Klépierre (OTCPK:KLPEF) Q4 2023 Results Conference Call February 15, 2024 3:00 AM ET
Company Participants
Jean-Marc Jestin – Chairman of the Executive Board
Stephane Tortajada – Chief Financial Officer
Conference Call Participants
Florent Laroche-Joubert – ODDO BHF
Stephane Afonso – Invest Securities
Frederic Renard – Kepler Cheuvreux
Jean-Marc Jestin
Good morning, everyone, and thank you for joining us this morning. I’m pleased together with Stephane to report Klépierre’s 2023 Full Year Earnings and I’m proud to say that it’s a very strong set of results. First, we generated €2.48 in net current cash flow or a remarkable 10.7% growth year-on-year. This is also 5.5% over our initial guidance of €2.35. With an outstanding momentum from top to bottom line, we delivered strong operating performance as illustrated by the 8.8% like-for-like increase in net rental income and a 9.6% increase in EBITDA.
Throughout the year, our venues has been attracting more and more visitors translating into a 6% increase in retailer sales with all countries and segments contributing to the growth. The very high leasing demand for our irreplaceable shopping centers has driven occupancy rate at 96% and a 4.4% positive reversion. Meanwhile, average lease duration in our portfolio has increased to 5.1 years. In an evolving environment, achieving such results takes a clear positioning. We own and operate a highly desirable portfolio in Europe larger cities with catchment area over 1 million inhabitant having a revenue per capita 20% above national averages.
Whereas online pure player posted decelerating performance, brick-and-mortar is a unique profitable solution for banners. As such, Klépierre malls welcome more than 700 million visitors every year and constitute an unrivaled means for retailers to access consumers. In the context of retail polarization, there is no physical substitute to our dominant places. They are here to stay and we will continue to drive solid leasing demand and gain market shares. It also takes a scalable long-term leasing strategy.
Indeed to continue to offer operating outperformance and profitability to banners and meet consumers’ expectation, we have been curating the mix through 2 main initiatives. Number 1, attracting and upsizing omnichannel retailers. And number 2, pushing up dynamic segments like health and beauty, sports, services and entertainment to replace outdated concepts. Consequently, we supported the expansion of growing retailers asking for more and larger stores. Let’s take a few examples.
Nike and JD Sports have increased by 67% and 47%, respectively, the total area they rent with us since 2019. Same goes with Rituals up 143%, Normal up 160%, Primark up 48% or Starbucks that almost doubled its footprint. In this context, in 2023 we continued to experience a strong demand for leading brands. This materialized through 1,700 deals signed, up 22% over 1 year in volume and a 20 basis point increase in occupancy and a positive reversion. The dynamic leasing momentum observed over the last 2 years is already ongoing in 2024.
Now let’s review our top line performance into more details. In 2023, we delivered an outstanding 8.8% like-for-like increase in net rental income. The year was notably characterized by the 6% increase in retailer sales, slightly above the level of indexation. In this context, we managed to keep occupancy cost ratio stable at 12.8% and maintain our reversionary potential. We also outpaced indexation by 300 basis points, activating multiple operating levers with 110 basis points increase in collection rate at 97.5% and the delivery of a 21% like-for-like increase in additional revenues made of turnover rents, car park revenues and mall income.
And lastly, we capitalized on the full year impact of positive reversion and further improved our operating margin. This year we will continue to unlock embedded growth potential not only through indexation and reversion, but also through incremental sources of organic growth like in 2022 and 2023. We are confident in our ability to deliver at least 4% increase in EBITDA in 2024. Now turning to the balance sheet. Since October, we have noticed a pivot in long-term interest rates on the back of easing inflation and more moderate stances from central banks.
In this context, for the first time in more than 5 years, the value of our portfolio remains stable over 6 months as did the EPRA NTA at €30.10 per share. Given recent inflation evolution and consensus peak in rate cycle, the stabilization trend should pave the way to a bottom-out in asset valuations. One additional evidence of this trend is €169 million of disposal closed or secured, 20% above book values. As a matter of fact, our strong results are also a demonstration of a sound financial discipline enabling us to operate with sector-leading metrics. By actively monitoring our cash related debt metrics, we currently enjoy a leverage ratio net debt-to-EBITDA of 7.4x and an interest coverage ratio of 8.4x.
With these levers, we belong to the Tier 1 companies within the listed real estate industry. The average maturity of our debt is 6.3 years and cost of debt remained very low at 1.5%. We are 98% hedged for 2024 and 84% hedged for 2025. Over the year, we took advantage of the strong liquidity available to Klépierre in the financing market and raised new long-term financing totaling more than €1 billion with a close to 7 years weighted average maturity. We also improved our liquidity position by signing €725 million of revolving credit facilities and we now rely on a €3 billion liquidity position.
Our sector leading balance sheet and strong and growing cash flow generation is the lifeblood of our action. This provide us with capacities to fund sizable cash distribution to shareholders as illustrated by our 8% average dividend yield in 2023. Going forward, as we always did, we will continue to work on our portfolio to deliver further value creation. Coupled with divestment of mature properties and currently nonyielding lands, we have room of maneuver to redeploy capital in higher returning opportunities, including extension and refurbishment with at least 8% return and targeted and opportunistic acquisitions. Last November we opened a large extension in Grand Place in Grenoble, which is now fully let and welcomed the first Primark mega store in the region.
This development is already a great success with performance exceeding expectation. Footfall increased by 60% compared to 2022 in December and the return on investment of this project is 8%. Next year we will complete the reshaping of Maremagnum in Barcelona just in time for the Americas Cup. Time Out Market will open its second concept in Europe and the first in Spain and yield on cost is 13.5%. Lastly, I’m delighted to announce that we recently launched the redevelopment and extension of Odysseum in Montpellier, currently welcoming more than 12 million visitors per year.
We are adding 8,200 square meter and restructuring 12,000 square meters. Yield on cost of this project is 9% and delivery is planned in phases in 2025 and 2026. As a direct result of our redevelopment initiatives, Klépierre venues are gaining market shares in recent years. Concretely, our actions are bearing fruits both in terms of retailer sales and footfall. Let’s take a few examples.
At Gran Reno following the extension in 2022, retailer sales are up 77% for a footfall increase up 40%. At Saint-Etienne refurbished in 2023, retailer sales increased by 79% while the number of visitors was up 23%. Campania and Emporia posted 26% and 19% increase in tenant sales after re-leasing. This being said, we have also demonstrated our ability to take advantage from targeted mall acquisitions. We recently acquired O’Parinor together with Sofidy, a super regional shopping mall in Paris anchored by international banners and posting €7,000 sales per square meter with a footfall in excess of 11 million.
Klépierre will act as an asset, property and leasing manager. Our equity investment is expected to generate a strong double-digit annual cash return from year 1 and the closing of this transaction is planned in the weeks to come. Looking in the recent past, we have a good track record in accretive acquisitions. As a proof of that, the values of Nueva Condomina, Oslo City and Plenilunio increased by 61%, 34% and 33% since their respective acquisitions. I think those are fantastic achievements.
Our leading portfolio is perfectly positioned with unique footfall over 700 million every year, high sales per square meter with low OCR. Our malls are the preferred location for retailers as evidenced with a high NPS score of 62 points, up 35 points versus 2017. Coupled with targeted investment in our malls and a changing mix, we are confident to attract more visitors in our venues. Based on 2023 very strong results, the Supervisory Board will recommend that the shareholders at the forthcoming Annual General Meeting approve a cash distribution of €1.80 per share, up 3% compared to last year. And this witnesses Klépierre uninterrupted dividend story and our best-in-class risk profile.
Klépierre expect to grow EBITDA by 4% in 2024. And factoring in the impact of higher interest expenses of €0.11 per share, we guide for cash flow per share between €2.45 and €2.50 in 2024. To conclude, let me talk about corporate social responsibility. Beyond our strong achievements especially in terms of energy consumption and path to net zero carbon portfolio, I am proud to announce you that Klépierre has once again been recognized for its leadership in transparency and performance in the fight against climate change by CDP. The group is included for the third time on the A list.
This reflects the consistency of our efforts and our commitments to build the most sustainable platform for commerce by 2030. And I will end my remarks on this and open the floor to questions. Thank you for your attention.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Florent Laroche-Joubert with ODDO BHF.
Florent Laroche-Joubert
Jean-Marc, thank you very much for this presentation and congratulations for this publication. I would ask 3 questions so if I may? So my first question would be so what is your confidence to see retailer sales to continue growing in 2024 at the Klépierre shopping centers? My second question on the investment market. So we see that we have a stable valuation of assets at Klépierre.
So how do you assess the appetite of potential buyers on the investment market and have you seen any change recently? And my third question is about your recurring EPS in 2023 and the guidance for 2024. So we see that you have exceeded significantly your guidance in 2023 so why not again in 2024?
Jean-Marc Jestin
So for sales in 2024, it’s always a difficult exercise to predict what will be sales. But the way we look at the macroeconomic in Europe that first of all we have south of Europe, which is very strong and the rest of Europe and the north of Europe very resilient. So the growth in the South is really — GDP growth is very sustained for 2024 and more importantly, labor market and wage increases are very important all over Europe. So we feel confident that sales in 2024 will be comparable to 2023. That’s the basis of our assumption for the guidance and we will see how it develops.
So when we look at the sales in January 2024, we are flat compared to 2023 and I would remind that 2023 January was a very strong month. So it’s the first month, which is encouraging. For the investment market, I will make it very short. The investment market is very quiet. We have been, nevertheless, able to dispose of noncore assets not for a huge amount, for €169 million, above book value 20%, which is I think a great achievement.
But the investment market today is not back to normal and I think this will become more interesting I would say in the second half of the year or beginning of 2025 when interest rate will definitely go down. So we still have a discussion with investors on noncore assets and I’m confident that we will also dispose some noncore assets in 2024. For the EPS, thank you very much for telling that we have beat the guidance in 2023, but I think we did that for the last 10 years. So the past never predicts the future, but we are very confident about the guidance. I think what is also very clear that the organic growth going forward is very strong.
So we are guiding for the first time the market on the EBITDA growth, 4% at least, which is also a good sign that we are confident with the market and confident to meet the guidance and we will do our best to outperform.
Operator
The next question is from Stephane Afonso with Invest Securities.
Stéphane Afonso
I would have 2 questions if I may. So the first one on appraisers’ assumption in particular regarding the NRI CAGR of plus 2.8% on average. Will it be possible to give us the levels of indexation that appraisers are forecasting for 2024 and 2025? And could we have an idea of the reversion rate that was captured in France in 2023? And also how has evolved the vacancy rate there?
Stephane Tortajada
So in the appraiser assumption, we have a 2.8% NRI CAGR as they take into account the 2.5% indexation in 2024 and the same level in 2025. In terms of reversion and vacancy in France, what we can say is that vacancy has decreased in France in 2023 compared to 2022. We do not itemize all the figures, but in France we have seen an improvement in terms of vacancy.
Jean-Marc Jestin
But maybe just to complement what just Stephane said. I think in the overall performance, France has been probably the country which has been the most impacted by bankruptcies. Even though this has not been very significant, we have seen during the course of 2023 a high number of stores being closed and being relet. So this has had a quite a nonnegligible influence on occupancy. So I would characterize the occupancy in France still suboptimal compared to 2019 while in the other countries, we are above ’19 level.
So that’s a complement to Stephane comment.
Operator
The next question is from Frederic Renard, Kepler Cheuvreux.
Frederic Renard
A question on my side maybe regarding your leverage. Where do you want to go in terms of your net debt to EBITDA? Do you feel comfortable today at those levels? And what can you say about a potential share buyback at some point in time?
Stephane Tortajada
Okay. In terms of leverage, so net debt to EBITDA for ’23 at 7.4%. Obviously this is much better than what we have seen in ’22 so we have improved the ratio. We have obviously some room of maneuver compared to our rating at Fitch and S&P. So we are comfortable at this level.
And even increasing slightly, we will still have some room of maneuver for the rating. So I will characterize this level like giving us some room for opportunity. In terms of share buyback, as usual it’s one of the option we have on the table when we look at how we can grow our net current cash flow per share, we have other options. As discussed by Jean-Marc, we see also some opportunities today in the market in terms of acquisition, but share buyback is definitely one of the option we have on the table if we want to grow the net current cash flow per share. It’s accretive obviously.
Jean-Marc Jestin
And maybe just also to just complement, I think we need to look at leverage with the other metrics of the company. So 2023, but like I would say the last 7 years, we are always able to grow dividend, reduce debt and growing cash flow. So I think we are very comfortable with this level of debt. Also meaning that we have a discipline on CapEx and development project going forward. So we are able to maintain a very strong balance sheet and also growing dividend and decreasing absolute level of debt.
So I think it’s a remarkable performance for the industry.
Frederic Renard
And so do I understand that if you can’t find opportunities in the market and I mean by that accretive opportunities like you did with O’Parinor, then share buyback would be an option to consider?
Jean-Marc Jestin
I think we can’t say that. We just say that this is by definition an option. In the past we did. We have plenty room of maneuver to continue to grow the business because the balance sheet is very strong so don’t misunderstand us. There is no plan today to buy our shares back and this is something that has not been discussed by the Board of Klépierre.
So we’ll see in due time.
Operator
Ms. [indiscernible], could you please repeat your question?
Unidentified Analyst
Do you hear me?
Jean-Marc Jestin
Apparently you were lost in the translation somewhere.
Unidentified Analyst
My question would be on the investment. So I know the question was already raised, but just to know if you see more opportunities coming or more distressed seller like the transaction of O’Parinor coming for 2024?
Jean-Marc Jestin
I think if I want to characterize it simplistically, I would say that the traditional investment market with the usual suspects is very quiet. But it’s fair to say that we are probably seeing and going to see more opportunistic transactions when the sponsors have to refinance their properties as we have seen that with the O’Parinor transaction. So yes, I’m confident that we will see more opportunities going forward of that kind.
Stephane Tortajada
So we have a question on the chat from a French asset manager. How do you see the dividend growing in the coming years? Do you have target in terms of dividend payout or dividend yield? On this one, I would say that we increased this year in ’23 our dividend by 3% compared to last year, €1.80 compared to €1.75. I think it’s fair to say that we want to see the dividend growing slowly with our business growing and our results growing along the time.
We don’t have target in terms of dividend payout, but we obviously look at what are the peers in the market for dividend yield. When we see that among the large cap real estate company across Europe, cash dividend yield are between 5% and 8%. I think we are already at the top of the range because compared to ’23 average share price, we are 8%. So I think it’s where we want to be in terms of cash dividend yield compared to our peers.
Jean-Marc Jestin
There is another question. In your presentation, you mentioned the decreasing exposure to fashion retailers. To what extent do you see fashion further? I don’t see the end of the question, probably further going down. So yes, but it’s not new news.
I think the fashion industry is going through quite deep transformation where we see large retailers taking more space and smaller retailers decreasing space or going out of business. So I think that this trajectory will continue. We will see probably in the coming 3 to 5 years a couple of percent less of small fashion stores and would be replaced by other activities as we show in our presentation. So as we speak today, health and beauty, sports, entertainment, food and beverage, services, convenience, which probably will take the lead in the coming 2 or 3 years.
Stephane Tortajada
So another question in the chat, again a French asset manager. We have just seen Henderson and Eurofund acquiring the mall Islazul in Madrid from Nuveen. Did you look at this asset and did you make any offer?
Jean-Marc Jestin
So I’m not going to answer directly to this question. So we keep our strategy secret. That’s an asset that we know very well and we also know it’s very close to [indiscernible] so that maybe between the lines, you can understand what I mean.
Stephane Tortajada
So another question in this chat. So from Daniela Lungu. Jan ’24 sales flat versus Jan ’23 show significant deceleration compared to plus 6% in full year ’23. Any more color on why you consider this to be a strong position?
Jean-Marc Jestin
Well, I think it’s the glass half empty. Anyway I think the way we have built the guidance for 2024 is to have sales at least at the level of 2023 and it’s difficult to predict what would be the final outcome in the next 12 months. But my point was to say that January 2024 was in line with our estimates. So that I will not comment more than that. 2023 has been a strong year and we expect 2024 to show at least a strong resilience and probably also some growth.
Stephane Tortajada
And Daniela, I think also you should take into account that in 2023 we had 5.8% indexation in average in our portfolio. So when we have plus 6% retailer sale, it does mean it’s very consistent. What is important is the consistency between indexation and retailer sales in order to keep the occupancy cost ratio quite stable. This is what is important in our business going forward.
Jean-Marc Jestin
Okay. Thank you very much. So we have no more questions. Thank you for attending this call and thank you for the questions. And see you soon.
Have a good day. Bye-bye.
Stephane Tortajada
Thank you.
