Earnings Call: Q2 2021

Jul 29, 2021

Good morning, ladies and gentlemen. A warm welcome to this year's 81 Earnings Call. Again, also on behalf of my colleagues, Hans Richard and Christoph, who's heading our IR activities. Yes, let's start the presentation with a quick glance at the highlights of the last 6 months. And after my introduction, I will, as usual, hand over then to Hans Richard, We'll provide you with further details here regarding our operational and financial results. Yes, starting with the highlights. As To be expected, yes, our business again has been substantially influenced by the pandemic during the first half year. Nevertheless, our business model has proven to be very robust throughout the ongoing global crisis here, and this has enabled us to generate very solid H1 results. On a year on year basis, total rents came down just slightly, and FFO even went up by approximately 5%. And despite an overall challenging market environment, we were able here to secure various and also substantial lettings successes, yes, including early follow-up leases for all our real locations here in Germany. Since our strategy update mid last year, we have been substantially more active concerning turnover activities within the portfolio. As a result, we continue to reduce our high street exposure from Originally, approximately 12% last summer to meanwhile only 5% of our total portfolio. And in addition, during H1 here, capital recycling led to the acquisition of 3 additional new properties, of which too fall into the new Managed to core category. More details here regarding these transactions later on in the presentation. As you're used to, our financial profile remains solid, currently supported by a very strong cash position, which is mainly driven by the proceeds from our portfolio which I just mentioned. So all in all, successful first half year, which contributed to our updated guidance at the end of this presentation here. Now let's have a closer look at the development of for our KPIs, and let's start, as usual, with a corporate perspective. Rental income, year on year, as pointed out, slightly down. Here, taking into account our substantial sales activity here. Operating results, substantially higher, driven by last year's impairment of probably today the portfolio affiliation as of June 2020. So that's where the influence come from here. Profit or anything in comparison to last year. Profit, reflecting the book value gains from our sales activities. FFO, influenced by lower maintenance costs as well as one payment here relating to the re letting of the real space. The FFO per share has slightly increased. And please, also, you take into account the year on year effect from 2 scrip dividends. LTB remains on the same level and NAB and NTA equal at 11.02, slightly lower but still fully in line with our guidance. Next page, Looking at our portfolio KPIs, yes, coming from originally 80 properties by end of last year, Portfolio as of 8.1 comprises 69 assets, of which 2 further have been sold and and will be transferred during the Q3 of this year. Like for like development on a year on year basis, Rents, yes, retail rents within our portfolio went slightly down, a result of rent Treases in our remaining High Street portfolio, which you can also see on the right hand side. Then whereas office rents went nicely up by 3%. And EPRA, this is mainly due to reletting of the vacant space, by the way. And EPRA vacancy remains unchanged at, again, very low level of 1.7%. Yes, same applies towards supporting here as we think the underlying strengths of the portfolio. On the next page, providing you with some additional information on our investments. So some key data here regarding the assets which we acquired since beginning of the year. Yes, meanwhile, the property and mines have been integrated into our portfolio, and we will start here comprehensive prep work for our intended refurbishment as early as possible. The office development in Munster is underway and still expect it here to be transferred to our portfolio around the end of this year. The recently signed multi tenant office property in Stuttgart, We will be here a very good addition to our managed to core part of the portfolio. Yes, from our point of view, It ticks a lot of relevant boxes here. It has a very it's in a very good macro and micro location, including outstanding infrastructure access shows low vacancy and good office demand in the surrounding area. And in addition here, it has a flexible space structure and already today high fit out level. Yes, and compared to the property in mines, we should be able to start with our enhancement measures even earlier. Needless to say, that in both cases, we will evaluate our refurbishment and letting topics here under consideration of our sustainability strategy, for instance, with reference to facade and the technical building equipment. Yes, with this, moving on to our disposals during the first half of this year. Next page summarizes these disposals, the disposals which have been signed and or closed here during the 1st 6 months and which, apart from all other arguments, enabled us here to further focus on our operational capacity and yes, on concerning assets for which we see a more attractive income and value perspective. So on the next page, going on a little bit with the on the disposal side, providing you with some more information on our total disposal program here. Yes, it's a summary of the sales activities within our strategic portfolio rotation. And considering the fact that we have started our program just 1 year ago, surrounded, Yes, by a challenging pandemic situation, I think it's fair to say that we have been able to deliver quite satisfying results. And by the way, during this period, Hambrona has rotated more of its portfolio than within the last 10 years probably. Yes, next to the financial facts, some key takeaways Some additional takeaways here from our side. Based on age and overall condition of the sold assets here, the total quality of our Remaining portfolio has further improved, and this also includes a better letting and maintenance profile in the short as well as in the longer run here. And in addition, the sale had a positive impact on our portfolio total portfolio KPIs of Ward and vacancy here concerning this portfolio. Yes, furthermore, the streamlined portfolio should additionally increase our operational efficiency. I just Mention it here especially concerning the successful sale of very small multi tenant assets here. And last but not least, the continuous turnover here, the asset turnover underpins, we think, the ability of our team here to act to successfully along a combination of ambitious targets and at the same time, a challenging market environment. Yes, concerning the few remaining assets, we will continue our disciplined sales process as well as the recycling of capital into new properties. And for the asset in Lubeck, we currently evaluate different letting scenarios as well as a potential repositioning. And for that reason, this asset has been assigned to the managed and core managed to core part of the portfolio. With this short overview, let me hand over to Hans Richard, who will provide you with more details on financials as well as our operating business. Thanks for now. Yes. Thank you very much, Nicolas. Good morning, ladies and gentlemen, and also from me, a warm Welcome. Let us now continue with the operating and financial figures for the first half year. First of all, let us have a closer look at our tenant base. Compared to the Q1 of this year, there are only minor changes in our channel structure. Edikan, Kauflandereven and Real are still leading our top ten list. In total, food retailers currently account for 33.6% Of the company's total rental income, an increase of 120 bps year on year. Further solid and reliable retail channels such DIY stores, pharmacies and drug stores contribute around 20% of our retail of our rental income. As a result of the disposal of numerous nonstrategic high strategic high street assets, the share of rents from the fashion sector was reduced significantly and currently accounts for 7.5%. Our office tenants, including medical care facilities, Medical practices, educational institutions and public authorities generate around 39% of total rental income. Our solid and balanced tenant structure creates a sound basis for ongoing stable and predictable cash flows. Now a few remarks on the current letting situation. Thanks to successful letting activities, the weighted remaining term of our leases For the total portfolio is around 6.2 years. The average terms in the retail and office portfolio remained at consistently high levels at 7 5 years. With 98.3% of the occupancy rate, According to April, definition is still very comfortable. The remaining leases outstanding for renewal in 2021 Only correspond to 1.4% of our total annual rents. And currently, we are very confident to extend the expiries in the course of the year. For the following years, our lease expiry schedule still shows that the share of contracts Expiring is well balanced. Larger letting tasks only need to be completed from 2023 onwards. Despite of the consistently difficult conditions on the German letting markets, we had a number of important successes in our letting operations and achieved a very strong netting result since the start of the year. We are able to conclude leases for around 96,000 During the Q1, we agreed a long term lease renewal with one of our biggest office tenants in our property in Cologne, which contributes to our leading results with around 16,000 square meters. The main tenant, Net Colon, A company run by the city and one of the biggest regional telecom service providers in Germany has made a commitment to the site until 2,036. In June, we achieved further substantial letting successes and assigned inside long term follow on leases for space currently used by the food retailer Real at our retail locations in Mannheim, Sele And Giesen, in view of the ongoing restructuring of the Haifa Market Group Real, Hambrona was proactively Exploring alternative uses for this space and started negotiations with potential new tenants at a very early stage. As a result, a mutually satisfactory cancellation agreement were reached with the existing tenant Real. At the same time, We were able to sign follow on leases with new and attractive anchor tenants from the food retail sector. The total letting volume amounts to 33 So the square meters, while the weighted term of the new leases is around 18 years. At all three locations, remodeling and modernization work is intended and will be carried out in close coordination with the tenants. These contracts include corresponding agreements for tenant and lessor investments. In the cellar property, a substantial part of the Pharma Real market will be taken over by the renowned food retailer Kaufland. The space is expected to be transferred during Q3 2021. The new anchor tenant is the Giesen Property. We also be a leading provider in the food retail sector. As the lease contract is still subject to the pending approval of the antitrust authority, The tenant cannot yet be named at this time. We expect the space to be transferred during the Q4 of this year. In connection with handover of the spaces in Selle and Giesen, we currently expect investments in an amount of 1.6 to €2,900,000 The exact amount of the costs as well as the potential effects on the 2021 earnings Situations are dependent from the outstanding approvals of the antitrust authorities and in particular of the local building authorities. During the modernization work at the Selle and Giesen locations, we intend to modify the layouts and the technical facilities to create a basis for integrating additional stores. We are already negotiating with further potential channels and are confident to successfully relet the remaining real spaces of around 4,200 square meters during the next month. In this context, we expect potential effects on the 20 22 results, which are dependent from the new tenant structures and thus cannot be reliable or estimated at current time. In Hamburger's largest retail property in Mannheim, the Globus Group has leased the entire space currently used by Real and committed to the location for 20 years. The rental space is due to be handed over to Globus by mid next The associated modernization and refurbishment work will therefore also start in 2022, but with a very limited impact on Hamburger's results. In accordance with the A compensation payment of €2,200,000 with a corresponding positive effect on this year's earnings and FFO. In connection with all three follow-up leases, we granted building cost subsidized in an amount of EUR 7,800,000, which will be prorated over the total lease term, slightly dedicating our total future rental income. Despite the costs involved, the conclusion of these follow on leases will further increase the quality of the retail locations and will secure of future cash inflows, which is already reflected in the fair value increases as of end of June 20 21. After the view on our recent asset management activities, let me give a few remarks on the current impact of COVID-nineteen. Despite the long lasting lockdown faced in the first half of this year and the associated impact On individual Hamburger tenants, incoming rent payments have seen surprisingly good performance in the last few months. Following the resumption of the lockdown at the end of 2020, the rent collection rates fell only slightly at the beginning of the year but continued to increase over the following month, resulting in an average of 96.7% in the lockdown month from January to June 2021. As a result of the gradual redemption of the FAL reaching restrictions in May June, the rent payment ratio rose immediately and almost back to pre crisis levels and came in 98.5% in July. Regarding the outstanding rent payments, we are continuing our cooperative dialogue with tenants affected by the lockdown and are confident to find further mutual and fair agreements as we did in connection with the 1st lockdown in 2020. After the view on our recent asset management activities, let us now take a closer look at financial figures for the first half of this year. With a total of 49 point €9,000,000 We saw a slight reduction in income from rents and leases compared to last year, which is mainly due to property disposals and pandemic related risk provisioning. Reductions are partly offset by additional rental income from acquisitions. Total maintenance expenses were around 15% below the level of 2020 and around €2,200,000 Net rental income amounted to €38,000,000 a slight reduction of 1.5%. Administrative expenses increased by around €300,000 compared to the first half of twenty twenty, mainly due to higher expenses for cash deposits. The significant rise in other operating income is a result of the already mentioned €2,200,000 compensation payment received from Real. Other operating expenses came in of Previous year's level, but just slightly rose compared to our Q1 figures as pandemic related impairments were limited during Q2. As a result of income and expenses, the FFO came in at EUR 28,400,000 In the reporting period, an increase of 5.1%. Now let me continue with a short look Our NAV and NTA development, the NAV calculation shows a slight decrease in long term assets as a result of the portfolio disposals in the course of the first half of twenty twenty one. The increase in short term assets relates to liquidity enhancements, Non current liabilities and provisions increased due to additional loans taken out in connection with the newly acquired assets. Overall, NAV saw a slight increase of 0.3% as against the end of 2020. NAV Per share at the end of June came to €11.02 As in the past, the difference between NAV and NTA is very low as Hambuna's intangible assets only amount to €500,000 Finally, a few comments on our financial situation which is still very comfortable. The REIT equity ratio amounts to 57.5% and is therefore still well in excess of the 45% ratio required. So the LTV as of end of June is nearly unchanged at 44.6%. Our interest coverage ratio rose once more to 9.5%. The average financing costs are on consistently lower level at 1.7% with an average remaining term of loans of 5.1 years. We have already concluded all follow-up financing for 2021 at favorable terms of 1.0% and Currently in negotiations on refinancing our liabilities expiring in 2020, which To a substantial part are due by the end of next year. So far from my side, thank you for listening. And let me now hand back to Nicolas for a short outlook. Yes. Hans Urshel, thanks so much. Yes, coming to the to our guidance and outlook for the remainder of the year. Yes, we see ourselves in a position to Centrate our full year guidance. Good reasons for this surely are our H1 results, which we just presented. But we are also able now to better see the outcome of certain operational tasks, including the effects from the ongoing asset rotation as well as the successful reletting of our real sites. In this context, we narrow the range for the expected rental income to €83,000,000 to €85,000,000 and expect to achieve an FFO in the upper area of the former range, meaning now within the range of €48,000,000 to €50,000,000 With reference to NAV per share, we are continuing to expect a number around the level of the end of 2020. For obvious reasons, this guidance also takes into account some remaining uncertainties concerning the continuing pandemic situation. Despite the fact or despite this fact and considering the proven robustness of our business since the beginning of the COVID crisis. Yes, we are looking pretty optimistically into the remainder of the year and are going to put a lot of effort in keeping up the dynamic concerning the enhancement of our platform. So with that, thanks so much for listening, and we are looking forward to We'll receive additional questions from your side. Thank you. We will now take our first question from Philip Kaeser from Warburg Research. Yes. Hello, and thanks for taking my question. Just a couple of Follow-up question from my side. First, regarding the divestment strategy of the High Street portfolio. So Very active on that side, only 6 assets left. And okay, excluding Liebeg, maybe five As it's, could you shed some light on the, yes, disposal plan for those remaining 5 assets? I mean, there's One large asset in with Dortmund, I'm still in the portfolio. So could we expect the divestment also Within 2021? Or you try to, yes, kind of dispose that in the beginning of 2022 regarding those Strong cash inflow already received from those sales of the other High Street assets? That would be my first question. Yes, happy to answer this. So I mean apart from Luebweg, as pointed out, all these as it's up for sale right now in the market, and we are in different point of transactions or conversations for these assets here within the transaction process. So therefore, it's a bit difficult for me at the moment provides you really with a reliable prediction of when we will which asset will be sold. Nevertheless, I mean, coming from the experience we have made within the last 12 months, I'm pretty optimistic that we should be able to further reduce this number of assets by end of the year in which all of this will help me exactly And at which point in time, I can't tell you. And just to make this clear, we want to continue, as pointed out, in a disciplined way, meaning in a value preserving way, finding the best solution here for the asset and for the company. And therefore, if it takes a bit longer, then that's the case, yes. I think we've seen a lot of speed here in the process and yes, depending on the market situation, yes? So therefore, we don't want to put ourselves under too much pressure to make sure that we always are able to keep the discipline here on the divestment side. Thanks. And could you shed some light on the acquisition side? I mean, you have to like you're sitting on a huge cash position due to the disposals. Kind of any indication when you are thinking to recycle a huge portion of that Also within 2021 or it's kind of hard to find suitable assets for the portfolio? I can say that, within the last couple of months, the acquisition pipeline has nicely increased. We see more interesting transaction coming to the market if you compare it especially with beginning of end of last year and beginning of this year, meaning assets with a mesh core characteristic as well as core assets. So I think we are At the moment, we have lots to look at. And from this point of view, I'm yes, I'm hopeful that by end of The year we will until the end of the year, we should be able to do the underwriting here or to support further underwriting here by another asset or 2, depending obviously on how the transaction go. But at least if I look at the pipeline at the moment, it's looking substantially better than 2 quarters ago. And this, by the way, relates to I'm sorry. And just Yes, this refers to office as well as to retail assets. I mean, just want to underpin this because as we recently acquired 3 office assets, You might get the impression, meaning not you personally, but somebody who's observing more and more that we are focusing on office, that's not the case. Yes, we are opportunistic in the sense, as pointed out in the past. And therefore, if I look at the pipeline at the moment, we see assets in both asset classes. But it's fair to assume that the recycling of the cash flow this year and next year happen at least? Yes, yes, I mean that's clearly our goal, absolutely. Okay. And the last question regarding those divestment strategy. Are there any new infos for the early repayment charges that are sitting in the room for at the beginning of the year Regarding the financing, the underlying financing of the remaining High Street assets, are there any updates on that side Regarding the size of these repayment charges, May or Q? Here we are optimistic that we can avoid these payments. But nevertheless, we have here to sign the contracts in the next time. Okay. And the last question regarding We are. So you pointed out the expected maintenance for Tele and Giesen for this year. And in Manheim, you mentioned there is very limited effect on the earnings on Could you quantify that? To date, it's too difficult to quantify it now, Which amount of CapEx and maintenance? If you say that it's a minor amount, Then it's around €100,000 in this level. Okay. We will now take the next question from Kai Kjellos from Berenberg. Yes, hello. Good morning. I've got a quick question. First, on Page 11 of the interim report. There you mentioned that the fair value of the portfolio increased by EUR 6,600,000 related to 5 assets. Could you give a bit more details on the or a bit more details on the update on this update and what were the main drivers which resulted in the uplift in values. 2nd question would be on Page 9 of the report. We saw an increase in the other assets to 7 €700,000 from €300,000 by year end 2020. May have to deliver a little bit more what was the reason for that. And then the 3rd question, is it fair to assume that also in the next quarters or at least for Q3, we are going to see What if we or let's say, a different development between maintenance and CapEx? I'm asking because we saw now in H1 a decrease in CapEx sorry, decrease in maintenance, But an increase in CapEx. So is it fair to assume that this will continue for the full year? And the very last question would be on the acquisitions. I think Mr. Karl mentioned that you expect for Stuttgart, the refurbishment or let's say the yes, kind of refurbishment to start a little bit earlier. Just to Ask why because the lease length of both properties compared to mines is fairly similar. So maybe you could explain a little bit more Why you think you can start why you think you can get your hands on that asset a bit earlier than in mind? Thank you. I may start with answering your last question, Kai. The concern Stuttgart is pretty easy, the answer, because if you consider the fact that one property is a single tenant property and the other one is a multi tenant property Apart from the walled, in Stuttgart, you have obviously, yes, a more flexible lease structure, meaning not all tenants are have and in contract at the same time. So therefore, based on the structure there, on the lease structure, Yes, it's a different time schedule for us when we have the chance to get access to the property in the different space. And then maybe as another answer to your question concerning the value uplift, Please keep in mind that we have started the conversations Pretty early, obviously, last year already, as pointed out, meaning our values and and ourselves. Obviously, we hear for our accounting purposes. By end of last year already, we had a Certain view could develop, and there were some estimates concerning maintenance, CapEx spending, let profile, rent levels, etcetera. And this obviously flew into the valuation already by end of this year. And Now as we were able to sign the contract and we have an even better view on the whole financial environment here associated to it, This led to the fact that by the for the half year valuation because of The expectations we had by compared to last end of last year, yes, we have reduced a bit reduced on the if I'm correctly on the CapEx side, some reductions. So we have to invest less than we originally anticipated. And additionally, obviously, the market has moved on within the last 6 months. So it's a combination of different effects, but this all led to the fact that we have this certain increase here on the value side. Yes. So So I answer the question for CapEx and maintenance first half. The relative high CapEx year With regard to one asset in Darmstadt, where we renewed the roof, this was EUR 1,000,000 CapEx and Darmstadt is one of the assets where we have changed the value coming from this CapEx, what was finalized now in the first half. The expectation that maintenance were less In the second half, you have heard, Kai, that we expect maintenance of EUR 1,600,000 up €2,900,000 in this year for the real case. So I would expect that we will have a higher maintenance in the second half than in the first half. Okay? Okay. Thank you very much. And may I have a may I ask a last Question on Page 5 of the presentation regarding the mines assets. You published a gross initial yield of 7%. Could you indicate where you see the annual rents And after you have spent your monetization investments and how much do you spend for monetizations once the tenants have moved out? I think this will be a bit too early because it will depend on some conceptual questions concerning the refurbishment, concerning mines because there are obvious reasons there are different options how we can approach this property once we have full access to it. And therefore, it's a little bit too early because I want to avoid any distraction here. But Once we have more light concerning our planning here, happy to provide more details in the next presentations. But would you see the rents, the currently contracted rents as currently the property being under rented or Let's put it this way. I think based on the yes, I mean, concerning looking forward, If we put more emphasis and we put more measures here into the property and invest into the property, we see additional rent potential, Yes, however, I wouldn't say that it's massively under rented at the moment. That's not the case. Thank you very much. As there are no further questions in the queue, I will hand the call back over to