Gecina: Earnings at June 30, 2023

Operational and strategic successes in a changing environment 2023 guidance revised upwards

PARIS–(BUSINESS WIRE)–Regulatory News:

Gecina (Paris:GFC):

• Recurrent Net Income (Group share) per share growth of +7.5% (+4.5% in 2022)
• Gross rental income up +8% on a current basis driven by reversion (+15% for offices), occupancy (+80bp), indexation and pipeline
• Disposals: €1bn with a +10% premium versus the end-2022 appraisal values and 2.5% loss of rental income
• Improvement in all debt metrics (LTV down to 32.2%)
• Efficiency plan generating a -17% reduction in energy consumption over 6 months
• 2023 guidance revised upwards: 2023 recurrent net income per share expected to be up +6% to +8%

First-half Recurrent Net Income (Group share) up +7.5% (€2.93 per share)

• Like-for-like rental income growth of +6.9% (+7.5% for offices) driven by:
  • Improvement in occupancy (+1.6%), with the average occupancy rate up +80bp over six months
  • Indexation that is ramping up (+4.2%)
  • Rental uplifts (+1.1%)
• Pipeline’s positive net contribution (+€7m over six months)
• Average cost of debt under control at 1.4% (1.1% for drawn debt)

Operational performances and market trends that confirm Gecina’s positioning

• Leaing trends confirmed in central areas
  • Reversion captured on offices, with +33% for Paris and +15% overall
  • Residential reversion of +13% captured
• Market vacancy rate in Paris’ Central Business District at an all-time low (c.2% source JLL)
• Pipeline deliveries scheduled over the next 12 months, 82% already pre-let

Significant improvement in all debt indicators in an uncertain financial context

• €1bn of disposals with an average premium of +10% versus the latest appraisals and a loss of rental income of 2.5%, executed in a quiet investment market, resulting in:
  • LTV down -150bp in six months to 32.2% (including duties) despite the -4% drop in valuations like-for-like (with the NTA down by -6%)
  • Liquidity further strengthened, now covering bond maturities until 2028
  • Debt now 95% hedged on average through to 2027

Strong reduction in energy consumption with the efficiency plan launched in 2022

• Average energy consumption reduced by around -17% over six months for the office buildings managed by Gecina following the efficiency action plan rolled out
• Roadmap to reduce carbon emissions per sq.m by -75% since 2008, in line with the carbon ambition “CAN0P-2030”

Recurrent net income per share growth of +6% to +8% now expected for 2023

• Operational performances exceeding expectations (positive trends on central markets)
• Disposals carried out with an accretive impact on recurrent net income
• Strong control over operating expenses in an inflationary environment

2023 recurrent net income growth guidance upwards, with €5.9 to €6.0 per share now expected (vs. €5.8 to €5.9 initially), up +6% to +8% compared with 2022 (vs. +4% to +6% initially)

Beñat Ortega, Chief Executive Officer: “The first half of this year confirms the performance achieved in 2022, reflecting Gecina’s strong operational successes in central areas and our proactive long-term debt management, giving us visibility over our financial expenses. The confirmation of these trends further strengthens our confidence, enabling us to raise our guidance in recurrent income per share for 2023.

In an uncertain context, with a disrupted macroeconomic environment, but favorable leasing trends for Paris City, we have decided to optimize and accelerate the Group’s dynamic capital allocation strategy.

During the first half of 2023, we sold €1bn of mature real estate assets, above their appraisal values and with a loss of rental income of only 2.5%, enabling us to further strengthen the quality of our balance sheet, which was already particularly robust, in addition to financing our pipeline, concentrated primarily in Paris and driving strong value creation, and offering us an opportunistic financial headroom.

In the context of a new reality on the real estate markets, today we are building the foundations for a Group that will be better positioned to deliver sustainable outperformance”.

Recurrent net income: strong growth

(1) EBITDA excluding IFRIC 21 after deducting net financial expenses, recurrent tax and minority interests, including income from associates and restated for certain non-recurring items.

Recurrent net income (Group share) came to €2.93 per share, up +7.5%, thanks to the combination of robust leasing trends, the increase in the rental margin and the good control of overheads and financial expenses.

Like-for-like rental performance: +€19m

This change takes into account the increase in the occupancy rate, the gradual impact of indexation and the positive rental reversion secured.

Pipeline (deliveries and redevelopments): +€7m net change in rental income

Recurrent net income (Group share) benefited from a positive effect of the pipeline, with the impact of building deliveries higher than the temporary effects of the assets made unavailable for rent with a view to being redeveloped.

• +€13m of additional rental income generated by the recent deliveries of buildings under development: “157 CDG” in Neuilly and “l1ve” Paris-CBD in 2022, as well as Boétie Paris-CBD and a residential building in Ville d’Avray during the first half of 2023.
• The buildings to be redeveloped reduced first-half rental income by -€6m, including the launch of work to redevelop the Icône building (previously 32 Marbeuf in Paris CBD) and 27 Canal (previously “Flandre” in Paris City).

Asset disposals: -€2m net change in rental income

The significant volume of disposals completed since the start of the year (€1bn of disposals, with a loss of rental income of around 2.5%) was concentrated primarily at the end of the second quarter. The impact on rental income is therefore moderate for the first half of the year.

Rental margin up +40bp

The rental margin is up +40bp over 12 months. This growth is linked primarily to the higher average occupancy rate and costs being charged back to tenants more effectively, offsetting the increase in local taxes.

Overheads under control

In an inflationary context, the Group paid particularly close attention to changes in its overheads. This focus has started to deliver benefits across all of the Company’s cost areas. As a result, the EBITDA margin shows a significant increase, up +110bp year-on-year.

Financial expenses: up +€9m

The disposals completed during the first half of the year have not yet had any impact on financial expenses. However, the impact on them will be immediately visible from the start of the second half of the year.

Financial expenses are up +€9m over 12 months. This increase is firstly due to a volume effect because the average net debt is up +€239m between the first half of 2022 and the first half of 2023. However, this increase also reflects a base effect compared with the first half of 2022, before the hedging facilities (caps) were fully activated. The average cost of debt has virtually stabilized since the second half of 2022 following the activation of these instruments (with an average cost of 0.2%), confirming the effectiveness of the Group’s debt hedging and further strengthening its visibility over the cost of its debt for the coming half-year periods.

Gross rental income up +8% on a current basis

Like-for-like, the acceleration in performance exceeded the levels reported at end-2022, with rental income growth of +6.9% overall (vs. +4.4% at end-2022) and +7.5% for offices (vs. +4.6% at end-2022).

All of the components contributing to like-for-like rental income growth during the first half of this year are trending up.

– The impact of the increase in the occupancy rate contributed +1.6% to like-for-like growth.

– The gradual impacts of the acceleration in indexation contributed +4.2%.

– Rental reversion was captured for both offices and residential: the capturing of this reversion contributed +1.1% to organic rental income growth.

With these positive trends on all Gecina’s business lines, like-for-like rental income growth of around +6% is expected for the full year in 2023.

On a current basis, rental income is up by nearly +8%, benefiting from not only the robust like-for-like rental performance, but also the pipeline’s strong net rental contribution (+€7m), particularly following two major deliveries of office buildings in 2022 in Paris and Neuilly and two new deliveries in 2023 with the “Boétie” office building (Paris CBD) and a residential building in Ville d’Avray.

Offices: positive rental trends

Increase in occupancy rate, positive reversion, indexation

Gecina has let, relet or renegotiated nearly 84,000 sq.m since the start of the year, with a strong level of lettings activity, in the context of a reduction in the vacancy rate in the central markets where Gecina operates.

– The vast majority of the transactions carried out during the first half of the year concerned relettings or renewals of leases.

• Overall, the average reversion captured came to +15%
• This performance, driven by central sectors in particular, was further strengthened during the first half of the year, with reversion reaching over +30% in Paris City.

– The remaining 10% of transactions mainly concerned buildings that were delivered recently or under development: they included the signing of a lease for the 35 Capucines building in Paris’ Central Business District.

Iconic transactions confirming the Group’s strategic positioning

Among the latest rental transactions secured since the start of the year, some operations highlight the very good performance by central markets for high-quality buildings.

During the first half of the year, the Group secured several rental transactions at close to or over €1,000/sq.m/year in Paris’ Central Business District, confirming the widespread adoption of a new rental benchmark, including:

– 35 Capucines (6,300 sq.m): nearly half of the building pre-let to a law firm (delivery expected for the second quarter of 2024)

– 24-26 Saint-Dominique (7,900 sq.m): half of the building pre-let to a private equity player (from the second half of 2024), following the BCG Group’s relocation to the l1ve building in Paris’ CBD

These transactions add to the list of rental transactions secured recently over the last 12 months based on these same levels of rent, with the 3 Opéra, 16 Capucines and 44 Champs-Elysées buildings.

The Group also let 8,700 sq.m in Boulogne-Billancourt in the Horizons building, with rents now over €500/sq.m.

85% of the Group’s portfolio is located in Paris City, Neuilly-sur-Seine/Levallois or the Southern Loop (primarily Boulogne-Billancourt), concentrated in the sectors with the most positive trends, benefiting from the polarization of the markets. In these sectors, the theoretical timeframe to clear the stock of vacant space is short, particularly in Paris and Neuilly (around 0.4 years), where it has been decreasing regularly in the last few years.

Change in gross rental income for offices

Like-for-like office rental income growth came to +7.5% year-on-year (vs. +4.6% at end-2022), benefiting from an improvement in the occupancy rate across our buildings for +1.9%, as well as a positive indexation effect which is continuing to ramp up (+4.8%), passing on the return of an inflationary context, as well as the impact of the positive reversion captured in the last few years (+0.8%).

– In the most central sectors (85% of Gecina’s office portfolio) in Paris City, Neuilly-Levallois and Boulogne-Issy, like-for-like rental income growth came to +5.8%, benefiting from an improvement in the occupancy rate (+0.7%), positive indexation (+4.5%) and other effects including positive rental reversion (+0.9%).

– On the La Défense market (8% of the Group’s office portfolio), Gecina’s rental income is up +14.5% like-for-like:

• Two thirds of this performance factor in a significant increase in the occupancy rate for the Group’s buildings, resulting from the arrival of tenants in the second half of 2022 with the leases signed previously on buildings that were vacant (Carré Michelet, Adamas).
• Reversion had a marginally positive impact on this sector (+0.2%).

Rental income growth on a current basis came to nearly +9% for offices, reflecting the impact of the pipeline’s positive net contribution (+€7m net of tenant departures from buildings to be redeveloped), notably taking into account the delivery of the “l1ve” building during the second half of 2022 and the “Boétie” building during the first half of 2023, which are both located in Paris’ Central Business District, largely offsetting the buildings vacated and currently being redeveloped (Icône-Marbeuf and 27 Canal-Flandre in Paris).

The impact of disposals completed during the first half of the year is moderate at this stage (-€2m).

Residential: operational trends confirmed during the first half of the year

The residential division’s rental income is up +4.9% like-for-like. This performance reflects the impact, on an equivalent basis, of indexation, rental reversion and the higher occupancy rate in our buildings (+190bp year-on-year).

YouFirst Residence: strong operational trends

Like-for-like, rental income from traditional residential properties is up +4.6%.

This performance takes into account the impacts of positive indexation (+2.5%) and the positive reversion (+1.2%) secured on the apartments relet, with an verage uplift of +13%.

YouFirst Campus: strong upturn in activity

Rental income from student housing portfolio is up +6.2% like-for-like and +6.1% on a current basis, reflecting the gradual improvement since the third quarter of 2021.

This performance is linked primarily to the significant reversion captured (contributing +5.5%).

Financial occupancy rate up +80bp over six months and +160bp year-on-year

The Group’s average financial occupancy rate is at a high level, with 93.9%, up +160bp over 12 months and +80bp over six months, reflecting the benefits of the strong upturn in rental transactions since the second quarter of 2021 and the digitalization of letting processes, making it possible to reduce transition vacancies in residential assets, as well as the normalization of occupancy levels for student residences.

For offices, the performance reflects the robust trend for leasing transactions, the delivery of buildings during the last 12 months that were fully let (l1ve-Paris CBD and Boétie-Paris CBD), the leases signed during previous quarters that came into effect in the second half of 2022.

However, this rate decreased during the second quarter of 2023. This decrease is temporary because it reflects the departure of tenants from three buildings located in Paris and Neuilly, with the majority of their space already relet, which are subject to small-scale renovation works. The completion of these works, expected for mid-2024, will enable the future tenants to occupy the building, resulting in a mechanical improvment of the average financial occupancy rate.

For traditional residential, the moderate contraction in the occupancy rate (-50bp over one year) follows the delivery of a residence during the first half of the year (in Ville d’Avray), where occupancy levels are gradually ramping up.

For student housing, the occupancy rate shows a slight increase year-on-year (+50bp) and over six months (+80bp), but is down over three months, once again reflecting a temporary effect, linked to the digitalization of letting processes. The Group expects this rate to normalize over the coming quarters.

Portfolio value: positive rent effect in central sectors, moderating the impact of an increase in capitalization rates

The portfolio value (block) came to €18.5bn, with a like-for-like value adjustment of -4% over six months and nearly -7% over 12 months. However, this change includes very contrasting trends depending on the areas, with a polarization of the markets, once again benefiting the most central sectors.

Offices: adjustment of capitalization rates partially offset by positive rent effects in central sectors

The value of our office portfolio shows a decrease of around -4.5% on average over six months and -7.2% over 12 months.

• Reflecting the impact of an adjustment in yields (“yield effect”), with a negative impact across all sectors (-6% to -8% for the first half of the year).
• Combined with a “rent effect” reflecting the different trends of the Paris Region’s rental markets. This effect is positive in Paris City (+5%) and the Core Western Crescent (Neuilly and Boulogne) with nearly +3%, but it is negative elsewhere (-3% to -6%), in the Paris Region’s less central sectors.

The very strong weighting of Gecina’s portfolio in the most central sectors, where rental trends are particularly positive, made it possible to moderate the value adjustment for the first half of the year.

Over 24 months, the trends in terms of life-for-like value growth reflect a significant adjustment due to yield expansion, offset by a very favorable rent effect in the central areas.

– The “yield effect” (negative macroeconomic effect attributable to an increase in capitalization rates) negatively affected the value of assets across all asset classes by around -14%.

– However, the “rent effect”, attributable to rental trends in each sector, show significant differences between locations.

• This “rent effect” is negative for more peripheral areas (Inner and Outer Rims), where it reached –10%, accentuating the decrease in value for the assets concerned.
• However, it is significantly positive for the central sectors (+15% in Paris), offsetting the drop in value resulting from the increase in rates.

Residential: resilient values

For the residential portfolio, the valuation retained is down slightly with -2.2% over six months (-2.2% for traditional residential, -1.7% for student housing) and -4.5% over 12 months (-4.8% for traditional residential and -2.3% for student housing).

NAV: Net Tangible Assets (NTA) of €161.4 per share (-6% over six months)

Net Disposal Value (NDV) of €172.2 (-6% over six months)

– The EPRA Net Disposal Value (NDV) was €172.2 per share (-6% over six months). It represents €179.7 per share including the unit values for residential.

– EPRA Net Tangible Assets (NTA) came to €161.4 per share (-6% over six months). They represent €168.8 per share including the unit values for residential.

– The EPRA Net Reinstatement Value (NRV) came to €176.9 per share (-7% over six months). It represents €184.9 per share including the unit values for residential.

This change primarily reflects the like-for-like adjustment in the portfolio value.

The scale of this contraction in the NAV was reduced by the Group’s moderate leverage effect, with an LTV (including duties) of 32.2% today.

The change in EPRA Net Tangible Assets (NTA) per share came to -€11 over six months, with the following breakdown:

– Dividend paid in H1 2023: – €2.65

– H1 2023 recurrent income: + €2.9

– Value adjustment linked to the yield effect: – €17.2

– Value adjustment linked to the “rent” effect: + €6.6

– Capital gains on sales: + €1.2

– Other (including IFRS 16): – €1.7

Capital allocation: €1bn of disposals immediately accretive, with positive impacts across all debt KPIs

€1bn of disposals

Since the start of the year, Gecina has completed nearly €1bn of disposals. All of the assets sold achieved a premium versus the latest appraisal values, with an average of +10%. For information, this premium represents +17% compared with the end-2019 appraisals.

These sales were completed with an average loss of rental income of 2.5%.

Specifically, the Group sold:

– three office buildings in Paris’ Central Business District (129 Malesherbes, 142 Haussmann and 43 Friedland), representing over 5,100 sq.m.

– one office building located in Cergy-Pontoise (around 10,000 sq.m)

– one residential building in Courbevoie (16,600 sq.m)

– the 101 Champs Elysées building, occupied by LVMH (nearly 10,000 sq.m)

Use of proceeds from the sales

In the short term, the proceeds from these sales have been used to replace short-term financing facilities (commercial paper) with an average cost of around 3.5%, resulting in an accretive impact on recurrent net income per share.

These sales had a positive impact on Gecina’s debt KPIs (LTV, ICR, net debt/EBITDA), as well as the level of available liquidity, now enabling it to cover all of bond maturities through to 2028 (at constant debt levels).

These disposals are also enabling the Group to optimize its debt hedging with a view to increasing its duration and level over the medium term.

Contacts

GECINA


Financial communications

Samuel Henry-Diesbach

Tel: +33 (0)1 40 40 52 22

samuelhenry-diesbach@gecina.fr

Sofiane El Amri

Tel: +33 (0)1 40 40 52 74

sofianeelamri@gecina.fr

Press relations

Glenn Domingues

Tel: +33 (0)1 40 40 63 86

glenndomingues@gecina.fr

Armelle Miclo

Tel: +33 (0)1 40 40 51 98

armellemiclo@gecina.fr

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