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Edited Transcript of FDR.PA earnings conference call or presentation 23-Jul-19 4:30pm GMT

Half Year 2019 Covivio SA Earnings Call

Metz Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Covivio SA earnings conference call or presentation Tuesday, July 23, 2019 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexei Dal Pastro

Covivio - CEO of Italy

* Christophe Kullmann

Covivio - CEO & Director

* Dominique Ozanne

Covivio - Deputy GM & Deputy CEO

* Olivier Francois Joseph Estève

Covivio - Deputy GM & Deputy CEO

* Thierry Beaudemoulin

Covivio - CEO of Covivio Immobilien

* Tugdual Millet

Covivio - CFO

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Conference Call Participants

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* Christian Auzanneau

AlphaValue - Research Analyst

* Christopher Richard Fremantle

Morgan Stanley, Research Division - Executive Director

* Florent Laroche-Joubert

ODDO BHF Corporate & Markets, Research Division - Analyst

* Peter Papadakos

Green Street Advisors, LLC, Research Division - MD & Lead Research Analyst

* Valerie Guezi

Exane BNP Paribas, Research Division - Real Estate Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day and welcome to the Covivio 2019 Half Year Results Presentation. For your information, this conference is being recorded. (Operator Instructions)

At this time, I would like to hand the call over to Mr. Christophe Kullmann, CEO of Covivio. Please go ahead, sir. Your line is open.

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Christophe Kullmann, Covivio - CEO & Director [2]

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Hello, everybody. I'm pleased to present you with this H1 2019 result for Covivio. First, what are the key milestone of this another active first half for Covivio? First, on our pipeline, we are well on track to always to increase development pipeline with 100,000 square meters new projects during this first half; second, a stronger balance sheet, we already reached our new LTV policy with 39.2% LTV, and we obtained an upgrade of our credit rating to BBB+ from S&P; and third, continuous strong operating performance, plus 3.3% in like-for-like revenue growth and plus 2.8% in like-for-like in value growth.

I will present some key points of strategy, after that, the key milestone we achieved during this first half. And after, Tugdual Millet, our CFO, will speak about the revenues and the financial results. After for the Q&A, all the team will be able to answer your questions.

So we now move to Page 5. The good weathers of this first half are the outcome of a strong and unique business model. We are a diversified real estate company, but we are also a specialist and among the leader in each of our asset class. This business model is less on this question. This is because it drives persistent performance. You see in this chart, Page 6, that we have been able to offer a resilient and strong stock performance for our shareholders of around 10% per year on average for the past 20 years, 10 years, 5 years or 3 years.

Now moving to Page 8. Development pipeline is one of our main strategic pillars. This pillar has delivered growth and value creation during the past years, and we continue to do so. We have today the largest committed pipeline we've ever had with EUR 2.1 billion committed project. In 1 year, we have more than doubled this pipeline. And with very attractive figures: 51% already pre-let, 6% yield on cost and more than 30% value creation target.

Some details Page 9 in terms of delivery, delivery date. Most of the deliveries will come in 2020 and '21. You see some of the right -- on the right side of the slide the main committed project. These are essentially offices in Paris and in Milan. A large part of our stock is fully pre-let, and we have interesting discussion for the ones not yet fully pre-let at the IRO or Silex 2.

Slide 10, let's move to the new committed project of this half year. With So Pop, this is exactly the type of investment project we like: First, an attractive location in the north of the 17th district of Paris close to the new metro line 14 and with a great visibility from the (inaudible). The market there is very dynamic with a strong demand on new space in the last 2 years and lack of new offers.

Second, and now Page 11, a story we are used to do: acquisition of an obsolete building at an attractive yield of 8.1%, which gave us time to prepare the full development once the tenant leaves. Here, we increased the rent by close to 150%, including 70% from the extension of the surface. With this project, we target a 60% total value creation, and part of it is already secure, thanks to the syndication of 50% of the equity to Crédit Agricole Assurances.

Another new commitment of this first half is the Alis project in Levallois. It is located in the high-quality location in the historic business district of Levallois right next to the metro line 3. We bought the last building of the existing asset in 2015 in view of a redevelopment plan upon departure of the tenant. The tenant left early 2019 and we launched the redevelopment project, increasing the surface by 50% and the rent by 60%. In the end, we target a strong value creation of 40% on this project.

In Milan, 2 new projects are being launched in the Symbiosis area, proving the success of this growing business district. As a reminder, the first 2 buildings of this area are already let: 1 already delivered and fully occupied by Fastweb, and the other under construction. We have committed the third building in the first quarter, Building D, already pre-let at 35% to a large corporate. And we also won the Reinventing Cities competitions for the development of a 10,000 square meter innovative building.

Another good news on the pipeline in Milan, the full pre-letting of our project, The Sign, in the business district in the southwest of the Semicenter of Milan. The Sign is a construction project of the land bank that we owned since 2008 committed last year. We had already pre-let the first building to Aon, and we have signed this semester a new lease with NTT Data. On the lease term still some development potential for our first building on the adjacent land bank acquired last year to be committed by the end of this year or the beginning of next year.

In parallel, EUR 350 million delivered are forecast 2019 through 9 project in Offices and Hotel, with a 30% target value creation. Six projects are already delivered, and the rest will follow in the second half.

We now move Page 17. Another milestone of this first half is the qualitative rotation we have made. We invested EUR 658 million. As I explained before, in Offices, we prefer to do development at 6% yield, rather than buying at [4%], you see the impact of our investment program: EUR 326 million CapEx in the pipeline and sure acquisition, mainly in Hotels.

The main acquisition is a very interesting one. We took a 30% -- 32% stake in a portfolio of 32 Accor Hotels in top location in Paris and Belgium, with the French major cities with very interesting growth prospect considering the very low price per room. We will manage the portfolio on shares we control with 2 investors we know well, CDC and Sogecap. I am sure it will also create asset management opportunities with Accor.

Moving to the disposal, Page 19. So first half was very active: EUR 732 million of disposal with a 6% margin on average. As anticipated, we accelerated the sales of mature asset, which represents 70% of the sales on the first half.

In French office, Page 20, we did 2 main disposal: With an office in Charenton, bought in 2014 at 6.5% yield; the second one, Green Corner, is a nice story. We developed it in 2015 with a 7% yield on cost and sell it 4 years later at 3.8% margin, which mean a total value creation of 100%.

In Italy, Page 21, we sold EUR 281 million of assets moving toward a target of focusing Milan and crystallizing value creation through the disposal of mature buildings. So this first half, we sold a co-mature office in Milan with a yield below 4% and 9 offices and 1 retail outside Milan.

Last but not least, Page 22. We have also been active in hotels with interesting deals. First, on B&B Hotel, 2 transaction represented EUR 385 million of hotels in secondary locations in France sold with 11% margin on last appraisal value.

In Germany, we sold the Westin hotel in Dresden at 9% margin value, above appraisal value, while keeping the land bank for our future residential development 8,000 square meters. This strategy drives financial performance, as we have seen, but also ESG performance.

Moving Slide 24, we have 3 main strategic pillars. Those pillars help us improving our ESG metrics. The first pillar is major European cities. It describes a will to invest in well-located asset, which means, first and foremost, being close to public transport. Our goal is to have all our building in less than 5 minute walk of a public transport. Today, we are at 93%.

Second pillar, we talked a lot about it, development pipeline. We develop new buildings with the best efficiency standards, improving the performance of our portfolio. By 2023, all of the building will be green.

Third pillar, is client centricity. By reducing the energy consumption of our portfolio, we also reduce the cost of our tenant. We want also to offer them more services and well-being. By 2023, 100% of our office building will have a service offer.

Now I will pass over to Tugdual to comment the other slides.

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Tugdual Millet, Covivio - CFO [3]

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Good evening, everyone, and let's see into more details the positive dynamic of our revenue during this first half.

Some key elements about the context. In Paris and Milan, we are benefiting from obvious scarcity of new products. With vacancy rate at historical low level, rents are growing. This situation is largely seen in the Greater Paris area where we should continue to drive the performance of our pipeline. And in Milan, prime rents is now reaching EUR 600 per square meter, pushed up by scarcity and strong take-up.

Page 27. This positive trend has positive impact on our like-for-like rental growth with another strong figure for our French office portfolio where we have a plus 3.9% increase with positive effects from reversion, occupancy and indexation.

On Italian offices, those 3 effects are also impacting positively the like-for-like rental growth by 1.4%. This situation of scarcity enable us to also benefit from immediate positive reversion when it comes to renewing leases with existing clients. We achieved a plus 3.2% rent increase during this first half.

Let's now move on German resi, which represent 23% of our revenues. As part of our strategy, the revenue base is well diversified with 51% coming from Berlin, 33% from North Rhine-Westphalia, and the remaining part, 17%. On average, the portfolio is yielding an appealing 4.1%.

On Page 29, the dynamic has been strong again during this first half with the same trends as last years. Growth of plus 4.4% on average is coming from reletting, indexation and modernization. In Berlin, it has been the strong performance, but also North Rhine-Westphalia has also delivered plus 4.1% during this first half.

Moving to Page 30. The situation of strong rent increase, especially in Berlin, is the direct result of the success of Berlin in attracting new talents from all over Europe, but being unable to give them enough living spaces and new construction. In order to stop this rent increase, the Berlin Senate has submitted a new law that should freeze the rent for the next 5 years, except for new construction. There has been a lot of discussion, a lot of debate, statements around this surprising new regulation. So what can we add to that?

First, it's not over, which means that they're still not clear on what would be the final outcome, either a softer law or constitutional debate or maybe something else. Second, and maybe the most important, it will not solve the main problem, especially for those who are arriving in Berlin. Where will they go if supply is not increasing and less investor would be willing to rent their buildings? And third part of the answer is also on our portfolio.

Then move Page 31. Looking to this slide, we are convinced that our Berlin portfolio will continue to perform on the back of a very strong market fundamental despite increasing regulation. The quality of our portfolio, mostly located in the best central areas of Berlin, makes it very liquid, also thanks to the average size of our buildings. The current valuation is still attractive, in particular when we compare it with what we achieved when it comes to do privatization program with plus 75% capital gain. And last, our current development pipeline, which will enable us to reach high market trend and rental yield will be also a strong support for future growth.

Moving to Page 32 on Hotels. It's also an area that is benefiting from strong market dynamic. The support of this trend is the evolution of the tourism arrival coupled with limited new supply all over Europe.

Page 32, this Hotel portfolio, after a strong plus 4.7% in 2018 is growing by 2% on a like-for-like basis this first half, thanks to plus 2.4% on management contracts, good growth on fixed lease, and specifically, plus 1.9% on Accor variable revenues. We should also notice that this performance is somewhat impacted by renovation project fully financed by Accor, which are negatively impacted the performance today but should be a good booster for the future.

Page 34. Overall, our revenue are growing by plus 3.4% on a like-for-like basis with mixed effects between indexation, occupancy and reversion. And our total revenue amount to EUR 339 million, and occupancy rate is still very high. That's been the case for a long term at 98%.

Finally, let's comment on the financial results. So the first success has been our ability to raise EUR 316 million of equity from our shareholders in order to finance our development pipeline while strengthening also our balance sheet. 83% of our share capital chose the scrip dividend this year.

Thanks to the asset rotation program that has been described by Christophe during this first half and the dividend in share, we have more than anticipated -- more rapidly than anticipated reached our LTV target, that is below 40% at 39.2%. This has comforted S&P to move our rating up from BBB positive outlook to BBB+, that makes Covivio a very strong European issuer.

Page 38, few words on the performance of our investment portfolio during this first half. On a like-for-like basis, our portfolio has increased by 2.8%. Development has been a key driver for this performance on Offices, and the capacity to increase this development portfolio this year will also increase our ability to continue to deliver. Note also that the recent lease of 16,000 square meters in our development project in Milan has not yet been taken into account in those figures.

On German resi, we have benefited from rental growth and also additional yield compression. And finally, on Hotels, we have seen mostly values increase, thanks to positive rent increase and a bit of yield compression. The current average yield of 5% leaves room for additional performance during second half.

Our NAV per share, Page 39, grew by 5.4% over in 1 year and 0.9% during this first half. Two comments on this: First one is the positive contribution from the value increase that account for EUR 4.40 per share; and the second is the impact of scrip dividend that has been done at EUR 81.70 per share, which has a slight dilution on NAV by 1%. And I should also mention the fact that we distributed 100% of our dividend during this first half.

Last, on triple net asset value, we have an impact of EUR 2.40 per share due to the mark-to-market of financial instruments following the strong decrease in interest rate during this first half.

Finally, on Page 40, the P&L. Figures in millions of euro are mostly increasing, thanks to the investment program of 2018, and above all, following the merger with Beni Stabili as we compare 52% share capital of Beni Stabili in first half 2018, 100% during this first half 2019. Also, we have on the positive side the positive effect of the like-for-like rental growth with steady net operating cost. On the other side, the deleveraging and the increase of the number of shares lead at the end to a plus 2.8% increase on EPRA earnings per share. Those results enable us to be confident with our annual guidance of more than 3% increase in EPRA earnings for 2019 with the second half that should be slightly stronger than this first half.

Then our next events would be on be the October 24 for Q3 activity and on November 7 in Paris for our next Capital Market Day. Now we are all together with the management team to answer to your questions.

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Christophe Kullmann, Covivio - CEO & Director [4]

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Thank you, Tugdual. And now a question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Valerie Guezi from Exane BNP Paribas.

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Valerie Guezi, Exane BNP Paribas, Research Division - Real Estate Analyst [2]

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So I've got 2 question. My first question is on the NIM and on German Residential, but mostly on Berlin. You had quite a very solid increasing asset value in H1. And I wanted to ask if you can share some discussion you're having with the valuators on how potentially the new legislation could impact asset value. And maybe if you can tell us whether your asset value are valued before or after this came out. That's my first question.

And my second question, I can see that -- so your LTV's already below 40%. What does that mean for your disposal strategy? Shall we expect less disposals going forward?

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Christophe Kullmann, Covivio - CEO & Director [3]

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Thank you, Valerie. On the first question, for Thierry, just to speak about the appraisal value in Germany.

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Thierry Beaudemoulin, Covivio - CEO of Covivio Immobilien [4]

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Yes. The potential impact on the new regulation on the valuation of our asset. So our portfolio is quite different than the competitor. It's high quality, centrally located and reasonable value per square meter, 200 -- EUR 2,700 per square meters. And when we do privatization, we are generating this quarter a 74% margin on this value. So we don't think further regulation on the rent will impact our value.

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Christophe Kullmann, Covivio - CEO & Director [5]

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And just to complete for the appraisal value, the appraisal was done and the appraisal take into account the current discussion. So that was clearly -- and the mood today is I consider this law is clearly today not in place, so they need to wait. But they don't see clearly an immediate impact on the valuation. And so we will see I'd say adherence, if there is any one. But today, as you noticed, there is a strong value increase in the valuation that continue in the first half.

On the LTV policy and on the disposal plan, yes, we've done, I'd say, most of the disposal plan in the first half, but we will continue to monitor our portfolio. We continue to work on selling what is noncore in our portfolio and nonstrategic. And also, we could continue to sell some mature asset in the future. But we are, as you noticed, at the level of LTV that we want. In the same time, we have some investments that are already studied. So both could be able in the second part of the year.

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Valerie Guezi, Exane BNP Paribas, Research Division - Real Estate Analyst [6]

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Can I just ask a follow-up question on the disposal program. Your asset value outside of Milan I think declined by 2%, and then I think the one you're trying to sell. Would you be ready to sell below expected NAV? Or do you still want to sell at NAV all the same?

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Christophe Kullmann, Covivio - CEO & Director [7]

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Alexei to answer the question about -- on what are we able to sell below NAV some asset outside Milan.

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Alexei Dal Pastro, Covivio - CEO of Italy [8]

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But first of all, as you have seen this semester, we have been pretty active in disposal for a total amount of EUR 282 million, 1% above NAV. The dynamic in Milan continue to be totally positive. And of course, on disposal of asset in the city, we see just upside. Maybe in the noncore portfolio, I said no strategic portfolio that today represent less than 1% of the total portfolio of the company, we could eventually have some minus. But of course, we are very focused in asset management activity in order to prepare the asset to be sold and maximizing asset values.

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Operator [9]

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We'll now take our next question from Florent Laroche-Joubert from ODDO BHF.

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Florent Laroche-Joubert, ODDO BHF Corporate & Markets, Research Division - Analyst [10]

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I would have 2 questions. So first, on the German Residential. So I have understood the first and third you have given. I will have a follow-up question. So you have given some expectation in terms of revenue potential growth for German Residential last year at your Capital Market Day. Can we consider that this expectation are still to date? Do you expect, however, to reduce them in the future? So that's my first question.

And second question, if my understanding is correct, you expect second semester stronger than the H1. So could you please give more color, please, if possible?

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Christophe Kullmann, Covivio - CEO & Director [11]

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On the German resi, what we imagine is that in Berlin, we imagine today perhaps less increase in the rent in the next months. The potential is there. The question now is timing, and timing in part with this potential new regulation will reduce the speed of the increase of the rents. That what we imagine. That what we need to monitor. But today, as we said, we need to have -- to see exactly what will be the regulation in Berlin. But what we see outside Berlin is that the trend continue to be very strong. And the figures, for example, in North Rhine-Westphalia are very good. And thanks to the fact that the operation in completely this portfolio, we see very good news. And we imagine that will continue in the second part of the year.

For the figure on the second semester, Tugdual to add more color on that.

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Tugdual Millet, Covivio - CFO [12]

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Yes. So we expected it to be a bit stronger than first half for mostly 2 reason: The first one is the impact of the small acquisition that we've done and also the delivery of asset that has been done during first half that should contribute to the evolution of -- positive evolution of the rent during second half.

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Operator [13]

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We'll now take our next question from Christopher Fremantle from Morgan Stanley.

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Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [14]

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I'm afraid it's just another question on German Residential, unsurprisingly. I just want to clarify what you're saying on Berlin. Are you saying that you believe your Berlin Residential valuation can keep rising, assuming that the German residential -- the Berlin residential law passes as it is proposed? And I wonder if you could just talk about how the price that you would underwrite an acquisition in Berlin has changed as a result of the announcement. Just want to push you a little bit on really -- if you believe that this is nothing to worry about, which is the sense that you have given in your presentation.

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Christophe Kullmann, Covivio - CEO & Director [15]

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Just to be clear, during the last 18 months make very sure acquisition in German resi, especially in Berlin, So because we consider and we have decided to move on the pipeline and to push on this way to continue to increase our exposure in the German resi. So that's what we will continue to say in the future.

So I have to say on valuation and on acquisition, for me, it's too early to give some colors. We need to wait the final outcome on the discretion and the potential regulation, and we will see after. What we can say today that there is strong lack of products in Berlin. The solution is really not for the city to froze -- to freeze completely the situation. So we will see what will be the end of the story. But what we see today, there is strong appetite in buying assets. With the part of the assets that were put -- pushed on the market, we find a lot of buyers. So what -- and what is also important is that we have the capacity to increase the amount of asset that we -- and flats that we can sell flat by flat in Berlin, we will see that will depend also on the end of the regulation. But what we consider today is that the value is there, and we will continue to extract the value in the future. But what's sure is that the increase of the rents will be lower than it was in the past.

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Operator [16]

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We'll now take our next question from Peter Papadakos, please, from Green Street Advisors.

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Peter Papadakos, Green Street Advisors, LLC, Research Division - MD & Lead Research Analyst [17]

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I have 2 questions. One is on Slide 38 with regards to your like-for-like value growth. I'm surprised the French Offices is not a little bit stronger given that the development pipeline element is close to 10%. If the development pipeline was 0, what would actually be the French Offices? Is that a number that you would -- that you can -- even from a back of the envelope sort of process calculate. That's one question.

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Christophe Kullmann, Covivio - CEO & Director [18]

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Could you repeat the end of your question? We don't catch it. Just what was the...

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Unidentified Company Representative, [19]

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Second question.

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Christophe Kullmann, Covivio - CEO & Director [20]

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No, the end of the question, it was?

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Peter Papadakos, Green Street Advisors, LLC, Research Division - MD & Lead Research Analyst [21]

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Basically, if you were to exclude any revaluation from the pipeline, what would be the French Offices -- or is the 1.8% essentially, it excludes anything to do with the development pipeline element? It's really on standing portfolio. That's maybe the question.

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Christophe Kullmann, Covivio - CEO & Director [22]

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Okay. So Tugdual will answer.

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Tugdual Millet, Covivio - CFO [23]

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So the figures is on the development pipeline, we have an increase of close to 10% during this first half, basically strongly pushed by our development in the south part of Paris. So the Flow and also IRO. That means that the remaining part of the portfolio is growing by around 1% during this first half. We have obviously some interesting reference in terms of price, thanks to this transaction on Green Corner. So I think that there would be also good support for additional performance during second half.

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Peter Papadakos, Green Street Advisors, LLC, Research Division - MD & Lead Research Analyst [24]

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So pretty straightforward. And then the other question is maybe just a comment, only if Olivier's on the line as well and Alexei. Just in terms of what's going on with class A versus class B office rents in each of Paris and Milan. We hear increasingly from many contacts that there's a little bit of a divergence in performance in ERV performance between class A versus class B, i.e., it's widening. What can you share in terms of your experience?

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Christophe Kullmann, Covivio - CEO & Director [25]

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Alexei?

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Alexei Dal Pastro, Covivio - CEO of Italy [26]

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Yes. We are really seeing positive trends in terms of rent, euro per square meter for prime Grade A office in Milan. We reached, as Tugdual said, EUR 600 per square meter. That is another growth in line with what happened in the previous quarter. This growth is mostly linked to new offices or just refurbished offices, sustainable, green and flexible. I agree with you that the difference between new offices and, let's say, old stock is getting wider and wider. And I believe it could be, as of today in Milan, in there at least of 20% in the same location, same characteristic of the building.

There is a strong, strong demand for Grade A. We have seen also this semester, out of the 240,000 square meter take-up in the city, above 70% demand for Grade A. And so this high demand leads to high prices. Obviously, they are strongly connected.

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Olivier Francois Joseph Estève, Covivio - Deputy GM & Deputy CEO [27]

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On the French...

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Christophe Kullmann, Covivio - CEO & Director [28]

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Olivier?

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Olivier Francois Joseph Estève, Covivio - Deputy GM & Deputy CEO [29]

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On the French market, you have a very different, I would say, situation from place -- one place to another. If you look at Paris CBD on average, you have for the first-hand asset, plus 6% on average, and on the secondhand, plus 9%. If you move to the first string, you have really an increase on the first-hand projects at plus 7% on average. And the secondhand, you have a little -- a slight decrease, and it mean that it's more difficult to rent secondhand assets on the first string. And you have an exception, is La Défense, where the first-hand rent are quite stable or a with a decrease, a slight decrease in certain situation, but not a lot of, I would say, references in this market.

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Peter Papadakos, Green Street Advisors, LLC, Research Division - MD & Lead Research Analyst [30]

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And maybe just a final question for Dominique, if he's there as well. U.K., a little bit of negative headlines with regards to RevPAR under pressure, especially in the regions. Any sort of qualitative comment on how the U.K. hotel portfolio is going for the first 6 months?

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Dominique Ozanne, Covivio - Deputy GM & Deputy CEO [31]

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It's true that on the first semester, the result are really good in London because the average price is increasing a lot. But on the province portfolio and the regional portfolios, there is a decrease of the RevPAR at that time of no more than 5%, but we hope it will not continue. But for the moment, the result in London are really good.

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Operator [32]

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Our next question will come from Christian Auzanneau.

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Christian Auzanneau, AlphaValue - Research Analyst [33]

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Three questions, if I may. Just I can -- one moment. The first is just to the 100% clear on Berlin. So I understand from the Q&A session that the freeze rents policy in Berlin is not fully included in your H1 valuation, the rent freeze for the coming 5 years. So it's not in the plus 9% like-for-like on your valuation. So it's right or wrong.

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Christophe Kullmann, Covivio - CEO & Director [34]

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Yes, it's included. That present value, as the information was delivered with the positive value. That's just what you can say.

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Christian Auzanneau, AlphaValue - Research Analyst [35]

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Okay. So you cannot confirm that it's fully included in that price?

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Christophe Kullmann, Covivio - CEO & Director [36]

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It's really included. That what we can say, is they take into account a question mark on the future. But what they say, that's a value that you imagine that is at the end of June. And today, the exchange we have with the appraisers, they say that there is too many uncertainties in this project to have a clear view on what would be the impact on the valuation. So we need to wait, as they clearly say, that they need to wait to the end of the story.

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Christian Auzanneau, AlphaValue - Research Analyst [37]

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Okay. So in other words, we cannot know if they put 0 growth on the rents in the 5 coming years in their own DCF.

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Unidentified Company Representative, [38]

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Could you repeat, sorry?

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Christian Auzanneau, AlphaValue - Research Analyst [39]

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We don't know if they fully include in their DCF when they do the valuation of those assets, 0 growth for the next coming years. It's not the case.

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Christophe Kullmann, Covivio - CEO & Director [40]

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No, it's not the case. It's not the case. Because they -- today, they need to wait as a result of the final result of that show. But at the end, it's not only a DCF valuation, just to be clear. It also is price per square meter valuation. And as we explained before, we have a strong difference between this valuation and the market value of flat by flat on these asset.

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Christian Auzanneau, AlphaValue - Research Analyst [41]

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Okay. The second question about Berlin, could it push you to increase your privatization program strongly just to exit, not fully in the coming year, but a little quicker than expected today just to switch from 100% owner to a more limited part of your portfolio located in Berlin? So accelerate the privatization or not there.

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Christophe Kullmann, Covivio - CEO & Director [42]

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Yes, it's really something which is possible. Today, as our portfolio is -- we are able to sell it through privatization. So we have all the authorization for that. So we could do that. What we have decided is to wait the end of the story and to decide that by the end of this year. But that could be one possible evolution of our strategy in Berlin if the situation could -- is confirmed as it could be today. But today, we don't -- we have decided not to accelerate. We decide to monitor this question and to wait the final outcome of the law.

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Christian Auzanneau, AlphaValue - Research Analyst [43]

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Okay. Brilliant. The other -- another one question is on the French Offices segment, in La Défense specifically. All understood that the rents are stable or slightly decreasing for maybe technical reasons in the first half of the 2019 year. Regarding the increase in potential offer in the market in the 36 coming months in La Défense, do you -- could we or could you share some changes in the increasing vacancy there and something like a pressure on the rents in La Défense and the Western Crescent?

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Christophe Kullmann, Covivio - CEO & Director [44]

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Olivier will answer on that.

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Olivier Francois Joseph Estève, Covivio - Deputy GM & Deputy CEO [45]

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Clearly, if we look at the market in La Défense, it's always been very volatile depending on the pipeline and the deliveries. You know that on average, it's, I would say 2 -- 205 -- no, on a long-term basis 200,000 square meter per year. As you mentioned, there is a quite significant pipeline coming, so we could have some -- it could put some pressure on the rent on that market. We are exposing La Défense only with our CB 21 asset with, I would say, a long-term leases and a very good, I would say, rental situation. And we implement constantly CapEx to upgrade the quality of the assets, services, the tour, et cetera. So it means that we have no fear about our position in La Défense. But for sure, if we were a player on new development, we would monitor carefully the situation.

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Christian Auzanneau, AlphaValue - Research Analyst [46]

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Okay. And the last, just quickly, I understood your 1% like-for-like growth on your French Offices is still in the pipeline. Are there inside that 1% some decompression in yields in the French Offices in some areas?

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Olivier Francois Joseph Estève, Covivio - Deputy GM & Deputy CEO [47]

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If there is some compression coming in that part of the -- no, in the past. Yes, not really with the rate remain quite stable in this part of the portfolio. And we'll see what happened. And as Christophe mentioned, due to the results we obtained on the disposal plan, maybe there is some room to have a increase on the part of the portfolio in the coming half.

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Christian Auzanneau, AlphaValue - Research Analyst [48]

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Okay. So in other words, on the first half, there is no decompression on any pocket of your assets on the French Offices..

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Olivier Francois Joseph Estève, Covivio - Deputy GM & Deputy CEO [49]

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No.

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Christophe Kullmann, Covivio - CEO & Director [50]

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No.

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Olivier Francois Joseph Estève, Covivio - Deputy GM & Deputy CEO [51]

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No decompression and no compression. Yes.

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Christophe Kullmann, Covivio - CEO & Director [52]

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No more question on the call. We have 2 question just -- that are written. The first one is from Jaap Kuin from ING. I read it. Could you describe potential changes in your investment appetite due to the political conditions in Berlin and Italy? If you're reallocating resources? Or are you planning to do this depending on further determination, confirmation of, for example, the Berlin rent cap proposals?

I will propose Tugdual to answer this question to change.

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Tugdual Millet, Covivio - CFO [53]

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Yes. Okay. I think we mentioned what is the impact of the Berlin political situation, no? Just remind you that we've stopped investment acquisition for the last 12 months, and we refocused and reallocate our investment program on development, which is not subject to potential future regulation. So development pipeline is key to address the problem of the Berlin cities so that should be welcome.

And on Italy, there's no political point, so we don't see really the point there. And I think that we have demonstrated that there is a very strong market environment, and we have been able to strongly deliver on our capacity to increase the pipeline and to let it quite rapidly. The last lease that we've signed on 16,000 square meter is the best example of the strong support of this market. So no change there, mostly focused on development pipeline as well as for our Paris office.

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Christophe Kullmann, Covivio - CEO & Director [54]

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And the second question from Jaap is, do you see the lower leverage as commensurate to your increased pipeline and lower yields? Or does it also open up more options on the acquisition side? If so, what is the maximum temporary LTV you would allow in case of a bigger purchase?

This is modification, small modification of the LTV policy. You have to remember, we were between 40% to 45%, and now we are below 40%. And 38% is a -- we consider a good figure for us. It's something that we want to keep now so that we'll not depend on the strategy of acquisition or not. It's really linked to what we feel about the environment and the current situation. And if there is a big acquisition, we will do what we do in the past. We'll raise equity, and we'll finance that through equity if needed.

And there is no more questions. So thanks to -- for all of these question and for listen to us, and see you soon. Bye-bye.