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Edited Transcript of LRE.MC earnings conference call or presentation 15-Nov-19 1:00pm GMT

Q3 2019 Lar Espana Real Estate SOCIMI SA Earnings Call

MADRID Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Lar Espana Real Estate SOCIMI SA earnings conference call or presentation Friday, November 15, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hernán San Pedro

Lar España Real Estate SOCIMI, S.A. - Head of IR

* Jon Armentia

Lar España Real Estate SOCIMI, S.A. - Corporate & Financial Director

* Jose Manuel Llovet

Lar España Real Estate SOCIMI, S.A. - MD Retail, Offices & Logistics

* Miguel Pereda Espeso

Lar España Real Estate SOCIMI, S.A. - Acting CEO & Director

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Conference Call Participants

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* Daniel Gandoy López

JB Capital Markets, Sociedad de Valores, S.A., Research Division - MD

* Ignacio Romero

Banco de Sabadell. S.A., Research Division - Research Analyst

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Presentation

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Hernán San Pedro, Lar España Real Estate SOCIMI, S.A. - Head of IR [1]

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Hello. Good afternoon, everyone, and thank you very much for joining us today. Welcome to our 9 months 2019 results presentation. As always, the press release was issued this morning and the presentation is also available in our website, our app and at the CNMV official website.

Team joining me this afternoon are Miguel Pereda, Board member of Lar España and Chief Executive Officer of Grupo Lar; Jose Manuel Llovet, Managing Director of Commercial Real Estate of Grupo Lar; and Jon Armentia, Corporate Director and CFO of Lar España. After the presentation, we will answer any questions you may have.

Now let me hand the call over to Miguel Pereda.

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Miguel Pereda Espeso, Lar España Real Estate SOCIMI, S.A. - Acting CEO & Director [2]

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Thank you, Hernán, and good afternoon, everyone. Let me start this presentation with the highlights of the first 9 months of the year.

First of all, the results of the company continue its positive trend with our EBITDA growing 9% compared to the same period of last year. EPRA earnings per share has also registered a positive increase of 19%. According to the most recent valuation of Lagoh, since acquisition, our portfolio value has increased by 13% since December. In Lagoh, we show a strong revaluation since December and up 46% in the last quarter. EPRA NAV per share stands at EUR 11.4, a 10% growth versus full year of 2018.

Moving on to our assets. Lar España continued to outperform the market in both retailers' declared sales and also footfall. We've been beating the Spanish market now for 15 quarters and new rents signed went up 11.1%. Annualized net rent have increased at 23% versus Q2 previous quarter driven by the incorporation of Lagoh. Our guest stay in our shopping centers is, in average, 86 minutes, and that's per visit and without taking into account the effect of Lagoh that we think will push the figure up.

We are also very proud to have a successful open in Lagoh in this month -- in the month of September with a full occupancy. In the corporate side, we paid EUR 75 million dividend or a EUR 0.8 per share over the result of 2019. That offers a 10.4% dividend yield over market cap at the end of the quarter.

On the top of this dividend, 100% of the shares of the first share buyback program that were around 3 million shares, have been amortized, and we have completed now 88% of the second program of EUR 42 million. Our goal will be also to amortize those shares that we are buying at the moment. Finally, we maintain our leverage at a attractive 33% net LTV and our average cost of debt stands at 2.2%.

In Slide #5, we can see the positive evolution of our main figures along those years. Retail occupancy has been increasing year-on-year and has gone out now this Q3 up to 96%. Along with the occupancy, retail GAV has also been growing at very attractive rates. Retail EPRA net initial yields stands at a level of 5.9% that we think is especially relevant if we compare it with some of our European competitors.

Moving to Slide #6. Now with Lagasca99 residential units fully sold, we have completed our noncore assets divestment plan. The exit yield of the full program is 5.2%, of course, excluding Lagasca99, and we have obtained a 87.5% average revaluation over acquisition price. After those sales, we can now say that we are a 100% retail company.

Move now to Slide #7, and let us talk a little bit about Lagoh. We are very proud to say that Lagoh is now already open with 7 -- EUR 17.2 million of annual rent that represents 15% above our estimates of EUR 15 million. It is fully leased, and we are -- we have already more than 1 million visitors in the first weeks after the opening. It offers a very wide range of shopping, dining and leisure experience. A very strong mix of top Tier 1 retailers are present and are bringing the last -- the latest flagships and formats to Lagoh.

Primark with the first -- with cafeteria and beauty salon or Victoria's Secret with its first full store in Spain are just some of the examples. It also has the best leisure and dining offer that you can find in all the industry, including a wind tunnel, a giant wave for surfing, virtual reality activities and others. It has certainly become the leading retail destination in Andalusia.

Lagoh valuation keeps on growing and has reached EUR 306 million of value at opening at the end of September. That means a growth of 46% in just the last 3 months.

Now I hand over to Jon to review the financial figures in a lot more detail.

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Jon Armentia, Lar España Real Estate SOCIMI, S.A. - Corporate & Financial Director [3]

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Thank you, Miguel, and good afternoon, everyone. In Slide 10, I would like to run you through our strong 9 months 2019 financial figures.

Gross asset value stands at EUR 1.6 billion distributed across 16 assets. Annualized topped-up net rent grew to EUR 92 million, a 23% increase quarter-on-quarter with a strong growth coming from the Lagoh shopping center opening. Gross rental income in the first 9 months of 2019 reached EUR 57.8 million and grew a healthy 1.8% like-for-like versus the same period last year. EBITDA climbed 9%, reaching almost EUR 38 million, thanks to the good operational performance of the company. Megapark, Gran Vía and Portal de la Marina are the top 3 shopping centers that have contributed the most to 9 months income.

Gross financial debt stands at EUR 671 million, with a net loan to value at a comfortable 33% and diversified funding sources at a very competitive cost of 2.2%. Once again, these figures clearly demonstrate the solid strength of our balance sheet.

In terms of EPRA, EPRA NAV stood at EUR 1,011 million and EPRA NAV per share rose to EUR 11.4, a 10% increase versus December 2018. The company's return on equity amounted to 13% whilst its return on asset stood at 7.5%.

Let's move to Slide 11 to go over retail performance. In terms of retail yields, the EPRA topped-up net initial yield stands at 5.9% and reversionary net initial yield at 6.2%, demonstrating the potential of our retail portfolio if all of the GLA was leased at market price.

Our operating results continued to trend upwards. Like-for-like gross rental income grew 1.8% and like-for-like net operating income increased by 2% compared to the same period last year. Turnover rent grew an impressive 30.5%, thanks to an increase in our tenant sales, and we have reduced lease incentives by almost 17%. The occupancy rate, according to EPRA standards, has gone up to 96%, a 1% quarter-on-quarter increase. And this is despite 8 of our assets having been under refurbishment during this year.

We have also seen very strong letting activity during the period. We signed 99 leases, including renewals, relocations, relettings and new lettings, resulting in a 11.1% increase in rent with over EUR 7 million in negotiated rent and more than 42,000 square meters rotated in the period. I would like to highlight that 65% of all Lar España's active lease agreements have lease expiries beyond 2023, which allow us to have a solvent tenant base and a significant level of guaranteed minimum rent.

Let's now move on to Slide 12 and look at the portfolio valuation at the end of September 2019. Lar España's assets have continued to show a strong value of lead. The total value of Lar España's portfolio has risen to EUR 1.6 billion, up almost 55% versus acquisition price and up almost 13% since the end of 2018 driven by the valuation of Lagoh shopping center carried out in September.

The value of Lagoh shopping center alone has increased by 132% since the end of 2018 and more than 45% in just the last quarter. We will also highlight that almost 80% of our retail assets are classified as large or very large according to the Spanish Association of Shopping Centers. That is to say, more than 40,000 square meters of GLA per asset.

Now let's turn to Slide 13 to go over the P&L. Our assets generated a total revenue of EUR 57.8 million. Lar España presented a very positive operating result and an EBITDA amounting to EUR 37.8 million. Profit for the period amounted to EUR 79.1 million.

Please note that due to the noncore asset divestment plan, revenues in 9 months 2019 included rent from these divested assets, which are not included in 9 months 2019. Therefore, these figures are not very comparable. However, despite having a different perimeter, our results have remained at similar levels.

Slide 14 details the stand-alone P&L for the retail portfolio. This provides a comparable perimeter demonstrating very satisfactory performance. Our retail assets generated EUR 57.5 million in revenue, a 6% increase compared to the same period last year. The company's operating results grew 52% compared to the same period last year. And the profit for the period reached EUR 82.4 million, a 52% year-on-year increase. As you can see, our retail performance shows a solid and strong performance when we compare 2 similar perimeters.

In Slide 15, you can see that at the end of the quarter, the company's total debt stood at EUR 671 million, EUR 140 million of which related to the senior secured bond. Net financial debt stood at EUR 516 million and net loan to value has maintained a comfortable level of 33% at the end of the period. The average cost of debt was 2.2%, with most of the debt 85% being fixed.

Now let's move on to Slide 16. We are always looking for new ways to maximize our shareholders' value. We have amortized 100% of the shares from our first share buyback program, amortizing over 3 million shares or 3.1% of our share capital. We have also completed 89% of our second share buyback program of EUR 42 million or 5% of our share capital. Our goal is to also amortize all the shares we buy back to further reduce Lar España's share capital. We expect to complete 100% of the second share buyback program and to amortize all the shares by the end of the year.

And now let me hand the presentation over to José Manuel who will review business performance.

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Jose Manuel Llovet, Lar España Real Estate SOCIMI, S.A. - MD Retail, Offices & Logistics [4]

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Thank you, Jon, and good afternoon, everyone. Before going through the presentation, Miguel has already mentioned, but I would like to start with a very short comment on the opening of Lagoh the past 27th of September.

Most of you have been following with interest the complete development since we acquired the land in 2014 as some of you were present in the opening. And I think that it is fair to say now that the result is outstanding and that we have delivered what we promised, proving again our development capacity after the previous developments of Vidanova and Lagasca.

Lagoh is now one of the best retail and entertainment complexes in Spain and probably in Europe. We have delivered complete information about the asset and its performance, but I would encourage you to have a visit and see how we are tackling the main challenges in the industry like the new commercial mix, the weight of food and beverage and leisure, online strategy, sustainability, digital and physical services to clients, et cetera, et cetera. We will be pleased to show and give you all the details. I always say that the value of a company like us is in the assets, and it is very important to visit them and see firsthand how they perform and how we manage.

Going now to the presentation, taking a look to the overall portfolio on Page 18, you see that we keep on track, outperforming the market for 15 quarters now despite having 8 shopping centers under refurbishment during the first 9 months of the year. Footfall for Lar España registered almost 50 million visits, a 2.4% growth despite having over 330,000 GLA square meters under refurbishment whilst the Spanish footfall average decreased by 1.2%.

Average stay of our visitors in our shopping centers is pretty high, almost 1.5 hours. Once we have implemented our customer journey project in all our shopping centers, we'll know more about the client and his needs and how we can make them stay more time in the centers.

Now in Page 19, you see the other basic KPI, that is sales. We have also beat the Spanish market this quarter. Tenant-declared sales have increased 2.2% whilst the Spanish market has increased 1.1%.

On the other side of the slide, in terms of letting, we have signed 99 operations during the first 9 months of the year with EUR 7.2 million of new rent and over 42,000 square meters of GLA rotated, which implies a rotation rate of 10%. I would like to highlight here the rental growth of 11.1% as evidence of the active management strategy implemented by Lar España and the potential rent uplift that we have in our portfolio.

In Page 20, let me go over the CapEx invested in the period. 92% of the CapEx invested is obviously Lagoh, which has become a strong source of value for our shareholders after its opening. The remaining part is invested in our operating assets. We are very conscious of the importance of having our shopping centers in permanent transformation to be aligned with the latest trends of the market.

Some good examples. In Megapark, the retail park and the fashion outlet have already been completed, improving its image and comfort for clients. Since completion, the number of visits has grown 11.7%, getting the peak of more than 7,900 people in the Super Thursday promotion last Thursday of October. The second phase of the project, already started, is an extension and a total change of image and services. The new leisure and cinema area and the new dining and terraces area will dramatically enhance client experience and extend time per visit and sales.

In Portal de la Marina, the full renovation is on its way, enhancing customer experience. The total renovation of the food court area is still ongoing, and we estimate it will be ready for the next quarter. The refurbishment works at El Rosal have been also completed at the end of the summer 2019, focused on mall entourage. Anec Blau shopping center is being completely transformed, incorporating a new food court, leisure area and outdoor garden.

In Albacenter, the former hypermarket is now 4 units, anchor in Mercadona and Mango now in works. This will be opened the first quarter of next year. And the refurbishment works of Parque Abadía are also well underway, are mainly focused on the sidewalks and terraces.

Now in Page 21, I'll give you some more details about Lagoh. That is the best example of Lar vision about the next generation of retail.

Lagoh will take customer experience to the next level, offering multi adventure for adults and children, the possibility of relax and enjoy on a boat ride in their 6,500 square meters lake, Yelmo premium cinemas with the latest technology, Urban Planet is presenting a wide array of trampolines, a giant wave to surf, a wind tunnel and also awesome play game room and visual reality gaming.

It is all completed by a wide offer of food and beverage with terraces on the lake, a food court with different offering of gourmet, casual and family restaurants. Retail obviously plays an essential role in Lagoh. Flagship stores of Tier 1 retailers, the latest formats enhancing the in-store experience, that puts Lagoh at the cutting edge of today's trends. It is crucial for the image of brands to be present in the dominant and best shopping centers like it is Lagoh.

Lagoh is a benchmark also in sustainability. Its construction has been BREEAM certified. Energies used are coming from clean sources, including the development of rainwater collection system to subsequently use in irrigation of green areas; a system of photovoltaic panels for power supply; geothermal energy, which takes advantage of the resources of subsoil of the area of which the facilities are located. Its lake acts as a regulator of thermal sensation in periods of high temperature and as a collector of CO2 particles. These are just some examples of the sustainability measurement -- measures, sorry, that have been implemented. It is also certified by [iron ore] for accessibility. Lagoh comes with universal accessibility since the beginning of its construction, and it has been designed barrier free.

Now in Page 22, we are going to see other examples of projects in transformation. The first one is the total refurbishment and modernization project of As Termas shopping center in Lugo. We have fully renovated its image with the newest materials and furniture, specific and adapted lighting of the different spaces and incorporated new elements of greenery focused on sustainable design.

With this improvement, Lugo neighbors can better enjoy their leisure and shopping time. Retain -- the dining area has been redesigned, increasing attractivity and making growth, the sales of the restaurants. The new dining area is essential to increase the dwell time of our customers. After the refurbishment, a total of 6 new contracts have been signed, covering an area of 3,597 square meters.

It is very important mentioning that new Yelmo cinema bring in the highest quality of image and sound to Lugo, in a few times, has become the clear dominant cinema in the region. As Termas -- sorry, is the market reference in the region of Lugo, offering a vast mix of Tier 1 brands such as 7 Inditex brands, H&M or Media Markt.

Another example, in Page 23, sorry, is the case of value creation in El Rosal. The center has been refurbished with the aim of combining tradition and modernity, adapting to the tastes and demands of the public, which has been always loyal to the center since its opening. The works has been focused mainly in the F&B area that has been radically transformed with a complete renovation of floors, furniture and plants and greenery. The outside terrace so far under use has become a unique and differential place with green -- and a playground at chill-out zone and an area for the summer. It is also worth to mention that over 6 meters we have and -- over 6 meters high tree on the central plaza.

Turning to the next slide. We also have completed, as I mentioned to you before, the refurbishment of Megapark retail park and the outside of the Fashion Outlet Centre, which is, as you know, the biggest in the north of Spain. We have made significant improvements to its look and feel, including a new landscape area where a diverse range of plants and a new children play area now take center stage. This has been transforming to an appealing modern urban space. Renovation will continue inside the fashion outlet, ensuring visitors enjoy a fantastic shopping experience.

And now moving to Page 25, you can see the estimation of rents in the medium term. Looking at the chart, we see -- we start with an EPRA annualized topped-up net rent of EUR 92 million, an increase of 23% in the quarter, thanks to the opening and inclusion of Lagoh. It is already generating rents.

So now the main drivers of our plan are: first, to continue with our leasing activity in our shopping centers, increasing the rents of our assets; second, potential future investments. In total, there is a reversion potential of EUR 7 million coming from market and vacancy rental potential, will lead us to EUR 99 million reversionary net rent. And additionally, we have the expected contribution of the future investment using our firepower that will provide EUR 15 million of rent according to our business plan. This is, obviously, as I always say, a theoretical exercise, which shows a 24% potential growth of our rents, rents of the company up to 1,000,014 -- sorry, EUR 114 million.

And now let me pass the call over to Mr. Pereda again.

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Miguel Pereda Espeso, Lar España Real Estate SOCIMI, S.A. - Acting CEO & Director [5]

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Thank you, Jose Manuel. Let me conclude this presentation doing some closing remarks.

During the first 9 months of 2019, we maintained our positive financial trends shown in the increase of our EBITDA 9%. EPRA NAV per share has grown 10% since December 2018, and we continue to deliver a solid operating performance with 15 quarters outperforming the market in both footfall and sales. This quarter, we are very proud to have successfully opened Lagoh, fully occupied and with the rents above our estimates and a revaluation of 46% in -- just in the last quarter. That is more than 25% if we do it net of CapEx.

Last but not least, in the corporate side, we have also completed 88% of the second share buyback program, and we have finished the third quarter with a net LTV of 33%. We are very proud to have revalidated the EPRA Gold Award being the only [successfully] to be awarded for 5 years on a row and while we have also revalidated the EPRA Sustainability Gold Award for the second year. Also, we can see an increase of 23% on the annualized topped-up net rents in just in Q3 with the incorporation of Lagoh to the perimeter.

Let me finish in Page 28 with some investment highlights. We have a portfolio of top dominant retail assets with 100% ownership that optimize our decision-making process. We have a value-added strategy that help us to generate recurrent income quarter-over-quarter. Developments and CapEx intelligence is an essential tool that we use to boost the value of our assets in this stage of the cycle.

We have the best-in-class management that allow us to outperform the Spanish market now for 15 quarters. We are also leading the transformation in the retail area through our data, quality, efficiency and also omnichannel strategy implemented in all our shopping centers. Thank you very much for attending the call.

And now we are open to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have 2 questions on the line today. Our first comes from Ignacio Romero of Banco Sabadell.

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Ignacio Romero, Banco de Sabadell. S.A., Research Division - Research Analyst [2]

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I have 2 questions, please. One has to do with your firepower. Have you identified assets to buy? Could you please tell us something about that firepower and how that could be used? And the second question has to do with valuation yields in the Spanish market. What should we expect for the second half of the year?

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Miguel Pereda Espeso, Lar España Real Estate SOCIMI, S.A. - Acting CEO & Director [3]

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Thank you. Thank you very much for the questions. It's Miguel Pereda speaking. Regarding the firepower, 2 considerations. One, yes, the company has the firepower and we have the ability to secure new investments, both because we -- after the divestment plan, we have a healthy situation in cash and also because our LTV is very moderate, as we said, 33%.

Clearly, we are looking at everything that we -- that is in the market. But it's also true that we are very, very selective in the way we approach new investments. Every single asset that we look at should be something with a couple of considerations.

One should be something that improves the average quality of our portfolio; of course, would comply with the considerations that we said, that is, I mean, value creation, dominant, et cetera, and then -- and that will be for existing properties; but also development, as we said. I mean -- and Lagoh probably is a good example of that, will be something that we are looking at.

We are not in a hurry. So we have the firepower. We have the intention to invest, but we don't have any specific calendar in terms of that. I mean we need to look for the best assets and the best situation. So I'm pretty sure that we will see things in the next few years.

Regarding valuations, well, that's really a good question. What we have seen in the past is that a slow increase in exit yields and valuation has been offset by the improvement in NOI. So that's why the values were quite stable. Our exit yield is going to grow or going to be increased in the future, very difficult to know. Of course, market references are going to be very relevant. We are expecting -- or the market is expecting to see a few closings before the year-end. That will be good reference, and we are not pessimistic at all on what that is going to mean.

So we don't consider that is going to be a material effect in the type of assets that we own. That's very, very -- because I think that the market has become very binary between the strong assets that are holding value very well and the less strong assets that probably will suffer a little bit more.

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Operator [4]

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Our next question today comes from Daniel Gandoy of JB Capital Markets.

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Daniel Gandoy López, JB Capital Markets, Sociedad de Valores, S.A., Research Division - MD [5]

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Two questions, if I may. The first one related to the -- if you can provide us with the read across, if anything, from the ongoing, say, process of the INTU portfolio? Meaning, I don't know if -- there are a lot of interest from potential bidders or pricing, if this could have some kind of read across for your own portfolio or if you could have some kind of implications related to your investment pipeline. That's the first question.

And the second question relates to the shareholder remuneration in the future. Since you say that you're not in -- hard to carry on with additional investments. And if finally these investments don't materialize, will you consider improving or rating the shareholding remuneration?

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Miguel Pereda Espeso, Lar España Real Estate SOCIMI, S.A. - Acting CEO & Director [6]

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Okay. Thank you, Daniel. Miguel speaking again. Regarding INTU, of course, these rumors and conversations that we had, but we are -- we're seeing -- our bet is that we are going to see some closings before the year-end. That's one thing. The second is that the investors that seems to be in the closing end are very well-known institutional investors, and that is also very relevant.

The third is that we think that the values -- the competition has been high, and we think that will bring good news to the market related to values, even being into a company that really needs to sell. And also, I think that something is going to be very relevant is that is a big transaction. We think that the values are going to be relevant, but also we need to take into account that only 50% of those assets are sold. So that means that it's also -- there's going to be -- well, not very clear, but might be the case. But -- so yes, I think it will be good news and probably in the short term.

Related to shareholders' remuneration, yes, of course, I think it will be in the interest of all shareholders. And it's clearly one duty of the board that in case that there is no investment in the short term, we should consider that as a way of improving shareholder remuneration, and that will be clearly in the agenda as has been the case in the past. Nothing has been decided. We still have an investment plan. But of course, that is something that is reviewed every quarter.

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Hernán San Pedro, Lar España Real Estate SOCIMI, S.A. - Head of IR [7]

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Okay. If there is no any other questions, thank you very much for attending the call. And remember that Lar España teams are at your disposal. Good afternoon, and happy weekend.

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Operator [8]

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This concludes today's call. Thank you for joining. You may now disconnect your lines.