CEO COMMENTS : Healthy operating performance
Half year results 2018
We continue to make good progress in strengthening and moving forward the business. The rotation towards a more concentrated portfolio of larger, good quality, office assets continues apace and is resulting in a structurally lower vacancy rate. The balance sheet is strong and the value-add potential is increasingly visible.
Healthy operating performance
The vacancy rate is16.6% in H1 2018, down by 1.8% from YE 2017. This is helped by a like-for-like fall in vacancy of0.6%. For offices the vacancy rate is down to 13.6%. This is still above the 10.5% level for the Dutch office market overall, but we are on track to further narrow the gap and still very much aim to end up with a below-market vacancy rate in due course. Some of our latest acquisitions include a significant element of vacancy (Q-Port: 25%; Lange Voorhout: 100%), which is clearly not helping in our aim to lower the vacancy rate in the near term. We will, however, if presented with the choice, always favour the prospect of better shareholder returns in the medium term over the impact on vacancy in the near term.
In June 2018, following a public statement by ING on the matter, we confirmed in a press release that we are in active discussions with ING to redevelop our 12,739m2 Laanderpoort office asset in Amsterdam. The plan is to replace the existing buildings with two modern office buildings, for a total of 30,000-35,000sqm. Negotiations are ongoing and will take some time to complete, but as it stands we are looking at a Q2 2020 start date and a total capex of €120m+. If and when negotiations are completed successfully we will be comfortable taking on this project, of this size and volume at this stage of the cycle, given that a significant element of it is set to be pre-leased to ING and given that Amsterdam South East is expected to strengthen further into an attractive multifunctional location.
We remain disciplined and, as such, are often finding ourselves outbid on potential deals in recent months.
A need to remain disciplined
The G4 office investment market is proving increasingly exuberant. So much so that we nowadays sometimes wonder if investors are more concerned about putting money to work than about returns. We remain disciplined and, as such, are often finding ourselves outbid on potential deals in recent months. We are still able to secure good deals though, such as the acquisition of Q-Port in Amsterdam in March and Lange Voorhout 7 in The Hague, as announced in a separate press release today. The strength of the investment market is also visible in ourreportedEPRA NAVper share, which is up by 4.9% to €38.44. Asset values were up by on average 3.1% in H1, with Amsterdam up by 7.5%. Rather than being tempted to leverage up at this stage of the property cycle, we still aim for a lower LTV in the years ahead, taking into account further non-core asset disposals, particularly now as we prepare for significant development capex in the years ahead.
Changes to the FBI regime
The October 2017 Government coalition agreement stated the intention that FBI’s, including NSI, will no longer be allowed to invest directly in Dutch real estate from 2020 onwards, due to the planned abolishment of the dividend withholding tax (DWT). We expect more clarity on this subject by mid-September, as part of the Government tax budget for 2019. Non-listed real estate FBI’s are able to restructure themselves and can, in doing so, potentially maintain tax transparency. NSI, as a publicly listed company, has to be an NV and cannot restructure itself. We believe this creates an uneven playing field and is probably an unforeseen, but damaging, side effect of the DWT plans. We find it hard, if not impossible, to explain that at a time when 35+ countries worldwide, including most of the G20 countries, have existing REIT legislation in place and more countries are actively considering the introduction of a REIT regime, the Dutch government, which actually introduced the REIT in Europe in 1969, is going against this trend for reasons of political expedience. We continue to believe that this issue can still be resolved. Our efforts are aimed at resolving this issue in collaboration with our peers, in particular for the benefit of Dutch private investors who are likely to be most impacted by this change. If we find ourselves unable to resolve the issue, we believe our future potential tax loss carry forwards may well be one of the mitigating factors in the actual impact on the profitability of our business.
't Loon shopping centre
A preliminary court ruling in June in favour of NSI, relating to our long-standing dispute over ‘t Loon shopping centre in Heerlen and a €12m+ claim on our insurance company CHUBB, is promising. We expect the legal proceedings to drag on for some time to come and we will continue to tenaciously pursue the claim. The claim is not yet recognised in our accounts, in line with IFRS.
The H1 2018 EPRA EPS of €1.19 is negatively impacted by €0.11 in one-off IFRS9 effects. Taking into account our leasing progress, the refinancing and our asset rotation to date, we raise our guidance for 2018 EPRA EPS to €2.50-2.55. The timing and size of potential disposals or acquisitions can still significantly influence the outlook. The upgrade to a better quality portfolio and a lower LTV has so far hardly come at a cost to EPRA EPS, helped in part by the recent refinancing. We now need to make further inroads into the remaining vacant ERV (€17m) to help underpin EPRA EPS. We are optimistic about the outlook for the business. With the team now in place and given the ongoing strength of the Dutch economy, the prospects for further rental growth in our focus markets and the embedded upside in our value-add initiatives, we expect to continue to drive attractive returns for our shareholders in the years ahead. As such, we are happy to propose a stable interim dividend of€1.04.Bernd Stahli
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.