Good day, everyone. Welcome to the Covivio activity at End September 2020. Today's conference is being recorded. At this time, I would like to turn the conference over to Tugdual Millet. Please go ahead, sir.
Thank you. Good evening, everyone. Thank you for attending this Q3 activity call for Covivio. Let's directly start with some data and comments on our different markets. Let's begin with the office market. I'm on page four of the presentation. After a very quiet Q2 due to the lockdown, the letting activity is picking up slowly on the back of more site visits and decisions which have been postponed for a few months. We are probably entering a new cycle, but entering with a vacancy rate at the end of 2019 that has reached its lowest level over the next 10 years. On the investment side, activity remains dynamic with new records in terms of yield in the gateway cities and particularly in Paris or Milan.
Obviously, available money is eager to invest, particularly on no-brainer assets, even at stretched yields. This is obviously supportive for the valuation. In German resi on page five, this is more of the same for years, with a continued housing shortage. In addition, in Berlin, as expected, we discussed that numerous times, the new regulation that has been implemented is putting away from the letting market an important part of the stock. This puts prices and rents on new apartments up. Finally, on hotels, page six, the environment is obviously still difficult. On one side, July and August have been really encouraging, demonstrating the potential for recovery when restrictions are lifted. It has been particularly the case in France and Germany, where we have the most important part of our portfolio with an important share of domestic clients.
The recent surge in the number of COVID cases all over Europe has put an end to the progressive improvement of the occupancy and RevPAR. We should expect a weak Q4 for 2020. Let's move to the key achievements of this third quarter. I'm page eight of the presentation. An excellent news has been the full letting of our 4,500 sq m development in Paris' 5th district. The good news that demonstrates again the success of our pipeline, made of excellent location and efficient restructuring programs. Most importantly, this successful achievement has been made possible thanks to the value proposition that we made to our clients with a full service offer. The building will be operated by our Wellio team with a five-year contract signed with a large public institution.
Our full service offer, Wellio, has been launched three years ago and is proving to be even more relevant in this environment. We are convinced today that selectivity will increase in this environment. As you see on page nine, we are well prepared to provide to our clients the best product made of excellent location, new or redeveloped, taking into account the need for efficiency, well-being, and sustainability. Most importantly, a full range of real estate solutions offering building as a service. These will be the key elements to differentiate ourselves. Moving to asset rotation and specifically on our disposal plan, page 10. We reached at the end of September almost EUR 500 million, with still a target to be above EUR 600 million by year-end.
The most important part of the disposal is made of mature office buildings, the overall margin of those agreements reached 12% versus last book value. In all of our strategic activities, we have been able to obtain significant positive margin on sales. Since the beginning of September, we've put other different assets for sale, mostly offices in Italy and France. When we talk about successful pipeline, it's also related to Berlin resi, page 11, where we start to benefit from the positive contribution of this activity. We have already generated 46% margin on cost on the first building delivered in 2020, and the amount to be delivered will be more than double in 2021 and double again in 2022.
Finally, page 12, as a reminder, we have closed the acquisition of eight very nice hotels fully let to NH Hotel for a new 15-year lease and a 4.7% minimum guaranteed rent. We are fully confident that this portfolio will perform on the back of the future recovery of tourism. On the ESG side, four of the main ESG rating agencies have updated their rating in the last quarter and have confirmed our status of leader in our sector. These rewards are strong ambition in terms of carbon reduction and green buildings, also our strategy focused on the client and supported by best practice governance. Moving to those nine months activity, page 15. First, we deliver on our pipeline. It has finally suffered very few delays due to the lockdown, the impact on cost has been even lower than what we initially expected.
To date, six office buildings have been delivered, Most of them are fully let, with still two letting process ongoing. The first one is on Via Dante, our first full service offer Wellio in Milan, which is occupied at more than 60%, just after the beginning in September, the opening. The second one is IRO, our recently delivered building in Châtillon, south of Paris, where we have signed a new agreement for 3,800 sq m, leading to an occupancy of 34%. Our letting activity has picked up a bit during Q3, with more than 125,000 sq m let or renewed overall, at or above passing rent or last rent. I'm going to comment two interesting example. The first one is our achievement in Milan, where we re-let 3,200 sq m with an uplift of 14% versus previous rent.
The second example is a new successful negotiation with Orange, with which we have renegotiated leases at passing rent for a new eight-year lease in exchange for financing CapEx on Parisian assets. Page 17, rental growth dynamic in German resi continue to be strong on the back of a positive reversion and also modernization programs. More specifically, in Berlin, we have still positive evolution, despite a lower pass than historically, due to the implementation of the first part of the Mietendeckel law in Q1 in Berlin. This negative impact should increase in Q4 with the implementation of the second part of the law. Moving to revenue, page 18. First, rent collection have reached high level at the end of September, with 97%, including 92% in hotels. This is the illustration of the quality of our tenant base, very much focused on large companies and residential households.
On the like-for-like performance, in offices and resi, we have delivered plus 1.5% like-for-like rental growth during those last nine months. This is a slight decrease versus H1, where we were at 1.9%, due to increased vacancy on offices and additional impacts on the Mietendeckel. Performance on hotels stands at around minus 52%, aligned with the figures published in H1 and confirming our expectation that H2 won't be better than H1. Before moving to the Q&A session, the key takeaways of this publication is first, operational results that are in line with guidance announced in July, with rental activity slightly picking up, delivering on the pipeline on offices and residential, and also disposal plan well on track to reach the target to be above EUR 600 million on a group share basis. Now, I'm happy to answer to your question, together with the IR team.
Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star and then one. If you are on a speakerphone today, you might have to pick up the handset or depress the mute function so the signal can reach our equipment. Again, that is star and then one if you would like to ask a question today. I'll pause for just a moment to give everyone a chance to signal. We have a question from Alvaro Soriano from Bank of America.
Yes, thank you very much for the presentation. Can you hear me well?
Yes.
Okay. Yeah, just three questions from my side. The first one on disposals. Can you comment or elaborate a little bit the margin achieved in Q3? We kind of feel that the margin is slightly coming down from 15% to 12%. Probably, Q3 disposals have been executed at a lower margin. The second question is about the weak performance you expect in hotels for Q4. The company has confirmed the guidance, but the potential losses in hotels, I think EUR 17 million, are expected, can be huge than that figure, given the weak hotel performance you are expecting for these last three months of the year. The third question is on dividend. I have to ask again, during H1, the company rejected the possibility of a scrip dividend. You were expecting capital rotation to be strong enough to pay a cash dividend.
If you could comment on how the dividend for the year looks like, and if you can confirm that no scrip dividend will carry out this year. Thank you.
Yeah. Thank you for those three questions. On the first one, yeah, mechanically, that means that there's been a smaller margin on disposal in Q4. Let's say that's still a strongly positive overall margin on disposal, which is, for us, a good signal for valuation. It's always depending on the asset that you put on the market, et cetera. For us, very good news to be able to confirm that. On the second question about the weak Q4, yeah, this is what we expect on the back of, let's say, recent announcement all over Europe. To be honest, and we've been clear on that during H1, we were not expecting a huge performance during H2. We have been positively surprised by the performance of Q3, and specifically in July and August has been quite good.
We have been a bit in advance versus our initial forecast, and we will probably be a bit late in Q4. Overall, there should not be an important impact. That's why we are confirming our guidance due to these different elements. Last question about dividend. Obviously, our objective is we align with what we said, obviously, in H1. Our objective is to confirm the LTV objective, and for doing that, this is the disposal plan. As I said, we are well on track, so there's no reason for why we should change our mind on this aspect.
Okay. Thank you very much.
Our next question comes from Celine from Barclays.
Hi. Sorry, can you hear me?
Yes.
Okay. Hi. I just have more specific questions on disposals. The first one would be, I have the feeling that most of the disposals in Q3 were German resi, and there was a major drop in terms of margin from Q2 to Q3. I read something like 81% in H1. It's dropping to 19% in nine months. How do you explain that drop? That would be my first question. The second question would be on the French office disposal that has been delayed. Can you give a bit more color around it and why it has been delayed and whether or not it's related to, I don't know, something like margins or credit? Thank you.
Yeah. Thank you for this question. The first one is on activity, obviously, as it has been commented, there's a slight decrease on margin, but again, still 12% margin on the overall disposal. An important part of the additional disposal is coming from German Resi, correct? A portfolio made of Plattenbau in Leipzig that we bought three years ago when we decreased vacancy from 50% to 3%. We consider it was fully mature, together with some asset in Berlin. We deliver that with a smaller margin versus the overall that we communicated. On average, it has an impact on the overall margin. The second question, I'm not sure I remember.
That was on the French disposal. French office.
On the French disposal. We have effectively postponed an asset that was under a sales agreement in H1 because we disagree with the seller on the outcome of technical due diligence. We are, I would say, fine-tuning the analysis in order to put that again on the market. Is it clear?
Does that answer your question?
Oh, sorry. Thank you. When you say you disagree with the seller, do you disagree on the price?
No. It was not clear. There's been a disagreement in the outcome of the technical due diligence, so on the technician side. We decided to fine-tune the analysis on the technical due diligence in order to put again this asset on the market.
Okay. Thank you.
We have a question from Florent Laroche-Joubert from Oddo BHF.
Hi. Florent. Thank you for the presentation. I would have 3 questions for you, if I may. What we can see today is that the sanitary environment is now worse than Q3, than this summer, and we are going to face more restrictions and more uncertainties, at least until next December 2021. I would have 3 questions due to this context. First question, what is your opinion today on the evolution of the investment market on offices due to this context? My second question on hotels would be, how do you see this activity worked in 2021? Because we would have maybe more than 12 months, that will be very difficult for hotel operators.
My third questions would be, do you see any changes in request by corporates for the future, wishes in terms of offices since we can see today more home working. Did you see that there are new needs, new wishes in terms of wishes for the activity?
Yes. First question on the investment market, I have to say that up to now, it has been quite dynamic as a market. We have all seen, including just recently one or 2 days ago, deals that have been closed on the office market together in Paris region, and also Milan. We continue to see very good appetite for assets at even premium or at book value, in the process that we are ongoing. That's why we said we were confident on our objective and our expectation even to be a bit higher than that. The question on hotels is a bit more difficult because, obviously, we are, let's say, We have a quite limited view on what would be the future evolution of restriction and the evolution of the virus.
What we saw, what was encouraging is that if restriction are progressively lifting up, we have seen a very rapid recovery in the RevPAR and occupancy as it has been the case in July and August. Let's say we need to be patient on that. It's obviously difficult to forecast so far for 2021. I would say we have today a revenue stream that is mix of variable and fixed lease. We have so far been able to collect an important part of the rent in a difficult environment, confirming the quality of our hotels and also of our counterparts. We all hope, personally and professionally, that this situation will progressively improve.
We are confirming again that on the long term, despite this short-term challenge, this industry will recover, and let's hope that it could recover also, probably faster than what we expect today, really in the middle of the turmoil. On the third question, on the office demand. The situation is, as we described, a bit better than in Q2. We have seen some transaction, and we have been happy to deliver on some interesting transaction in Paris, but also in the south part of Paris. We see in fact, in our view, two good example. The first one is the transaction in Gobelins, where we have been able to secure this clients because we have been able to be flexible and to offer a full range of service.
That was key for a rapid decision for this transaction. The second one is the asset in Châtillon, which is a different kind of client, which is also looking for a competitive solution. Obviously, this building is a very good opportunity for him because it's close to transportation, just very close to the ring. With rent around 300 EUR per square meter, it's very competitive, and it corresponds to probably an increasing part of the demand that will focus also on this kind of things. Yes, in this environment, clients are carefully looking to cost and particularly real estate cost.
The things that we need to do today is to focus on the quality of the offer, to be competitive, and to offer probably something more in order to differentiate ourself and to be among the first to be able to fulfill our buildings.
Okay. Thank you. That's very clear. Maybe if I can, just a follow-up question on the hotels. If we take the assumption that the situation will continue to be significantly affected by the crisis of COVID in the first part of 2021, can we assume that you are confident to collect rents for this part of 2021 as you collected rents in Q2 and Q3 2020?
During this first half, we have done a very constructive negotiation with our clients, our partners, the hotel operator. We are together in this situation. Our objective is to have, when the recovery will come back, to have a very efficient professional hotel operator to manage the hotel that we have. That's why we have formed solution with them, in order to face this situation. As I said, due to that, we continue to have strong relationship that enable us to collect an important amount of the rent that we are due. I hope that it will, and I think that it will continue to be so. If needed, obviously, we will be happy to continue to discuss with them on a case-by-case basis, in order to face this situation.
Well, okay. Thank you very much.
Our next question comes from Marie Domon from Green Street.
Hi, good evening. I actually think you mentioned it earlier, but I just wanted to know, for IRO, did you manage to achieve the rent that you had in your disclosure, which is like EUR 325 per square meter? In the future-
Yeah, that was in line with our expectation.
Maybe for the rest of the building, or maybe if you start to have conversations for Alvis, which is in Levallois, so it's further down the road, it's 2022. Did you start to see negotiations that are asking for lower rent than what you have in your business plan, or this is not yet started?
For Levallois, yes, I have in mind some discussion that we initiated, and we have done recently some site visit as we have now launch the development, and we have a precise date for the delivery. It's probably a bit too early to go more into detail, but I would say the location is excellent, and the proposal in terms of building size on the metro station, et cetera, makes us quite confident on our capacity to let it and in the competitive environment is quite well-placed.
Thank you.
We have a question from Christopher Fremantle from Morgan Stanley.
Hi. Yeah, good evening. I just wanted to ask a couple of questions on the hotel business. I think you say in the release that the RevPAR within the hotel business is down 55%, I think, so far, yet your rents received is down 51%. My question was, what proportion of your hotels have minimum guarantees? If you can just clarify if they are being triggered or not. I know in some of your U.K. hotels, you have a material adverse change clause and you're not recognizing any rent for this year. If you could just give some clarity on that, please. Then just to follow that, can you clarify that there is no risk of breach of your interest cover covenants within your hotels business? Please, just some clarity on the test for 2020.
Yep. On the RevPAR, I'm not sure I followed your question because the -55% that was in the presentation, it was for the month of August 2020 versus 2019. That was just to, let's say, illustrate the fact that summer was quite encouraging in terms of performance. The comparison with the -52% in our revenue is on the nine months basis. Taking into account the variable part of our revenue and the fixed part of our revenue.
Right. What is the RevPAR down for the nine months?
We don't have a statistic on the RevPAR on the hotels because we communicate on, let's say, rents and EBITDA. I would say the -55%, you mean compare in August with your portfolio? Not sure I have the information yet.
I think the point I'm just trying to raise is that the rent received doesn't seem to reflect the fact that, in many cases, there is a coverage, that you have minimum guarantees within your variable rent clauses.
I'm trying to understand if those have been triggered or not.
Yeah.
If not, why not?
Let's summarize like this. Apart from the, as you mentioned, on the U.K. portfolio, where we did not collect the rent due to this MAC clause, all the other revenue are made of either EBITDA, either variable rent, and specifically, again, with Accor, then the remaining part is fixed rent. This is where, specifically, we report the amount of collected rent versus what we invoiced.
Maybe I'll take this offline. Bye.
Okay.
Could you just comment on the interest cover?
On the interest cover, specifically on Covivio Hotels, we were at 2.5 times at the end of first half. Q3, we are in line with H1. Expectation is no material deterioration on that. Base case is that we should be okay with the covenant, which is at two times. In any case, we will closely monitor that, and if needed, we will ask for a covenant holiday. It has been largely accepted in numerous hotel deals so far. I would not see a major risk on this.
Okay. I'm just going to sneak in one more, if I may. Have your hotel valuers provided you with any updated guidance on the valuation trajectory in this segment? I know you recognized 3% down only in the first half. Is there any more guidance that your valuers have given you that you can share with us?
No, not yet. It's a bit too early. We've seen some small transaction on the market, which are quite encouraging, I would say. On the other side, we've also hearing a lot of new firms that are raising, let's say, money to be prepared to invest on the hotel side. I think the discussion will start in the coming weeks, so far, I cannot comment or give more details on that.
Okay. Thank you.
Once again, ladies and gentlemen, if you would like to ask a question today, please press star and then one. We have a follow-up question from Alvaro Soriano. Please check your mute function.
Yeah, can you hear me now?
Yes.
I was on mute. Sorry for that. Just a quick one to follow up on Covivio Hotels and back to the dividend topic. Last year as well, Covivio Hotels made a capital increase through a scrip dividend accepted by all shareholders, including Covivio. We can see that scenario this year?
It will be decided among the shareholders, of which, obviously, Covivio is an important part. The objective is to take decision in the interest of Covivio Hotels and Covivio. We will decide accordingly, taking into account the situation, the balance sheet, the needs, LTV, et cetera.
We can assume no decision has been made yet on that topic. Okay. A second question on your renewals for next year. In offices, I think you have around 31% of your income to be renegotiated or renewed over the next 24 months in France offices and 18% in Italy. How those conversations are going, and especially with your largest tenants, with those tenants where you have partnerships, I mean, France Télécom, Telecom Italia, EDF, Suez? Are they willing to renew the same space? You are starting to feel that their office needs will change in the coming years?
Hold on. I am just collecting the information. Just a few seconds. There is probably misleading information because, let's say, in French offices, we have around 14% of our leases that are expiring. I would say the discussion will come. An important part of this is coming from Orange, and specifically some asset that will be ready for redevelopment in Paris, and the future pipeline where we are currently working on with, let's say, fine-tuning for the building permit as soon as it is fully vacated. On the remaining part, it would be, I would say, an analysis on a case-by-case basis. There are no big deals apart from the redevelopment part. There is no, in this lease expiry situation, that would lead to a strong increase on the vacancy rate or a strong decrease in the rental level.
Okay, thank you. At this stage, you cannot share a number, especially on French offices, that analysts we could use for 2021 in terms of vacancy rates coming from these renewals. At this stage, it is difficult to have that number?
It is a bit too early, again, I am taking the example of what we have done with Orange recently. We have renewed the lease at passing rent. There is really an analysis on a case-by-case basis, depending on the situation of the client, what we have with him, the flexibility that he could ask. Probably some of them will ask for less surfaces. I would expect that for some because of the economic situation. Again, overall, I do not see big deals in the lease expiry that we have for next year.
Thank you.
Alvaro, you missed to, for 2021 expiries, if you take into account the assets that we enter to the development pipeline, especially in Paris, as Tugdual just said, the lease expiries in total for Covivio represents 3.8% of the total revenues of Covivio.
Very clear. Thank you very much, Paul.
As a final reminder, ladies and gentlemen, that is star and then one if you'd like to ask a question today. It appears we have no further questions at this time. I would like to turn the conference back over to our speakers for any concluding remarks.
Okay. Thank you very much for your attention and all your question. Obviously, all the team is available to you to go more into details in more specific question. Have a good night.
Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.