We have managed to further strengthen the business during 2021, despite the continuing challenges as a result of covid. This is clearly visible in all main KPIs. Going into 2022, having successfully completed the asset rotation programme started in 2017, we enter the next phase of NSI with a high quality, focussed portfolio with strong embedded growth potential, a balance sheet to support the growth, and we have the team and platform to execute our ambitions.
SCALABLE PLATFORM FOR ATTRACTIVE RETURNS
The disposal in Q4 of our two remaining retail assets (Zuidplein and Heerlen) and the last of our non-core provincial assets truly marks the end of the substantial portfolio rotation plan that we announced back in 2017.
We now have a focussed, quality portfolio of just over 50 assets in locations where we want to be. Also, all the back-end systems are fully in place so that we are able to expand and scale from here if and when the right opportunity arises.
The LTV at 28.2% at year-end 2021 permits us to do exactly that, even with all the development capex still to come. Still, we remain highly disciplined when considering new acquisitions.
We are not dependent on acquisitions to drive shareholder returns. We estimate a 7-year unlevered forward IRR on the standing portfolio of 5.6%, of which 4.1% income return and 1.5% capital growth. This expected return will be supplemented by potential development profits and value-add initiatives.
WORKING ON A PARIS-PROOF ROADMAP
In recent years we have substantially invested in sustainability, which has once again been recognised with a GRESB five-star rating. We are now working on the next phase of our sustainability ambitions, aiming to bring the portfolio to BREEAM Excellent where possible and by preparing a Paris-proof roadmap.
Achieving Paris-proof (50 kWh/m2 per year) is a daunting task. Our ambition is to achieve this by upgrading the real estate. A substantial effort will be required over a multi-year period, in an active dialogue with our tenants – as it will be a joint effort.
FURTHER PROGRESS IN DEVELOPMENT
We continue to work hard to move all three major development projects (Vivaldi, Laanderpoort and Vitrum) forward. At Vivaldi we have entered the technical design phase, we have selected a contractor and are still scheduled to start in Q3 2022.
At Vitrum we have entered the final design phase and are still aiming for works to start Q4 2022. Unfortunately a variety of external factors have held back progress at Laanderpoort. We are now assuming works to start in Q1 2023.
We estimate an average yield on cost for the three projects of 5.5% per year-end 2021. This includes the latest building costs inflation (8-12%) and expected longer construction periods. As prime yields in Amsterdam remain firmly below 4.5% we believe these projects continue to remain viable and profitable.
OUTLOOK FOR 2022
In Q4 2021 we made the choice to ‘take the pain’ and lose the rental income from the remaining non-core high yielding assets such as Heerlen, Zuidplein and HNK Apeldoorn. Whilst we are confident that redeploying the proceeds of these disposals will be a positive for shareholders in the long run, it will initially negatively impact our EPRA EPS.
Inflation is now a widely acknowledged phenomenon globally. Positively, almost all of our leases are indexed to CPI and only a small percentage of these have a cap on indexation. We expect indexation of 3-4% in 2022.
The year-end vacancy of 5.9% (or 4.1% if we exclude ‘t Loon and the strategic vacancy) is far below the level for the wider Dutch office market, at 9%. This befits the quality of the portfolio we now own and, going into 2022, this vacancy rate may well allow us to selectively push rents beyond ERV on lease renewals.
Almost two years into the covid pandemic it is now clear that the WFH debate is only partially about how much space will be required. It is much more about what type of office space will be needed. We are optimistic that, given our portfolio, this will prove more of an opportunity for us than a threat. With a NPS score of +20.3, up from +16.9 a year ago, our customers are increasingly recognising our product and services, whilst we still see plenty of room to further improve this score.
We forecast an EPRA EPS of € 2.05-2.10 per share for 2022. This forecast assumes no further acquisitions. Our intention is to maintain the dividend at € 2.16 as we continue to take the view that a sustainable level of dividend is a function of the long term income generating capacity of the business and not of the level of income in any individual year. A final dividend of € 1.12 per share will be proposed to the AGM.
We currently project a stabilised level of EPRA EPS of € 2.70-2.80 by 2026, based on the standing portfolio and assuming all three projects successfully completed and fully let.
We are organising a Capital Markets Day for investors in April to showcase the strength of the business, the attractive long term characteristics of our focus locations and our approach to providing services. We will also highlight the embedded future growth, including both the existing and potential development pipeline.