CEO COMMENTS : Organisational rationalisation
Annual Report 2017
At NSI we can look back on a very successful 2017. InFebruary we announced our new strategy to become theleading specialist in the Dutch office market. As highlighted inthis 2017 report we have made good progress during theyear, on almost all fronts.
We have put in place an almost entirely new organisation, with a new culture and identity. We reduced the team from81 employees as per the start of 2016 to 55 as per year-end2017, of which 24 are new hires. Our EPRA cost ratio has fallen to 24.3% (was 27.7%) as a result. We have also substantially upgraded our IT infrastructure and our management information systems, further automating both our internal and external reporting. In addition, we have reviewed and updated our contracts with external service providers and have decided to outsource the day-to-day technical management of the portfolio.
With the foundations now in place, and the Dutch economy and property market in good shape, we are optimistic about the outlook
A more focused portfolio
The number of assets is down by 39 assets to 126 (having sold 44 assets1 for €242 million and acquired 5 assets for€139 million during the year). The disposals include circa60%2 of our retail assets, in line with our strategy to focus solely on offices going forward. The asset rotation has resulted in a more focused, higher quality portfolio, with better margins and a lower vacancy rate. In 2018 we will continue to prune and work the portfolio, towards a more concentrated portfolio of larger office assets in fewer locations. The vacancy rate reduced to 18.4% at YE 2017 (was 21.4%at YE 2016). This is largely driven by disposals and acquisitions, and a 7% like-for-like improvement in the occupancy rate for HNK. We are optimistic about the occupancy outlook for 2018, as our letting activity is picking up, driven by the new asset management and leasing team and the positive economic environment.
Internal growth – office (re-)developments
In 2017 we identified substantial development potential in our existing portfolio. This includes three office developments in Greater Amsterdam, with combined capital expenditure of more than €300 million and a circa 7% yield on cost. The first of these could possibly break ground as early as H2 2019. We are pleased that we have been able to source these attractive growth opportunities internally, at yield levels that are not available for standing investments in the wider market today. We believe that in the current market new development is one of the better ways to deploy capital and drive returns for shareholders – also when taking into account the higher risks associated with developments.
Even though the potential upside is attractive, we will not pursue these developments without due consideration. We will regularly assess 1) if we have the right skill sets in house,2) how many projects we can run concurrently on our balance sheet, and 3) where we are in the property cycle. It is entirely conceivable that one or more of these developments will not happen until the next property cycle.
The YE 2017 EPRA NAV is €36.66 per share, up 6% year on year. With disposals done at an average 4% premium to book value and new leases agreed at an average 1%premium to ERV, we believe our external appraisals are well underpinned.
The like-for-like portfolio saw a 3% increase in value in 2017, with HNK up by 10% and Offices up by 3%. The polarisation in the office market continued during the year, with the G4portfolio up 9% and provincial assets down 11%. Our remaining retail portfolio is down 2%, mainly reflecting lower ERVs, even given the ongoing strength of the Dutch economy and consumer confidence.
Debt refinancing & LTV
In late 2017 we worked on our debt profile and agreed new 8 year funding at a margin that suggests that NSI now has an implied investment-grade credit rating. This reflects the significant progress the business has made in recent years.
The average cost of debt has been reduced to 2.3% (was2.8% at YE 2016). Rather than pursuing the lowest cost of debt to drive EPRA EPS by going for shorter maturities, we prefer to use the improved credit rating to extend the average debt maturity.
The LTV is down to 36.9% at year-end 2017 (was 44.1% at YE 2016) and is set to fall further, as we continue our asset rotation program and prepare the balance sheet for the development opportunities ahead. Given the increasing focus on value-add initiatives, we are lowering our target LTV range to 35-40%.
Having said that, we would still be comfortable to move above this range, albeit on a temporary basis, if and when the right property deals come along.
Outlook for 2018
Whilst most of the restructuring is now behind us, in 2018 we will continue to streamline the business and further improve systems and processes. With the foundations now in place and the Dutch economy and property market in good shape, we are optimistic about the outlook.
We appreciate that everyone looks like a rock star in a bull market. Whilst we too benefit from the current up-cycle, atNSI we are in it for the long run and therefore are working hard to prove good stewards of capital over the entire property cycle.
This sometimes comes at a cost. Having been a net seller in2017, we are likely to face a fall in EPS in 2018 – notwithstanding the positive effects of the recent debt refinancing, improving cost efficiency, a better portfolio andimproving leasing prospects.
Based on the portfolio at year-end 2017 we anticipate anEPRA EPS in the range of €2.35-2.45 for the whole of 2018. The actual outcome will, however, very much depend on the timing and size of future disposals and acquisitions.
Looking back on a successful 2017 and looking forward to 2018 with confidence, we are pleased to propose to our shareholders a final dividend of €1.12 per share, resulting in as table dividend of €2.16 per share for the year.
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.