Thank you, and good morning, everyone. Thank you for joining our Q1 2024 earnings call. Our CEO, Kruno Crepulja, and our CFO, David Dreyfus, will walk you through our presentation and give you an update on our current business performance and our outlook. As usual, this will be followed by a Q&A session. With this, I would like to hand over directly to Kruno.
Hello, everyone. I'm glad you could join us for our Q1 results earnings call. Once again, our results show strong resilience in a still challenging environment. We had a very solid start to the year, and we view ourselves on track for operating and financial targets in 2024. After the demand shock we experienced, the market appears to have bottomed out. The moderate recovery we have seen since the second, has continued in the first few months of the current financial year, taking into account the traditionally weaker seasonality.
In our retail customer business, we are seeing the first signs that the introduction of the Growth Opportunities Act will have a positive impact on demand, but larger effects will take some time. Many of our customers first need advice to understand the relevant tax implications. Our view of the institutional market is largely unchanged. We see increasing investor interest, but we do not expect a broader market recovery before the second half of the year. Let me remind you once more that we are, of course, pleased that we already concluded an institutional deal in Q1, as reported in our last call.
On the supply side, the picture also remains largely unchanged. Construction costs have stayed largely stable in recent months. Construction companies are giving up part of their margins due to the weaker order situation, but it remains to be seen how companies will be able to absorb the expected rise in labor costs. A new wage agreement for the construction industry is expected this year. Instone has shown a strong resilience during this crisis. We have maintained a strong balance sheet, high liquidity, and leading profitability.
From this position of strength, we want to take advantage of special opportunities for acquisitions in the current environment in order to strengthen the basis for future growth. In an attractive buyer's market, we are currently in advanced stages for the first land acquisitions since 2022. We are very confident that these acquisitions have the potential to generate above-average margins and returns. Let's now take a brief look at our financial KPIs for the first quarter of 2024.
Our adjusted revenues amounted to EUR 119.5 million, nearly on prior year's level and in line with our budget. Our gross margin stayed at a high level of 27.4%. Although we believe that this margin will come down somewhat as the year progresses, this is further evidence of leading profitability in our industry in Germany. The basis for this lead is our special expertise, expertise in construction management, as well as our discipline in the purchase of land. Our bottom-line result of EUR 9.6 million was slightly above last year's level and also shows that we are on track to meet our full-year targets.
Against the backdrop of this very solid start of the year, we are also reiterating our guidance for 2024. Our working assumption remains that we can expect a slight acceleration in market recovery in the second half of the year, and that 2024 will therefore mark the bottom of the revenue earning cycle. Moving on to slide 4 in our presentation. As usual, this chart provides you an update on our sales momentum in our private customer business. Due to the traditionally weaker seasonality at the beginning of the year, we saw the expected slowdown in demand in Q1.
However, we have noticed a moderate but steady recovery. We are seeing positive momentum, early indicators of demand, such as reservations in particular. Compared to the previous year, we are observing an improvement from the depressed levels. In numbers, this means an increase of our retail sales from EUR 6 million in Q1 2023 to more than EUR 25 million in Q1 2024. I think it is fair to say that we have left the trough behind us. We are also noticing that the first buy-to-let investors are taking advantage of the improved conditions resulting from the introduction of the Growth Opportunities Act at end of March.
From our discussions with our sales teams, however, we realize that many customers still need to fully understand the positive return implications from the increase in depreciation, and furthermore, require advice from their tax advisors before finally committing to buy. Furthermore, the processes that still exist on the banking side when granting loans also has a dragging impact on demand. It can therefore be assumed that the positive impact from the new law will become more visible with a certain time lag.
As expected, the situation on the institutional market has not yet changed since our last call. Investor interest and engagement has increased in recent months, and we are in talks on potential transactions. However, investors are still largely taking a wait-and-see approach, and we also share the more or less unanimous view-... that a broad-based recovery in the transaction market is unlikely before the second half of the year. One of the interesting developments is that there is an increasing number of investors looking at new builds in the affordable segment.
This product can benefit from favorable subsidy conditions in some federal states. We see this as a very exciting niche, in which Instone is very well positioned. Our first institutional deal in 2024, with a volume of EUR 62 million, also fits into this category. Our innovative new product is also an attractive differentiator of Instone in this market segment. Overall, sales increased from EUR 52 million in Q1 2023 to EUR 88 million in Q1 2024. On the following slides, five and six, we provide an overview of relevant macro indicators. The downturn triggered a high level of uncertainty regarding the price development of residential property.
The price discovery process was made even more difficult by low liquidity in the market. I think we have already gained much more clarity today, and the new equilibrium seems to be emerging in the market. After a moderate price correction, prices for new builds appear to be bottoming out. I would like to emphasize once again that new builds have shown a significant outperformance to existing properties with low energy efficiency. This is also recognized by institutional investors, in particular, who are now looking to restart investments in the residential property market with a clear focus on new builds.
The chart at the bottom of this slide illustrates construction price inflation over time. The most recent data confirms the trend of the last few quarters of stabilizing construction costs at elevated levels. This is also reflected by our own on-the-ground experience. We expect a largely stable CPI in 2024. So far, the costs are well within our budgets. We are benefiting from our improved negotiation power vis-a-vis construction companies due to the weaker order books. The construction companies have to give up part of their margins in the current environment. However, there will be a new collective agreement in the construction industry this year, and we will need to keep an eye on that.
Over to page six. Let me add some additional remarks on the price discovery process. The main driver for price stabilization is the continued dynamic rental growth, especially for new builds. In combination with the moderate price correction, forward yields for free finance units are back to around 4% and approaching the long-term mean. The rental yields for subsidized affordable units are significantly lower, also due to the return contribution of subsidized loans with low interest rates.
We have also seen this in our own transactions. The positive trend of dynamic rent growth is fully intact. On the chart at the bottom of this slide, we provide you with an update on the new build rental growth data from Bulwiengesa for the top seven cities. There are some regional differences, with Berlin maybe seeing the strongest growth, but generally speaking, we have clearly seen continuous rental growth acceleration over the last quarters. In comparison to some other data providers, the Bulwiengesa data even look conservative.
In tight letting markets, energy efficient, newly built properties continue to outperform the broader markets. As you know, new builds also benefit from much more favorable rent regulation in comparison to the existing housing stock. In good locations, landlords of newly built properties are able to negotiate inflation-linked rental contracts. This clearly contributes to rent increases in the current environment. Moving on to slide 7. Instone has proven resilient in the downturn. The key strengths of Instone, especially in these markets, are our strong balance sheet, our leading margins, and also our high level of pre-sales.
Our high level of pre-sales also provides a high visibility for our projected 2024 revenue and earnings targets. Projects worth EUR 2.9 billion are currently under construction, of which almost 90% have already been sold. This provides a stable source of future revenues of some EUR 640 million, as well as for the secure, secure future cash flows. With this, I would like to hand over to David for the financial section of the presentation.
Thank you, Kruno. Let me now walk you through our Q1 financials in a bit more detail, starting with page 9. As Kruno has already pointed out, we are very pleased with our solid start to the year 2024, which we see as a transition year. Overall, the results were very were fully in line with our expectations. Our revenues are nearly on previous year's level. Progress of the pre-sold units were the main contributor to our realized revenues, but there was also a noticeable positive impact from the closing in Rothenburg.
We continue to achieve high gross margins of more than 27% in Q1. Due to a change of project and revenue mix throughout the year, we expect our full year gross margin to come down slightly to around 22%, in line with our guidance. Our target gross margin remains clearly the benchmark of the industry. During our last calls, we also discussed our increased focus on costs and cash preservation with you. Our implemented cost-saving measures, including headcount reductions, are obviously bearing fruit.
We reported that we reached our target of annualized platform costs of around EUR 70 million in Q4. This is now also reflected in our Q1 results. Our platform costs are now significantly lower than in the previous year, despite the overall inflationary environment. As a result, we were able to keep our adjusted EBIT in Q1 stable at EUR 15.8 million. Our interest results improved slightly, despite some rise in interest costs, due to lower net financial debt compared to last year.
Our adjusted earnings after tax of EUR 9.6 million have slightly exceeded prior year's level due to a lower tax rate. To give you some detail, we anticipate a decline in the tax rate in 2024 to slightly above 24% from some 32% in 2023. The main reason for this are a higher expected earnings contribution from our Berlin JV, as well as from our Westville project. Over to page ten. With a strong operating cash flow in 2023, we were able to further strengthen our balance sheet. Our Q1 results continue to reflect this strength.
As in 2023, we had a negative operating cash flow in the first quarter, mainly due to individual milestone payments. This led to a slight climb in our LTC to some 17%, which thus still remains at a very low level. Our net debt to EBITDA ratio also remains at a very moderate level of 2.4 times. The competitive advantages of our strong balance sheet are clearly tangible for us in the current market. Our strong financial position allows us to invest countercyclically and to take advantage of special opportunities.
We remain very selective, but we are currently at an advanced stage for the first project acquisition since 2022, as mentioned by Kruno. We believe we can achieve very attractive margins and return levels above the long-term average with these projects. In addition, these projects would have an advantage of already having planning permission and pre-sales could start in the near future. Moving to the next slide. As stated before, our operating cash flow was negative in the first three months of the year, mainly due to the naturally high impact of larger individual milestone payments, which can always lead to certain volatility in the cash flows in individual quarters.
This is also reflected in the cash flow development of the previous year. We are sticking to our guidance of a positive operating cash flow for the full year 2024. Whereas in the early phase of the crisis, the focus was clearly on cash preservation, which has proven to be the right strategy, our focus is now slowly shifting back to growth. The table on the right-hand side of this slide gives you an indication regarding our financial firepower for growth investments. We have a very strong liquidity position of more than EUR 240 million, and we therefore remain net cash positive on the corporate level.
In addition, we have access to revolving credit facilities totaling EUR 160 million. For our projects under pre-construction, we have contractually secured undrawn project finance lands, finance lines of more than EUR 130 million. Furthermore, our expected positive cash flow in 2024 and thereafter, mainly stemming from the completion of our largely pre-sold buildings under construction, also contributes to our financial headroom. But again, we still stay very selective with regards to acquisitions in 2024. While we expect to see very attractive opportunities over the next 12 months, we also want to see more evidence of recovery on the demand side.
A strong balance sheet clearly remains a key pillar of Instone's business model and our strategy going forward. Chart 12 provides an overview of our solid financing structure. There are no changes compared to our Q4 reporting. As you can see, the next relevant maturities are in H2 2025. We will address this and aim to smooth our maturity profile in the near future. I think it is important to point out that the financing environment for the industry as a whole remains very challenging for the time being, and the insolvencies in the industry are clearly having a negative impact on lending.
... However, Instone remains one of the very few developers in Germany with access to secured and unsecured financing. Finally, turning to page 13. Based on our very solid start to the year and our high earnings visibility from high proportion of pre-sales, we believe that we are well on track to achieve our full year targets. Accordingly, we reiterate our guidance for 2024, which is summarized in the table outlined on this slide. With this, I would like to conclude the presentation and move on to the Q&A part.
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephones. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. In the interest of time, please limit yourself to three questions. Please allow for one question to be addressed before you proceed to the next. Anyone who has a question may press star and one at this time. The first question comes from the line of Thomas Neuhold from Kepler Cheuvreux. Please go ahead.
Thomas?
Thomas, the line for you has been unmuted. You may proceed with your question.
Sorry, I was on mute. Thanks a lot for the presentation, and thank you, my questions. I only have one, which is regarding the potential acquisition pipeline. I was wondering if you can give us more color in which cities that the potential acquisition targets are located, and is it a traditional Instone product or more the value home product? You mentioned that you want to stay conservative for the time being, so I was wondering if you have a kind of acquisition volume target for this year, which you can share with us. Thank you.
Hello, Thomas. So, we are currently focusing on, of course, the top metropolitan areas. Here, we look at well-connected locations with high quality. I think we will see now in the next 12-24 months also the buyers focusing on high quality locations. This is first. Second is, we currently have, of course, a significant pipeline of acquisition projects we are working on. Two of those we are finalizing currently. It's in total a GDV of roughly EUR 250 million. We will, of course, announce those when they are finally signed.
But we are very, very comfortable that we will get those accomplished. And regarding our target for this year, I would say that and we plan to acquire roughly EUR 500 million of GDV plus. It depends on the quality of the offers due to the fact that many of the sellers are still not accepting the new, I would say, price environment, which needs some time. And also the banks haven't really done the necessary price correction, so this will take some time. So I think the EUR 500 million plus gives you a good feeling for what we plan for this year.
Thank you very much.
You're welcome.
Thank you. The next question comes from the line of Thomas Rothäusler from Deutsche Bank. Please go ahead.
Morning. I'll just follow up on, on Thomas' question, and, and you mentioned, like, the EUR 500 million GDV, you, as, as an acquisition target. So is it, is it correct to assume this to correspond to roughly EUR 100 million land value? And also on this, what, what, what is the, the rough pricing level? I mean, if you compare it to recent years or let's say, to peak levels, maybe two years ago.
So, I have to add some more information that we currently focus, as David said in his speech, on projects which have a shorter duration between, let's say, the purchase date and the building start. So more like, zoned land is our current focus more. And therefore, I think the price correction we are currently seeing in the market or we expect to be there is roughly 30% plus. It depends, we also have, of course, seen developers in the first quarter 2022 paying incredible prices. So maybe here the price correction is more at 50%.
So these are, let's say, the answers for the first part of your question and the second regarding the volume. You assumed roughly EUR 100 million. I think this is realistic. Yeah.
Hmm. So if you assume this to be like 30%, 50% discount, it's like kind of distressed. It's definitely distressed situations or-
I think it's
Is that correct?
Yeah, you are right. I think it's more like, you know, when you put the numbers into a residual calculation and you put the new price, the yields we are expecting to stabilize at 4% roughly, and you compare this with the initial, let's say, calculation in the first quarter of 2022, you get to the correction of 30% to 50% of price in land. And I think-
Mm
... this will be the reality, the new reality. And I think one additional information, the EUR 500 million we are targeting for this year could be higher. But we also think that the overall price correction, the market for land, will take some time as the investors coming back is taking some time. Also, the new reality takes some time to get through the balance sheet of banks, sellers, et cetera. So therefore, we think that 2025 will be the year where the biggest volume of land transactions will come.
Mm-hmm. Okay. The other question is, like, if I listen to you, you sound rather upbeat or, yeah, I mean, somewhat upbeat on demand recovery. This despite, I mean, softer sales activity in the first quarter, if you compare to the fourth quarter, of course, you refer to seasonality, but maybe you can provide a bit more color on, you know, that would be useful, you know, for your confidence on this kind of recovery.
You know that we have, you know, very early indicators. So like people being interested in making an appointment with our broker teams, for example. So we've seen these first indicators clearly, recovery and more demand of potential buyers. Then we have, before we go to the notary, the reservation of a flat, and the numbers here are also increasing. And there's a steady increase in curve of reservation we are seeing in the last few months. Currently also see that all the, let's say, brokers are giving us the feedback that the degressive depreciation or the depreciation program has positive impact in people being very interested to understand how this works.
So, and that's, this is the only thing we currently are facing, that first, the people have waited to see what is the decision of the government. Then the decision came, was positive, but the details of the program, what does it mean? Could I benefit from this program? When does it make sense to buy? This takes some time, and we expect the feedback in sold numbers will come in a few months. It's currently not really recognizable in our numbers.
Mm-hmm. And maybe one follow-up on this new tax incentive for retail investors. What is actually the product line, let's say, the product pipeline for this, for this product? And how quickly can you realize it?
So, they are—I would say that the aggressive depreciation is one element which is decided by the government, and there's another or other two elements which have to be also mentioned. I think the very attractive environment is that you can combine those different programs. So the first program is the aggressive depreciation. So in the past, we had the 3% linear depreciation for 33 years. Now we have a aggressive depreciation starting with 5%, and this is for, you can say, for all the buy-to-let investors when they buy new builds. Then there is a second program, which is linked to...
Total, investment costs of EUR 5,200 per sq m, but the sq m here is a bit different from the living space sq m. So you can say that this is linked to nearly all projects which are roughly not exceeding EUR 7,000 per sq m sales price. And you can additionally depreciate 5% of maximum cost of EUR 4,000 per sq m. So you can combine those two programs. In addition, if you get to and this is also linked to high energy efficiency, so you have to achieve, it's called QNG 40. So it's a high efficiency building with additional checks you have to do during the planning and construction phase.
In your question, all, you can say nearly all of our projects are fitting these requirements. We also have changed the design of the projects in the last 12 to 18 months. We have used the time, of course, to adjust our existing projects to the new requirements.
Mm-hmm. So at the end of the day, you could fully benefit from-
Yes
... a potential demand recovery on, based on that incentive?
Abso- absolutely.
Mm-hmm.
Incentive is, when you think of, you know, 5% aggressive plus for the first four years, additionally, 5% from this other program, and you get-
Mm-hmm
... also a bit lower interest rates for a part of your investment. You come out with returns of double digit plus, plus the rent yields. So this is a very attractive program set up, but again, it's not so easy to understand. So you need a lot of education to educate the people of the benefits of these two programs, which could be combined. And this is also new. Through this law, you can combine these two programs. Before that, it was not possible.
Okay. Just wondering, do you already run marketing campaigns on that, or is that something you leave to third-party financial advisors, or?
No, no, we are starting this, we plan to have a sales start, of course, for this year. We are using this also for the one or the other existing sales activity. So it took some time before it was really clear and checked by, you know, tax advisors, how to... What could be said, what could be also confirmed. And this, of course, takes some time, but we are currently ready to market it in our projects and of course, in the new projects we are planning.
Okay, thank you.
Welcome.
Thank you. The next question comes from the line of Manuel Martin from Oddo BHF. Please go ahead.
Thank you. Gentlemen, just one question from my side. On the financing side, the debt maturity schedule is so far relaxed for you until H2 2025. However, meanwhile, what is your perception when it comes to financing conditions? Are banks a bit more relaxed in their conditions and terms? Maybe you could give us some insight there. What's going on the financing side, please?
Thank you, Manuel, for your question. It's David. I think you have to differentiate between the corporate financing side and the project financing side. On the project financing side, we see that we so far are still in an environment where we get all our projects and land plots financed, and where conditions have been sort of stable over the last quarters. And on the corporate side, I think there we see that banks are still reluctant generally to look into new lines, but we have good discussions on looking into this.
We don't have the pressure, fortunately, to actually do anything on the corporate side, but we're looking, as we normally do, into this and follow the market very carefully, and believe that it will take a bit more time until we see conditions in the corridor and at a level that might be interesting again for us to come back towards the second half or the last quarter of this year moving into next year.
... Okay. Okay, thank you.
Thank you. We now have a question from the line of Philipp Kaiser with Warburg Research GmbH. Please go ahead.
Yeah. Hello, everyone. Thanks for taking my question, and congrats to the promising start to the year. My first question is regards to your first institutional deal. How much of the EUR 62 million will be recognized in revenues already this year? Could you give us a number here?
Hi, Philip, it's Kruno speaking. I think we need a few seconds to fix this out.
Maybe we can continue with the second question if you...
I'll come back to you, Philipp, in a second.
Yeah, yeah, yeah. No worries. Just want to kinda understand how far away you are from your lower end of the guidance by taking, like, the EUR 400 million already secured, and then adding the part of the institutional deal on the revenue line to get a feeling how much is left to reach the lower end, but sure we can pick up the number.
Yes.
My second question is also regarding your bottom line in guidance. I mean, you had, like, a decreasing platform cost, lower tax rates, and printing already a sound, almost, EUR 10 million net income in the first quarter. And historically, your first quarter isn't your strongest quarter in regards to the bottom line. So what can possibly go wrong in the next three quarters, which I might have not on the table?
So I think that the difference between this first quarter and maybe the quarters, the first quarters before, was that we always had, you know, high margin projects running through our balance sheet. And today, these high margin projects are, let's say, we are bringing them to a construction end. And-
Mm.
What means that, for example, Westville, which you know that this is a project which is this year-
Mm
... is a significant part of the revenues, roughly EUR 100 million is coming from this project. And this has a very or let's say a lower margin. The gross margin is roughly at 18%.
Mm.
And then we are having projects which we are starting construction, which have been sold recently. And overall, this means that in the past we have, we have had the situation that the gross margin from the first quarter was increasing steadily, and now we will see the situation that the first quarter margin will decrease to the level we have, we have guided through, let's say, these reasons I mentioned. And the impact of, or the positive impact of revenues of the project are EUR 16 million, 16 of the-
Mm
... of the Nürnberg sales activities.
Okay.
For this.
Okay. Perfect. Okay, thanks a lot. That's all from my side.
Thank you.
Thank you. As a reminder, if you wish to register for a question, please press star and one on your telephone. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the conference back over to Burkhard Sawazki for any closing remarks.
Thank you for your participation. If you need further information, please do not hesitate to contact the Instone IR team also after this call. Thank you. Goodbye.
Thank you.