Gecina S.A.

Hi, everyone. Thank you for attending today, this meeting, either in person at Gecina quarters or using the webcast for this H1 2022 earnings presentation.

I'm very pleased to talk to you as Gecina's CEO. As you know, I've joined Gecina 3 months ago, following the AGM.

Since then, those first months have been extremely active, asking a lot to our teams, meeting all our people, visiting all our assets, our clients, our partners, our banks and starting now with our shareholders, but also trying to deliver the best results for our company. Since I joined the group, I've gone through a full process of asset reviews, asset by asset, project by project, to investigate every single business opportunity to enhance the group performance and in turn, we were not missing opportunities to improve our path to cash flow growth starting from today.

What I can say at this stage is that I have been impressed by the quality and the engagement of the teams and the deep knowledge of our portfolio. Having said that, I can share with you my conviction that the DNA of Gecina is the relevant setup to perform in the current context and for the years ahead and grow the cash flow.

Centrality and scarcity is obviously -- are obviously key assets for Gecina's current and future performance because we have the conviction that leasing market is set to remain polarized over the long term. Gecina, being an emblematic leader on CSR criteria, is also a massive strength when looking ahead.

As you all know, soberness, carbon issues, biodiversity and well-being have become already a key criteria when corporates are seeking for their new headquarters. Here again, Gecina's leadership is at the right place.

The pipeline is also something quite unique, not so much because of its size, but because of its quality, given the location where our projects are. To my knowledge, I see no other players having such a pipeline in such prime locations.

Here again, Gecina is at the right place. Right place, also, right time as well considering the balance sheet, in the current context of increase in interest rates, with an excess liquidity covering all our bond refinancing needs until '27, combined with a strong hedging profile.

Let's move now to this H1 earning publications, which is a clear illustration of how these trends are actually driving Gecina performance. Year-to-date, our activity has been particularly strong and benefiting from supporting market trends, mostly in areas where Gecina is active.

More than 57,000 square meters have been let, relet or renewed, bringing an average positive reversion of 13% and an improved occupancy. As a result, gross rents are up by 3% in H1.

So our recurring net result is driven up, plus 4.3%, excluding the impact of disposals occurred in 2021 and a one-off effect. On the valuation side, figures moved upwards as well, plus 1.3% like-for-like, mainly driven by rental growth.

NTA is thus up plus 2.8% since end 2021. And those solid achievements in H1, beating our initial expectations on operational matters, drove us to raise our guidance 2022 to EUR 5.55 per share, up plus 4.3%.

All the current context is calling for caution. Let's move now to a quick dive in our office and resi markets.

Office rental markets have been particularly well rented this half year again, revealing a strong polarization and stronger than expected. The recovery of the take-up is an evidence since Q2 2021, and this respond has been even higher in Paris City.

Immediate supply felt in the heart of Paris by 14%, while increasing slightly in average for the whole region. Polarization is clearly there, with vacancy in Paris at 2.8% and Northern [ Reims ] now at more than 18% in vacancy, up 26%.

Favorable trends for us that largely serve Gecina business as considering its portfolio is highly concentrated in the most central locations in the Paris region. 84% of our portfolio is located in Paris, Neuilly or Boulogne, and those submarkets are clearly ticking the box of centrality and scarcity.

We have been leading those leasing markets with new leases that these past weeks broke prime records in the best markets in Paris CBD and Neuilly. In May, Gecina signed with a pharmaceutical group a 9-year firm lease on its freshly delivered asset in Neuilly, the 157 Charles de Gaulle, on 8,000 square meters at more than EUR 650 per square meter.

And a few days ago, we just signed a lease with a luxury brand in Paris CBD, a 10-year firm lease on the old 67 Lisbonne in the CBD, almost 8,000 square meters with no vacancy, no CapEx and a 20% uplift. Other discussions are ongoing, and we will try to exceed the EUR 950 threshold.

Because of the quality of its portfolio, the size of its portfolio, and the deep knowledge and the energy of our teams, we are capable to set new benchmarks in the area where we operate, like I said, in Paris CBD, but also in Neuilly. Iconic transactions, obviously, but also significant deal flow since Gecina signed more than 57,000 square meters in H1.

Through this transaction, again, 13% uplift in rents through renewals and relettings, an increase in average occupancy rate by 110 basis points, and an increase in pre-letting since operation delivered in '22 and '23 are now pre-let at 85% against 67% at end of '21. As a reminder, half of the transaction achieved by Gecina in 2020 and 2021 were outside the central areas.

In the Defense, for example, on Peri Défense, leaving us in a favorable situation, with 91% of current vacant premises and our pipeline ahead are located in Paris near Boulogne. Calculating the theoretical time frame to clear vacuum stock on each of those subsectors shows how much the market can be polarized in favor of where we have currently leasing challenges.

Now moving to our resi business. This H1 results show how predictable is our occupancy rate but shows also that we can deliver significant rental growth, in average, 8% during H1, on top of indexation through the reversionary potential of our assets.

And same as in our office business, scarcity and centrality are key drivers for that growth. Our resi portfolio is unique in Paris and adjacent cities, same as our student housing portfolio located in the key student cities in France.

On student housing, we can confirm in H1 that occupancy rate is progressively returning to its pre-COVID levels. We do expect occupancy rate in September to be above 97%.

Additionally, like in offices or resi, our pricing power is strong since this good occupancy plan in September, above 97%, will be achieved in a context where we have grown our prices by 16% since the pandemic started. These favorable trends and strong operating achievements in H1 have started to benefit our financial performance over the first half, with a positive contribution of occupancy rates and also reversionary potential.

The combination of favorable drivers brought a significant performance in Gecina's like-for-like portfolio rental growth up to, for example, 2.7% in offices. We'll go through the main drivers of that growth in the following slides: vacancy reduction, reversion and indexation.

Occupancy rate, as I said, is the strongest driver of our like-for-like growth this first half. Already in H1, average financial occupancy grew by 110 basis points, driven by offices and student housing.

But note that we are referring to our average financial occupancy that impacts H1 at 92.3%. But our spot occupancy rate at the end of June is 93.1%, so 80 basis points above that level, and will feed our like-for-like growth in H2 again and '23 obviously.

And we don't include there, the prelettings. As we said earlier, average reversion is pretty high at 13%, but has a limited impact on H1 on a pro rata basis, obviously.

Strong performance also in Paris. Same on reversion, 8%, on our resi portfolio, but we have also, during that period, improved our internal processes, thanks to digital, our renovation program, but also management intensity.

Those efforts are clearly paying off, with the growth of our reversion month-after-month this semester. And the third driver is obviously indexation.

As you can see, there is a lag effect between the day inflation that we have all in mind in France and what finally drives our rents up. In H1, contribution from indexation to like-for-like is only 0.9%, while the last index for ILAT, the one applied for offices, was published at 5.1% recently.

That should drive further indexation impacts in the months to come. On top of these 3 drivers of like-for-like growth, the good news is H1 is that pipeline is also contributing to our rental growth and consequently to our FFO.

As you will see, this pillar is expected to increasingly feed the net recurring cash flow soon. Recurring net result is up by 3.9% in H1, if we exclude the impact of the disposals achieved in 2021 and a one-off effect.

Recurring net income benefited from the positive organic performance, as just detailed, EUR 8 million, the net positive contribution from the pipeline we've talked about, EUR 2.4 million, and a stable cost of debt in H1 at 1.2% in average. Let's move up to the capital return of our performance in H1, which is crucial for REIT, obviously.

This is, I believe, necessary to point out the fact that the macroeconomic environment has changed rapidly this past few months and weeks, with a new paradigm now emerging. We may have left to work without -- a world without interest rate and no inflation, recently the risk premium compared to the prime property yields to French sovereign bonds, yields that we usually comment, has adjusted significantly in the last weeks.

What we felt interesting in this potential new paradigm to note that, comparing prime property yields in Paris to French sovereign bonds indexed, we see that the risk premium remained stable at a relatively high level, around 390 basis points. The increase in interest rates being offset by the increase in inflation forecasts.

And I hope that we have shown in the past and during this H1 that our pricing power in our 3 markets, 3 pillars, 3 activities is relevant towards inflation. And in this context, investment volumes in offices are up by 52% in Paris in H1.

As an illustration of this, investment markets have remained dynamic in the most central areas, with recent strikes seen in H1 until late H1 at prime values significantly higher than our valuation at end June 2022. And I'm even not talking about implicit values at our current stock price.

On a like-for-like portfolio, appraisal values are, at end of June 2022, up by 1.3%, largely driven by our rental achievements and roughly stable yields. But on top of our like-for-like evolution, NTA, NAV had been positively driven by the pipeline value creation gains.

EUR 171 million in 6 months have been achieved on our pipeline of offices, largely driven by the new lettings, better than expected on our key assets. On Boétie, for example, Paris CBD, to Eight Advisory Group, or namely, on the 157 Charles de Gaulle in Neuilly.

But not only offices are driving our NTA up on the pipeline, but also our resi perimeter, with the net contribution these past 6 months, very solid, at plus EUR 34 million net capital gain booked in -- from our valuation. And this is clearly coming from operations, 2 assets in our portfolio, Ville d'Avray that we started leasing recently and will be delivered in Q1 2023, but also from a building we own in Paris, Building [indiscernible] to be transformed from a former office assets into residential, with an increase in size, increase in square meters because we transform offices into resi.

And this half, we have obtained all the legal requirements to launch this project. As a consequence, NTA net asset value adjusted from the dividend payments, is up by 4.3% in 6 months, also including a positive contribution from asset disposals in H1, because we have sold assets at 8% premium over the last appraisal value.

I'm referring to the disposals of building being in La Defense, which has been sold in H1, and 2 other small assets in Paris. On the ESG side, you are surely aware of our clear ambition regarding carbon neutrality by 2030.

But the news flow these past months clearly show how increasingly important soberness day-to-day. This challenge has been underlined recently by Emmanuel Macron a few days ago and the European Commission obviously.

We at Gecina want to be clear, we want to be a short-term contributor for energy soberness. And consequently, we have been a full team to engage our company, our suppliers and our clients on that matter.

But we will have more time to share my views on this topic of ESG later this year. We have identified at least 30 assets where, without CapEx, we can optimize the current situation.

Now moving to the balance sheet. Our A3 rating has been recently confirmed by Moody's, July 1, at the highest scored for the sector.

Our LTV has been further decreasing by 150 basis points over these past 12 months, mostly thanks to the disposals done in 2021 and being recently. Additionally, I wanted to mention today that our liquidity position and bond maturity schedule is particularly strong.

In January 2022, so before I came, Gecina issued an opportunistic new EUR 500 million new bond, right before interest rates started to rise, with a 0.875% coupon, with an 11-year maturity, to maintain the excess liquidity of more than EUR 1 billion. And that allows us to face all refinancing bonds needs until 2027 at stable rate.

We are in a situation where we can select where and when we want to go on the market in the next years. That's a favorable situation, I do think.

And we also have a conservative approach on hedging. Let me share with you a few words on Gecina hedging policy that will drive potential change of cost of debt at constant level of debt.

Short term, 90% of our financial expenses are hedged at excellent conditions for the years 2022 up to 2024. On top of that short-term protection, almost half of our bonds in volumes will mature after 2030.

This is due to the fact that we have decided to issue bonds since 2020, with an average maturity of 13 years, with obviously a higher cost in short term. But that was decided to offer us a unique protection for the future.

And we think that's quite unique in our industry. Since we talk about -- a bit about the future, let's go through our pipeline.

As I said, excellent leasing on that asset, 157 Charles De Gaulle, in H1, driving, obviously, capital gain. Another key assets is delivered in CBD.

l1ve projects have -- Grande Armée in Paris. I don't want to be too long today.

I guess you have been talking about that quite long. I won't take the time to comment the asset, but it's a brilliant example of Gecina's capacity and know-how to transform obsolete assets into best-in-class ones.

Services, CSR, architecture, design, and excellent leasing is at stake with l1ve. This asset will continue and we start -- sorry, will start to contribute to our cash flow in H2 this year.

And we are launching a new project in the 300 of Paris, 32 Marbeuf, 13,000 square meters assets that we plan to redevelop in order to bring more square meters, more value per square meters, but also 2,000 square meters of gardens, terraces and rooftops. This project will have all the relevant CSR certification, obviously, including biodiversity.

32 Marbeuf will be delivered in '25. And we target an uplift versus current brands, and they could be above 60% than the previous rents.

Important to note that this committed pipeline is secured in terms of costs and should generate more than EUR 90 million of annual rents in the years to come, with less than EUR 600 million to be spent from now on. And leasing is very much advanced, as you can see, 85% for the next years and 50% as a whole.

To conclude this presentation, we can summarize this H1 by saying that operating performance is there and has beaten Gecina's expectation in H1 in all KPIs: occupancy, pipeline leasing, stronger reversionary, potential capture, et cetera. Second, markets where Gecina operates have shown stronger dynamic than expected.

It have been moving up towards quicker than expected in the most central locations. Inflation in this indexation came above forecast as well.

In the meantime, uncertainty increase on the debt markets, thus calling us for caution. And in this context, calling for caution and despite an interest rate increase since the last months, we are raising Gecina's 2022 guidance to 5.55%.

We are, Nicolas, Samuel and I now happy to answer your questions that you may have. Thank you.

I would have 3 questions. So the first one, maybe on the indexation.

So we can see that we could expect an indexation in the coming year of plus 5% in your offices. How are you comfortable to invoice this indexation to your tenants?

And how can we compare it to your reversion potential? Maybe so on the cost of -- second question, on the cost of debt.

So we understand that you're hedged at 90% for the 2 or 3 coming years. And today, your cost of debt is at 1.2%.

What can we take in our model for 2023, 2024? For example, so I don't know show -- any color to give us for that.

And the third question, we can see that your LTV is quite low today, below 32%. How do you want to allocate your capital in the coming months?

Thank you for those questions. The first one is indexation.

How comfortable are we? I think we have a favorable situation.

We have an excellent quality of clients, with strong credit. The leasing markets are supportive, and our contracts are fully indexed.

So I think the indexation topic will obviously fuel our cash flow growth. Maybe on cost of debt, I think the 4 outcomes are pretty easy to get on Bloomberg.

90% hedging for Gecina for those 3 years, a combination between swaps and caps. The rest is on the market.

And maybe to answer your question on LTV, yes, so I think we are -- and that's the job done before me. Obviously, we are in a favorable situation regarding LTV.

As I said, I think we are quite enthusiastic on business. And I think we have a lot of growth to capture through our business, through our pipeline, through reversion, et cetera.

And that's our first driver. And I think on the rest, asset allocation is a key topic for a company, for REIT.

So we will work on it quite hard. But I think the time is to look at it more as a positive sign.

It's not bad to have a low LTV now.

And just maybe to help you to make the calculation on the cost of debt, we can give you at least one clue, which is that, as you know, a part of hedging is coming from CAPS, which are representing a little bit less than 20% for the next 3 years. And these caps are at strikes which are just above 0%.

So they will be very efficient pretty soon.

Otherwise, we have a few questions online, if I'm correct. So I'm reading the first one.

Could you please elaborate on the indexation capturing, how much is expected for this year and how much from next one? And furthermore, when should we expect to see the strongest impact per quarter?

So indexation, the impact of indexation will progressively grow through our P&L in the next months, obviously, with the schedule of our leases. That has been included in our guidance.

But it's not a huge impact for the first quarter. Obviously, occupancy and the arrival of some pipeline assets will be a key driver for our cash flow growth.

And for the next quarters, I think we are planning an important growth in our H2. When you look at H2 2021 compared to H2 2022, when you deduct H1 within our guidance, yes, we are planning a significant growth over the next quarters, almost 10% growth, H2 to H2.

Especially -- and the main impacts are delivering the pipeline and growing occupancy, obviously, because on the pro rata basis, it plays not fully, indexation.

Maybe to add just one small thing. It means that as of today, every single lease coming to the anniversary date of the leasing, I'm sure, will be indexed using the last ILAT index, which is, as we say, 5.1%.

So it means that we have a progressive and lagged effects into our P&L. And that's something positive.

Full impact will be more seen along 2023. I would invite you maybe to see several publication that we've done in the past or in this documentation that shows, in average, the lag effects.

So it means that we're going to have it, but that's not immediately seen in the like-for-like measures for accounting reason and for -- but that's in there, that's embedded. So we have a second question online.

Taking into account your solid balance sheet, could you also consider an external growth into a new office European markets via an investment into a discounted REIT? And that's a question from Laurent [indiscernible].

Thank you for the question. The -- a company like us is always looking at opportunities, but it's depending on opportunities.

So I think I will not comment in advance any kind of those topics. Next one.

Given the strength of reversion that you described and mechanical contribution from indexation, what are the reasons behind this relatively small print? Yes.

This is exactly what we said about the lags between the transactions and the spot indexation and what we post in our H1 results. The deals that we are signing today, like we gave some examples, we -- have starting dates most of the time after the period.

And if it's within the period, the pro rata basis of that is limited. So that's really the explanation.

There is always a lag effect between what we post as an operational performance and the results of the semester.

We have another question from Laurent [indiscernible]. Are you considering a share buyback program?

Accelerating divestments when possible to address a huge discount on NTA?

Again, thank you for the question. The share buyback program, obviously, we see the advantages of a share buyback program, with the quality of the portfolio we have and the consequent quality of the square meters we buy at a low price.

But obviously, I think time is not there. The markets, we need to be prudent and cautious on what we do.

So it has to be seen in -- like you said, on the global asset allocation strategy based on disposals, acquisition, potentialities and share buyback. So we see all the potentials of each of those aspects of capital allocation.

We will work on it, but there is no definitive answer on that topic now.

Another question from Allison Sun. Earnings guidance up by 1%.

Given how bullish you are, is it a bit conservative? What's the rationale behind the guidance raise?

As I said, there is a lag effect between what we achieved in the semester and the consequence on this semester and the next semester. So I think we are happy about our performance.

And that was more to show our confidence. And obviously, the more we progress during the year, the more certainty we get on our results for the whole year.

So we are now end of July. So we have secured a series of indicators of our P&L for the year.

And that's -- and this is -- in that context that we have raised our guidance. Obviously, there is still cautious.

We are still cautious because of the interest rates and the impact on the not covered cost of debt. But we have taken those elements and felt that growing slightly, the guidance was relevant.

A question from a Jonathan Kownator. Could you please go for your main leasing challenges, and what's your target in terms of occupancies?

As I said, the leasing challenges are mainly located in Paris and Neuilly and Boulogne. So we have within next months, Horizons, which is a Jean Nouvel tower in Boulogne to be let, and we are currently renovating, improving the services to lease that.

We have a series of small square meters around Paris, and typically, some square meters in l1ve, some square meters in 157 Charles de Gaulle to let in Neuilly. And clearly, also, our challenges are on our pipeline.

So 32 Marbeuf. We also have the 3 l'Opéra, just facing -- a flagship building facing l'Opéra.

So very concentrated. And we hope to give you some good news on that front over the next quarters and results for 2022.

A question from [indiscernible]. Could you throw some light on rent incentives being offered for the new lettings in Paris?

How has this changed versus 2020 and 2021?

Well, rent incentives are quite usual in our office business. I would say they are roughly flat in Paris, while the rents we are asking for, for our prime assets are clearly significantly increasing.

So I would say that no specific update on incentives for Paris.

And 2 questions from [indiscernible]. First one, what is the outlook for vacancy and rental growth in your markets in the coming years?

And the second one, what else can you do as a new CEO? What areas are you looking at?

Obviously, we don't give too much guidance on the next years. And the guidance for -- will be for February '23, during our H -- our results for 2022.

So I will not go through all the items of the cash flow growth for next year. That will be for that period.

The -- but what I can say is that, yes, we have an objective to improve occupancy significantly. I think we have -- following COVID have a decrease in occupancy in our portfolio, but the trends are good.

Our assets are well located, and our leasing challenges are on the best spots. So occupancy should go up before year-end.

Just as an indication, like I said, the spot vacancy is already higher than H1 average at 93. But if we include all the type of deals, we might be even slightly higher.

And the areas you want to look at?

And the areas I want to look at as a CEO, all of them, asset allocation, asset strategy, CSR strategy, ERV growth, potentiality to accelerate the cash flow growth by accelerating the pipeline. Classical CEO for it.

Faster, better, sooner. Yes.

We may have also some question by phone, if I understood correctly. So maybe we can take them.

A few questions from my side. At first, I appreciate that you say it's too early to give a strategy on capital allocation.

But just to get a bit of a feeling. You did already announce some disposals at a decent premium of 8%.

Are you still seeing that kind of opportunities in the market? Is there still appetite?

And you commented a bit on the transactional market in -- towards H2, but is it still ongoing in the last months? And then secondly, on like-for-like rental growth, I noticed that for CBD offices, it's a bit lower.

It's only 0.5%, slightly below even indexation, even though you do report strong reversion figures there. Does that difference come from occupancy levels there?

Yes -- so both of my questions.

Yes. The investment appetite, yes, we have seen until late June, a very decent transaction.

And the investment market, like I said, in Paris has been quite buoyant, up by 50% compared to the same half the year before. So the -- we have seen so far quite an appetite for the best locations.

Obviously, the market is trying to understand what will be the consequences on each asset and on each location, what will be consequences of the new paradigm, inflation/rising interest rates. But so far, and even in June and even in July, we saw transactions which are supportive.

On the CBD like-for-like growth, yes, you are right. It's a bit lower than the rest.

Because of occupancy, as you said, we have -- we are planning to release some assets, namely, [indiscernible], for example, within the next months, with quite a decent reversion, but the occupancy has impacted downwards the performance of that specific sector.

Okay. And sorry, one more question.

On the pipeline, you mentioned the EUR 1 billion of control in certain for those 8 assets. Are those costs already fully locked in, the development cost?

Or do you see any impacts there or any delays of them actually transferring to the pipeline because of the current climate?

You are referring to the committed pipeline?

No, to the controlled uncertain, so those 8 projects, above EUR 1 billion. If those costs -- development costs are already fixed, or if you could see some delays or lower yield on costs because of the current rising development.

No. What is fixed is all what is committed, so what is ongoing, with fixed term and quite significant penalties in case of delays.

We have selected always at Gecina very solid companies, construction companies that have the capacity to deliver on time and on price. On the controlled, so the future ones, obviously, we will have to assess one by one if it's relevant, still or not.

What is clear is that we have a positive effect because of rental growth. So I think those project are still valid.

But we are agile, we are pragmatic. So when time will come, we need to get sometimes the building permits and so on.

So when time will come, we'll reassess the opportunity to do it, and we'll deliver on it. But so far, I think we are quite confident on them.

But the cost is obviously not secured.

For the assets on the control and pipeline, just to add, so one thing, Véronique, keep in mind that these portfolio are largely in the heart of Paris City. And just keep in mind that most of the value of this theoretical total investment cost is made by the initial value of the land and the building.

And so it means that a part of it, which is driven by construction cost, is relatively moderate. Let's say it can be 20%, 25%.

So it means that the total impact of increasing construction cost is having a moderate impact on the total investment cost for this project and not always having a significant consequences on the unit cost. You can expect, especially if you consider the fact that ERVs and diversification are driven upwards these past quarters.

We have a couple of questions from Bruno Duclos, one regarding the cost of the pipeline, so that's something that we have just already answered. Another one, will you conduct a pipeline review given the uncertainty on exit values and yield on cost for both committed and uncommitted pipeline?

Obviously, like I said, it's asset by asset. Very often, we reassess our targets.

So yes, we will be agile and pragmatic on each of those projects. But we are -- as I said, 85% of that committed pipeline is already pre-let for the next 2 years.

And we have, in whole, more than 50% kind of pre-lettings on those projects. So I think we are quite secure on the costs and we are quite confident on the top line.

Another question from Bruno. What is your view on cap rates for prime assets given that the investment market is less busy?

Do you intend to intensify your disposal strategies?

On the prime assets, the cap rates have been pretty stable, at least what we have been -- have seen so far, with still quite appetite. We saw a recent reduction of [indiscernible] here in Paris 9, are only small, which was done at a good price.

So we see still a good pricing on those assets until recently. On the disposal strategy, I think Gecina has been really active to reshape its portfolio, and we are super happy on the portfolio we have today.

So then we are back to the conversation we had just before on what should be the right asset allocation strategy, but it's not something you do like this. So it will have to be worked out.

So it will be in that context. I think on the portfolio, we are happy with the portfolio we have.

Any question in the room maybe? Otherwise, on the phone?

Okay. Thank you very much again.

Thank you for your questions, and see you soon. Have a nice day.

Bye-bye.