Earnings Call: Q1 2021

May 19, 2021

Hello, everyone, and thank you for joining us today on our earnings call for the presentation of our results for the Q1 of 2021. On the Core State Investor Relations website, you can find our earnings press release, the report and the corresponding slide deck. As usual, I'd like to direct your attention to the forward looking statement and disclaimer wording on Page 2 of our presentation. This Safe Harbor language applies to the presentation and all comments we will be making today. I would also like to mention that everything is being recorded. You can replay the call and view the transcript on our Investor Relations website after the call. On the call with me are our CEO, Rene Parmentier and our CFO, Lars Niederik. We will guide you through the presentation followed by the usual Q and A session. The time frame for today's call is about 30 minutes. Now it's my pleasure to turn the call over to Rene. Rene, the floor is yours. Many thanks, Kai, and a warm welcome from my side. Speaking about the highlights of Q1 2021, of course, brings us once again to COVID-nineteen. The 3rd wave of the pandemic still impacts the real estate investment markets and leads to delayed recovery that even For example, we managed to keep the acquisition fees in our Real Estate Equity segment stable. We have a well filled Deal pipelines in both segments, Equity and Debt. This will lead to significant upswing in our activities in the course of the year. Long term positive market drivers such as urbanization, demographic changes and the interest rate environment remain in place. Particular good news is our Real Estate Debt segment enjoyed a good start into the year. COVID-nineteen, however, Let in one opportunistic fund consisting of commercial assets to negative revaluation effects. This impacted our P and L. We used again, and I cannot stress this enough, temporarily our balance sheet for highly profitable bridge lending for financing real estate developments. This is, on the one side, highly attractive from an EBITDA perspective, but absorbs on the other side parts of our cash pile at the end of Q1. That's the reason why we, with an unchanged focus on deleveraging and reducing Our debt will significantly decrease this lending until the end of Q2. And our aim to significantly reduce net debt during 20 21 is unchanged, and we're on a good path to deliver on this. Let me get on to the acquisition of AFS. In brief, everything in time and on schedule. Closing is just a matter of days as we already received in May the regulatory approvals in Germany and Luxembourg. Then the real work will start. We will entirely integrate the new operations To fully utilize the synergy effects, just one fact here. Around 80% of AFS clients are new to the company, so plenty of room for growth and cross selling here. We evaluated our setup We identified several areas for revenue and cost synergies. This led to an enhanced corporate setup with A centralized portfolio management phase to the customer, a bundling of our sales forces with a clear focus on investors and a full range of new products like the very successful City Quarter Fund or the Whole Loan Fund. All in all, we have done nothing short of a full reshaping of our operations into a manager of the entire real estate value chain. And I can tell you from numerous talks to clients, they welcome this. Please flip to Page 4. You know this chart from our previous calls. It shows the development of our assets under management, especially of our core business real estate AUMs. We realized about 1% net organic increase in our real estate AUMs After revaluation effects, so once again, growth in a difficult market and planned decrease of our noncore nonreal estate AUMs of around €100,000,000 Let's take a deeper look into the segments we are operating in and compare them to the end of last year. This already mirrors our strategic reshuffling and the success of our new products: residential and city quarters up, Logistics and others up, office down. Microliving and retail, merrily stable. All in all, We have around 50% of our real estate AUMs in equity, roughly 1 quarter in real estate debt and the last quarter in 3rd party property management. So a very healthy diversification in my eyes. And as mentioned before, we have another record sourcing pipeline in real estate debt of around €500,000,000 Representing a project volume of more than €2,000,000,000 in real estate equity, we are in advanced contractual negotiation Status for around €1,500,000,000 of which around 2 third in LOI stage, 1 third in exclusivity. So very promising new business ahead. Please flip to Page 5. You see in this chart our HFS Fund status as of end of Q1. The focus is unchanged as risk management remains the crucial success factor in this business. Around 70% of our financing go to the top 7 cities in Germany, and around 70% is for residential or city quarter projects. The total commitment fund volume is €1,300,000,000, so merrily unchanged. The number of finance projects stood at 48, and the average mezzanine financing size was around €27,000,000 That's a bit higher than in the past, reflecting usual fluctuations and our approach during the crisis by focusing more On bigger developments like city quarters or superior conversion projects in A locations. Let me give you some insights on our mezzanine business into HFS operations in Q1, and please flip to Page 6. As you all know, in Methanen financing, everything comes down to risk steering and project selection. In other words, we're to give the money to and closely monitor the usage of the money. This is in times of crisis even more important. And that's why we focused on residential or city quarter developments in Germany's top 7 cities. At the end of Q1, 28 different borrowers received mezzanine capital from us. And as you can see on the right side of this slide, The top five clients all focus on resi in the big cities, and none has a share of more than 18% of the Fund's capital. So in times of crisis, we focus our counterparty relations to selected well established players with proven track record and long standing relations. Currently, the average loan duration is around 18 months, And we are working consistently towards reducing this also for the sake of higher profitability. What's on the menu in the upcoming months in our real estate debt business? The market is providing significant tailwinds As traditional banks restrict their credit lending, while the market is eagerly asking for these financing solutions, Megatrends like demographic changes, urbanization and increasing working flexibility are playing out in our favor. And that's where we come in as the leading powerhouse with a scalable product platform and a clear focus. We already are the clear market leader in mezzanine lending, but we will further strengthen this position by the issuing of new products, For example, the whole loan that has gotten a remarkable number of pre commitments during the initial marketing phase. Last but not least, Our Real Estate Debt business is very sustainable and profitable. Nevertheless, we still have untapped synergy effects Our client relations and the early involvement in developments create for our Real Estate Equity business. Here, we expect annual synergies of around €10,000,000 until the end of 2024. With this, I would like to hand over to our CFO, Lars. So please flip to Page 7, and Lars, the floor is yours. Many thanks, Rene, and also a very warm welcome to all of you from my side. Before we dive a bit deeper into our figures for the Q1, Please let me explain our new segmentation. We wanted to highlight the enhancement and increased significance of the real estate debt business. So we split up our previous segment Real Estate Investment Management into 2 new segments: Real Estate Equity, comprising acquisition and sales fees as well as asset and property management fees and real estate debt with the lines underwriting and structuring fees, real estate debt asset management and Cooper participation fees and income from bridge loans. All other income lines previously in warehousing and in alignment capital are now condensed in other segments. Let us start with real estate equity. You all know the typical seasonality of our business or in other words, We operate in a back ended loaded market. COVID-nineteen, especially the 3rd wave, even strengthens us. Nevertheless, We managed to keep acquisition related fees at €2,000,000 and asset and property management fees in core and core plus stable compared to last year's pre lockdown Q1. Underwriting and structural fees are showing €4,000,000 and clearly reflecting the high turnover of the fund in the beginning of 2021. Driven by the pandemic, the Cooper fee was reduced from €11,000,000 to €8,000,000 for higher risk provisioning and a minor impairment in one project. We spoke about this before. The temporary peak in bridge lending led to significantly higher income from bridge loans, up from €2,000,000 to €6,000,000 Our other segments were hit by around €5,000,000 of negative valuation effects, driven by the publicly endorsed measures to contain the 2nd and soon after the 3rd pandemic wave, especially the nationwide shutdown in Germany and co investments in opportunistic retail assets in 1 fund. Such the income from other segments went down from €6,000,000 to minus 3,000,000 All in all, we delivered aggregate revenues and gains of €37,000,000 down from €52,000,000 And with this, we are well within our own budget and run rate to reach our full year guidance. Now please turn to Page 8. Let me speak about our cost structure. Basically, we realized several negative factors for our as a temporary cost for our new strategic setup for the improvement of our product range and the bundling of sales. But these things We pay off well in the upcoming months, so the money is very well spent. The OpEx ratio in the first Quarter comes down to the inner necessity of our fixed cost base, and we feel this especially in times of Somehow reduced deal appetite from clients. As you can see, our OpEx were kept merely stable with around €22,000,000 in real estate equity, €2,600,000 in real estate debt and nearly €3,000,000 in the other segments. Other income went down due to lower reversals of provisions from 2 point €4,000,000 in the last year's comparable quarter to below €1,000,000 in Q1 2021. Our G and A expenses ended up at around €12,000,000 up from €7,000,000 in Q1 2020, reflecting HR and M and A related one offs. We aim to reach the G and A of between €30,000,000 €40,000,000 by year end. All in all, our adjusted EBITDA stood at nearly €1,000,000 Our D and A remarkably lower at around €5,000,000 As for the first time, this figure is without any depreciation and capitalized asset management contracts from the HFS acquisition. Our net profit stood at minus €14,500,000 And adjusted by expenses from the AFS acquisition, D and A and DPAs, our adjusted net profit at around minus €9,000,000 Let me underline again. These figures are not good, but they are broadly in line with our budget and phasing throughout the year. So we stick clearly to our full year guidance, and Rene will give you some more background on this later on. Now please turn to Page 9. Reducing our debt and as a consequence, reaching a much better leverage ratio remained absolutely crucial for us. Therefore, let me speak a bit more about the key balance sheet figures and ratios. By the end of March, we showed total financial debt adjusted by around 27,000,000 Euro of rental and leasing liabilities of €612,000,000 The biggest parts are 2 main financing instruments, the senior bond with €297,000,000 and the convertible bond was €195,000,000 Our bank and other debt of around €120,000,000 included €55,000,000 of warehousing debt in our Giesem premise. At the end of the Q1, We had more than €60,000,000 of cash, leading to a net debt figure of €549,000,000 The cash pie was impacted by HR related and minor other one off costs, higher, but as said before, very profitable bridge lending, Some expenses for the new corporate setup and sales structure and last but not least, as we are prepared as we prepare the company for the next growth level once the pandemic impacts are waning. Our net debt reduction plan includes the repayment of this bridge in the current 2, but also placements from our balance sheet to be more precise from inventories, associates and Joint ventures out of the financial instrument, till the end of more than €80,000,000 We are on track to deliver on this And further amount of more than €60,000,000 of co investments will be turned into cash in the next year, so in 2022. And let me confirm once again our ambition to bring our financial leverage below 3 into our midterm target range of 2 to 3 times. With this, I would like to hand back to you, Remi. And please flip to Page 10. Thank you. Thank you very much, Lars. Let me finally give you some backgrounds on our road to guidance and the components of our financial outlook. We operate in a structural growth market. We expect a gradually decreasing COVID-nineteen impacts and then a marked Market upswing. We are well positioned to benefit from catch up effects. We are seeing the first Positive impacts from our advanced product range, especially in real estate debt, from our newly shaped sales team. And we expect the closing of AFS anytime soon, and this alone will deliver around €60,000,000 of revenues, €10,000,000 of EBITDA and €7,000,000 of net profit for the year running. So we expect, mirrored in our new P and L segmentation, to realize between €20,000,000 35,000,000 Acquisition and sales fees in equity, between €30,000,000 €40,000,000 of underwriting and structuring fees and debt and Between €80,000,000 €90,000,000 of asset management fees in each of these two segments, including property management fees in Equity and coupon participation fees and debt. The income from other segments will be between €5,000,000 20,000,000 On this basis, we once again confirm our financial outlook for the full year 2021 with aggregated revenues and gains of between €235,000,000 €260,000,000 EBITDA of between €19,000,000 €115,000,000 and adjusted net profit of between €50,000,000 €75,000,000 In a nutshell, the market and its drivers are working massively in our favor, and we will benefit from this in the upcoming months. With this, we will return to decent growth and profitability and make CoreState an attractive investment for shareholders again. With this, I would like hand back to the operator, and we are now happy to answer all our your questions. Ladies and gentlemen, at this time, we will begin the question and answer The first question is from Kai Klose from Berenberg. I've got a couple of questions, if I may. The first one, mentioned at the beginning of the call that the acquisition fees remained stable. Could you indicate what was the underlying acquisition volume? Kai, it's Kai here. We had on the real estate equity around €200,000,000 of assets, new assets. And on the real estate debt side, it's around €400,000,000 Okay. So this is a combined number. I'm just looking into Page 7 of the interim report Where we have the acquisition fees only showing in the Equity business. So this €2,000,000 refers to the €200,000,000 acquisition volume for Equity? Right. Exactly. And then the second question on Page 7 also report, could you indicate why the asset management fees In the Real Estate XT segment, it went down relatively significantly, while the underlying OEMs remained stable relatively stable? Of course, the main driver is a decrease in our development fees of around euros 2,000,000, euros 2,500,000 compared to last year, where we have reversed these bigger micro living projects with 1 key client. And the remainder, around €1,500,000 is linked to asset management fees and an opportunistic product, which has a performance link on these asset management fees. So what would you then define as a kind of recurring asset management fee What from the Q1 also Q1 numbers? Yes. We will definitely see here an up Lift in the performance of the asset management fee and, of course, take these public restrictions into account. Q1 will definitely be the worst in terms of the season through the year. So of the €8,800,000, so could you indicate roughly how much of that was recurring? Recurring in terms of in 2021, everything, of course. And we but we will see there an side on asset benefit fees for the year. So definitely a much higher level, take only our revenue split on where we want to achieve around €80,000,000 to €90,000,000 for the entire year in this line item. And the last question from my side would be on the coupon participation fee. You mentioned that Because of risk provisioning and impairments, the amount of the earnings contribution was lower. Could you elaborate a bit more on why that where that came from? What was the reason for these two projects which you mentioned caused the write downs? It was only it's again, Kai. It was only one project where we have seen an impairment on the project value and achieved only a lower rate of repayment on this project level, and we are talking here about a mid single digit million amount. And this is the reason why I was back on the developed math coming from €12,000,000 €13,000,000 as a run rate for our coupon participation fee. We have seen only €8,000,000 in the Q1. Next question is from Manuel Martin from ODDO. Please go ahead. Gentlemen, two questions from my side, if I may. The first question is on the Expenses on the general expenses. It seems that the cost structure went up in G and A. Is this only related to one offs? And if you could maybe you could bring some more color to these one offs? As far as I understood, You think you might have €30,000,000 to €30,000,000 costs by the year end in G and A. Maybe you can elaborate a bit on that because that seems to be higher than last year. That would be the first question, please. So a very great answer. We have around €6,000,000 one offs in the G and A, And thereof, €3,000,000 relate to HR related expenses and Approximately CHF 3,000,000 CHF 2,700,000 are related to M and A transaction costs. Kian, that's Kian. If you Make you back on the envelope math and guide this or adjust this and then guide it to the year end. We are talking about €25,000,000 maybe up to €30,000,000 of total G and A for 'twenty one. Okay. Just to follow-up on it, has anything changed in that structure? I mean, HR related, is it making well, having less stuff or having more stuff? Or How can I read that? Obviously, it's an one off for the termination of some contract of contracts with our people. So Yes, it's a one off, and it's if you look on the numbers of people which we have had in our company between year end 2020 and The Q1, you see a clear decrease of stuff in our company. Okay. I understand. My second question would be on real estate debt, the guidance. On Page 10 assets, it's on page 10. The revenue split that we see here for real estate debt, the outlook, Does it consist of HFS entirely what we see here in real estate debt or how much AFS is inside these figures? Yes. AFS is included here on a pro rata temporary basis. And the numbers you can see on the same page on the 4th bullet on the upper side of the slide, we have had They are roughly €16,000,000 of revenues from AFS, and this is predominantly included in the underwriting and structuring fees of these €30,000,000 to €40,000,000 And the remainder, of course, is the underwriting fee of HFS for newly subscribed loans or bonds to out of the fund. And this hasn't changed since the communication of the acquisition. We always said it's on a pro rata 6 month basis. Okay. I see. I see. So in these underwriting instruction fees of €30,000,000 to €40,000,000 there is the Pro rata temporary share of the HFF fees inside. Next question is from the line of Till Heimler from Pictet. Please go ahead. Yes. Hi, good morning. I was wondering if you could provide sort of a cash bridge to the 2022 maturity. When you think about today's cash holdings, the disposal proceeds you said would come in by Q2 and then Also in the next year, that gets you to maybe €200,000,000 or so. Do you have a contingency or some sort of buffer For that, if something wouldn't materialize, then what do you think it's a free cash flow you can generate from your EBITDA that you're guiding for? So what we said in the past, you can see also on Page 9 in the presentation. So to get to the €200,000,000 to pay back the convertible, The first bridge item is 118 short term bridge loans, which will be repaid over the year, but of course, it makes no sense to let them, so to say, be a negative interest on savings account. Therefore, we lend them based on an Unbelievable over demand in the mezzanine business, and obviously, we see there are 18% to 20%. So however, This is going to be planned and is reserved for the repayment of the convertible. And then the second, as always said, is that we are planning in the second half of this year around midpoint 100,000,000 placements From different sources, from our inventories, from our associates, JVs and the financial instruments, so this will happen this year. So this gives you another €100,000,000 on midpoint, we said €80,000,000 to €120,000,000 So these are the first 200,000,000 And then thirdly, even next year, and this is normal course of business, when you look at our Co investments that we every year place some of these around 30 investments to other clients. So and this will deliver another, we assume €60,000,000 So when you ask about buffer, we don't need Large working capital, large working capital amounts. So therefore, if you take the first two items, you have the 200 Plus our cash, even which is shown in the Q1 of €63,000,000 you have then €260,000,000 obviously. And if you would need additional buffer, which we currently don't see, then we have our placements on the co investments In the next year plus, obviously, free cash flow production that will happen this year and that will happen next year. So overall, we use the cash currently very efficiently and I think much on the very high economic base By bridge lending, although it contradicts the at the reporting date, a lower leverage, that's correct. However, we want also obviously to earn money with this. And we are very well placed and prepared To deliver the €200,000,000 but even more as I just indicated. So that's a plan going forward. Okay. So you are very confident about your ability to reduce net debt already for Q2 given that we are more than halfway through that quarter now? Yes. Absolutely. Again, maybe to give you some more flavor, if you would want The short term bridge landings, this is really short term money. Just to give you the mechanism, Unfortunately, our fund is so over demanded, which is obviously positive, but that means When further developers ask for money, we are able to use our liquidity, in particular, the €180,000,000 to provide them with loans. And but of course, it's short term. So that means once it's again, liquidity in the fund, then we flip this short term bridges either in the fund or it's purely or it's simply paid back. And when I'm saying short term, I'm talking about weeks, I'm talking about months, but definitely not about years. So we have this Line item, fully under control, and we can steer it, I wouldn't say on a day to day basis, but at least on a weekly basis, and this is what we are doing. Next question is from Stephan Chappeau from ZKB Asset Management. Please go ahead. Yes. Good morning, and thanks for taking this It's a follow-up to what you just were elaborating on. So if this short term lending business is so Attractive. And there's so much demand for it. And you were saying I think you said close to 20% Interesting you can generate on this. What is the longer term plan Then to continue to be involved in this type of business, if it as it seems to be extremely attractive Since you were the money that you're currently employing there will be needed to pay down to converts next year. What's the longer term plan? So longer term plan hasn't changed. We want to use this fund to reduce the net debt by paying back the convertible. That's the first thing. Second thing is, and that is a strategical element, which has been executed in the beginning of the year, with the AFS acquisition. We will, and we are in the middle of doing so, further enhance our equity raising on the HFS AFS side. So what does it mean? We have currently, as stated in the past, by the way, a pipeline of around €400,000,000 So We have asked from developers to provide them loans around €400,000,000 but the fund, So our more than €1,000,000,000 is currently fully employed as it was always in the past. So the solution to your question and also for us is very comfortable. Once we have increased our equity raising efforts, so that means simply gathering more equity, that's why we have there was One reason why we have acquired AFS, please keep in mind around 80% of AFS clients are completely new to HFS. So there's a large there's no overlap basically or very small ones. So To answer again your question, we will reduce our short term bridge lending because we will increase our funds Equity money and there, by the way, we get more or less same rates, say around 17%, 18% interest paid. Okay. Excellent. Thank you. And then final question. I think you were referring to The recovery and I think you used the word catch up effect. Can you elaborate a bit on what that is and how you see that playing out? Of course, what we have mentioned before, We were struggled in the Q1 still for the entire real estate investment management market in restrictions and lockdowns. And of course, you will see a much more booming market in and this is not only in the Real Estate Investment Management. This is for the entire economy in the second half of the year. And of course, people who are a little bit more reluctant or were reluctant in the Q1 to spend money and to invest in projects have to fulfill their own budgets in the second half. And bear in mind, we are still in the lower for longer interest environment, even if you would see A small hike on the inflation side in the last couple of weeks, but The baby boomers are still out there, and they spend every single month year money to the pension And this money has to be invested, and we, of course, are a natural partner on the real estate side to do this for these insurers and pensioners. And never forget, also historically, the Q1 is always the relative seen weakest quarter. Why is this the case? Because everybody is closing deals year end in the real estate business. So that means in the Q1, you start Negotiating, structuring, buying the assets that you're going to be placed in the second half of the year. So therefore, the double Seasonality is now the Q1, as usual. Although I have to point out We haven't seen this obviously in the debt business because it's anti cyclical, yes? COVID rather helps it because banks tend to lend less. But on the real estate equity side, we will see then obviously also with the As you know, we have also broken now the 3rd wave in COVID. So all of this will help Then to generate, obviously, catch up effects, we call it yes, but it is from our point of view, it's in our budget, it's in our phasing. We are always budgeting the Q1 is the weakest. And then you have to catch up effects, which we don't call internally catch up effects because this is normal course of business that you're going to place the assets that you have acquired in the 1st and second quarter, which you placed in, in the 3rd Q4. There are no further questions at this time. And I would like to turn back to Doctor. Kai Gregor Klinger for closing comments. Please go ahead. Thank you so much for listening. We appreciate your interest and your questions. We will be on the road, unfortunately, only online in the upcoming weeks. Do not hesitate to contact us for any further questions you may have. And please be reminded that our half Year figures are out on August 11, and our AGM will be held on June 28. We look forward to speaking to you. So stay healthy, and goodbye.