Inmobiliaria Colonial SOCIMI S A : Transcripción Presentación Resultados 4T 2023

COLONIAL FY 2023 RESULTS PRESENTATION

[00:00:02.420] - Operator

Ladies and gentlemen, welcome to Inmobiliaria Colonial Full Year 2023 Results Presentation. The management of the company will run you through the presentation, which will be followed by a question and answer session. You can ask a question by phone by pressing *5 on your telephone keypad, or you can also send your questions through the webcast platform. I would now like to introduce Mr. Pere Viñolas, CEO of Inmobiliaria Colonial. Please, sir, go ahead.

[00:00:31.510] - Pere Viñolas Serra

Thank you. This is Pere Viñolas speaking. Good afternoon to everyone. I'm pleased to introduce the presentation of results for 2023. Before going through the specific results, I would like to start by saying a few words on where do we see the market today, where do we see our strategic positioning, and where our clients are today regarding Colonial assets.

[00:01:06.880] - Pere Viñolas Serra

What we have been realizing in these previous months and in the previous weeks, is that it's clear that Colonial is strategically positioned in the urban product of the future. Let's put it this way.

[00:01:26.890] - Pere Viñolas Serra

What clearly is happening with markets, with our clients, what business want is that there's a clear confirmation that there's a preferred option for prime central locations, for good commuting to your place where you work, for good experiences where you work with amenities, with services, for spaces with light, spacious communal areas, again, with a well- being space for everybody. This is being a clear winner in the behavior of our market.

[00:02:09.430] - Pere Viñolas Serra

It's proving how scarce this asset is. That, whereas Colonial is strategically positioned, is our focus, and I think that we are clearly benefiting from this trend.

[00:02:30.240] - Pere Viñolas Serra

Our current position in a few sentences is, first of all, we are outperforming on letting activity. We are outperforming achieving the highest occupancy rate. We are capturing rental growth, which is above average. We are attracting the best clients, and therefore, we are delivering strong cash flow, which is growing. This is the strategic framework where Colonial is, and this is what explains the results that we are sharing today with you.

[00:03:13.400] - Pere Viñolas Serra

I'm in page 5 now of our presentation to go into the numbers, into the headlines. There are four areas where I'd like to comment quickly. The first is about cash flow. Year 2023 has been a year of a strong cash flow growth. Our net rental income has grown 9% like-for-like. That is a very robust number in absolute terms, but also very good number in relative terms compared with our history and compared to our market, to our competitors.

[00:03:58.160] - Pere Viñolas Serra

Our EBITDA has grown by 12%. Our EPS has grown by 7%, beating the guidance. Our EPS, if measured by continued operations, has grown 18%. The reason behind this strong cash flow growth is mainly the operational outperformance. We've signed contracts on a historical record, a historical high level of almost 160,000 square meters. That is very important, not only looking backwards, but looking forward, thinking about our future P&L.

[00:04:40.830] - Pere Viñolas Serra

Occupancy at the end of the year was 97%, which is a leader position in our European framework. Rental growth year-on-year is 7%, supporting the trend towards polarization that is at the heart of our strategy. Rental growth is not only good throughout the year, but it's accelerating. Rental growth for the last quarter of the year was 11%.

[00:05:13.520] - Pere Viñolas Serra

The capital allocation strategy of the company has remained very active. We've been disposing of those assets that were mature enough to crystallize in additional value for shareholders. We disposed of more than €700 million, and more importantly, confirming the appraisal values, all of them. That proof that both liquidity and valuation of our assets are in the right position. As a consequence, debt reduction has been of almost €500 million. In the meantime, the quality of our debt remains very high, with 100% of the debt at fixed cost, the cost of the debt at 1.75 spot.

[00:06:11.410] - Pere Viñolas Serra

We've been in a year of repricing, as you know, of adjustment to the market. Our assets are being adjusted downwards 9%. When you look at the European framework, at the European landscape, and when you look at the different quality of each asset adjusted for quality, this performance in relative terms is satisfactory.

[00:06:41.170] - Pere Viñolas Serra

Finally, the non-financial KPIs that for us are very important regarding ESG, what they show is an ESG leadership in the case of Colonial. Our rating in Sustainalytics put us at the top 0.2% of the global community of companies that are following Sustainalytics, and number one in Spain as a company. Our CDP score remains at A, which put us at the top 1.5%, that is at the highest percentile in the global index at the top level. GRESB is providing a score of 94, which again is putting us at the very top of the leadership of companies in this parameter.

[00:07:39.560] - Pere Viñolas Serra

Finally, at the asset level, 100% of our assets are Breeam Leed, which in comparable terms is non-existing in Europe. Page 6. This bet on quality is clearly seen in these two maps where you can see what's happening in our sector. What's going on in prime CBD markets, in super prime CBD markets, I have to say, is that occupancy is what you see in these two maps. It's not what is happening in secondary markets, which is different, but it's excellent. We are insisting in looking at the fundamentals of the companies and looking at the difference, and the difference is there.

[00:08:36.350] - Pere Viñolas Serra

You can see that also in page 7, where you can see that Colonial's playing field, which is the super prime in our sector, is behaving in a remarkable different way that the office market as a

whole, benefiting from the scarcity of the product that we own, which is highly rewarded and highly followed by the market.

[00:09:06.080] - Pere Viñolas Serra

The results we are presenting today are super strong in terms of operational performance, are very good in relative terms in terms of valuation. The driver behind this is a very specific positioning of the company that is in line with market trends and that put us in a better profile in order to transform this positioning in actual returns. I will now hand over to Carmina Ganyet to go through the section on the financial performance of the company.

[00:09:47.090] - Carmina Ganyet

Thank you, Pere. In this section, we are going to detail the main financial indicators and the keys that underline the strong evolution of this recurring result. As Pere has mentioned, in general terms, I would like to highlight that the recorded results has been described first by a strong growth of the cash flow, so revenues increasing 8% like-for-like, as well in the same direction, the EBITDA growing 12% and 18% considering the continuing operation, and recording the net profit per share increasing 7% year-on-year, 18% without considering the asset sales.

[00:10:31.900] - Carmina Ganyet

Secondly, the second semester with the valuation update is also described by a strong resilient in the valuation of our portfolio compared to some peers adjust to the quality of the asset. A decrease of 9% of adjusted value in 12 months, meaning a portfolio value of €11.4 billion, an NTA per share of €9.9 per share, 14% decrease in 12 months per dividend.

[00:11:01.850] - Carmina Ganyet

Finally, the financial discipline and the disposal delivery. We have demonstrated during the year as well the ability to undertake the divestment in a very narrow market, confirming valuations with a reduction of net debt, almost €500 million.

[00:11:17.520] - Carmina Ganyet

In next page, we would like to focus on the recurring results. As we said, it increased by 7%. Without taking the sales into account, 18%. Considering the different main impacts of this positive growth, you can see in the graph the positive contribution of the continued operation portfolio, €42 million. On the other hand, the negative impacts of the disposal of non-strategic asset, as well the negative impacts of the financial cost, only €12 million, basically due to the rate effect.

[00:11:55.460] - Carmina Ganyet

Remember that during 2022, the average financial cost for the total debt was 1.44% compared to the average cost of 2023 with 1.72%. The market has been increased by more than 300 basis points, while in Colonial, the cost of debt has been only increased 30 basis points. Consequently, the EPS increases by 7%, up to 32 cents per share, beating the upper range of the initial EPS guidance. In the next pages, we are going to analyze the different impacts in detail of this EPS growth.

[00:12:34.730] - Carmina Ganyet

Page 11, first, the growth of EPS is basically based on a strong growth on gross rental income. The portfolio and operation adds €23 million, 6%. The entry in the operation of the project adds another 10% of gross rental income, €35 million. Notice that this year we have a full impact of [inaudible 00:13:00], and as well the anticipation of the delivery of Lourdes Antiques to Cartier, Velázquez, and Miguel Ángel as the main project that has been delivered during 2023.

[00:13:13.550] - Carmina Ganyet

Important to highlight that the alpha strategies and the pricing power of our portfolio represents 16% of gross rental income growth. In the opposite direction, the sales of non- strategic assets had an impact of a reduction of rents of €35 million, and the results of that with a higher profile of our portfolio that has shown an increase of gross rental income of 16%.

[00:13:40.450] - Carmina Ganyet

In the next page, we are going to explain where has been this growth and why. It should be noted that the total rental growth has been positively impacted by a great performance in Paris market with a 15% rental growth, 8% like-for-like, in line with the Madrid market. In comparable terms of the portfolio, the three markets have performed very positively with an extraordinary evolution in Paris and in Madrid.

[00:14:10.170] - Carmina Ganyet

This extraordinary like-for-like growth of 8% is basically due to a combination of rental growth due to the shortage of the product in the market where we operate, and the strong demand for the super-prime assets as well as the indexation effect, thanks to the quality of the contracts and clients, and finally, 2% of the improvement in occupancy, especially in Madrid.

[00:14:36.000] - Carmina Ganyet

If we look at it in the perspective on page 13, this rental growth is being accelerated year-on- year. In this page, 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 rents and the pricing power of our portfolio beyond the indexation effect, as you could see in the split 2023 impact.

[00:15:06.260] - Carmina Ganyet

The other impact on the EPS has been the disposal. I am in page 14. This year has been also characterized by a strong financial discipline in our company. In this sense, we have been doing a very attractive portfolio management in order to recycle capital and strengthen the capital structure. In a market as narrow as it was in 2023, we have been able to sell almost €574 million, and very important highlight, confirming valuation, as you know very well.

[00:15:39.980] - Carmina Ganyet

Colonial continues with this capital recycling strategy with an additional disposal plan of additional €500 million. During the first month of the year of 2024, we have already secured €150 million of sales, including the net Méndez Álvaro residential, as you know. But very important, at an overall premium of this disposal of 5% above last appraisal. The quality and the liquidity of our portfolio, again, confirms the liquidity in the markets and beating the appraisal when we have been succeeding the disposal program.

[00:16:19.400] - Carmina Ganyet

This strategy of the recycling capital has been reinforced the capital structure, reducing net debt to close €500 million, 9% of the debt, and as well increasing liquidity up to €2.9 billion between revolving credit lines and 500 million cash, covering more than 1.5 times the debt maturity that expires for the next three years. Today, we keep this liquidity available for the company, as we shared with you in the past in some presentations. We will decide the best allocations subject to opportunities, so we keep as of today the optionality of this cash allocation.

[00:17:14.300] - Carmina Ganyet

As you perfectly know, Colonial-I am in page 16-has carried out a very active management of the capital structure, not only reducing net debt through disposal, as we described, but also successfully covering the interest rate and any refinancing risk.

[00:17:34.400] - Carmina Ganyet

In this sense, as you can see in this page, Colonial has a very safe profile of the debt with 100% fixed cost of hedge, with a maturity profile quite comfortable as it shows the debt maturity that 77% of the debt expires after 2026, and 50% of this future debt that will be refinanced in the future is already pre-hedged at a level of Euribor of still 67%. It means that the debt is secured at a very interesting cost of debt well below market levels, already secured for the following years, thanks to this pre-hedge position took in 2021.

[00:18:18.600] - Carmina Ganyet

Finally, the reduction of debt has been positively impacting the ratio of Net Debt/EBTIDA from 19 times to 15. But considering the portfolio in operation, the ratio has been in decrease as well, reaching today a level of 12 times. As a summary, no referential risk at all, leveraging the investment rate zone and secure cost of debt well below market levels for the following years.

[00:18:45.450] - Carmina Ganyet

If now we go to the other part of the balance sheet, the asset, as we have commented previously, its valuation decreases in 2023, 9% in terms of like-for-like. If we look at each market, Paris shows a correction of 10%, Barcelona 11, and Madrid below 5%. The main impact, as you see in the chart, is in the Paris market due to its adjustment to the new reality of rates. In a way, this is the beauty of having a well-diversified prime asset in these three different markets.

[00:19:24.130] - Carmina Ganyet

It seems as well that after these corrections and with the market consensus about long-term real rates, the asset value are bottoming out from the peak. So if we analyze the details of these corrections, the yield expansion has been offset by the pricing power of the portfolio and also by the project deliveries, as you could see in next slide, in page 18.

[00:19:50.810] - Carmina Ganyet

As I said in the bar chart, you can see how the higher rates or the higher cap rates are being offset partially 50%, 5-0, by rental growth and project delivery. But what are the cap rates included in this appraisal. You see in the right-hand second side, after being expanded since June 2022, an average portfolio of 100 basis points, the evaluation yield is today an average yield of 4.35%.

for really absolutely record rent.

[00:20:30.280] - Carmina Ganyet

Five twenty-five net valuation yield in Paris, 125 basis point expansion, 475 yield for Madrid, and 5% yield for Barcelona. The combination of being in these three markets, the pricing power of our assets, and I would say also, of course, the project delivery has demonstrated a resilience profile of the portfolio compared to our peers and to other profile of assets adjust to the quality of the portfolio.

[00:21:02.040] - Carmina Ganyet

Finally, the updates at NTA, calculation shows in this page 19, the value correction as well, but also the benefit of the quality portfolio and their active portfolio management. The increase in cash flows and the delivery of the project have offset 50% the expansion in yields, resulting from the increase of rates showing, consequently, an increase of NTA of 14% per dividend, €10.2 per share, and €9.95 per share post-dividend.

[00:21:40.370] - Carmina Ganyet

I would like to highlight the split of the impact of this NTA in the one part, the negative impact of the macro or beta driver's meaning rates, and the adaptation to the new macro long-term rates. After being adapted to the new reality of this real rate, so after this consensus of the long-term rates, this impact would be one shot. But on the other hand, the capacity of value creation of colonial platform through this alpha strategy, through the pricing power of the portfolio, recording earnings, and project delivery, with a total positive impact of 20%. This is not one-year impact. This is part of our strategy and of our capacity to value creation.

[00:22:27.310] - Pere Viñolas Serra

Thank you. We now ask Carlos Krohmer to step in to talk about the operational performance of the company.

[00:22:35.770] - Carlos Krohmer

Thank you very much, Pere. We are on page 21. As Pere mentioned, 160,000 square meters signed this year. This is quite a lot. We've especially been already at very high occupancy levels. One-third of this has been new leads, the rest has been renovations.

[00:22:52.190] - Carlos Krohmer

If we would have had more space available of our top space, it would have been even more square meters. We've signed this at very good terms, nine-year terms, and with the top names, and also at top rates. We have signed at 41 in Velázquez. Velázquez is one of the buildings with the highest average rent in the Madrid market. Washington Plaza, a tenant in the luxury business, has increased space at a rent above €1,000 per square meter a year. On Cloud, we also have a new tenant for a very large space, and we let the flagship store of Adidas on the Galerie des Champs-Elysées

[00:23:35.480] - Carlos Krohmer

All of this urban products, not just office, urban products in the middle of the city, this is what we can do, high-quality product in the urban center. When we look a little bit into the detail of the market rental growth that is on the page 22, relief spreads remain strong at 5%, especially Paris. Paris has longer-term contract, so there is a relevant price increase on relief spread to be captured.

[00:24:01.990] - Carlos Krohmer

If we look at rental growth, very good rental growth, 7% good growth across all markets. But more important than this, we are seeing an increase in acceleration. First quarter, 3% year-to- year growth, then 7, then 9, then 11. It's a clear highlight of the trend that we are seeing on the super prime in the market.

00:24:23.680] - Carlos Krohmer

When we go into the occupancy on page 23, you can see 97%, the highest occupancy in the last four years, but being already at very high occupancy levels in the previous years. We have increased in a year 140 basis points, very highlighting the increase in Barcelona, 390 basis points, and increasing in Madrid and Paris, we are basically stable at 100% occupancy level.

[00:24:52.940] - Carlos Krohmer

Where is the available space? This is on page 24. We have 3.2% of available space, 0.9% of this is CBD Madrid, Recoletos, Discovery, and Window. We're already having conversations today there. Part of this will be led in the coming weeks.

[00:25:09.770] - Carlos Krohmer

In Barcelona, and this is important to highlight on the Barcelona market, there's sometimes discussion. In the CBD, the occupancy is 100%, close to 100%. We have 0.2% of the vacancy corresponds to the Barcelona CBD portfolio. Then we have three of assets that are basically more on the 22 add, but we are planning the different actions, and we are positive on the near-term evolution of these premises.

[00:25:41.910] - Carlos Krohmer

Last word on ESG. We have already mentioned, we'll be quick on this point. We have had top ratings on ESG, just to highlight the top 0.2% globally on sustainability means we are one of the 26 best companies among 16,000 and 1 of the 7 best companies among 1,100 in real estate Europe, similar on CDP. I think very remarkable 100% of our assets have BREEAM and LEED certification.

[00:26:15.170] - Carlos Krohmer

Last element, GRESB, 94 on 100. And as you know, we are one of the few companies that are covering the full value chain. We are really in the business of value creation and urban transformation, and we are doing it well. We have 98 on 100 on the GRESB score on development management.

[00:26:34.430] - Pere Viñolas Serra

Thank you, Carlos. Final words on my side on the strategic positioning of the company and on the future growth prospects on page 27. Colonel has been carefully building a strategy based on quality, on a differential positioning of their for our assets, which should allow for this particular profile of resilience cash flow growth.

[00:27:12.760] - Pere Viñolas Serra

Also, we've been relying on a multi-layer cash flow strategy. That is because of this quality that we can deliver not only full inflation hedge to us through, but also enhanced rental growth that can provide cash flow that on top of that, additional value will be created by the cash flow coming from our project pipelines and from our acquisition strategy.

[00:27:49.170] - Pere Viñolas Serra

So far, we've seen a return from this strategy happening. Today, we saw the growth of our EBITDA. Today, we saw the growth of our EPS from a continuous operations point of view, which is a double-digit. We see the rewards of this. As I said, not only in absolute terms, but in relative terms.

[00:28:13.500] - Pere Viñolas Serra

If what we want to achieve is long-term returns that on a regular basis provide an alpha differential compared to the market because of our particular strategic positioning, in 2023, we saw that happening again. We saw, in the end, our assets with a higher occupancy rate, and we saw our assets with a higher gross rental income than our peers.

[00:28:47.380] - Pere Viñolas Serra

In assessing the value of the company, the value of our strategies, I think that coming from macro to micro and assessing the individual characteristics has to be a priority. Because of that, also, our gross asset value, like for like variance has proven to be particularly resilience.

[00:29:15.510] - Pere Viñolas Serra

Besides this, let's call it ordinary cash flow generation profile, we've been successfully delivering on our existing pipeline. On 2023, we saw the delivery of the final stage of Louvre Saint-Honoré and progress in Méndez Álvaro office.

[00:29:38.500] - Pere Viñolas Serra

Because of that, we have strong visibility not only on additional gross rental income coming from these projects, €51 million in gross rental income PNL for 2023 annualized, but also a full potential top up of almost 80 or around €80 million.

[00:30:04.060] - Pere Viñolas Serra

This allows for a visibility of our cash flow profile in terms of future growth that allows us to see that our passing rent that today is 426 has the potential to go above €500 million, around 540 to be more specific. Colonial's positioning in the end is allowing for a cash flow generation profile that not only will provide quality, but also growth.

[00:30:48.590] - Pere Viñolas Serra

On top of that, we will remain active on an active capital allocation strategy. We've been divesting substantially in the last period. We've been divesting 14 assets for more than €700 million. That has taken place at valuation appraisal values. We remain focused on this shareholder value creation. We have an objective of loading non-core for 2024, too. We have a particular goal of divesting around €500 million in additional assets. At the same time that we are considering reloading our prime pipeline with new initiatives.

[00:31:50.010] - Pere Viñolas Serra

If I could say something about the future alphas, the future pipelines that the company is working on, is that it will be based on a philosophy of urban regeneration, urban transformation, and more in the range of mixed use, as we've recently done in certain assets, like Méndez Álvaro in particular.

[00:32:17.380] - Pere Viñolas Serra

As a conclusion, the summary of our results in 2023 is, first of all, super strong operating performance, in particular in terms of letting performance that remains at very high historical volumes based on the scarcity of retail stock, based on the central locations that we own and the qualitative benefits in terms of experience that these assets provide.

[00:32:51.810] - Pere Viñolas Serra

2023 has been also a year of above average market rental growth. We've seen this like-for-like, which are very important in relative terms to our history and relative terms to our market. Providing returns that are coming with a differential to what's available for an average office investment.

[00:33:24.180] - Pere Viñolas Serra

2023 has also been a year of again, proving that the top products are denuding extra value and extra cash flow. We've seen the examples of Louvre in France. We are seeing the example of Magnum, and therefore that confirms the strong track record of Colonial in the field of urban transformation with outstanding capital value gains.

[00:33:57.710] - Pere Viñolas Serra

This top value is not only in terms of quantitative KPIs, it's also in terms of qualitative KPIs, such as those related to sustainability and the capacity of Colonial in developing low-carbon destinations that outperforms the market in occupancy and rental levels.

[00:34:21.560] - Pere Viñolas Serra

More specifically, as we said, we've been divesting €700 million. We have a strategy to keep on divesting. We have started the year in this direction, confirming the capability of Colonial in delivering these disposals at appraisal values with good liquidity and timing. Year to date, we have divested around 150 millions, and I confirm that is in line with appraisal values.

[00:35:06.670] - Pere Viñolas Serra

This capital allocation strategy goes hand in hand with good management of our capital structure, with our debt, which remains fully hedged in the next two years and above 97% for the next 4 years, and with a cost of debt that remains very low in the range of 1.7%.

[00:35:35.570] - Pere Viñolas Serra

In a nutshell, just to finish our presentation, we believe that Colonial is a well-established human transformation platform that is proving that it can deliver a solid outperformance, and that it provides a prime strategic positioning that is benefiting from polarization, that is able to deliver alpha value creation through projects and rental growth, and that can deliver also a creative strategy through capital recycling and through disposals also.

[00:36:16.360] - Pere Viñolas Serra

We believe that the asset values have gone through a process of repricing, and we believe that our yields are approaching its peak, and that is presenting an opportunity to benefit from the real estate recovery cycle. Therefore, we will be able to deliver new opportunities on our balance sheet and beyond.

[00:36:43.560] - Pere Viñolas Serra

Just to finalize, for year 2024, we see the EPS mainly in line with the most recent performance, in other words, above the guidance that we gave one year ago. We see a range of 30, 32 that will depend on the specific disposal execution. We confirmed that dividend for 2023 will be 27 cents that will be proposed to the general shareholders' meeting. That is an 8% growth year- on-year. That's in line with a long-term strategy of providing dividend per share that is growing in a relevant rate on a yearly basis.

[00:37:36.050] - Pere Viñolas Serra

We believe that we have the capacity to deliver a dividend percent growth of 8%-10% rate of growth going forward. As I said, our strategy will include a disposal program of circa €500 million for the year 2024. That's all. We've been very pleased to share with you this year of results, very solid from the operational performance point of view. Now we'll be happy to answer any questions that you may have. Thank you.

[00:38:18.780] - Operator

Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please press *5 on your telephone keypad. You can also send your questions through the webcast platform. Questions received by phone will be answered first. Thank you. The first question comes from Veronique Merkens from Kempen. Please go ahead.

[00:38:40.780] - Veronique Merkens

Hello. Good evening all. Thank you very much for the presentation and congratulations on another set of strong operational results. I think the key worry for Colonial, obviously, is its balance sheet. Looking at your Pro Forma app for LTV, it's increased to 47.3%.

[00:39:00.950] - Veronique Merkens

I'm curious how your discussions with the credit rating agencies are going, and if you've calculated what headroom you have in terms of valuation declines before you could get downgraded. Also, curious you're already talking about new opportunities on the balance sheet, whereas I think investors at this point would still like to see you deliver significantly before you could act on those opportunities. Curious to hear what's your view on that.

[00:39:30.880] - Pere Viñolas Serra

Thank you. On the new opportunities, I wanted to highlight that just in the transformation in what we own, we are able to deliver growth in our value going forward. We've just seen as this happened with assets or projects that has just been delivered, and this, let's say, source of value creation will remain a part of our activity.

[00:40:04.120] - Pere Viñolas Serra

Regarding debt, maybe I will ask Carmina to step in and give us a view on what you asked, Veronique. Thank you.

[00:40:09.330] - Carmina Ganyet

Yes. Thank you, Veronique. About debt, as you know, in the rating agencies and the conversations we have, they don't look at only metrics like long-to-value. They look also predictable cash flow, resilience of this cash flow, cash flow growth, and quality of this cash flow, of course. This approach, and then, of course, the assumption also was a correction on valuations.