of the margin would be hypothetically, would be great? And then it would be great to get a couple of comments on reversion outside Paris City. And also, what you're seeing in terms of tenant incentive trends in both Paris City and in other areas, please?
Benat Ortega: Yes, sure. I'm not sure I got your first question on student housing. I think, what we have tried to show during this first half is that we are looking at our residential portfolio as a whole. We are all seeing student client into a transitional resi. We have started to have young adults in our student housing platform. So the rationale is to have -- for each flat, the maximum sources of clientele to deliver as much growth as we can. On the margins, we will have to give you a specific detail between resi and student housing, but I would not expect massive differences between the two. On reversion outside Paris. Like I said, I think it depends very much on what lease is coming due. What was the rent signed nine years ago. What has been the inflation. So that's why beauty that it's a small portion of what we own, but obviously, it can be negative from a year to another. You saw that the rental effect in our appraisals outside Paris have been negative for quite a while. So yes, we are posting sometimes downlifts, but beauty, we are capable. In fact, it's a super small portion of what we own. So to be in [Cologne] (ph), we have one asset, which is I don't know, zero point, I don't know, what percent of our portfolio. Yes, we are posting down this. But I think we have posted 28%. And on incentives, I think the incentives in Paris are pretty stable. Sometimes decreasing, especially operated offices as its shorter leases, we have almost no incentives on that business. So in an average, I think it would decrease a bit the quantum of incentives in our P&L. And obviously, in the periphery and its market data, but it is going to be 30%, 35% sometimes incentives for long-term leases. And we indicated on Page 8 of our presentation, really the -- what we see as effective rents or rents after incentives showing that in Paris, it has been up 25% after incentives since 2018 while our effective rents are down by 10% in the same period on the rest.
Adam Shapton: Okay. That’s helpful. Thank you.
Benat Ortega: Welcome.
Nicolas Dutreuil: We have another question by -- from Jonathan Kownator, Goldman Sachs (NYSE:GS). Are you starting to see some pushback on the higher level of rents in CBD Paris City or can rents go much further?
Benat Ortega: That's the million-dollar question. For the time being as you saw, we are achieving significant reversions and high rents. We even achieved, on several leases, EUR1,200 per square meter per year. So for the time being, it's still favorable. Obviously, the higher you go in rents, especially when it's large surfaces, the more complex it is to find tenants. So I think there is always a limit to that spectacular growth. So first, we'll have to consolidate those figures and then see how it goes later. But yes, remember we were at EUR900 three years ago, and we are now signing at EUR1,200 for the best of what we own obviously. It's not everywhere, but for the best, yes we sign at EUR1,200.
Operator: Thank you. [Operator Instructions] It appears there are no further questions, so I will hand back to Mr. Ortega for any additional or closing remarks. Please go ahead, sir.
Benat Ortega: Thank you all for listening. Maybe before ending this call, I wanted to inform you that, that was last call from Samuel, as he's starting a new professional adventure in another listing company. We'd like to thank you warmly for his commitment during almost 10 years. At Gecina, great partner from my arrival at Gecina and wish him the best. His successor will start in September and has been with us for several years in different jobs at Gecina. In the meantime, Samuel will be on-shoring with us and available for questions. Obviously, until the end, Nicolas is also available and if we don't see each other, I wish you all a beautiful summer. Thank you. Bye-bye.
Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
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