Hello, and welcome to the Gecina 2024 half-year earnings call. Please note this call is being recorded, and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad. If you require assistance at any time, please press star zero, and you will be connected to an operator. I will now hand you over to your host, Beñat Ortega, CEO, joined by Nicolas Dutreuil, Deputy CEO in charge of Finance, to begin today's conference. Please go ahead, sir.
Good morning, everyone. I would like to thank you for being with us this morning during this presentation of our H1 2024 results. Let's start with an overview of our financial performance. First, in the first half of 2024, we recorded continuous growth for the third consecutive year, with a net recurring income up by 8.4% in euro and per share. Second, valuation has stabilized notably, thanks to sound rental growth in central location, while yields have been more stable than six months ago. Third, with a broadly stable LTV and excellent aging of our net debt, Gecina maintains a strong balance sheet that offers room for optionality and visibility.
Fourth, during this first half, we have worked hard to position Gecina now for future growth by deploying a new approach on both residential assets and offices to deliver operational outperformance and by improving our accretive pipeline. As said, Gecina is posting strong recurring net income per share growth. If considering our guidance 2024, this will be +20% recurring net income growth in three years. Four factors explain this outperformance. Central locations, providing rental uplifts above indexation and low vacancy rates, a strong balance sheet, and notably long hedging, securing low-interest rates in our P&L. Note that all disposals achieved last year have been accretive. During this first half, financial expenses have, for instance, decreased by EUR 8 million versus H1 2023. Third, an accretive pipeline made of centrally located projects, positively contributing to our recurring net income growth profile.
Finally, attention to operating expenses and service charges. We have improved our process on these matters, contributing to enhance our operating and rental margins. This outperformance is partially due to our portfolio location. This premium exposure has been built progressively these last past eight years through selling assets in secondary locations, so the red dots on the left-hand side map, and redeploying our capital into central areas, the green dots on the right-hand side map, representing acquisition, development, or M&A. This slide illustrates the so-called polarization of office markets in Paris region and the outperformance in central locations. Again, this first half 2024, half of the takeup of Paris region was concentrated in Paris, where only 13% of immediate supply is. As a consequence, vacancy rates are close to all-time lows at 2.7% in Paris CBD as of June 2024.
This translates into a very contrasting picture when comparing both vacancy and market trends in central location and secondary locations. According to market data, rent after incentives went up by 25% in Paris CBD since 2018, while down -10% in secondary locations. Given this situation, Gecina has been able to capture rental uplifts, both on the residential portfolio, +15% in H1, but also on the office segments, +14% in average and even 28% in Paris City. As a consequence of this polarized market, Gecina is adapting its strategy. This means capturing rental uplifts in central locations where our portfolio is mostly located, with prime rents now in the range of 1000-1200 EUR per sq m. You can see a few examples shown on the slide.
A first pre-leasing deal on Icône building to be delivered in H1 2025, and relettings in Rue Royale, Place de la Madeleine, Boulevard Haussmann, et cetera. Outside of Paris and Neuilly, our priority has been to maintain occupancy and securing rental visibility by renewing leases or re-leasing assets, and we suffer in certain cases, some downlifts. On average for offices, uplifts were +14% again at group level in H1. We have deployed in 2023 a new office approach on core locations in Paris, providing 20%-30% additional net rental income return for the group by offering ready-to-use offices in prime locations. This so-called operated offices offer is already deployed over 4,000 square meters, providing attractive return while requiring very limited amount of CapEx.
We do intend to deploy this further along tenant rotation on a floor-by-floor approach on circa 40 potential buildings eligible to this leasing process, targeting potentially 15,000 square meters by next year. On the residential portfolio as well, we believe we can build up a new, fully amenitized offer. We've acquired, thanks to our student housing experience, a strong know-how for operated residential, that we now intend to deploy on part of our residential portfolio. Gecina has already started to operate 150 units that way, with furnished apartments, including services and adapted sizes. This could be raised to 600 units by 2025. As a result, with supporting market trends and still high indexation, our strategy provides solid like-for-like growth with a significant contribution from rental upwards.
Like-for-like rental growth, those reach +6.3% in H1, and even 6.5% on office segments, showing Gecina's capacity to significantly beat indexation trends, and we believe in a sustainable way. Fair to say that our strong performance is not only driven by organic perimeter, but has also been supported by accretive pipeline contribution and a low dilution from last year's disposals. As a result, total rental income is up by 3.1% year-on-year. During this first half, we have also worked to improve our capital allocation, so to provide growth potential for the years ahead. As we sold EUR 1.3 billion of assets last year, we immediately paid back short-term debts to, of course, reinforce our balance sheets by reducing our net debt by EUR 800 million, but also to be able to fund accretive projects in the future.
In total, EUR 850 million of CapEx are to be spent between 2024 and 2027 through redevelopment projects in Paris City and Neuilly. Those who deliver additional potential rents to the current situation of EUR 100 million-EUR 120 million. This eight hundred and fifty million euro CapEx requirements includes two new large projects to be launched in Paris and Neuilly. As we know, we expect important deliveries in 2024 and in 2025, with more than EUR 150 million already spent in that pipeline, and now other new projects to come and deliver between 2027 and 2028.
Keep in mind that some of the assets to be restructured ahead, will need first to be vacated, and we therefore expect tenant departure by the end of 2024 for closing close to EUR 20 million annual rents. As mentioned earlier, two new emblematic projects will be launched this year, with the well-known Carré de Neuilly, located in the main axis of Neuilly-sur-Seine, and Gamma in Paris, facing Paris Gare de Lyon transportation hub. These two projects will require EUR 280 million of CapEx, with an appealing net additional potential rental annualized contribution by 2027, likely to exceed EUR 30 million. Some comments on those two projects. Carré de Neuilly is a 36,000 square meter project to be delivered in 2027. We have designed it to be a new premier, fully amenitized office building in the very prime market of Neuilly-sur-Seine.
These very unique projects will include a great food hall in the ground floor, following the recent acquisition of those surfaces, 4,000 sq m of high-end amenities on the first floor, very efficient and large floor plates, and more than 4,000 sq m of gardens and terraces, as you can see on the picture. Gamma is in the very immediate neighborhood and directly connected to Paris Gare de Lyon, one of the strongest transportation hubs of the whole Paris region. It will offer one of the most efficient office solutions in this part of the city by 2027 again. These 19 sq m project—19,000 sq m project, with rare rooftop views in Paris, as you can see, will offer also—will also be operated and fully amenitized.
Obviously, our balance sheet indeed enables us to consider and to accelerate our redevelopment strategy on the best locations in Paris region. Best-in-class balance sheets, with ratings A-minus and A3, recently confirmed by S&P and Moody's, has been improved by an intense refinancing activity in the last months, with bonds and renewed credit lines. Our view to redeploy our capital through aggressive redevelopment projects is reinforced by the stabilization of our portfolio valuation on a like-for-like basis. Office valuations are even slightly up in H1 by 0.4%, following a strong adjustment seen these last years. Peak-to-now valuations are now down by 13%, as being the sum of significant impact from yield adjustments, -24% peak to now, stabilizing now, and a globally positive rental impact of 12% on the same period of time.
Note, this rental effect is positive by 16% for Paris City and between -2% and -10% in secondary areas. This valuation stabilization came at a time when investment markets are still muted in terms of volumes. Volumes are down -57% in H1 2024 versus H1 2023. However, 80% of office investment transactions achieved in H1 were located downtown in Paris City, with transaction yields appearing to be around 4% and sometimes below. Paris City has therefore recovered a relative liquidity above EUR 100 million for office assets, which is a good news, although very few products are for sale downtown, where owners are not for sellers. As mentioned earlier, the upturn in values in H1 was mostly driven by central locations.
Paris City valuations are indeed up 2% like-for-like in six months, with a still negative but mild yield effect, minus 0.4%, and a positive rental effect by 2.2%. In secondary locations, however, yield effect is still more significantly negative, driving valuation moderately downwards. Given Gecina's portfolio breakdown, valuations are globally stabilizing with a moderate but positive 0.2%. When talking about sustainable long-term growth, CSR is also critical. With 100% of our portfolio certified since the end of last year, we went further this first half, delivering on our ambitious strategy. The energy efficiency plan launched end of 2022 was particularly efficient already in 2023, and is still proving successful in H1 2024, with a further decline in energy consumption of minus 3.4% per square meter.
Such a performance is remarkable, as already exceeding in 6 months the average annual reductions registered in these last past 15 years. 46 assets have been already fully audited by our task forces, created internally to improve each asset, even if the maintenance is delegated to our tenants. As a case study, the MAP building, owned by Gecina in the 16th arrondissement of Paris and operated by our tenants, delivered an impressive reduction in energy consumptions these past years of 36%, with a great collaboration with our clients, reducing the energy bill by circa EUR 70K per year without any CapEx. As a result, our main KPIs clearly show leading performance per share.
Recurring net income per share and euro, up by 8.4% in H1 to 3.2 EUR, as the combined effect of a strong like-for-like performance, +6.3%, a positive contribution from the pipeline, +EUR 7 million. The improved EBITDA margin, +70 basis points, and decreasing financial expenses of -EUR 8 million, due to a stable cost of raw debt at 1.1% and a decreasing net debt by EUR 0.8 billion. On the NAV side as well, our NAV NTA is broadly stable in H1, -1% in six months, reflecting our portfolio valuation stabilization, here again, per share and in euro, while having the interim dividend in March, paid in cash.
The trends remain therefore favorable for Gecina, with outperforming locations still supporting our performance, combined with a solid financial structure that provides room for furthering further growth, especially through our creative pipeline, delivering growth and value creation ahead. Our leadership in CSR still continues to post improving performance, and we believe in our new operated and fully amenitized approach on serviced offices and residential segments to deliver outperformance. We can therefore confirm and reiterate our guidance for 2024 FFO growth, per share and euro between 5.5% and 6.5%. I'm available with Nicolas and Samuel for any questions you may have.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take our first questions from Florent Laroche-Joubert from Oddo BHF. Your line is open. Please go ahead.
Good morning, Nat. Good morning, Nicolas. So thank you for this presentation. I would have three questions, so if I may. My first question would be on the current environment. So we see now that the values of asset have started to stabilize. And as a result, could you please tell us if now you have maybe a greater appetite to look for further acquisitions opportunities? My second questions will be on student housing. We have seen some news in newspaper meaning that you could be in a process to dispose this business.
So I don't know what you can tell us about your willingness to keep this business in your company for the next period or not. So that would be my second question. My third question would be on your cost of debt. We have seen that you have extended your hedging for the next years. Would it be possible maybe to have more colors on what could be your cost of debt, for example, at the year-end of 2026? Thank you.
Thank you, Florent. Two questions around the same topics, which are investments, acquisition, and so on. Yeah, it's a rather good news that valuations are stabilizing, obviously. As you saw, our first intention is to invest in our assets where we see the better return, both in NAV and in cash flow creation. So that's a bit where we intend to focus our energy and our capital for the time being. Obviously, we are looking at acquisitions, but I have nothing specific to comment. On student housing, it's a bit the same. We never comment news and potential M&A deals in advance. The only stuff I could say is that, you know, we have worked to have a solid balance sheet and to be opportunistic buyers and sellers.
So we are not forced sellers, and we are not forced buyers, so we will keep saying that and being the same situation. But we are obviously opportunistic players on that. And maybe third, on cost of debt, as you saw, we still have a strong hedging position over the next 4.5 or 5 years, with an average hedging above 90%. So obviously for the next years, it should be rather stabilized. The increase in the hedging position was mainly last year, thanks to disposals. So it has mechanically increased the hedging by decreasing the quantum of debt, more than specifically putting in place hedgings at a different price than before. So we have not specifically bought hedging in this market. It's more a mechanical improvement by decreasing the amount of net debt.
Maybe, Florent, you know that a large part of our aging position is coming from a fixed debt coming from our bonds. And so of course, this one that's a legacy of the issuance we've made in the past.
Okay, so that means that now you are comfortable on the fact that cost of debt could remain in the range of 1.1% or slightly higher, but not significantly higher, even if it is edged?
But, obviously, when it's edged, it doesn't move. It will depend on the quantum of net debt and your assumption on the remaining. So, but yeah, the debt in place would not change its price or its cost in the near future.
So, okay. So thanks. So maybe that's good news, actually.
I think it's so it was already a good news six months ago, but still there. Yeah.
Okay. Okay, so thank you very much.
Thank you, Florent.
We will take our next questions from Valérie Jacob, from Bernstein. Your line is open. Please go ahead.
Hi, good morning. So I've got a few questions. My first question is about your guidance. We've got some deliveries in 2024, and if you look at what's happening in H2, it seems not much higher than what's happening in H1. So I was wondering if you could comment on that. My second question is on the investment market. I mean, you've alluded in the presentation that it's been muted in H1, and I just wanted to have your opinion on if you've seen some changes lately. And my third question is a follow-up on student housing. It's a small part of your portfolio, so I was wondering if you would say that this is non-core for you.
Also, you know, looking at disposals, either you know, other part of your portfolio, or maybe if you could share how you're sort of thinking about, you know, asset rotation. Is it purely opportunistic, as you said, or are they some type of building or asset that you think you would be more likely to dispose of? Thank you.
Thank you, Valérie, for your three questions, which are maybe four. On guidance, as we indicated, we plan to have a growth per share around 6%. That's still the case. We had good news in leasing, obviously. I think on the H1 versus H2, there is always cut off topics between H1 and H2. Have in mind also that, you know, the disposal made last year were dilutive already in H2 last year, and we had a significant amount of deliveries last year in H2. So obviously, the H1 is pushed by all those base effects, but we are quite confident in achieving our guidance for the end of the year.
On the investment markets, you know, I was quite prudent in February when we had that call. I'm still prudent in the quantum of volumes invested in Paris retail and offices. I think there is a combination between a lack of qualitative products in the market and a limiting number of buyers on that. However, recently we have seen more investors, some qualitative assets were for sale, let's say in June and July, and apparently we were not sellers of those assets, but apparently there was a greater appetite than let's say six months ago, at pretty tight yields. So that's a bit the feeling we have, is that there is a bit comeback of buyers and a lack of products for sale.
I think that's very much concentrated in Paris City itself. Outside Paris, it's significantly more quiet. Maybe last on disposals, again, we don't really like to comment on what we plan to sell. I think we like what we have, and we work on, in fact, to create value everywhere we are. And therefore, it depends on, you know, investment appetite and return expected from those disposals. So, nothing specific to say, this first half. As you saw, we have not sold much, one residential asset early in Q1.
Okay.
Thank you.
We'll take a question that we have received on the webcast. Amal Aboulkhouatam, Degroof Petercam is asking us, "Could you give us some color on the level of profitability you expect from operated offices and residential?
Well, the profitability depends on the way you look at it, but for the time being, we'd have to grow our knowledge on how far we can go, but we are achieving rents after deducting every type of cost on those operating assets on offices, 20%-30% above the LTV of those assets. And with very limited CapEx, because in half of the situation, we take back all the fittings of the previous tenants, and we release it with a very minimal CapEx, so the returns are excellent. On resi, a bit the same, pretty high profitability. That implies more CapEx, because obviously, we need sometimes to reduce size of the flats. So a bit more CapEx, but still above, it's a, it's a two-digit profitability, and sometimes we're starting by year two.
The second question we have in the same, on the same platform, Serge Demirdjian Sofidy is asking us about the releasing spread on secondary location in general.
Well, like, like you saw on the, we have sometimes flattish reversion and sometimes negative reversion. If you look at the evolution of the valuation of our portfolio, you saw that we had, for several semesters, a negative reversion. So obviously, yeah, like, like I said, there are down lifts. So good news, it's a super small portion of what we own. Typically in Boulogne, we tend to be more flattish, flattish minus in the 1 or 2%, which is the worst of what we own, it could be 15, 20% down lifts. Yeah.
A question as well on the phone from Adam Shelton, Green Street. Okay. So maybe if it doesn't work, we can go to another question from Bruno Duclos, Invest Securities. He's asking: There is no huge gap in market rents between CBD and good quality location in the medium term, like La Défense. The same applies to the yields. Does it change your views on the good location to invest in?
I think it shows the importance of. Those trends, in fact, show the importance of transportation hubs, easy to access, quality of the buildings, capacity from the investors to reinvest, to propose, you know, collaborative, green, efficient building. So for the time being, it shows that where we have the vast majority of our portfolio, we are confirming by the trends and the appetite from tenants, so that means Paris. But I think La Défense has shown during this first half, quite a, when repriced, quite a decent appetite from tenants. So several deals were gone during first half in La Défense. So same goes for Boulogne. So I think when it's well located, I think it works. Question is, can you deliver the same growth like we can show, where we are mostly exposed?
So for the time being, not a dramatic change in our views on where the market goes. I think it's more confirmation, but we'd have to track it properly over the next quarters.
I'm back on the phone. with Adam.
Thank you. We will take our next question from Adam Shelton from Green Street. Your line is open. Please go ahead.
Hello, can you, can you hear me?
Yeah.
Yeah. Sorry, I'm not sure what happened before. Two quick questions. I appreciate that you are not gonna comment on the student housing sale that's been reported, but could you give us a sort of guidance on what hypothetically would happen to the rental margin for the residential segment, if you did sell student housing? So, you know, how much are the operating costs, how much do they overlap? How much are they integrated? So anything you could say on what the effect of the margin would be, hypothetically, would be great. It'd be great to get a couple comments on reversion outside Paris City, and also, what you're seeing in terms of tenant incentive trends in both Paris City and in other areas, please.
Yeah, so I'm not sure I got your first question on student housing. I think what we have tried to show during this first half is that we are looking at our residential portfolio as a whole. We are hosting, you know, student clients into our traditional resi. We have started to have young adults in our student housing platform. So the rationale is to have for each flat, the maximum sources of clientele to deliver as much growth as we can. On the margins, we will have to give you specific details between the resi and student housing, but I would not expect massive differences between the two.
Okay.
On reversion outside Paris, like I said, I think it depends very much on what lease is coming due, what was the rent signed nine years ago, what has been the inflation. So that's why, you know, but it's a small portion of what we own, but obviously it can be negative from year to year. You saw that, you know, the rental effects in our appraisals outside Paris have been negative for quite a while. So yes, we are posting sometimes down lifts, but it's, we are capable. In fact, it's a super small portion of what we own. So typically in Colombes, we have one asset, which is, I don't know, zero point, I don't know what % of our portfolio.
Yes, we are posting down this. Yeah. But I think we have posted, you know, 28%. And on incentives, I think the incentives in Paris are pretty stable, sometimes decreasing, especially operated offices. As it's shorter leases, we have almost no incentives on that business. So in an average, I think it will decrease a bit, the quantum of incentives in our P&L. And obviously in the periphery, and its market data, but it can be 30%-35%, sometimes incentives for long-term leases. And we indicated, you know, on page 8 of our presentation, really the—what we see as, you know, effective rents or rents after incentives, showing that in Paris it has been up 25% after incentives, since 2018. While effective rents are down by 10% in the same period on the rest.
Right. That's helpful. Thank you.
Welcome.
We have another question from Jonathan Kownator, Goldman Sachs. Are you starting to see some pushback on the higher level of rents in CBD, Paris City, or can rents go much further?
Huh. That's the million-dollar question. For the time being, as you saw, we are achieving significant reversions and high rents. We even achieved on several leases 1,200 EUR per square meter per year. So for the time being, it's still favorable. Obviously, the higher you go in rents, especially when it's large offices, the more complex it is to find tenants. So I think there is always a limit to that spectacular growth. So first we'd have to consolidate those figures and then see how it goes later. But yeah, remember we were at 900 EUR three years ago, and we are now signing at 1,200. or the best, best of what we own, obviously, it's not everywhere, but for the best, yeah, we, we sign at EUR 1,200.
Thank you. As a final reminder, if you would like to ask a question, please press star one on your telephone keypad now. It appears there are no further questions, so I will hand back to Mr. Ortega for any additional or closing remarks. Please go ahead, sir.
Thank you all for listening. Maybe before ending this call, I wanted to inform you that that was last call from Samuel, as he's starting a new professional adventure in another listed company . We would like to thank you warmly for his commitment during almost ten years at Gecina. Great partner for my arrival at Gecina, and wish him the best. His successor will start in September and has been with us for several years in different jobs at Gecina. In the meantime, Samuel will be roadshowing with us, and available for questions. Obviously, until the end, Nicolas is also available, and if we don't see each other, I wish you all a beautiful summer. Thank you. Bye-bye.
This concludes today's call. Thank you for your participation. You may now disconnect.