Gecina (GFC.PA), the French real estate investment trust, has reported a strong start to 2024 with its first-quarter earnings. The company saw a notable 6.2% like-for-like increase in rental income, supported by a thriving rental market in central Paris. With historically low vacancy rates in the Paris Central Business District (CBD) at 2.3%, Gecina has achieved a 16% rental income increase. The company is maintaining a solid balance sheet while actively working on major redevelopment projects in Paris and Neuilly. Gecina has also emphasized its commitment to optimizing revenue from existing assets, identifying potential in approximately 13,000 square meters of office space. The company's financial outlook for 2024 remains positive, with recurring net income per share projected to grow by 5.5% to 6.5%.
Key Takeaways
- Gecina's rental income increased by 6.2% on a like-for-like basis in Q1 2024.
- Paris CBD's vacancy rates are at a historical low of 2.3%, contributing to rental performance.
- The company reported a 16% increase in rental income.
- Gecina is focusing on redevelopment projects and optimizing revenue from current assets.
- The company's guidance for 2024 indicates a recurring net income of EUR6.35 to EUR6.40 per share.
Company Outlook
- Gecina has reaffirmed its 2024 guidance, with expected recurring net income growth of 5.5% to 6.5%.
- The company is concentrating on three major redevelopment projects and optimizing existing office spaces.
Bearish Highlights
- There are no plans for share buybacks as capital is being redirected towards redevelopment projects.
Bullish Highlights
- The investment market for prime assets in Paris remains strong with decent appetite.
- Serviced office solutions are showing success in small assets with potential for future expansion.
- The reversionary potential of the Paris portfolio is estimated at 25-30%, indicating room for growth.
Misses
- The Paris City portfolio's performance was slightly below indexation due to various factors, including occupancy changes.
Q&A Highlights
- Benat Ortega discussed the stable investment market for offices in Paris, with no major changes in valuation.
- Gecina is optimizing student housing occupancy and has launched a successful young adult initiative.
- Serviced office solutions are in testing with positive results, and expansion is being considered.
- The company is managing acquisitions and disposals to improve the asset portfolio effectively.
Gecina's first-quarter performance sets a positive tone for the year, with the company leveraging the strength of the Paris real estate market. The low vacancy rates in the Paris CBD are indicative of the demand for prime real estate, which Gecina is well-positioned to capitalize on. The company's redevelopment initiatives and strategic focus on asset optimization suggest a proactive approach to growth, despite the temporary setbacks in the Paris City portfolio's indexation performance. With a clear strategy in place and no current interest in share buybacks, Gecina is poised to reinvest its capital into projects that promise to enhance its long-term value.
Full transcript - None (GECFF) Q1 2024:
Operator: Hello and welcome to the Gecina Business at March 31, 2024. Please note this call is being recorded and for the durations of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end of the call. [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. Thank you.
Benat: Hello to everyone and thank you for being with us this morning. Before we can answer your questions with Nicolas and Samuel, I would like to quickly comment on our performance and recent achievements. As you may have seen already in the press release published yesterday, our performance has been solid this quarter again, and we can confirm our initial guidance with the net current cash flow growth by 5.5% to 6.5% for the whole year. Indeed for the first quarter, the Group’s rental income is up by 6.2% like-for-like, driven first by a solid indexation that remains high with a contribution by 5.2% during this period. Have in mind that the last ILAT index for offices is up by 5.6%. On top of that, the rental market shows an outperformance by the most central sectors of Paris region. Vacancy rate in Paris is therefore historically low, 2.3% in Paris CBD, showing a further year-on-year decrease. And, the stable take up in Q1 2024 versus Q1 2023 for the entire Paris Region is driven by Paris City and Neuilly, where take-up has grown by nearly 50%. Thanks to some large transactions. In this context, Gecina again captured a robust level of rental uplift in this quarter, plus 16% on average close to 30% in Paris City. Those uplifts have a 1.2% contribution for the first quarter coming on top of the 5.2% indexation impact. Thanks to our strong balance sheet that allows us to optimize our capital allocation, we can post a 4.2% rental growth on a current basis. With the limited impact of the massive disposals completed since the start of 2023, EUR1.3 billion with an average premium of 8% versus last appraisals and a loss of rental income of 2.5% only and the positive impact of our development program. [Indiscernible] of 2024, we are already working on our growth perspective over the medium term. With a robust financial structure, 34% LTV and a surplus liquidity nearing EUR4.1 billion significantly improved in 2023, Gecina is moving forward to prepare next year. During the first quarter, we have even improved our liquidity profile with EUR0.7 billion of new bank credit lines expiring in ‘25 to ‘27 renewed with an average maturity of seven years. We are preparing also three major redevelopment projects in Paris and Neuilly to be hopefully launched over the next 12 months as we are in the building permit phase. This would increase our potential for cash flow growth obviously and will bring additional value creation potential. This project represents nearly EUR500 million of investment to be made with EUR35 million to EUR40 million net additional rents over time. Alongside this, since the end of 2023, we are improving our capacity to optimize revenues on existing assets for both residential and office properties. At this stage, the new solutions have been rolled out for almost 4,000 square meters of offices and Gecina has identified around 13,000 square meters in the short-term in offices. On the resi side around 450 apartments are currently in the scope to-date. Finally, note as well that the Group has sold in Q1 EUR44 million of assets, once again slightly above appraisal values with an average yield below 3%. Given this solid set of results, we can reiterate our guidance for 2024 with recurring net income Group share expected to reach EUR6.35 to EUR6.40 per share in 2024 ends up by 5.5% to 6.5%. Thank you. And now, Nicolas, Samuel and I are now available for the questions you may have.
Ortega: Hello to everyone and thank you for being with us this morning. Before we can answer your questions with Nicolas and Samuel, I would like to quickly comment on our performance and recent achievements. As you may have seen already in the press release published yesterday, our performance has been solid this quarter again, and we can confirm our initial guidance with the net current cash flow growth by 5.5% to 6.5% for the whole year. Indeed for the first quarter, the Group’s rental income is up by 6.2% like-for-like, driven first by a solid indexation that remains high with a contribution by 5.2% during this period. Have in mind that the last ILAT index for offices is up by 5.6%. On top of that, the rental market shows an outperformance by the most central sectors of Paris region. Vacancy rate in Paris is therefore historically low, 2.3% in Paris CBD, showing a further year-on-year decrease. And, the stable take up in Q1 2024 versus Q1 2023 for the entire Paris Region is driven by Paris City and Neuilly, where take-up has grown by nearly 50%. Thanks to some large transactions. In this context, Gecina again captured a robust level of rental uplift in this quarter, plus 16% on average close to 30% in Paris City. Those uplifts have a 1.2% contribution for the first quarter coming on top of the 5.2% indexation impact. Thanks to our strong balance sheet that allows us to optimize our capital allocation, we can post a 4.2% rental growth on a current basis. With the limited impact of the massive disposals completed since the start of 2023, EUR1.3 billion with an average premium of 8% versus last appraisals and a loss of rental income of 2.5% only and the positive impact of our development program. [Indiscernible] of 2024, we are already working on our growth perspective over the medium term. With a robust financial structure, 34% LTV and a surplus liquidity nearing EUR4.1 billion significantly improved in 2023, Gecina is moving forward to prepare next year. During the first quarter, we have even improved our liquidity profile with EUR0.7 billion of new bank credit lines expiring in ‘25 to ‘27 renewed with an average maturity of seven years. We are preparing also three major redevelopment projects in Paris and Neuilly to be hopefully launched over the next 12 months as we are in the building permit phase. This would increase our potential for cash flow growth obviously and will bring additional value creation potential. This project represents nearly EUR500 million of investment to be made with EUR35 million to EUR40 million net additional rents over time. Alongside this, since the end of 2023, we are improving our capacity to optimize revenues on existing assets for both residential and office properties. At this stage, the new solutions have been rolled out for almost 4,000 square meters of offices and Gecina has identified around 13,000 square meters in the short-term in offices. On the resi side around 450 apartments are currently in the scope to-date. Finally, note as well that the Group has sold in Q1 EUR44 million of assets, once again slightly above appraisal values with an average yield below 3%. Given this solid set of results, we can reiterate our guidance for 2024 with recurring net income Group share expected to reach EUR6.35 to EUR6.40 per share in 2024 ends up by 5.5% to 6.5%. Thank you. And now, Nicolas, Samuel and I are now available for the questions you may have.
Operator: Thank you. [Operator Instructions] We will take our first question from [Eva Ollajibak] (ph) from Invest Securities. Your line is open. Please go ahead.
Unidentified Analyst: Yes. Good morning. Sorry, it’s [Stephane Rousseau] (ph). Thank you for this presentation. I have two questions if I may. The first one regarding the new project. So, I understand that you are targeting a yield on cost between 7% to 8%. It’s quite a huge improvement compared to the 5% I have in mind for your control pipeline at the end of last year. So, maybe could you give us more color on how did you manage such increase in the yield in a context in which I do not see a decrease in construction cost? So, that’s my first question.
Benat Ortega: Yes. Thank you for the question. In fact, maybe you’ve done the calculation [35 evaluate 500] (ph). What we are referring when we call investment, it’s about asset allocation, it’s additional CapEx that we may put in the assets against the additional rents. So, that’s where you find that revenue. Obviously, the way we were communicating on our development pipeline was new rents against existing value of the asset plus CapEx. So, that’s less relevant when we talk about asset allocation. So, it’s really new cash in the assets against additional rent where you can find those additional CapEx, yes.
Unidentified Analyst: So globally, it’s about 5% compared to the same level as we could see.
Benat Ortega: Yes, probably a bit better I would say, yes.
Unidentified Analyst: Okay. Thanks. And, just one last question. If I am right, I understand that the leases having a break or experience this year represent about 25% of your rental base. So, would it be possible to give us more granularity in terms of location or the main assets that are concerned this year?
Benat Ortega: It’s about breaks and lease expiries I would say. I think there is an appendix that we presented at the end of last year. I don’t have that in mind. But I would say it’s pretty in-line with the averages of our portfolio. There is nothing really specific on that this year.
Unidentified Analyst: Okay. Thank you very much.
Operator: Thank you. Our next question comes from Florent Laroche-Joubert from Oddo BHF. Your line is open. Please go ahead.
Florent Laroche-Joubert: Hi. So, thank you for this short presentation. I would have one question more on the investment market in offices. So, what’s your view today on the appetite on the investment market in offices? And, what’s your view also on the valuation of the assets and maybe your first discussion that you can have with appraisals for the campaign of [ASH-1] 2024?
Benat Ortega: Yes. Thank you. I think we had a call one month or two months ago on our annual earnings. So, I think the market has not changed dramatically. Like I said, I think they are pretty muted outside Paris. Still decent appetite for prime assets inside the city. So, in my view no major evolution. It looks to be a bit easier, but no major evolution on my side. And on valuation, I think again, we will see, we have not started to have discussion on appraisal, so I don’t have anything to mention so far.
Florent Laroche-Joubert: Okay. And, maybe your appetite to dispose more assets in 2024, because so we can see that so you only dispose EUR44 million of assets. So, have you a big appetite to dispose this year or?
Benat Ortega: It’s same answer like some months ago. I think the beauty of our balance sheet is to remain optional. So, if we can achieve great results we’ll do. Otherwise, we’ll continue with our plan which is improving our asset portfolio and growing the company. So, nothing specific to mention. Even if we are all like always monitoring acquisition and disposals in an optimized way.
Florent Laroche-Joubert: Okay. Thank you very much.
Benat Ortega: You’re welcome.
Operator: Thank you. [Operator Instructions] We’ll take our next question from Adam Shapton from Green Street. Your line is open. Please go ahead.
Adam Shapton: Good morning, team. Thanks for taking the question. I’ve two quick ones, just on residential occupancy, you’re not splitting out student residences now, is that the gain there, just to confirm is that the seasonal student occupancy that’s driving the gains there? So, question one. And, then the other question on your serviced office solutions, you say the near-term opportunity is about 13,000 square meters. How large do you think that opportunity could be in the medium term? And, can you talk a bit about the economics or kind of premiums are you getting for this product versus conventional office once you take into account the additional costs?
Benat Ortega: Yes. Thank you for your questions, Adam. On the first one, yes, like I referred to last time, we are trying to optimize the average occupancy throughout the year on the student housing portfolio. So yes, it’s significantly driven by that. And, so far we have been that classically student housing occupancy decreased sharply starting in April, May down to July and then we are full in September. So, we have launched our young adult initiative and so far it’s paying off. So, you don’t really see that in Q1, because Q1 most of the time we are almost full, but that should drive a bit better. And, so it’s proving successful so far. So, the teams are very active on that. So, that’s first question. The second one on service stores, we are still in testing mode. So, far we have been successful on small four plates. So, the plan I was referring to over the short-term is mainly small surface that we have in our small assets in Paris. And, when looking at the expiries over the next 12, 18 months, we think that we can deploy that initiative there. And obviously, over time, we’ll assess if we can do that on larger surfaces or we keep that on small surfaces. The clientele is quite high-end on those, from hedge funds to private equity funds to small lawyer firms. So it’s pretty high-end. And we are achieving uplift compared to large trends almost by 100% sometimes. And, when we compare to EME, because we are always talking about the reversionary potential for portfolio inside Paris, against [CRE] (ph), we can be 25%, 30% in average.
Adam Shapton: And just to be clear, does that take into account the additional cost?
Benat Ortega: Yes. That’s net of all CapEx, additional operating expenses and so on. So, it’s really net-net.
Adam Shapton: Okay. Very helpful. Okay.
Benat Ortega: But so far it’s pretty small. So, that’s why I’m still prudent, my style so, I’m pretty prudent. So, so far it’s proving successful. We will enlarge that and over time reassess each time the capacities, the profoundness of the market on those type of services. But so far it’s proven successful.
Adam Shapton: Thank you.
Operator: Thank you. We will take our next questions from Veronique Meertens from Van Lanschot Kempen. Your line is open. Please go ahead.
Veronique Meertens: Good morning, all. Thank you for the presentation. Just one question from my side. Looking at the like-for-like of Paris City, it’s slightly below indexation. Is it correct that that’s mainly coming from a change in occupancy? And, do you have any view on how that’s evolving forward and then, for the next 12 months?
Benat Ortega: Maybe two elements. You know that indexation is a compound between several indexes, ILAT offices, ILC for retail and the index applicable to resi. So, you can have different indexation in our portfolio depending on how much retail represents typically. So, ILC was lower than ILAT. So, one, indexation is slightly below the average of the Group. And, the second is occupancy. We referred to that previously in the course. Typically when BCG left our Saint-Dominique asset last year to go to live, the asset was empty. We have redone basically acquisitioning and we have already, we left that asset. So, once we re-deliver the asset and it’s already related, so that should come back. So, yes, there is an impact by occupancy on Paris CBD. And as there is demand for assets, there was no upside to redo the assets completely. So, there is a small period of work.
A – Unidentified Analyst: So, it means that a part of this indexation in fact we are getting it through the uplift in rent we have between two tenants.
Benat Ortega: Yes. But it’s actually still [indiscernible]
A – Unidentified Analyst: Yes.
Veronique Meertens: Okay.
Benat Ortega: You’re welcome.
Operator: Thank you. [Operator Instructions] Our next question comes from Allison Sun from Bank of America. Your line is open. Please go ahead.
Allison Sun: Hi, morning. I wonder what do you guys think about share buyback? It looks like the implied is around 5% actually cheap. Any plan on that front? Thanks.
Benat Ortega: No, no specific plan on that. For the time being, we are focusing on redeploying capital in our redevelopment projects. Like I said, we are working hard to be capable to launch them. And, that scarcity in Paris is coming partially by the complexity to get building permits. So, we are working hard on that. And, again we have almost EUR500 million to invest. And, like I commented, a pretty decent profitability. So, that’s our first and major task these days.
Allison Sun: Okay. Thanks.
Benat Ortega: Welcome.
Operator: Thank you. It appears there are no further questions. So, I will hand back to you Mr. Ortega, for any additional or closing remarks. Please go ahead.
Benat Ortega: Thank you all for listening. Thank you for your questions and see you soon. Bye-bye.
Operator: This concludes today’s call. Thank you for your participation. You may now disconnect.
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