Earnings Call: Q1 2020

May 6, 2020

Yes. Good morning, ladies and gentlemen. I'm here together with Hans Richard Schmitz and Christoph Heitmann, and we all like to welcome you here to our Q1 earnings call. First of all, to those whom I didn't have the pleasure to meet yet here, let me quickly introduce myself. My name is Niklas Karof, and I joined the company as CEO in March. Meanwhile, I'm working in the German commercial real estate market here for more than fifteen years. And should you be interested in further details on my professional background, please just have a look at our website, which I will recommend, or please feel free to contact me directly, of course. So even though I feel proud here working in my new role together with the colleagues in this call here and obviously the remaining team of Hambonna, the immediate start at the company the immediate start here had been rather sad and unusual. Sad because just before my start, Rudiger Motzek used to be a member of the Board here since 02/2007. So for a very long time, he passed away completely unexpected. And jointly with Hans Richards, he had a very strong share, obviously, in the success of the company over the last years. And yes, for that reason, I would like to use the opportunity here of this introduction to remember him. Yes. And the unusual part of my initial phase obviously came by the start of the corona crisis here and its consequences for all of us. With this, just let me go to the slide showing and providing an overview here on the main figures. And despite here the operational challenges, since the extensive shutdown in the German industry, the company has been able to generate very good results during the first quarter here of 2020. As you can see here in the quarter on quarter comparison with last year, the operational business has developed relatively strong, leading to an FFO per share up by almost 9%. On the portfolio level, vacancy remains on a very low level, providing additional stability to the business. Equity and LTV level remain almost unchanged. ICR, by the way, is well above 4.5%. NAV per share up by approximately 7%. And Hans Richard will provide you further details now on the next slides. And for that reason, I would like to hand over to him at this point in time. Thank you. Thank you, Nicolas. Good morning, ladies and gentlemen, and a warm welcome from my side as well. Let us now take a look at our results in more detail. As already mentioned by Nicolas, we generated income from rents and leases of €21,800,000 by the March, an increase of 3.4%, which was mainly due to the investments in the course of the last year as well as the property transfers at the beginning of this year. For the same reason, from incidental costs charged to our tenants were 4.5% higher and came in at €5,400,000 Current operating expenses rose only slightly compared to previous year's first quarter with €5,400,000 an increase of 1.6. The expenses for the maintenance of our property portfolio fell by roughly 17% to €1,200,000 the costs related to ongoing maintenance and various minor plant activities, about onefour of the expenses incurred in connection with the new leases and lease renewals. After deducting the costs, net rental income amounted to €18,700,000 a plus of 5.7% compared to the previous year. Administrative and personnel expenses increased by 5.1% to €1,600,000 in total. Accordingly, our operating cost ratio, which is defined as administrative and personnel costs in relation to income from rents and leases, rose slightly to 7.4% compared to 7.3% in previous year. Other operating income amounted to €600,000 The rise in income essentially related to contractually agreed compensation payments due to delays in transferring ownership of the office property developments in Aachen and Bonn. Other operating expenses amounted to roughly €500,000 in the first quarter of twenty twenty. This item includes legal and consulting fees of €214,000 which mainly relates to expenses in connection with filling the position of our new CEO. The financial result is nearly unchanged compared to previous year's first quarter as a result of scheduled repayments and the refinancing of loans on better terms following the expiry of the fixed rate interest agreements. As a result of income and expenses, the FFO increased by 8.8% and amounted to €13,300,000 in the reporting period. The corresponding FFO per share increased to €0.17 €0.2 above the value of €0.15 from the first quarter twenty nineteen. The further disproportionate rates in FFO compared to rental increase once again proves our cost discipline. The next chart includes a few remarks to the portfolio changes. During the first quarter, two recently completed office property developments in Neuhiesenburg and Bonne were transferred to our portfolio. The total investment volume was EUR42.1 million. Including the two additions, the company had a portfolio of 81 properties with a fair value of around billion as the March. The two assets we contribute to rents was EUR2.3 million per year, increasing the annualized rental income to EUR87.7 million. Considering the tough environment on investment market during the previous month, the growth initial yields of 5.55.3% are very attractive. The properties are located at established and well connected office locations and are characterized by a modern building design with a high energy sustainability. They have been built using high quality materials and meet the very latest standards. The office in Neuesenburg is currently in the process of being certified by the German Sustainable Building Council, DGNB. It has already been pre certificated at the GGNB's highest level, Platinum. The IPAT tenants of both assets, the insurance company Bauma and the IT service provider UBL, are established companies with strong financial standing and entered long term lease agreements. The transfer of the newly built office property in Aachen, which was originally scheduled for the first quarter, is still pending due to a delay in completion of the building and ongoing contract negotiations of the developer with an additional anchor tenant. The asset with the gross initial yield of 5.2% is already predominantly leased to the Balmer Insurance. Transfer of ownership is scheduled for this month. Moving to the next slide to give you further information on the NAV development. As a result of the portfolio additions, net asset value according to EPRA increased to €932,000,000 as at the end of the first quarter, plus of 7.1% compared to the corresponding point of the previous year. Net NAV per share amounted to €11.69 Considering the share price development during the last weeks, the current NAV discount is around 30%. The next slide gives an overview of our lending situation. The weighted remaining term of our rental agreements for the whole portfolio amounts to six point six years. The average maturity of our retail contracts is seven point six years, while the average term of our office leases is four point eight years. Having a look at the lease expiry schedule, we see that expiries are evenly distributed throughout the next years. Regarding the rent agreements ending in 2020, we achieved a number of lending success in Q1 and signed follow on leases for most of the expiries. The remaining share of leases expiring until the end of this year accounts for just around 1% of the total rental income of the company. The outstanding extensions basically refer to office contracts, which expire at the end of the year. On the next slide, a short look at our tenant structure. There were no changes in our top 10 tenant list since the beginning of the year. Hamburg is currently benefiting from its high share of tenants in systematically relevant areas. Itica, Kaufland, Lueva and Real are still leading our top 10 list with a share of around 28% of our total annual rental income. In sum, food retailers currently account for around onethree of the company's total rental income. Other retail tenants, drugstores, pharmacies or do it yourself stores, including the European market leader, Ovi, contribute around 12% of our rental income. Our office tenants, including medical care facilities, medical practices, educational institutions and public authorities like the Agency of Unemployment generate around onethree of total rental income. Our solid tenant structure is the basis for our cash inflows even in economically difficult times such as these. With the upcoming transfer of the office in Aachen, the bauma insurance, another tenant of high credit worthiness, will move to our top 10 list. With the next chart, a few words to our financing situation. Despite the current global crisis, the company's financial and liquidity situation is still comfortable. REIT equity ratio amounts to 56.7% and LTV to 42%. At the March, Hamburg had cash and cash equivalents of €43,600,000 In addition, the company had another financing commitments or credit facilities of €32,000,000 Furthermore, we hold various unencumbered properties that can be used to generate additional funds if necessary. For the first time, average cost of debt is below the level of 2% at 1.98%, while the remaining term of our loans slightly decreased to five point three years. We also do not have any pressure due to financial covenants. In the past, we didn't accept any covenants on our mortgage loan agreements. In connection with the €75,000,000 bonded loan taken out in 2018, we have given the creditors assurances that we will comply with an EBITDA to interest coverage ratio of at least 1.8. Currently, the ratio is around 4.5. Moreover, there are no further financing requirements in 2020 as all the lien agreements scheduled for refinancing have already been. Refinancing activities for 2021, debt maturities are already in progress. So far, my explanations to our Q1 results, and I would like to hand you back to Nicolas for an overview of the current business situation. Yes. Thanks, Richard. And let me continue with my explanations on the next slide. Yes, business situation. As pointed out before, I think it's fair to say that Q1 overall has been a successful start here for the company. However, because of the, yes, ongoing social restrictions and economic uncertainties concerning the corona crisis here, we decided to withdraw the forecast to postpone our AGM and to put the dividend amount here also under renovation. If I look to other market participants here, we find ourselves, I think, in good company with this careful approach. Nevertheless, I can assure you that this hasn't been an easy discussion for us. As most of you know, Hambaughner has a long track record here of reliable predictions and announcements. However, this is precisely why we decided as we did, as we still don't have a reliable picture yet of how the corona effects how these effects are going to develop in the next weeks and months, we still think it's best to wait until we have a bit more visibility here on the relevant drivers, especially letting and investment market. Yes. And on the next slide, which you can see now, we would like to provide you with an additional short update here concerning the previous effect here of the pandemic on our operational business. Yes, regardless of the major public shutdown, including obviously large parts here within the commercial real estate market, we think that our portfolio our defensive portfolio so far has presented itself comparatively resilient. In April, as you can see here on the overview, we received approximately 85% of our contractual rents. And as you can imagine, our asset management here had numerous additional conversations on top of their regular communication here with our tenants and is working extremely hard in finding individual solutions here within this unique situation. With reference to the concerning the group of tenants who haven't transferred the rents, the overview shows also here a split up by sector, which I hope will be helpful for you to get a better understanding here. Yes. Hardly surprising, the vast majority here concentrates concerning the tenants who didn't pay their rent yet, concentrates on the nonfood retailers, which next to the restaurant business, obviously, have been hit especially hard here by the order restrictions. Yes, overall, we are convinced that the strong portfolio focus here on market leading food retailers and on the other hand, office tenants here with strong financial profiles will help to find a good way through the current situation here. Yes, after the recent loosening of shopping restrictions just a couple of days ago here across Germany. Currently, 5% of our total annual rents are not only yes, are not or only partially affected by closures. We think that this is a pretty interesting additional information. Yes, as we all know, soon will be a way back to normal business. Nevertheless, and I hope we get this across as well, supported by these numbers here, we remain confident. And last but not least, just a quick outlook. Yes, a few words on this topic. As pointed out before, once we have more clarity here, more visibility on the lasting effects from corona, we'll get back, obviously, with an update on forecast and AGM and including, obviously, as well dividend. And until then, we will further focus here on our day to day business tasks, including, for instance, as mentioned before, an intensive and hands on tenant management as well as the for instance, the finalization year of the remaining refinancing for next year. In addition, we intend to use these unusual market conditions, yes, to develop our strategy further, in any case, with a clear goal to grow the company further. Yes. And with this, we I would like just to sum up here. We hope that this is a good overview for you, providing you some additional information on the current status here of Hambroner. And happy to receive your additional questions from now. Thanks so much. Will now take your first question from Gerhard. Morning. Jeff Knuts from Dusseldorf. I have one question first regarding your vacancy development. It's interesting that the vacancy rate, rent guarantees, came down to 1.6%, while not including rent guarantees, the vacancy rate is up. This is due to the guarantees from the new acquisitions, so if there's some vacant space in it? Yes, that's correct. This is depends from our new acquisitions in Neuesenburg and in Bonnen. That's correct. And what amount of space needs to be filled in these two buildings? Sorry, we haven't understand this, Rod. How many square meters need to be filled in this building? So on what or what's the vacancies in these two new buildings? In the meantime, in Bonn, we have at the moment around 25% vacancy and in Norwegian bulk, it's around 12%. Okay. And then I have a question regarding your maintenance expenses. It's very low. So is this do you expect the usual pattern that there is some more later this year? Or is this due to the current situation with probably less tenant turnover that is a general reduction against the previous year? No, this is not a general reduction. This is, I would say, normal that you see over the year different amounts for this type. So refurbishment and so on, that's mainly a part what we have do for tenants, for example. And the demand in the first three months was not so high. And then regarding your the higher depreciation, you mentioned there are some 900 and 60,000 impairment losses. And how could you be done on the valuation of property? Yes, that's right. That's related to a couple of smaller nonstrategic assets here for which we have processed additional information within Q1. Yes. But in total, if you see that it splits up into the T, it's very small. Yes. And then you mentioned you are working on your new strategy. Am I right to assume that you currently do not have an acquisition portfolio or acquisition pipeline? Sorry. I mean the acquisition itself is regular business here within Hambowner. I think you have to differentiate here a little bit. Concerning further acquisitions, obviously, we are currently scanning the market. We have assets and opportunities we have a closer look to, but no nothing under exclusivity at the moment. Obviously, we are a little bit shy at the moment because the market is not fully transparent, the investment market, as I pointed out before. But we're clearly, looking forward, want to acquire further assets. I mean that's for sure. And the other topic is strategy in general. And that's more what I was referring to during with my comments that I said, okay, we want to use this corona crisis here as well a bit on reflecting our investment and business strategy and see if there might be points where we like to change looking forward. Yes? But that's something we are discussing here at the moment internally. And yes, we came to conclusions, then we would communicate this, of course. And then regarding the development on more and more openings. Also, now I've heard restaurants in in in lower Saxony are allowed to open probably. So can can we expect that probably in summer, you will get then nearly, yeah, 100% of your contractual rents? Or are there any clients where you think they will see substantial difficulties for them to paying rents if the even in case that the business reopens? Yes. I think I mean that's obviously difficult for us at the moment to do any real reliable predictions. I mean please consider that the numbers we presented to you here only reflect the rents we received for the month of April. The rents for the month of May are just coming in at the moment. So within the next couple of days, as any other landlord, I think we will have a better view on this. And as we don't know how the corona crisis is going to continue, it's at this moment pretty tough to make a call here because obviously we have so many different influencing factors. I mean the restrictions the formal restrictions for the public authorities are one thing. But on the other hand, obviously, the business for each of the retailers is different. And it will, I think, also depend on how their operational business is really coming back to normal and what you can call normal, yes? So there are different influencing factors. It's not just the formal setting of the authorities to open the shop or not, that's my guess, which will where you can directly, on a linear basis can try to evaluate how many rents will be paid. I think this would be a jump. It would be too easy. That's my personal guess. But I think I mean, I think with 85% coming in, in April, I think that's a pretty I mean, considering the overall situation, it's a pretty good number. And yes, let's see how this is going to further develop here within the next couple of weeks. Thank you. Thank you. We'll now take your next question. Yes. It's Kai Klose from Berenberg. I've got three quick questions. The first one is regarding the recent acquisitions on Page four of the presentation shown on Page four of the presentation. Could you indicate how if all of those properties have already been refinanced in the small loans? And what kind of terms you have negotiated? And second question would be on the debt expiry schedule here for 2021, particularly with 9.5% debt due. Just out of interest, do you extend this just to extend by mortgage loans? Or would you consider to increase the portion of unsecured debt and then repay the loans and then take up, for example, the bond or promissory note? And last question would be on the CapEx spend on Page three shown in the presentation. Could you just indicate the reduction compared to Q1 'nineteen? I think there might be a bit of an overflow from 'eighteen into 'nineteen. That's why CapEx in Q1 last. This month. So there's nothing to do, and this is an average interest rate of around 1%. Second question was acquisitions. Loan expires in '21. Loan expires in 2021. Here, we work on this. And hopefully, then we will have a solution in the summer. I'm very optimistic here that we will can do this, and we will do this with secured debt, not unsecured. Unsecured is more than an option for further growth. Thank you. Thank you. It appears there are no further questions. I would like to turn the conference back to you, sir. Please go ahead. Yes. Thanks so much. And on behalf of the Ambono team here, thanks for your attendance and looking forward to continue our conversations with you. Yes, thanks. Have a good week, and please stay healthy. Bye bye.