Gecina (GFC.PA) reported a 6.7% increase in gross rental income year-to-date, driven by indexation and new leases. The French real estate investment trust (REIT) maintained its outlook for recurring net cash flow at EUR 6.4 per share.
Key Takeaways
• Gross rental income up 6.7% year-to-date
• Rental reversion of 14% overall, 28% in Paris
• Three major development projects delivered in Q3
• GRESB score of 95%, top-rated office REIT
• 100% of debt now classified as green
Company Outlook
• Recurring net cash flow projected at EUR 6.4 per share
• Indexation and reversion expected to decline in coming quarters
• Monitoring significant lease expirations in 2025-2027, particularly in Paris outskirts
• Preparing for future use of La Defense tower, currently occupied until 2027
Bullish Highlights
• Strong rental reversion, particularly in Paris office market
• Successful delivery of three major development projects
• Top GRESB score among office REITs
• Promising serviced office segment with new space opening in Boulogne
Bearish Highlights
• Investment market remains quiet
• Leasing activity impacted by Olympics and political uncertainties
• Potential negative reversion and vacancies in Paris outskirts
• Decreasing inflation may affect indexation and reversion
Q&A Highlights
• Flexible acquisition strategy focusing on total return rather than minimum yield
• Potential opportunities for Tour Mirabeau asset following tenant departures
• Acknowledgment of possible rent decreases for 2025
Gecina, a leading French REIT, reported strong performance in its recent earnings call, with a 6.7% increase in gross rental income year-to-date. This growth was primarily driven by a 5.4% contribution from indexation and 1% from new leases. The company experienced significant rental reversion, particularly in its office business, with a 14% overall increase and an impressive 28% in Paris.
During the third quarter, Gecina successfully delivered three major development projects: Mondo (30,000 sq. meters, fully pre-let), 35 Capucines (6,000 sq. meters, fully pre-let), and Dareau (residential conversion, 92% occupancy). These deliveries demonstrate the company’s ability to execute on its development pipeline and attract tenants in prime locations.
Gecina’s commitment to sustainability was highlighted by its GRESB score of 95%, maintaining its position as the top-rated office REIT. Additionally, the company reported that 100% of its debt is now classified as green, underscoring its focus on environmental, social, and governance (ESG) factors.
Despite the positive results, Gecina faces challenges in the broader market. The investment market remains quiet, with decent liquidity in central Paris. Leasing activity has been impacted by the Olympics and political uncertainties, although some corporates are reassessing their office space needs. The company is closely monitoring lease expirations, particularly in the outskirts of Paris, with significant expirations expected in 2025-2027 that may lead to negative reversion and vacancies.
Looking ahead, Gecina maintains its outlook for recurring net cash flow at EUR 6.4 per share. However, the company expects indexation and reversion to decline in the coming quarters due to decreasing inflation. To address future challenges, Gecina is preparing for its tower in La Defense, currently occupied until 2027, while exploring options for future use.
During the Q&A session, Gecina’s management discussed its flexible acquisition strategy, emphasizing a focus on total return rather than a specific minimum yield. The company’s ability to hold properties long-term and enhance them positions it as both a value-added and core player in the market.
In conclusion, while Gecina reported strong performance and maintains a positive outlook, it remains cautious about potential headwinds in the Paris real estate market. The company’s focus on prime locations, sustainability, and flexible strategies may help it navigate the evolving market conditions.
Full transcript – None (GECFF) Q3 2024:
Operator: Hello and welcome to the Gecina Business at September 30, 2024. My name is Laura [ph] and I will be your coordinator for today’s event. Please note, this call is being recorded and for the duration of the call your lines will be on listen-only mode. [Operator Instructions] Today, we have the CEO, Benat Ortega, joined by Deputy CEO in Charge of Finance, Nicolas Dutreuil, as our presenters. I will now hand you over to your host, Benat Ortega, to begin today’s conference. Thank you.
Benat Ortega: Good morning. Thank you for being with us today; very happy to have the opportunity to present those — this business update for Q3 2024 and answer your questions, obviously. During this first 9 months, gross rental income is up by 6.7% like-for-like, mainly driven by indexation, the effect of indexation, plus 5.4% but also the contribution of reversion captured on new leases, a contribution of 1%. Obviously, we have continued to get a significant rental reversion from our office business, plus 14% overall and even better in Paris at 28% during those 3 quarters, as well as on the residential portfolio with an increased reversion of 16.5%. Some deals during Q3, during a more quiet leasing market, especially in Boulogne and around La Defense with a consulting firm or communication company but also we have signed a lease with the university in Paris 7th arrondissement. As such, occupancy is slightly up year-over-year. And more importantly, during this quarter, we have been capable, in fact, to deliver 3 large-scale programs, development programs on time and on budget. The first one being Mondo, around 30,000 square meters repositioned office asset located in Paris CBD, fully pre-let 1 year in advance and benefiting from the highest environmental certification start-up. The second is 35 Capucines, next to our head office in Paris, a bit more than 6,000 square meters office in Paris CBD, again, fully pre-let to a luxury company and a law firm. And third, we have just delivered a conversion of an office building into residential accommodation in Paris called Dareau on the 14th arrondissement, where 92% apartments have been delivered recently and will be let until year-end. At the same time, during this quarter, we have the great news to have again an excellent score at GRESB, 95%. We are the first REIT on offices within that rating. And second news on the nonfinancial aspect of our company, 100% of our drawn and undrawn debt is now fully green following the greening of our latest or last credit line during Q3 2024. And as such and especially thanks to those development projects delivered on time and on budget, we are now expecting to have our recurring net cash flow around EUR 6.4 per share and also the leasing which have been rather good during this first 9 months. Thank you for your attention. And obviously, we are here to answer your questions.
Operator: [Operator Instructions] And we will now take our first question from Florent Laroche-Joubert of ODDO BHF.
Florent Laroche-Joubert: I would have 2 questions. Maybe the first one on the investment market. So could you please give us maybe more color on your view on the investment market, notably in terms of liquidity and opportunities for you? So my second question would be on the leasing side. Do you see any change of corporates that want to have maybe more the employees back at their office? So do you see any link with the leasing activity? And maybe so the leasing activity was also quite calm in Q3. Do you see any change in Q4?
Benat Ortega: Thank you, Florent. So then 3 questions. On the investment market, as I commented for several quarters now, the investment activity is quiet. However, we have seen a series of deals, especially in Paris, especially Paris CBD at pretty decent value. So, again, a pretty quiet investment market but still a decent liquidity on the central location of Paris region. Regarding the back to the office, I think we saw a series of announcements by big corporates, U.S. banks, very driven by the U.S., by the way which have maybe gone a bit too far on working from home policies. So, yes, from our conversation with tenants, that topic is back on the agenda. And yes, they are reassessing the needs of square meters. I’m not saying that the general trend is not decreasing square meters. I think that’s still the case but maybe corporates are re-evaluating the quantum of decrease of square meters compared to what they used to have 15 years ago. So, yes, it’s slightly changing. And I couldn’t say it’s a major shift but psychologically, it’s starting to be a small different change. And maybe the — on the leasing and more quiet leasing market, obviously, the activity has been impacted by the Olympics which have complexified site visits, especially during July. And, obviously, the political uncertainties in Paris since June have not helped. So, yes, we have seen decelerating leasing activity during this quarter but it doesn’t look to change a bit the ambient, generally speaking, still very few qualitative office assets on central location and a pretty wide offer outside Paris. So still complex to manage outside Paris.
Nicolas Dutreuil: And maybe if I can add one point on the investment market and what we’ve seen during Q3, I would say that, what’s interesting is that, when you look at the transaction which has taken place during this last month, you can see and it’s, of course, public information that most of these deals have been made at cap rates around 4%, some of them even below which I think will give for the appraiser for year-end a couple of benchmarks which will be interesting because when you look at the valuation of our portfolio in central location, we are around this yield. And second point which is also interesting is that, of course, we could consider that the liquidity of the market has been reduced because of the smaller number of deals. But what’s interesting is that, when you look at the building which has been put for sale, the demand for this asset is very strong, meaning that you have a quite large number of potential buyers looking at these potential acquisitions, meaning that in Paris, the lower amount of deal is not coming from a lack of demand but much more because of a lack of supply.
Operator: And we’ll now take our next question from Veronique Meertens of Van Lanschot Kempen.
Veronique Meertens: Two questions from my side. Maybe a follow-up on that investment market. Obviously, you currently added some new projects, probably more in the pipeline but are you also actively scanning the market for interesting acquisitions? And are they there? Plus secondly, on that development pipeline, any updates on the other projects? Is everything going to plan? And also in terms of letting activity? Or did that also slow down a little bit around the Olympics?
Benat Ortega: Yes. On investment market and acquisition, like Nicolas said, a few assets are on the market these days. So we are obviously monitoring all of them, checking if it’s in line with the return on capital we want to achieve on those. So for the time being, nothing specific. But, obviously, we are scanning the market. We are a big player in that market. We have some of our investment capacity. So — but very careful on the way we allocate the capital. On development, like I said during Q2 in July, we are working on getting the permits. And as you know, it’s pretty complex to get those permits. So still working on it. And hopefully, we will have a good news by year-end.
Veronique Meertens: Okay, clear. And on sort of like pre-letting rates, any updates on that side?
Benat Ortega: Not material; still working on it. We have signed one more lease but nothing material.
Operator: [Operator Instructions] And we will now move on to our next question from Nadir Rahman of UBS.
Nadir Rahman: Can I confirm that you can hear me clearly?
Benat Ortega: Yes.
Nadir Rahman: Yes. I had a quick question on the inflation and indexation because you said that your 6.7% like-for-like indexation is 5.4% driven by indexation. And I wanted to confirm, given that Eurozone inflation is starting to fall and we’re seeing a slowdown, where do you see the indexation and therefore, the reversion potential — sorry, the like-for-like growth going from here in the next few quarters?
Benat Ortega: Thank you for the question. That will be more an answer for next call, annual results and next year guidance. But just to give you a flavor, obviously, inflation is decreasing significantly. So, obviously, the contribution of inflation will be probably the highest in 2024 compared to the next year. That’s just mathematics. So, now, as you can see, we still have reversion so that should flow into the cash flow in the future. And have in mind that it’s a lag effect. So even if inflation has decreased this year a lot, in fact, we are more benefiting from inflation of last year. So, obviously, that impact will decrease quarter after quarter in the next quarters.
Operator: We’ll now take our next question from Jonathan Kownator of Goldman Sachs.
Jonathan Kownator: Just a question on credit spreads. Could you just let us know where you would stand today in terms of your credit spreads, please, for sort of 5-year, 7-year financing? Do you see an improvement? Or are they rather stable?
Benat Ortega: They are improving, obviously. But that’s a public figure. But if you look at the 7-year bond, yesterday night, it would be in the range of 3%, 3.2%.
Jonathan Kownator: Okay. And…
Benat Ortega: [Indiscernible].
Jonathan Kownator: Yes, of course, that’s not the credit spread. Yes, I know that.
Benat Ortega: And the spread is depending on the duration but around 80, 90 bps [ph].
Jonathan Kownator: And would the bond markets be more favorable than the bank market right now or are they rather comparable?
Benat Ortega: No. For the time being, it’s still more attractive to go on the bonds. Have in mind that following all the disposals we did last year, we have decreased a lot our commercial paper activity. So for the time being, we are more looking at probably growing that amount which has a very limited spread. And if you have in mind, it’s a 1 bps, 2 bps spread before going on the bond market. So we still have flexibility on that for the time being.
Jonathan Kownator: Okay. The second question on — just on leasing. Do you have any big leasing topic that you’re watching, any big departures or any space where you have, I don’t know, strong changes happening?
Benat Ortega: Sure. You have our tenancy schedule in the appendix, not only in Q3 but Q2, I guess. So we’ll have expiries on the outskirts of Paris over the next years in Boulogne, in La Defense between ’25, more importantly, in ’26 and ’27. So, yes, we will have expiries and we’ll have to manage those situations. And in the meantime, obviously, we will have also expiries in Paris with more reversion. So that’s a balance. But yes, we will have expiries on the outskirts and that’s where it’s more painful with probably negative reversion and potential vacancy.
Jonathan Kownator: Are you seeing — I mean, a broader question, I guess but from that perspective, obviously, this very imbalanced market between strong demand in the center, more supply coming through in the outskirts and less demand. I mean, how is this playing out in your view? What do you see from owners of space in the outskirts? And are you seeing tenants starting to consider cheaper rent options at this stage versus being in the center or is it still status quo?
Benat Ortega: I think it’s — you have like 3 markets basically. You have still a good market inside Paris. With adjusted rents, you have like Boulogne, La Defense which are attractive and attracting people from other geographies. And then independently somehow on the rents, a very limited demand on the other locations inside Paris region. So that’s still quite valid. So maybe what we have seen is, with declining rents and increased incentives in La Defense, a quite good activity in La Defense typically. So I think when it’s well located, good public transport and adjusted price, then you find more demand. Typically, this has been the case for Boulogne and La Defense. But, obviously, it’s painful in rents.
Jonathan Kownator: And so, how are the owners of the assets that are suffering at this stage reacting? And do you see any movements from, I don’t know, funding partners, banks? Are you seeing more distress there? And any clue as to how this is playing out right now?
Benat Ortega: For the time being, not really. The situation is as long as they have a lease in place and even with decreased rents, I think there is a kind of status quo between investors, lenders and tenants in that. So, again, we are not really exposed there. But from what we see from our window, it doesn’t look to be — to have happened a lot of distressed situation. So it’s — people are working, trying to collect cash flow; so not really a dislocation there.
Jonathan Kownator: Okay.
Benat Ortega: That might sound surprising when I listen your silence but that’s what is happening.
Jonathan Kownator: Okay. No, fair. What’s the latest update on your tower in La Defense? I mean, obviously, you’re on the contract until 2027 but are you able to move earlier than that and sort of progressive strategy for that building? Well, those two.
Benat Ortega: Obviously, it’s 2 listed companies at stake, so I will not comment on discussions but we are working to prepare that and look at all the options.
Jonathan Kownator: Can you remind us when they physically move? Or are they — have they moved out already or…
Benat Ortega: No, they are still in the tower, still in the tower.
Operator: [Operator Instructions] We will now take our next question from Adam Shapton of Green Street.
Adam Shapton: Just a quick one. I know it’s been a quiet leasing quarter and you mentioned a wait-and-see attitude with the Olympics and elections and so on. Just wondered what you’re seeing — what you’ve seen over the last 3 to 4 months in your place, serviced office rollouts. Are you seeing good demand sort of in terms of pricing and what you’re getting in terms of premiums to sort of conventional market rents there? Any update on that side?
Benat Ortega: Yes. Same like I said on Q2, it’s still a pretty decent business model with good premiums. But like the rest of the market impacted by that wait-and-see approach. So we have — the leasing has been a bit more quiet but we still see good demand, good visit activity. So nothing very different. Again, it’s a pretty small portion of what we do but still promising. I think it gives us — and the idea, it’s not a new business but it’s just a way to address differently the market and to have more option to lease somehow. So typically, we are testing and we’ll test that in Boulogne with a small surface, 2,000 square meters in Boulogne that we’ll deliver in November, also to open, in fact, our capacity to lease. So if someone needs an office for a project for 1, 2, 3 years, immediately available, immediately designed and furnished. That’s an alternative to the rest of what we have vacant which is more — it takes like 4, 6 months to be in the office after furnishing, partitioning and so on. So it just gives us more options, in fact, for — to get some clients.
Operator: And we’ll now take our next question from [indiscernible].
Unidentified Analyst: Just a quick question on my side. If we come back on the acquisition market on the investment market, what will be today the minimum yield you will be looking at for any acquisition? Can you give some color on that?
Benat Ortega: No, we look at the total return. So the initial yield depends on if there is a vacancy, if it’s under rented, if there are works. So it’s more what we try to expect on the pipeline somehow as a total return. And I think the beauty — so a few projects on the market. So I don’t see so many deals to be done by Gecina but the beauty of our company is that, we can buy assets that we need to keep for 10 years because you have tenants to evict and so on and then do works, or we can buy and manage to grow the rents. We can amenitize the asset, try to capture more reversion. So I think we have different options of assets to buy. So we are not a purely value-added player. We are not a pure core player. So we can play on several grounds. But still to buy, we need to find the right profitability and the right product and the right location. So — but we have somehow more options than most of the players.
Unidentified Analyst: Okay. But then on total return, is there — I mean, is it moved regarding your cost of capital or…
Benat Ortega: Yes, it’s on cost of capital, obviously. It’s — but it depends on the risk we take. So I think we have a tailor-made approach. I think when we look at — we are not an investment player. Somehow, we are a REIT. So we look at how does it improve the company. So does it improve the cash flow growth of our business? Will it generate a capital gain in 5, 10 years? So it depends on the risk we take and the speed of that. But, obviously, it has to grow our KPIs, our main KPIs which are NAV and cash flow growth. And we can play on those 2 grounds.
Operator: And we’ll now take our next question from Benjamin Legrand of Kepler Cheuvreux.
Benjamin Legrand: Just maybe a more specific question. I was reading somewhere that you have tenants leaving the Tour Mirabeau in Paris. And I was just wondering if it was getting emptied or if you had any plans for this tower to be relent [ph]. Basically, what’s the plan for this asset?
Benat Ortega: Yes. Thank you for the question. That might be — but not being specific, potentially a new project for Gecina. But for obvious reasons, we have been silent on it.
Benjamin Legrand: Okay. Okay. And in the — if I remember correctly, in H1 results, you were talking about some rent — like rent decrease for 2025. I don’t remember exactly the number. Was that considered in that number?
Benat Ortega: Yes, that might be that situation.
Operator: Thank you. There are no further questions in queue. I will now hand it back to Benat for closing remarks.
Benat Ortega: Thank you for all your questions and listening that call. See you soon. Thank you. Bye, bye.
Operator: Thank you. This concludes today’s call. Thank you for your participation. You may now disconnect.
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