Good day, and welcome to the activity in March 2020 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Christophe Kullmann. Please go ahead, sir.
Thank you. Good evening, everyone. Thanks for joining this call on the Q1 activity of Covivio. Before going through the first quarter news flow in this crisis phase, let's take a step back on our business model. I'm on page four. As you know, Covivio is a diversified company, mainly exposed to office and residential, which represent 84% of our portfolio as of today. Diversification in terms of asset class and in terms of country offers a secure profile to the company. The resilience of our revenues relies also on the solidity of our tenant base. On offices, which represent 60% of our portfolio, 91% of our revenues come from large corporates. On German resi, residential activity is one of the most resilient. We have no vacancy and benefit from a market with a structural lack of supply.
On hotels, 96% of our tenant base is made of major operators, leaders in their market, such as Accor, InterContinental, or NH Hotel. Focusing on our office portfolio, page six. We have built our portfolio through strong relationships with large corporates. You see some of the main names on this slide. Those corporates have been our partner for a long time. This strong relationship has always been the source of security and value creation through high occupancy, long leases, and regular renegotiations. Obviously, the basis of this successful strategy is the quality of our portfolio. High-quality buildings located in strategic locations, Paris, Milan, top German cities, are let at reasonable rents, especially in Paris, where we have a huge renovation potential. Diversification of the partnership strategy with large corporates has offered us a strong resiliency in the past. You see the figure, slide seven, on occupancy on lease maturity.
Our occupancy rate has always been higher than 95%, and we have been able to keep a high rental visibility, thanks to long lease maturity. On our development pipeline, slide eight. The development pipeline has always been a source of value creation and quality improvement of our portfolio with a limited risk. One example, looking at the 480,000 sq m of offices we delivered for the past 10 years, the occupancy of the buildings delivered has reached on average 96% on the year of the delivery. Today, this pipeline is based first on office projects in central locations. 54% is pre-let, of which 75% of the 2020 deliveries, and we expect more than 30% margin. Second, of residential developments in Berlin in a context of severe housing shortage, we expect margins above 40%.
In this environment, it is also important to remind you the strengths of Covivio, starting with the solid balance sheet. LTV 38.3% at the end of 2019. A long-term debt with an interest cover ratio of 5.7 times. This is in line with our triple B plus rating with a stable outlook. Diversification is also strong in our funding sources. For example, we put in place at the beginning of this month a new debt of EUR 270 million on a German resi portfolio with 10-year maturity at a cost below 1.2%. In order to keep this balance sheet strong, the AGM of today has approved a dividend of EUR 4.8 per share, with the option to be paid in cash or in shares.
As of today, 49% of the share capital committed to take the dividend share that will be issued at EUR 47.80 per share, excluding dividend, which represent on the basis of today's share price, a discount for the shareholder will be taking of more than 11%. In dividend shares, we represent between EUR 200 and EUR 420 million capital increase to finance our announced investment. Finally, in terms of liquidity, we have a comfortable EUR 2.5 billion liquidity made of cash and FCF. Our commercial paper program continue to work following the announcement of the ECB, which enabled us to keep on accessing to competitive money. Our debt profile has been largely extended, and we have ample headroom versus our covenants. Now, I give the floor to Tugdual Millet for Q1 rental activity and asset rotation.
Thank you, Christophe, and good evening, everyone. On page 14, on the main KPI for the revenue at the end of March. The total revenue amount to EUR 241 million, with first on offices where we benefit from the positive trends we experience on the market where we are plus 1.5% like-for-like rental growth on French office and 2.4% on Italian offices, and particularly plus 4% on the Milan-only offices during this first quarter. The strong evolution that you see on German office is due to Godewind, which we started to consolidate during this first quarter. Our German resi portfolio continue to be strong with plus 3.5% at the end of March. All the regions contributing to this good level. Finally, on hotels, we are seeing the impact of the pandemic on part of our revenue, which leads to a 10.4% decline during this first quarter.
Going more into detail by asset class, page 15 on offices. We continue to discuss on projects, on letting opportunities, relating with our clients in France and in Italy, because most of them need to implement some decision to move, and we have a pipeline of short to midterm discussion on existing surface, but also on our development pipeline. It is obvious that virtual reality is also a key driver for clients to continue to discuss in this context. During this first quarter, we negotiated 26,000 sq m, including 4,600 sq m in Paris and Turin during these last months only. Covivio is the real estate partner of big corporate. As such, our exposure to very small companies is very limited, and the credit risk of our clients is fully under control.
For very small companies impacted by the mandatory closure, as asked by the French government, we have decided to apply rent cancellation for the three months, which represent around EUR 400,000 for Covivio. Page 16, we see that resi is also performing well with a +3.5% like-for-like rental growth during this first quarter. For example, in North Rhine-Westphalia, we have been able to deliver a +18% on relating during this first quarter. Overall, that means that trends continue to be strong despite additional regulation. Considering the quality of the portfolio, the level of unpaid rents continue to be extremely low, and even if it's marginal, considering the context, we pay also special attention to the small retail portion that we can have on the ground floor of those assets, and we are discussing on a case-by-case basis with the small clients. Finally, page 17 on hotels.
Our clients are facing an unprecedented challenge with a major part of our hotels that are, for now, closed. There is an important drop in occupancy rates, which explain the -10.4% evolution on a like-for-like basis during this first quarter, particularly with -26% on Accor portfolio, mostly in France, with lease based on turnover and -27% on our operating properties, most of them being in Germany, with some of them still open today. In this difficult situation that our clients are experiencing, we are effectively negotiating with all of them in order to find the best solution to first face this environment, and second, prepare in the best condition the recovery. Considering the importance of the crisis for our tenants, a part of our fixed rents will also be impacted. The negotiation are currently ongoing, and we will give more color during our half-year results in July.
Finally, expectation are that domestic consumer will be the first one to support the recovery. I think it's encouraging for the different geography where we have most of our hotels. Moving now to the asset rotation activity and on page 19. On the disposal side, we are delivering, in fact. Portfolio that were under agreement at the end of 2019 has been sold for total price of EUR 179 million, of which EUR 115 million of B&B Hotels in Germany. More importantly, the appetite for core mature assets from firms, insurance companies, OPCI or SCPI continues to be high with price that we are negotiating above 2019 appraisal value. Since the beginning of the lockdown, we secure most of the EUR 190 million of new agreement, mostly on offices, with a +7% premium on appraisal values.
This good performance makes us quite confident on our objective to sign more than EUR 600 million of disposal for 2020. We are also, page 20, on track on our investment that we secure during the last few months. The most of important of those being the Godewind acquisition with the 10 offices located in the top seven cities of Germany. We have tonight secure around 74% of the share capital. This is the figures we just received few minutes ago. The calendar is unchanged with the second period that will end mid-May, and the delisting expected in May also. The AGM of Godewind will occur on May 7th, which enable us to effectively change the governance. The other one is the hotel acquisition that we secure end of 2019.
Here also, we are on track with the closing targeted in September 2020, and a new 15-year lease with NH offering a minimum 4.7% yield on cost. To conclude, page 22. What I would like to emphasize today is that first, we have a resilient revenue profile that will enable us to get through this crisis. Yes, hotel activity will be impacted, is impacted, but you see the figures for offices and resi, the activity is sound there, and this is 84% of our portfolio. On the other hand, the work of our team and the discussion continue to deliver, and we keep on delivering on the disposal and the investment plan, specifically also on CapEx. Regarding guidance, last, we start to see the end of the lockdown in Europe, but still with a lot of uncertainty.
This is why we decided to wait until first half results to give you an updated guidance. Two words to conclude this presentation on the solidarity effort we decided to implement, page 23. First, we put in place different measure to help our clients, small and medium-sized companies all over Europe. We also put our hotels at disposal of the health authorities and propose to offer overnight stay to healthcare staff once the crisis will be over. In Italy, for instance, we provide financial support for the production of sanitizing gel. Finally, as you may remember, when we announced our purpose last year, we also decided to create a foundation for Covivio, and the budget of the foundation has been raised in order to help vulnerable people badly hit by this economic crisis.
Thank you for your attention, and we are now happy to answer to your question with Christophe. This is now the time for Q&A session.
Thank you. If you'd like to ask a question, please go by pressing star one on your telephone keypad. If you're using a speakerphone, please pick up your headset before pressing the corresponding digits. Again, once again, that is star one if you'd like to ask a question. We'll take our first question from Peter Papadakos with Green Street Advisors.
Good evening to you both. I just had one question on office, actually, not hotels. Is there anything you can say about what types of deferral requests you have been asked by tenants? We get a lot of disclosure from the U.K. office companies on that front. Is there anything that you can say for your portfolio for the French office specifically? What % of the rent roll has asked for some sort of a reprofiling of their lease payments for the rest of 2020? Thank you.
Thank you for this question. I have to say, thanks to the tenant base we have with very large corporate, I remember 91% of our clients in the office are large tenant, in France and in Italy. We have very few questions like that. For example, for the Q2 rent, we had almost was paid as usual. It was probably in France. We have some question on the small companies, but as you have said, for us, it's a very small part of what we have, because the very small cap size company account less than 1% on our revenues today. What we can say today in terms of rent that are paid, we have very small impact on our portfolio, both in France and in Italy.
We saw the question about small company, and I have to say, retail, that you can ask where there are some discussions, and we accept, as also Hugues has said, for the very small companies in France to cancel three months of rent, and that equivalent in total is EUR 400 thousand, that was precise before.
It sounds like what you've flagged today is, on the office side is the majority of the, let's say, of the discussions which are going on with regards to office, and we shouldn't see any deterioration on that front from the larger customer base.
As of today, yes. As today, I can say we have some question mark. I have to say, we receive some question for some tenant, but we have no specific issue on that. We saw a discussion, I have to say, that we conclude where in Italy with two tenant, where we accept some free rent period more, but also we prolong the lease, that will have no impact on the IFRS rent. That will, for me, also secure the rent for a longer period. That's the type perhaps of other discussions that we could also have in the future in France. I have to say, as of today, it was not the case.
Okay. Thanks, for the color v ery clear.
Thank you. We'll take our next question from Celine Huynh with Barclays.
Hi. I have three question, actually. Bear with me, it's a bit long. The first question is on the hotel portfolio, and more specifically on the fixed leases. I think you mentioned, Tugdual, that you wanted to get the operators, help them get on the other side. What does that mean? Is that more rent waivers or rent deferrals? That would be my first question. My second question would be, can you share with us your discussions with your valuers currently, how they could write down the hotel portfolio in June 2019, especially on the variable leases portfolio, where most likely you'll be getting zero revenues in Q2? Same question for Italian offices. My third question would be on your LTV guidance. You mentioned you wanted to maintain your disposal target of above EUR 600 million by the end of the year.
Do you think EUR 600 million is enough to maintain your LTV below 40% if we factor in some write-downs coming through? Thank you.
Thank you for the question. First, on the hotel side. What is clear is that we are directly impacted by the significant decrease in activity of around 50% of our hotel revenues. Given the magnitude of this crisis, part of the fixed rent will also be impacted, and we have, I would say, ongoing discussions with all the partners we have, to find with them solutions to get through this crisis together. That means that we will have an impact on also on the fixed rent. Today, it's too early to give you figures, because we are still There's those discussions that are ongoing, that could give perhaps some clear end period of this year, perhaps longer leases, perhaps more impact on this year. We will give more color in July on this point after, I hope, we will find agreements with all our partners.
That was the first point, first question. On the valuation, as of today, I have to say, it seems to be also it's a bit early to give complexity color on that. What is clear is that on 84% of our portfolio, which are offices and German resi, we are confident on the valuation. For example, and all what Tugdual said on the new agreement we had with the French office portfolio during this last month. I have to say the solid point to discuss also with appraiser on the fact that there is room in our appraiser value. On German resi as of today, we have also some discussion with the appraiser, and we don't expect any decrease of value at the end of June. We expect a new small increase. On the hotel side, I imagine that would be an impact.
Just to remind, the appraiser will not take into account the result of the first part of the year because of the DCF. That will not be taken. It will be a loss for the first part, not with the valuation. We will see, and I have to say, today it's really too early to give figures on this point. On the last point, on the LTV side, perhaps Tugdual?
On the LTV side, what we said is that we have this objective to sign a minimum of EUR 600 million. Considering the investment program that we have with Godewind, et cetera, the dividend in share, we will probably be slightly above 40% at the end of the year, but that does not change our objective to be below 40%. That will take maybe a bit longer time.
Okay. Thank you for that. Can I ask you a last question on your pipeline, your development pipeline or the pre-lets. Are you seeing some tenants walking away from the pre-letting agreements or delaying their decisions so far?
No, I have to say that. Not the question, because for tenant today, for what is signed. What is clear is due to this situation, there is a slowdown in the new discussions. That is true, and that will take more time, because people need also to take into account the new environment. Nothing that is changed in what is signed today. What we see is that the tenant market is less active, especially in the recent program situation, than it was at the beginning of this year.
Okay. Thank you.
Thank you. Once again, that's star one if you'd like to ask a question. We'll take our next question from Jonathan Kownator with Goldman Sachs.
Good afternoon. Thank you for the presentation. A couple of questions, if I may. On the hotel side, you've obviously made a lot of acquisitions in the past. Do you see potential, would you have any appetite for potential opportunities in the market if there is a discounted price? Where would be your appetite in terms of pricing, i.e., how would you think about interesting perhaps cap rates? I don't know how you want to frame that in terms of returns, perhaps. That is the first question. The second question, in terms of offices, perhaps, thinking slightly more medium term, given also all the pipeline of offices in Paris in particular, that is to be delivered over the next two to three years.
How do you expect rental growth to evolve, do you expect a significant correction potentially of market rents in Paris offices, would you think it should be fairly moderate at this stage? Appreciate, obviously, if it's more speculative, any color or guidance or views would be certainly helpful at this stage.
On the first point on the appetite on investments in the hotel sector, I have to say today, we have done our program of investments of the year. We will not go through a new investment in this initial. After that, we need to wait, really, the evolution of the situation. The hotel industry is a cyclical industry. We have today to face a very bad time in this industry. We know that in the future, we don't know exactly when, it will recover. We are continue to be committed to invest in this asset class in the long term, not immediately today, because we need also to wait and to sustain our balance sheet with the LTV after what you have said before.
On the office side, what we see today, just to remind the vacancy rates in Paris is at historical low level today. There is really not too many projects under construction. A lot of projects were forecast to be launched, not so many under construction. First of all, I have to say with this situation, we will see a delay in the realization of the works. We imagine, for example, for our portfolio, that we imagine that we have almost one quarter delay on all the main works we have to do. That means that today I don't see a huge oversupply in Paris. What I see and what I feel after some discussion with big tenant is that the cost reduction will be a key driver of the next months for them.
That means that the top rent will be difficult to continue to be paid or to achieve. I think that what is key today is to have the right assets, in term of quality, but also in term of rent. That means not too expensive. When I am looking for the portfolio of Covivio and to our development, I think it fits really well with this also economic objectives.
If I may, perhaps just to bounce back on the hotel, if that is your stance, in effect, would you be tempted to renegotiate the deal that you've done recently? If you're very cautious, you think that it's not closed, is there any opportunity for you to reconsider that?
We were fully engaged to do the deal. What we have negotiated is to postpone the acquisition. It was initially forecast that we acquire this portfolio by the end of this month, we postpone the acquisition at the beginning of September. That's what we have done. We have worked with the tenant, with NH ZAC Clichy, his commitment to take the asset at this date of beginning of September, and to pay us a rent, which is minimum guarantee of 4.7%.
Okay. Thank you.
Thank you. We will now take our next question from Laura Gomez with Kempen.
Hi, good evening. You answered already my first question with regards to the delay of the pipeline, so thank you for that. Circling back to your comment on rents, do you expect to revise any of your yield on cost projections, given the fact that maybe now higher level of rents are kind of difficult to obtain?
What I have to say, most of our future pipeline, first of all, the committed pipeline, which is really launched. We have not so huge rents. We are in Paris 17 in Saint Ouen, with very interesting rents, also in Levallois. I have to say, no question mark on this part of the pipeline. The future pipeline, so managed pipeline, is mostly composed of assets inside Paris. That are today let, I have to say, to the tenant, and perhaps also this crisis will delay a little bit the exit of this current asset. We will see, and I have to say, so it will be a decision more for next year than for this year, to decide if we decide to postpone some of this future investment.
Understood. Thanks. Maybe just one question, an additional question, if I may. We've heard statements from corporate saying that maybe some non-front office operations would be more driven to work from home as this crisis evolves and maybe there would be a need for less mid-office space. For the more peripheral, if you will, assets, there seems to be maybe not a need for as much space as previously thought. You mentioned your tenants or the discussions that you're having with your tenants are, they're not withdrawing from negotiations, do you see them maybe reducing the amount of space that they previously had stated that they needed?
I'd say it's too early to answer this question. It's a really good one, for me, it's really too early to have an answer to that. Today, it's not a question of our clients. It could be the question in the future, perhaps, but not today. Really, I think it's a point that everyone is thinking today in the office and beyond that. What I see, because we have also signed some leases during this period, I said that before, we had, let's say, other discussions during these days with other potential tenants. There is really a situation that will continue to move and to be alive after that, in terms of strategic evolution, in terms of using of the office. I consider it's really too early to give a clear answer on that.
We will, as a lot of things to say, people in this area think more on that, I have no answer today.
Many thanks. That's highly appreciated. It's way too early, I just thought maybe you had some clarity. Thank you. Helpful nonetheless.
Thank you. We'll now take our next question from Duclos, Bruno from Invest Securities.
Hi. Could you give us an update on what is going on the construction sites of your pipeline? Could you give us a little bit of follow-up when you do expect the construction sites to restart? Another question is about the construction cost. Does this have an impact on the cost of your pipeline? What is your view of the construction cost after the crisis? Do you expect more competition or, on the contrary, less project and lower cost?
Yes. On the where do we stand in the works. First of all of our projects were stopped in France and Italy during the last weeks. Until the end of last week, we reopened three projects in France that are now starting to work, not at full speed, but starting to work. We imagine that by going the next 15 days, all of our work site will be reopened, and the work will restart. After that, as I said before, we imagine that the timing will be longer because the new rules of protection rules will be important, and it could be some delays that will continue in the delivery of the projects. For us today, the most important is to discuss with the tenant that perhaps we need to postpone their waiver in some assets.
In terms of cost of construction, I imagine that this crisis will have an impact on the amount of work that will be done in the future. That means that we will have two impacts. First, more protections costs that will increase the construction cost, and second, less competition between the different projects, and that means to our company, and cost that could be lower. Today, for me, also difficult to give a clear answer to that.
Okay, thank you.
Thank you. At this time, it appears there are no further questions in the queue. I do apologize, we do have another question. We will take our next question from Florent Laroche-Joubert with ODDO.
Hi. Yes, this is Florent Joubert from ODDO BHF. I would have two questions. The first question about your like-for-like growth in Milano. I think you told us that it was 4%. Just to know, where does it come? My second question, it is about your disposal objective of EUR 600 million. Could you please explain us how and why you are so confident to reach this target?
Okay, I will take the second one, you can answer for Milan. On the disposal plan, why? Because just when you see the figures that we discussed today, we have interesting agreements on mature assets that we were on our disposal plan. It was something that was forecast, and that we were able to manage during this lockdown period. What we see is that there are a lot of SCPI, OPCI, that raise equity, and that today are acting to continue to work in the office market. We have, I have to say also, other discussions that we wanted to have done disclosed today, that make us confident that we will be able to reach this amount of disposals. Perhaps, Julien, if you want to answer for the like-for-like in Milan.
Yes, in Milan, specifically, as I mentioned, we had +4% like-for-like rental growth for Q1. This is mainly due to, first, very solid occupancy level. We increased the occupancy during this first quarter, and also even a bit higher impact due to renewal. We have been able to increase the rents at renewal date with an important tenant. Those two drivers explain the very good performance during Q1.
Okay. Thank you very much.
Thank you. We'll take our next question from Alvaro Soriano with Bank of America.
Hello, guys. Thank you very much for the presentation. Just two questions on short-term COVID-19 impact. Any of your tenants are thinking in increasing the distance between employees, and that could impact, in the short term, the level of take-up in some of your buildings? I'm referring if some of your tenants are thinking in expanding their footprint, just to keep employees safe. The second question is in your WeWork space, Wellio, your brand, do you expect to control the health on those spaces? Thank you.
I didn't hear the answer to the second question. Okay, I don't really catch it.
Me neither. Sorry, you will have to say it again. Sorry. I heard WeWork, but that's it.
Yeah. I don't know.
Yeah. Obviously, to be honest. No, basically on your Wellio flexible office space, if you expect to improve or to try to control as much as you can the protocols in terms of health, try to keep COVID-19 contagion measures under control. As far as some of the people working on those premises are out of your scope or out of your control? That would be the second question.
Okay. Two question into the COVID-19 effect. Well, yes, this question of what I have to say for some of the biggest tenants, we have some remarks coming that they can stay perhaps longer in offices, because also they need to have more space for their team during the next months, perhaps year, to face this new situation. Perhaps it could have an impact. I have to say today it's really too early and to say that, but what is clear that each of our tenants are working on sanitary measures, to really understand and to really protect their employees, in this new situation. After the lockdown, the situation will be really different in the office than it was before the lockdown. In term of our Wellio site, yes, we will put in place specific measure to prevent what we can on the virus situation.
We are working on the protocol as of today. We are working also with a lot of other companies to see what are the best practice that we can put in place to protect the employees of our client in the Wellio site.
Okay. Thank you very much.
Thank you. It appears that we have no additional questions in the queue at this time. I'd like to turn the conference back over to management for any additional or closing remarks.
Okay. Thank you everybody to listening this conference call, and see you soon, I hope directly, not through a call. Bye-bye.
Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.