CEO COMMENTS : Strong valuation momentum
Half year results 2019
We are pleased to present our H1 2019 report. During the six-month period we have made further progress across the board. The disposal of our remaining non-core assets continues apace, we have identified several additional large value-add initiatives and leasing momentum remains positive. Now, just over two years into the strategy set out in early 2017, we believe it is time to update and refine it.
Strong H1 valuation momentum
In H1 the portfolio saw a 5.3% uplift in values, explaining most of the 10% increase in NAV over the period. The uplift is widespread and is noticeable well beyond the Amsterdam office market, driven by both ERV growth (1.3%) and yield shift (4.0%). Retail values were down again in H1 (-5.1%), but here the evidence of our recent disposals (including the sale of Rijswijk, The Hague and Utrecht at book value) should provide considerable comfort.
Due to the strength of the investment market and the quality of the non-core assets offered to the market our disposal programme is progressing well. In H1 2019 we sold 12 assets for € 48.1m. These disposals reflect – on average – a 12.2% premium to the year-end 2018 book value.
We actively continue to pursue further non-core disposals. By year-end 2019 we expect the remaining exposure to non-core assets to be less than 10% of the overall investment portfolio.
Following two acquisitions in Q1 for € 28.7m, in Amsterdam and in Leiden, there have been no further acquisitions in Q2. We see almost all deals on the market and continue to believe that our development programme offers better prospective returns, even on a risk-adjusted basis, than many of the prime assets now offered to the market. We do not feel any pressure to acquire assets to expand and will remain disciplined in our capital allocation.
Occupancy rate remains a key focus
The Q2 2019 vacancy rate, at 12.5%, is moving down and remains a key focus. This includes 2.2pp of intentional vacancy, related to potential projects and several non-core assets that we believe are worth more vacant.
We have signed several large lease contracts with a H2 start date that will help to further reduce the vacancy, including a 4,814 sqm letting at HNK The Hague. We also see strong interest for the top 5 assets in terms of remaining vacancy, which suggests we remain on track for a below 11% vacancy at year-end 2019.
Even with all the focus on the occupancy rate, we will at times actively pursue vacancy to further our development programme. At Centerpoint in Amsterdam, for example, the vacancy is set to increase in Q3 given the medium term redevelopment plans.
We constantly review the potential in our investment portfolio for value-add (re-)development and extension opportunities and in H1 we have identified eight projects with an estimated all-up cost of € 850m, reflecting a current book value of circa € 150m and cap ex of about € 700m
A € 850m development pipeline
We constantly review the potential in our investment portfolio for value-add (re-)development and extension opportunities and in H1 we have identified several additional potential projects and have obtained sufficient comfort from our discussions with municipalities on others to now increase the list of potential projects to a total of eight, all of which could happen over the next decade.
These projects have an estimated all-up cost of € 850m, reflecting the current book value of circa € 150m and cap ex of about € 700m. The projects on average should be expected to generate a healthy profit margin on through-cycle valuation yields.
We have already identified three potential projects: Laanderpoort, Motion and Centerpoint in Amsterdam. Of the other five projects, four are located in Amsterdam and one in Leiden. One of the Amsterdam projects is Vitrum, where we plan to do a full renovation and expect to be able to add additional meters on lease expiry in 2021. We will disclose more details as and when appropriate.
We recognise that a €850m development pipeline is substantial relative to the current capital base. It is not insurmountable though. We have a strong balance sheet position and we can time projects depending on our view on the cycle, embedded project risks and our capital position. We could also decide to partner some of the projects and/or sell parts of it over time, or at times increase asset rotation to release additional capital for the pipeline. In any case, we will not strain the balance sheet at any point in time.
Update on current projects
At Laanderpoort the team is still in negotiation with ING to come to a formal agreement on the redevelopment. More detail will be provided as and when appropriate. It is already clear though that due to the long period of negotiations the potential date to start this project is being pushed out to H1 2021.
At Centerpoint we have signed a letter of intent with the local municipality and adjacent owner ASR to work out a master plan for both plots by Summer 2020. The plan is to increase the density on the plot, replacing 15,000sqm of existing offices on our plot with at least 60,000sqm in new mixed-use space.
At Bentinck Huis in The Hague we obtained provisional approval for our plans from the local municipality in June. We are aiming for a delivery date in late Q4 2019/Q1 2020 and are in discussions with several potential tenants.
Outlook for 2019
We notice an uncertain picture on the wider economics front in Europe. GDP growth forecasts are being toned down and the ECB is once again pointing to more stimulus in support of the economy.
It therefore appears increasingly likely that interest rates will stay lower for longer still. In combination with the current economic outlook we believe the search for yield is bound to continue, further suppressing property yields and supporting property values.
The business is getting stronger through all our initiatives and the outlook is favourable. We believe the development pipeline, which undoubtedly has a clear value today, will prove a key differentiating feature for NSI for the years to come, helping to make the business even stronger still. This is also increasingly reflected in our funding costs, with the agreement of a 12-year €40m fixed rate unsecured loan in early July at a cost of 1.7%.
On sustainability we have submitted the necessary documentation to GRESB and expect to get our first score/result in September. Our sustainability ambitions run high and are being integrated in our development programme. Our first GRESB score will help us plot a realistic path for the journey ahead.
We now forecast an EPRA EPS for FY 2019 of € 2.40-2.50, as we continue to upgrade the investment portfolio and lower the overall risk profile of the business. We are pleased to once again propose a stable interim dividend of €1.04. This H1 2019 interim dividend will, as usual, include a stock dividend alternative.
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.