A year into her role as CEO of Gecina, Méka Brunel talks to PropertyEU about the takeover of Eurosic and the company's new strategy of refocusing around urban office and living spaces.
It's a full year since Méka Brunel became Gecina’s new chief executive officer, and if the past 12 months are any indication of the future, it’s going to be an eventful and profitable tenure at the French REIT.
Not only has Brunel brought home the largest corporate acquisition ever by the Paris-based office giant, but the deal – a friendly takeover of smaller peer Eurosic – has helped deliver significantly higher-than-expected earnings in 2017.
‘This is a transformational deal,’ Méka Brunel tells PropertyEU in an interview, commenting on the transaction. ‘It has deepened our footprint in our own playground - the Paris office market, and it accelerates our value-extraction programme.’ Nonetheless, the size of the deal isn’t so important, according to Brunel. ‘Size is not related to how much value you can generate. Size is about giving you more means, but definitely not a purpose in itself.’
Brunel took the helm in January last year after nearly a decade as head of the European real estate business of Ivanhoe Cambridge, a Canadian pension fund and also the principal shareholder in Gecina. Speaking of her move from Ivanhoe Cambridge to Gecina, Brunel says it didn’t change her way of doing business.
‘The listing aspect means a lot of obligations that have little to do with the operational business. The timing of the decision-making process is also different,’ she adds, ‘but the discipline is the same. You need to go to a board and go through the numbers to see if an investment makes sense. As a fund manager you have a dedicated timeline for holding assets because over time your internal rate of return is going to move. In the end, the mission is the same, to be accretive for shareholders.’
Ivanhoe Cambridge did, however, provide more flexibility in terms of the investment spectrum, which she realises was very instructive for her career. ‘With Ivanhoe Cambridge being a large direct player in a number of markets as well as a major shareholder in different companies such as Gecina, I needed to be knowledgeable about all these different businesses. I learned a lot from their business model of mixing direct and indirect ownerships and all kinds of assets.’
A TRANSFORMATIONAL YEAR
Gecina’s growth ambitions go back to 2016 when the company cashed in on its €1.35 bn healthcare portfolio and launched an offer for smaller peer Foncière de Paris. The bid - part of the group’s new strategy of focussing on offices in Paris and the Paris region - failed, with the company losing FdP to Eurosic, despite the higher terms offered.
Ironically, a year later, Gecina doubled down with an offer to take over the new Eurosic-FdP combine in a deal making it Europe's leading real estate group for offices and the fourth largest listed real estate group on the Continent.
‘It was an amicable agreement, with part of the portfolio sold back to the Eurosic shareholders,’ comments Brunel. The operation, which closed in October 2017, was value-accretive for shareholders from the start, and strengthened Gecina’s leadership position in the central Parisian office market. It also delivered higher-than-expected operational and financial synergies, according to Brunel.
‘Altogether we told the market that we were expecting €17 mln in synergies on the operational side but so far we are already at over €20 mln on a full-year basis and we expect to exceed €30 mln. This is for a number of reasons. We have simplified the management structure, reducing the number of auditors and directors and we have secured better financial conditions. Also, we didn’t initially take into account how we were going to have a better management of the portfolio.’
DISPOSAL PROGRAMME
On the financing side, the transaction has increased the group’s loan-to-value ratio from 29.4% previously to 42.4% at year-end 2017, although Brunel says that she is committed to reducing it to a more moderate level in the medium term. To accomplish a lower debt ratio, Gecina is implementing a programme to dispose of at least €1.2 bn and up to €2.2 bn of assets from the Eurosic and the Gecina portfolio. Around €655 mln of disposals have so far been completed at an average premium of 12.5% to the latest appraisal values, in line with the group’s like-for-like portfolio value growth (11.8% during the year 2017).
‘Having a lower LTV is a real goal for us,’ Brunel admits. ‘We should be able to reduce our debt ratio to between 35 and 40% through asset sales as we have a number of other assets which we would like to divest. These are either mature core assets and/or assets which have nothing to do with our strategy, such as logistics properties, assets in Italy etc. As these properties are very different from one another we have created different sets of sales discussions and processes.’
Despite the higher debt ratio, the company was able to reduce its net financial expenses by 6.5% in 2017, mostly thanks to €2.2 bn worth of bond issuances over 2017 at a historic low margin of 1.3%, which helped reduce the group’s overall cost of debt from 2.2% at year-end 2016 to 1.7% a year later. ‘We have been very proactive by refinancing our different credit lines to reduce the cost of debt and by hedging as much as possible. We will continue to optimise the structure of our liabilities, improving the length of our debt and capitalising on the positive market environment,’ Brunel adds.
Meanwhile, the buoyancy of the Parisian office market, combined with the Eurosic integration, resulted in a higher-than-expected profit for Gecina of €363.5 mln in 2017, up 4.6% on the previous year. The company is forecasting an increase in earnings of between 3 and 6% in 2018. Brunel: ‘The main priority this year will be to continue to create value and increase profitability at the same time as we transform the company in terms of the ways of living and working that it offers to our clients.’
NEW RESI FOCUS
Indeed, Gecina announced at the presentation of its full-year results that it now sees its residential assets as part of its core portfolio and plans to retain and add to them in the long term. It has already identified nearly €200 mln worth of investments in the sector, including €107 mln that is already committed. The sector currently represents 16% of its total portfolio, or a value of €3.2 bn, largely focused on the western part of Paris.
Brunel says that the decision reflects a new strategy of refocusing around urban office and living spaces. ‘The reality is that a new way of living and working is emerging, focused on urban spaces. Today, Gecina considers that its residential portfolio is aligned with the needs of new, more mobile and flexible lifestyles and the demand for central locations, and that retaining this portfolio is relevant to complement Gecina’s specialisation in urban offices. Our global purpose is to meet our clients’ needs by offering them living and working spaces.’
Contrary to healthcare or logistics, two asset classes which Gecina has exited in the recent past, residential does not require a very different set of skills from offices while delivering a similar level of risk-adjusted returns, which is key to continuing to attract equity investors. ‘It is important to make sure that there is a link between the different types of asset classes in the portfolio and today we believe that residential offers the same level of profitability adjusting for risk,’ says Brunel.
Asked whether the company plans to grow further this year, either with acquisitions or with corporate takeovers, Brunel believes the company does not have much space left for new investments at the moment. ‘We are a little bit ahead on what we can do [in terms of acquisitions] and we continue to be very disciplined in our investments. That said, corporate acquisitions are always opportunities, you cannot plan on them.’
