Warehouses De Pauw NV (OTC:WDPSF) Q4 2021 Earnings Conference Call January 28, 2022 9:00 AM ET
Company Participants
Joost Uwents – Co-Chief Executive Officer
Alexander Makar – Corporate Finance Analyst
Mickaël Van Den Hauwe – CFO
Conference Call Participants
Vic Peters – FINFLOW
Frédéric Renard – Kepler Cheuvreux
Unidentified Analyst – KBC Securities
Francesca Ferragina – ING
Michael Glazer – Liberty SBF
Unidentified Analyst – Aviva
Joost Uwents
Good afternoon, Team WDP. At home are in one of our offices. Good morning to our friends in the U.S. Good afternoon, Europe. Good evening Asia. Welcome, everybody, of the live stream of the full-year results of WDP over 2021. Just one practical thing, we are open for all your questions, but put them in the chat box during the presentation and we will answer them afterwards one-by-one. Thank you. So Mission 2021 accomplished. Ready for growth and may for future. ’21 was again very good year for us. And we could secure, again, €500 million of new investments. And this gives us at the end, a portfolio today of €6 billion, and above that, a development pipeline of almost €600 million.
So we could reach our target of 1.1 EPRA earnings per share; a growth by 10% towards last year. And based on this, we can give you a new outlook of, again, another $0.10 extra, which brings us by the end of the year at EBITDA earnings per share of $1.2. An important this, that we could reach that goal by securing only 75% of the targets portfolio growth. So we did faster and other better yields. All this brings us, like mentioned, up the portfolio of €6 billion we wanted and based on the outlook we can say that our long-term targets are within reach and we will be able to realize them one year earlier than initially foreseen. So time for new plans based on the future of logistics and the importance of the supply chain for every company.
And we brought this together and the vision that it pictures a visionary DC that you can see here. And in all our plans, for the first time, we will do more than only external growth. The first 20-year of WDP, our growth was driven by external growth. And now we can add extras to this external growth. So up to external growth plus. There is like already some years to structural growth of our business based on industry drivers that we all know. But now we can add to other drivers to new engines of growth our — the hidden value of our existing portfolio and also climate as an opportunity. And we never went for growth to growth but profitable growth. And this means that we can grow our earnings per share from €1 in 2020 to €1.5 in ’25, so 50% in five years’ time.
And in the meantime, our portfolio will grow further up to €8 billion. And indeed, there are now the new drivers. That’s the most important [Indiscernible] external growth based on all the structural drivers of our business. And of course, we will capitalize on our existing regions, the BENELUX and Romania. But we will also be broadening towards an EU footprint by further deployment in Germany and France. And above this external growth, we will get value from our existing portfolio by unlocking all the potential through extra services have great sustainability measures and so on. And above that, we see climate as an opportunity. Thanks to our new climate action plan and especially energy. We see energy as a new business within the energy transformation where we think that buildings and especially distribution centers will have a very important role.
Just to remember once, our real long-term success drivers were always focus, culture, clients, and alignment. And this gives us already 20 years of profitable growth mentioned in one single overarching TPI earnings-per-share. And so we realized the last 10 years, an average growth of our earnings per share of 8%. And by this plan, we can continue to do so for the next four years with the same 8%. But now, Alexander will first comment on the markets insights.
Alexander Makar
Thank you, Joost, and good afternoon, everyone. Let’s briefly discuss the current state of the markets and its outlook. 2021 was yet another great year for logistics real estate. When we look at the strength of Europe’s economic recovery but also the strength of the logistics market, both were reflected in very strong take-up and investment activity. When we look at demands, we see it’s ranging all the way from last-mile up to larger scale logistics. When we look at the demand momentum coupled with growing scarcity, limited availability of land, but also supply demand imbalances. We saw vacancy rates dropping to new lows; mostly remarkable in Romania, but also well noted in Belgium where we reached [Indiscernible] 1%.
Mostly in regions where supply has fallen very sharply over the past 12 months, we’ve now seen pressure being added through these ERV s. The momentum was also well-maintained in investment markets, where also the yields dropped to new lows. All in all, we can conclude that the logistics market is in well strength and with a strong demand, we see that the position that WDP has today, we’re very well-positioned to capture the new growth in the market as well. That being said, we see more restricted zoning and growing scarcity, which is becoming a challenge, which urges us to become more intelligent on sourcing, but also make more utilization of our existing portfolio.
When we’re looking out on the demand drivers that will support the external growth in our portfolio, we can broadly speak and say that they remained relatively unchanged given that they are structural of nature. Clearly there are nuances in the regions in which we’re active, but all-in-all, it’s mostly sector breathing. Whether we talk about omnichanneling, automation, supply chain resilience, or sustainable developments, these all bring more complexity to the table. But all these strengths are well experienced in our portfolio. Something that you also comment on right now.
Joost Uwents
Thank you, Alexander. And indeed, in our activity, let’s say that’s a report of everything that Alexander said, and there we can show in reality all those trends. Of course, we always say that we don’t buy anything, and then you always do something, and in the end, we bought for €170 million up at a very decent yields, and not only existing buildings, but also new land reserves but I’ll come back on that later. But if you look then into detail in our projects, well — we again have executed a lot of projects have we made and we finished almost 400,000 square meters of new projects across our different areas. And let’s say it’s where all kinds of the projects we see in the market. There was food, food e-commerce, pharma, retail, e-commerce.
So let’s say a little bit of everything in all our regions. So well spread and indeed almost 400,000 square meters and with a CapEx of 300 million. But indeed above the things we realized, we have already more than the double of square meters under construction. Also, well spread over the different regions, and we have almost 900 square meters under construction, or that pipeline that I mentioned of €600 million. and this at the same yield of the one realized already so the basis of our growth. But above all those projects and all those square meters that we are constructing now, we still have a very nice land bank, the real development potential.
And much more than just the land bank, we can also continuously replenish it. Indeed, we had a land bank of €100 million last year, but we could add another €100 million, which we could use almost directly full and within new projects, and we could keep and this year, even enlarge our land bank from €100 million up to, when everything is realized, more than €170 million, which gives us a building potential of 1.5 million square meters that we can build with this land bank. But the most important elements are the dynamics, the fact that it’s not only €1 million who stays there, but that’s we can within a year as land for direct developments. The valuation, well, I think it’s still very conservative and we still are, so no doubt even leads to very nice portfolio revaluation, our valuations are still conservative.
Based, of course, very high qualitative portfolio strategic logistics corridors with more than 50% of them are suitable for urban logistics. Occupancy rate stays very high. I would say it’s only frictional emptiness. It’s a full house. And more than half of all the leases that are maturing this year are already extended, so there also a very good base. And our client basis with [Indiscernible], of course, still as the most important client or tenant, it stays very diversified and not only on a client-level, but also in industry-level. But today, we are not only speaking about the short-term future but also about the real long-term future. The one who really — where we really have to care about by launching a new climate action plan. A new climate action plan, we worked already a long time as our ESG journey.
First, we worked and we start working on the S&G. And we said in the meantime, we are preparing the real thing, the E were — and of course, I think every ESG roadmap has to end and has in the heart of it, a climate action plan that we prepared last year, and so we can now say that we can be and we will be net zero by 2050. And we have already a long history in sustainability. We started with our solar panels in 2007 and based on that, step-by-step, we went further and further, and now, let’s say, we really have a structured, long-term climate action plan that goes up to 2050. A climate action plan made for future and based on three important tracks: WDP Energy, WDP Decarb Plus, and WDP Green. Alexander will explain all the details of that plan.
Alexander Makar
Thank you Joost. So as you also mentioned, we aim to become net zero throughout our complete value chain, meaning scope 1, 2 and 3 by 2050. And we have set up three main tracks with very clear and ambitious objectives in order to become net zero by 2050. And the first track relates to energy. And the objective of this track is to become the green energy solutions provider of our clients by leveraging our existing know-how, but also adding on with more innovation. We know that in the EU, for example, 40% approximately of the buildings of the energy consumption is derived from buildings. And given the EU climate ambitions, we know it’s a challenge, but also an opportunity for WDP to show its green leadership and contribute to the energy transition.
And for that reason, we have chosen to upscale our renewable energy capacity by creating 250 megawatt peaks of renewable energy capacity, or solar panel capacity by 2025. We do not just stop at the energy production. We also want to have 100% of green energy procured by of our clients of those contracts that we have under control. And furthermore, we will focus also on energy efficiency. We want to have 100% of our entire portfolio to be equipped with LED lighting by 2030, making use of all the space that we would have in and around our warehouses to generate energy and link it through micro grid systems and then resort systems would make our warehouses the actual solar power station of the future.
And to add-on, you must know that when we look at the basis and the foundation of our climate action plan is based on data, data that we derived from our energy monitoring system, which measures all the utilities that we have in our warehouses of our clients. Meaning, the water, gas, and electricity. And we start laying that out already in 2018, and we gathered the data for nearly three years, which was a foundation of our climate action plan. And given the importance and the value add, we decided to enter into strategic partnership with Nano Grid, the energy profit company. When we continue to the second track, WD in [Indiscernible], the main objective is to decarbonize our entire value chain, our scope 1, 2, and 3.
We do not just stop at our own corporate activities being our scope 1 and 2. We know what the impact is of our development activities on the environment. And for that reason, we have set up a very ambitious and transparent and genuine roadmap in decarbonizing our entire value chain. Transparent, because we set targets for our Scope 1, 2, but also our Scope 3. It’s ambitious because we aim to become net zero well before 2050 for Scope 1 and 2, but also partly Scope 3. And genuine because we know what the impact is of our upstream development activities, and we will work on that to reach it and obtain net zero by 2050 as well. To give just one more example, when we look at the right graph upward, we see the evolution of our Scope 1 and 2 emissions over the past years, and our outlook.
As we said, we want to become scope 1 at 2 net-zero for our own corporate activities by 2025 and for our car park by 2030. And just to give you an example, we already started stepping away from fossil fuels in 2016 and 2017. We continue to further invest in green procurement in order to become net zero by 25 already for corporate offices. Then finally, to continue on the third track, which is Green; there we want to implement and we want to integrate sustainability in the development, the operations, but also the financing of our Company and the group on the long-term. And there we have rolled out an entire business case where we can maximize our efforts in terms of [Indiscernible], but also related to reporting and other standards. And for that, we want to have DTC&D recommendations implemented already by 2024 in the annual report of 2023.
Aside from that, we also want to have 75% of our entire property portfolio to be certified [Indiscernible] certificates. Next to that, we also want to have 75% of our debt to be green. And in order to achieve this ambitious targets, we must both invest in our existing portfolio, but aside from that, also on our new developments. And one of the key actions that we will make is to certify all new developments going forward as of now with [Indiscernible] Group as a minimum. And finally, we will also participate into the CTP in 2022. And to give you a bit more insight in how extensive our research was, we will show you this graph. And basically, we want to indicate that we did not only look at the climate footprint, which are the main 6 GHG emissions. We went beyond that and we integrated the environmental footprint, where we also focus on the human life, soil, measuring land and water pollution, which was way more expensive. And then on this slide, this is actually where all our data and analysis comes together.
We have calculated our entire carbon footprint for the year 2020, and we had some very remarkable insights. The first of all was when we look at our own corporate activity scope 1 and 2, we realized that it was just a less than 1% of our total carbon footprint. Another remarkable insight was that more than 65% of the entire carbon footprint relates to our upstream scope 3 emissions. And the third one is that approximately 1/3 or 35% of the emissions relates to the downstream scope 3 of our client’s energy use. And that’s why we decided to implement in a zero strategy in which we maximize our efforts, focusing not only on scope 1, 2, and scope 3 downstream, but also on our upstream activities by 2015. And it is a brief roadmap on how we will decarbonize our scope 3 emissions by 2015.
For scope 3 upstream emissions, we will maximize our efforts by investing more in sustainable materials, in circular materials, and more circular PV panels. Aside from that, we will continuously invest and explore new technologies. For Scope 3 downstream emissions to become net zero by 2040, we will further integrate and invest into the green energy procurement, energy efficiency solutions for our clients, of course. Aside from that, we will upscale the renewable energy capacity and finally, we’ll further integrate electrification of our warehouses. And all-in-all, and it’s a major difference that we want to make is that we will maximize our efforts. And finally, we will participate to carbon removal rather than just offsetting our CO_2 emissions. And with that being said, I will hand over the word back to Mitch for the comments on the financial results.
Mickaël Van Den Hauwe
Thank you [Indiscernible] Joost and Alexander and also welcome from my side. So let me walk you through the performance of last year. And for those who like large numbers, we generated €1 billion of profits last year. Now, of course, this is accounting profits, so we need to actually look at the underlying components. And these were, first of all, the most important one underlying recurring cash earnings or EPRA earnings with just to over €200 million, which was up 10% on a per-share basis at €1.10. And these results are more — most importantly very broad-based by all our teams and countries. Main driver, of course, has been and will be for the next years, the steady stream of development completions, which were all delivered on time and on budget by our teams.
And also next to that, on an organic basis, we too had like-for-like rental growth of 1.4%, which was driven 1.1 by indexation and 0.3 by a slightly higher occupancy rates and a flat reversion rates, so that’s — that last point, that means that all contracts with a break got rolled over at the same conditions and track the highest inflation, though we see upward pressure rising and see growing potential for positive rental spreads. Although we expect also to have — for this to happen only gradual considering the existing contracts that are obviously in place. And also what we have to point out is that we do boast 10% on a per-share basis. But actually, that includes €350 million of equity raise. So with the average share counts also plus 5%, so that makes the results look very strong, although it was partially held by some couple of non-recurring items as well.
And also note that the plus 10% is in line with the guidance, but with the upgraded guidance in the middle of the year where we went from plus 7% to plus 10%. And the difference versus our original guidance relates to the effect that we had a consistently high occupancy rate, some acquisitions, and also no doubtful provision so very strong rent collection rates and very strong and paying client base. And obviously, what’s most striking in these numbers is obviously that we had a reevaluation of €850 million for the full year, which is a revaluation of the portfolio of plus 17%. And when we look at the components, that actually breaks down as follows. We had for 60% downward yield shift in the portfolio, for 20% ERV uplift s in the portfolio, and for the remaining 20% that is related to project development gains.
And to give you some more colors on the drivers behind that, yield shift was 80 basis points downward, ERV uplift was plus 3%, and the average leads and capital gain for project development surplus upon completion was 40%. And that is also, of course, the main driver behind the 40% growth in our NEV we saw last year. And just as a general comment as well, and I do acknowledge that most of you know these that — these results and also our guidance incorporates a provision should we not be able to maintain our writ status in the Netherlands due to the uncertainty. And it’s had an impact of €4 million in the EPRA earnings and €100 million of deferred tax liability in the portfolio results. Then when we take a look at our balance sheet, I think there we invested again as promised over €400 million.
And also very importantly, and we talked a lot about the revaluation of the portfolio, but that was funded mostly by new — real new equity and the — plus 400 million CapEx was funded by, as mentioned, €350 million of equity through the ABB at the start of the year, contributions in kind, stock dividends, and retained earnings. So meaning that we stick to your principle of having a very stable and solid capital structure. And that’s in combination with a strong revaluation of the portfolio, which is still conservative as Joost mentioned when compared to current market yields. This make of obviously our metrics look very strong. And above all, our balance sheet also remains very liquid.
I think here, that summarizes it very well on these slides on the metrics, you can see for yourself with Warehouses De Pauw now firmly below 40%, and above all, our net debt to EBITDA adjusted around 8 times, which is where we wanted to be and our most important [Indiscernible] symmetric, and that is indeed the result of this policy of having finance or financing our growth on a 50-50 debt equity mix in a very consistent way. Also in terms of liquidity, there all is well under control and which more than 750 million of undrawn credit facilities we can cover, at least until the end of ’23 all committed capital expenditure and upcoming refinancing. So there, the baseline is actually unchanged a well-funded balance sheet and ready for further growth.
And within this growth, as mentioned by Alexander, we also seek to issue even more green loans, as we will implement a policy to maximize the green certification of our assets Then perhaps looking a bit at the cost of funding itself, our cost of debt declines towards 1.8% by year-end based on good coverage metrics. And here it’s important to mention that our income, our earnings, is inflation linked. The revenue side is fairly well inflation linked, and our cost base, mainly the interest expenses, are protected for rising rates due to a high hedge ratio and I think more than ever, we can say that due to the growing scarcity of our products, meaning our land positions and our buildings, we are more than ever protected for a rise in inflation. And then looking at the longer-term perspective, you can see our LTV declines as a portfolio got revalued and we consistently financed on a 50-50 debt equity mix.
So that actually means that as mentioned to you before, we have not leveraged on portfolio revaluations. And to maintain a real stability in our capital structure, we look at the left-hand chart on net debt to EBITDA, which actually hasn’t moved in the last 10 years. And I think that also shows and demonstrates the consistency with which we manage the capital structure. Likewise, as we have a strict discipline in allocating capital as well to profitable projects. Then moving further on the outlook, there — what the outlook on — for 2022 is concerned, we got for another rise of €0.10 towards €1.20. So that’s a rise of plus 9% year-on-year based on the same drivers of course and the development completions, and also with a higher inflation — level, a higher level of indexation of the contracts.
And this figure is also robust as it is mainly driven by projects delivered end last year in 2021 because we have a very steady stream of project deliveries in Q4 ’21 and the end the projects that are currently in the pipeline will mostly contributing full as from 2023. So I think that’s it on financing and outlook and we would like to revert now and start the Q&A session. Alexander.
Question-and-Answer Session
A – Alexander Makar
Thank you, [Indiscernible]. If you have any further questions, please put them in the chat. And as the first set of questions from Frédéric Renard from Kepler Cheuvreux. The first one is on the acquisition that we made over the past year. The 173 million CapEx, if we could give any additional comments on the 102 million that remains to be accrued in the balance sheet.
Mickaël Van Den Hauwe
It’s about banking. It’s a combination of lands that will be purchased and some sale and leasebacks that are being scheduled. It’s combination, Frederic.
Alexander Makar
And on the outlook for 2022, could we communicate on the level of indexation expectations that we have.
Mickaël Van Den Hauwe
Yes, they’re — actually the — so perhaps first and how a lot of contracts structured. All our contracts are CPI-linked and we have, let’s say, 70% has no cap and 30% has a cap, let’s say, between 3% and 4%, which means that up ’til 3%, we fully captured inflation and above it, let’s say 4%, 5% then we can capture around 90% of inflation. And when you look at the actual level of indexation on average, the combination of ’21, ’22 for the contracts, index is 4.0%. We should be able to capture contractually 3.5% but in the accounts in ’22, in the guidance, it is at 2.5%. And so that compares to the 3.5% which we will capture, but the only difference is the timing aspect.
Alexander Makar
And can we also give more indication on the rental uplift that we made from the renegotiations of the 54% out of the 14% leases maturing in 2022?
Mickaël Van Den Hauwe
For ’21, most of them got just rolled over at the same conditions. And here for the ones for ’22, we had a couple of them with an uplift already. It’s about €500,000. But do note that we cannot automatically do it for every contract. Our teams are aware of this. We look at it. It needs to be market-based and we have also — it’s also data-driven. But do note that we specially had it in the presentation and that we see in the medium-term rental upside potential. But with a commercial approach, we do not have let’s say like in the UK, automatic 5 years’ market rental review.
It’s indexed at a break, then when we want to renegotiate the entire contract, then you need to cancel the contract. And that’s a bit aggressive and not our approach. But whenever there is potential for discussion with the clients, we will do and have this discussion that’s why we mentioned and we see the potential it is growing. So the estimated rental values are increasing and growing now above our contractual rents. And we expect this spread to increase. And that increases the potential in the medium-term, but it will grow gradually.
Joost Uwents
And also with the time difference and because if you negotiate something today, it can be that is only applicable next year.
Alexander Makar
And then we have a few questions on the new growth plan. First of all, what is the yield on costs that we target in both Western Europe and Romania?
Mickaël Van Den Hauwe
It’s a 5% for Western Europe development yields, and 7% in Romania.
Alexander Makar
And the signs from the regions that we currently target, anything new on the radar?
Joost Uwents
Well, we will enlarge, and like we said, our core business and our core countries stays the [Indiscernible] and Romania, but we’ll now actively broadening our activities towards Germany and deeper into France. And we have set — we have an existing portfolio in France, but we will go deeper in France, and also we did our first project in Germany, and we will also focus on Germany further.
Alexander Makar
And maybe to continue on the growth expectations. So in the projected 8% CAGR of EPRA EPS, can we give more color on the indexation that is included?
Mickaël Van Den Hauwe
Yeah, for — so for ’22 we took the 3.5% which will come then with the lag partially in ’22, ’23 at the 3.5% And for the other years, we took the 5 year EU inflation swap of 2% and we in the business plan, we take a total. Like-for-like rental growth on average of 2.5%. So which is 2% inflation and 50 beeps rent reversion, about $1 million that the latter is.
Alexander Makar
And on the external growth, the $2 billion that we targeted, can we give more color on the regions and we’re going to target for quantified?
Joost Uwents
There is no specific quantification on the regions. So let’s say we look up every profitable, good project with a right ERR [Indiscernible] this in our region. And so we will — it has never been that we really want to say that so many there are only there, let’s say, so we will go for the good and profitable projects wherever they are.
Alexander Makar
And when it comes to the reshoring front, do we already feel the impact of companies moving or reshoring from Asia all the way through Europe?
Joost Uwents
Well, reshoring of production and because that’s the real reshoring that is indeed that’s not happening so fast. But we see people and clients of us thinking about. It is of course, not so easy, but for small things it happens already. And we see it, let’s say we see it sometimes for pharmaceutical things for high value add productions, we see people thinking about that, or even for other more normal production, but then they are looking more eastwards than into say Western Europe.
Alexander Makar
And maybe just to continue on the future development and the yields on costs. What about the development margins? What are our expectations on that front?
Mickaël Van Den Hauwe
Well, last year in ’21, the development margins were around 40%. In the meantime, obviously, yields have dropped and development — as market yields have dropped, development yields have dropped too; that’s why we also take this new assumption of 5% and 7% in our business plan. For the moment, development margins are still intact because the stabilized yields have dropped too, but there’s — yes, building costs are rising too. Sometimes you can feed it through to the tenant depending on how strong your cards are with the land position. We do know that it is a very strong competition as well. So there is pressure on development margins as well, even though that in the short-term, they are rather stable, but in absolute terms, the yields have come down.
Alexander Makar
And with regards to the portfolio of WDP. Do we think that or do we believe that we will see less big-box in our warehouses and a shift towards urban warehouses?
Joost Uwents
Let’s say we do it all, like we invest everywhere in our region. We do them both. And in our region, relative we have a very high, dense population, and we have let’s say a region of more big agglomerations instead of big cities. You can say like more than 50% of our warehouses are suited for urban logistics. But let’s say we will focus on all kinds of logistics on the big boxes, on urban logistics, and all the others. We go really — we just do logistics, but within logistics we go for everything.
Alexander Makar
And with the land availability decreasing over time, especially most popular destinations to we believe that we should shift into new regions, whether that be in the Netherlands more to the North.
Joost Uwents
Let’s say in the Netherlands, we are almost everywhere active we even go above smaller. Let’s say that today growing and it’s almost the limits but yes, if there are good things, we can go higher. But indeed by adding Germany and going and not only the Finlay’s but by adding Germany and deeper into France, we think that there are more than enough possibilities within the current portfolio.
Mickaël Van Den Hauwe
And now we would also add that. That’s also one of the reasons why we didn’t not to go to let’s say five to 10 more countries and because it makes no sense to have in each country only let’s say $200 million. You need to really have a platform via genuine players and also do not forget the importance and the value of building those clusters in our market, because this will give us in the medium-term, also more pricing power by having a lot of buildings in one region, and the more challenging it would get to grow, to secure land and to grow then the more valuable your existing portfolio gets so [Indiscernible] it goes hand-in-hand.
Joost Uwents
And also, by being deeper in the market, you can also make more personal and doing added value investments. So it has also a big advantage of being, let’s say, not everywhere active, but being deeper into the markets where you are.
Alexander Makar
And maybe to continue on the location of our property assets. How many of our logistics platforms are located along cargo railway aligns?
Joost Uwents
Well, 20% of the portfolio is really dedicated on moving modal sites. But let’s say that the majority of our buildings is in the neighbors of multimodal sites. So you don’t need to be always on-site but in the neighborhood off and that’s also thanks to our high dense network of all kind of terminals. We can — let’s say, they are very close to one or another terminal.
Alexander Makar
And then we have another question from Vic Peters (ph.) on our land bank. Can we fully exploited the land bank when countries increasingly impose limits on CO2 emissions and our local authorities prefer more employment?
Joost Uwents
It is more difficult. Land is becoming more scarce. But there are also better and high-quality of these projects where indeed that adds value. I think just — there is — it are not just boxes anymore where they just shuffle with some goods. No, it is more and more high-tech buildings and they are really the heart of every business. So the importance of our distribution centers is getting more and more
Joost Uwents
important. And so the investments are higher. And so you can also then go to the local authorities. And so with better projects which are just so much more than just some boxes within a big box.
Alexander Makar
Another question on the Romanian portfolio, what are the expectations on the construction costs in Romania, and would a potential Inflation in construction cost limit the growth potential that we see in the market?
Joost Uwents
Of course, there is — also a construction costs are higher in Romania, but I would say at the same level as here in Western Europe, there are no other elements and it is the same inflation of the same cost — higher cost off our Romanian products towards construction costs in Western Europe. And so there are — indeed this being not limits on our growth. On the contrary, I would say Romania, it’s a very stable country, it’s more stable every day. It has a good growth perspective. And so there are not so many warehouses, yet. The region, Romania it has big as a [Indiscernible]. In Romania you have 50 million square meters of warehouses in Romania, only five. And indeed, economy is not so far yet. But that is, indeed, a very good basis for further growth together with our clients, and the knowledge we have there, there are no limits on the growth today.
Alexander Makar
And then another follow-up question from [Indiscernible] from [Indiscernible]. How can we further unlock value in the existing portfolio and how we will do it, and to follow-up, how do we believe whether or not our portfolio is still undervalued?
Joost Uwents
I’ll start [Indiscernible]? I think — yes, indeed we have — when lands becomes more scarce than your existing portfolio, of the one who owns lands and buildings, that’s getting a higher value. And indeed, and we are not only a developer, but also an investor. We have a very nice standing portfolio of 6 million square meters of buildings and that you can use now, together with your clients, when there is no new land available to upgrade it to make it better. And indeed, we have already questions for that from different clients. Last year, we have totally, let’s say, 3 clients who asked, can we make a project together to make our building better and upgrade them?
Okay. Finally, it was not the big amount. It was almost €10 million, but we could hire effective rent with 10%. ERVs went up with 10% and we could get a revaluation of 25% after the investment so that our small investments together for me, proofs that you can indeed together with your client upgrade further to your building and all the climate action plan requests of our clients will also create their demand to make it better together with the clients.
Mickaël Van Den Hauwe
Yeah. And I would also add to how we will further on local value within the existing portfolio there. We have the screening on our portfolio too, and we believe that it is at least €100 million of redevelopments, profitable redevelopment, CapEx, we can do within the existing portfolio and like Joost mentioned also in the in the energy space, we can add more hardware, let’s say to our buildings by even increasing more the solar capacity footprint, adding batteries. Adding the infrastructure for electric vehicle charging. Now it is only, let’s say, passenger cars, then small vans. But when the trucks will come, that will be another ballgame as the buildings will need to get better and better equipped, and that provides opportunities to invest and get more out of the existing buildings.
And then the second part of the question was how you compare to market yields? Well, our portfolio’s currently valued at an EPRA net initial yield of 4.7. But let’s say, excluding Romania first, 4.3. That screens towards market yields — market prime yields of between 3 and 3.5. So that still screens conservatively. And in Romania, the portfolio is valued at just over 7 EPRA net initial yield. But there, there is no real benchmark because there is no investment market. Is only a couple of large developer investors for buying holds and developments who are active?
Alexander Makar
And then we have another question Winllerby (ph.) from KBC Securities. In order to get more visibility on the structural growth of e-commerce, how comfortable are we beyond 2023 given that e-commerce stocks lately have been quite volatile?
Joost Uwents
Well, there are studies from CBRE that says that only for e-commerce between now and 25, we will need another 30 million square meters of warehouses only for E-commerce. Of course, probably this will also, let’s say, diminish some classical retail warehouses. But indeed there is still a structural growth of need of e-commerce space in Europe. The coming year, up to ’25.
Alexander Makar
And then another question from Enneth. The remaining portfolio has posted a positive fair value and change this year? Please elaborate on what you see in the market in terms of demand and investments transactions?
Mickaël Van Den Hauwe
We can only say that there are no real — there is no investment market, is not institutionalized. There is also nothing coming on the market and if what — based on what we see in years, is that if something would come on the markets tomorrow, that it would at least be 6%-7% yields and that’s —
Joost Uwents
[Indiscernible] we just own — we just do buy and hold both —
Mickaël Van Den Hauwe
And therefore, the €30 million revaluation you saw in the portfolio was some development gains and it’s 25 basis points, yield shift to limited but there is no benchmark, there are no transactions. But a risk premium versus Western Europe is obviously extremely high.
Alexander Makar
And how do we supply — how do we assess the supply situations in our core markets? Are we concerned in any specific region in terms of speculative developments?
Joost Uwents
No. The market is demanding enough. No. We see no problems in any specific region or sub-region.
Alexander Makar
And could we give more visibility on our land reserves, whatever that should decrease again, and can we deploy more land?
Mickaël Van Den Hauwe
If we could — if we can, we will do it, and we have done it last year. We increased it by 50%. If we can do a bit more than we would be happy to do that of course. We have very strong people and boots on the ground who first have to secure land positions and above all, water.
Joost Uwents
And ask for land, and not just for speculative land, or just by saying, I want to buy it and I will do a project. No, you can go and say, I want to do a project with this or this client in this sector, and then let’s say you get much more chance to get a piece of land. And so that’s also important, but those projects, and that fact you never see in our land bank because at the moment that comes in, it goes directly into projects.
Mickaël Van Den Hauwe
Yeah. And to add further on that, it’s not about putting a check or money on the table. It’s about having an industrial project with the client and then you can buy the land.
Joost Uwents
One of the best examples of the last two years was Lokaren for the biggest chocolate box in the world. Well, indeed, the land was foreseen and was dedicated for [Indiscernible]. But you had and you needed to be able to get the project and then you could get the land. Nobody could buy it without having [Indiscernible].
Alexander Makar
And maybe to follow up on that question. Do we see any major difference in the permitting process between France and the Benelux?
Joost Uwents
Not really. It’s a little bit longer and you have a combination of your building permit and your exportation permit. But — that you have more and more in Belgium too and Netherlands so there — no, there is no real — can take a little bit longer, but we don’t see a real difference.
Alexander Makar
And then a question from [Indiscernible] from Aviva, whether we see any possibilities to start investing in infrastructure such as water purification or larger scale wind mill projects, for example?
Mickaël Van Den Hauwe
Let’s say, we look at everything that is logistics related infrastructure. It has to have a link with our core activity because do not forget our company’s purpose that we help our clients grow within the heart of their supply chain, so we provide a home to their supply chains so it’s link to infrastructure for logistics, yes then we can look at it.
Alexander Makar
Another question from Michael Glazer on the projected 8% EPS CAGR versus the previous growth plan, EPS CAGR is a higher, can we get some insight on to what extent it comes from more developments or inflation or other income?
Mickaël Van Den Hauwe
Well, if we would have made — what we did is that we were needing, or we were close to achieving within the short term, the targets of the old plan. And then we set around the table and we thought, okay, how can we still add value for our clients and shareholders in a growing competitive environment. And how can we add new drivers as well, so that’s we are ready for the long-term, and not only think about the next 2, 3 years. And then we said, “Okay, that is this secular structural demand driver. And these are there to stay, like Joost explained. And this will account for around 75% of the compound annual growth rates of 8%. So they give a basis of 6% and we add another layers of 2% growth per year, so 25% of the growth will come from these drivers like, like-for-like or rental growth, and the energy space.
Alexander Makar
And then we have another question from Francesca from IMG which regards to our new developments and cost inflation, how has it evolved over the past year, both constant inflation, as well as the lead times in development?
Joost Uwents
Well I think we can say that on average, construction costs went up [Indiscernible] 20%,
Mickaël Van Den Hauwe
10%-15% now.
Joost Uwents
10%-15% now, sometimes that’s a max 20%.
Mickaël Van Den Hauwe
But 10%-15% versus pre -COVID.
Joost Uwents
Pre-Covid, but then towards the real downside within COVID the 20%, but let’s say that now it’s stabilizing on that high level. And so as from now, you can calculate it into your projects. But indeed, besides the cost inflation there is also indeed the lead time in the construction. There is no — let’s say we were able to deliver all the project or almost all the projects together with our clients in time until now. But for new projects, there we have to take into account a longer realization period.
Mickaël Van Den Hauwe
And also to give you some color on that in the past, it was, let’s see, as soon as we secured the land 6 months for permitting, 9 months for construction, and these 9 months has now become between 12 and 15 months. So you could see a net effect of 3 to 6 months related to supply chain issues like mainly for the raw materials and capacity constraints with the construction companies. But there we have the benefit too, of working already for many years with the — in partnerships with the main construction companies in all the countries of activities.
Alexander Makar
And then we have another question with regards to our plants in Germany. To what extent would it contribute by 2025 and can we give a general update on how our plans are going.
Joost Uwents
Well, a general update. I think we made that general update the end of last year where we said that we could pre -let our first projects fully before ending the construction. So let’s say we planted our flag and we realized a real profitable, very nice project. And in the meantime, we also hired a Business Development Manager who will start the 1st of March. And so then, let’s say, with a first existing building and a first development, demand can start and go into Germany and really start deploying further our activities there.
Alexander Makar
And then a follow-up, do we expect a major difference in development yields in Germany compared to with the Benelux?
Joost Uwents
Not in the development yields. Investment yields or let’s say — also their investment yields are the same on the market is as liquid or even a little bit more liquid than the Netherlands but it’s the same environment as the Netherlands.
Alexander Makar
And then we have another question from Gerald on the nitrogen policy in the Netherlands. Will that potentially negatively affect growth, ambitions or our EPS forecasting by 2025?
Joost Uwents
No.
Alexander Makar
And we have covered most questions unless anyone has any other remaining question, please put it in the chat. We have just one other question with regards to the like-for-like rental levels. As indicated, it’s moving very slowly but what are we seeing in terms of market rent evolutions?
Mickaël Van Den Hauwe
Yeah, what we see, it’s very scattered. It depends really on the micro-market. But we’re seeing in some locations at least plus 10%. And that is also the levels, the uplifts we saw in these couple of renegotiations we had, like we mentioned.
A – Alexander Makar
And we have no further questions.
A – Joost Uwents
Well, then let’s say we could keep our promise to get it into one hour and then I have to say thank you all for listening to us and listening to our livestream, we’re commended 21 and more important about the future. We are ready for further growth, external growth, internal growth covered by climate opportunities.
A – Joost Uwents
Thank you all very much and have a nice weekend.
