CEO COMMENTS : Fully on track
Annual Report 2018
We are now two years into the new strategy we announced in early 2017, to become the leading specialist in the Dutch office market with a strong platform, pro-active asset management, value-add initiatives and active capital recycling.
During these two years we completed €300m in acquisitions and €363m in disposals and are down to around €200m (17% of assets) in remaining non-core assets, which we intent to gradually exit in the coming years. The portfolio is now 80% located in our focus markets, with 45% situated in Amsterdam. Meanwhile, we have significantly improved the operational performance and have built up a promising pipeline of developments and value-add initiatives.
2018: Fully on track
We have made good progress in reducing the vacancy. The 13.8% vacancy rate at year-end 2018 is down 4.6% over the year, including a 2.0% like-for-like contribution. The vacancy rate remains a key focus. We continue to aim for below market vacancy in the medium term and an overall vacancy rate of below 10% by 2020. The vacancy for the office portfolio is already down to 11.1% at year-end 2018 and for the G4 it is already close to equilibrium at 7.2%.
The FY 2018 EPRA EPS of € 2.64 is substantially impacted by the high level of asset rotation, with a concentration of disposals near the year-end, but also by a large number of positive and negative one-offs. The net effect of all these one-offs is € 0.12 (negative) and includes a paid lease termination fee, the service cost reconciliation, the release of provisions and a IFRS9 impact relating to refinancing.
In 2018 we sold 35 assets for €122m, including 18 assets with an asset value below €2m, and have exited another 18 cities. We acquired four assets and are now down to 95 assets in total. Both the number of assets and cities will see a further decline in 2019. We still own 35 assets with a value below €5m, so there is still room to rationalise and improve the operating efficiency of the portfolio.
We have significantly improved the operational performance and have built up a promising pipeline of developments and value-add initiatives
The property cycle & balance sheet discipline
The Dutch office cycle is maturing. The market for prime assets is still healthy and liquid, with capital values well underpinned due to a continued influx of - mainly - foreign money on relatively modest return requirements. Having said that, the yield shift appears to be coming to an end and the outlook for capital values is now increasingly reliant on the outlook for rental growth.
The divergence between prime and secondary assets is set to widen in 2019, as financing for secondary assets in provincial locations is proving harder to obtain and if available, more expensive. This underpins our case to further geographically focus the portfolio.
Whilst we still see opportunities to acquire interesting assets at what we believe are attractive IRRs, we remain disciplined and expect the balance of our deal volume to shift to disposals in 2019. This should see us move the LTV to below 35%, from 36.9% at year-end 2018.
We believe a lower LTV is warranted at this time, to offset the higher balance sheet risk related to an increasing exposure to development cap ex in the period ahead. This will come at a cost to EPS in the short run, but ultimately create a more stable business in the long run and should also result in development profits to compensate.
The discussions with ING on the redevelopment of Laanderpoort are ongoing. A mid 2020 start date to create 30,000 - 35,000sqm of new offices is still achievable. The renovation of Bentinck Huis in The Hague is on track for delivery Q1 2020 and we are already seeing good indicative interest for all or part of the project. We are making very preliminary preparations for a potential redevelopment at Centerpoint in Amsterdam, although at this stage it is still uncertain whether this is a project for this cycle or the next.
We have the balance sheet capacity to absorb the potential €120m+ capex for Laanderpoort, even before further disposals of additional retail assets and provincial offices in 2019. The Laanderpoort project will have to be substantially de-risked, however, before any further projects can and will be committed to.
Cost ratio and scalability
We have the team in place and the business is increasingly moving to where we want it to be in terms of portfolio focus, balance sheet, operating performance and embedded value-add potential.
With a successful restructuring now behind us the business is clearly scalable from here. We could easily accommodate a doubling in the size of the portfolio to more than €2bn without any significant expansion of the team. Having said that, growth for the sake of growth makes no sense and is not our objective.
There are, however, some clear benefits to scale. Our EPRA cost ratio will only fall materially from here if we can spread the costs over a larger asset pool. In addition, a larger portfolio would allow us to consider a larger absolute development or value-add programme, take on larger assets, further reduce funding costs and improve the still relatively modest liquidity in the shares.
The current EPRA cost ratio of 26.5% may appear high relative to some of our listed European peers, but this is almost entirely due to the relatively small portfolio size of NSI and the exposure to HNK, our flex office service concept.
We are really pleased that we have managed to keep EPRA EPS more or less stable in recent years, even though we have substantially upgraded the quality of the portfolio and significantly reduced the risk profile - moving NSI from a passive dividend distribution model to a more pro-active total return model.
As we continue to optimise the portfolio in 2019, we will be selling off more of our remaining non-core assets, including some high yielding provincial assets. We are unlikely to compensate entirely for the resulting income loss with our operating performance (i.e. vacancy reduction and efficiency gains). We anticipate an EPRA EPS for 2019 in the range of € 2.40 - 2.50. The actual outcome will depend on the timing and size of any acquisitions or disposals.
Given the good health of the business and the positive outlook we will propose that the AGM keep the dividend level over 2018 stable at € 2.16, meaning a final dividend of € 1.12 per share.
Mr. Stahli was named CEO of NSI N.V on September 1, 2016 for a period of six years. Bernd (45) has more than 20 years of experience in the capital- and investment markets in the real estate sector. He has held various positions at (international) financial institutions, most recently at Kempen & Co investment bank where he has been Managing Director of Securities - European Real Estate since 2013.
Previously, Mr. Stahli worked as a "Head of European Property Securities Research" at Bank of America Merrill Lynch in London. Because of this background, Mr. Stahli combines in-depth knowledge of all relevant aspects of international (listed) real estate with a broad network in the capital market.