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Global strategy of the Cofinimmo Group

What are the risks faced by the Group?

The Group regularly identifies the risks it faces. A comprehensive list of these risks, of their potential impact on the Group's activity and of the mitigating factors and measures are detailed on pages 2 to 11 of the 2015 Annual Financial Report.

Does the Group plan to extend its activities to countries other than Belgium, France, Germany and the Netherlands?

From a geographical perspective, the Group’s strategy gives priority to a presence in Belgium’s bordering countries, with a rate of establishment which enables it to acquire sound knowledge of the chosen foreign property markets. The existence in these countries of the REIT (Real Estate Investment Trust) tax regime, similar to that of the RREC, is an incentive to select them by preference.

Does the Cofinimmo Group do property development?

The Cofinimmo Group does property development for its own account, i.e. the Group carries out construction and large-scale renovation works of properties with a view to letting them and to maintaining them in its portfolio, usually on a long-term basis. The amount invested in this activity, which serves to maximize returns on investment, is limited to 10 % of the portfolio fair value, so as not to affect the Group’s risk profile.

Does the Cofinimmo Group do property development with a view to sell?

Article 41 of the Royal Decree of 13.07.2014 stipulates that RREC cannot act as “commercial” property developers. A “commercial” property developer is a person whose activity consists in building properties with a view to selling them, against payment, either before, during or within five years after the construction. In accordance with Article 41 of the Royal Decree of 13.07.2014, Cofinimmo does not do any property development with a view to sell.

Valuation of the property portfolio of the Cofinimmo Group

How is the portfolio of investment properties of the Cofinimmo Group valued?

The value of the investment properties of the Cofinimmo Group is the average of the values resulting from two valuation approaches: the ERV (Estimated Rental Value) capitalization approach and the DCF (Discounted Cash Flow) approach.

  • The ERV (Estimated Rental Value) capitalisation approach consists in capitalising the Estimated Rental Value (ERV) of the property using a market yield in line with the investment market.
  • The DCF (Discounted Cash Flow) approach requires the assessment of the net rental income generated by the property on a yearly basis during an explicit forecasted period. The projected period varies generally between 10 to 18 years. At the end of this period, an exit value is calculated, taking into account the anticipated rent and yield at term horizon.

These two approaches are detailed on page 106 of the 2015 Annual Financial Report.

How are the development projects of the Cofinimmo Group valued?

Land and old heavily to be refurbished buildings are valued using the residual valuation approach. It consists in determining the size and type of project that can be built/refurbished according to town planning regulations, to then estimate the value of the end project and the costs that need to be incurred to realise such a project. The difference between the two estimates is the residual value. The costs incurred during the (re)development are then added to this residual value as the works progress.

What is Cofinimmo’s accounting treatment of the assets which lease receivables have been sold?

  • At the closing of the lease receivables sale: The accounting value of sold receivables is derecognized from the balance sheet (heading “Investment properties”). The net proceeds of the sale are used to pay down corporate debt. The difference between the accounting value of the lease receivables sold and the net proceeds is accounted upfront under the financial result.
  • Recurrent after the closing of the transaction: The writeback of the lease payments sold is accounted for under the P&L (heading “Net rental income”). It is a non-cash item. The variation in the expected fair value of the property at the end of the lease, determined quarterly by external real estate experts, is accounted for under the P&L (heading “Change in fair value of investment properties”). The counterpart of these two bookings is accounted for under the balance sheet (heading “Investment properties”).

Office portfolio of the Cofinimmo Group

Why has the Cofinimmo Group chosen to reconvert office buildings into others uses?

Since a couple of years, the Brussels office market suffers from an oversupply. Consequently, rents are under pressure and the vacancy rate is quite high. On the other hand, the demand for housing units and for nursing home beds is booming. With this in mind, the Cofinimmo Group has chosen for the reconversion of two of its office buildings into residential units to be sold, and of one of its office buildings into a nursing home to be leased on a long-term basis. The buildings in question, which have reached the end of their economic life, are particularly well suited for a reconversion because of their structure and their location.

Healthcare real estate portfolio of the Cofinimmo Group

How are the healthcare sectors organised in Belgium, France and the Netherlands ?

In Belgium:
Nursing and care homes:

  • There are three types of operators of nursing and care homes in Belgium: the public sector, the non-profit private sector, and private operators. Each type of operator accounts for about a third of the market.
  • There are three types of residences for dependent elderly people in Belgium: nursing homes, nursing and care homes, and service flats. Unlike the first two types, service flats do not offer medical services.
  • Around 50 % of the income of operators of nursing and care homes comes from social security, with the other 50 % coming from the residents.
  • The number of nursing and care home beds is limited by geographical zone and set by the public authorities.
  • The daily price paid by a nursing and care home resident varies from 30 EUR to 80 EUR, depending on the home’s geographical location and the services offered. The average daily price is 40 EUR. This daily price may be increased only on account of indexation or in the event of substantial renovation.

Hospitals/Clinics:

  • There are three types of hospitals in Belgium: university hospitals (15 %), non-university hospitals (75 %), and hospitals in the non-market sector (10 %). Private clinics account for 7 % of the market.
  • The largest share of the income of public operators of hospitals comes from social security.

In France:

  • Any operator in the healthcare sector in France must obtain statutory authorisation to be able to offer medical services.

Nursing and care homes:

  • There are three types of operators of nursing and care homes in France: the public sector (50 %), the non-profit private sector (30 %), and private operators (20 %).
  • There are several types of residences for dependent people in France: EHPAD establishments (Etablissement d’Hébergement pour Personnes Agées Dépendantes) and service flats, dealing with long-term dependency care, SSR establishments (Soins de Suite et de Réadaptation) and MPR establishments (Médecine Physique et Réadaptation), dealing with short-term dependency care.
  • 70 % of the income of EHPAD operators comes from the residents (“accommodation charge”). Around 20 % comes from social security, depending on the establishment’s degree of patient care (“care charge”). The other 10% comes mainly from public funds (“dependency charge”).
  • The creation, conversion or extension of an EHPAD is subject to advance authorisation, issued by the public authorities. Every project must also be the subject of a call for projects.
  • The daily price of an EHPAD is set freely by the establishments but its annual reassessment is subject to a ceiling set annually by the public authorities.

Hospitals/Clinics:

  • 80–90 % of the income of operators of hospitals comes from social security, with the other 10–20 % coming from patients and private insurance companies.

In the Netherlands:
Hospitals/Clinics:

  • In the Netherlands, medical services are provided by general hospitals, university hospitals, specialised hospitals, and independent private care centres (Zelfstanding Behandel Centra, ZBC).
  • Every Dutch resident must take out health insurance.
  • Operators in the healthcare sector invoice their care to the insurance companies on the basis of a list of 3,500 treatments. Prices and volumes invoiced are set either on a flat-rate basis by the public authorities (budget granted to insurance companies) or by free negotiation between the operators and the insurers.

What is the difference between a “triple net” and a “double net” lease contract?

“Triple net” leases provide that the operating expenses of a property (i.e. taxes, insurances and maintenance) are fully borne by the tenant. In the case of “double net” leases, the maintenance expenses are (partially) transferred to the landlord (maintenance of the structure of the building, of the roof, of the window frames, for example).

If regulation in the healthcare sector evolves, is it at the owner’s cost or at the operator’s ?

It depends on the provisions of the lease contract.

  • In the case of a “triple net” lease, the cost of complying with the new norms is borne by the operator tenant.
  • In the case of a “double net” lease, the details of the lease contract need to be examined. If, for example, the lease contract states that the maintenance of the window frames is the landlord’s responsibility, the latter will have to see to it that the size of the windows is in compliance with regulation.

When it comes to norms regarding the operational management of the nursing home or clinic, the cost of complying with new norms is borne by the operator tenant.

What is the risk for the Cofinimmo Group if an operator tenant of a healthcare asset goes bankrupt?

The agreements between the Cofinimmo Group and the operators of healthcare assets provide for a guarantee from the mother company of the operator. Moreover, if the latter was to leave the Group, he would have to set up a bank guarantee. As a reminder, the operators have an obligation towards the Cofinimmo Group of regular financial reporting, enabling the Group to actively and closely monitor their financial health.

Management of financial resources

How are the legal debt ratio and the loan-to-value ratio of the Cofinimmo Group calculated?

Legal debt ratio:
Non-current financial debts
+ Other non-current financial liabilities (except for hedging instruments)
+ Trade debts and other non-current debts
+ Current financial debts
+ Other current financial liabilities (except for hedging instruments)
+ Trade debts and other current debts
= Total debts
/ Total assets (except for hedging instruments)
= Legal debt ratio

 

Loan-to-value ratio:
Its calculation can differ from one financial institution to another. The calculation hereunder is the most restricting for the Cofinimmo Group:
Non-current financial debts (bonds at nominal value)
+ Other non-current financial liabilities (except for hedging instruments)
+ Current financial debts
+ Other current financial liabilities (except for hedging instruments)
- Cash and cash equivalents
- Cash collateral
= Net financial debt

Investment properties (at fair value)
+ Non-current finance lease receivables
+ Current finance lease receivables
= Total portfolio value

Net financial debt
/ Total portfolio value
= Loan-to-value ratio

What are the target levels of the Cofinimmo Group in terms of legal debt ratio and loan-to-value ratio?

Cofinimmo’s policy is to maintain a legal debt ratio and a loan-to-value ratio close to 50 %. These may temporarily rise above or fall below the 50 % bar without this signalling a change of policy in one or the other direction. This policy is coherent with the moderate risk profile of the Group’s assets and cash flows and, more specifically, with the long residual length of its leases.

What are the covenants related to the debt of the Cofinimmo Group?

Cofinimmo’s credit agreements, when they refer to a debt ceiling, refer to the legal debt ratio, with a maximum of 60 %. In case this thresholds is exceeded, the Group must return to a level below the threshold within maximum six months. If this is not achieved, financing conditions can be reviewed.

How is the ICR (Interest Covering Ratio) of the Cofinimmo Group calculated?

Interest Covering Ratio:
Operating result
+ Interests on finance lease receivables
= EBITDA

Financial charges
- Financial revenues
+ Interests on finance lease receivables
+ Amortisation costs of hedging instruments
= Net financial charges

EBITDA
/ Net financial charges
= Interest Covering Ratio

What is the interest rate hedging policy of the Cofinimmo Group?

For a detailed presentation of the interest rate hedging policy of the Cofinimmo Group, please consult the chapter “Investor Relations/Debt information” of this website.

Tax-related questions

What are the benefits of having the RREC (Regulated Real Estate Company) status in Belgium, the SIIC (Société d’Investissement en Immobilier Cotée) status in France and the FBI (Fiscale BeleggingsInstelling) status in the Netherlands?

RREC, SIIC and FBI benefit from a tax exemption on most of their revenues. In exchange, they must meet a number of obligations, in particular in terms of their result distribution. For more details on the RREC, SIIC and FBI regimes, please consult the chapter “About Cofinimmo/Regimes” of this website.

Are all the subsidiaries of the Cofinimmo Group eligible for the RREC, SIIC or FBI regime?

All the subsidiaries of Cofinimmo are eligible for the RREC regime (Belgian subsidiaries), the SIIC regime (French subsidiaries) or the FBI regime (Dutch subsidiaries). The first Cofinimmo subsidiary to have obtained the RREC status is Pubstone SA/NV. This happened on 30.06.2011. According to the Royal Decree of 13.07.2014, Cofinimmo has 24 months as from this date to convert all of its subsidiaries into RREC, except those in which it holds a participation since 01.01.2009 at least, i.e. Bolivar Properties SA/NV, Belliard III-IV Properties SA/NV, Cofinimmo Services SA/NV and Leopold Square SA/NV.

What is the tax treatment of the dividend on Cofinimmo shares?

A withholding tax of 27 % on the total gross dividend is retained at source, unless the shareholder can demonstrate entitlement to a specific exoneration. In principle, the withholding tax of 27 % is a flat-rate tax on the transaction for individuals investing in a private capacity, entities subject to corporation tax and non-residents who have not allocated the shares as part of a professional activity in Belgium. For taxpayers subject to corporation tax, the withholding tax of 27 % is not a flat-rate tax. These companies must declare gross dividends and will be subject to corporation tax at the rate of 33.99 % (except in circumstances where a reduced rate applies). Some investors benefit from an exoneration or reduction in the rate of withholding tax, pursuant to a provision of domestic law or a double taxation agreement. Potential investors are advised to consult a tax advisor to find out about the specific tax implications of their personal situation.