Hello, and welcome to the Icade Results as of March 30, 2022 Call. My name is Josh, and I will be your coordinator for today's event. Please note this conference is being recorded, and for the duration of 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 to register your question. If you require assistance at any point, please press star zero, and you will be connected to one of our operators. I will now hand you over to your hosts, Olivier Wigniolle, CEO, and Victoire Aubry, CFO, to begin. Thank you.
Good morning, everyone. Olivier Wigniolle speaking. Thanks for joining this call today. I'm going to present our Q1 2022 result with Victoire Aubry, our CFO, and then Anne-Sophie Lanaute , our Investor Relations, is also with us. This presentation will be followed by a Q&A session. Maybe before to start with the figures and the numbers, just a few words regarding the overall environment for Icade. I think it's now fair to say that the sanitary situation is fully stabilized in France. Regarding that standpoint, the situation on our different markets is really back to normal.
However, as you know, a new geopolitical crisis at the horizon during the first quarter of this year and leading to some, like this, uncertainties and indirect consequences on our businesses, I mean, and I will come back to that, especially, on the supply chain for construction material. We have to take into account this new environment, I will say, once again. Let's go now directly to slide five to start the presentation with the figures of our revenue. I'm now on slide five of the document that is presented. Our total revenue on a 100% basis, which means the IFRS P&L, amounted to EUR 440 million, which is an increase of +4.4% compared to the first quarter of last year.
On group share, which is now probably the main focus that we have on our revenues. Our revenues increased by +6.1% up to EUR 319 million. If you look at the revenue from our investment portfolios on a group share basis, they increased also by +6.1% up to EUR 443.3 million. On a like-for-like basis, we have a difference between the office portfolio and the healthcare division, which Victoire and I will come back to that, to specific items that are behind those figures. For the property development division, Icade Promotion, the strong momentum continued during the first quarter with a +5.9% increase in revenues at EUR 241 million.
Overall, as I said, group share revenues amount to EUR 390 million, a +6.1% increase and a +3.7% like-for-like increase. I'm now on slide six. Let me now comment the key highlights for the period. The figure that we are presenting this morning reflect, in our view, a solid business performance across our three business lines. Victoire will come back to that, and we'll elaborate more into the detail, but some few numbers. For the office portfolio, the gross rental revenue group share stood at EUR 86 million, up by +1.4%.
The positive impact of the 2021 acquisition, EQHO, Perial, as well as significant completion in 2021, including our building FRESK and Origine, have more than offset the negative impact of 2021 disposal and the departure of some tenants. Let me remind you that we managed to dispose last year more than EUR 400 million in 2021 of core and fully let asset. Victoire will also comment the like-for-like evolution. It is decreasing in line with our budget and expectation, and there are, beyond these figures, some specific items. It's mainly explained by the departure of two of our tenants from the EQHO Tower in La Défense.
Paradoxically, a very good news, the renewal of the lease of AXA France, our largest office tenant within our portfolio. AXA France occupies 75,000 m² of office space in Nanterre, just behind La Grande Arche of La Défense. AXA is a tenant with Icade for now more than 15 years. They entered the building in 2007, and we have renewed the lease with AXA France at the end of last year.
Regarding the healthcare division, revenues are strongly up, plus 14.6%, driven by the significant investment volume recorded in 2021, more than EUR 900 million, and just to remind you, mainly outside of France. Let me also highlight that for both portfolio, the impact of a rising inflation and also a rising indexation has already been captured over this first quarter for both property division, plus 1.3%. The impact of rising indexation is expected to accelerate from Q2 onwards. For Icade Promotion, our development subsidiary, the sales momentum remained very solid, still driven by a very strong demand for residential. Residential schemes are representing more than 78% of total revenue for Icade Promotion.
Economic revenues for Icade Promotion stood at EUR 264 million, at +6% compared to the same quarter last year. Figures for new orders are also very well oriented for Icade Promotion. After having reached a record level in 2021, orders are still up by +5% in volume and even +28% in values. Victoire will give you some more details, shortly. Second takeaway of the first quarter I would like to highlight is the continued execution of our strategic plan and our 2022 priorities that are well on track. For the office division, on top of that, the good news is the improving letting market, especially in Paris area, but also in the regional cities.
With a little bit more than 500,000 m² of office let during the first quarter in Paris region, the market is up by +40% and very close to the 10-year average, which is frankly a good news for Icade. Investment market remained also very active. Therefore, we are able to continue the dynamic asset rotation within our office portfolio with the disposal of two mature assets for a total amount of EUR 400 million. One is already completed, and the other one is under preliminary agreement. The volume of disposal already represent roughly two-thirds of our targeted volume of disposal for 2022. I can confirm the appetite, the strong appetite for mature asset in the Paris market.
Regarding the Icade Santé, growth and diversification continued with two acquisitions closed in the south of Europe, in Spain and in Italy. Let me remind you that more than 30% of the EUR 3 billion investment plan by the end of 2025 of our Icade division has been completed so far. Moreover, the volume of new projects, of new investment projects and the pipeline is still growing, so we are very positive on our capacity to deliver the acquisition volume. In addition, and this is something quite new, Icade Santé disposed during Q1 2022 a small portfolio of four assets for EUR 78 million with a 10% premium over the latest appraisal value. This small transaction was decided in view of portfolio optimization.
It's also a good news in term of valuation for the valuation of the entire portfolio. Finally, Icade Promotion, as I said, continues to benefit from a very strong residential demand. It is true that one of the consequences of the geopolitical crisis in Ukraine is an impact on cost of construction. Due to market appetite for residential and construction process optimization, the situation is also, for the time being, still manageable. On the liability side of our business, for sure, we are more than satisfied with the new bond that we have issued very early in January. EUR 500 million, eight years, 1% coupon. It's for sure clearly a good news for Icade and the financing of our activity.
On our low-carbon targets, as we want to remain among leaders in the real estate industry, we have once again in February increased our ambition. We have aligned our three business lines on the 1.5-degree pathway. We will use now the SBTi standards in order to make sure that all our figures regarding carbon footprint will be reliable and transparent. I will come back to the outlook and guidance in the conclusion, but now I leave the floor to Victoire. Victoire, the floor is yours.
Thank you, Olivier, and good morning, everybody. Let me share with you the operational performance of each of our business line more in detail, starting with the office property division. I'm on slide eight. Let's talk first about leasing activity. In a rental market under normalization, showing sign of recovery, as Olivier said, the top figures reflect the resilience of Icade office portfolio, offering rental income up +1.4% to EUR 86 million in group share, especially in a context of significant volume of disposal last year. More than EUR 500 million for the record was more than offset by 2021 acquisition and completions. On a like-for-like basis, despite a negative figure end of March, -3.3%, we remain confident for the near term. Why? First, the evolution is very concentrated on two events.
The first one, the departure last year of tenants from the EQHO Tower in La Défense, as Olivier said just before. The second impact, the renewal of AXA France headquarters in Nanterre-Préfecture, a strong but very positive negotiation for us. The tenant renewed 100% of the 75,000 m² of floor space for the next nine years for a level of rents in line with the ERV, of course. This renewal clearly reinforced the rental basis, but it has also a negative impact on a like-for-like. A word on the financial occupancy rate stood at 87.5% as of March 31, 2022, broadly in line with the rate end of December.
I remind you this indicator was impacted by the disposal of four fully leased mature assets last year, as well as the completion of two major buildings for which a part is still vacant. Important for me to highlight that the evolution of the vacancy rate from 10% end of March 2021 to 12.5% end of March 2022 is 100% due to the vacancy of new and very well-positioned assets in the current letting market. Very efficient upfront rotation, best CSR standards, adapted to new work organization standards. I'm speaking about FRESK and Origine. At this stage of the year, we confirm our confidence to be able to fully let those two buildings before the end of the year and target, therefore, a financial occupancy rate above 90%.
Finally, it is the third reason to remain optimistic for the coming months regarding Icade's office division GRI in a recovering market: inflation. As a reminder, 100% of the office leases are indexed on the indices integrating an inflation component. 75% on ILAT indices and 25% on ICC and ILC indices. With the rise in the various indices since Q3 2021, the average indexation that is reflected in Q1 for office rental income is a +1.2%. The impact for the whole year is estimated at a +2.8% with a stronger effect in the second half. In effect, the indexation impact is implemented at the anniversary date of the lease each year. Regarding the portfolio, it's spread during all the year.
Definitely, for all those reasons, concentrated 2021 departures, none since January 2022. Positive outlook on indexation, vacancy concentrated on new and efficient buildings will remain positive in the context of recovering French letting markets. Regarding investment, we continue to invest in pipeline, of course, for an amount comparable to last year, EUR 55 million end of March. Last topic I want to share with you on the office division is definitely the continued asset rotation. After more than EUR 500 million of disposal in 2021, we managed to dispose two buildings in the first quarter for a total amount of EUR 400 million, as Olivier said. We completed the sale of the Millénaire four building, a 20,000 m² asset located in Paris 19th district, for EUR 186 million.
This area, the Millénaire Business Park, represented for Icade, after selling a portfolio of four assets during the last five years, an equity IRR of more than 10%. We also signed a preliminary agreement for the sale of the Gambetta building, a 20,000 sq m asset located in Paris 20th district, for EUR 219 million. Of course, fully aligned with the last growth asset value, slightly above. Those two operations demonstrate again the strong appetite of investors for core assets and attractiveness of Icade's office portfolio. It also gives the office property division a head start on its 2022 asset disposal plan. As a reminder, we target an annual average volume of disposal of EUR 500 million-EUR 600 million. Let's now move to the healthcare division. I'm on page nine.
As Olivier commented before, rental income is strongly up with an increase of merely +15% to EUR 52 million on group share basis. This growth is mainly driven by the acquisition completed in 2021 in France, but more widely abroad in Portugal, with acquisition of four private clinics end of 2021 for EUR 213 million on a 100% basis, but also in Italy and Germany. In March, acute or post-acute care contributed 85% of the total healthcare rental income. We continue to benefit from a solid portfolio of long-term committed tenants. Financial occupancy rate is unchanged at 100%, and the average lease break is circa eight years, nearly stable versus last year.
Last but not least, what about inflation and indexation in this portfolio? As for the hospice division, nearly 100% of the healthcare leases are indexed on indices integrating an inflation component. As of end of March, 55% of the gross rental income was indexed on ILC. I remind you that ILC is an index of Loyer Commercial Rent index in English, which represent trends in consumer prices, excluding tobacco and housing rents for households in metropolitan France and the overseas departments, so directly reflecting inflation. The indexation impact, including Q1 healthcare rental income, is a +1.4%, slightly above offices, mainly due to the foreign part of the portfolio, and the anniversary date of the lease are concentrated in Q1 in Germany.
The impact for the whole year is estimated at +3%, with a major effect in the second half. On growth side, after a strong investment activity in 2021, particularly in the second half of 2021, the volume of investment in Q1 2022 is broadly in line with Q1 2021. The division pursued its diversification with acquisition abroad and in acute and non-acute care, representing EUR 21 million group share, split between Italy for EUR 13 million and Spain for EUR 8 million. So far today, we have already completed more than 30% of our EUR 3 billion investment plan by 2025. As Olivier said, the volume of project under analysis is growing. Finally, we announced the sale of a portfolio of four private clinics in France for EUR 78 million.
This operation has been made with a 10% premium above appraisal values, consolidating the value portfolio, if necessary, and improving the quality of the portfolio, as Olivier mentioned just before. Now on slide 10, for our third business line, few comments regarding property development with Icade Promotion. Sales momentum continued in Q1 2022. We could have spoken about catch-up effects in Q1 2021. With figures end of March 2022 overperforming Q1 2021, we can definitively speak about a strong and positive dynamic and conquest posture. Economic revenues grew by 6% to EUR 264 million, driven both residential, representing close to 80% of the total revenue, and also office segment. Operational indicators are also very well oriented. After a record level in 2021, orders are up again.
It is a +5% in volume and +28% in value, driven by the Paris region. The business is still supported by strong demand from both individuals back in the market in 2021 and a continuing strong appetite from institutional investors that represent 41% of the total revenues. Now looking at leading indicator, they remain well-oriented, confirming growth potential. Total backlogs stand at EUR 1.8 billion, up by +2.1% compared to December 2021, +3.5% for residential. An additional potential of revenue of EUR 2.9 billion deriving from the residential portfolio that we do control through options or preliminary agreements. In total, the medium-term revenues potential for Icade Promotion is now at EUR 7.7 billion in the five coming years.
To conclude my comment on the development business line, Icade Promotion continued to adapt its solution through Urbain des Bois , the subsidiary dedicated to low-carbon timber construction, launched in 2021, and that was recently chosen for a significant project. You have the detail in the press release or AfterWork by Icade for solution dedicated to the conversion of offices. Just before handing over to Olivier for the outlook, I would like to say a word about the balance sheet with continued optimization and expanded use of green finance. First, Icade issued last January a new EUR 500 million green bonds, bringing the total amount of green bonds outstanding to EUR 1.7 billion.
The operation was done at a very attractive conditions, eight years, one coupon, 1% coupon, and we are more than glad that this operation is very enhanced regarding today's market conditions. Thus, green and social debt instrument represents 35% of total gross debt, and we have room to continue to improve this percentage with very solid and rigorous criteria. Icade Santé has also continued to strengthen and empower its liabilities with two operations, including the signature of a revolving credit facilities for EUR 400 million with a five-year maturity conclude on very attractive terms. It will enable Icade Santé to cancel the EUR 200 million advance taken out with Icade. Olivier.
Thank you. Thank you very much, Victoire. Let's go now to slide 12 to conclude this presentation of our Q1 2022 revenues and give you some outlook. Let me first recall which are, in our mind, the two key takeaways of this first quarter. The first one is solid business performance across our three business lines, and the second is a clear continuing implementation of our strategic plan that will end at the end of 2022, just as a reminder. In terms of outlook, let me also highlight, as I said, that the COVID-19 crisis is clearly behind us, and that the positive effect of inflation that is already visible in our Q1 revenues will arise from Q2 onwards.
On the other hand, the geopolitical environment has deteriorated with potential indirect and favorable consequences on our market, especially on the supply chain for construction material. We have reacted immediately to adapt our business to this volatile environment with appropriate action to manage increasing construction cost. In this context, we are still very confident that we will deliver our objective status for 2022. Let me first recall our priorities for 2022. For the office property investment division, we are really focused on letting and renewal activity, disposal plan and opportunistic acquisition, and still ready to launch some new development projects. As you know, we are now really selective on that just to take into account the environment.
For the healthcare division, our priorities for 2022 are still the same, growth, expansion and continuing tenant and geographic diversification. For the liquidity and the listing of Icade Santé, which is still one of our priorities, it will be, as we already said, when the market condition will allow. A word maybe on the nursing home controversy in France that occurred during the first quarter. The outcome of the investigation launched on Orpea by the French government to reinforce the regulation of the operation and to increase control of the use of public funds paid to operators. That's the first outcome, and probably we will have some more after the summer. At the level of Icade, really, we do welcome this measure.
It is clear now that we will have in the near future the same kind of a regulatory environment between the nursing home segment and the acute care business. We really do think that it's a positive move for the industry and for the investment in healthcare real estate. We are really favorable to that. For the property development division, Icade Promotion, priorities are still to increase revenue to achieve a higher margin. For sure, it's a little bit more challenging in the context that I have described, and also to accelerate in the low carbon construction. In this respect, the promising development of Urbain des Bois, our dedicated subsidiary for wood construction is really appealing.
As far as CSR and low carbon strategy are concerned, we have dedicated a slide in appendix to that, reflecting how the group step up again our low carbon targets. With the target that all of our business line will be aligned with the +1.5 degree pathway by 2030. A say on climate and biodiversity resolution was proposed to our general meeting last Friday, and the resolution was approved by more than 49%. Clearly our shareholders are aligned with this on what we are doing in terms of low carbon or carbon footprint.
Subject to the non-degradation of sanitary condition and the possible consequences of the current geopolitical context, we clearly do confirm our guidance for 2022. Our net current cash flow per share is expected up +4%, excluding the impact of 2022 disposal. The net current cash flow for our healthcare division will be up by +5% to +6%. Our 2022 dividend, subject to a general meeting approval, will be up by +3% to +4%. Thank you for your attention, and now Victoire, Anne-Sophie and I are ready to answer your question.
Thank you very much. If you would like to ask a question on today's call, please press star one on your telephone keypad now, please. Please ensure your line is unmuted locally, and then you will be introduced into the call. That's star one on your telephone keypads now, please. Our first question comes from the line of Stéphane Afonso from Invest Securities. Please go ahead.
Yes. Good morning, and thank you for the presentation. Four questions on my side, if I may. The first one on the office division. Could we have an idea of the reversion rate in Q1? Also one question regarding the disposals on the healthcare division. What is actually the rationale behind those disposals that will be dilutive for the cash flow? Two questions for the property development activity. You're saying that you have taken concrete measures to offset the rise in construction costs.
What are they actually? My second question, is it possible that the strength of the demand in Q1 in property development is partly due to the fact that the private investors have advanced their buying decision regarding the rise in interest rates? Thank you.
Okay. Victoire, could you answer the first one? I will answer the three other one.
The first one, your first question is regarding reversion, that's it? Just,
Yes
To make sure I well understood. Okay. As I said before, the main impact regarding the like-for-like evolution compared March 2021 to March 2022 is a negative figure regarding exit and entrance of tenants. I'm not speaking about positive or negative reversion. As I said, AXA renewed the leases with a level of rent fully in line with the ERV. It's fair to say that this tenant is in our portfolio since 2007, meaning that when we renewed last year the leases, of course, we had to align the level of rent at the ERV in line with the market. That's the main impact we had last year regarding reversion.
On the three other questions, the rationale for the small disposal within the healthcare division is, as I said, you know, it's optimization of the portfolio. It means that sometimes we have several assets which are close to the other. We knew that maybe some operating companies will move from a building to another. It's the first disposal that we have, I think, ever made within the Icade Santé portfolio. It's clearly not part of the strategy to have, you know, the rotation within the healthcare portfolio as we do have within the office portfolio.
On this one, it seemed that we are not 100% sure of what will be, you know, how the renewal of the leases for those three properties will occur. We do think that it was, I think an appropriate move to dispose some of them. The good news that even with some level like this uncertainty in and especially in one of the assets, the overall valuation of the portfolio is 10% above last valuation. After that, if you look asset by asset, one is clearly impacted by the near future. On the two others, the difference between last valuation is maybe closer to +20%.
It's really, even if it's a small transaction, EUR 78 million, in our view, it's an interesting pricing of this portfolio. Concrete measure, you know, to deal with the, you know, with the-
Cost consistency
The rising cost of inflation for the time being on ongoing schemes, you know, it's less a question because, you know, contracts were signed last year or before the rise of the construction goods. It's more a question for, you know, second part of the year or 2023. What we are doing clearly, mainly the main measure is to change the way we do manage construction at Icade. We usually, and most of our contracts are general GMax contracts with general contractors. Now we have mainly especially to split, you know, and the overall contract into two, three or four parts.
One for the structure and the concrete, the other one for the façade, the third one, you know, for all the technical elements and the fourth, you know, for all the elements linked to decoration. Look, by doing that, you know, we are offsetting, you know, the margin of the general contractor. It's the main measure that we have to implement, you know, to face the rising cost. It means that at the end of the day, you know, the scheme is a little bit more complex to manage from a technical standpoint because it's easier when you have a single general contractor.
When you split, you know, all the works in three or four parts, you have to make sure that all the companies working on the same scheme are, you know, aligned on the same, you know, timing and so on. That's the main measure. Second, for sure, we have on every P&L of our scheme, you know, we have a provision, you know, which is called, how do you say Aléa ?
Aléa .
Aléa in English. It's Aléa also in English, which is usually 4%-5%. We for sure have to use that, you know, in order to face rising costs. Finally, maybe surprisingly, we are still able to increase, you know, sales price, because it will be the transition with your fourth question, because clearly the demand is really strong.
Mm.
Therefore we are able to increase sales price. Just to give you an example, we have launched just last Saturday a scheme in Versailles in the west of Paris. Just during the weekend, we have been able to increase twice the sales price due to very high level of demand. That's the way we are managing, you know, the rising construction cost. Trend for residential is supported not only by private investors, but mainly by, you know, institutional investors, and which just remind you that it represent now more than 50% of all our revenues for the development division.
by private clients, but not individual investors, but just they are buying apartment to live in. The question behind your question is what will be the future of the Pinel scheme, which is for the people which are not familiar with that, the tax incentive scheme that we have in France for investing in residential for private investors. The end of the scheme, this tax incentive scheme, is the end of 2022.
For sure we don't know exactly what will be the future of this tax incentive scheme, but it's not the main driver of, you know, the growth of the market, the number of new orders that we have signed, which is still up by more than 5%, you know, compared to last year, which was a record year. If you look, it was +28.8% in value, for sure, because we have more and more, you know, schemes in Paris area compared to the past. That explain, you know, the difference in terms of growth in value.
Even if I do recognize that it, you know, the increasing construction cost is not good news, for sure. Sometimes, you know, it's not only a question of increasing cost, just the supply chain, which is, I think, broken.
Mm-hmm.
Sometimes you have difficulties to find.
One more time.
Construction material. To find iron for the time being is really challenging, you know, because it used to come from Russia and Ukraine for a large part of the market.
Mm-hmm.
Clearly the supply chain is completely more than disturbed. It's a bit challenging. As we do see for the time being and maybe for 2022, it's manageable and hopefully supply chain for construction material will be back to a normal situation by the end of this year.
Thank you.
Thank you very much. Our next question comes from the line of Céline Soo-Huynh from Barclays. Please go ahead.
Good morning. Just one question on my side, please. Would it be fair to say that you're indicating a lack of like-for-like rental growth higher than 3% by the end of the year, and it is higher than what you were expecting during the last result? If that statement is correct, why didn't you feel confident enough to increase your earnings guidance? Thank you.
Good morning, Céline. You know, the answer to your question is our confidence to relet some premises that were vacant in the EQHO Tower to fully let our FRESK building and to fully let our Origine building. That we are confident. If the answer to your question is, are we 100% sure that the environment will be stable enough to achieve that? I don't know. As Victoire said, the property that we have on the market are probably the best property, you know, on their respective submarket. Our guidance, you know, is based on a conservative scenario for reletting.
Why do we don't increase you know the guidance at the end of Q1? Let's see in July what will be the situation.
Mm.
I hope you will recognize that the environment is complex, let's say like this. If you have any clear view of what will be the final scenario for the crisis in Ukraine, we don't have. Maybe you could have a complete stop, you know, on some supply chain or you could have, you know, a scenario on rising interest rate. Sorry to mention that, but you have seen that the world of nuclear weapon have been used by some.
Mm.
Political leaders in Russia. We clearly don't know. Though I think it's a bit too soon to be absolutely confident that the results by the end of the year would be better than the one expected last November or in February when we released our guidance. What we could say for the time being is that we are confident with the existing guidance. Let's see in July what would be the evolution of interest rates, geopolitical situation.
Mm.
I will say political evolution also in France, because even if we had, sorry to say that, but, we saw positive result yesterday evening. We have now, you know, the election at the parliament in June. We don't know what will be the situation. All these elements makes the environment, let's say a bit complex and volatile. Volatile. I really do think that Icade is able to manage the environment to increase the guidance. Again, a bit too soon to have a clear view on that.
Yeah, yeah, I hear you, Olivier. Does that mean indexation is higher than what you had expected during the last result, but you are more cautious on occupancy rates?
No. It doesn't mean that we have a clear view on positive elements such as indexation. As you know, clearly, you know, the indexation for commercial leases would be probably between 4%-5%.
Mm-hmm.
On average in this year. It's clearly not what we had in our central scenario when we had made the guidance in at the beginning of the year. That's the positive element. We are still positive on the letting process.
Mm-hmm.
As we have discussed, on the other hand, we have negative elements in the environment which are not linked to Icade, but they could have set part of the positive.
Yeah.
Of the positive news. It's a bit at the end of April. It's a bit too soon to have a clear view to see on which side, you know, the balance will move. It's linked to elements which are clearly nothing to do directly with Icade.
Mm.
We do not control the cost of higher. We do not control the final level of interest rate. We do not control, you know, the final result of election at the parliament. All those elements, I think, could have, you know, an impact on our different markets. That's why we are, again, really confident in our capacity-
Mm.
To deliver what we have announced. To deliver more, we have to wait a bit. A little bit too soon.
Thank you, Olivier.
Thank you very much. Our next question comes from the line of Florent from ODDO BHF. Please go ahead.
Hi, Olivier. Hi, Victoire. Thank you for this presentation. I would have two questions. The first one on the offices. You have said that there's today a strong appetite in the investment market for mature assets. Does that mean that could we expect maybe another disposal at Icade in the very short term? Maybe second question on that, have you any view today on how investors analyze the geopolitical context for investing in mature assets, and how they analyze potential increase of interest rates? That would be my first question. My second question would be on healthcare.
Are you confident today that the nursing home controversy will not impact your potential and schedule for the liquidity event? Thank you.
Hey, good morning, Florent. On your first question, as you probably have in mind, our target in terms of volume of disposal is between EUR 500 million-EUR 600 million euro.
Mm-hmm.
In the office portfolio. We have, for the time being, achieved EUR 400 million. One is under preliminary agreement, but it's a firm, you know, preliminary agreement. We will put, and we have started to put, another asset on the market. That's why I was able to make this comment because we do see institutional investor, which are the buyers for mature slash core asset. They are really, and more and more risk averse. That's for sure. You know, in the context and the environment that we were describing clearly, you know, life insurance company, pension fund, you know, asset manager for their retail fund, they are clearly risk averse and more and more.
Therefore, it means there is a strong appetite for core asset. We are confident in our capacity to deliver our disposal plan in attractive condition. For the time being, no impact on valuation of rising long-term interest rates. As you know, during the last 12 months, we have an increase of long-term interest rate for more than 125 basis point. It came to what all the, you know, all the players were saying. If you look at the level of the risk premium at the end of 2021, it was a highest level for the last 10 years.
We all had in mind that there was a buffer to absorb an increase in long-term interest rates because if institutional investors have still a strong appetite, they are still risk averse. They also are always making some arbitrage between, you know, sovereign bonds and alternative asset. For the time being, with an increase of roughly 125 basis points in long-term sovereign French long-term interest rate, you have no move in the valuation of core office building. I will add also, it's true also for healthcare asset. It mean that the market has considered that it was reasonable to decrease the risk premium.
I think for sure, if you have an additional 125 basis points, maybe my answer will be different. For the time being-
Mm.
At this level of long-term of interest rate on the French market for our office portfolio, but in Europe for healthcare asset, we didn't see. That's why also it's important, you know, to have disposal within the portfolio to make sure that our valuation are accurate and so on. But for the time being, the market either accepted to decrease the level of the risk premium. For the second question as well.
Regarding the nursing home controversy and its.
Oh, yeah.
Potential impact on the process of the IPO.
I don't know if you, that's a very French topic. I don't know if you have seen the debate between the two candidates at the presidential election last Wednesday. The question was not addressed, but was mentioned. The reelected president has said, he didn't see any reason to, you know, to cancel or, you know, the private sector for nursing home. What we have seen, you know, in the first measure that was announced and they will be implemented probably very soon. They were just announced by the French government. It was only more, you know, a question in term of controlled audit.
Now, for the standards.
Mm-hmm.
Again, if it's about real estate standards, we are really confident with the fact that private nursing home operators in France, such as Orpea, Korian, Colisée, and the others. Their portfolio, including the assets that we have on our portfolio, have the best standards of the market. I think there is no reason to see that there would be any impact on the real estate side. On the operating side, you know, we don't know what will be the new standards, you know, for nurses or doctors or care assistants within a nursing home facility. There are surprisingly no standards for the time being. There will be new standards.
Again, if you look at what is the financing system for nurses and doctors and care assistants, for the time being, it's financed by the French Social Security, and for part of that. The second part is financed by local authorities. In French, it's said the department, which is the second highest level of local authorities after the city. If the financing system will remain the same, I don't see, for the time being any major impact on the operating margin of operating companies. Again, I think it's important to remind how the level of rent is determined for a nursing home. It is not a question of the supply and demand like for retail or-
Mm-hmm.
Lease or logistics. It's based, you know, on the cost of the property. The cost of the property is the land plus the construction cost. You could assume that.
Yeah.
Especially on the construction cost side, it will maybe even increase a bit. After that, you just apply a cap rate. For the time being, as I said, it's quite stable, you know, in the French market. For the time being, the cap rate is between 4%-4.5%. I don't see any reason, especially with rising interest rates, to have a decrease, a significant decrease in cap rate. You know, maybe for best asset and you have some transaction, especially with retail asset manager, with retail fund, you know, just below 4%.
Maybe you have a room for a cap compression, you know, which mean at the end of the day a risk premium that would be smaller. That's the way we do calculate the rent for nursing home. You could assume that the French government will launch a lot of new projects. I don't see any reason why, you know, the rents, you know, for nursing home facilities will decrease. After that, for sure, we are also checking, you know, in terms of credit risk, you know, some ratios such as, you know, the effort ratio of the EBITDA covering the level of the rents. How will be the evolution of operating margin of private operators?
Let's wait for the new standards. We do understand from the French government that it will be probably mixed, you know, with the restructuring of the retirement system in France. It will probably take some time before final implementation. What could be sure in our view is that the demand, you know, for nursing home rooms and facilities is increasing and increasing.
Mm-hmm.
The demand is really more than significant. We will have to build some more new facilities. I don't see, due to the state of the public financing in France, that the public sector will be responsible for everything. It means that French government will need private operating companies to face the increasing demand, and therefore they will have to accept a bit like for acute care, you know, operating companies. Companies such as Elsan or Ramsay Générale de Santé are making what is called a reasonable level of profit.
I really do think that, you know, nursing home sectors and acute care sector will have, at the end of the day, the same kind of a regulatory environment, the same kind of level of profitability. There is no controversy on the acute care sector. Let's see if there will be any political reaction. I'm sure you have seen that KKR has launched a bid on
Mm.
Not on Ramsay Générale de Santé, but on the mother company, Ramsay Health Care in Australia. This could have an impact on Ramsay Générale de Santé in Europe. It means that even, you know, investor which have probably in mind quite a high level of return on their investment, they do consider that, you know, the environment is stable enough to invest that. For the time being, what could you see? Let's say I see that my main shareholders, Caisse des Dépôts, is, let's say, like this, close to the government, as it's a public financial institution. We have a lot of discussion on that topic to see what could be good news for the sector.
We don't see, for the time being, any major risk for the private operating companies regarding the nursing home sectors.
Last one. Perhaps the last question.
The last one was?
Perhaps last question.
Last question.
Our last question.
It's a question.
Yeah.
Do we have another question?
Yeah.
We do indeed. The last question comes from the line of Benoît Faure-Jarrosson , Invest Securities . Please go ahead.
Hi, good morning. I can see there's upward pressure on rents in the short term. You've got indexation that's lifting rents both in office and healthcare. You've got rising construction costs, which increase the required rent for new healthcare facilities. I'm just thinking, can you provide a bit more perspective on the long term? Because obviously you've had rent rolldown in some office assets, and that's an indicator that we might have indexation lifting rents in the short term, but they may need to be reset down by the market in future. Likewise, a bit of insight into healthcare renewals, because equally there has to be what is the process for setting rents at renewal?
Because it isn't a simple case of looking at the cost to build the facility and applying a yield because, you know, you might be 10, 20 years since it's been produced. Is it compared to the rents on new facilities, for example? How does that process work? Just some insight into both of those segments and how rents might be driven in the long term, please.
Again, on a long-term perspective, I agree with you. You know, short term-
Mm.
The environment is complex and volatile. You are positive news, negative news, you have up and down because due to all those elements that we were mentioning. In the long term, for the time being, we do see, you know, rents for healthcare as stable, and they have always been stable. Everybody has to keep in mind that rent for acute care asset or nursing home, they just follow indexation at the end of the day. There are no move up at all or down. Especially outside of France, when you have 25-year leases, you know, and even in France, where you have shorter leases, when we do renew the lease, there is no negative or positive reversion. Rents are stable.
Frankly, as I said, I don't see any reason to see why it will change. There is a change really under the scale due to the fact that premises will cost more and so on. Maybe there is probably a trend for higher rents, especially if you have, you know, higher long-term interest rates. For offices, clearly, you have to go market by market, sub-market by sub-market. For the market in which we are active at the level of Icade on the midterm, not to say long term, but midterm perspective, I will make some comments.
What we do see, I think, as I said at the beginning, as good news, you know, the volume of letting transaction is still, let's say 10% below 2019, but very close, -2% compared to the 10-year average.
Average.
I think it's fair to say that the market is quarter after quarter back to normal. In the Paris area, in the Paris region, vacancy rate is overall stable, even if you have some differences between sub-markets. Overall, no one is launching new scheme on a speculative basis. There is still some appetite for large transaction, even in the kind of sub-market when we are active. You may have seen in the document that we have signed. Within Icade Promotion, our development subsidiary, a significant transaction in the north of Paris. The building is fully let.
We are not allowed to disclose, you know, the name of the tenant for the time being, but the market is still active. Again, no one is launching due to a complex environment, you know, new scheme on a speculative basis. The CBD vacancy rate is probably close to zero or something like that. It means that, you know, probably in the near future, some corporates, you know, looking for new premises for cost reason, you know, level of rents or just for availability, they could have appetite for best location outside of Paris. Our central scenario is not based, you know, on the second count increase, you know, of rental values within our portfolio.
Yes.
It's we do not see for the time being, and I want to look at the transaction. I mean, what was interesting, you know, the renewal of the lease with AXA. They have been approached probably by all the landlords of La Défense, all the landlords, you know, the west of the Paris. They have decided to stay in the building. I mean, unfortunately, it's not a brand-new building. Just to remind you that they have been a tenant with Icade for more than 15 years.
Mm-hmm.
Which is a bit quite unusual, and not to say a record.
No.
Means that they will remain more than 20 years in the same building. For sure, in terms of rental value, it's the rental value of a building which is 15 years old. More or less, it mean that we have to offset part of the indexation that we had during the last nine years. We do not have any investment on the buildings.
No.
They didn't ask for.
Additional investment.
To improve the quality. At the end of the day, even if we have a negative impact on the net for our growth, I would say that rental values are more or less stable. That's the way we do see the market. Back to your question on construction cost, if they are rising, if you know you do assume that rental values are not increasing, I think that the situation where no one has appetite to launch you know new schemes on speculative basis will continue, which is on one hand double good news for us, which means it protects you know the existing portfolio, not only ours, but the others.
B, as you know, we have this flexibility on our land bank. We are working really hard with you know, local authorities-
Local authorities.
Where on cities where we have our land bank in order to have something more mixed in terms of use, you know, with residential, probably, life science building, you know, data center buildings and so on. For sure, elections were two years ago, but, you know, in France, it takes time.
Mm-hmm.
I'm sure that by the end of this year, we will have very good news that we will be able to show, you know, in terms of use of our land bank. Overall, and even I do recognize that the environment is complex.
Mm-hmm.
We really do think that you have a lot of competitive advantages to cross or to go through this complex environment.
Mm-hmm.
For sure we have stress scenarios as any corporate. Clearly, even with our board, we don't think that the stress scenario will be the one that will occur. Thank you very much.
Thanks very much. Thank you.
For having joined this call. If you have any additional question, do not hesitate to send them to Anne-Sophie, Victoire or myself, and we will be more than happy to revert to you as soon as possible. Thank you very much. Bye-bye.
Bye-bye.
Thank you very much for joining today's call. You may now disconnect your handsets.