Hello, and welcome to the Klépierre first half 2022 earnings presentation. Please note this conference is being recorded. During the duration of the call, your lines will be monitored only. However, you will have the opportunity to ask your questions at the end of the presentation. This can be done by pressing star one on your telephone keypad to register your question. I will now hand over to Jean-Marc Jestin, Chairman of the Executive Board, and Stéphane Tortajada, Chief Financial Officer, member of the Executive Board, to lead today's conference. Thank you.
Thank you for joining us this morning. I'm pleased to present Klépierre half-year 2022 earnings. We had a productive and successful semester. We recorded strong operational results and generated EUR 428 million on net current cash flow. This is EUR 1.32 per share, an 84% increase compared to 2021. This half-year has demonstrated the strength of our business model based on strong cash flow generation, a limited cost base, and a clear focus on high cash returns to our shareholders. Coming off two difficult years marked with multiple store closures and various trading restrictions for our retailers, our results are a testament to the quality of our portfolio, our strategy, and our teams. Despite a challenging global environment, our clients have seen their business drastically improve in the last 12 months with a strong momentum in the last quarter.
Retailer sales and footfall confirmed their positive trajectory already observed during the second half of 2021. Let's remind ourselves that January 2022 was still impacted by the pandemic, and notably the lockdown in the Netherlands, the 2G rule in Germany, and mandatory face covering to visit stores in the other countries. From February to June, the trend improved month after month with a sequential acceleration in the second quarter. Our retailers posting sales above 2019 levels and footfall being at the highest since 2020 at circa 90% in May and June, at 10 percentage points better than in second half of 2021. This performance has been evenly distributed in all the regions where we operate, as well as among all the segments. Nevertheless, the pace has been especially firm in Scandinavia and in the Netherlands, which outpaced pre-pandemic levels.
Fashion also posted an impressive rebound, reaching 102% of 2019 levels in the second quarter, while household equipment has continued to outperform. Food & B everage is also about to close the gap with sales at 96% of 2019 levels in the second quarter. On the leasing side, demand for our space has been strong. We signed 700 leases, including 516 renewals and relettings, which is in line with pre-COVID levels. Reversion uplift stood at 2.7% on average, with Iberia and Italy at a remarkable 8.2% and 5.7% respectively. Strong retailer demand, proactive asset management initiatives, and steady leasing activity led us to bring occupancy up 50 basis points year-on-year at 94.7%.
This translated into an occupancy cost ratio of 12.4%, 20 basis points below the level of December 2021. Among others, we signed multiple deals with leading brands in all segments, such as Inditex, Primark, Calzedonia, H&M, Nike, Adidas, JD Sports, or Sephora, but also with innovative retailers like Jimmy Fairly, Miniso, or AliExpress. Value retailers like Normal, Pepco, or HalfPrice also choose Klépierre to pursue their development. We were also pleased to accelerate our marketing and loyalty efforts to re-engage with our customers through online and offline campaigns. We launched a new loyalty program in more than 30 malls across Europe, now gathering more than 130,000 new members. Social media, one of our strategic milestones to increase brand awareness, has been accelerated.
As of today, we count more than 5 million followers on Facebook and Instagram, an increase of 24% compared to 2021, and we plan 25 malls to be active on TikTok by year-end. Consequently, on the back of higher footfall and increasing sales, our variable revenues generated by parking, specialty leasing, and sales-based rent surged by 77% compared to 2021. Before turning to development and balance sheet, I would like to highlight that we pursue deploying our Act for Good CSR strategy. Daily, our teams work to make shopping centers more environmentally and socially responsible. As such, our global leadership in sustainability is widely recognized internationally, especially by GRESB, CDP, MSCI or SBTi, that attribute highest scores and ranking to Klépierre. Since February 2022, we have been deeply committed in providing support to Ukrainians and refugees.
Our teams promptly organized clothes, food, and healthcare products collection from retailers, visitors, and association in all our malls in Europe. All items, thousands of packages, were shipped to Sadyba Best Mall in Warsaw, which became a logistic hub to transfer these donations to Ukraine. Additionally, in the context of tension on energy supply and increasing related costs, Klépierre is also committed to further reduce its energy consumption. As a reminder, we have reduced our energy consumption by 45% and our carbon emission intensity by 84% since 2013. Turning to development, we are highly selective on CapEx , as you know, focusing only in accretive projects with a clear target to limit the cash out for Klépierre.
The major highlight is a successful opening of Gran Reno extension in Bologna early July, which is the final step of a full makeover. It was 98% leased at opening and delivers a 7.6% yield on cost, far above initial target. This flagship mall displays 145 stores with an outstanding set of retailers such as all Inditex brands, Primark, H&M, Sephora, New Balance, Tommy Hilfiger, JD Sports. As such, I invite you to watch the movie available on our website, which showcases our first customers enjoying this new place of shopping last Saturday. The group also delivered four new Primark mega stores in France and Italy. In total, Klépierre will have developed six new Primark by end of 2023 for 36,000 sq m .
Now turning to the balance sheet. We have been very active since January 2022. We have closed or signed EUR 470 million of disposals with a net initial yield of 6%, which is 0.4% below book value as of December last year. This is a further step in our asset rotation strategy. Over the last 18 months, we managed to close transactions for a total amount of EUR 1.3 billion, and these were made at an average yield of 5.6% near or at appraised value. Pro forma disposals made in July translate into a sizable decrease in net debt with solid financing metrics, such as a net debt to EBITDA of 8.6x and interest coverage ratio of 10x. Our loan-to-value ratio reached 38.8%, stable compared to 2021 year-end.
On top of a 6.5-year average debt maturity and a 1.1% cost of funding, the hedging profile remains solid with 88% of net debt hedged this year. The liquidity position stands as EUR 2.3 billion after EUR 400 million of debt repayment in the beginning of the year. As a consequence, S&P confirmed our BBB+ rating with a stable outlook in May. We have also paid in cash this year a EUR 1.7 per share dividend, which is 78% of the 2021 net current cash flow per share. We therefore deploy our financial strategy for 2022 based on a combination of asset rotation, deleveraging, best in class cash distribution to our shareholders in order to make Klépierre the most resilient platform to face the coming challenges of retail real estate in Europe.
This solid set of results, coupled with the ongoing positive operational trend, leads us to revise upwards our net current cash flow guidance of at least EUR 2.45 per share, a 5.4% increase compared to the midpoint of our initial guidance. This assumes that operations are not impacted in H2 2022 by any new COVID related disruptions or no major deterioration in the geopolitical situation. It does include disposals close to date and a EUR 0.12 profit per share booked in H1 2022 relating to higher rent collection for 2020 and 2021. I would like to conclude by saying that since the outbreak of the pandemic, Klépierre was proud to serve its shareholders, paying EUR 1.4 billion dividends in cash while reducing its net debt by EUR 1 billion.
I think this proves the resilience of our business model and the dedication of our teams to deliver value. Now we are happy to answer to your questions.
To remind you, if you would like to ask a question or make a contribution, please press star one. First question comes from the line of Stéphane Afonso from Invest Securities.
Jean, I have three questions on my side, if I may. The first one on rent, would it be possible to have an idea of the like-for-like growth in H1 without all the positive COVID effects? I mean by that the impact of indexation of occupancy and prevention. Also, could you elaborate a bit more on the negative reversion rate in France? And finally, regarding the current climate of rising interest rates, do you intend to accelerate disposals or be more cautious on your committed pipeline? Thank you.
Okay, thank you very much. As you know, when we do have an exercise to do, a comparison between H1 2022 and H1 2021. As you know, in H1 2021, we had almost 2.5 months of store closure. It's extremely difficult to do a real like-for-like based on this fact. Unfortunately, we cannot answer specifically to your question. But I think if we look at the other KPIs, the occupancy has been stable at 94.7%. We also signed a significant number of leases, which as I said, proved the retailer demand for our malls at a 2.7% reversion.
Indexation in 2022 is above 2.5% for the whole year of 2022. All in, the rents and rent collection, as we indicated, is targeted to be at 96.7% very precisely, which is 7% below the five-year average before COVID. I think most of the KPIs show that the dynamic is positive and second semester will be probably able to give a full and clear like-for-like comparison between H2 2022 and H2 2021. On the negative reversion in France, you know, we don't really comment too much on a country-by-country basis. I think on the presentation, it's on page 19.
Yes. No, it's on 10, sorry. Okay, here, France, it's yes, it's a market where we, as you also can see, occupancy is a bit lagging compared to the others. Clearly France is almost neutral in terms of reversion. I have no specific comment on that. I will probably more highlight Italy, Scandinavia, Iberia and Netherlands, which are all positive. All in, I think it's a good set of results. On interest rate, I think the first takeaway on the development pipeline, as you know, we have been always extremely cautious of never launching a big number of development pipeline projects.
We don't have a lot of CapEx or commitments for the next year. We think we are protected. For disposals, we'll continue our strategy to refocus our portfolio to the best set of assets. We expect to deliver further transactions in the next 12 months.
Thank you. Maybe one last question. How your average costs are expected to evolve over the next 24 years?
You mean 24 months?
No, I mean, three to four years.
Well, we have a—i f you refer to the December 2021 full disclosure of Klépierre, you have the hedging profile. This has not changed. We are 88% hedged for 2022. If we look at 2023, we are 84%. We will have to manage the floating interest, but we are active on that. The level of hedging is very strong for 2022 and quite comparable for 2023.
Okay. Thank you.
The next question comes from the line of Rob Jones from BNP Paribas.
Good morning. Good set of results. I'd like to understand one comment on Q2. As your retailer sales declined, obviously strongly, although throughout many of those months, June slightly down in terms of retailer sales and to a lesser extent, footfall. Am I being too negative in extrapolating this negative movement through part of H2, or do you think we'll still end the year to be in a position where your retailer sales is roughly in line with 2019 levels and footfall is, say, 90% of 2019 levels?
Well, that's when it comes to projecting sales and footfall, I think once more, based on H1, even though we were in a very I would say challenging environment with the start of the Ukrainian invasion, sales have been extremely resilient. Footfall, I think, is a very good element. If you remember when we reopened in 2020 and 2021, we were more at 85%. Here when we see footfall at 80% even at the very beginning. Footfall is very strong and I think this will remain in place.
When it comes to sales, even though we are a bit cautious about the outlook for consumer spending in all Europe for the rest of the year, our malls are located in a strong catchment area and the average consumer profile and the revenue per capita probably our customers are a bit more protected against inflation. We are reasonably confident that the numbers will be strong. We never do a projection on sales. July when we have the feedback from the retailers is that in our malls it's strong.
We'll report when we have the numbers. We are reasonably optimistic about the resilience of our sales and footfall in our malls and all over Europe. I think one element we highlighted is that the improvement is all over Europe and all over the segments, which really show the global resilience of the consumer spending in our malls.
Okay. Agreed. Just one follow-up question.
Yeah, yeah, sure.
Great. In terms of retail's strong July to date. In terms of your discussion with retailers at the point of reletting or lease renegotiations, are you seeing any pushback on your legal ability to pass through the full extent of indexation to tenants? I appreciate indexation is obviously gonna continue to ramp up over the coming months. Are you getting any pushback from tenants at the moment? If so, are you offsetting that with longer lease duration? Or at the moment are tenants accepting those uplifts?
We index our leases on the first of January every year, so all of them. I think the indexation for 2022 has been, I think it's over 2.5% for us and for our retailers. At plus and minus, some of the countries are higher than the others. We have not noticed a real pushback on the indexation for 2022. The indexation for 2023 will be probably at a higher level. The position of the company is that the indexation is contractually due. We don't see any real pushback from the retailers. We will see in 2023 what the level of indexation is.
We are of the opinion that the indexation is due. I think the retailers understand that.
Thank you very much.
The next question comes from the line of Jaap Kuin, Kempen. Kempen.
Hi. Good morning. I've two questions for market. First on the risk of political interference with indexation in France. Could you maybe comment on the relevance for Klépierre and what do you think is going to happen? Second question on vacancy. Could you maybe share your vacancy targets for year ends, and especially in relation to fashion retailers, where there was a lot of worry in H1 about their ability to absorb cost increases. Could you describe what you see and what retailers are telling you how they are coping with this cost inflation?
Thank you very much for the question. I think on the debate which is currently taking place at the French Parliament and at the French Senate, I will not make a specific comment. There are discussions about capping the indexation for small entrepreneurs. We'll know soon what is the outcome. As we know today, it has been rejected at the Parliament. It has been rejected at the Senate. There is a last round of discussion. We'll see. We never comment on political debate at the Parliament.
When it comes to a vacancy target, I think what is worth mentioning is that when we get out of the closure, we had a post-COVID recovery plan. The post-COVID recovery plan we had for Klépierre, we are more than on track. When it comes to vacancy, the pre-COVID level was 3%. We are at 5.3%. There is still a road to go. As we indicated, I think in the previous comments, we think this will probably happen more in 2023. Occupancy is strong. The retail demand, the retailer demand for our space is strong.
As you know, many of the retailers have seen some of their geographical areas being closed in Russia, in Ukraine, and there is, to a certain extent, and China is also difficult. We see a clear flight to quality in continental Europe. I think this is good news of the geopolitical situation for us. Retailers are really seeing European big malls in capital cities and regional cities as a safe haven. This is the good news. We think this will be a great support for keeping occupancy high. We expect to curb vacancy in the course of 2023.
More specifically to cost price inflation that is facing the fashion retailers, do you believe they're able to pass that on to their customers?
If you look at the public information on some of our key retailers, they have already passed a bit of inflation to their customer. Apparently on the first semester, the price elasticity of demand was doing okay. They have a bit more concern about second half, but it's not my job to comment on the retailer business. They will probably in fashion pass a bit more inflation to their customer. Inflation is not always a bad element. We'll see. I think yes, even in fashion, we see prices going up in the stores.
Great.
And then c an I just follow up, the use of short-term leases, is it still going down, or could you give us a quick comment on that one? Thank you.
Oh, no, we have no comment to do on short leasing. We don't have short leases. I think probably you refer to something else. We have disclosed our, I would say, average firm duration of the leases, and this has not changed from 2019 to today. I think, off the top of my head, we have 4.4 years average firm duration, and this was almost the same in 2019. We don't see an explosion of short-term leases at Klépierre.
Okay, great.
The next question comes from the line of Rob Virdee from Green Street.
Good morning.
Good morning, Rob.
A couple of questions, please. The first one on your outlook statement, it reads quite optimistically, particularly given all of the news I read on inflation and pressures on consumer discretionary spend, and a lot of global retailers are talking about perhaps having too much inventory. Are you seeing any of this in your centers, your retailers? Is there any pressure you're seeing on consumer discretionary spend? That's the first question.
I think what we can comment is our share results. In an environment where inflation was already there, we have seen sales being quite strong in our malls, I have to say. There is a lot of narrative about what would be the impact on the consumer spending. I think this will probably depend a lot on the consumer profile, on the catchment areas. I think we also have to probably have a different view on what we call discretionary and non-discretionary. Our malls are real mass market malls. So I'm not sure we have the same split between what is discretionary and non-discretionary from a customer perspective.
Once more we look at the numbers. There is a concern about consumer spending going forward. Looking at the GDP growth in our countries at the European level, it's 2.6% for 2022. We are not ignorant of the economic situation, but we can only comment on what we have delivered. For the time being, it's, I think, pretty strong.
Thank you. On the second question is on the investment markets. Clearly, the Nordics have been quite liquid. You've done the transactions in Norway this time and a full year as well. How is the rest of the continental European investment market looking? I note in the release you do say that you're streamlining the portfolio in a rebounding investment market. Is there any kind of specific countries in Europe that you can pick out to say particularly strong or otherwise? Is there any distress you're seeing?
Maybe just for smiling a bit. Every time we sell in Spain, we say, "Ah, Spain is liquid. What about the other countries?" When we sell in Norway, what about the other countries? No, I think we have been over the last years able to sell a bit everywhere. We sold in Germany, we sold in France, we sold in Norway. I think the markets really depend on the specific situation. When it comes to the investment market, in fact, the rebound has been strong until I would say March, April, end of April this year.
Clearly today we see more wait-and-see approach from investors due to the hike in interest rates. There is clearly a pause not only in the shopping center asset class, but I think in all real estate asset class. Once more, we can only comment on what we have done. We have delivered EUR 1.3 billion disposal over the last 18 months or even shorter at good yields, and i n many geographies. We will continue looking at pruning the portfolio, finding the good investors at good prices. Even though the market is a bit altered today, we think it will reopen probably in the second semester.
Thank you.
The next question comes from the line of Markus Kulessa from Bank of America. Please go ahead.
Yes, good morning. Thank you very much for your call. I have t hree questions. First one, maybe I missed something just on the loan-to-value, which is stable post disposals. Can you just guide me quickly how this relatively big amount of disposals LTV has been stable, what has been compensating on the other side?
Well, maybe I can start with this one. We have sold EUR 290 million portfolio in Norway on the 1st of July. We are providing a pro forma as of June, taking into account what happened on the 1st of July. The 38.8% LTV is pro forma, the July 1st disposal.
Yes, with pro forma stable versus December, no? That's what I don't understand with all the disposals.
Yeah. Maybe if you go to page 19 of the presentation we put on the website, you will see that pro forma the July disposal, the net debt stand at EUR 7.8 billion, which is down EUR 139 million versus last December. Because basically we made a transaction closing very beginning of July, and that's why we give pro forma figure of this disposal made in beginning of July.
With stable asset values, but with all the disposals, your LTV should have been down versus the year-end 2021. This is—d on't forget that, we paid dividend in one installment during the first half of the year, and the dividend was EUR 1.7 per share.
EUR 480 million.
EUR 480 million. Basically, we do not expect to pay dividend in the second half. That's why we have a big effect on the first half, but dividend will not be there for the second half. There will be, I think, a very significant impact year-end 2022, more than the half year.
Yeah. Okay. No, that's clear.
Yeah. The dividend payout.
Second question is on the NCCF guidance for H2, which is around EUR 1.15. Do you have maybe the components in terms of what's the impact of disposals and also what indexation or like-for-like you assume for H2 to get the EUR 1.15?
We are not used to itemize the second half guidance. What we can tell you that, first of all, indexation is done on January the first. Okay? It's done. Okay? It's done. It's not going to be re-indexed in the second half of 2022. We have in the guidance for the whole year, so here you want to have a specific answer for H2, but in the whole year, EUR 2.45 cash flow, net current cash flow guidance, it includes the impact of the disposal which has been done so far. It's around EUR 0.07-EUR 0.08, I think, on the full year. That's it.
Okay.
The next question comes from the line of Florent Laroche from Oddo. Please go ahead.
Yes. Good morning. This is Florent Laroche from Oddo BHF. I would have two questions. First question is I would like to understand how your guidance for the whole year can be conservative. Because if you look at your guidance, at least EUR 2.45 , we understand implicitly that you expect maybe net current cash flow per share at EUR 1.13 in H2, compared to EUR 1.20 , excluding the one-off effect of the collection of rents of 2021 and 2020. How could we see it as conservative? Maybe my second question is more on your strategy at medium term. We understand that you want to continue disposals.
In the meantime, you are very cautious on the pipeline. What is your strategy, from a midterm standpoint on the growth of the cash flow? Thank you.
Thank you very much for the question. We give a guidance, so I'm not sure we have to qualify if it is conservative or aggressive, but to please you, I will say it's probably more conservative than aggressive, and by nature. Klépierre, we prefer to beat the guidance than not. The H1 has been strong. The push from 2020 and 2021 also proved the extreme resilience of the company. We are collecting rents for 2022, but also we see the retailers settling the disputes for 2020 and 2021.
I see this as a very positive signal of the strength of our customers. To conclude, we are not ignoring that the situation may be a bit complicated for the second half. We have made a guidance for disposals and pipeline. The disposal strategy has always been to continue steadily to prune the portfolio and to reconcentrate on the best assets. We are selling what we may call non-core assets and concentrate on large cities, large catchment area, more than 1 million inhabitants, with a revenue per capita higher than 20% of the national average. We stick to the strategy.
It's a medium long-term delivery for us, but we are doing it. We'll continue. We have been successful, I would say, over the last 12 months. For the pipeline, we do have some pipeline. We have EUR 2.5 billion pipeline. In the current environment, we were a bit on wait and see, but we will continue to deliver the extensions for our best assets as we did for Gran Reno, which is extremely successful. We will continue to deliver value to our shareholders through, I would say, a very well-controlled pipeline stream.
Appreciate the color . Thank you very much.
Thanks.
I think we have a question from Inna Maslova from Degroof. Can you please elaborate on the indexation that has been secured over H1? Are you able to pass on full indexation?
Yes. I think it's a bit of a repetition of a question that I already answered. I would say almost 100% of our leases by contract they are indexed on the first of January. So we have charged the indexation for 2022. The first of January 2022 is done. It's paid. So it's over. It's over, okay? We pass the full indexation. We will do the same January 2023. On the first of January, we'll pass the indexation to the retailers. Contractually it is due, and for the time being, we don't expect any major concern.
We have another question from Jonathan Kownator from Goldman Sachs. Can you please comment on your ability to pass on inflation to retailers? Are you able to pass it through, or are some reluctant? Second question, do you expect reversion to turn negative as a result of high inflation? I think it should be the same.
I think we look at the inflation impact on our business as Klépierre. We have a cost base of G&A administrative expenses, which is around EUR 100 million. For 2022 this is under control. We will, like many corporations, have to deal with the wages increase for 2023. I think this is at the level of Klépierre. This is clearly manageable. I think the most important element is the level of service charge we pass to our customers. We roughly charge to our tenants EUR 350 million of service charge for security, but also property taxes, cleaning and many other services, and energy.
Energy is clearly going up in 2022 by 40%, as you know, and this we are working on to continue reducing energy consumption. Clearly in the whole package of service charges, energy consumption is on the rise. On the other element, most of the contracts for cleaning, security and maintenance they were secured for 2022 and some of them for 2023, and they are more wages-related indexed. And probably this would be much softer than the global inflation in all the countries which is pushed by the energy.
I think when we look at the—and w e don't have a lot of projects under construction, we don't have a lot of renegotiation to do with construction companies because of inflation. I think the outlook for 2022 and also going forward for 2023, we see it as manageable. We will report in due time for 2023 when we will have contracted all the service charges to our tenants. Once more, they are passed to the tenants at 100%.
Another question from Sander Bunck from Barclays. It looks like the total pipeline has increased from EUR 1.2 billion to EUR 1.8 billion group share over the first half. Can you give a bit more color on the type of developments that have been added? How likely it is that the additional development will be executed, and what level of return you would expect from the incremental development pipeline?
I'm not sure I get exactly the question. I understand the question perfectly, but don't we miss group share and total share? Yeah. What I propose is that on the numbers we take the question offline and then we go through the explanation. The pipeline has not really changed from last year to this year. I propose you to skip it and to clarify your understanding. Thank you very much for attending this call, and thank you very much for your question, and we are looking forward to see you soon. For those who are taking holidays, please enjoy your summer break.
This is ending the call for today. Thank you.
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