Earnings Transcript for LI.PA - Q1 Fiscal Year 2024

Operator: Hello and welcome to Klépierre's First Half 2024 Earnings Presentation, hosted by Jean-Marc Jestin, CEO; and Stephane Tortajada, CFO. My name is George. I'll be your coordinator for today's event. Please note this conference is being recorded. And for the duration of the call, you lines will be listen-only. [Operator Instructions] I would like to hand the call over to your host today, Mr. Jean-Marc Jestin, to begin today's conference. Please go ahead, sir.

A - Jean-Marc Jestin: So good morning, everyone. I'm very happy to welcome you today from Milan together with Stephane, to present Klépierre's 2024 first half earnings. We are delivering another strong set of results which evidenced the continued growth and expansion for the company and its retail partners over recent years. First, let me highlight that, contrary to common belief, we are evolving in a supportive macroeconomic environment. Private consumption, a good proxy of shoppers' behavior, is increasing in Europe. Unemployment rate is historically low. And the labor market is very dynamic, as evidenced by current robust wage growth. All those KPIs show that our business underpinnings are healthy. To tackle retail transformation, Klépierre has developed a unique positioning with 70 irreplaceable premium malls throughout Continental Europe. They attract more than 700 million visitors annually and generate more than EUR12 billion of retailer sales every year. We constantly adapt our retail mix and invest in our assets to match customer demand and offer leading national and international banners, the profitable stores they seek in the highly selective expansion plans. And in that context, Klépierre is geared toward growth. First, our unrivaled platform of prime malls, the positive macro backdrop I just mentioned and our unique know-how in terms of asset and leasing management lead us to deliver solid organic growth year after year. Secondly, backed by our sector-leading balance sheet, we are able to seize highly accretive acquisition opportunities, while still enlarging our dominant assets to generate external growth. This is our DNA and our plan for the future. This being said, let us review our first half results in a bit more detail. Our venues have continued to gain market shares and attract more and more visitors, with footfall up 2% in H1 and even 11.5% since June 2022. Similarly retailer sales strongly increased by 3.9% in H1, more than doubling national indices. These directly translated into lower OCR, down 20 basis points at 12.6%, creating further rental uplift potential medium term. Our highly attractive destination malls crystallize high lease intention over the period, supporting all our operating KPIs. We signed close to 900 leases, 11% more than in H1 2023. And generated 3% positive rental uplift on renewals and re-leasing. Meanwhile, we continue to curate our tenant mix to offer outperformance and profitability to banners and meet consumers' expectation. We welcome and upsize stores of leading omnichannel retailers like Zara, Calzedonia, Mango and many others. And push up dynamic segments, including health and beauty or sports with deals with Normal, Rituals, JD Sports and Adidas, among others. More concretely, we support leading retailers' expansion through leasing and asset management initiatives to enable them opening their flagship in the right places at the right format and in due times. As such, at La Gavia, we welcome Lefties, the last born of the Inditex Galaxy. And enlarged New Yorker after the rightsizing of the electronic store. At Campania, we enlarged a Zara store to 6,000 square meter, ranking among the best performing worldwide in terms of sales. At Nave de Vero we opened a brand-new Primark mega store. Finally, at Arcades and Val d'Europe, we brought the sports and leisure offer to the upper level with the openings and enlargement of JD Sport, Adidas or Foot Locker; and the remarkable unveiling of La Tete dans les Nuages and, more importantly, Otium Leisure in Val d'Europe over more than 13,000 square meter. Today, we’re the preferred platform for expanding omnichannel retailers. All leading brands are significantly increasing their footprint in our malls. They are investing in Klépierre's destinations for a simple reason. They have access to 700 million of visits at affordable cost with high sales conversion rate, ensuring them profitability. Consequently, growing retailers continue to ask for more and larger stores. Let us take a few examples. JD and New Yorker have respectively increased by 55% and 73%, the total area they occupy in our malls since 2019. And same goes for Rituals, 160% up; Normal, 231% up; Primark, 99% up. While Inditex increased its footprint by 12%. Now let us review our top line performance into more details. In a year of lower indexation, Klépierre has once again delivered a remarkable 320 basis points net rental income outperformance on top of indexation, resulting in a 6% like-for-like increase over the first half of 2024 and probably the most solid performance among its retail peers in Europe. This best-in-class achievement is a testimony to our ability to unlock embedded value through multiple performance drivers. Number one, the high lease intention translated into an optimized occupancy at 96.2%, up 50 basis points over one year. While collection rate increased by 120 basis points at 97.7%. We also benefited from the full effect of 2023 positive rental uplift. Number two, our 700 million annual footfall enable us to generate sizable additional revenues that rose by 8% on a like-for-like basis, driven by mall income, media revenues, turnover rents and car parks revenues. Additionally, we run a very cost-efficient platform, which enabled us to deliver a 5.4% growth in EBITDA, which mean a further improvement in EBITDA margin by 60 basis points. This increase is definitively an outperformance when we compare it to our 4% EBITDA growth announced in our initial plan in February. Our second engine for expansion is our capital allocation policy fueled by our sector-leading balance sheet and growing cash flow generation. It enable us to invest in external growth opportunities and create shareholder value, and we have a very strong track record. Our latest acquisition of Plenilunio, Oslo City and Nueva Condomina have delivered respectively a 37%, 34% and 73% increase in valuation since acquisition. And this year, we are happy to have been able to acquire RomaEst and O'Parinor, 2 prime malls of 100,000 square meter in capital cities in our two largest core markets at very attractive terms. With more than 10 million footfall, they rank among the most visited shopping centers in their respective geography and showcase a complete and up-to-date retailer mix with high sales per square meters. And thanks to clearly identified asset management and leasing initiative, we will generate a double-digit cash return on those two investments. We also continuously upgrade and enlarge our leading asset, which are crystallizing high leasing tension. At Klépierre, we do believe in a very disciplined approach to development, no greenfield but only extensions, ensuring a controlled level of risk and high returns for our shareholders. In the development field, we also have a solid track record with four main extensions completed over the last five years for a total amount of EUR500 million and a return on investment above 8%. All projects have been delivered on time, on budget and I can tell you with no cost overruns. Those projects are all great successes with significant increases in footfall and retailer sales and our market share is growing. This year, the highlight for development is the unveiling in July of the 5,200 square meter extension of Maremagnum in Barcelona to welcome some of the most dynamic international retail banner like JD, Bershka, Pull & Bear or Stradivarius along with a fantastic Time Out Market on the rooftop, marking the finalization of the reshaping of this leading mall, in Barcelona. The yield on cost is 13.5% and the total numbers of visitors in the mall already jumped by 10% since opening. In the same vein, we launched a 18,500 square meter extension at Odysseum in Montpellier. It is the leading mall in Montpellier and we want to further strengthen its leadership in its catchment area. With already more than 12 million visitors per year, it will host 22 new banners including a Primark mega store, as well as a new restaurant offering. Delivery is planned for 2025 for a total investment of EUR56 million and a yield on cost at 9%. As a direct result of our positioning and actions, we have been able to deliver a 3.3% growth in net current cash flow per share, standing at EUR1.25 in H1 2024. Between H1 2022 and H1 2024, the net current cash flow CAGR is 5.2%. Based on these strong results, we are confident in our ability to deliver further growth and raise our 2024 guidance. We now expect to generate a 5% increase in EBITDA instead of 4%, and net current cash flow to reach EUR2.50 to EUR2.55 per share in 2024. Now turning to balance sheet. Our solid track record in cash flow growth has been driving property values up for the first time in five years. We’re turning the corner with a 2% like-for-like increase over six months, encompassing a 2.5% positive cash flow effect more than offsetting a slightly negative market effect. In the meantime the average EPRA net initial yield of the portfolio remained stable at 5.9%. And as a result our EPRA net tangible assets per share grew 4.3% at EUR31.4 per share. Going forward, incremental support in valuation should come from a positive market effect, with recent interest rate cuts and others to come. Discount and exit rates currently reaching all-time high levels should normalize. Over the period, the robustness of our balance sheet has also been acknowledged by our rating agencies. Concurrently to RomaEst's acquisition, S&P reaffirmed its BBB+ rating and upgraded Klépierre's outlook from stable to positive. Fitch also confirm its A- senior unsecured rating with a stable outlook. We continued to operate with sector-leading credit metrics and we further improved them over the first half. Our net debt-to-EBITDA reached a historic low at 7.3 times, while our loan-to-value ratio decreased to reach 37.6%, down 40 basis points over six months. These key advantages provide the group with the flexibility to provide -- to continue to invest in profitable external growth opportunities at right time points in the cycles. To wrap up this presentation, I would like to emphasize that we have the right positioning and strategy to deliver long-term growth and generate value. We create preferred destination for shoppers and retailers with active leasing and asset management actions. We constantly enhance our portfolio through accretive acquisition and targeting developments. Our strict financial discipline to serve our shareholders with regularly growing cash dividends leave us room for external projects. With a long-term view we also continue to progress in CSR to build the most sustainable platform for commerce. So I’ll end my remark on this and open the floors to the questions. Thank you very much for your attention.

Operator: Thank you sir. [Operator Instructions]

Stephane Tortajada: Yes. We have a first question on the webcast, so -- and the chat, from [Broker] (ph). Can you give us more color on assets disposed this year? And are you planning to do more?

Jean-Marc Jestin: So thank you very much for the question. So we have done -- so just maybe to anticipate the next question. The investment market is still very quiet, but we -- in that environment, we have still been able to dispose some assets. So we have as we speak, sold a bit more than EUR100 million at quite a good condition. So it is 14% above book value and it is at an average 5.5% net initial yield. So for certain assets, as we said in the past, when they are good assets, small size, we do find quite an appetite for them at book value or even higher and decent net initial yield. So we are still working on some disposals. You know that we have no disposal target. We do that to curate our portfolio and to prune it over time and to -- so when we look into perspective, we have sold EUR106 million and invested EUR240 million. And the gap between the yield is just very accretive for us.

Stephane Tortajada: Okay. Another question [Peternos] (ph). You closed a couple of acquisition year-to-date. How will you describe your investment pipeline going forward? And is there any geography we're interest in?

Jean-Marc Jestin: I will say that first of all, we’re -- our core market -- we only look at potential opportunities in our core markets. So basically our core markets are France, Italy, Iberia and Scandinavia, I’ll say. So we will always look only in geographies where our platform is strong, where we can really accompany the retailers to grow. So that's number one. So Eurozone mainly and in those core markets.

Stephane Tortajada: Okay, next one for [Pierre] (ph). What would your incremental firepower to make additional acquisitions? I can take this one. So basically we are obviously very much looking at our investment-grade rating and are very careful about keeping a very high investment-grade rating. In the last note published by S&P in May, they do see EUR700 million of investment capacity between 2024 and 2025, so we think it's a good assumption to look at our firepower for the next 18 months, I will say. Okay, yes, we can go to the phone now. We have some questions over the phone.

Operator: Yes. Thank you very much sir. Our very first question from the telephone audience is from Pierre Clouard calling from Jefferies. Please go ahead. Your line is open.

Pierre Clouard: Thank you. Good morning. So I have two questions on my side. Maybe, on the operational side, where do you see landing your rental uplift and occupancy in 2024 will be my first one. And the second one is the guidance. Can you remind us, what is the level of disposals and acquisitions that are accounted in the guidance today? And if you are doing more acquisitions, is it a chance to see another rise of the guidance?

Jean-Marc Jestin: Okay, thank you Pierre. So you know we are against itemizing the guidance line by line, but as you have seen last year for 2024, we decided to provide a guidance at the EBITDA level. So I think you can easily derive from what we have done in H1 what could be the full year numbers. I think what is important is that due to disposal, we have a 4.9% NRI growth on a non-like-for-like basis. And EBITDA has grown even further at 5.4%. So -- and on a like-for-like basis, NRI was 6% up. We are increasing our guidance based on the current performance of the company on H1. So the -- regarding disposals, I think we always put a bit of disposal in our budget. We never put any acquisition. So we are fully in-line with what we had incorporated in our guidance, very in-line but we do it sooner than expected, so -- and we will probably do a bit more, but this will not be extremely material.

Pierre Clouard: And on the rental uplift and the occupancy, any chance to see those metrics improving by the end of the year?

Jean-Marc Jestin: All right. I think if we look at occupancy and we itemize a bit, we are at -- in many countries, we are at level which are very close or even equal to pre-COVID levels. There are some markets where we are still a bit suboptimal due to -- mainly to bankruptcies at -- over the last 18 months. So I think that, where we can probably still continue to improve occupancy, it is in France and a bit in Spain, I’ll say.

Pierre Clouard : Okay. Thank you very much.

Operator: Thank you Mr. Pierre Clouard. We'll now move to Florent Laroche-Joubert of ODDO BHF. Please go ahead.

Florent Laroche-Joubert: Good morning Jean-Marc, good morning Stephane. So thank you for this presentation. I would have two questions on my side. Maybe could you please give us more colors on the improvement of your -- from where comes the improvement of your EBITDA margin? And is there any sort of room to improve it in the next 18 months? And maybe also another question. So on the -- we have seen that you have improved your incremental revenues, so including variable revenues, by plus 8%, if I'm correct. So is there any further rooms also to improve for these revenues?

Jean-Marc Jestin: To the first one. I will jump on the number two. So incremental -- I was not connected.

Stephane Tortajada: Yes.

Jean-Marc Jestin: Okay. So thank you, Florent --.

Florent Laroche-Joubert: Yes, I can hear you.

Jean-Marc Jestin: So I will answer to the second question before Stephane answer to the first one. So for the incremental revenues, I think, over the last -- we have seen that -- over the last couple of years, this has been a way for us to grow revenues. And so it is a combination of retail media, specialty leasing, mall income, car parks also turnover rents. Due to the high performance, we are negotiating leases not pure variable leases. But we are increasing the level of sales-based rent percentage in our leases. So we see this as a way to continue increasing over the next probably 2 years, 3 years, 5 years. So I think we are not at the maximum of where we should be, so I'm very positive about this source of revenues. And I think we will deliver great performance going forward.

Stephane Tortajada: Yes. On the second part, which is the improvement in the EBITDA margin. So basically our NRI is growing at 5%. And we have very tight cost control, and it does mean that our costs are quite stable over the period, and we expect more or less the same for the rest of the year. So the improvement in the EBITDA – the amount you see in H1 should be more or less the same for the full year, because we expect to be in the same Zip code in terms of EBITDA increase. Because we have given a guidance at 5%. So you should take this assumption for H1 for the full year. I think it is a reasonable assumption.

Jean-Marc Jestin: Well, I think it's quite a remarkable achievement that we can grow revenues. And we -- and our cost, salaries mainly, salaries -- and they are not increasing in a context where you have inflation and wage growth, so that is a very cost-efficient organization, I may say.

Stephane Tortajada: Okay. Thank you very much. I have a question on the chat from Pranava from Barclays. Thanks for the presentation. I understand you have prefunded your November '24 bond with a bond earlier this year. We look at the Bond issue opportunities in H2 for CapEx need of 2025 debt. So we have issued EUR600 million in Feb '24. We have a bond redemption of [EUR560 million] (ph) in November '24. And in 2025, we have very low redemption level around [EUR250 million] (ph), so basically we don't have urgent financing need. Nevertheless, as mentioned by Jean-Marc, we are looking at potential other opportunities. And if we find attractive targets, of course we will be happy to come back to the bond market to finance, but it is a bit early to take this decision, obviously. Okay. Yes?

Operator: We still have a couple of calls in the queue. Would you like to take the next question of the gentlemen?

Stephane Tortajada: Yes, sure.

Operator: Okay, thank you very much. We will now move to Rob Jones of BNP Paribas. Please go ahead. Your line is open.

Robert Jones: Great. Thank you very much. So just following on from Pierre-Emmanuel's questions regarding some of those components of your like-for-like growth. Obviously you touched on the rental uplift and the occupancy, but I just wanted to touch on the third one, which is the collection rates improved, up 120 bps almost 98%. I wonder how that compares to a, pre-pandemic levels, and where you could push that collection rate to. Can we get to north of 99%? And does that drive further like-for-like upside in the reporting periods to come? And then my second and final question was around asset values. You've got a slide in your presentation, on Slide 23, where you talk about the next incremental tailwinds coming from market effects and basically highlighting that discount rates are at all-time highs. Rates -- ECB rates are coming down. And ultimately you are, it looks to me, like pointing to an expectation that discount rates come down and ultimately we see a bit of inward yield shift, albeit not necessarily in H2. I wonder if you can just touch on that kind of capital value outlook point as well. Thanks.

Jean-Marc Jestin: Okay, Rob, and thank you for the two question. At this time, I'll take the first one and Stephane will take the second one. So on the collection rate, that is a good question. I think what has been driving us is that, post-COVID, we had quite a -- not important but quite a non-negligible number of bankruptcies. And we have spent enough time to curate our tenant mix and to change difficult tenants by new tenants. So this has a direct impact on occupancy and -- but also on rent collection, which is improving due to the -- I will say, the credit of the new tenants. So when we look, we are still a bit suboptimal compared to the good old times, I will say. We were ranging between 98.6% to 98.9%, okay? So I think the reasonable and -- rent collection should be -- the target should be around 98-point-something. That's -- so marginally we can improve it. So I think, the [two] (ph) suboptimal level where we are, even though it has improved dramatically, it is a bit of occupancy in the geography I mentioned and a bit of rent collection. And it's, as you can imagine, a bit in the same geographies. In some of the countries, we are already at 99.5% rent collection. So it is on specific markets, we are curating the mix. That takes a bit of time, but it's improving.

Stephane Tortajada: Yes. On the second part, basically if you look at our valuation in H1, it's plus 2.5% on cash flow, minus 0.5% in market effect because these contracts slightly increased. But basically the expert made the job based on 10-year swap rate taken like in April, May, which were quite high, to be honest, it was 2.8%, 2.85%. Our view is obviously -- and I don't have a crystal ball, is that this long-term and short-term rate in Europe should normalize. And it may happen in H2, it may happen next year. But we do not see any reason is -- normalization of long-term rates that we do not have a positive market effect coming. So we -- obviously we do not give any kind of guidance because it is the expert job, but we think this is the direction of travel.

Jean-Marc Jestin: Yes. And maybe if I may add. I think, as we said, we are turning the corner. And I think there is still some room for improvement in terms of valuation as Stephane said on the discount rate, definitively, and also on the ERV assumption for appraisers. Because we still have -- we are still doing better in terms of leasing that -- what the appraiser are taking as ERVs. So we -- if I take Italy, I think the CAGR for the appraiser is 2.3% over the next 10 years, where the like-for-like net rental income is exceeding 7%. So I think the -- we have a double effect. They are more conservative not everywhere but more conservative on ERVs than what the leasing transaction shows. And on discount rate, we are at a very high level. And this should probably normalize. But -- so I wanted just to add -- also add that on the ERVs.

Robert Jones : Thank you very much.

Jean-Marc Jestin : We have other question on the phone.

Operator: Yes, sir. Let’s introduce the next caller. And the next one that we have is going to be Céline Soo-Huynh of Barclays. Please go ahead Celine.

Celine Soo-Huynh: I've got two questions, please. The first one is on valuation. How do you think the valuers are looking at the higher-yielding assets you acquired year-to-date compared to the valuation of your own portfolio? That would be the first one. And the second one is on your acquisition strategy. Have you thought about acquiring listed companies since the trailer launched discount to NAV and higher implied cap rates than yours? You had made a bid in the past for a listed U.K. REIT. So wondering if that could be something back on the table. Thank you.

Jean-Marc Jestin: Okay, thank you, Céline. So first of all, as -- I will say as a caveat. We worked out, prior to COVID to have the right balance sheet to go through the cycles. And maybe we are the only one who has been able to go through the cycles without disappointing their shareholders. And so it is true. Also it is fair to say that today we have more than -- capacity than anyone to look at external growth, but we’ll only do it if it’s adding value to the portfolio. And if it is accretive to our shareholders. So we will be extremely selective. And we’re not a forced buyer, so we will do or we won't do, but we just said that we have the flexibility to seize opportunities. And we are happy to have done two very good deals at attractive conditions. So when it comes to valuation okay, I think without making a debate on the methodology, I think it's -- the way the valuers are doing valuation, okay, it is based on the standard that you can -- we can all bid again, okay? So valuation, it is the value between a willing buyer and a willing seller. And so if you go to the RICS definition of what a willing seller is, it's neither an over-eager nor a forced seller prepared to sell at any price, okay? And a willing buyer is someone who is motivated but not compelled to buy. So I think, when they look at the transactions we have done, we are probably in the exceptions to the rule. So I don't know if they were a forced seller prepared to sell at any price or wanted to exit. So I think it is like in any market. So we can do good deals or we can do bad deals. So valuations are between a willing and -- seller and a willing buyer under certain condition. And so we -- those transactions has simply no impact on valuation. On M&A, we never commented on that, and we will never. We have nothing on the radar and we prefer to stay put. And we will only look at opportunities on a single basis.

Celine Soo-Huynh: Can I follow up on that? How much do you think there is distress from the market in terms of million of euros?

Jean-Marc Jestin: I have -- I was tempted to say I have no clue. But you can imagine that we are monitoring the market. So I can't answer to that question, okay? I think it is an interesting time. So the REIT, okay, they have to be prepared to go through the cycles. That is what our shareholders want, okay? When the cycles are up, we don't buy. When they are down okay, we have questions about valuation, but that's where you have opportunities, so we will seize opportunities if they come as I said, very selective. And we have no specific objective to do before the end of the year, but we are quite active in monitoring some specific situation which are interesting.

Celine Soo-Huynh : Thank you.

Jean-Marc Jestin : Thank you.

Operator: Thank you very much for our question. Mr. Jestin, as we have no further questions at this time, sir, I'd like to turn the call back over to you for any additional or closing remarks. Thank you.

Stephane Tortajada: We have other question coming to the chat. So [indiscernible]. Could you give us more colors in terms of ERV change in appraiser assumption? And is the rationale only based on improved OCR? Or is there other factors?

Jean-Marc Jestin: Well, I think it is a mix of different elements. I think the ERV is always a judgment based on OCRs. It's also -- it's difficult for -- to predict ERVs when you are not really able to predict what could be the -- how you curate the mix, how you change the mix. So that's where probably the appraisers are a bit lagging behind because we have I think, better know-how of what type of brands we can bring in our malls. What type of sales they can do. So how we can -- with higher sales, getting higher rents. So I think, the ERV discussion, it's sometimes a bit more static with the appraisers based on current OCR, but they don't really – it is difficult for them to factor in the asset and leasing management initiatives we may have. But definitely it is based on OCR. So what is, I think noticeable is that we’re delivering higher like-for-like growth than the CAGR that they’re taking into account, not in all the countries but in some countries. So it asks the question that are they a bit more conservative than reality. That's what I wanted to say, but they are independent and they do the job as they think they should.

Stephane Tortajada: Okay, do we have other question on the phone, maybe?

Operator: We do not appear to have any further questions, sir.

Stephane Tortajada: Okay.

Jean-Marc Jestin: Okay. So thank you very much to all of you for attending this call. And once more I wanted to reiterate we are very happy with the strong operating performance, which drive to valuation increase and a guidance upgrade. And see you soon. Have a good day.

Stephane Tortajada: Thank you.

Operator: Thank you very much. That will conclude today's conference. Thank you very much of your attendance. You may now disconnect. We wish you a good day, and goodbye.