Welcome everybody. Wolvertem calling, like they say in the newspapers. Let's look together once for the last time, shortly to 2022, and try to look forward to 2023 and further on. 2022 was the year with the biggest increase of the cost of capital, our beloved WAC, in nearly 40 years, as mentioned in a study by Citigroup. This has had an enormous impact on the real estate sector. We had to rethink models and profitability. Yes, we adapted with Team WDP, supported by structural demand for warehouse space as a part of the global supply chain. WDP is ready for the new reality. Let's look into the details. We made, again, a fantastic presentation with all the details. As usual, we will not go through, in detail through the whole presentation, but we will focus first on some hot topics.
Afterwards, you can ask all your questions on the presentation and others by chat in the Q&A, which will be organized by Alexander. First, let's go back for the last time to 2022. I think we can be proud that we realized a further growth of our earnings per share of 13% up to EUR 1.25. Based on a very nice and very good balance sheet with a loan-to-value of 35% and a full house, 99% occupancy rate. Together with the pipeline of realized and project in realization, we are again able to raise further our earnings per share up to EUR 1.35 or 8%. Let's say very nice figures for 2022 and 2023. If you go back one year, exactly one year, we were together here to present you a new strategic plan.
That started with our slogan, from external growth to external growth plus. Well, the way to that goal, the long-term goal of 25 changed. We have now three drivers for growth instead of one and two in preparation for the next plan. It's about structural external growth, which is still there, which we still will do, the value of the existing portfolio, and also our new business line, WDP Energy. All shoulder to shoulder are supporting together our growth and our profitability, supported by a very strong and liquid balance sheet based on a brand-new rating, BBB+ with stable outlook. Mick, can you give us some details about the change profitability of each driver and also about the balance sheet?
Yes. Thank you, Joost. First, to add further on our business plan, which we started, one year ago. There, as soon as we launched it, the war in Ukraine came, you had the inflation backdrop, the macro environment changed, in fact all the parameters changed, some plus, some in minus. The critical thing is, as a company, how do you react to this? That is by adapting and taking into consideration the new parameters of the new operating environment. Today, the main challenge is to safeguard the profitability on new investments because of the strong increase in cost of capital, like Joost mentioned, and building costs, which continue to be elevated. We adapted very quickly by changing, first of all, our hurdle rates for new developments.
To take a step back, what we originally foresaw in the business plan was 5% yield on cost for new developments in Western Europe, 7% for Romania. In Q1, Q2, the new business originations, the new deals were around those levels, even within a challenging context, but were also funded still at 1.5%. In Q3, we changed to minimum 5% and 7% plus indexation during the construction period. As from Q4, our new realizations are minimum 6% and 8%, and that is achievable. We think profitability should still be a bit higher today considering the cost of capital. We therefore would like to push for 7% and 9%.
I say deliberately would like to push because it's not yet fully possible automatically on every project today because of the fact that we would need to push rents even a bit further and do not yet see building costs decline. We have a lot of in-house knowledge, good boots on the ground, and we need to be creative and selective. What's for sure is that in our view, the investments need to be calibrated on today's parameters. We put profitability first. Whereas, yes, the EUR 500 million of new business volume, new developments per year was a target originally in the growth plan to achieve the EUR 1.50 earnings per share target in 2025.
That is no longer necessary. We can also live with, for example, EUR 250 million new business developments per year, but focus on higher profitability. The good thing is that we have been in spite the fact that we have been 20 years reliant on solely external growth as a driver, we now have multiple drivers. We have organic growth, mainly through indexation, but also through upgrade opportunities within the existing portfolio at higher Yield on Cost, of course, and we have the accelerated deployment of our energy business. For which we all have already concretely identified EUR 150 million of projects to be executed in 2023, 2024 at an IRR of 8% and targeted Yield on Cost of 10%-15%.
What we're trying to say here is, yes, we will still continue to grow, but more balanced and with an utmost focus on profitability. We have always mentioned that there is no single path towards the EUR 1.50 per share. We are open for business, but we take into consideration the parameters of today and how do we think we can achieve the EUR 1.50. We have a very strong development pipeline, profitable pipeline of EUR 600 million, with EUR 300 million cost to come. To that, we will add new developments with the focus on profitability. We have another layer of organic growth, mainly through indexation, which is higher than in the past. We add another layer of profitable energy projects.
Yes, we will need to be more selective in deploying capital, considering the higher cost of capital. It's not just about making the development gain, it's about cash flow generation. That's where our focus is. That's what matters. Within this context, we can confirm our target of EPRA earnings per share in 2025. For the next topic, we go over towards property valuations and balance sheets. When we look at property valuations first, where do we stand? Well, you can see that overall in 2022, we posted a 2% valuation decline in the portfolio, and that was actually being composed of a 50 bips upward yield shift. The input discount rate applied by the property experts and some higher transfer taxes in the Netherlands.
Partly offset by ERV growth of plus 11% and the development gains on our pre-let development schemes. There was around 20% development margin. Of course, the valuation was positive during the first three quarters, then mainly the yield shift came in in Q4. Overall, our portfolio is today valued at an EPRA Net Initial Yield of 5.0%, excluding Romania, that's 4.6%. That is based on a value per square meter of around 900 EUR, which is roughly where a back of the envelope replacement cost would be. Obviously, we have received many questions. What is your outlook for property values and, well, for and for yields?
We do not have a crystal ball, but based on what we see today in the market, the macro environment, inflation rates, and what we see, in terms of potential deals and indicative pricing in the market, we believe the yields will go towards 5%. That's, let's say, also excluding further other positive elements like further ERV and ERV growth and inflation, which are also forecasted. Aside from that, I think what we can say is that we are in any case prepared for a new cycle. We have a very strong position, as you can see on slide 40, and yes, today, even with the valuation decline in Q4, we still have only an LTV of 35%.
Even, when we do a stress test and would add it would take another 13% hit or EUR 800 million to even get to 40%. That is the underlying reason for that is that we have never only focused on LTV, but we managed our already for a long time the capital structure based on true leverage on the business through net debt to EBITDA, which comes in at seven times, which we believe screens good in a wider European context. As a result of focusing on that metric, we now have balance sheet room. We have a stress tested balance sheet because we never leverage actually on portfolio revaluations. We will continue to act like that as well.
Even more importantly, also our liquidity is very solid, and we have EUR 1.7 billion of undrawn confirmed credit lines, which largely cover all our committed investments plus refinancing over the next two years, plus leaving a buffer to for any potential investment opportunity. We can talk also about LTV of course, but net debt to EBITDA matters and what will also matter more in the future is your Interest Coverage Ratio because all costs of debt have been based on very low base rates. It's important to judge how that will increase going forward. I think there we can say today our debt book is fully hedged.
We have limited debt maturities in the next year. Even for the next five years our hedge ratio stays on average 87%. This allows us to really capture inflation, because indexation of rents increasing your revenues is one thing, but your cost base also needs to be protected to be able to feed that through to the bottom line. That is the case for us. Even if we would draw the next EUR 500 million of debt on the existing credit facilities, then our cost of debt of today of 1.9% would only go to 2.1%. I think our cash flow is well protected from that. That's it on the details of the growth plan, property values and our balance sheet.
I would like to hand over back to Joost for a comment on markets.
Indeed we can have, let's say, the best company and the best balance sheet, but we need, let's say, a good real world. There we can still say that the fundamentals of the logistics sector and more broad, the supply chain is still very, very good. There is a still a structural demand for warehouse space based on, let's say, the same strategic points as last year. First of all, outbound. Yes, there is still e-commerce. Yes, e-commerce is still growing, but let's say in a more normalized way. The extreme growth of e-commerce has stopped. We see further investments in the outbound strategy of every company. It's more about omnichannel today than just e-commerce. For example, there you see a lot of investments in the food e-commerce. More broad companies are investing in their omnichannel.
Today, they have to deliver at home, tomorrow in the office, Saturday, in a shop, and on Monday they have to be able to take it back. That there people and companies stay investing in. The same at the inbound side. Strategically, even when today it is a little bit more difficult, business cases are the more difficult. There can be a little bit slowdown in decision-making. Strategically, let's say the de-globalization has to continue and people think about their strategic supply chain. For example, the investment of Intel in Europe can be postponed a little bit, but they mentioned they will come. We will not continue to make and produce chips only in Taiwan. We will make them in every continent. That takes time.
Yes, it can be postponed a little bit due to high construction costs or scarcity of land, but it stays there. People are thinking about strategic stocks, about how they have to handle that by postponing a little bit production, doing it in a later phase in the production, doing it closer to house or having more strategic stock, even one that has a cost today. The strategic investments at the inbound side and the outbound side of our warehouses stay there. Indeed, of course, you also have today new investments. You have to take care of the warehouse you have. There are no possibilities. Everything is full, so you have to take care of what you have. Then you will also adapt your buildings, make them better, make them more sustainable. Also think about electricity.
Is there enough electricity? Do we have to automate to make our warehouses more efficient? There, those structural trends stay there and make that. Let's say there is no or almost no vacancy of warehouses in Europe. Above that strategic demand, there was also a temporarily more short-term demand for warehouse space due to, let's say, the recession, eh. Too many goods were ordered and not sold. That was within our warehouses, eh. Because in the financial crisis, there was empty space, and then we had, let's say, 3%, 4% of extra short-term demand by which we could fill our warehouses. Now, the warehouses were already full before the recession. Our clients had to find solutions on their own by having a higher internal occupancy or putting and keeping goods into containers on the yard.
Let's say today we have, on our behalf, no, temporarily, demand. Let's say when this will flow away during 2023, the normal occupancy rate within our warehouses will go to more normal levels. It will have no impact on our occupancy rate. Therefore, I think we are still positive about the structural demand for logistic space in the places where we are. It's time now for all your questions. I hoped that we discussed the hot topics, and now it's up to you, and we give the floor to Alexander for the Q&A.
To all participants, you can use the live chat to address your questions, and we'll take them one by one. We have a first question coming in. How is Ukraine today affecting the position in Romania?
Well, let's say it's making Romania a better place to invest. Romania is the safe haven of the region. It's part of NATO, it's part of the EU. It's a safe place also, let's say, protected by naval, but especially also by, strategically by, the Americans. Let's say, we see investments coming over from Ukraine or from even Russia, to our warehouses, to our production units. We see more investments than, let's say, one year ago.
We have another question from Wim Lewi from KBC Securities. On the high construction cost inflation, we now see that the material prices, such as steel, is declining and so are the order books. Is there any idea why the construction costs for logistics are not coming down?
Well, let's say we hope that construction costs will and can come down in the near future. There is also inflation and indexation of the wages and some materials are still high. Besides this, let's say, buildings were also becoming better with higher standards. We hope that there will be a little destress and that prices will come down a little bit by mid-year, we think. We don't calculate really big discounts in the construction prices for this year.
Yeah.
At least, we have a stabilization at a high level, and we can again fix fixed prices and a fixed timing.
Yeah. In a normal cycle, when you look at the cycle, they should come down. We want to be cautious because we don't see it yet because 50% of the construction cost is still made up of labor, and that is increasing also, nowadays. Too early to judge.
Okay. Then another question, follow-up from Wim on the yield expansion, specifically in Q4. Interest rates have been very high since the start of the year. Is there any specific reason that you see why the yield shift has been moving since the fourth quarter and not in the second quarter or the third?
Because of the fact that in the first two quarters, people were still finalizing deals from the old cycle because they were initiated negotiations end of last year. As the war started, there was a stop in investments, not because there was no interest. There is still a lot of interest and also a lot of interest from equity buyers. The markets needed to recalibrate. In the equity markets, that happens immediately on a spot basis. In the direct property markets, there is a lag in which markets adjust. Now we believe that over the next quarter, there should be a new equilibrium, and that's the only reason.
We have another question from Rob Virdee of Green Street, specifically on the EUR 300 million capital increase of October 2022. Have you deployed any of this capital for additional growth over and above the CapEx penciled in before the capital increase?
Well, we would not look at it like that. What we have said is that in the EUR 300 million capital increase we did is we said, we have several reasons to ask for that capital to our shareholders. First of all, we had a very strong and profitable development pipeline. We added, because we identified them concretely, another layer of a material layer of energy projects of EUR 150 million. On top of that, we also want to be ready, for new opportunities as when they come. We, and we, the reason was also that in this type of market, it would not be wise to first invest and then raise capital.
You need to also not over-leverage yourself and have a prudent stance on your balance sheet. We have a good run rate of new investments, like were added in Q4. We had another volume of EUR 100 million of new projects added. The message we want to give is, we are open for business. We have good teams, boots on the ground, but we need to maintain the profitability on our projects so that we have sufficient earnings per share aggression.
Another question coming on, the solar panels. Can you give a bit more insight on the profitability, and the future of WDP Green?
Yeah. On WDP Green in it, WDP Energy in itself, there, we believe that with our warehouses and our sites, we have 50 million square meters of land. We have 7 million square meters of buildings, and so also of rooftops. We believe we can play a material role with that in energy transition. To do that, first of all, you need production capacity. That is the first thing we need to do. We net need to add production capacity. We aim to go from 100 megawatt-peak installed to 250 megawatt-peak installed.
On the profitability, we target an internal rate of return on a project basis for those solar projects of around 8%, and the Yield on Cost will then be higher 10%-15%, a bit higher in the beginning, a bit lower towards the end. Also, that's need to be a bit higher because it's a bit more front-loaded because of the fact that you don't have a terminal value for the solar panels. That's something we need to do in the first instance. That's the start. Because those are profitable investments. Then we can really start to do other nice things on our sites.
For example, adding batteries to have a better management of the energy consumed locally, but also in combination with a further electrification, not only of the buildings and the equipment inside, but of the electrification of the fleet of our clients, eh, really. That is decarbonizing and making the transport more efficient. That is the real game changer, because our clients are now starting to look at obviously towards electric vehicles for the cars, but the game changer will be the electrification of the trucks, and that is where our clients are looking at. That's a whole new ballgame, because then, for example, in the pilot we are doing in Zellik, the Green Mobility Hub we are building there.
With a full rooftop solar plant, batteries, plus electric vehicle chargers for cars, vans and trucks. The energy consumption of that site as a result of that, or the result of the electrification of the fleet, will do at least times three. We believe there is sufficient potential for the years to come.
Maybe just to follow up on the profitability of new investments, could you also elaborate on the assumptions taken into account to reach the 1.50% in terms of inflation and on new developments?
Yeah. On, on inflation, so we use organic growth of 5% for 2023, based on the on the outlook for inflation, and thereafter, 2.5% for inflation. On the assumptions for the investments is executing the EUR 600 million development pipeline, of which EUR 300 million needs to be still needs to be spent. EUR 150 million of energy projects in execution in 2023, 2024, with full impact in 2025, and then per year another EUR 250 million added to our development pipeline. Those are the main assumptions.
We have a few questions on the client payment behavior. Is there first any change in client payment behavior up till today, and do you expect it to come?
Our client behavior is very good and follows a really stable pattern. We have around 15 days, Days Sales Outstanding, so that's very good and 99% of rents collected. There we believe that for the foreseeable future it will remain stable, so we do not see any change in behavior on that, and that is also in the guidance, stable client behavior. What is always a risk, that's what we have always said already for 20 years, one of the most important operational risk is if a client falls bankrupt, because then you have abruptly an unforeseen temporary vacancy in your portfolio. There in a recession and with still high energy prices, what could be a risk.
There we analyze that. The risks mainly sit in recession-sensitive sectors like industrial, non-food retail, and wholesale. The good thing is that most of our clients and all the clients having a rent above EUR 1 million, versus rent, a role of almost EUR 350 million. These are all big international companies. When you really look at the weaker segment between brackets, that's mainly the SME segment within those sectors, and that's around 5% of the portfolio where we need to be a bit more attentive. Also these clients are paying very well. You could also see it as, let's say, we don't or would not like it, but you could also see it as an opportunity because the market is still strong.
When there would be a vacancy, it could have a temporary effect, but we could then also relet the building at a higher price afterwards.
Do we see today any rental reversion potential on the portfolio?
Well, today, the portfolio is based on the ERVs we publish and based on which the property valuations are based, versus our contractual rent, the portfolio is still 5%, 6% under-rented. There is still also upward pressure on ERVs.
We have a general question on the Netherlands. First of all, can you give any update on the future of the FBI regime?
Well, well, there, the Dutch Ministry of Finance has indicated that they would now, that they intend now to abolish the regime, starting from January 1, 2025. And in our guidance and in our business plan, we take into consideration a provision as if we do not have the status. For the short term, meaning for the years until they abolish it, meaning for 2021, 2022, 2023, 2024, we are still in discussion with the Dutch tax authorities to be able to maintain it, but it's still in discussion.
To stay in the Netherlands, there is another question, with regards on the permitting, given the nitrogen regulation, is this expected to cool down the investments or the new developments going forward?
Not specifically, let's say the nitrogen laws. In general, I think in the Netherlands, the scarcity of land is very important and there is still big demand for new warehouses, but there is no land. There we can say that it's not the permits, even when it's more difficult and when it takes longer, it are not the permits who are the problem, but it is the availability of land.
Another question on the valuations. Is there any specific significant difference between the countries in terms of movements in the fair value?
Yeah. There have been some differences according to the evaluators and the countries. The Netherlands has seen the biggest yield shift, so it's ranged from +20 to +80 basis points. The most was in the Netherlands, where it's our biggest and most liquid market.
There is another question, here from Francesca, from ING, regarding the 40% LTV guidance. What investments have been taken into account?
Yeah. The 40% is not the guidance. We say it will still stay below 40%. You as you will see in the detailed balance sheets we will publish in the annual report, what is in there, it's like other years, it's the execution of the committed investment pipeline, so the development pipeline plus the solar projects. Both are scheduled in 2023, 2024. For the part that is will be executed in 2023, that's around EUR 400 million, and that will have an effect of, on the LTV of +1.5%. Also taking into consideration that we have each year the retained earnings and the scrip dividend, of course.
Another question coming from Geert de Mazure. Do you see any developers that are getting into trouble in distress?
Well, I think you can say distress is probably too early, but they are at least nervous, I think. Because indeed they made projects based on a certain profitability, and now we are, what is the exit value? At which value will they be able to sell? So let's say if it was possible, they postponed the projects and waiting to see where yields are going. Today, yeah, and the market is frozen. There are almost no activities in the investment market, so they are, let's say, nervous, but not in distress yet.
Okay.
More stopping and, let's say, cooling down, speculative projects.
We have another question on Romania. CTP, your competitor, is very active in Romania, just like WDP. Yesterday they announced a large project. How is competition and yields looking like in Romania today?
Well, it's indeed, it was a very nice project that CTP won. It is an existing client of us, LPP. Very nice project of 60,000 square meters. In the end, the client has chosen for finally the price and there we said this is too low for us. Finally it came at a net effective rent of EUR 2.65 per square meter per month, which gives EUR 32 per year. Which gives us, let's say, a profitability of around 5%. There we say, "No, thank you." There we concentrate on quality and on profitability more than just on quantum.
Maybe just to stay in Romania, another question from Steven. Could you please elaborate how the current macro environment impacts Romania differently from the Western European markets? Do we see any specific difference in terms of demand and also the valuation in that market compared to the Western European portfolio?
Well, in terms of demand.
I think demand is very strong, and I would say there is even or there was even more demand than last year due to the fact that, let's say, it was the safe haven, like I mentioned in the beginning. Some projects that were first foreseen for Ukraine and for Russia, like the LPP project that we just mentioned, came down to Romania because it's a more safe place to invest. No, and we have seen also in our production units that production is driven up due to the fact that it is indeed a good place. It's a big, stable country.
Demand is very healthy and on, let's say, the valuations, I think there everybody was waiting for valuations going up, but it didn't happen, they did not had to come down too, because they stayed rather flat and stable over the last year.
Yeah, because the market is more in fixed hands.
Yeah.
The market is taken by by the likes of CTP, WDP, who are developers and the end investors. There has not been a real downward yield shift, and now the upward yield shift is rather limited.
It's not an institutionalized,
Indeed
... market yet.
Indeed.
Another question from Rob. You mentioned that the investment market deteriorated during the second half of 2022 with large bid-ask spreads, and the yields increased. Do you already see any signs of recovery, or at least stabilization? Do you expect to see any distress in the market in the near future?
I think not yet. Probably who knows? We have to wait for MIPIM within one month. For the moment, we don't see new deals yet. Some people are looking, trying, let's say, if they would go or not. Yeah, the spreads are still too high, and market stays frozen for the moment. We think it still can takes a while. There is no pressure to sell with most of the investors because, yeah, the warehouses are full. They are generating cash flow. Even when they have high loans against it, the loans can be paid back because there is cash flow. Our sector is generating cash flow. There is, most of the times, no pressure. We think it could take a while.
We, of course, hope that there will be opportunities, but we are not sure, and we don't think it will be before summer.
A question from Peter from Kempen. If you want to derive the Yields on Cost to 7% in the Netherlands or Belgium, what rents would you need? Would anything need to move to obtain that 7%, and is that achievable today in the current environment?
That's the difficult thing, indeed, because construction costs stayed high but stable. Land prices also. Cost of capital went up. Those are the three elements that went up. Indeed, if you want, at that moment, a higher profitability, then the rents have to go up. Today you are, I think between 70 EUR, yeah, 70 EUR per square meter per year, 70-80 EUR depending on the kind of building, on the location, on land price. That's the difficult thing today, that markets and clients are not there or are almost not there.
When you look at the investment market, any assets coming up to sale in the market, what yields are you receiving or seeing?
Not yet. Yeah, I think, there are no real investment memorandums yet. I think I've read in some newsletters of the analysts today that Blackstone went with some portfolios to the market or will come with some portfolios to the market. I've not seen any investment memorandum this year yet.
A final question. Currently, on the solar panel strategy and the revenues, do you expect any increased regulatory risk?
Yeah, well, the risk is already there, I would say, and identified. So for the, what good is for all the new investments in solar panels is that we are profitable on an autonomous basis without green certificates. And they, in most of the times, they do not exist even anymore. So that's a very positive thing. And yes, there is a regulatory risk for the solar panels, that is that the Flemish Government has a, is working on a plan, on a draft legislation to abolish the green certificates on existing schemes, which were delivered between 2008 and 2012, which had a green certificate duration of 20 years. And they intend to cancel those certificates as from 2024 for the remaining six years.
That's a risk. That is something they are working on concretely. They have an agreement in the Flemish Government. We will likely push through, and then we will need to see what legal actions we could take, and our colleagues will also take. That represents a risk of 2% of our revenue and 3% of our EPRA earnings.
I'm just looking if there are any other questions. There are few detailed questions that will be taken offline. We will address them later. Maybe just one more question. Is there any update on Catena that you can give on the strategy?
For that, you have to listen to the publication of, the year results of Catena, I think the 22 of February. No, it's a very good company in very good shape. Let's say also with, a low loan-to-value, with possibilities to invest and to grow further. For that, let's say wait and see, and we hear you, 22 of February.
This currently concludes it, all the questions. I would like to give the word back to you, Joost.
Thank you. Thank you all for the questions. If you have still questions later on, don't hesitate. You can always call us. You know that we will answer as quick and as good as possible. To conclude, I would say, never waste a good crisis. It force us to be creative and innovative. We call it to be and to work with warehouses with brains. finally, I should like to say and thank you all, and thank all our stakeholders and clients to support us. especially a special thank you for team WDP for the fact that they have been so adaptive, and the agility that they showed last year in order to be ready for the new reality. Thank you. Have a nice weekend.