Earnings Call: Q2 2021

Aug 11, 2021

Hello, everyone, and thank you for joining us today on our earnings call for the presentation of our results for the first half year of twenty twenty one. On the Core State Investor Relations website, you can find our earnings presentation, our press release and the H1 report, which you can follow. 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 new CFO, Udo Gigerich. 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. Rene, thanks, Kai, and welcome from my side. Let me start by giving you an overview on the highlights and key messages of the Q2 of 2021. In general, our market and our own performance in this environment showed dynamic growth both in revenues and earnings. This includes catch up effects, but also a somewhat normal upward development shaped by sustainable drivers. We benefit from this also because of the strategic transformation we initiated back in Q1 With a new and strong focus on our clients and the setup as a full service firm for the entire lifecycle of a real estate investment. We see impressive growth and a booming market in real estate debt, not only in Q2 with the financial structuring of 1 of Biggest single asset deals in 2021 at Core State Bank, but also in the upcoming months based on a very well filled pipeline. Our Real Estate Equity business is in line with our budgets and phasing and typical for this sort of operations will show An upswing with a little time gap in the second half of the year. We already feel the transaction market becoming more vibrant. Our other segments reached stability in asset valuations, also driven by growing momentum In real estate transaction market against the backdrop of notable progress in vaccination campaigns worldwide. So speaking about what's on the menu for the upcoming months, we are fully on track to deliver on our financial outlook For the full year 2021, and we will also deliver on our net debt reduction ambition with a leverage target of below 3 times. Last but not least, our new fully aligned management team is on board. With the exemption of the COO, we'll complete us hopefully soon, And the team is fully committed to our common goals. As you can see from the fact that the entire management board owns We need 10% of the outstanding shares in CoreState. So we strongly believe in this company And I ask you to flip to Page 4. You see an overview on our assets under management on this chart. Our core business, real estate assets under management, went slightly down to €24,300,000,000 at the end of June, driven mainly by the termination of micro living developments, but also the sale of some assets and typical Seasonality in our investment management business. In parallel, the non real estate AUMs also decreased as planned to €3,100,000,000 When we step a bit closer to the various sectors, We realized the ongoing gradual shift of our clients to more basic risk return profiles. You see this mirrored in the increase in residential and city quarters and in logistics and a slight decrease in office and retail. Our real estate assets under management consist of 47% real estate equity and roughly 1 quarter each In-depth and third party property management. When I dare look into the upcoming months, we expect further growth in all business lines, Supported by a strong financing pipeline of around €500,000,000 of mezzanine business and a SOAR pipeline In advanced contractual status of around €1,500,000,000 for our real estate equity operations. I ask you to flip to Page 5. Let's now take a deeper dive into our newest family member, The Core State Bank. The acquisition was signed in January and already closed in May, so very efficient deal execution, including regulatory concepts. Those days, the entity was called AFS, Rebranding and integration into our operations and client management is done yet. This acquisition came at a perfect timing As the market is really booming out there in this segment, backed by prosperous economic environment, Ever more restrictive lending policies at traditional banks and a sharpened housing scarcity, especially in bigger cities in Germany, Austria and Switzerland. So the Core State Bank hit the ground running. Our new colleagues structured and closed in May June With the financing volume of more than €1,000,000,000 the largest ever single property project, the so called First on Kurfurst dump in build in. This has correspondingly generated a positive impact on our real estate debt segment performance. In parallel, we're currently dealing with a pipeline of around €1,000,000,000 of already mandated Financings of projects which are in preparation. Brief, the growth story will go on. But this is not the only reason why we've acquired this business. The strong client relations And the early stage involvement in large real estate developments give us clear advantage also for our real estate equity segment when it comes to follow-up deals and especially cross selling opportunities. So all in all, we are very, very We're on a very, very good path here as well. I ask you to flip to Page number 6. This chart, You know it's from our previous calls gives you an intel on the usage of our debt funds at HFS. The total commitment fund volume was unchanged at around €1,300,000,000 And at the end of June, we financed 45 projects with an average financing side of around €28,000,000 The focus has not shifted since years And is with around 70% on residential and city quarters and Germany's largest cities. Currently, we gave funding to 20 Six different borrowers, the largest of which is not taking an exposure of more than 20%. We are absolutely convinced that the strategy was the basis for our remarkable performance during the crisis and will be the foundation for a very profitable future in this business. With this, I would like to hand over to our new CFO, Udo Gigeris. Let me add that I'm very pleased that you, Udo, Our own Board with your long standing track record in various finance and IR roles. Please flip to Page 7 now. And Udo, The floor is yours. Many thanks, Rene, and a very warm welcome to all of you from my side. Please allow me some introductory words Before, I'd like to give you some information on our financials. Before I joined Corstet, I was Executive Vice President, Finance and Investor Relations at Unipa and CFO at 50 Hertz. So I bring in vast transformation Experience in very institutionalized environments, but I also had various touch points to the real estate and financial services industry With, for example, being responsible for building 1 of the most outstanding corporate headquarters in Berlin, the 55 Hertzsnezkwartier, and also investing a substantial part of Uniper's pension assets in real estate. Just one week ago, I took over the responsibility for IR, Accounting tax, controlling treasury and risk management net cost saves. My key tasks in the upcoming quarters are clearly The development and implementation of a funding and refinancing strategy on the back of an increased efficiency through integration and digitalization of the processes. The basis for all of this is an improved transparency and investor awareness for the transformation story of Corstad and subsequently leading to an increase in market cap. I'm looking forward to speak to all of you, Our dear investors and analysts personally in the upcoming weeks, starting already this afternoon. And please be also aware, I shared a belief in the bright future of CoreState Group with my Board colleagues and thus will, Already starting today and in the next days also invest in the stock myself. Please turn to page 8. Please allow me to give you some information on our income lines. And very brief, we saw a strong recovery, especially in the second quarter from the pandemic. Our Real Estate Equity segment delivered €7,000,000 of acquisition and sales fees and €35,000,000 Euro of assets and property management fees, thus showing a steadiness in core and core plus products, but also a slightly reduced income stream from Micro Living Development. We expect this segment to pick up momentum in the second half of to 2021, and we already realized tangible signs for this market for this in the market. Real estate debt with underwriting and structuring fees of €28,000,000 asset management fees, including CPF of €31,000,000 and income from bridge loan of €10,000,000 simply bringing in very good results on the back of the new business at Core State Bank and increasing CPF in Q2. As part of our approach to reduce balance sheet exposure, we expect bridge lending and corresponding income to go down in the upcoming months. 4, we will still also opportunistically take advantage of these high profitable business In the future, we reported some COVID driven negative valuation effects in Q1 impacting our income from other segments, but we saw a stabilization in asset values in the Q2, leading to income from the other segments of €3,000,000 down from €7,000,000 in the first half of last year. This all adds up to €113,000,000 of aggregated Revenues and gains, up from €96,000,000 in the comparable period of 2022. Please turn to Page 9. With this chart, I would like to show you our key P and L figures. Our OpEx ratio of more than 50%, clearly higher than usually usual and higher than we want to see in the medium term, was driven by some seasonality effects, the inelasticity of our fixed cost base, but also some extraordinary transformation costs for the above mentioned business enhancement initiatives in our Real Estate Equity segment. Main focus of the upcoming years will be to keep the overall cost stable through taking out complexity and usage of modern technology and Digitalization, while increasing the revenues and thus reduce the OpEx ratio. The G and A expenses of nearly euros 24,000,000 up from €16,500,000 in H1 last year includes one off expenses from M and A and also set up costs for the strategic repositioning. Our EBITDA So at nearly €35,000,000 with a clear improvement of margin to 35%, up from 27% in the 1st 6 months of 2020. D and A, roughly EUR 17,000,000 include the first time consolidation effects from AFS, now Core State Bank. This leads to an EBIT of €17,500,000 after €9,600,000 in the comparable period of last year, our financial results was kept merely unchanged at €9,700,000 and our income tax expenses, driven by limited usage of international tax loss carryforward within the group, was minus €7,400,000 Our net profit for the first half of twenty twenty one stood at €500,000 Corrected by M and A related expenses of €4,800,000 depreciations of around €13,000,000 On PPA related intangibles and DTAs of minus €3,300,000 the correspondent adjusted net profit shows more than €15,000,000 All these figures and the visible upswing in Q2 compared to Q1 are in line with our budget and phasing during the year. So we are on track to deliver on our financial outlook. Please turn to Page 10. One of my first and foremost tasks as a CFO of Corsted will be the reduction of our net debt to reach the leverage target of below 3 until end of the year. And let me be very clear, we are steering the right course to reach this. You see on the chart That at the end of June, we had €620,000,000 of total debt adjusted by €28,000,000 for leasing liabilities. With our cash pile of more than €60,000,000 our net debt stood at €557,000,000 Crucial steps on this will be a net debt reduction of more than €50,000,000 in Q3, stemming out of bridge loan lending repayments and cash conversions from assets in our balance sheet. This will be followed by the deconsolidation of the Giesen premise Currently, in our inventories, further placements of our balance sheet and repayments of more than €180,000,000 in total in Q4 2021. Another €60,000,000 or more are designated as proceeds from placements of our core investments in 2022. So to stress this again, debt reduction and financial derisking is key for us, and we all in the management board will clearly focus on the delivery. And we will focus on a more efficient management of our liquidity and define a derisk funding strategy for the remaining debt. With this, I would like to thank you for your attention, and please flip to Page 11. And Rene, turn to you. Many thanks, Udo. I'm proud and grateful to have you, our newly established management team. We together will now clearly focus on stability and governance and costs and growth in revenues. Let me speak about what's ahead of us in brief, a very bright future and we will deliver on guidance in 2021. We already realized that the transaction markets, including several catch up effects, is coming back remarkably, And we will definitely participate here, especially supported by our advanced product range, Tangible pipeline and the enhanced sales setup. And last but not least, our debt segment With its unique financing platform, we'll continue to contribute with strong performances. Our leading market presence in the That business and thus our direct access to developments on a very early stage also significantly supports our real estate equity segments. With new clients, additional investment opportunities and through a front position for assets and property management contracts. So for the full year 2021, we expect acquisition and sales fees in our real estate equity business of between €15,000,000 €30,000,000 And asset and property management fees of between €80,000,000 €90,000,000 Our debt segment will show On the midpoint €40,000,000 of underwriting and structuring fees €85,000,000 of asset management and coupon participation fees. The other segments will deliver between €5,000,000 €20,000,000 Based on this, I can once again confirm our financial outlook with aggregated revenues and gains of between €235,000,000 €260,000,000 Adjusted EBITDA of €90,000,000 €150,000,000 and adjusted net profit of between €50,000,000 €75,000,000 In brief, a booming debt business, an equity business that is picking up momentum And all of this on the backdrop of long term supportive market drivers. So we look very, very optimistic into the upcoming quarters. With this very positive outlook and a very profitable second half of twenty twenty one, I would like to hand back to the operator, We're now happy to answer your questions. Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. First question comes from the line of Kai Klose from Berenberg. Please go ahead. Yes, good morning. I've got two questions, if I may. The first one is on Page 23 of the first half report. Could you give us a bit more details on the accounting of AFS into cost debt's balance sheet? So there was a €65,000,000 in goodwill €80,000,000 accounted in the other intangible assets. Yes. Could you give a bit more details on how you came to these two numbers? And second question would be on Page 10 of the presentation. I just look up the Q1 presentation where you say on Page 9 that the leverage should that you have an ambition to bring it down to below 3. And now you say year end ambition of 3x, so not below 3x anymore. May I could So indicate if this is just a change in wording or if your ambition has changed that you don't target anymore reduction to below 3 times? Thank you. Okay, Kai. Thank you very much for the questions, and Looking forward to speak to you personally. May I answer the second question first and then we answer the first question on the IFS? We clearly speak about leverage below 3. However, this is still an ambitious way to go on. We have a plan to bring this down below 3 until end of the year, and we see already inflows from the repayment of the bridge loans and from the deconsolidation of some assets. And Kai, it's Kai here. So maybe can you elaborate a little bit more what you want to understand based on our goodwill, our PPA For Core State Bank Okay. You mentioned in the Page 23, we see And that we saw quite a strong increase in the other intangible assets, which I assume is coming from FS. May I get a little bit more on how that number came up? Of course, it's part of the PPA and the goodwill allocation, which we have done together with our auditor. And based on the underlying working capital, which was allocated between Corsted Bank and us and The other assets, which we have consolidated. Okay. Thank Next question is from the line of Anthony Dyke from BNP Paribas. Please go ahead. Yes. Good morning. Can you clarify what you mean by deconsolidating assets such as Giesen? Is that an outright sale or what do you mean exactly by that? Thank you. Yes. It's Rene, Anthony. Yes, exactly. It's an asset which is in Giesen, And it is on the balance sheet with debt of around €55,000,000 and equity around 30 Something and it's on for sale. So it's refurbishment. It was renovated in parts of the center repositioned. And we have a very stable income on that, but we want to sell it. That's definitely the target To deconsolidate it and to sell it, definitely. And we're working on that and but we're very relaxed on that. It's a good well placed shopping center and a good area and it has good traffic. So it's not the typical high street stuff. It has nearly €5,000,000 of rents on an annual basis at the moment with a target at €6,200,000 at the moment, but we're Working on renting it out. So we have good progress on that. Next question is from the line of Charles Botsford from PAMCO. Please go ahead. Hello. Thanks very much for taking my questions. I've got a follow-up on the Giesen one. So if you deconsolidate Giesen, You lose a certain amount of debt automatically. So what's the debt which is assigned to Giesen? Yes. What I said, it's around SEK 60,000,000 something like that. SEK 60,000,000, okay. One. And then the second question is on the On the forest targets for this year, Charles. So €60,000,000 if you deconsolidate Giesen effectively, that you would lose automatically? Okay. And then the second question is on the bridge lending repayments. So I can see from the slides on Page 10 that you're expecting €50,000,000 in Q3. Do you have an amount that you've already received? Or are you able to disclose that? Or is it all coming in, in September? No, we have already received something in July, and it will and there will be repayments in the next in the coming weeks then because The client also has sold some assets, and therefore, there is free liquidity at the client side. So can I assume that Sort of €25,000,000 of the €50,000,000 have come in already or Less? Less than that. Okay. And then in terms of the Q4, obviously, there's a large number. I can understand €60,000,000 From the Giesen, but the other €120,000,000 in that Q4 number of €180,000,000 of Net debt reduction. Can you give us some more detail on that? So some of that is the bridge loans, which presumably is another €70,000,000 out of the €120,000,000 Yes. It's basically a third out of the bridge loans. Then we have cash conversion placements from the from our fund business around another third, And the remainder is then free cash flow. Okay. So in Q4, you're expecting somewhere in the region of €60,000,000 of free cash flow? No, €20,000,000 to €30,000,000 can be reached. €20,000,000 Okay. So, sorry, it's the balance of the 3rd. Okay, Good. Thanks very much. Next question is from the line of Manuel Martin from ODDO BHF. Please go ahead. Thank you. Hello, gentlemen. One question from my side regarding the Real Estate Equity business. The Real Estate That business sounds quite promising. But on the equity business, So you assume a picking up in activity in H2 this year, also more clients to come. Do you have A view on your AUM growth when it comes to real estate equity business, any targets or a growth path there in mind? Yes. Thank you, Emmanuel. This is Rene. I mean, you have already seen in July, August progress on that, which is obviously not part of the first half of the year. We had announced Augsburg, Smaller one. Yesterday, we acquired about €160,000,000 of equity in our French business, and we want to raise minimum €1,000,000,000 at least, yes? €1,000,000,000 at least to answer the question. But we have a strong pipeline there and we will Close couple of deals now in the next couple of weeks. So this is just I repositioned the whole sales team and everything there at the beginning of the year. So That took some time as well, but the team is now up and running. People can meet. We have our London sales people. We had them in Yesterday and today. So we're making good progress and we will sign and seal a couple of deals in the next couple of weeks. So in September, a larger one. So Maybe it's €1,000,000,000 maybe it's more, yes. So but we have a clear target, clear guideline and second half of the year is obviously much, much stronger than the first half Historically and especially of course, date. I see. Okay. And the €1,000,000,000 Is the target for 2021 or is it a 1 year target more or less? This is for this year, second half. That's what I want to say. Okay. Okay. Thank you very much. You're welcome. Next question is from the line of Philip Hoessler from Pareto. Please go ahead. Yes. Hello. Philip Hoessler from Pareto. I have two questions, please. Firstly, Firstly, on the shopping center in Giesen, you sound very confident that you will be able to sell Giesen in H2. Do I interpret this correctly that you're already in Discussions with the potential buyer? And secondly, on your EBITDA guidance for the full year €90,000,000 to €150,000,000 If I take the H1, you have reached €40,000,000 Q2, €37,000,000 So if I take Q2 times 2, I end up at €115,000,000 Or SEK114,000,000 And you sound very bullish regarding the pipeline for debt and real estate equity. So why haven't you Raised the guidance or at least have said we are confident to reach the upper end of the guidance? Thank you. Yes. Thank you very much, Filip. Let me answer this is Rene. Let me answer on Giesen. Yes, we are. It's We are in discussions on this asset and since couple of weeks already, and I'm very confident there. And on the other Topic I would like to hand over to Udo now to answer the question. But I would like to say, I mean, core states Should not be in a position, especially after last year, to raise guidance. There's still a lot to do, and we're working very hard. And you've seen The first the second quarter now looks much better, and we're very confident. But Udo, as our new CFO, Please. Thank you, Rene. Yes, you're clearly right with your calculation. However, you also have to see that in Q2, we had Very large deal with the first in Berlin in. And therefore and we now have a good Pipeline in place, but not these again, these large deals anymore. And therefore, we clearly do not want to raise any outlook Look, so far but we are optimistic to be, as we said, reached the outlook and hopefully More on the higher half of the outlook range than on the lower half. Okay. Thank you. Very clear. There are no further questions at this time. And I would like to hand back to Doctor. Kai Gregor Klinger for closing comments. Please go ahead. Thank you very much for listening. We appreciate your interest and your questions. We will be on the road, unfortunately, mostly online After the summer break, please be reminded that our Q3 figures are out on the 10th November, And our Capital Market Day will be held virtually again on the 8th December. We look forward to speaking to you. So stay healthy, and goodbye.