Earnings Call: Q1 2021

May 19, 2021

Hello everyone, thank you for joining us today on our earnings call for the presentation of our results for the first quarter of 2021. On the Corestate 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 two of our presentation. This safe harbor language applies to the presentation and all comments we'll 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, René Parmantier, and our CFO, Lars Schnidrig. We will guide you through the presentation, followed by the usual Q&A session. The timeframe for today's call is about 30 minutes. Now it's my pleasure to turn the call over to René. René, 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-19. The third wave of the pandemic still impacts the real estate investment markets and leads to delayed recovery that even intensified the usual seasonality in our business. Nevertheless, we have a lot of reasons to be optimistic. For example, we managed to keep the acquisition fees in our Real Estate Equity segment stable. We have a well-filled deal pipeline 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. Particularly good news is our Real Estate Debt segment enjoyed a good start into the year. COVID-19, however, led in one opportunistic fund consisting of commercial assets to negative revaluation effects. This impacted our P&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. Our aim to significantly reduce net debt during 2021 is unchanged, and we're on a good path to deliver on this. Let me get onto 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. 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 and 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. I can tell you from numerous talks to clients, they welcome this. Please flip to page four. 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. Once again, growth in a difficult market and planned decrease of our non-core non-Real Estate AUMs of around EUR 100 million. 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. Micro living and retail merely stable. All in all, we have around 50% of our Real Estate AUMs in equity, roughly one quarter in Real Estate Debt, and the last quarter in third-party property management. A very healthy diversification in my eyes. As mentioned before, we have another record sourcing pipeline in Real Estate Debt of around EUR 500 million, representing a project volume of more than EUR 2 billion. In Real Estate Equity, we are in advanced contractual negotiation status for around EUR 1.5 billion, of which around two-third in LOI stage, one-third in exclusivity. Very promising new business ahead. Please flip to page five. 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 seven cities in Germany. Around 70% is for residential or City Quarter projects. The total commitment fund volume is around EUR 1.3 billion. Merely unchanged. The number of finance projects stood at 48. The average mezzanine financing size was around EUR 27 million. 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. Please flip to page six. As you all know, in mezzanine financing, everything comes down to risk steering and project selection. In other words, where to give the money to and closely monitor the usage of the money. This is in times of crisis even more important. That's why we focused on residential or city quarter developments in Germany's top seven cities. At the end of Q1, 28 different borrowers received mezzanine capital from us. As you can see on the right side of the 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. 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. 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 EUR 10 million until the end of 2024. With this, I would like to hand over to our CFO, Lars. Please flip to page seven. Lars, the floor is yours. Many thanks, René, and also a very warm welcome to all of you from my side. Before we dive a bit deeper into our figures for the first quarter, please let me explain our new segmentation. We wanted to highlight the enhancement and increased significance of the Real Estate Debt business. We split up our previous segment, Real Estate Investment Management, into two 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 coupon 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-19, especially the third wave, even strengthened this. Nevertheless, we managed to keep acquisition-related fees at EUR 2 million and asset and property management fees in Core and Core Plus stable compared to last year's pre-lockdown first quarter. Underwriting and structuring fees are showing EUR 4 million and clearly reflecting the high turnover of the fund in the beginning of 2021. Driven by the pandemic, the coupon participation fee was reduced from EUR 11 million to EUR 8 million by 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 EUR 2 million to EUR 6 million. Our other segments were hit by around EUR 5 million of negative valuation effects driven by the publicly endorsed measures to contain the second and soon after the third pandemic waves, especially the nationwide shutdown in Germany and co-investments in opportunistic retail assets in one fund. The income from other segments went down from EUR 6 million to minus EUR 3 million. All in all, we delivered aggregate revenues and gains of EUR 37 million, down from EUR 52 million. With this, we are well within our own budget and run rate to reach our full year guidance. Please turn to page eight. Let me speak about our cost structure. We realized several negative factors for our expenses as a temporary cost for our new strategic setup, for the improvement of our product range and the bundling of sales. These things will pay off well in the upcoming months. The money is very well spent. The OPEX ratio in the first quarter comes down to the inelasticity 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 EUR 22 million in Real Estate Equity, EUR 2.6 million in Real Estate Debt, and nearly EUR 3 million in the other segments. Other income went down due to lower reversals of provisions from EUR 2.4 million in the last year's comparable quarter to below EUR 1 million in Q1 2021. Our G&A expenses ended up at around EUR 12 million, up from EUR 7 million in Q1 2020, reflecting HR and M&A related one-offs. We aim to reach the G&A of between EUR 30 and EUR 40 million by year-end. All in all, our adjusted EBITDA stood at nearly EUR 1 million. Our D&A was remarkably lower at around €5 million, 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 €14.5 million and adjusted by expenses from the AFS acquisition, D&A and DTAs, our adjusted net profit at around minus €9 million. Let me underline again, these figures are not good, but they are broadly in line with our budget and phasing throughout the year. We stick clearly to our full-year guidance, and René will give you some more background on this later on. Now please turn to page nine. Reducing our debt and as a consequence, reaching a much better leverage ratio remains 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 EUR 27 million of rental and leasing liabilities of EUR 612 million. The biggest parts are two main financing instruments, the senior bond with EUR 297 million and the convertible bond with EUR 195 million. Our bank and other debt of around EUR 120 million included EUR 55 million of warehousing debt in our Giessen premise. At the end of the first quarter, we had more than EUR 60 million of cash, leading to a net debt figure of EUR 549 million. The cash pile 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 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 Q2, but also placements from our balance sheet to be more precise from inventories, associates, and joint ventures out of the financial instruments to the end of more than EUR 80 million. We are on track to deliver on this and further amount of more than EUR 60 million of co-investments will be turned into cash in the next year, so in 2022. Let me confirm once again our ambition to bring our financial leverage below three into our midterm target range of two to three times. With this, I would like to hand back to you, René. 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-19 impact 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. We expect the closing of AFS anytime soon, and this alone will deliver around EUR 16 million of revenues, EUR 10 million of EBITDA, and EUR 7 million of net profits for the year running. We expect mirrors in our new P&L segmentation to realize between EUR 20 million and EUR 35 million acquisition and sales fees in equity, between EUR 30 million and EUR 40 million of underwriting and structuring fees and debt, and between EUR 80 million and EUR 90 million of asset management fees in each of these two segments. Including property management fees in equity and coupon participation fees in debt. The income from other segments will be between EUR 5 million and EUR 20 million. On this basis, we once again confirm our financial outlook for the full year 2021, with aggregated revenues and gains of between EUR 235 million and EUR 260 million, EBITDA of between EUR 19 million and EUR 115 million, and adjusted net profit of between EUR 50 million and EUR 75 million. 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 to hand back to the operator, and we are now happy to answer all your questions. Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from Kai Klose from Berenberg. Please go ahead. Yes, sir. Good morning. I've got a couple of questions, if I may. The first one, you mentioned at the beginning of the call that the acquisition fees remained stable. Could you indicate what was the underlying acquisition volume? Hi, Kai. It's Kai here. We had on the Real Estate Equity around EUR 200 million of new assets, and on the Real Estate Debt side, it's around EUR 400 million. Okay. This is a combined number. I'm just looking to page seven of the interim report, where we have the acquisition fees only showing in the equity business. This EUR 2 million refers to the EUR 200 million acquisition volume for equity? Right. The second question on page seven of the report, could you indicate why the asset management fees in the Real Estate Equity segment went down relatively significantly while the underlying AUM remained relatively stable? Of course. The main driver is a decrease in our development fees of around EUR 2 million, EUR 2.5 million compared to last year, where we have reversed these bigger micro-living projects with one key client. The remainder, around EUR 1.5 million, is linked to asset management fees in an opportunistic product, which has a performance link on these asset management fees. What would you then define as a kind of recurring asset management fee of the Q1 numbers? Yeah, we will definitely see here an uplift in the performance of the asset management fee. Of course, take these public restrictions into account. Q1 will definitely be the worst in terms of the season for the year. Of the EUR 8.8 million, could you indicate roughly how much of that was recurring? Recurring in terms of in 2021, everything, of course. We will see there an upside on asset management fees through the year. Definitely a much higher level. Take only our revenue split where we want to achieve around EUR 80 million-EUR 90 million for the entire year in this line item. The last question on my side would be on the coupon participation fee. You mentioned that because of risk provisioning and impairments, the amount for the income provision was lower. Could you elaborate a bit more on where that came from? What was the reason for these two projects that you mentioned caused the write-down? 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. We're talking here about a mid-single digit million amount. This is the reason why back on the math, coming from EUR 12 million, EUR 13 million as a run rate for our coupon participation fee, we have seen only EUR 8 million in the first quarter. Many thanks. Okay. Thank you. 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 general expenses. It seems that the cost structure went up in G&A. Is this only related to one-offs? If yes, maybe you could bring some more color to these one-offs. As far as I understood, you think you might have a EUR 30 million-EUR 40 million cost by the year end in G&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. The very straight answer, we have around EUR 6 million one-offs in the G&A, and thereof EUR 3 million relate to HR related expenses, and approximately EUR 3 million, EUR 2.7 million are related to M&A transaction costs. It's Kai. Make your back-of-the-envelope math and adjust this and then guide it to the year end. 25, maybe up to EUR 30 million of total D&A for 2021. Okay. Just to follow up on it, has anything changed in that structure? I mean, HR related, is it having less staff or having more staff, or how can I read that? It's a one-off for the termination of contracts with our people. Yes, it's a one-off. If you look on the numbers of people which we have had in our company between year-end 2020 and the first quarter, you see a clear decrease of staff in our company. Okay, I understand. Thanks. My second question would be on real estate debt, the guidance. 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 temporis basis. The numbers you can see on the same page on the fourth bullet on the upper side of the slide, we have had there roughly EUR 60 million revenues from AFS. This is predominantly included in the underwriting and structuring fees of these EUR 30 million-EUR 40 million. Okay. The remainder, of course, is the underwriting fee of HFS for newly subscribed loans or bonds out of the fund. This hasn't changed since the communication of the acquisition. We always said it's on a pro rata six-month basis. Okay. I see. In these underwriting structuring fees of EUR 30 million-EUR 40 million, there is the pro rata temporis share of the HFS fees inside? Yes. Okay. Thank you. Next question is from the line of Till Heimlich from Pictet. Please go ahead. Yes, hi, good morning. I was wondering if you could provide a 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 EUR 200 million or so. Do you have a contingency or some sort of buffer for that if something wouldn't materialize? What do you think is the free cash flow you can generate from your EBITDA that you're guiding for? What we said in the past, you can see also on page nine in the presentation. To get to the EUR 200 to pay back the convertible, the first bridge item is EUR 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, bear negative interest on savings accounts. Therefore, we lend them based on an unbelievable overdemand in the mezzanine business, and obviously we see there 18%-20%. However, this is going to be planned and is reserved for the repayment of the convertible. The second, as always said, is that we are planning in the second half of this year around midpoint EUR 100 million placements from different sources, from our inventories, from our associates, JVs and the financial instruments. This will happen this year. This gives you another EUR 100 million on midpoint. We said EUR 80 million-EUR 120 million. These are the first EUR 200 million. 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. This will deliver another, we assume, EUR 60 million. When you ask about buffer, we don't need large working capital amounts. If you take the first two items, you have the EUR 200 million plus our cash even, which is shown in the first quarter of EUR 63 million, you have then EUR 260 million obviously. 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. Overall, we use the cash currently very efficiently and I think much on a very high economical base by bridge lending. Although it contradicts at the reporting date, a lower leverage, that's correct. However, we want also obviously to earn money with this. We are very well-placed and prepared to deliver the EUR 200 million, but even more as I just indicated. That's the plan going forward. Okay. 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. Okay. Thank you. Again, maybe to give you some more flavor, if you would want the short-term bridge lendings, 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 EUR 180 million, to provide them with loans. 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 simply paid back. When I'm saying short-term, I'm talking about weeks, I'm talking about months, but definitely not about years. 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. This is what we are doing. Thank you. Next question is from Stefan Schupp from Zürcher Kantonalbank Asset Management. Please go ahead. Yeah, good morning and thanks for taking this question. To follow up to what you just were elaborating on. 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% interest that you can generate on this. What is the longer term plan then to continue to be involved in this type of business? It seems to be extremely attractive since the money that you're currently employing there will be needed to pay down the convertibles next year. What's the longer term plan? Longer term plan hasn't changed. We want to use these funds to reduce the net debt by paying back the convertible. That's the first thing. Second thing is, that is a strategic element which has been executed in the beginning of the year with the AFS acquisition. We will, we are in the middle of doing so, further enhance our equity raising on the HFS, AFS side. What does it mean? We have currently, as stated in the past, by the way, a pipeline of around EUR 400 million. We have asked from developers to provide them loans around EUR 400 million. The fund, our more than EUR 1 billion, is currently fully employed as it was always in the past. The solution to your question, also for us, is very comfortable. Once we have increased our equity raising efforts, that means simply gathering more equity. That's why there was one reason why we have acquired AFS. Please keep in mind, around 80% of AFS clients are completely new to HFS. There's no overlap, basically, or a very small one. To answer again your question, we will reduce our short-term bridge lending because we will increase our fund's equity money. There, by the way, we get more or less same rates, say around 17, 18% interest paid. Okay, excellent. Thank you. 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? Yeah, of course. What we have mentioned before, we were struggled in the first quarter still for the entire Real Estate Investment Management market in restrictions and lockdowns. 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. Of course, people who are a little bit more reluctant or were reluctant in the first quarter to spend money and to invest in projects have to fulfill their own budgets in the second half. Bear in mind, we are still in a lower for longer interest environment, even if you would see a small hike on the inflation side in the past couple of weeks. The baby boomers are still out there, and they spend every single month and year money to the pension schemes, and this money has to be invested. We, of course, are a natural partner on the real estate side to do this for these insurers and pensioners. Never forget, also historically, the first quarter is always the relative seen weakest quarter. Why is this the case? Everybody is closing deals year-end in the real estate business. That means in the first quarter, you start negotiating, structuring, buying the assets that you're going to be placed in the second half of the year. Therefore, the double seasonality is now the first quarter as usual. Although I have to point out that we haven't seen this obviously in the debt business because this is anti-cyclical. Yeah. COVID-19 rather helps there because banks tend to lend less. On the Real Estate Equity side, we will see then obviously also, as you know, we have also broken now the third wave in COVID-19. All of this will help then to generate obviously catch-up effects, we call it, yes. It is from our point of view, it's in our budget, it's in our phasing. We are always budgeting the first quarter is the weakest. Then you have the catch-up effect, which we don't call internally catch-up effect because this is normal course of business, that you're going to place the assets that you have acquired in the first and second quarter, which you place them in the third and fourth quarter. Okay, perfect. Thank you. There are no further questions at this time, and I would like to turn back to Dr. 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. Please be reminded that our half year figures are out on August 11th, and our AGM will be held on June 28th. We look forward to speaking to you, so stay healthy and goodbye.