KLPEF - Klépierre SA (KLPEF) Q4 2022 Earnings Call Transcript
Klépierre SA (KLPEF)
Q4 2022 Earnings Conference Call
February 16, 2023, 03:00 AM ET
Company Participants
Jean-March Jestin - Chairman of the Executive Board
Stephane Tortajada - Chief Financial Officer, Member of the Executive Board
Conference Call Participants
Jaap Kuin - Kempen
Céline Soo-Huynh - Barclays
Presentation
Operator
Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Klépierre Full Year Earnings Conference Call presented by Jean-March Jestin, Chairman of the Executive Board; and Stephane Tortajada, CFO. Please go ahead, gentlemen.
Jean-March Jestin
Good morning, everyone, and thank you for joining us this morning. I'm pleased to report Klépierre 2022 full year earnings. Despite external headwinds characterized by a very uncertain geopolitical situation in Ukraine and a volatile macroeconomic environment with high inflationary pressure and rising interest rates, we had a very successful year, and our business continued to grow.
Before going through the numbers, I would like to highlight our remarkable achievements in delivering on the Act for Good CSR strategy. For the third year in a row, Klépierre ranked at top of the global retail listed - Europe retail, Europe retail listed and Europe-listed categories with a score of 98 out of 100. And GRESB is the world's leading ESG benchmark for real estate and infrastructure investments.
And why are we ranking number one? In 2017, we committed to aligning our business objectives with our corporate social responsibility approach. 5 years down the line, we have successfully achieved 99.8% of our 32 targets, including reducing the energy intensity of our portfolio by 42% and our greenhouse gas emission by 82%. And make no mistake, this is a unique performance.
And let me give you just one figure. Our malls in Europe consume on average 79 kilowatt per square meter. And in France, the figure is 70. The French industry average consumption for our mall [ph] is 1.09. There you have it, we are simply 30% better.
And last week, we unveiled our new CSR plan, which was co-constructed with a 9-member scientific committee. And our ambition is simple for 2030, build the most sustainable platform for commerce. The first pillar is to achieve a net zero carbon portfolio with an average portfolio energy efficiency of 70 kilowatt per square meter. And we will also lend our support to retailers' energy reduction initiatives with an objective of cutting their consumption by 20% and developing low carbon solutions throughout our portfolio.
The second pillar is to be a local contributor with a project at each shopping center designed to give something back to the community. The third pillar is to act as a skilled developer by up-skilling 50,000 people, which is an extremely stimulating goal. The fourth and last pillar is to act as a game changer by promoting sustainable lifestyles as we guide 50 million shoppers towards sustainable consumption.
Let's now review our 2022 results. We generated €2.62 in net current cash flow per share, up 20.3% compared to 2021. This is also 13% over the midpoint of our initial guidance range of €2.30 and €2.35 and 7% higher than our revised guidance of $2.45 given in July. These robust figures are the direct result of our clear strategy and positioning.
Klépierre owns and operates dominant malls in Europe's largest cities, which catchment areas over 1 million inhabitants, having a revenue per capita, 20% above national averages. The cities we are in and the malls we own are essential venues for the most dynamic national and international brands to operate their flagship concepts, reach out to their customers and nurture their optima [ph] channel strategies.
Our teams have a laser-like focus on delivering the best and seamless customer experience through our four differentiating operational initiatives that you are now all familiar with. Together, these initiatives are serving our vision to provide our communities with venues where they can shop, meet and connect, with the best and most modern retail service and leisure offering in an entertaining appealing and hospitable environment.
Our strong results are also a testament to our disciplined capital allocation policy based on a moderate use of leverage, controlled capital expenditures and continuous asset selection to streamline our portfolio by divesting mature properties.
In 2022, our business continued to grow remarkably with retailer sales and footfall up 25% over the year. We also observed strong momentum in all regions and across all business segments. By geography, the Netherlands and Germany, together with Central Europe led the way with sales growing by 45% and 40%, respectively. France and Iberia also outperformed the group average with sales up by an average of 28%. All segments posted double-digit sales growth with Food and Beverage, up 44%, and Fashion, Health and Beauty and Culture, Gift & Leisure also growing by around 25%. Overall, the 2022 sales rebound has allowed our retailers to achieve pre-COVID levels in all countries and all segments.
As regards leasing activity, tenant demand has been strong across all territories. We continue to renew and widen our retail and leisure offering with expanding retailers in the sports segment, banners such as JD Sport, Nike, Snipes, Emel [ph] and in the apparel segment with Inditex brands, Primark, Calzedonia, Mongo, Levis or United Colors of Benetton, as well as among value for many retailers like Normal, Action, Pepco and Lidl. We also continue to leverage our platform to establish differentiating brands in the new territories such as Jimmy Fairly, Miniso [indiscernible]
We signed 1,360 leases during the year and achieved a remarkable 4.1% positive reversion on top of the 3.7% indexation applied in January 2022. Since 2020, we have relet 26% of our stores to new tenants, which one again illustrate how successfully re-offerings at our malls - has been transformed and how attractive our revenues are to retailers. We also raised our occupancy rate by 110 basis points over the year to 95.8%.
And lastly, the average duration of leases in Klépierre malls increased to 5 years, significantly higher than one year ago and even higher than pre-COVID levels. Our occupancy cost ratio stood at 12.9% on average, helping support future organic growth.
Looking at net rental income, 2021 was severely impacted by COVID-19 as stores were closed for 2.5 months on average. 2022 is the first and disturb year with virtually no business disruption due to COVID, even though some light restrictions remain in place during the first quarter. An important aspect of the year is that we have also almost finalized all our negotiations with our retailers for the payment of funds due for the years 2020 and 2021.
To expand further, in 2022, net rental income included two nonrecurring one-off contributions, reversal of provision due to better-than-expected rent collection for 2020 and 2021 for €88.6 million and €25 million of net rental income generated by asset disposed over the course of 2022. Excluding those two elements, net rental income for 2022 amounted to €921.7 million, reflecting the basis of the first undisturbed year since COVID-19 outbreak.
Now on disposables. We pursue our portfolio streamlining and have disposed of close to €1.5 billion in assets over the last two years, including €602 million in 2022. The transactions were executed in line with appraisals value just 2.4% below. We are committed to continue refocusing our portfolio on best-in-class assets, finding the optimal fit between Klépierre's future growth ambitions and the plans of expanding retailers. As of today, the portfolio is highly concentrated with the largest 20 malls representing 54% of the overall portfolio value and the largest 70 equating to 92%.
Turning now to our development activity. Last July, we opened a large extension in Bologna, which is now fully let. Performance is exceeding expectation in terms of footfall with a 47% boost compared to '19, and our objective is to attract between 9 million and 10 million visitors per year. The return on investment is 8%, and we achieved an additional €49 million sales over the first six months of operation. We also delivered five new Primark mega stores in France and Italy on time and on budget.
In Grenoble [ph] the reshaping and extension of Grand Place [ph] is progressing well with 89% of the projected net rental income signed. This new development will open at the end of this year and was the first Primark store in the region, and yield on cost is 8%.
Lastly, I'm pleased to announce the introduction of the second time our market in Europe at Maremagnum, our premium mall in Barcelona across 5,600 square meter on the rooftop floor with breathe-taking views over the city, the Marina and the Mediterranean. The market will showcase the city-based food, drinks and culture based on time house editorial curation. The mall will feature a mix of 14 kitchens, a full-service restaurant, four bars and even space, the studio and an outdoor launch. Yield on cost is 13.5%.
Turning to the balance sheet. Our strong cash flow generation, coupled with conservative capital allocation has enabled us to substantially decrease our net debt. Net debt has fallen by €1.6 billion over the last two years. Our financial metrics are strong, if not better than pre-COVID levels and are among the most robust in the industry.
Our loan-to-value ratio is at 37.7%, while the leverage ratio net debt-to-EBITDA is 7.9 times and the interest coverage ratio stands at 10 times, among the highest of our peers. We currently have a significant headroom on the covenant and a robust BBB+ S&P rating.
With very limited refinancing needs in the year to come, our liquidity position stands at €2.8 billion, covering our refinancing needs until 2025. The average maturity of our debt is 6.5 years. Cost of debt remained stable at 1.2%, and we are fully hedged in 2023 and 90% hedged in 2024.
Based on these strong financial and operating results in 2022, the Supervisory Board will recommend that the shareholders at the forthcoming May 11, 2023 Annual General Meeting approved a cash distribution of €1.75 per share, up 3% compared to last year. If approved, it will mean that since the outbreak of COVID-19, we will have served €6.65 per share or €1.9 billion in cash at an average dividend yield over the period of 8%.
For 2023, the group expects to generate net current cash flow per share of €2.35, up 5% compared to 2022 adjusted for disposals and one-off. With these commitments and figures in mind and on the back of improving macroeconomic condition in the Eurozone [ph] our ambition for 2023 is to deliver higher cash returns to our shareholders while remaining at the forefront of ESG best practice in real estate.
And I will end my remarks on this and open the floor to questions.
Question-and-Answer Session
[Operator Instructions] The first question is from Jaap Kuin of Kempen. Please go ahead.
Q - Jaap Kuin
Yeah, thanks. Good morning. I think my first question will be on the retailer sales. So we see, I think, on average in the fourth quarter, 100% versus 2019, which means I've taken into account price inflation. The volume component seems down, maybe about 5% to 10%, also maybe your view on this. So how do you view this in terms of, let's say, a sustainable development of rent growth and indexation in relation to the turnover development at your retailers?
Jean-March Jestin
Thank you for your question. I think it's - I think we have to take it as a good news. The sales are back to pre-COVID levels. It's also important when we mentioned not to skip only 2022. 2022 for our clients is 25% more sales. So for them, it's better profit. And I think it's a good achievement. And I think what also is very interesting to notice is that it's all over the territories and all over the segments. So I will consider that it's a good base for future growth.
In terms of footfall, we are today at 92% of pre-COVID levels, which I think it's also quite a remarkable achievement. And if you remember, when we reopened the malls in 2020 and 2021, we were closer to 90 - 85% or even shy of 90%. So I think it's a good achievement.
So we see the development in sales positively. And there are obviously some brands doing better than the others. But overall, we see a good satisfaction from our retailers when they look at their sales in our malls. We are outperforming the benchmark in all the regions where we are. So I will qualify the sales as strong and resilient.
Jaap Kuin
Okay. Great. And then maybe as - some other follow-up. So you've achieved, let's say, 3.7% indexation, 4% reversion. There's still obviously impact from cost inflation also on the retailers. Can you maybe describe the last few months of current negotiations and discussions with retailers, how they feel about absorbing further rent increases and how that also leads to your view on what will be possible in 2023, also leading to the question, what's baked into your guidance in terms of reversion in indexation for this year? Thanks.
Jean-March Jestin
So number one, we did 4.1% reversion on top of 3.7% indexation, so it's almost 8% on the new leases signed. We have an indexation average for Europe for 2023 around 5%. We have seen no major objection from our retailers to pay indexation. Where you are right, and it's a point of attention for all of us is that many of the retailers, as you know, are suffering cost increases and their margins are under pressure. So for the timing, we have not seen a pushback on indexation and including for 2023. And you know indexation is nothing else than accelerating the capture of the reversion we have embedded in our portfolio. So 5% for 2023 is the average indexation in our portfolio.
Jaap Kuin
Great. Maybe as a quick follow-up. So what do you think the current remaining reversionary potential would be? Thanks.
Jean-March Jestin
We don't provide that number.
Jaap Kuin
Thank you very much.
Operator
As a reminder – excuse me...
Jaap Kuin
Morgan [ph] can you give some guidance on disposal in 2023? What does the current investment landscape look like? Could you also comment on yield expansion expectation going forward?
Stephane Tortajada
So regarding disposals, we - as you can see for at least 6 or 7 last year, we never guide on disposals. We are committed to streamline the portfolio. We are doing it. And over the last two years, we sold for €1.6 billion. In different markets, it was in Norway, in France, in Germany, so we are still confident that for the non-core assets we own, we will find buyers for those properties close to book value. But we don't guide the market on the volume of disposal, we want to achieve for 2023. And in the guidance, there is no impact of those potential disposals if they happen.
Jean-March Jestin
Investment landscape, what we can say is that Q1 obviously is quiet. There are not many transactions happening, but it doesn't mean that the market will stay quiet for the rest of the year. So I will say, a soft start of the year and we will see further down the road, we will see more activity.
Operator
The next question is from Céline Soo-Huynh of Barclays. Please go ahead.
Céline Soo-Huynh
Hi, good morning. Just one question, please. Can you touch on your NCCF guidance for '23, its including a stable occupancy rate assumption, macro environment might be more challenging this year than last professional retailers. We already seen some of them going into administration at the start of the year in France. And I do appreciate that it could be a small proportion of your rental income, but if you could tell us how likely it is for occupancy to remain stable this year? Thank you.
Jean-March Jestin
Well, I'm - when it comes to bankruptcies, it's - we have a bit of an uptick in France compared to last year for the middle price segment fashion retailers. But when we - but once more when we look at the brands that get bankrupt in France, each of them, they have around 10 to 15 stores with us out of 11,000 stores. So the impacts are almost negligible.
So what we have assumed for 2023 is that the guidance will be based on flat sales compared to 2022, which I think it's a reasonable assumption, even though I don't have the crystal ball. The flat occupancy, we have - we were - pre-COVID we were at 97% with 3% of vacancy. We went - we doubled vacancy during COVID to 6%. We are back almost at 96, so I think we have almost stable the occupancy to pre-COVID levels. So it may fluctuate marginally but we don't see occupancy being under pressure in 2023.
For the macroeconomic environment, I think there are quite a consensus today that the - this would be a soft landing for the European economies. And once more, we don't take a bet on macroeconomic trends. We are also - we are also uncertain about the geopolitical development in Ukraine. But we are confident that our guidance is based on realistic assumptions for 2023.
Céline Soo-Huynh
Thank you very much.
Operator
[Operator Instructions] The next question is from Neeraj Kumar [ph] of Barclays. Please go ahead.
Unidentified Analyst
Good morning, everyone. Thank you for taking my question. So in terms of your refinancing needs, you have €520 million unsecured bond maturing in a couple of months. Can you please help me understand how you're planning to refinance that?
Jean-March Jestin
On the financing, we have around €700 million of financial instrument coming to maturity this year in '23. As of today, we have a bunch of options on the table. First, obviously, the banking market is wide open, and we have already received some proposals from the banking market.
Second, mortgage loan market is also quite open for moderate leverage. As you know, in the past, we were not a big user of this mortgage market because excluding Scandinavian assets, it's less than 1% of our indebtedness, but it does demonstrate we can go further up, so we have some options there.
And on the bond market, the start of the year was extremely positive. We have seen spread coming back from peaked today like more than 150 basis points since start of January, spread compressed by more than 70 basis points. We have seen two real estate deals in the bond market. So I think there are also some options there. So basically, we have a few options on the table, and we will make the best decision based on pricing and maturity. But I think as of today, there is some liquidity in the financing market for us.
Unidentified Analyst
That's helpful. Thank you very much. And my second question is in terms of your cost of debt, I see it's 100% hedged for 2023. I mean how do you see it developing over a couple of years, maybe especially in the context of your €1.2 million commercial paper program?
Jean-March Jestin
Okay. The cost of debt has been stable at 1.2% for three year 2020, 2021, 2022. In 2020, I'm sorry, in 2019, it was 1.5%. So basically, what we see for 2023 is a cost of debt between 1.2 and 1.5 because we are hedged on the rate at 100%, but obviously, we are exposed to spread. But as I've just said, spreads have been extremely volatile since the start of the year. So we could see opportunities to finance at quite compress spread. But in any case, it will not be above 1.5 for sure.
And for 2024, it's a bit the same story. We are a 90% rate hedge. So no issue at all on the rate and on the spread, depending where the spread will be, but I think it would be a fair assumption to say that it would be around the same mark than 2019, that is to stay around 1.5.
Unidentified Analyst
All right. Thank you very much for taking my questions.
Jean-March Jestin
Thank you. We have two other questions from Amal. So the first one is, can you comment on the 13.5% yield on time out project in Barcelona and what is the level of pre-letting. So the level of pre-letting is 100%. And the yield, I cannot comment more than it's just 13.5%. So it's a good return, I think.
Good - and the second question is given the high rent indexation expected to pursue in 2024, your guidance looks quite conservative. Do you expect higher financial cost to impact net current cash flow in 2024?
So there are two questions in one. About being conservative, probably it's my reputation and Klépierre reputation to be conservative when it comes to guidance. But at least it's, I think, a guidance which is 5% above rebased 2022. So it's quite a significant increase.
What do you expect higher financial costs in 2024? So it's linked to your answer, Stephane?
Stephane Tortajada
Yes. I think that, again, the rate are hedged for '23 and 90% for '24. So on this front, I think we know exactly where we will land. It will very much depend upon the spread. Spread has been compressed very significantly in the last two months. So I would say that in 2024, we should not expect something very different for 2023 in terms of cost of debt. So something around 1.5% most probably.
Jean-March Jestin
From Florent [ph] at Bank of America. Can you remind us the net leverage target? As you know, we do not give some guidance in terms of leverage. We give only net current cash flow guidance. What I can tell you is that based on the rating today, BBB+ stable outlook, we have obviously some guidance from S&P.
In terms of net debt-to-EBITDA, the threshold is 11 time. So needless to say that we feel extremely comfortable with the S&P guidance. And in terms of debt to debt to equity, it's 50%. And today, the last S&P estimate is around 43%, 44%. So I think we are - here also, we are extremely comfortable with the S&P guidance. So basically, the message here is that we do not give a guidance on leverage, but we feel extremely comfortable with S&P guideline for current rating.
Second question, have you quantified the amount of green CapEx required to reach your goals? I think the - we have four pillars. So the first one is probably the most demanding to be net zero. We have three sub targets in it, which are important to know.
The first one is the one I mentioned is to be at 70 kilowatt per square meter for energy consumption. We are at 79. So it's still something we can do without really spending CapEx. And if we have to spend CapEx, it would be probably something that will be absorbed by the maintenance CapEx that we have in our malls today.
The second objective is to drive the tenant energy consumption in their shops by minus 20%. We will invest into a better measuring their own energy consumption and providing benchmark and proving solutions. So we think that this will not require a significant amount of CapEx.
So the third pillar of being net zero is to produce energy on site with photovoltaic mainly, but it can be also other means, up to 30% of our consumption. This will probably require the CapEx, and we will have there two options. The first one is to do it by ourselves and sell the energy to the retailers or to the grid and have a return on it. Or to team up with partners that will make the investment. So we have not made completely our decision today how we are going to choose between the two, but we think the CapEx element, either we have to take them and we will have a return. Otherwise, it would be taken by the partner.
All right again. Are you happy with the BBB+ or you aim for A minus? The issue for A minus is that, as you know, S&P takes a view by subsector on rating range, and they derive the methodology for each issuer rating based on this view by subsector.
As of today, it's quite striking to see that in retail real estate, most of the player and the BBB bucket. And I would say that it's more a question of S&P changing his view or methodology on the subsector than us reaching some specific target to get to the A minus. Obviously, this is a conversation we have on a very regular basis with S&P, try to convince them that it should have a more positive view, I would say, but it will very much depend upon it.
So there is a technical question from Pierre Emmanuel. Your income from the disposal of investment properties and equity investment is negative by €74 million in 2022. How can I reconcile it with minus 1.8% communicated?
So yeah - to be fully transparent on the 1.8% that we have communicated, it's on the retail properties that we have sold. We have, at the end of December, disposed 40,000 square meters of offices in [indiscernible] when we combine the two, it's a noncore asset, we don't communicate on it on a regular basis, but it was disposal. When we combine the two, the average discount to book value is minus 5.2%. So clearly, it was lower than book value for the offices, which was the last one we had in our portfolio.
So in the €74 million, and even technically here, we are half of the amount, which is a technical recycling of the ForEx reserves. So - but I will leave this to offer a discussion with our team. When we sell a property in Norway or in the non-euro currency zone, we have to recycle the reserves - the ForEx reserves through the P&L. It has no cash impact, no retained earnings impact. It's just a technical booking.
Operator
The next question from the phone is a follow-up from Jaap Kuin of Kempen. Please go ahead.
Jaap Kuin
Yes. Sorry to go again. But just on valuations, could you maybe describe your confidence level in your current valuation done by the appraisers?
Jean-March Jestin
Basically, if you look at the bank covenant, we have in the banking documentation, a 60% threshold for LTV, it's IFRS LTV, and that's why we communicate on the same methodology or LTV at 37.7. So as you can see, we are very far away from the threshold and we are extremely comfortable with this number compared to the limit.
The rest is ICR more than two. We are at 10. So a lot of headroom again. And the secure debt compared to portfolio value, excluding Scandinavia, less than 20% and were less than 1%. So basically, on these three criteria, we are extremely comfortable with the banking dock. The last one is a portfolio [ph] value in proportionate method, more than €10 billion were at €17 billion. So no issue at all.
Jaap Kuin
Yes. Thanks for that. Actually, what I meant was what's your level of confidence in the quality of the appraisals?
Jean-March Jestin
The - So I think the valuation they are done every six months. The - I think what needs ready to be taken into account by those who are looking at our earnings, is that the discount rate of our properties are constantly growing over time. And today, we have a 7.2% average discount rate. And when we compare this discount rate with other real estate asset classes, we think - and we have the conviction that we have done the job and that the valuers have already factored in the valuation. I would say, some kind of uncertainty they may have on the valuation. So we are comfortable with the value. And once more, I think the - we are the first asset class that has expanded the discount rate so far, so high.
Jaap Kuin
Yes. I would agree with that. Just maybe then as pausing in a different way. I mean, would you actually buy relatively well-operated malls, if you were offered more - would you actually buy yourself at a 5.5% net financial yield?
Jean-March Jestin
I think the - I think I don't know if I'm going to answer to that question. For the time being, we have nothing on the radar screen. The philosophy we have when we look at acquisition, what we did in the past is they have to be - they have to tick two boxes - three boxes.
First one is that we need to buy high-quality properties with reversion embedded into it. So among properties which are comparable to the best we have. The second tick mark is that the acquisition has to be accretive and sub tick market that it has to be consistent with our balance sheet objective. So for the time being, I think we are on a wait-and-see mode.
Jaap Kuin
Thank you. Thank you very much.
Jean-March Jestin
More question about do you plan significant acquisition? I think I just gave the answer right away. Cost of debt expectation for 2025, I think you already gave some element to...
Stephane Tortajada
Yes. On 2025, our level of rate hedging is more than two third, 68%. So we are starting to be well covered. To be honest, it's also very much depend upon what is your view on 2025 short-term rate. As of today, if I look forward, the market consensus is that short-term interest rates should come down starting end of '24 in Europe. So it very much depends upon the view you could have on 2025, right? So I would not bet that the rate will stay at the current level forever at a certain point of time, there could be some volatility on the right. So as of today, we are two third covered and we will see how we manage this position along the road.
Jean-March Jestin
Question? Are we taking no name questions? Okay. So there is one with no name. So I would have preferred to have the name of - but anyway. How do you see the performance of e-commerce? I think there is a lot of literature about it. So I'm not going to spend too much time on it.
I think e-commerce, the pure players are seeing their sales going down compared to the peak. Second, pure player are literally smashed by increase of prices and inflation. So they are going through difficult times. When it comes to the e-commerce of our retailers, I think it's developing well. The share in their sales is growing. There are more and more delivering their promise to their customers or having a strong omnichannel proposal.
This translates into less stores but better stores. And our view was that the e-commerce development in our tenant-based business will be favorable to us as we own among the best properties where the retailers want to have their flagship store, where they can deliver this omnichannel proposal.
And we see also more and more retailers pushing for the returns to come to the stores and also charging a fee on return when it doesn't come to the store. So I think the store will play an increasing role in the e-commerce part of our retailers business.
Jean-March Jestin
So thank you very much for your time this morning. And obviously, we are fully available to answer follow-up questions today by e-mail or in the coming days and also with our Investor Relations team with Paul. Thank you very much.
Operator
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.
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Klépierre SA (KLPEF) Q4 2022 Earnings Call Transcript