Hoofddorp, the Netherlands,

IN FOCUS: Strategy update 2017

Annual Report 2017

NSI has set out a clear strategy. In February 2017 the company announced it will become the leading Dutch office investor and operator, driving excess returns through active asset management and disciplined asset rotation. Valued at over one billion euros, the portfolio is underpinned by a strong balance sheet with significant capacity to fund both internal and external growth. By investing in attractive space and a high level of services for its customers, NSI can generate sustainable and growing revenue to drive long-term shareholder return. By ‘leading’ we mean achieving the highest risk-adjusted return, adding shareholder value through a value-add total return approach supported by an optimal capital structure.NSI strives to constantly improve the portfolio, raise the quality of the platform and lower the cost of capital.

Asset rotation and accretive investments

NSI focuses on larger office assets in economic growth locations based on the perspective that long-term growth can only be achieved in locations where rents can grow because of economic activity. Furthermore, efficiencies can be achieved and margins improved by having fewer, larger assets in a select number of locations. Last but not least webelieve that the depth of the investment market in these locations has a genuine positive effect on the risk profile as liquidity is often one of the most underestimated risks in property.

The necessary size, tenant activity and scale of the investment market to drive excess returns is concentrated mostly in the four largest cities in the Netherlands (G4) and some other economically vibrant areas. NSI defines the G4 and Den Bosch, Eindhoven and Leiden as its most important target cities.

NSI is rotating out of its retail assets and will monetise its smaller, provincial office assets while we may explore alternative use options for several office assets. In some cases this is to add additional value to these assets, while in others alternative use may improve the liquidity of the asset so it can be sold more easily. The proceeds of disposals will support further expansion into offices through acquisitions or value-add initiatives and (re-)development. NSI actively seeks(re-)development opportunities in its portfolio as an attractive alternative in order to obtain assets in the best locations with better cash flows at lower prices.

HNK is NSI’s answer to a growing demand for flexible offices pace. This demand is not only driven by smaller occupiers but also by large corporates aiming to become much more flexible in the future. New IFRS regulations and the ever-changing global market place in which companies compete are but two reasons why we will see fewer occupiers take single let leases for more than 10 years in the future. HNK is unique in that it can offer tenants a combination of traditional long-let space and flexible space in a single building.

Creating the right platform

In its quest to be the best NSI needs

 to have the best operating platform. Only with the best team, culture andprocesses will NSI be able to deliver leading results in an optimal and cost-efficient way. To attract the best talent anew culture and identity have been set out. With its defined core values, drive, professionalism and the will to push boundaries, NSI aims to maximise the full potential of its employees, the shareholder’s investment, and the assets thatNSI acquires and operates.

NSI is also investing in IT due to its increasing importance ina data-heavy industry, as IT helps to streamline processes and aid data consistency and reliability.

At NSI we are constantly assessing if the organisation and associated costs are justified by the size and performance of the portfolio. In this respect it is key to aim for an optimal cost structure and not just focus on achieving the lowest cost possible.

Being a listed entity means always needing the organisation to be a certain size and have a value-add strategy. This, in turn, means always having slightly higher costs than would be the case if a passive investment approach were to be adopted. For NSI it is not about achieving the lowest running costs but about being efficient. We believe that if we run a structurally efficient, focused business that delivers an attractive return to shareholders, our share price and share rating will reflect this.

Prudent balance sheet management

Along with obtaining the best portfolio and creating the number one platform, management has another important tool to drive shareholder performance. By constantly optimising the balance sheet structure and capital allocation, management has the levers to minimise its cost of capital.

NSI has a new LTV target range of 35-40%. Although this range is not an exact science, management feels that within the range the financial risks are sufficiently low for where we are in the Dutch office property cycle combined with NSI’s current operational risks and the development risks it aspires to take. 

Having the right capital structure should result in the lowest possible cost of capital. Starting with debt, by lowering theLTV we can attract debt at better margins and reduce the cost of financing. A credit rating can further help improve the perspective of a wider range of investors, again lowering the cost of borrowing. 

For NSI the capital structure should be entirely supportive of the real estate strategy of the business, while not being a business in its own right. NSI manages its balance sheet prudently, actively assessing based on a variety of metrics if the combination of operational and financial leverage is appropriate for the business. We believe that by running the business prudently we will be recognised and rewarded by shareholders, which in turn would provide us with access to capital markets if and when the right opportunities emerge.

Progress in 2017

In the year under review asset rotation resulted in a more focused portfolio of higher-quality assets. The number of assets fell by 39 to 126. The disposals included selling around 60% of the retail assets. The average asset value increased to €8.8 million at the end of 2017, a 26% increase compared to 12 months earlier. The exposure to the G4 increased from 40% to 57%. This part of the portfolio is significantly outperforming the remainder, underpinning the strategic choice that was made.

In 2017 NSI invested in building a new team and upgrading its assets to drive occupancy growth. Efforts to attract new tenants are expected to bear fruit in 2018. This will have a leveraged positive effect on NRI as it will both accelerate GRI and improve the NRI margins.

NSI identified substantial development potential in its existing portfolio in 2017, including three office developments in greater Amsterdam area. The first could possibly break ground as early as the second half of 2019.

Following the strategic review, NSI moved to a cost base that is much more appropriate for its current asset base and put in place a new organisation that is both nimble and scalable, shrinking the number of FTEs by approximately 45%. A new culture and identity have been set out. Core processes have been optimised, digitalised and automated, while some non-core processes have been outsourced. Cost savings should start to come through from 2018 onwards.

The financial and operational reporting systems have beentaken to the next level and newly implemented tools have improved the internal and external reporting process, providing greater insight to manage the portfolio correctly. In addition NSI has a new brand appearance (logo, colour), share price and website, as well as a new investor base with improved investor recognition.

After balance sheet date, in January 2018, NSI attracted new capital in the form of a private placement from Pricoa CapitalGroup. The euro-denominated notes have a fixed coupon reflecting an implied investment-grade credit rating. Such recognition from a highly reputable international investor is a reflection of the steps NSI has taken in the past few years to professionalise the organisation and strengthen its balance sheet.

About 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.