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Edited Transcript of WDP.BR earnings conference call or presentation 31-Jan-20 9:30am GMT

Q4 2019 Warehouses de Pauw Comm VA Earnings Presentation

Meise Feb 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Warehouses de Pauw Comm VA earnings conference call or presentation Friday, January 31, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mickaël Van Den Hauwe

Warehouses De Pauw NV - CFO & Risk Manager

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Presentation

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Mickaël Van Den Hauwe, Warehouses De Pauw NV - CFO & Risk Manager [1]

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Ladies and gentlemen in the room here in Wolvertem and also logged in through the webcast, I would like to warm welcome you today at the occasion of the publication of our full year 2019 results and outlook 2020.

Now before we start, I just have some practicalities for you. For the people dialed in through the webcast, you can switch the images between presentation and webcam on the right-top corner. And later on for the Q&A, which we will organize at the end of the presentation, you can use the text balloon at the bottom right to fill in your questions, which we will reply to at the end of the session. And for the people in the room, please mute your iPhone, as we are in a live webcast.

Also, I would like to apologize because Joost, our CEO, is not here. He fell ill last night with a fever, with the flu. So he's at home in bed. And so Joost, if you can hear us, if you're listening, get well soon, and we hope to get you back soon.

So these are, let's say, the practicalities, and then it's back to the presentation. And I think as has become a tradition now, we take always one step back in the beginning of the presentation through a movie, because a movie to take a look back at the last year says more than a thousand words. So I would like to present to you this movie, which we have made already for the fifth time in a row. Please watch with me.

(presentation)

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Mickaël Van Den Hauwe, Warehouses De Pauw NV - CFO & Risk Manager [2]

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So I think that's provided a very nice overview of what has been a fantastic year, exactly in the 20th years of WDP on the stock markets. And we would also like to thank, therefore, our teams, our clients and all our other stakeholders like you, the investors, and our banking partners to achieve that together with us.

Now the highlights of 2019 in some numbers. We have been able to realize further growth in our results and been able to deliver on our guidance with an EPRA earnings per share of EUR 0.93. That is, of course, after the stock split and is exactly in line with our guidance provided at the start of the year.

Then also a lot of activity in the existing portfolio because let's not forget, we talk a lot about growth at WDP, but let's not forget that 2/3 of our team is working on preserving what is there, keeping the clients happy, maintaining the buildings and preserving the high occupancy rates. And we got, let's say, a very nice leasing volume in terms of square meters leased for new contracts of 1 million square meters that were leased, of which 1/3 is in the existing portfolio and which kept this occupancy rate at a very high level of 98%. And then 2/3 of that 1 million square meter of leases was generated for -- in terms of business development in the context of the new business plan.

And let me recall the original hypothesis of this new 5-year plan we launched at the start of 2019. It was to further grow the portfolio at the same pace, a rhythm of around 10% per year with a targeted investment volume of EUR 1.5 billion and a targeted average increase in our EPRA earnings per share of [EUR 6] to EUR 1.15 in 2023. And let's say, we've started very well into this plan, achieving new volume of investments of around EUR 550 million.

And let's say, how we view it is that to achieve the profitability in earnings per share in the fifth year, we need to realize the EUR 1.5 billion of growth within -- in 4 years. So that's rounded EUR 100 million of new volume per quarter. We did a bit more, but that's also related to this exceptionally big project for Barry Callebaut, which is a EUR 100 million project. But it means that we are well started into the new plan. And in fact, a nice combination of growth in all our key markets which is positive. And as expected, the volume is mainly driven by pre-let development projects, a combination of new and existing clients.

And we were able to do so at the envisaged profitability targets of 6% development yields in Western Europe, 8% in Romania. And so we did a bit more, and we could fund that at a better cost of capital than originally foreseen, which is why we are now through this boost confidence into the plan in achieving these targets and that we say this EUR 1.15 EPRA earnings per share target will be a minimum to be achieved in 2023.

Then to give you some market insights and trends there, the fundamental long-term drivers of our sector remain unchanged and are intact. That is, our buildings are not only becoming more intelligent, better equipped with solar panels, cloud connectivity, all these type of new features, but they are also becoming more important because they are at the center of gravity of the whole supply chain. You have the retail, the consumer is still there, but how is he there? Is he digital, figital? We don't know, but he's there. He's consuming, and we all know that our buildings, our distribution centers are in the heart of where it happens.

The companies need to make profits in our distribution centers. And so they are at the heart of the supply chain, which is constantly evolving. And the strength of e-commerce, supply chain reconfiguration, which are leading to a structural demand in new logistics space, these are intact and are also leading to our buildings becoming more and more important because when you order, for example, your Nike shoes and you order personalized Nike shoes, they will be produced, manufactured in China, but the personalization will be done here in Europe. And so that increases the value-add of the activities in our buildings, too. So these trends remain intact.

And now how is this looking in our key markets? There, we can say Belgium, Luxembourg, we have positive market dynamics, but a bit less availability of land. But overall, a good dynamic market. The Netherlands has had a strong boom in new logistics space over the last couple of years. That is returning to a more normal level, let's say a healthy level, in which we as a market leader, can play our role and can continue to grow. But there also, it is more challenging to source land. Romania, there still -- the case for Romania is still intact. We're seeing a lot of activities also cross-selling between -- in the portfolio with clients who are active in Western Europe going to Romania or clients asking for expansion. So there, the case is intact.

And overall, we see a very good positive market dynamics and opportunities to grow. But obviously it will, due to the fact that it is more difficult to source lands and that permits are taking a bit longer and that there is strong competition, we believe that the future will be more brownfield projects, meaning redevelopment projects, more tech into the buildings like automation. And probably in the future, as land and space needs to be used in a more viable way, probably over term, more high base and also in the heights with multiple floors as a general long-term tendency. So overall, more complex deals, but we believe that we are well positioned to do so and to further attract these opportunities to further grow into the sector as it will be more client-let based, based on links with the clients, specific knowledge of technology or in-house teams of business developers running around, boots on the ground to secure land and permits. And also the fact that land is becoming a bit more harder to secure is also the best protection for the existing portfolio.

When we look at the actual activities in terms of realizations, there we've done a number of purchases. You know that we -- it is more difficult to foresee. And we always say we don't buy anymore, but every year, we buy our own mini portfolio of EUR 100 million, which comes out of the network. It's a combination of some land plots we acquired and also a couple of sale and leasebacks we did with existing clients.

Also, the projects we have had -- we are, let's say, delivering projects at a run rate of 100,000 or even a bit more square meters per quarter. And what has been delivered has been mainly the projects which were under the former growth plan and which were in delivery. So all of these have been, in the meantime, completed.

And as already mentioned, we secured a lot of new volume of projects in 2019, which -- and that is currently under construction with a record volume in our pipeline around 650,000 square meters. And what is very positive is that it is spread in all our region there in Belgium, Luxembourg, the Netherlands and Romania. A very healthy mix, almost EUR 500 million of total investments. And this pipeline is fully pre-leased. So we always start from the clients in leasing up our buildings.

And also this, the average lease term of the projects in the pipeline is 10 years. So delivering this pipeline will further also strengthen our metrics and our existing portfolio.

And then one very nice example of how projects are becoming more complex and are becoming more sustainable is here. Our project together with our client and partner, Barry Callebaut, which we are realizing. We are starting the project right now in Lokeren in Belgium. There, it is, in fact, a centralization exercise of Barry Callebaut, which is centralizing 7 classical distribution centers into this new warehouse with also a lot more pallet capacity to cope with future growth, and it will be, in part, a classical low bay warehouse, and a part of it will be a fully automated high bay warehouse of 40 meters high. So -- and all of it will be with -- even the substantial increase in pallets, places and capacity will be with a lower use of land, so a better and sustainable way of working.

And also, it will be fully energy neutral as we will have substantial solar -- install solar capacity on the roof. So that gives also a bit a look into the future on how we see these projects evolve.

Then obviously, as mentioned, the big challenge today is to secure land. That is very important that we keep this machine running. And not only do we show this slide, in which we mentioned that based on the existing land reserves in the portfolio, we have the potential to develop another 1 million square meters of logistics buildings, so that we have a lot of potential within the existing portfolio to further grow and have something on offer for our clients. But we also want to show you the dynamics of this slide -- of this figure, that we are in fact constantly replenishing our land reserves and to get the machine running and to have something on offer for our clients.

Then, as you know, we have been active in 5 countries, well spread between the Benelux, Northern France and Romania. And last year, we also added a sixth country, Germany, more specifically the North Rhine-Westphalia region. And we afford to do so and to tackle these markets, for which we see a lot of complementarities within our existing portfolio, we signed a partnership, a joint venture agreement together with our good German colleagues, our listed colleagues of VIB Vermögen. And this joint venture was formalized end of December, and we could already start with a first land acquisition on which we can develop 40,000 square meters.

And so after having everything formalized from the legal perspective, we have now launched this operationally together with our teams and hope, let's say, to commercialize this plot of land in -- throughout the course of this year.

Then I think in terms of portfolio metrics, these are, let's say, no big changes. Still a very, very healthy in the meantime, portfolio over EUR 4 billion, 5 million square meters spread amongst our core markets.

Yields, of course, their yields continue to go down. Also for our existing portfolio, EPRA net initial yields around 5.6 across the portfolio and still compared to market transactions, a conservative valuation in our accounts at EUR 725 per square meter value of our buildings.

And also there, quite a young portfolio. Average age is 7 years. And now about -- throughout the history of WDP in building up the portfolio, around 60% of the portfolio has now been constructed, developed by ourselves, and 40% was acquired through acquisitions. And it will be further strengthened with these -- all these newbuild projects which are in the pipeline.

On occupancy, they're well maintained, and I say, at a high level. And what you see with the remaining vacancy, it's always around 2%, 3%. That is really frictional vacancy related to tenant movement. So we are able to keep this at a very high level. But it also shows you with all these leasings, which I mentioned in the beginning of the presentations, the dynamics of our market, and that is also quite important. And also the fidelity of our clients that still our clients, when there is a bridge of a contract, and typically, on average, we have 10% to 15% leases maturing each year, that out of this 10% to 15%, 90% the clients on average renew their leases upon maturity. So we are very happy with this statistic, which has been quite stable over time.

Then tenants, I think still well spread amongst several industries. Also the top 10 clients is active in multiple buildings. And as we grow, the diversification gets stronger, and it is still the case that the sun is our biggest tenant, with around 6% of the income. And that is, in fact, spread over 85 sites. And I'm very proud, thanks to the work of our teams, that they have been able to increase our solar footprint from 60-megawatt peak installed capacity in 2019 towards 80-megawatt peak on 85 sites. That means that today, we can say that 1/3 of our buildings have access to locally produced green electricity. So I think that's quite remarkable. And going forward, whenever it's possible and profitable and feasible and we have an agreement with the client, we will try to build that out further. And in the medium term, we aim therefore the target of 100-megawatt peak.

Now then when we take a look at our results, I think there you can see obviously in 2019, the progression we've made in 2018 and '19 with the constant stream of deliveries of projects where -- which explains the most part of the growth mainly pre-let development projects. In the rental income, the like-for-like figure was 1.4%, the organic growth of our rental income and the composition of that was -- there was an impact of 1.7% due to the indexation of our rental contracts and a modest 30 basis points down impact because of a slight drop in the occupancy during the year because of tenant movements.

But as you know, occupancy increased, in fact, again, towards 98% of the start of the year. So in 2020, you will see the opposite impact of this vacancy. It's simply a matter of cut-off related to tenants' movements.

There, going further down the line in solar energy, there the capacity was mainly added at the end of the year. And also, it is stable when you look at the absolute figures. But on an underlying basis, the organic evolution of the solar panels was a bit lower because we had quite an unfavorable comparison base because 2018 was a really exceptional year in terms of solar irradiation, but nothing very special in there.

And also going further, our operating expenses, well under control. And in June, reached the profitability we foresee into the business plan going forward that operating margin of just below 92%. And I think all in all, a very nice growth and evolution in our EPRA earnings, which were up 13% in absolute terms. But of course, it's only relevant to take a look at the per share data. And there you can see earnings went up by 8% year-on-year, in line with what we guided for. Also, there is a big component in our results due to the revaluation of the portfolio. So in rounded figures, portfolio got revalued by roughly EUR 300 million. That's for 80% derived from a revaluation of 7% of the underlying standing portfolio due to the continued downward pressure on yields in the investment markets. And 20% of the EUR 300 million revaluation of the portfolio was coming from the latent capital gains on the development projects where we had an average capital gain of around 20% for the projects delivered.

And I think that has led, when you look at the balance sheet, to an increase in our balance sheet of EUR 700 million, and which is actually quite simple. It was a bit more than EUR 400 million investments, which is the logical consequence of identifying projects at around EUR 100 million per quarter. EUR 400 million invested, EUR 300 million revaluations. And you can also see the result in combination with the fact that we have funded a large part of this EUR 400 million investments with new equity, come back on that in a minute, has led to a very strong balance sheet with a loan-to-value of around 45%, a decline with 5% year-on-year.

And in fact actually, when you look at the management of the capital structure, there we want to say we stay disciplined and in tune with our strategy. And that is like we guided for in the business plan when we invest, when you aim to invest throughout the course of the business plan EUR 1.5 billion, we want to do it in a consequent way. And having the issuance of debt and equity follow the investment rhythm with a 50-50 debt-to-equity mix. And as we secured a new investment volume in 2019 of EUR 550 million, we wanted to fund 50% of that through equity, which we did, and so we did. We had the retained earnings and the stock dividend contributing already EUR 85 million. And then we did the accelerated bookbuild placement in November as a first Belgian REIT for EUR 200 million, which has then further strengthened our balance sheet. And I cannot stress that enough. The fact that Belgian REITs are now allowed to execute ABBs substantially improves their capacity and -- to raise equity. And in fact having a daily access to equity capital markets is a very strong improvement for the whole Belgian REIT sector and completely in line now with our European colleagues.

There also, I would like to touch upon something related to the management of the capital structure. You've seen solidly we guided for LTV of around 50%, 55%. There, it makes less sense to continue to do that in the sense that our values are moving up. So what we are doing is we are focusing on funding our business plan with 50-50 debt equity and also letting the revaluations grow into our loan-to-value and ensuring that on an underlying basis, we have a stable actual leverage applied to the business in terms of net debt-to-EBITDA, which we want to have between 8 and 9, and it is -- ended the year at 8x, perfectly within our desired bracket.

Related to cost of funding, as already highlighted in the beginning of the presentation, we were able to secure these projects in the context of the new business plan, in line with the originally foreseen profitability of 6% in Western Europe, 8% in Romania. But we could also fund them at a lower cost of capital and at the same time, we could also work further on the existing debt, where we took the opportunity, when interest rates had a strong decline in September just after the summer, to restructure some of our hedges like we've done in the past on a cash-neutral basis, blend and extend. And extend them, the longer hedged in time, at a lower rate. And that will have an effect of EUR 4 million or 20 bps starting in 2020. So I think overall, good debt metrics and also in terms of duration of between 4 and 5 years average duration.

Now you will see that contrary to what we had in the past that there are in 2020, next to the commercial paper program, which is fully covered by backup plans, that there is also still EUR 70 million of long-term credit facilities maturing, that is in fact related to a small credit facility, EUR 20 million. And also the first bond we did in 2013, which will mature, that's EUR 70 million, and that is foreseen that we will refinance that out of the existing undrawn credit facilities.

Then I think in terms of return on equity, I'll let you be the judge of that. We try to have an efficient and profitable deployment of capital, leading to a cash return of 9% based on EPRA earnings and the dividend. And obviously, the remainder is coming from the changes in fair value in the portfolio.

Now when we look ahead to this year, of course, we can say that 2020, we will continue at the same pace. And we guide for an EPRA earnings per share of EUR 1, which comes in handy after the 7:1 stock split. It's EUR 1. It should not come as a surprise because this EUR 1 was the original guidance for 2020 in the 2016-2020 plan. And we also confirmed this EUR 1 guidance at the occasion of the capital increase in November. So we guide for an increase of 8% based on a continued good operational metrics like lease renewal rates and occupancy rates. And obviously, the growth being derived from the further completions and deliveries in the development pipeline, which we have discussed. And related to the dividend, it is actually quite simple, the forecast, because as we distribute 80% as the legal minimum a Belgian REIT needs to distribute, our dividend increases at the same pace of our EPRA earnings per share.

Then also we try to further work on our reporting related to ESG. And there, as already discussed with you extensively throughout the last year, what we did in 2018 is there, we took a step back and we said, "We have a lot of things we do, a lot of good individual initiatives, but we need an overarching strategy." And that's why we implemented and communicated it last year through the annual report, let's say, an ESG framework with a framework where we believe as a company can make a difference, from which the results, you can see here on this slide.

But in 2019, we also did a lot of specific activities because what we did in 2019 is after we built further on the ESG framework, and we also built an ESG Roadmap. We will communicate that in more detail in the annual report, and we built an ESG Roadmap. So just like we have a strategic financial commercial business plan in a 5-year horizon. We also have this in ESG business plan with concrete actionable items for which in 2019, you can see the summary on these slides.

I think the most important thing is that we could work further on our governance. There, we changed the corporate legal form from the historical partnership structure with a statutory manager into a plain vanilla, a public limited company. We did that at the EGM in end of September.

Next to that, we could also have achieved further improvements in our sustainability measures. For example, the solar panels like we discussed, but also very important is that in 2019, we rolled out with a partner, a full energy monitoring tool across the whole portfolio. And because you can do whatever you want, you first need to measure and have the data. And now we will be able to do so, calculate our footprint in a scientific manner and also analyze these data and engage further with the clients how we can reduce and optimize the footprints of our buildings and their activities.

Also, we are aware that the reporting is becoming more and more important to all of our stakeholders, and we also want to go further in this. There, we just want to make the caveat that we can, as a company, not react to all these type of rating agencies in terms of ESG. Therefore, what we want to do is we want to continuously report on what we do rather than vice versa by implementing this ESG Roadmap and reporting on what we did. And following, let's say, industry standards like EPRA sustainability best practices, GRI and focusing aside from that on a limited number of rating agencies to which we can give feedback, and to which you can also see, we have the ambition to further improve our standards and our ratings when it comes to ESG.

So I think that's -- on the presentation, that's pretty much it. I just have one last request for you, that is, our partner and client, Barry Callebaut, has been selected by Flemish (sic) [Flanders] Investment and Trade for foreign investment trophy of the year, and it is a contest based on votes. So we would be very happy and appreciate it if you could vote for our projects in this context, all of which you can find the details right here.

So I thank you, and I think we can now move towards the Q&A part.

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Questions and Answers

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Mickaël Van Den Hauwe, Warehouses De Pauw NV - CFO & Risk Manager [1]

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I think we will first start with questions from the audience in the room here.

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Unidentified Analyst, [2]

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So congratulations for the results. I've got 3 questions, different kind of question actually. The first question is regarding Germany, you announced a project end of December. I was wondering how confident are you to keep growing in that country? That's the first one.

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Mickaël Van Den Hauwe, Warehouses De Pauw NV - CFO & Risk Manager [3]

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I will do them one-by-one, if I may. No, we went to Germany to, let's say, broaden our activities around the Benelux neighboring regions and with the purpose of the complementarity of our -- with our existing portfolio because now we have to say to the clients, it stops in Venlo. And whereas the market, that market is one market from the perspective of the clients. You have the triangle, the logistics triangle, Amsterdam, Rotterdam, Duisburg, with Duisburg being the largest inland port in Europe. And for us, we see a potential for growth in this market.

Of course, competition is very intense, like in other markets, but we see a strong complementarity with the existing client base and certain opportunities to be realized. And our purpose is, when we go to a new market geographically, to establish a meaningful presence, meaning critical mass and a long-term presence for our clients. And the purpose is that we can now invest into these markets in the start-up phase together with our partner and then to make it, let's say, a meaningful profit driver for our next business plan.

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Unidentified Analyst, [4]

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And still in Germany, what do you think about VIB Vermögen? Potential target for WDP maybe at some point?

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Mickaël Van Den Hauwe, Warehouses De Pauw NV - CFO & Risk Manager [5]

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I know where the question comes from, but that has not been the intention at all. And the intention has been really to establish a joint partnership where both parties, which we believe have a very -- have the same philosophy, the same spirit, the same way of working, the same mentality to bring these 2 listed players to the table. And we can both bring something to the table. That is, VIB can bring their strong knowledge of the German markets, the way of working, securing land, securing permits. And we can also offer to the table our existing client base, which is more complementary to the North Rhine-Westphalia region.

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Unidentified Analyst, [6]

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Then two questions. The second one is what could be, according to you, the impact of the coronavirus in the supply chain of some of your tenants if it would be lasting? I mean you have 40% of exposure towards 3PL logistics player. So what's, in your view, your risk in this regard?

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Mickaël Van Den Hauwe, Warehouses De Pauw NV - CFO & Risk Manager [7]

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Well, it is obviously very difficult to impact that. At this time, I think the impact would rather be if there is an economic slowdown or temporarily slow down as a result of that. But we don't see any immediate impact, let's say, on our portfolio.

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Unidentified Analyst, [8]

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Okay. And the last question. You mentioned that for the last 5 years, about 90% of all leasing were renewed. I was wondering, looking differently, how -- what happens to the remaining 10%? I mean do you recommercialize the building directly? Or do you try to, well, rebrand them? Or if they are too old, for instance, with no updated specificities. I mean if the [free 8] is below 10 meters or whatever, what is your strategy on that one?

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Mickaël Van Den Hauwe, Warehouses De Pauw NV - CFO & Risk Manager [9]

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Well, most of them get leased to other clients, and that is also confirmed by the continued high occupancy rate. But every now and then, we foresee at the end of the lease when a building is a bit older, when it requires a redevelopment, we can do the redevelopment. And that is also how we view capital recycling because we get often asked, "Why don't you rotate your portfolio a bit more?" We do not sell assets because then we sell a very good location and most of our clients with whom we can do repeat business. But for us, when a building is at the end of its technical life cycle, we will not sell to a developer and then buy it back at a high price. We will do it ourselves as long as there is, in the zoning plan, a future for logistics. Otherwise, we would sell it.

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Unidentified Analyst, [10]

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We already had this discussion, but I would like just to come back on the market trends and how you see market trends evolution in the different markets where you are active in. Do you see some start of tensions in some specific areas? Or do you think it's just business as usual in terms of re-letting?

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Mickaël Van Den Hauwe, Warehouses De Pauw NV - CFO & Risk Manager [11]

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Okay. So in terms of market rental growth, what we said also this summer, we said that historically, we have in our portfolio, in the re-lettings we had each year, a couple of larger contracts coming up for renewal, which had been indexed for a long time and for which market rents had not followed completely. And as a result of that, we needed to set them back closer to the base rent. And the impact of that historically has been around half of the inflation, which we needed to give back to the clients on an aggregated level.

This summer, we said that due to the well-performing market and also the fact that it's a bit more difficult to source land, that we see that impact diminishing. And that is also now confirmed in our like-for-like numbers, which had no impact from the renegotiation. It was flat, and I've checked this before this presentation.

In fact in 2019, we had 10 contracts with a change in rent, and it was always some modest pluses and minuses, and the aggregate was 0. Now going forward, what we see in our existing portfolio for the re-lettings is that they will be re-let in -- at the same conditions, and that holds true for all our markets.

Now it is true that we are seeing, let's say, the first signs of scarcity, I would not yet say. But we are seeing that the land is becoming more difficult to source. It's not really a genuine scarcity. You would need that genuine scarcity of lands for real fundamental long-term rental growth. For the time being, it is more difficult to source the land, and let's say he who has the land, who can secure the lands, will win the tenants.

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Unidentified Analyst, [12]

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I have a second question. Following the successful entry in Germany, do you consider expanding in other countries, more powers in Europe?

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Mickaël Van Den Hauwe, Warehouses De Pauw NV - CFO & Risk Manager [13]

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Well, what we've said in the beginning of the growth plan 1 year ago is that we can manage the envisaged growth of EUR 1.5 billion in the existing key geographical markets, being the Benelux, Northern France and Romania. And -- but that for the future, for our next plan, we would need to broaden our activities.

And then in terms of countries, we have then said in Eastern Europe, we are very happy with our exposure in Romania. And Romania will be kept at 20% of the overall of the portfolio. I mean we'll not venture around Romania in other CEE markets because we want to stay a core Western European risk. And then, like we have started historically in Belgium between Antwerp and Brussels, gone to Luxembourg, France and the Netherlands and then now Germany, that we'll expand. And we've then said, we will look around the Benelux neighboring regions, perhaps go a bit deeper into France or go to the east, and we have now, in the first instance, chosen for Germany.

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Unidentified Analyst, [14]

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Yes. I would like to come back on the LTV. So thanks to the revaluation, the LTV declined to 45%. Will you move up to the 50% to 55% because it helps you, in fact, in raising more debt, while you don't need new equity? Or do you say no, no, the 45% is the next level, we stay around that to have some buffer for maybe bad times that will not immediately appear [at the] ...

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Mickaël Van Den Hauwe, Warehouses De Pauw NV - CFO & Risk Manager [15]

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It's a good question because, indeed, I forgot to highlight that in the -- because it's in -- you can see it in the market guidance we provided. We mentioned that we would stay below 50% debt ratio. But in the future, the philosophy is indeed to stay below that 50% and to fund our business plan exactly on a 50-50 debt/equity mix and have a stable underlying net debt to EBITDA. So there, you can see, we will definitely hold some buffer in that.

If there are no questions from the room here, we can move towards the questions from the webcast.

A first question is how much of your future development pipeline do you envisage delivering in 2020?

We're there, you have seen it in the slides, we are executing a pipeline of around EUR 500 million, which is scheduled for delivery in 2020 and 2021. And you should take into consideration that we grow at a rate of 10% -- around 10% per year. So that each year, on an annualized basis, we have the impact of 10% growth, meaning EUR 400 million of assets that start to yield and contribute to our portfolio and earnings.

Then the next question is, do you have a view on how much further yields can compress?

Well, there we can say what we see in the real markets. In the real market, the investment market, we used to have, let's say, the range of the whole market, let's say the whole market, was rather between 4% and 6%. And over the last couple of months, we've seen that the yields range that corridor, let's say converge more towards a narrower range in the real markets towards 4% and 5% and even regardless of the features, being quality, tenant's duration. So there, there is still strong pressure on yields and even on the 4%. How it translates into our values, we cannot comment on. I think the trend in our portfolio valuations is correct. Obviously, it is still undervalued versus what we see in the real market, but there valuers are backward-looking and are also not appreciating portfolio effects and they're valuing the individual assets.

Then a further question, do you envisage being able to grow rents more than inflation in the future? Is there scope to increase rents on re-lettings and renewals rather than just rolling over at the same terms?

Well, I think that question also relates to the question on rental growth which we have just discussed. But for the short term, we believe that rents should grow in line with inflation, and that rents -- or contracts will be rolled over at the same conditions. Then, obviously we need to look at what will happen with the availability of land, but whenever there would be, let's say, market rental growth, we believe it will first emerge in some specific clusters where there is a real scarcity of land.

And then the question is also, when are you able to capture that in your rents?

Because we are having contracts of on average 6, 7 years, and for the new ones, they're for -- signed for 10 years. But at least it is indeed true that the fact that land is becoming more difficult to source, that is in fact the best protection for the existing portfolio, that is true.

Given the appetite of the investment market, isn't it time to get rid of the weakest, oldest assets, probably with a premium to book, while reinjecting the proceeds in the, strengthening the pipeline?

Well there, actually we are already doing that. And it's not that we have a high mass or volume of, let's say weaker, older assets. What we do is when we have, let's say, an older asset or an asset where we do not foresee a future for logistics or difficult assets, we will definitely sell it. And we sell around, let's say, a bit less than 1% of the portfolio per year, but we also continue to redevelop our assets. And for example, in one of the slides in the presentation, you can see that there is 4% of our portfolio cataloged as Class C warehouse, meaning the very old generations and older buildings. But you can see in the slides next to that, that we also categorize part of our portfolio the exact 4% -- it concerns the same buildings -- as future redevelopment potential. And what is that? These are really the oldest buildings in the portfolio, which we may have acquired through sale and leaseback at around land value and for which we have still a long-term rental contract. And what we will do at the end of the lease, if the tenant vacates of course, is that we will redevelop these assets. And for us, that is -- postpones the redevelopment potential.

Then I --- next question. Could you even more explain how your clients can benefit from the installation of the solar photovoltaic panels? You sell the electricity to the net. And then?

Well there, in fact, it's a win-win situation, because we take the strategy and the philosophy that as the owner of the buildings, we should be the ones investing in the solar panels. So we do not rent out our roof to a third party, no, we do it ourselves, develop ourselves, put them on our rooftops. And then what we do is we sell the electricity first to the clients and -- whereas in the old days, the dimension of a photovoltaic installation was more in tune with the capacity that could be on the roof. Now the dimension, the capacity of the solar panel projects is really well [thought of] and in sync with what can be used on-site. So we try to put installations, which can have a maximum usage on sites. And for the new installations in Belgium and the Netherlands, let's say, on average 70% of the electricity will be used on-site by the existing clients, which can buy electricity from us at a -- which is green, locally produced and at a substantially reduced cost in -- unit cost in terms of EUR per megawatt hour, and they can have a reduction of up to 30% of their unit price. So we believe that it is a win-win.

Could you comment on the development project cost in Romania, how easy is it to find a developer, labor for construction sites, et cetera, and construction costs?

There, indeed the economy is performing well. So you would normally say there is a tendency for prices to go up from an intuitive point of view when you look at the economic cycle. But there, we've been able to and are able to keep our development costs under control in Romania. And that is also in part because we have partnerships, really, with all the large construction companies, which remember that we were also there during the more difficult years. So there, there is no difficulty in securing these construction firms for executing in a timely manner our projects.

Okay. I hear that we have two more questions, if you can project them on screen. How do you manage the competition you meet in Eastern countries with VGP? First try to sign contracts with tenants?

Well there, in terms of the CEE markets, I already mentioned that we are perfectly happy with Romania, which -- as exposure and as a growth market complementary to our existing markets, and that we see further opportunities to grow further in Romania. And I think there, we have the advantage in Romania that we have the first-mover advantage and have established a real network of properties and clients throughout the whole country because we have, let's say we are active on all logistics corridors. And indeed, as opposed to more type of developer companies, these start more from, let's say a top-down macro view and start from the land. Whereas we, indeed, start from the clients. And we will first secure the clients, that's correct.

On the record number of 600,000 square meters under development, is this number temporarily higher? Or do you think you can keep developments at this level?

Well, of course it is also a bit higher because of this exceptionally large project for Barry Callebaut, of course, which is a EUR 100 million project which is also impacting that pipeline. But going forward, what we see is that our aim is to grow with around 10% or EUR 400 million per year. So that, I think, is the actual number to look at. And there, based on what we see, the depth of the market, the possibilities, our talks with clients and the negotiations are ongoing, it's also our aim for 2020 to keep the run rate of EUR 100 million per quarter of new investments at the same pace in -- throughout the next quarters, for sure.

One final question. In your business plan, how much equity do you intend to raise to finance your growth plan? And what are your assumptions regarding your capability to raise equity at a premium to NAV?

Well there, we said that, in the beginning of the plan we said that we envisage an investment volume of EUR 1.5 billion, which we fund -- which we aim to fund on a 50-50 debt/equity mix. That means we have, let's say EUR 750 million of equity required throughout the growth plan. And half of that can come from the retained earnings and the scrip dividends, which contribute EUR 80 million, EUR 90 million per year. And the other half will need to come from ABBs, of which we did the first one, EUR 200 million, last year. And if we further raise equity, it will always be in the context of matching our investment written with simultaneous debt and equity issuance. As we have done in November, we raised EUR 200 million of equity, but you -- the investors already knew that we could already deploy it in the pipeline. So it will always be in function of our investment. Then regarding to our capacity to raise equity at a premium to NAV, yes, we are quoting -- the shares are at a premium to NAV, but I cannot -- we cannot comment on the valuation of the company. Of course, we try to influence our earnings per share. And I'll leave you to be the judge of what the valuation should be.

I thank you very much for you in the room and to all the participants in the webcast. Thank you very much, and hear you soon.