Icade Sa Ord

Hello and welcome to the ICAID results as of September 30, 2024. My name is Caroline and I'll be your coordinator for today's event. Please note this call is being recorded and for the duration of the call your lines will be on listen-only mode. However, you'll have an opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your questions. If you require assistance at any point, please press star 0 and you'll be connected to an operator. I will now hand over the call to your host, Nicolas Joly, the CEO, to begin today's conference. Thank you.

Good morning. Nicolas Joly speaking. Thank you all for being here today on this call. I am with our CFO, Christelle de Robillard. This morning, we are pleased to present ECAD results as of September 30th, 2024. This presentation will be, of course, followed by the usual Q&A session. So let's start with slide five for an overview of the main messages for the third quarter of the year. The investment division reported a solid rental activity with almost 51,000 square meter signed or renewed during the quarter. Property rental income continued to grow, rising by 3.6% like for like, driven by indexation. Property development indicators showed a slight improvement with orders up 9.6% compared to the same period last year against the backdrop of falling interest rates. Nevertheless, we remain cautious in a market still uncertain over the coming months. During the third quarter, we also demonstrated the appeal of our asset portfolio through the disposal of four well-positioned offices located outside the Paris region and in Neuilly, above the latest appraised value. Given the resilience of our business and very high finance income expected this year, we are aiming for a 2024 group net current cash flow towards the top of the guidance. We will, of course, come back to this at the end of the presentation. Let's look now at performance by business division, starting with commercial investments. The rental market in the Paris region continued to slow, with take-up down for the third consecutive quarter. Over nine months, take-up in Île-de-France is down 9% compared with last year. Against this backdrop, ECAD's team posted a very good performance, with almost 51,000 square meters signed or renewed in the third quarter, bringing the total volume over the first nine months of the year to 107,000 square meters. These signatures and renewals represent an annual rental income of 12.4 million euros and a world of 6.7 years. The good rental momentum was firstly driven by the well-positioned offices, which accounted for 84% of the 12 million euros of additional income. In particular, we are pleased to announce the signing of a pre-let agreement for 24,000 square meters of office in Toulouse on an annual basis, counting for an annual headline rent of 5.6 million euros. This new project, scheduled for completion in 2027, represents circa 70 million euros of capex. In addition, We signed two new leases that, in my view, illustrate our ability to build special, dedicated relationships with our major institutional tenants. The first one is with Schneider Electric for a 3,800 square meter additional space in Eden, increasing the pre-let rate of this asset to 85%. The second one is with Veolia for more than 5,000 square meters in Aubervilliers, in addition to the existing 45,000 square meters already let for its head office. The financial occupancy rate stood at 86.6% as of September 30, 2024, down minus 1.3 points compared with the end of last year. This decline mainly concerns offices to be repositioned, with the financial occupancy rate in the well-positioned office segment remaining above 90%. Let's now move on to page 8, related to the asset rotation. The investment market is, as you know, still very calm, with an investment volume of less than 7.5 billion euros, down almost 19% year-on-year. Outside the Paris region, the investment market is even down by 26% compared with the same period last year. Nevertheless, We managed to complete this quarter the sale of two assets in Marseille for €45 million and to sign additional sale agreements on two other assets in Lyon and Neuilly for €37 million. These disposals to first-class users and investors were carried out above the appraised value at the end of June 2024 at prime rates, and they testify to the quality and attractiveness of our assets. Let's turn to slide nine. This quarter, ECAP delivered two office assets representing a total of 5.8 million euros annualized headline rents. The first asset, named Cologne, is a 2,900 square meter office building in the Paris Orly Rangis Park, led to FIBOR, Avanci Energy subsidiary. The refurbishment of this building is a showcase of our expertise in adapting assets to climate change and to the risk of vulnerability to heat waves by 2050. The second, called NEXT, is a state-of-the-art 15,800 square meter office asset in the heart of Lyon-Pardieu, which has been completely refurbished to meet client needs and highest environmental standards. The building was 100% pre-lit more than two years before delivery. Let's now move on to the operational performance of the development business line. Supported by the fall in interest rates, we recorded a slight positive upturn in orders this quarter. At the end of September, the Property Development Division booked more than 2,800 orders, up plus 9.6% in volume and plus 2.3% in value compared with the same period last year. the improvement has been particularly noticeable in sales to individuals, while the momentum on block sales has remained relatively in line with what we've observed in the first half of the year. Despite these positive signs, we remain cautious about the months ahead in a market context that is still fraught with uncertainty linked to the pace of interest rate cuts the end of favorable penal tax regime, and the political environment in France. In this context, the group has been still highly selective, as shown by the figures. Firstly, the housing permits filing were 50% down versus last year. Secondly, the sales launches declined by 32%. And thirdly, the pre-sold rate on operations launched has been maintained at 80% year-to-date. And I will now hand over to Christiane for an update on the financial results.

Thank you, Nicolas. Let's move to slide 12, in which we present the trend in consolidated revenue as of September 30, 2024. The total IFRS revenue amounted to 1 billion euros, stable compared with last year. Over the past nine months of the year, The stability of revenues is explained by the good performance of the property division with rental income up by 8.5 million euros. The consolidated revenue from property development division is slightly down, driven by the reduction in the backlog. Let's jump directly to next slide for details on property investment division. Gross rental income amounted to 280 million euros as of September 30, 2024, up plus 3.1% compared with the same period in 2023. Growth was mainly driven by indexation, plus 5.5%, partly offset by the effect of Sinan departures, minus 2.2%, and negative reversions on renewals, minus 0.2%. Performance varied according to asset class and is particularly supported by like-for-like growth in the well-positioned office and light industrial segments at plus 6.3% and plus 6.5% respectively. Economic revenue from the property development business stood at 829 million euros at the end of September, down minus 1.7% compared with the same period last year, with the various business segments following different trends. Firstly, revenue from the residential segment was up plus 35 million euros compared to the end of September 2023, driven by the reduction in the backlog built up at the end of 2023. Secondly, revenue from the commercial segment was down minus 56 million euros compared to the same period in 2023. As a reminder, the first nine months of 2023 were positively impacted by the opportunistic sale of an office building on Rue Tedbou in Paris for 40 million euros. Let's move on to slide 15, related to balance sheet management. The group continues to manage its balance sheet proactively. Firstly, we maintain a very strong liquidity position at 2.4 billion euros at the end of June 2024, covering the group debt maturities until mid-2028. Secondly, over the first nine months, we proactively manage our debt maturity schedule. In the first half 2024, we successfully bought back €350 million of bonds, enabling us to reduce the next 2025 and 2026 bond maturities. In July 2024, we issued €150 million of new bonds as attractive terms maturing in 2030 and 2031. Thirdly, we have maintained a robust hedging policy. In particular, we strengthen our long-term edging profile in June and July with 200 million euros of forward swaps starting in 2026 and 2027. To be noted also that our 2024 debt is still fully edged. I'll hand over to Nicolas for the conclusion and details on the guidance.

Thank you, Christelle. Well, based on the group's results, As of September 30, 2024, in our year-end forecast, we expect, on the one hand, a net current cash flow from strategic operations to be towards the top of the 2.75-2.90 euro per share range, given the resilience of the property business, the significant finance income, and tight cost controls. And on the other hand, we expect a net current cash flow from discontinued operations of circa 80 cents per share. So as a result, we expect a group net current cash flow for 2024 towards the top of the 3.55, 3.70 euro per share guidance range. So to wrap up, well, I would say that we saw encouraging momentum in Q3 with good rental activity. an improvement in liquidity on some small and core assets, and better operating indicators for property development, despite a context that still remains uncertain. At the same time, we are continuing to work on our reshaped deployment challenges, on which we'll be happy to provide you with an update in the full year results 2024. And with that, let's start the question and answer session.

Thank you. As a reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We will take the first question from line Celine Tsehun from BACBIS. The line is open now. Please go ahead.

Hi, Nicola. I just have two questions, please. The first one, can you confirm how much annualized IFRS rental income is expected to be lost in 2025 due to tenant departures? That would be our first one. My second one is on the disposals of the healthcare portfolio. I think you mentioned in the last set of results that you were in talk about the disposal of the Italian portfolio, which is part of ESU. Can you provide an update on this? And also on the sale of the French portfolio to Primonial, how binding is your option to Primonial, i.e. can you break it if there's another buyer? Thank you.

Yeah, good morning, Céline. Thanks for your question. Well, on the first one regarding the lease expiry schedule, well, I will firstly answer on 24 to be as transparent as we've always been. So as for 24, we are broadly in line with what we've shared in July with 24 million euros of rent loss year-to-date, and we expect an additional 25 million before the end of the year, including the Pulse building with Kojo. So on those 24 plus 25, the majority are composed of to-be repositioned offices and the Pulse building. Regarding 2025, we will give you more visibility, of course, in the full year 2024 results. It's a bit early to tell. Maybe just to share the growth figures, We are here talking about a total annual rent of 60 million euros. So this is below what we were facing in 24, which was a record year. There's also a fact that 60% of those 60 million euros concern the first semester. So definitely, we shall have good visibility next February And we will be as transparent as we've been this year about our revenue expectations. For your second question on the health care disposal, well, actually, there are no major news during the past two months. It was quite a short period of time since the end of July. Of course, there's absolutely no change of strategy on our side and still the priority to execute stages two and three. Maybe a word on stage two. We still have discussion with Premier and other investors. confirming the interest in the asset class and the uniqueness of the asset portfolio, and also confirming that most of the investors wait for the year-end to confirm the stabilization of the value before moving on to their investment process decision. And on stage three, we're referring to the Italian portfolio. Indeed, the marketing of this portfolio is ongoing. As we've shared in July, we've structured beginning of September a dedicated process with the bank after receiving a non-solicited offer in July on part of the portfolio. We expect some LOIs mid-November, and hopefully we'll be able to organize a second round in Q4 for expected pre-sale agreements and closing during the first semester of 2025. We will, of course, also keep you posted on the next steps. You know that in the meantime, we are still benefiting from cash flows and dividends. And as for the agreements with Primonial, as we've already said in the past, on stages two and three, this is not a binding agreement with Primonial. So Primonial is not compelled to buy. they are compelled to priority dedicate their inflows. But as you know, in the current context, they don't have inflows anymore. That's the reason why we are going to third-party investors, especially international investors too. But the agreements are non-binding. But that also gives us the room to renegotiate with other type of investors, for example.

Thank you. Can you confirm the size of the Italian portfolio, please?

Yeah, it's roughly 40% on the international total portfolio. Thank you.

Thank you. We will take the next question from line Valerie Jacob from Bernstein. The line is open now. Please go ahead.

Hello, good morning. Can you hear me?

Hello?

Hello, can you hear me?

Yeah, yeah, we can.

Yeah, perfect. Okay, sorry. I've just got two questions. My first one is on the property development business. You're saying that you're seeing better operating indicators. And I think the turnover is done versus last year and is expected to still be done next year. And I was wondering if you could help us understand what does that mean for margins and how quickly you think you can restore the margin of this business. That's my first question. And my second question is, you've done two disposals ahead of book value. And I just wanted to know that if that makes you confident that your asset values could be stable in H2, or do you expect more weakness due to some tenants departure? Thank you.

Yeah. Thank you, Veneri. Well, on your first question regarding the development activity, well, the turnover indeed is pretty stable, but also due to the fact that there's been months now that we are more and more selective, as you saw on the figures shared on the presentation. I would say that, yes, we've seen some recent positive signs in the market with the falling interest rates, slight increase in orders, also a decline in consolation rates by private individuals. All of that are good news. But once again, in our view, the political and fiscal context still calls for caution. Still ongoing discussion on the finance bill. You get the municipal election in March 2026, that are tomorrow. And there's also the end of the PNEL tax scheme at the end of 2024. So that's the reason why We think we need to remain highly selective in the launch of new operations, as shown in the presentation. And as for the second question on the asset value, well, yeah, we were pretty satisfied to see that we were able to find some liquidity on the asset, especially above the recent valuation. More globally, I would say that we still have the similar view as in the end of July, meaning that the main part of the adjustment is in our view behind us. The risk premium has been restored. Maybe you all know that, but as a reminder, over the past 24 months, as of June 30th, 2024, the adjustment on the total portfolio was minus 26%. Of course, the strongest adjustment was was on the 2B reposition assets, whose value has been almost cut by half. We saw that the portfolio value slowed less in H1 compared to the last period. We remain cautious as some further value adjustments are still possible in our view by the end of 2024, especially on the 2B reposition assets due to the polarization of the investment market, as you know. But interest rate cuts seem to be well underway now, even if we also need on this side to remain cautious about the pace of the decline, which is still data dependent, as explained by the central banks. So that's globally our view. Too early to tell. The discussion with the appraisers are only starting now.

Thank you. Can I just ask a follow-up question on my first question? I mean, I understand you say you need to remain selective, but does that mean that you're going to do less in volumes but add better profitability? I mean, if you can be a bit more specific on what that means. Thank you.

Yeah, we are more selective both on the margin of the new operations that are launched also more selective on the level of pre-commercialization before launching the operation, but we still have some operations that have lower margins that need to be delivered. On that, we went through the whole portfolio, as you know, at the end of June, and now we have a clear view on what is ahead of us. So we still need to deliver some historical operation will lower margin, but we are really selective on the new ones to be launched.

Thank you.

You're welcome.

Thank you. We will take the next question from the line. The line is open now. Please go ahead.

Yes. Good morning, Nicolas and Christine. So maybe I would have a first question. So on the offices property, the investment, Could you please give us maybe more close on the level of rent of the leases signed this quarter compared to previous rents that you could have signed in the same areas? And that would be my only question. Thank you.

Okay. Good morning, Florent. Thanks for your question. Well, as for the new leases signed, we are also there in line with what we've shared. I mean, we still signed the new leases and renewals in line or above DRVs with incentives that are in line with the market. So no major change with our strategy on the past month. And as you know, therefore, we are still crystallizing the negative reversionary potential we've shared with you. On this one, there is no updated figure, of course, to disclose on these Q3 results on the well-positioned asset. You can consider a gap that is slightly widening compared with the beginning of the year, as indexation remained strong in 24 and continued to impact positively the rent, but not the ERV. But of course, we will provide you with an update in the full year release on that. But globally, every time we sign a lease, it's at the ERVs or above with incentives in line with the market.

Okay, thanks. And in terms of follow-up questions, could you please tell us how you see the ERV to change during the year?

Well, the ERVs remain pretty stable over the past months and years. We saw that the incentives increased over the past months and years. There was like a slight inflection on some areas outside of Paris regarding the incentive on the last data shared. For example, in La Défense, but it's only a beginning. We are still expecting DRV to be maintained pretty stable as for well-positioned offices.

Okay, thanks.

Thank you very much.

Thank you. We will take the next question from line Amol from DeGroove Beta Camp. The line is open now. Please go ahead.

Good morning, everyone. Thank you for taking my question. So I think one of the questions was already answered previously about the conditions for the recently signed lease contracts. Perhaps just a follow-up would be, on the lease that expired in 2024, so roughly 50 million euros. What's the share or the amount that you are expecting to relate by next year out of all the lease that have expired or are about to expire in Q4?

Yeah, thank you, Amal, for your questions. Well, as we said, the majority of those departures were coming from assets to be repositioned and the Pulse Building, you know, that formerly hosted the Olympic Committee. So for the to be repositioned assets, you know that our strategy and conviction about that is that it's really hard to find a new office tenant. That's the reason why the teams are working on repositioning scenarios that can be anything but offices. So we don't expect to sign new leases on those ones. And the strategy, once again, is to reposition the asset and then sell them once we've secured the building permit, for example. And for the Pulse building, well, on this one, no major news to share on this Q3 too. And as we've already said, this will take time. Because even if this is a great building, it's still a hard momentum from the global area, the northern part of the Parisian region, and the more local environment is still evolving there, so it will take time definitely before relating this space.

Okay, thank you. Yeah, thank you. Perhaps a follow-up question. You know, you didn't provide any guidance for dividend, but you seem more confident on the, let's say, EPS, not current cash flow figure for 2024. Can you share with us perhaps what would be the criteria given your liquidity position and the current liquidity in the market? How do you see the dividend evolving or being set in 2024?

Yeah, of course, it's too early to talk about dividend, but We'll stick to our philosophy. And as we've said in the past, our priority, once again, is to retain as much cash as possible to finance reshape in our strategic plan. So the distribution will be limited, of course, to sick obligation. But I'm sure you also have in mind that we have this remaining residual health care distribution obligation accounting for 2.54 euro per share. Thank you very much. Thank you, Amal.

Thank you. We will take the next question from Nadir Rahman from UBS. The line is open now. Please go ahead. The line has been dropped. We will take the next question from Neeraj Kumar from Barclays. The line is open now. Please go ahead.

I have just one quick question regarding your hedging profile. It says you entered into 200 million forward swap agreement during the quarter. Can you provide a bit more color around this? And is it linked to any potentially financing activity you may incur in the short term?

Yes. Thank you for your question. So indeed, we mentioned that we are fully hedged until the end of 2024. And we managed also at the same time to have a good level of cost of debt. At the end of June, we posted a cost of debt at 1.52%, which was indeed slightly improving, sent to a swap and turning into four from the end of 2023. At the same time, we... We are very cautious and proactive regarding our hedging policy. That's why we implemented two new swaps recently for more than 200 million euros that will enter into force starting in 2026 and 2027. So all in all, this should help to keep the cost of debt below 2% until... in particular due to the expected drop in rosette, but also with this good level of edging.

Got it. Thank you.

Thank you, Neeraj.

Thank you. As a reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We will take the next question from line Nadir Rahman from UBS. The line is open now. Please go ahead.

Good morning. Can you hear me? Yeah. Morning, Nadir. Sorry if my line got disconnected earlier. Just one question on the inflation and the indexation that you're seeing in your rent and the like-for-like. So I believe there was a, I think, roughly 5.5% indexation contribution, but then you're seeing a negative reversion and also from the tendency. So with inflation coming down across the Eurozone more widely, And in the next few months, there's software macro and environment. Where do you see the indication going from here? And do you still see the same like-for-like across the coming few quarters to the year? Thank you.

Yes, thank you for this question. So indeed, you're totally right. Our performance at the end of September was majorly supported by the good effect of indexation at 5% at the end of September. But indeed, when we look ahead, we are expecting inflation in 2025 to decrease and to be more between 2.5% to 3%, and then to continue to decrease slightly.

Thank you. Thank you, Nadia.

Thank you.

We will take the next question from line Akamsha Allen from Citi. The line is open now. Please go ahead.

Hi, morning, Nicola, Christelle. I just had a quick question on healthcare sale pricing. Is there any potential to renegotiate the pricing that might be upward or downward under the agreement you're already in for stages two and three? And just a quick one follow-up on that is, do you think you might get more negotiating power with a third-party investor outside of the current agreement? Thank you.

Yeah, thanks for your question. Well, about the price on the FCA transaction, I think the basis is basically DA Navy. That's the price at which, for example, Primonial has some call options on our shares. but definitely there's optionality negotiating some potential price below that or above if Primonial is not in a position to buy the shares. So basically, once again, the whole agreement is definitely non-binding on the stages two and three. Well, there's main direction pointing at the NAV, but we have opportunity and room to negotiate some discounts or prices above. What we don't want to do, as already shared, is to accept very large discounts for just the sake of saying that we sold the healthcare business. Of course, we can be open to some slight discounts, depending on the size of the potential investment, but our view on that is that as this delivers steady and predictable cash flows that are supporting our group cash flows, that would not make sense to accept very large discount on that. But if we want, we have room for.

That's very clear. Thank you. Thank you very much.

Thank you very much. There's no further questions in the line, and we will hand it back over to your host for closing remarks.

Okay. Well, thank you, all of you, for being here around the call. Looking forward to sharing some information news for the full year results next february in 2024 and before that looking forward to seeing you again bye bye have a nice day and a nice week thank you for joining today's call you may now disconnect