Inmobiliaria Colonial SOCIMI S A : Transcription Proyect Alpha X Presentation

Inmobiliaria Colonial - Alpha X

[00:00:00.000] - Moderator

Ladies and gentlemen, welcome to the Inmobiliaria Colonial presentation of the project Alpha X. The management of the company will run you through the presentation that will be followed by a question and answer session. You can ask a question by phone by pressing * 5 on your telephone keypad.

[00:00:20.680] - Moderator

I would now like to introduce Mr. Pere Viñolas, CEO of Inmobiliaria Colonial. Please, sir, go ahead.

[00:00:31.330] - Pere Viñolas

Thank you. Good afternoon. This is Pere Viñolas speaking. I will be presenting the transaction that we want to share with you today. But as usual, I have with me, Carmina Ganyet, Chief Corporate Officer, and Carlos Krohmer, Chief Corporate Development Officer, for any additional comment or question that it may be necessary.

[00:01:00.260] - Pere Viñolas

What we would like to share today to you, it's one initiative that, in fact, represents two different initiatives that we would like to present. The first one has to do with our capital structure. We would like to announce that today, we sign an agreement with CriteriaCaixa, that will become, as a consequence of this agreement, a new reference shareholder of Colonial.

[00:01:38.990] - Pere Viñolas

This will happen through a capital increase in kind for a total amount of €622 million, which will deserve a number of shares that will represent a blended price of €6.1 per share per dividend. Pardon, €7.1, very important, per share per dividend. That is a very significant premium on current share price. If you allow me on the weighted average price of the last few days, I think that in excess of 20% if we look at the last 10 days.

[00:02:36.270] - Pere Viñolas

This contribution will include two different layers. The first one is a contribution in cash of €350 million, and there is a second one of a contribution of assets that currently belong to Criteria, more specifically to InmoCaixa, which is real estate branch. This second layer of contribution, the one in assets, will include 60% of assets in the category of living or residential, and 40% of this contribution will be in the office segment.

[00:03:29.880] - Pere Viñolas

This contribution and this initiative of Criteria in order to become a new reference holder in Colonial is in the framework of a strong endorsement of Colonial strategy, which is taking place with a long-term strategic investor with an industrial growth approach. This is the first thing that I wanted to share today.

[00:04:01.400] - Pere Viñolas

There's another thing which is very much related, which is the fact that at the same time we are announcing the launching of a new project, a pipeline the so-called Alpha X, which is an initiative in order to develop in excess of 110,000 square metres that will involve a Capex for circa €385 million. That is a very interesting initiative of growth opportunities where we expect very interesting returns with a leverage IRR in the range or in excess of 9%.

[00:04:50.090] - Pere Viñolas

This new initiative will go hand in hand with the assets contributed by Criteria for a total amount of 272. As I said, this contribution will have a mixed nature, 60% living, 40% office, also with interesting expected returns. I think that putting both things together, the capital structure, re-enhanced with Criteria as a new shareholder and this reloading of Colonial's growth profile, I think that we have to understand this in a framework of increased financial flexibility for opportunistic acquisitions. That is, we expect these initiatives to be the first layer of this growth story, but we are doing this in a framework of increased financial flexibility in the future.

[00:06:03.070] - Pere Viñolas

The financial impacts of this transaction are as follows. First of all, we would like to highlight a more qualitative element, and that is that this transaction allows for a more attractive total shareholder return, basically because it allows Colonial to fully to develop its capacity through new growth projects, and because the company is doing this to increase financial flexibility. That would be the first qualitative element that is more linked to the long-term strategy.

[00:06:46.410] - Pere Viñolas

More going into the short term of the immediate financial impacts or financial implications. We believe that this deal is attractive, first of all, because it's taking place at a relevant premium on share price. As I said before, I think it's 22% above the weighted average of last week. That means a strong endorsement for the value of a company.

[00:07:23.380] - Pere Viñolas

From a capital structure point of view, it's very accretive in terms of LTV, that is an improvement of more than 450 basis points. That is, of course, because this transaction includes no debt whatsoever. At this level, I would like to highlight that we believe that this LTV improvement is to remain sustained over time, not only as an immediate impact.

[00:07:59.960] - Pere Viñolas

Regarding the EPS, we confirm that the guidance that we disclosed for this year remains unchanged post- transaction. That is, looking at the return profile of Colonial for the year 2024, the 30-32 range in terms of euros per share remains unchanged, which is relevant, taking into account the nature of this transaction that includes a capital increase.

[00:08:40.910] - Pere Viñolas

Of course, this transaction has a slightly dilutive impact on the last reported NTA, which I would like to emphasise that is the NTA of December 2023. We estimate that a new number post-deal would be around €9.55 per share, that is 4% less than the available number for the end of 2023.

[00:09:15.010] - Pere Viñolas

Finally, and by the way, I'm on page four of the presentation, a comment on governance. As I said, CriteriaCaixa is expected to own circa 17% of Colonial post-transaction, roughly speaking in line with Qatar investment authority that will remain in a similar range. Last but not least, to be more specific, what we find today is an MOU that now we have to execute. This means that we will have to call for a general shareholders' meeting, an extraordinary shareholders' meeting that probably will take place during the month of June after the formal issues that have to take place in a contribution in kind, not a capital increase, have been fulfilled, which will take place in the remaining part of this month of May.

[00:10:25.130] - Pere Viñolas

I will go now more into the details. First of all, I would like to go more in depth on the first thing that I mentioned, which is the fact that Colonial is reinforcing its capital structure with CriteriaCaixa as a new shareholder. On page 6, just to emphasise again, we will be doing a capital increase of €622 million at the price of €7.1 per share per dividend. This will be subscribed by an institutional long-term investor like CriteriaCaixa is at an obvious premium to the share price that we've seen recently, and this we believe that is showcasing Colonial's value potential.

[00:11:23.990] - Pere Viñolas

This €7.1 is a premium on year to date VWAP and above also, obviously, current trading. This transaction is all equity, so will provide substantial deleveraging and will provide enhanced financial flexibility, and of course, will significantly increase the market cap of the company post-transaction.

[00:11:53.360] - Pere Viñolas

This contribution is distributed in two different layers. There's first a contribution in assets for a total amount of 272. The way this €7.1 blended price has been drafted is based on the fact that the 272 contribution of assets is being valued with an NTA parity, December 2023 as the basis for the contribution. The contribution in kind, 350, is done at 5.80, which is the average price of the last few days. These two things put together is what are leading us to this €7.1 of blended average price.

[00:13:01.610] - Pere Viñolas

We emphasise a technical issue just for clarification. As you know, the next ordinary shareholders' meeting will be approving and therefore, distributing an ordinary dividend, the one that we already expect of €0.27 per share, as this contribution of Criteria and the delivery of the shares to them will happen after the dividend is paid, the blended price post-dividend will be €6.83. We believe that this transaction is very positive, very good for Colonial from a short-term point of view, but more importantly, from a long-term point of view. It's even more important, the qualitative element, the quantitative element. CriteriaCaixa is one of Europe's leading investment holding companies, and what we are doing through this transaction is reinforcing our capital structure with a new long-term and prestigious shareholder that is a total catalyst for Colonial's growth strategy.

[00:14:27.190] - Pere Viñolas

I will now jump into Section 3, which is about the transaction rationale of this announcement. I will jump into the other part of the equation, the fact that today we are also announcing the reloading of Colonial's growth with the launch of a new project Pipeline. I'm on page eight of the presentation. We announced that we'll be launching a project Pipeline that will include four projects, two based in Spain: one in Madrid, and one in Barcelona, two based in Paris.

[00:15:20.230] - Pere Viñolas

These four projects account for more than 110,000 square metres of prime assets, including 385 million of capex to be invested. All of them are within a philosophy of urban transformation with good returns, as you will see, with a respected yield on cost in excess of 6%, that will allow for substantial reversion to be captured with more than 64 million of rental revenues. As I said, within a framework of urban regeneration, that means that all of them include philosophy that goes into the direction of urban mix-use transformation in other nature, like healthcare of life science or business campus.

[00:16:18.520] - Pere Viñolas

Besides this project Pipeline to be launched, Colonial will be developing and extracting additional value from eight assets to be contributed by CriteriaCaixa in this transaction, again in line with this urban regeneration strategy, as I said before, with a total value of 272 million, 40% office, 60% living, and on one side, offices based in Madrid, CBD, and Méndez Álvaro, and one asset based in Barcelona, and a number of units in the living sector, also basically Madrid and other cities.

[00:17:10.680] - Pere Viñolas

To go more into detail, page nine, the first four projects that I was describing that are based on the existing portfolio of Colonial, what we intend to develop is, as I said, project, two projects in Spain, two projects in France. On the left-hand side of this slide number nine, it will be the first one, we already provide certain details in the past, is Sancho d'Avila, a project of transformation of a current office building into a healthcare unit, into a healthcare project based on an already existing agreement, already pre-led with a leading Spanish operator with a 30-year contract. That means that we expect from this project a very sound return, but particularly and even more, a very good risk-adjusted return because we are talking about a pre-led unit.

[00:18:27.330] - Pere Viñolas

The second one, and I go into the Paris zone for a minute. It has to do with Condorcet. Condorcet is an existing asset that belongs to SFL, 24,000 square metres. Here we are launching a project for a future campus on the 9th quartier, where we pretend to create additional GLA in a mixed-use approach basically based in office, but also open to other users in the field of sustainable housing and sustainable accommodation.

[00:19:14.410] - Pere Viñolas

The third one would be Santa Hortensia, the former IBM headquarters in Madrid, almost 50,000 square metres. There we are in advance progress for identifying different mix-use strategies that will be able to deliver very attractive on-geared returns and also elaborate returns with, as I said at development of a mixed-use approach based in offices and other uses.

[00:19:49.350] - Pere Viñolas

Finally, another one that is already on the way is the project scope in a building which is the former Rives de Seine headquarters in Paris, where a multipurpose building offering a unique range of services with generous outdoor spaces is already being developed by SFL. It's a project next to one of the main transportation hubs, the Gare de Lyon in Paris, and obviously, it will have the best standards in terms of ESG and the best characteristics for a business camp.

[00:20:29.850] - Pere Viñolas

On page 10, you can see where these projects are located, always in line with strategy of Colonial, being very much focused in prime CBD. On page 11, you can see a summary of what we intend to do. You may see the distribution for different kinds of users, and all of them in urban central areas, but with a transformational element which is very much central to the overall strategies for the different units. You may see that the delivery of these projects is expected to happen between 2026 and 2028, and the total value of these projects will allow for on-year returns that will be able to create substantial value for shareholders.

[00:21:33.920] - Pere Viñolas

Page 12, there's a little bit of detail for the assets that are to be contributed by CriteriaCaixa. We are talking, first of all, as I said, 40% of the contribution is office, is what you may see. I don't know if you are following the presentation, and you can see that there are three that are in a blue framework. There are these three office units, office projects. One is based in Barcelona, the other two are central CBD in Madrid, Gran Via 30 is the address, and the other is based in Méndez Álvaro, which is the so-called Visionary building, which is a next-generation building that has just been recently refurbished with the best standards, which is geographically very close to our own projects in Méndez Álvaro.

[00:22:43.700] - Pere Viñolas

Besides this, the 60 % of the contribution have to do with five different residential units that are already listed, that are basically in Madrid, but then with two additional projects in Málaga and in Zaragoza. For us, the exposure to residential, we see it as a very good natural complement for any strategy of any company which wants to develop office projects inside urban central areas.

[00:23:24.700] - Pere Viñolas

Let's go to the next section, which is section 4 on the financial impacts of this project. As I said at the beginning, for us, first of all, the important thing to emphasise is that we believe that this transaction allows for Colonial to accelerate its total return for shareholders. That means this transaction is based on a number of projects that we are launching, based on a solid financial framework. This means that the expected total shareholder return for shareholders will be enhanced, will be better. At the same time, what will be better is the capital structure that will be enhanced in a material way because of the nature of this transaction.

[00:24:24.670] - Pere Viñolas

We believe that this transaction allows for additional flexibility, flexibility to develop the projects that you have presented today, but also any other opportunistic acquisition that may be available in the market. This qualitative element and meet to long-term element is very important.

[00:24:47.610] - Pere Viñolas

Having said that, now, if I go into the short-term impacts, the first one are more obvious is that this transaction is happening at a relevant premium on share price. The second element is that this transaction allows for a material reduction of the LTV. The EPRA LTV is to go down for more than 450 bp . The third element is that the EPS guidance is to remain where it was, that is, confirmed at a level of 30-32 cents per share. The final element is that there's a slight dilutive effect on the last reported NTA on the December NTA, now looking to 9.55 post-deal NTA after this transaction is executed.

[00:25:49.410] - Pere Viñolas

There's another set of comments regarding not so much the short term, but the mid term. The first thing that we would like to highlight is that this improved LTV is expected to be sustained over time. That is that we don't expect to go, let's say, materially down LTV just immediately, but then not being able to remain low because of the different activities that the company may do.

[00:26:20.150] - Pere Viñolas

These initiatives of Capex that we are announcing are spread among the next four years. Our expectations for the EPRA LTV is that we will remain in this new level in line with the number that we are seeing post- transaction. That's, by the way, in line with our strategy and intention as a company. We believe that we want to have our LTV in this new set of range, and that strategy and this transaction is, therefore, consistent with our strategy.

[00:27:07.999] - Pere Viñolas

Also for the mid to long term, we expect this transaction to be accretive on a forward-looking EPRA EPS. That obviously is because of the high return attached to the new projects. Also, as a consequence, we expect this transaction to provide for a certain mid term acceleration in NTA growth, again, because the return expected for these transactions is materially higher than the current yield for our asset.

[00:27:43.460] - Pere Viñolas

Let's go into final conclusions. I'm on page 16. We are very happy with this transaction. It has the two sides of the coins that today we believe that you need to have. You need to have a growth profile that is reloaded, and you need to have, at the same time, a framework with solid fundamentals, with fundamentals that are even better than what you had.

[00:28:17.480] - Pere Viñolas

That, from, let's say, business point of view, quantitative point of view, at the same time, I'm going back to the new shareholder issue. If you can do that with an additional shareholder which is very much in line with Colonial strategy, we believe that that's a true and real catalyst. Obviously, this transaction provides for significant de-leverage.

[00:28:52.290] - Pere Viñolas

I would like to maybe emphasise that as we've been sharing in many presentations, Colonial today, it's under no stress regarding leverage. We don't have any maturities in the next 3 or 4 years that are not covered by our existing cash. Our unused-grade facilities are in excess of two billions. Our cost of debt is at 1.7 and expected to remain for the next few years in this range.

[00:29:25.920] - Pere Viñolas

Last but not least, just a few days ago, S&P confirmed the rating of the company at the BBB+. That means that when talking about leverage, we see this more as a preferred choice in terms of capital structure because of the financial flexibility that is providing more than particular constraints that we have to face in the short term. Therefore, one thing we like of this transaction is the additional fire power that it offers in order to accelerate Colonial's growth profile, and particularly at the moment of the cycle where very interesting alpha strategies can be identified.

[00:30:17.250] - Pere Viñolas

We believe that this enhancement of our capital structure goes hand in hand with a new set of alpha projects that are very much in line with our history and where we believe that we will be able to generate value, very good returns, and a very interesting transformation for the assets that we will be managing.

[00:30:44.120] - Pere Viñolas

Finally, we are also happy with the assets that are contributed by Criteria. You will have seen that both in the office and the residential sector. Two comments regarding this. More long term strategic kind of thinking, we believe that to be in the office means to be in the urban transformation business today. To have exposure to residential is a very good complement which allows for the best use of your assets and your spaces, which allows you to put at stake your best capabilities. Therefore, we like that more from a short-term point of view, we believe that for those assets, we have the capacity of extracting additional value that we can extract meaningful strategies that will provide good returns also on these assets.

[00:31:47.590] - Pere Viñolas

All of this together will mean substantial reinformance of the growth profile of the company with rent, as you can see, in a chart of this page that will jump from €412 millions of rents to an estimate of potential rent above €560 million euros.

[00:32:13.170] - Pere Viñolas

Some final comments on the transaction agreed with Criteria. Today, what we did is a signature of a MOU in order to execute everything that I described today. By the way, this happened after an approval by Colonial's Board of directors that I have to say that unanimously approved the transaction with high conviction from all directors and existing relevant shareholders sitting at the board.

[00:32:57.070] - Pere Viñolas

After this signature of the MOU, we start with a formal procedure for this kind contribution in kind of a projects. That means that we'll have to deliver an independent expert report that will lead us to the signature of a contribution agreement. This final agreement will have to be approved by an external shareholders meeting that we expect to happen during the month of June. The delivery of the shares, the final issuance of the shares, and the effective contribution will take place either by the end of June or more probably during the month of July.

[00:33:49.140] - Pere Viñolas

This is the transaction that we wanted to share with you. As I said in a word note, we think that it's very good for the company, it's very good for its growth profile, for its financial structure. We believe that it's very good for the short term, and we believe that it's very good for the long term, and from a quantitative and financial impact point of view, but also from a qualitative impact.

[00:34:17.810] - Pere Viñolas

This is it. Thank you very much for your attention. Now, as always, we are available for any question that you may have.

[00:34:27.230] - Moderator

Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please press star 5 on your telephone keypad. Thank you.

[00:34:39.860] - Moderator

The first question comes from Ben Richford. Please go ahead.

[00:34:46.460] - Ben Richford

Hi. Good evening. Thank you for answering my questions. Got a few. Firstly, on the properties that you're acquiring, how can you give us more comfort around the upside potential? Have these been underworked assets? Do they have high occupancy rates versus your existing portfolio? Are they under-rented? What are the property yields on them? Just a bit more around the current valuation and upside of the assets you're acquiring.

[00:35:23.620] - Ben Richford

A second question just around the pipeline of existing assets you're redeveloping and launching today. To what extent is this accelerated because of obsolescence, in particular, around ESG? A third question, could you give us some yields on costs and profit margins for those schemes, please? That's all my questions. Thank you.

[00:35:52.600] - Pere Viñolas

All of them will be handled by Carlos Krohmer. Carlos, go ahead, please.

[00:36:01.210] - Carlos Krohmer

First on the contributed asset, as you have seen in the presentation, basically, it's concentrated on assets in Madrid and one asset in Barcelona. They're very well-located assets. One of them recently brand new refurbished. We are doing here together with the Manu project, a really build-up bet on the Méndez Álvaro subsegment in the Madrid City Center. You know that it's one of the most dynamic markets in Madrid with the highest rental growth profile at the moment. We are very happy with this exposure. The other asset of Madrid is in the CBD and fully rented, and we think we can, with our active management, extract significant additional rents and value.