Real estate company Gecina saw its focus on central Paris pay off in 2017, with buoyant demand driving the acquisition of rival office space owner Eurosic. Since then, Gecina has been busy cutting the cost of its debt as part of a long-term strategy, as David Wigan reports.

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Nicolas Dutreuil

Gecina, Europe’s largest office real estate company, is landlord to some very glamorous tenants. They include luggage maker Louis Vuitton and jeweller Chaumet, both of which inhabit prime central Paris locations. The property company has seen the value of its €20bn asset portfolio rise amid a vibrant French property market, low borrowing costs and strong demand for its signature modern office space.

Given the positive macro environment, Gecina has been in acquisition mode. In 2017, it cemented its market-leading position by completing the purchase of rival Eurosic, owner of a €6bn property portfolio also mainly focused on the Paris region. 

“France is seeing a lot of demand for state-of-the-art offices and some strong momentum on the macro level, so it has been an excellent time for us to expand,” says Nicolas Dutreuil, Gecina’s chief financial officer. “The Eurosic transaction was a big part of that strategy and lifted the proportion of offices in our portfolio to about 80%.”

A negative positive

The Eurosic deal was funded through a rights issue and share exchange, combined with bond issuance and bank credit lines, and moved the companies’ loan-to-value ratio to about 40%, compared with just over 30% before the transaction. The additional leverage led rating agency Moody’s Investors Service to assign a 'negative' outlook to Gecina’s A3 long-term rating in June 2017, citing execution risk on planned asset disposals.

The negative outlook, however, was no impediment to Gecina tapping the fixed-income markets for capital. The company has issued three bonds since August 2017, aiming to fund the acquisition, manage its liability profile and set aside some money for further opportunities. The first, a €1.5bn three-tranche issue, attracted some €5.5bn of demand, confirming the market’s confidence in Gecina’s acquisition strategy. That was followed in September by a €700m private placement. The average maturity of the issuances was slightly over 10 years.

We have aimed to keep as much debt as possible at a fixed rate, which gives us a natural hedge against rising benchmark rates 

“We have about €8bn of debt, of which around €5.5bn is in bonds, and part of our issuance strategy is to try to extend the average maturity of our debt, to better reflect our long-term investment plan,” says Mr Dutreuil. “A few years ago, the average maturity of our bonds was about five years, but through our recent sales we have moved it to around 6.9 years.”

Low-cost debt

Another motivation was to refinance some of Eurosic’s high-coupon legacy debt, taking advantage of a low interest rate environment to lock in relatively cheap borrowing.

“We have been busy and clearly one of our targets is to reduce our average cost of debt,” says Mr Dutreuil. “In addition, we have aimed to keep as much debt as possible at a fixed rate, which gives us a natural hedge against rising benchmark rates.”

Gecina’s average cost of debt has fallen to about 1.3%, from as high as 3.5% in 2013, and 70% is either fixed or swapped into a fixed rate. Coming into 2018, the company has been keen to keep up the momentum.

“At the end of 2017, we thought we still had room on the balance sheet to be opportunistic and to benefit from the great market conditions,” says Mr Dutreuil. “Our plans were slightly complicated by our annual results and blackout period around the end of February, and then some serious volatility on the stock markets, but after that we were good to go.”

Twelve-year bond

In line with its strategy to issue longer dated bonds, and to continue building out its curve, Gecina targeted a €500m 12-year bond and appointed Société Générale, HSBC, Mizuho, ING, Barclays and Crédit Agricole Corporate and Investment Bank as joint bookrunners on the transaction. 

After discussions with the banks, the company decided to launch in early March with initial price talk of 75 basis points (bps) over mid-swaps area. After just three hours, the book was twice oversubscribed and banks tightened up price guidance to 65bps plus or minus 2bps. Very few orders bled away and the company ended up selling its targeted €500m of bonds at 63bps over mid-swaps.

“The order book ended up at €900m, which is less coverage than we had on the previous sales, probably because of the more nervous tone in the markets in the first quarter and also because peers were in the market around the same time,” says Mr Dutreuil.

An interesting aspect of the order book was presence of a material number of Asia investors, says Mr Dutreuil, which accounted for about 10% of total orders. That was the result of marketing efforts made by the company over the past year, including some Asian roadshows.

“I think the heightened interest reflects our strategy to increase our visibility, but also the fact that with the acquisition and our recent high level of activity we are becoming better known as a high-quality issuer,” says Mr Dutreuil.

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