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Edited Transcript of GFC.PA earnings conference call or presentation 19-Jul-19 8:00am GMT

Half Year 2019 Gecina SA Earnings Call

Paris Jul 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Gecina SA earnings conference call or presentation Friday, July 19, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Méka Brunel

Gecina SA - CEO

* Nicolas Dutreuil

Gecina SA - Deputy CEO in Charge of Finance

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Conference Call Participants

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* Florent Joubert

Oddo BHF - Analyst

* Charles Boissier

UBS - Analyst

* Jonathan Kownator

Goldman Sachs - Analyst

* Valerie Guezi

Exane BNP Paribas - Analyst

* Christopher Fremantle

Morgan Stanley - Analyst

* Celine Huynh

Barclays - Analyst

* Christian Auzanneau

Alphavalue - Analyst

* Marie Dormeuil

Green Street Advisors - Analyst

* Neil Green

JPMorgan - Analyst

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Presentation

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Méka Brunel, Gecina SA - CEO [1]

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Morning, ladies and gentlemen. Very welcome to this session of presentation of the results of Gecina mid-year. I'm very honored and glad to be in charge of presenting these results. And before doing so, I would like to say how honored I am to be in charge of this Company with this great and outstanding team which have collaborated and contributed to these very good results -- set of results we are publishing today. And I would like to, through this presentation, to congrat them very warmly.

So, building the future is what we are aiming to. First of all, let's start by a clear and performing strategy. Our strategy is based on centrality and scarcity. Since 2014, where the strategy of Gecina moved from a dividend-yielding company to a total return company, we completely focused on centrality and scarcity, delivering sustainable performance since, very actively; and we'll go through in a couple of minutes. We put in place a very proactive management of our property -- portfolios of properties through the pipeline of new -- repositioning of our building, and the rotation of non-strategical, very major assets.

Since 2017, we put also the focus on the residential portfolio, seeking for agility and performance. And, of course, the emerging priorities have led us to sustainable and client-centric approach that you are all aware of, but getting more and more value and positioning in our portfolio.

Okay. Centrality and scarcity. As you probably know, our portfolio is made by 61% of the portfolio is located in Paris City itself; 91% is in Paris City and the Western Crescent altogether, so in the best office areas in the region. Our residential portfolio is 78% in Paris City and 22% in Paris region, mainly in the western part of the Paris region.

As a consequence, we are delivering rental and capital outperformance. NAV is up by 8% in the last 12 months, plus 5% since the -- in the last six months. And we are observing very favorable market trends, indicating outperformance is set to continue ahead for the coming period.

The underlying strategy behind that is a very proactive asset management which leaded us to do very proactive rotation, as I said, of nonstrategic and major assets; and at the same time, to put in the pipeline the assets which needed to be refurbished or restructured for the future.

Our pipeline is to deliver value creation and rental growth for years ahead. 5.9% yield on costs for a EUR3.8 billion pipeline projects, mostly located in Paris City; 65% of them are located in Paris City itself. Incremental rental income expected ahead of around 20% convert to full year 2018 rental income. And roughly altogether it will represent EUR130 million to EUR140 million further IFRS gross rent contributing from 2018 to 2024, net of disposition achieved in 2018, and of rental loss as a consequence of assets transferred to the pipeline.

Gecina's exposure to the most central and promising areas has leaded us to sell, to dispose, whether it is fully disposed or under preliminary agreement of EUR423 million of assets in this first half, with 5.7% premium on latest appraisals.

The consequence of that is that we continue to reduce our LTV: 35.3%, including duties, by end of June; and increase the exposure to the best location and most central areas. As you can see in the chart below, the comparison between end of 2015 and H1 2019, whether it is on office portfolio percentage as a whole in the portfolio, or the location in the Paris City itself.

Residential. You remember that when I joined 2.5 years ago I was concerned about the loss of value on this portfolio, which wasn't worked on. There was no asset management, no global strategy around that. We were almost on a runoff position. So since the residential portfolio benefits from this renewed strategy we put in place and our very active asset management, the uplift is materialized by circa 8% -- 7.8% -- in H1, versus 1.9% during the period of 2014 to 2017.

By the way, I would just underline that we apply the regulations in Paris which has a sort of rent control on the residential portfolio. We didn't -- even in the period that the rent control wasn't in place, we continued to apply that in our portfolio.

The like-for-like rental growth represent 2.5%; and the valuation, 2.9%, in the last six months; and 7.4% if we compare on a full-year basis.

Supportive and sustainable long-term trends revealing business opportunities of established investors continue to be part of the equation of residential performance in the coming period. And by the way, the need for decent and best location rental and flexible positioning of rental multi-residential assets.

We also, since the end of 2018, putting -- continue to work on our sustainable strategy. And we put in place a new brand named YouFirst, which is client-centric approach. This new brand -- by the way, quite unusual in the real estate industry at large, and in REITs actually -- identify and answers clients' needs of tomorrow; the quality of client relationship, customers' lifetime value; high value-added services at prime location to be offered to our clients, whoever they are; develop flexible office spaces and offer services across our network of assets; and deliver high level of services for residential and office spaces users.

In H1 what we put in place is digital lease signature for both office and multi-res. New CRM, both office and multi-res, give us a chance to better understand the needs, that [their] know our clients, that [their] understand their needs and enhance clients' relationship quality.

And partnerships, we put in place a partnership with GarantMe on the student housing, giving access to student at the same time as we have a guarantee. And we invested in Fifth Wall and Demeter to fund steady [cater one to prop tech] is Fifth Wall; and the second one to sustainability, which is Demeter, to renewable energies in France. Both of these investments are representing our dedication to urban and sustainable innovation capacity through startups that we can help us to improve our business.

So, this chart is very representative of what happens when you change -- when we changed the strategy in 2014 after the change of shareholders and moving from a dividend-yielding company to a total return company. Of course we are taking advantage of also the support of strong markets. But the quality of our asset management, the focus we put on knowing how to manage our assets, give us the capacity to show the acceleration of value creation over this period of five years.

As you see, the average total return from 2019 to 2018 -- 2009 to 2018, full-year on nine years, is average 11.5%; and in the last 12 months, 11.4%, which show you that this asset value return gave us a chance to achieve -- it is achieved from like-for-like revaluation. It is achieved from capital gains of disposition, net revaluation of recent acquisition, and from the pipeline.

Strong performance in a very supportive rental market. Strong take-up in H1, 1.1 million square meters had been leased. It's a lower number compared two last year, same period. But there is less availability. There is less spaces available in the best areas, so the lack of product also explain that. 44% of this take-up is located in Paris City itself.

Immediate supply has decreased by 7% in H1 2019 compared to H1 2018; 13% of this immediate supply is in Paris City. And, of course, the vacancy rate decreased by 20 bps in the same period year on year. In Paris itself, CBD, the vacancy rate is 1.7%.

If we look at rent increase in different areas, you can see that globally, Paris is up by 9%. 61% of our portfolio is based in Paris. The Western Crescent and La Défense by 1%. La Défense is really suffering right now on the leasing market. 30% of our portfolio are in these areas. The Inner Rim is minus 8%, but it is the addition of many different location, and the quality of location is important. Real estate is always about location, location, location, and the quality of assets. 5% of our portfolio are in these areas, and 1% is Outer Rim, which still see correction by 7%.

Globally, scarcity in Paris is driving our performance in market rent recovery as a whole. This drives a positive reversionary potential set to feed rental and capital growth ahead. Paris CBD and the fifth, sixth, and seventh district are up by 20% (sic - see slide 12, "23%"). 42% of our portfolio is located in these areas. Paris, excluding CBD, is up by 10%; 20%, almost, is in this location. Western Crescent, minus 2% in our portfolio; 30% of our portfolio are in these areas. And other Paris region, minus 7%; we have 6% of our portfolio. Total potential uplift ERVs versus passing rents are up by 8.6%.

This positive uplift is also materialized on headlines rent we observed in our portfolio in H1. 85,000 square meters have been let, re-let, or renewed in H1 2019. Headlines reversionary materialized on new leases signed in the most central areas represent 5% in CBD and six and seven districts, 2% in other areas, 5% in La Défense/Western Crescent, and minus 7% in other areas. Paris City still strong and outperforming.

Now, what about the investment market. And portfolio rotation is (inaudible) yes. Rationalizing our portfolio, capital rotation, and reinforcing our balance sheet has always been our goal in all that period. Still, we observed a very solid and supportive investment market. Historical high risk premium appealing to investors seeking resilient yields and long-term capital value protection.

Office investment in H1 represented EUR6.6 billion in Paris region, plus 23% year on year; and EUR2.5 billion in Paris City, plus 18%. Paris region, as a reminder, is the largest and the most liquid investment market in Continental Europe.

If you look at the chart in bottom left, you see the risk premium compared to the 10 years government bond and the comparison with the Gecina net office yield, which is 4.1%, 410 basis points, because interest rates are at zero. And we see also on the right side, the chart on the right side also how it works in terms of delta prime yields, 10 years bond, French, the difference between Gecina and the prime yield in the market, still very positive.

If we look at our portfolio, this portfolio rotation aims to strengthen Gecina's profile for the years ahead. We achieved last year EUR1.3 billion of full disposition, 90% outside of Paris, with 4.2% premium to last appraisals. Since the beginning of this year, EUR423 million are either sold or secured. 72% non-strategic -- hotels, logistics; 79% from Eurosic perimeters; and 62% outside of Paris with a premium of 5.7% to latest appraisal.

Altogether since the acquisition of Eurosic, we had sold and/or secured EUR2.3 billion and we still have disposition ongoing. As an example of what has been sold or either under premier agreement, we have the hotel portfolio for EUR181 million; logistic portfolio, EUR29 million; and Pointe Métro 2 on premier agreement, EUR58 million.

Still proactive portfolio rotation; we see already further decrease. When we bought Eurosic, we were at 44% LTV. We are today at 37.5%, excluding duties; 35.3% including duties, just to be comparable to our peers.

The centrality of the portfolio has improved from 56% in Paris City to 61%; 85%, including the Western Crescent and La Défense, to 91%. And the -- what is for me and for the team for Gecina very important is the average privation rental yield of 4.4% compared to our average yield on cost of committed or almost committed pipeline, which is 5.8%. And when you look at the location of this pipeline, you see how strong our capacity to create value is in the coming period.

Now, let's have a focus on the pipeline. This is an outstanding pipeline of EUR3 billion of committed or to be committed projects. You can see where we were, beginning 2018 -- end of 2018, sorry, for the committed pipeline. We delivered a couple of assets which are Ibox especially, which is 100% pre-let; EUR1.5 billion. We launched a new project for another EUR1.5 billion, which makes the EUR3 billion. And consider that we have further value creation to be booked, around EUR700 million. I'm not commenting the other numbers which we already talked about.

Just to give you a reminder, recent deliveries in 2018 represented a couple of very beautiful assets: Guersant, Penthemont, Octant Sextant, Ville l'évêque, Le Jade, Sky 56, Be Issy, Le France on the office side; Rose de Cherbourg on the student housing in La Défense.

Average occupancy rate: 92%; EUR185 million net value creation booked in H1 on assets delivered in 2018; EUR515 million since inception of all these operations, plus EUR7 per share; EUR256 million net value created for the whole pipeline in H1, which represent EUR3.5 a share. So strong contribution to the result of Gecina.

More to come. Seven projects delivered or to be delivered in 2019: Carré Michelet [a concer], only 29% already pre-let; La Défense, again, is really suffering now. And we have a couple of conversation ongoing. Valerie Britay, present here, running our office portfolio, is working hard with her team to make it work, but very tough market. The rest is either pre-let, which is the case of MAP; 100% pre-let to Lacoste.

Others: Penthemont is pre-let to Yves Saint Laurent. Others have just -- Pyramide is 100% pre-let; Being is under -- not very high refurbishment, light refurbishment, will going to be delivered by the end of the year, and I think that conversations will start around that. Friedland, no-brainer, I hope. And Ibox has been delivered. Average pre-let for this year, 54%; average yield on cost, 5.4%. Theoretical prime exit yield, 3.6%.

And key projects are to be transferred to the committed pipeline in the near future. Eight projects, 80,000 square meters, total investment of around EUR900 million; and remaining CapEx, EUR200 million. 70% in Paris itself, 61% in the CBD; 5.6% yield on cost; current theoretical prime yield, 3.2%; deliveries expected from 2020 to 2024.

Now let's talk a little bit about the residential portfolio. I'm not going to re-explain the new strategy of keeping this portfolio and running also very active asset management on this portfolio in the right -- the last period of time.

Just as a reminder, it's EUR3 billion of portfolio, EUR2.7 billion operated, EUR300 million still on sale or the end of -- you remember the Hopper program. On the operated portfolio, we are densifying and extending using all the capacity of the [allure low]. We renovate/upgrade. We have a multiannual program of EUR200 million of CapEx.

We capture -- we believe that we can capture -- we already captured, sorry, in H1 a rental uplift by 7.8%. And we optimize assets and do portfolio management very actively, which enhance our rental margin and reduce vacancy. The disposal program as -- since the beginning of the year represent a capital gain of 20% premium based on latest appraisals.

The track record is proven with tangible contribution from the renewed strategy. As you can see, from 2015 to 2018, the value creation average in Gecina has represented 9.2%: 9% on offices, per se, and 9.7% on multi-res. But it comes also from the fact that the multi-res was put aside.

And you have the comparison of the average yields. Like-for-like valuation growth in H1, 2.9%; 7.4% over the last 12 months. Uplift I already mentioned, 7.8% versus 5.6% in 2018; 1.9% average from 2014 to 2017. And the rental growth, 2.5% there as the indexation is 1.2%.

Now I leave the floor to Nicolas Dutreuil to give you more information about our financial performance.

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [2]

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Thank you, Méka. Good morning, everyone. I'm very happy to be with you today to present you these set of result. As you have seen, we've been very active on all the fields during this first half of the year; on financing, of course, but on leasing, on deliveries, on organization of the Company. And all this are very good achievements. Of course our boosting result for this first half.

You can go on page 27 to see how they have impacted our figures for this first half of the year. And of course we will see how they are going to impact our figures for the future, which is much more important.

So first, the like-for-like growth for rents, you've seen that we were at plus 2% for this first half. All our business lines are positively impacted, and we will come back in a few seconds on what are the drivers of this growth.

If we look at the impact of the whole portfolio and the evolution of the whole portfolio on our rents, we are decreasing, by 1.4%, our rents. This is coming, of course, from the disposal we've done last year, mainly on the Eurosic portfolio. You remember that we have sold many during the second half of 2018, nonstrategic assets. The [radiance], restaurants, office assets in the second rim of Paris; and, of course, all the rents which were attached to these buildings are impacted our rents for this first half.

What is interesting is that I don't know if you had the figure in mind, but if you look at exactly the same number for the first quarter of the year, we were at minus 2.6%. Meaning that we have a positive trend in the evolution for rents, and this is clearly the illustration of the ramp-up of the pipeline. All the deliveries we have done, mainly during the second half of 2018, are now positively contributing to our rents. And this is something that is going to continue, of course, during all the year of 2019; plus, of course, all the additional deliveries we will get during the year.

We have more or less the same trends on the FFO per share. We are, of course -- and that's the positive impact of all disposal continuing to deleverage as a company. As Méka said, we have now LTV, including duties, at almost 35%.

But I think what's more important during this first half of the year is the increase of the NAV. The NAV increased by more than -- around 8%, sorry, at almost EUR170 per share. And this increase -- and we will come back to that in one second -- is clearly one of the driver of our total return. And it is coming from all the pillar of our strategy, meaning of course the performance on the operating side of the business, but also all development pipeline and the quality and the location of our asset for the like-for-like growth.

What's kind of interesting to notice is the total return we get thanks to all this strategy, meaning that a shareholder of Gecina during the last 12 months have benefited from a value creation of almost EUR18 per share, coming from increase in the NAV I was referring to, and from the dividend get end of -- mid-2018 and beginning of 2019. Globally speaking, we are talking of a return of 11.4%, meaning that at the same time that we are decreasing the risk attached to the Company by deleveraging, by refocusing on the key locations, we are continuing to deliver very steady returns.

So I was referring to the EPRA growth, which is -- EPRA NAV growth, sorry -- which is contributing for two-thirds of the total return, increased by 8% during the last 12 months. The key drivers of this growth are of course our operating results for EUR220 million for FFO, the value creation coming from the pipeline for EUR260 million -- I will come back to that in one second -- and the revaluation of our portfolio on a like-for-like basis of EUR450 million.

And if you go on page 29, you can see how this like-for-like growth of our portfolio has been generated. Clearly what's interesting to see is that, globally speaking, we have -- the valuations have increased by almost 4%. But the key drivers of this growth is office portfolio in Paris, which is representing almost half of our portfolio and which has been grown by more than 5%.

And if we look at the drivers of this growth, what's also very interesting is that more than two-thirds of this growth is coming from ERV's uplift, meaning that appraisals in the valuations could be for the DCF or capitalization, all taking into consideration what we are seeing today in the market. And Méka was referring to that, which is an increase in the rents for the more central locations, which has of course a direct impact on our valuations.

The remaining part of the increase of the valuation is coming from cap rate compression. We are still seeing in the market some cap rates compression coming from transactions at a very low cap rate, and of course this is benchmark for the appraisals. But also cap rates compression coming from good news we get on our own portfolio. Because of course when we are leasing a building, the risk attached to this building is decreasing, and so we are benefiting from a smaller cap rate.

The other engine of the growth of our NAV is, of course, the pipeline. If you look at what happened during this first half of 2018 (sic - see slide 30, "H1-2019"), it was generating a growth of EUR256 million. And interesting enough, a large part of this growth is coming from project we have delivered in 2018. It means that even when a project has been delivered, there is still a lot of value to capture on this project.

And this could be easily explained by a couple of drivers, first one being that there is some location and some commercialization we still have to do on these buildings. And so when we are leasing and sending new leases on this buildings, of course we are creating more value on this project. There is of course the [T ice] consumption on these buildings. And also, for some assets, we have signed already a lease. But the tenancies and the leases started a couple of months after delivery. And so we are closer and closer of the beginning of the lease, and so it has an impact on the valuation.

What's also very important is what we still have embedded in our portfolio in term of future value creation. If you look at our EUR3 billion portfolio development pipeline, sorry, we have let's say only EUR230 million of value creation, which is already crystallized through the valuation. Meaning that all the value creation which is coming from the difference between our yield and cost and our yield and delivery is still to be crystallized in our NAV for the future.

Now let's go on page 32 to focus on our FFO per share. We see exactly the dynamic I was referring to, talking about our key figures with of course the impact of the disposal we've done in 2018, mainly during the second half of the year. Meaning that this impact should be smaller at the second half of 2019. And which is also very important, we were talking of the development pipeline in terms of value creation; but it's also, for us, a strong driver in term of FFO growth.

We can see that where, in the past, we used to have more losses -- rent losses coming from assets transferred to the development pipeline; now we are generating much more lease -- rents, sorry, coming from all the deliveries, even if we continue of course to refuel the pipeline, but we have a net contribution of the pipeline of EUR22 million. And that's also some things which should be much more positive in the future because you know that we have a couple of deliveries which took place end of 2018 and second half of 2019, so it should contribute to the performance of the Company for the second half.

Concerning the like-for-like growth of our rents, which is I know something that you are looking at very carefully. As I said, we were at plus 2% for portfolio globally speaking, plus 2% of the office portfolio. What's interesting -- and that's a discussion we have with you on a regular basis, is how is -- we can break down this growth. And you have the chart on the bottom left part of the page with the breakdown of this like for like, coming from of course indexation, coming from vacancy, and coming from re-lettings.

And what's interesting to see is that when you look at how it has evolved during the last years, we have more and more positive impact coming from indexation, of course, but this is something which is coming from -- as a market and macro. But also which is coming from more portfolio, much interesting, an uplift in rents which start to generate a like-for-like. Of course it takes time; that's also a discussion we have on a regular basis.

You've seen that we have a reversionary potential of almost 9%, meaning that this reversionary potential will fuel and contribute to this growth in the future. But we know that there is always a lag effect, because we need to wait for the end of [the lease] and the departure of the tenant, or the renegotiation of the lease, with Valerie teams, in order to crystallize this reversionary potential.

One word on our financing structure. You know that our goal is always the same: reducing, as much as we can, the cost of our debt; securing this cost of debt over the longer period, as we can; and of course keeping flexibility on our balance sheet to make sure that we are able to adjust the size of our financing structure to the needs of the Company in term of investment and development.

And so we've been very active, with almost EUR1 billion of additional financing put in place during this first half of the year. Of course a EUR500 million bond we issued earlier this semester with a 15 years' maturity, so securing a financing and cost of debt for a long term. But also, and we are very proud to announce it, a third sustainable credit line signed with BNP a few weeks ago for EUR260 million. So we are continuing to work in order to have a greener and greener balance sheet.

And of course we are managing our financing structure, because at the same time then we are issuing this new debt, we are of course paying back -- reimbursing short-term maturities at a lower cost. And that's enabled us to stabilize our average cost of debt for this first half while we are increasing the maturity of our debt.

One word to conclude on our guidance, so for 2019 and for the future. So on the short term, you've seen that since the very strong performance we had during this first half, we are increasing our guidance for the full year. We were at EUR5.70 to EUR5.75 per share in term of FFO. And we consider now that we will be between EUR5.80 to EUR5.85 per share, so that's a direct result of all what has been done during the first half of the year.

And also what is clearly very important is to give you visibility over the future, and our pipeline enable us to do so. And so we consider that we have EUR100 (sic - see slide 34, "EUR130 million") million to EUR140 million of additional rents to come from the development pipeline, which is quite a huge number because it represents almost 20% of the existing rents of Gecina.

Thank you for your attention. And now the floor is open to your questions.

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Questions and Answers

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Méka Brunel, Gecina SA - CEO [1]

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Yes, a question in the room?

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Florent Joubert, Oddo BHF - Analyst [2]

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Congratulations for your performance. So Florent Joubert from Oddo BHF. So I would have maybe two questions. So first one, so we see now that you have a reasonable level of LTV. And the question is to know what you are going to do now? Have you any appetite for acquiring new assets, maybe from doing a new significant acquisition, or for doing maybe more share buyback? I don't know.

And second question, so we have seen that you are interning to exclude the negotiation for buying Carreau de Neuilly. So I don't know if you can share any additional view of that transaction.

And maybe as a follow-up question, so this transaction is very typical because you would swap this asset with another matured asset. So do you contemplate to do more transaction in the future in this format? So what -- thank you.

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Méka Brunel, Gecina SA - CEO [3]

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Thank you very much. Two good questions, thank you. First of all, what do we intend to do? In terms of acquisition, as you always said, we are neither forced buyer nor forced seller. So this is all about the strategy and how we can improve the quality of our portfolio. And we haven't changed for the last four or five years our expectations in terms of return and capacity to create value, so we are not going to change our expectations, and keep the discipline.

The second question about the potential acquisition of something outstanding in the market is sort of -- I don't know, merger and acquisition, M&A, whatever. These are very opportunistic. And I don't see anything special, but if I had something in mind, I wouldn't talk to you until the moment it is possible. So no, there is nothing special to talk about.

The LTV, the fact that we maintained the LTV low and would continue to maintain it at a reasonable level, it's because we consider that leverage is good but shouldn't be a goal in life, and we shouldn't improve our performance only by getting advantage of low interest rates. So this is also part of the discipline and the management of our long-term loans that we were talking about.

Nothing related to the fact that we would like to keep it low because it is low or not, but we have always said that we consider around 35% is a decent number. And we would like to keep this discipline, and still believe that this is a decent number.

Actually, every day everybody is expecting interest rates to move up; they are not, so far. But you know what? You'd rather be disciplined no matter what, you never know what going to happen. So I would like to keep this discipline.

And your question about Carreau de Neuilly, it's typically the kind of acquisition we like. This was a competition. By the way, we -- I always said -- we already mentioned that we are not fan of competition. Because it's -- because of the expectations we have in terms of returns and the quality of asset and our capacity to create value, we are never really competitive. But in this case, we had the ability to suggest some asset swap, which is what they were looking for.

This is a complicated restructuring of an existing asset. By the way, if we end up to conclude this transaction, there's still the market which is owned by the city of Neuilly, which is to be about to create the whole structuring, et cetera.

So this is the type of thing we like: it's complicated. It's sophisticated. It does need all kind of engineering, and this is what we know how to deal with. And we also on the next door building, which is mainly let to Chanel, so we are largely located in that area. But in this axis going from plus -- (spoken in French) -- where you have the Obelisk, I'm sorry.

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [4]

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Concorde.

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Méka Brunel, Gecina SA - CEO [5]

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Concorde, thank you. Going from Concorde to La Défense, we are in this axis. We are in Champs Élysées. We have a couple of assets along Champs Élysées. We have the [Light] building, the former Peugeot headquarters in Avenue la Grande-Armée. And this is the continuity in Avenue Charles de Gaulle, which everything is going to change. The Avenue itself are going to change, becoming much more welcoming by the new set of restructuring of the Mayor of Neuilly, so this is going to be transformational.

And, by the way, this is a win-win transaction ultimately, when it is going to be done -- would be done. It's because they would like to continue to collect rent, but from mature, already refurbished assets. And we'd like to take care of raw materials to reposition and restructure. And I think that this is the reason they consider that they can be in exclusivity with us.

The reason, by the way, we made public announcement is because this was a competition. Not so many people were in this competition. At the moment that they started to tell other people that they were no more in, I started to receive calls congratulating me. So I'd rather announce that we are in an exclusive period rather than have rumors in the market.

But this is the type of assets we love. But you know what? Doing from time to time, one out of the time. By the way, this is not fully let but it is let, actually. So there is rent to be collected for a couple of years before it is vacated, emptied, and repositioned. So we like that. This is our type of beauty.

Maybe a question online. Charles Boissier -- Charles, over to you. Good morning.

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Charles Boissier, UBS - Analyst [6]

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So, I just had one question on like-for-like rents. So the metric for office (inaudible) have went from 2.5% to 1.9% versus last quarter. And one element which I believe is not something you can really impact very much, but indexation, which contribution is going down to 1.7%, even though the ILC indexation is increasing. (inaudible) statistic agency to reach 2.5%. So just was wondering what makes this indexation contribution soften to the like-for-like metric.

And then perhaps more generally on the like-for-like, you mentioned that the vacancy change could be slightly negative in 2019. I think this is something you flagged already at the start of the year. And I just was wondering how much more visibility on that vacancy impact do you have now versus six months ago. Thank you.

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [7]

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Yes, good morning, Charles. In fact, in terms of indexation, what is not so easy to forecast is that you know it depends on the date where our leases have been signed, because we have not a firm date of indexation for all our leases. And it depends on index of calculation on a quarterly basis, meaning that from one quarter to another, you can have a stronger impact than for another one.

So you can have not a regular growth in terms of indexation depending on specific quarters, which leases are indexed or not. So maybe that's the reason why it could be complicated for you to compare, from one period to another, the indexation.

Regarding the potential vacancy effect we can have on our portfolio, we know that potentially we could have some discussion with tenants on a nonprime location at the end of the year and we could have a temporary vacancy, mainly in [Paris de France] area. Meaning that it could impact our like-for-like, not on indexation, not of course on the (inaudible) for rent, but on the vacancy effect. Meaning that today we do not have a clear visibility on what will be the impact, but we prefer to be cautious on that. We are not talking of big numbers, but we could have a little impact coming from that.

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Méka Brunel, Gecina SA - CEO [8]

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Thank you. Maybe a second question online. Jonathan Kownator.

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Jonathan Kownator, Goldman Sachs - Analyst [9]

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Yes, a couple of questions if I may. So the first one just on like-for-like rent growth, just if you can comment on the performance of Paris CBD, which was rather small. Like if it's perhaps a temporary vacancy, but if you can you -- elaborating, it was 0.2% only. But obviously you describe it as your strongest market.

The other question that I have was on La Défense. You made a couple of comments during the call saying how tough it was. Obviously you have two development projects which are rather sizable in that area being delivered, like Q3 2019. If you can perhaps give us a bit more color on that market, that would be helpful. Thanks.

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Méka Brunel, Gecina SA - CEO [10]

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Yes. I well take the question on La Défense and give a chance to Nicolas to answer you on the performance of Paris CBD.

La Défense is a very cyclical market, and for some reason it is suffering again. Probably there are many different reasons around that. A lot of deliveries were going to happen in that market in the coming period. We also need to consider not all the restructuring are high-quality in terms of densification, quality of services, quality of access, et cetera. There's a lot going on in terms of access and the whole (spoken in French), which is going to be transformed in the coming period.

So altogether -- and by the way, the public transportation, more than 80% of people are using public transportation to go and work in La Défense, except that it doesn't work that good. And we need to wait until the moment that we have the other lines of the new Metro lines in -- coming in force in the coming years, and giving much more capacity and accessibility. A lot going on in La Défense at the same time.

But look, this is cyclical and we must say that there is a -- we see that in the building Carré Michelet. I thought that Carré Michelet would have been leased sooner than that compared to [BEC], and I think that this is what I mentioned last time we talked together. This is not the case, still suffering. But Valerie Britay, again, and her team, they are doing whatever they can to make sure that they are securing some leases on that building.

Look, anyway, in any case, vacancy is our worst enemy, in any case. So we need to have our building full. But yes, there are deliveries coming in the coming period and -- but not all the building are the same quality. Still, probably will give you more flavor of the day when we will understand better what's going on in La Défense, but the observation we make today is that this market is really suffering.

And maybe also the other buildings are restructured, the non-high-rise building are densified, restructured, better quality, better accessibility, especially in Paris, or in some other hubs in the Paris region. And therefore as a consequence, La Défense is suffering from, as usual, from the quality of the assets, the fact that the [journal] expenses are too high, the services are not there, the densification are not there, et cetera.

This is not the case, by the way, of Carré Michelet, which I would recommend. At our -- probably at our Investor Day we should visit this building. It's beautiful and outstanding, and really answers to the needs and the demand of our tenants. But the global market is suffering now.

Nicolas, up to you.

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [11]

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Yes. On the like-for-like of the CBD submarket, it's one of the issue we have, is that we are slicing our portfolio in small pieces to gave you a [flavor] by area, sometimes one single asset could have an impact on the overall figure, which is exactly what happened on the CBD for this first half. We had one building which is temporarily vacant because we are doing a few walks between two tenants. It is already partly pre-let, so it's clearly a temporary vacancy impacting this part of our portfolio.

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Jonathan Kownator, Goldman Sachs - Analyst [12]

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Okay, thank you very much.

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Méka Brunel, Gecina SA - CEO [13]

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Thank you, Jonathan. Another question online, and then I will ask the audience if there is a question in the room. Valerie Guezi from Exane. Good morning, Valerie.

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Valerie Guezi, Exane BNP Paribas - Analyst [14]

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Hello, good morning. So I just want to ask a follow-up question on this vacancy issue, because I think Nicolas mentioned that that's toward the end of the year, so that shouldn't impact 2019 like-for-like too much, but that will impact 2020. Is it correct or am I missing something?

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [15]

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It will depend on the discussion we will have. Of course if we have vacancy in the portfolio in this area, it could have an impact on the like-for-like. But here again, that the part of the like-for-like coming from the vacancy, so that the one we can walk on and we will of course focus our attention on these buildings to limit the impact is much as possible.

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Méka Brunel, Gecina SA - CEO [16]

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The only thing we can ensure you of is that we will use all the energy needed to fill the buildings and to lease the buildings sooner than later, but it depends on what happens. And sometimes you need to program some works, maybe we didn't expect at first place for different reasons, that takes longer than expected.

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [17]

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And you know, but I'm sure you are very familiar with that, when you look at the drivers of the like-for-like, uplift and indexation have impact on the whole portfolio but by small amounts. Vacancy, if you have only one floor vacant on one building, this impact is strong because it's not run during a couple of months. So meaning that even if the issue could be quite easy to tackle, it could be a question of weeks or months before re-leasing a building, the impact on the like-for-like could appear very strong, and maybe stronger than the real impact on the figures.

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Méka Brunel, Gecina SA - CEO [18]

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Thank you. Any question in the room from the audience? No. Let's go back over the phone. Christopher Fremantle from Morgan Stanley. Good morning, Christopher.

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Christopher Fremantle, Morgan Stanley - Analyst [19]

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Good morning. I just had one question. Wanted just to ask you to pick up a comment you make on page 29 of the presentation when you talk about the valuation. And you say in that slide that you think market rents recovery is starting to be accounted for by valuers, which implies that the valuers are still not fully reflecting the level of current market rents within the valuation.

So I just wanted to ask you, to what extent do you believe that they are still underestimating the current market rent, the true market rental level within your portfolio? And can you see a scenario where that momentum in the first half is maintained in the second half as valuers continue to recognize that new market level? Thank you.

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [20]

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Thank you, Chris, for giving me the opportunity to come back on this point. Yes, when I say they have started, in fact they had already started. Last year, you remember it was one of the statement we did when we presented our full-year results during the second half of 2019. We had already quite a strong positive impact coming from the increase in the ERVs.

It does not mean that it is finished, for sure, for a couple of reasons. A first one is that we continue to see today an increase in the ERVs, an increase in the rents we are signing with tenants. Meaning that the trend in the market today -- and this is a direct result of what Méka was explaining regarding the trend in the market in term of vacancy rate, more specifically in the more central location with a vacancy rate in the CBD below 2%. It means that in our core market it will continue to drive ERVs up, and so we should continue to see increase in our valuations.

Second point, which is also interesting, is that one of the methodology which is used by appraisers to do the valuation is a DCF methodology. And of course on this kind of methodology, the appraiser is of course considering that we will be able to reach the ERVs at the end of the lease. And so meaning that the closer we are from the end of the lease, the stronger is the impact on the valuation.

So it means that, even if appraisers have already taken into consideration the calculation today's ERVs, we should continue to benefit from a positive impact coming from just the timing and the maturity of [all of this].

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Christopher Fremantle, Morgan Stanley - Analyst [21]

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Okay. May I ask a follow-up? Could I just press you slightly? Do you believe that the rental values that they are assuming at the end of the lease are materially below what is achievable?

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [22]

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That's a good question. I don't think so. Because to be honest, they have done a huge walk during the first half of the year to go through all their assumptions to make sure that they were in line with what we were seeing in the market since last year in term of rental uplift.

Having say that, what they are clearly not taking into consideration is a future increase in the ERVs, meaning that when they are doing their calculations, they are considering that the ERVs -- maybe in two years', three years', four years' time -- when the lease is going to end, is today's ERVs. So when we see today's a positive trend we have in the market, we hope that ERVs at the majority of the lease will be above their assumption.

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Christopher Fremantle, Morgan Stanley - Analyst [23]

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Okay, thank you. That's clear.

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Méka Brunel, Gecina SA - CEO [24]

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Thank you, Christopher. Maybe we're going to take Celine Huynh from Barclays. Good morning, Celine.

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Celine Huynh, Barclays - Analyst [25]

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Hi, good morning. Thank you for taking my two questions. My first question is on the share buyback. I was just wondering if there's any specific reason why you didn't reach your EUR150 million target. And also a follow-up on Charles' question considering the large discount the share is trading it, which you consider extending the share buyback program, both in time and in quantum?

My second question is regarding Ivanhoe Cambridge. If you could confirm they have pledged your entire 15% exposure, or just part of it? Thank you very much.

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Méka Brunel, Gecina SA - CEO [26]

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Thank you for your questions. On Ivanhoe Cambridge, I think they had pledged 100% of their shares. This is what they reported to AMF and to the company itself. So yes, it is pledged. They probably will refinance it. And this is what we saw in their press release in the announcement they made at AMF and the reporting being made to the Company.

The other question was about the share buyback. Nicolas will give you some ideas about why we didn't reach 100% of the EUR150 million.

Today we do not intend to launch any new program. This is not just about launching program and just trying to capture -- to re-evaluate, because we are [destroying] shares or not. This has to be related to what the strategy of the Company is and what we have in mind. And so there is nothing -- program like this in the coming period.

But Nicolas, can you give some technical reasons why we didn't reach 100% of the EUR150 million?

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [27]

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Sure. What we said is that we had a maximum share buyback when we announced it, end of February this year, of EUR150 million. But you know that we cannot, because of regulation, buy above a certain amount of shares every day. That's the regulation of [MAR] regulation. And so it means that considering the volumes we've seen in the market since end of February, we've been able to buy an amount of 100 million and almost 10 -- EUR110 million. So that's what you have in the accounts for the end of June.

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Méka Brunel, Gecina SA - CEO [28]

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Thank you. Is there any question in the room? No, okay. Christian Auzanneau from Alphavalue on the phone. Good morning, Christian.

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Christian Auzanneau, Alphavalue - Analyst [29]

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Good morning. I have a couple of question. The first concerning the pipeline, could you tell us how you will finance it all along the four or five coming years? That's a EUR3 billion consideration. And according to -- I presume your LTV policy ought to stabilize it, so should you proceed to some disposals, and of what type of disposal could you make? That's for the first question.

The second is, after your disposal in June of your hotels portfolio, does it remain some other hotels for sale or is it fully sold? And I will have one other question after that.

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Méka Brunel, Gecina SA - CEO [30]

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Yes. Many thanks for your questions. On the hotel side, this is the only portfolio we own and this came from Eurosic -- actually came from Foncière de Paris. This is on their premier agreement and would be after this period confirmed by -- during the last quarter of the year. But this is the only portfolio we own.

Maybe on the financing of the pipeline, Nicolas?

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [31]

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In fact, when we give you the amount of EUR3 billion or EUR1.5 billion for the committed pipeline, this is including the today's value of the buildings. So we are talking of the total investment cost, which is coming partly from today's value of our assets, plus the CapEx we will have to invest this project.

So if you look at just the CapEx we will have to inject, we'd see -- which is the cash out we will have in the coming years -- for the committed pipeline, it's only for the 2.5 coming years, EUR300 million. Meaning that, considering the size of the portfolio of Gecina, the financing, undrawn financing lines we have, and maybe additional disposal we will do, are not at all an issue.

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Méka Brunel, Gecina SA - CEO [32]

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But the disposition program is always about the proactive asset management, whether the assets are mature or nonstrategic or not contributing, or we consider that we are done with the value creation. From now on it's not for reducing our LTV or financing, whatever; this is just much more on the strategic and on a mainstream base.

Thank you very much. Marie Dormeuil from Green --. Oh, sorry, you had another question (multiple speakers).

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Christian Auzanneau, Alphavalue - Analyst [33]

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My last question -- sorry. And regarding maybe sequential pace of the rents in Île-de-France -- the city of Paris, La Défense, and the -- out of it in the suburb. So you consider that the pace of the increasing rates is decreasing from the year-on-year figures you mentioned. With a minus 7% around, with a something like stable in La Défense, or maybe right now decreasing since January 1. And whatever for this figures, the color on the instantaneous situation of Paris (inaudible).

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Méka Brunel, Gecina SA - CEO [34]

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Yes. You are talking about the breakdown in different areas in terms of decrease or increase of rents in the coming periods, right?

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Christian Auzanneau, Alphavalue - Analyst [35]

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Not entire -- more about you gave some annual year-on-year figures, and just to -- precise -- what's this pace will be at the end of 2019 according to the news we have in the markets? So as an example, the minus 7% outside from Paris on the secondary asset, will they continue to decrease, accelerate the decrease according to the [very current] situation we can see on the market?

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [36]

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Clearly that's not an easy question to answer because we don't know where will be the market exactly at the end of the year. Having say that, of course here we are talking of market figures coming from brokers.

And I would say that more than focusing on 2019, I think what's important is to look at it through the trends we've seen in the market. Meaning that clearly -- and that what you are seeing for the first half of the year -- in the most central location, we are benefiting from the scarcity issue, meaning that there is no land bank available in Paris. Building regulation is quite constraining.

And so, compared to other cities where you can destroy smaller building and build brand-new towers in the middle of the city, that's not the case in Paris. So clearly for Paris we are benefiting from the scarcity

effect, which is not the case in other location, and which is explaining this very different trend.

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Méka Brunel, Gecina SA - CEO [37]

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More generally, if we consider that only 1% of our portfolio is in the Outer Rim, this is not very significant in terms of what is the impact in the portfolio and in the performance of the portfolio.

But globally speaking, it's much more about -- I mean, when we are talking about the Outer Rim, we are [auditioning] a lot of different kind of animals. This is not very coherent in terms of quality of assets, location, and positioning of all kind. So definitely Paris market is very strong, but definitely it will benefit to the best asset and the best location. And again, around (inaudible) probably transportation and mixed use areas.

And so we do not really know, when we say minus 7%, which asset exactly has impacted this minus 7%. I mean, it's not that significant in the market and this is not the mainstream of the transaction we see. But we're going to continue to follow that up.

Thank you very much. Thanks to you. Now over to Marie Dormeuil from Green Street Advisors. Good morning, Marie.

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Marie Dormeuil, Green Street Advisors - Analyst [38]

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Good morning. I have two questions on my side. Just following up on the development pipeline and how much you still have to spend. So if we put together the committed and the controlled and certain, you have about EUR900 million. Even this thought, persistent NAV discount that we've seen, is it possible that the value creation at the property level is actually offset by the REIT's relatively expensive cost of equity?

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [39]

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Clearly not. That's a calculation we are doing; and clearly not. Because if you look at the amount of value creation we have on this project, by comparing the yield on cost on this project and the yield at termination, the value creation is largely big enough to offset this discount issue.

Having say that, and that's a discussion we had already in the past, of course we are looking at this discount. And that's something that we are clearly trying to work on and to understand and to see how we can reduce it as much as possible.

But we are not driving all real estate strategy only based on the level of the discount compared to the NAV, because the discount is moving month by month. We are doing investment on the long-term. And so for us what's clearly important is to have the right asset at the right place in line with our tenants' needs.

And maybe at one specific day because our share price have dropped, does not make sense, but we are sure that on the long-term basis it will make a lot of sense in terms of value creation. And that's exactly what we are seeing with these set of results.

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Marie Dormeuil, Green Street Advisors - Analyst [40]

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Thank you. And just another question on the residential pipeline. So you have EUR250 million of renovation and refurbishment CapEx planned. Can you update us on what's the targeted return for this CapEx? And we have in mind like a 5% gross return. Is it too ambitious, or what's the target?

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Méka Brunel, Gecina SA - CEO [41]

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Go ahead.

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [42]

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No, look, clearly when we see -- and maybe I don't know if it is a good news or a bad news. But our houses portfolio was [indeterminate] in the past. We believe, clearly, that the 5% return that we can get on this CapEx is a lower range of our assumptions. So you are not wrong with staying -- with having in your model this figure. And we hope it will be above.

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Marie Dormeuil, Green Street Advisors - Analyst [43]

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And jurist in the long-term, how do you expect this CapEx to contribute to your residential like-for-like? What would you say would be a decent estimate of -- in terms of basis points that would be related to this CapEx program?

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [44]

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Well, the advantage with resi is that you can walk with statistics much easier than offices. So the assumption that -- what we are seeing today in our portfolio is that the rental [apiece] we get on the apartment where we have done the walks is above 8% during this first half of the year. And you know that we have a churn rate for resi tenants of -- at between 15% to 20%, so it could be a good assumption for your modelization.

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Méka Brunel, Gecina SA - CEO [45]

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By the way, just one thing I would like to underline on the multi-res portfolio, comparing for Paris market to what everybody has seen, whether it is in Germany or in New York or in other places.

In Germany, these portfolios, these multi-res portfolio, came from the social housing which were owned by lenders. And the lenders went bankrupt because -- well, this is not an offense to say that usually governments and public institutions don't know how to manage whatever, the assets -- whatever the assets are. And they have been -- they went bankrupt during the course of -- the end of 1990s, early 2000s.

Then it has been bought by [Walter Funds] or private equity funds. And then a new investment has been injected in these companies. They made the IPOs. They became public, and owned by large shareholders, much more institutional shareholders, whether it is large pension funds or insurance companies. But this transition came from the social housing, especially when you are talking about Berlin, is really -- the origin is social housing.

In France, the leasing private market, per se, dedicated to middle-class people, is owned by individuals. Especially individuals with a huge amount of fiscal contribution which costs the budget of the government of the country EUR4 billion a year.

So there is a rent control, but people like us who are not coming from the social housing, we are the largest owner in Paris, but we have only 5,600 units -- in Paris, Paris region, I am talking, at large. So this is not going to be the same type of rent control or rent under control. We don't believe that because it's going to be the end of private investors, of individuals investing in that area, which is absolutely needed to support the construction and the investment and the development of housing in France because there is a real need for residential.

The need globally of the country is 500,000 units a year, and today we are at 350,000, something like this. So there is a lack of product and especially adapted and good product in the market. I just wanted to bring this information.

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Marie Dormeuil, Green Street Advisors - Analyst [46]

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Thank you.

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Méka Brunel, Gecina SA - CEO [47]

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Now, Neil -- thanks to you. Have a good day. Neil Green from JPMorgan. Good morning, Neil.

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Neil Green, JPMorgan - Analyst [48]

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Good morning. Just one quick question from me, please. In the results you mentioned -- or you referred to about EUR35 million of rental income that will be vacated shortly for the next stage of development. Is it safe to assume that that will effectively be entirely vacated by the end of this year? Or will it perhaps be staggered through 2020 as well, please?

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Méka Brunel, Gecina SA - CEO [49]

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I'm sorry, just want to make sure that I understand your question. Are you talking about the building which are going to be transferred to the pipeline?

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Neil Green, JPMorgan - Analyst [50]

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Yes. Yes, please. Yes.

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Méka Brunel, Gecina SA - CEO [51]

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Okay. I think it is globally under control. And we already by raising our expectations by year end, we made assumptions that take into account what kind of [vacation] we're going to have. We do not expect any kind of surprise.

But Nicolas?

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Nicolas Dutreuil, Gecina SA - Deputy CEO in Charge of Finance [52]

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No, I would say that a large part of it, yes, will be -- should be in the buildings, end of this year or beginning of next year. Having say that, that's something which is of course anticipated. And we know that first we'll be compensated by the additional rents we will get on our last deliveries; first.

And second, of course that is in impact which is already taken into consideration in the long-term guidance we gave you for the EUR130 million to EUR140 million of additional rent. We are of course excluding from this calculation the existing rents on the buildings which are going to be transferred to the pipe.

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Neil Green, JPMorgan - Analyst [53]

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Brilliant. Thank you.

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Méka Brunel, Gecina SA - CEO [54]

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Thank you very much. Any other question in the room? We have nothing left online. Thank you very much for your attention. Of course, we remain 100% available for any further question. Do not hesitate to call up on Nicolas and me, but also Samuel, who can answer every single question. And I wish you very nice vacation; and see you in September on our Investor Day. Have a good day. Bye.