Good morning, everyone. Thank you for joining our Q2 2023 earnings Call. Our CEO, Kruno Crepulja, will walk you through our presentation and give you an update on our current business performance and our outlook for 2023. 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 Q2 earnings call. In an overall still tough environment, we once again achieved very solid results with continued high margins and on the basis of a strong balance sheet. This result was also supported by additional cost-saving measures we have taken. If you look at the business development in the 1st half, we must note that sales were in line with the general market, very sluggish, although it is also fair to point out that we can observe a moderate recovery in our private customer sales business in the recent months from an admittedly very low level. The institutional market is still largely frozen, and we do not expect a notable market recovery before H1 2024. In a smaller size transaction, we successfully sold a part of our Bamberg project to an institutional investor in Q1.
As mentioned in the past, our guidance for this year does not include major institutional deals. On the supply side, we are observing a continuation of the positive trend with construction cost inflation receding. Against the backdrop of decreasing order books of construction companies, our negotiation power is currently improving steadily. Accordingly, we remain highly confident about meeting our cost budgets for the year. Given the current overall still low visibility on the demand side, we are clearly doing our homework, and we have increased our focus on costs and cash preservation in the last quarters. Our efforts are bearing fruit. Platform costs for the 1st six months are already slightly lower than they were a year ago, and more savings should be achieved by the end of this year.
Specifically, we view ourselves on track to reach our targeted run rate for platform costs of EUR 70 million by Q4, 2023. As you will see, our business generates positive operating cash flows in the 2nd quarter. Hence, our solid balance sheet and leverage ratios have improved. Let's now take a brief look at our financial KPIs for the 1st half of 2023. Our adjusted revenues amounted to EUR 279.5 million, slightly above previous year's level and in line with our budget. Our gross margin stayed at a high level of 25.8%. This clearly reflects a leading profitability compared to our German peers.
Due to a higher top line, stable margins, rising contributions from our Berlin JV, and despite higher interest costs, our earnings after tax have increased quite significantly over the 1st six months to EUR 23.9 million. Overall, our H1 results show that we are fully on track to meet our financial targets for the full year, 2023. We reiterate our 2023 full year guidance with adjusted revenues of EUR 600 million-EUR 700 million, an adjusted gross margin of around 25%, adjusted earnings after tax of EUR 40 million-EUR 50 million, and a positive operating cash flow. Moving on to slide five in our presentation. As usual, we provide full transparency regarding sales speed in our retail customer business. As you can see, our sales speed remains below the long-term range.
However, there appears to be a meaningful improvement versus recent lows, which is in line with anecdotal reporting across our branches regarding increased customer inquiries. Sales are focused on projects in more advanced stages of construction, as the risk to miss out is a more relevant consideration. Although, customers clearly prefer to minimize the period from the signing to completion, not least to avoid financing costs. We will see how sustainable the improvement is. For now, we are taking an optimistic stance. As already mentioned, the situation in the institutional market has not really changed so far. Most of our institutional investors continue to stay in a wait and see mode. However, talking to our clients, we feel that 2024 could become a better year, but for the time being, the visibility on the timeline remains low.
Clearly, the advanced energy standard of our product, accelerating rent growth across all our focus regions, and the stabilizing rates environment will help reopen the market with institutional clients. On the following slides, six and seven, we provide an overview of relevant market indicators. The key question, especially in the current environment, is the price development. The slump in transaction volumes reduces transparency regarding appropriate price levels and reflects market uncertainty. The value of published market data has certainly suffered due to the aforementioned reasons, I think it is still fair to say that the big picture is starting to get a bit clearer. We are seeing only a moderate decline in headline prices for new build properties in the metropolitan areas. Newly built properties are clearly outperforming the broader market, while properties with a CapEx backlog for energetic refurbishment are seeing the largest discounts.
The latter is clearly a result of the energy crisis and the expected changes in the regulatory framework for heating systems in Germany. Although, there appears to be a relevant degree of regional differentiation, with cities such as Berlin and Leipzig or Cologne and Dusseldorf, showing a better performance with regards to both price and rent development. Nevertheless, I think it's also fair to say that asking prices, as shown on the left-hand side, might differ somewhat from the actual transaction prices. The right-hand side of this slide shows construction price inflation over time. The most recent data from May show a continuation of the trend of receding inflation. This reflects our on-the-ground experience with new construction contracts largely in line, and in some cases, even below budget. In addition, we clearly benefit from improved negotiation power vis-a-vis our suppliers, as construction companies' order books are increasingly weakening.
Over to page seven. The persistently strong momentum in rents across residential assets and the particular strength regarding new build rents, are perhaps the most important positive developments in the market. Over the past month, rents, particularly in the metropolitan areas, have shown high single digit year-on-year increases. This trend is also confirmed by all relevant market surveys. Energy efficient, newly built properties are once again a key beneficiary of this development. There are clear regional differences, but overall, rent growth in the major cities has picked up over the past 12 months to a level we have not seen in many years. The scarcity for residential space is reinforced by, 1st, a massive decline in new construction. 2nd, a substantial number of would-be buyers that are forced into the rental market. 3rd, the well-known migration and urbanization trends.
Considering the time lag in connection with supply for new build properties, we can expect the demand surplus for rental properties to continue to put upward pressure on rent prices. As you know, new build benefits from much more favorable rent regulation. Due to the high demand situation, landlords of newly built properties in good locations are able to negotiate inflation-linked rental contracts. This clearly contributes to higher growth rates in the current environment, also in the existing leases and not only in new leases. We believe that this strong development will help the market in its price discovery process to narrow the bid-ask spread. While the rise in interest rates has clearly triggered a rise in the yield requirements, the net price impact is clearly mitigated by the strong rent performance and the sound outlet.
You are familiar with our two-dimensional graphic, contrasts the opposing effects of rent development and yield expansion. We still consider our base case scenario to be realistic, that we can expect a price correction of around 5%-8% until the institutional market reaches a new equilibrium. This would imply rental yields in the free finance market of slightly below 4%. Moving on to slide eight. Instone can navigate through the crisis with a comparatively low risk profile. In addition to a strong balance sheet and industry-leading margins, the high level of pre-sales is a key element of this. The high pre-sales ratio provides high visibility for revenue and cash generation, and it significantly mitigates potential inventory risks.
On this chart, we illustrate that projects worth EUR 3.1 billion are currently under construction, and there are some EUR 2.8 billion, or 90%, have already been sold. The total value of sold projects, including projects in the pre-construction phase, amounts to EUR 2.9 billion. This forms a stable source of future revenues of nearly EUR 900 million, which have not yet been recognized. As you know, we have a change in our CFO role. David Dreyfus will take over the position from Foruhar Madjlessi. David has already spent a significant amount of time with the company, and I believe we have been able to secure a smooth transition of responsibilities. He's also participating in our call today, but will only officially take up the position from September 1st onwards.
I will therefore also lead you through the financial section of our presentation today. David, thanks for joining us on this call, and we look forward to permanently welcoming you in about three weeks from now. Let me now take you through the H1 financials in a bit more detail, starting with page 10. We have achieved overall results that against the current market backdrop, we consider to be absolutely satisfactory. Our revenues have increased versus last year's H1. Pre-sold projects and construction progress have been the major contributors to H1 revenues. As just mentioned, cumulative outstanding revenues from our-... EUR 900 million. We continue to achieve attractive margins underpinning the quality of our projects, as well as our ability to manage construction costs.
With a gross margin of around 25%, we certainly have an industry-leading profitability, which is also confirmed when looking at the latest results of other listed peers with a focus on Germany. We have already discussed our strong emphasis on costs and cash preservation in the current environment. Despite a rising number of units under construction, we have already managed to reduce our staff costs. This has been achieved based on lower variable compensation, as well as a general freeze for new hires. In addition to staff costs, our focus remains on improving G&A cost position. As a result, we continue to expect up to EUR 80 million of platform costs for the full year 2023. While we also feel on track to reach a run rate of annualized platform costs of EUR 70 million by the end of this year.
An important pillar to our sound bottom line results was the earnings contributions from our joint venture project in Friedenauer Höhe in Berlin, which is progressing in line with our expectations. Most of the more than 1,000 units have been pre-sold to institutional investors. A total of 131 units have been designated to retail sales, and given its particularly attractive location and well advanced construction, the retail offering project is currently among the best-selling in our portfolio. Over to page 11. On slide 11, you find a brief overview of how we are going to achieve our sales and revenue targets in the current financial year. After having reached sales contracts of around EUR 71 million in H1, the full year target of at least EUR 150 million implies somewhat higher sales in the 2nd half.
Against the backdrop of the recent positive retail sales trend, we expect a rise in retail sales in H2, and we also consider the signing of a small institutional deal still a possibility. In addition, we will benefit from index-based sales price adjustments with our institutional clients, which will also be captured as new sales according to our definition. The revenue bridge on the right-hand side shows that our full year forecast is based primarily on revenues generated from pre-sold properties and the expected construction progress. Turning to the next page. As you can see, Q2 credit metrics have improved. We maintain a rock-solid balance sheet, which is clearly a key competitive strength of ours in the current environment.
On the back of a lower net debt position in the 2nd quarter and rising operating earnings, our LTC ratio stands at moderate level of 24%, while Net Debt to EBITDA decreased to 3.1x. As previously communicated, there can be a degree of volatility, in particular, around the Net Debt to EBITDA figure. However, we anticipate keeping our strong balance sheet and generally moderate leverage metrics. As you can see from the footnotes, we have excluded some EUR 80 million cash and some of EUR 54 million of corresponding financial debt in this calculation. This is due to subsidized loans attributable to our customers. As a result of this adjustment, we have chosen a conservative disclosure. I would like to point out our book value per share, valued at costs, amounts to more than EUR 13 per share, significantly above the current share price.
As you can see, our Q2 operating cash flow has been positive with EUR 34.3 million. We expect the difficult market environment to persist throughout the remainder of the year, we also see the risk that potential distressed situations of highly levered players in our sector might have an adverse impact conditions in the sector. Therefore, we maintain a high focus on cash preservation. We are currently investing in new land on a highly selective basis only. We are keeping our powder dry for distress- we believe will emerge. We will, however, not re-restart new investments, except if the risk/reward profile is highly attractive. For example, if the sale is very likely until we see a market stabilization. Until then, we will focus on working on our existing EUR 7.2 billion pipeline. The cash outflow for land in H1 relates to prior year commitments.
Our liquidity position remains strong. With our current cash position and undrawn revolving credit facilities, we have more than EUR 350 million of liquidity available. In addition, we have contractually secured undrawn project financing lines of more than EUR 150 million. It is worth noting that we remain one of only a few developers with continued access to secured project financings. We have successfully completed project financings with a volume of EUR 150 million year to date. The full access corporate funding and project financing will clearly be another competitive advantage for Instone. Chart 14 provides an overview of our solid financing structure with appropriate maturities, which we aim to further improve in the near future.
From a position of strength, we are currently discussing with our lenders an additional smoothing of the maturity profile of a promissory note due in 2025. Turning to page 15. Against the backdrop of our very solid H1 results, we view ourselves on track to reach our 2023 financial targets, which we consider to be robust with respect to our P&L targets, and as target revenues are primarily driven by construction progress from existing projects. With this, I would like to conclude the presentation and move on to the Q&A part. We would like you to ask the question one by one so that we can answer them accordingly. Thank you.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star, followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the handset before making your selections. Anyone who has a question, again, may press star followed by one at this time. One moment for the 1st question, please. Our 1st question today will come from Thomas Rothäusler from Deutsche Bank. Please go ahead.
Hi, everybody. Yeah, a couple of questions. The 1st is on a rough outlook for say, the next until next year. Actually, you expect no major recovery before the 1st half of 2024, if I got that correct. You expect actually the 1st half of next year also eventually to be weak. Actually, all the hope is on a recovery in the 2nd half of next year. If this would materialize, definitely the results for next year should be below that of this year. Actually, considering, you know, a lower starting point from revenues from pre-sold units compared to this year, would you roughly share this picture?
Hi, Thomas. I think of course it's, it's, too early to give a guidance for 2024. What we can say is that approximately EUR 400 million of the planned revenues for, for the coming year come from already sold projects. Where, of course, the construction process has to be achieved or the progress has to be achieved. On the other hand, when we look at our, let's say, current situation of, private sales and, and retail sales, we see some recovery. When we look at our discussions with, institutional buyers, the situation is quite a bit better than we have seen it maybe a few months ago. Therefore, again, we don't want to, to, to give you a guidance today, but I think it's a very good and, and solid base. We are starting with, EUR 400 million of revenues already secured by the existing, by the existing sales.
Okay. The 2nd question is actually on your gross profit margin, which is, which is still quite high, roughly 26%. If, if you compare to your peers, what would you say is the key reason for that? What level can this be kept if you assume you to start new projects with like, much lower margins?
I think that, you know, from my perspective in comparison to, to many others, you know, we have been always, a, a specialist on, on, residential development in Germany for many, many years. We have been the 1st mover to start this business nationwide, and we have a lot of experience and, and, really well-skilled people. Looking at the value chain, I think we, we, we, we do the right things in acquisition. We, we, we find out the, the right opportunities in the market, and we have the whole process under control. You know that we have a deep understanding of construction management, and, and this all leads to the margins, which are significantly better than, than, than many, many other peers.
Looking forward, when you look at the overall situation, I think of course, if we assume a price reduction of 5%-8% for the existing portfolio, this will have some kind of impact on gross margin. We think that roughly, roughly, the gross margin should stay at the level of 20%. Additionally, we will see plenty of opportunities. From these stress situations where we, we are absolutely sure that we can generate in the future, attractive market, margins from this, distressed situation. Overall, I think, you know that we always said that, we think that the gross margin over the time period should be at the level between, 20%-25%. This is absolutely achievable also in the future.
Okay. The 3rd question is on new projects, and how many can we expect you to start this year?
We have currently, a big number of, you know, projects under construction. We are currently building roughly 6,000 units. Of course, let's say starting we started construction in the project in Hamburg, Rothenburgsort. Depending on the sales activities, we are always, you know, be very cautious. We start the project if we reach 30% pre-sale rate for the owner-occupier business, or if we sell the whole project in the institutional business. Due to the lower sales activities, of course, there's also some kind of, you know, lower, lower project start activities. Again, I think, we are, let's say, well on track regarding our, our, revenue, revenue, target for this year. For next year, we discussed this a few minutes ago, what we, what we expect on, on the revenue basis.
Mm-hmm. Actually, a follow-up on this. I mean, if we assume you two start new projects that maybe more activity there, if, if, if demand should recover, what should we expect with regards to working capital? Actually, considering these projects typically take longer to get sold in this market, I would assume. Also with, with more project starts, the, the pre-sold rate would then also, come down consequently, I, I assume. Is that the right picture?
I think we will see this for some kind of time period before the market is, is, is again accepting new, new, let's say, price points. What we currently have is that institutional buyers are on the sideline. When you think about the macro environment we have in Germany, we have, let's say, rising rent prices. We have a significant demand, supply, demand imbalance. From my perspective, what is now necessary to get the market to a, I would say, stabilized situation, is that that the market has to come out with a, with a new price points. Then, let's say the deal flow will start again. The question, if will the deal flow will be, be as strong as, let's say, in the year 2020 and 2021? That's, that's hard to say.
What I can say is, that the construction activities key, are going down, the pressure in the market, in the resi market is further increasing. From my perspective, the appetite to invest will start again, but for the time being, of course, there is some kind of, of impact on, on, on working capital.
Okay, one question is actually on new land acquisition, you mentioned opportunities. At what discounts can you currently or could you currently buy new projects? It seems like there's quite a level of distressed situations already. Maybe, you know, a rough idea would be helpful.
If you translate our 5%-8% price reduction and if you calculate, you know, this on a level of land price, it would mean that we expect the land prices in comparison to 2022, should go down by 20%-30%. We currently, we see the one or the other, let's say, opportunity in the market, where the landlord is under pressure and is accepting discounts. As the same as for institutional buyers, it will take a few months' time before the landlords are so under pressure or accepting the new reality. Currently, I would say there are only a very limited number of, of these, let's say, discount available project, this number will go up significantly in the next month.
Mm-hmm. My last question is actually on this proposal from the government on new tax incentives for newly built, the so-called degressive depreciation. Any view from your side on this? Is this a meaningful measure, or what do you expect if this would be realized?
Let's say this degressive depreciation is clearly a driver for demand from my perspective. Because when you look at the terms, they are comparable to listed buildings where we currently sell on a very good level. When we look at our project in Leipzig, it's a listed building. We have nearly the same sales speed as we had in the past. There was no impact on sales speed for this product type. If this comes, this will clearly, let's say, increase demand of retail clients significantly. Is it meaningful? I think it will help. What we think what the government should do additionally is to try to put in some kind of program for the institutional investors. Again, I think, of course, it will help in the, in the sales activities, to improve.
Okay, interesting. Do you mean this is meant for, for retail investors, or, or does it also include institutional investors?
So maybe-
Can they also benefit?
No, not from the, from the structure they have. They are not able to, to generate the depreciation.
Oh, okay.
It's for, for retail clients, so small investors, mainly dedicated. That, that, that has, of course, a technical, yeah, there are technical issues for institutional buyers to benefit from this.
Okay. Thank you.
Welcome.
Again, it is star and then one to ask a question. Our next question today is from Manuel Martin of ODDO BHF. Please go ahead.
Hello, thank you for taking the questions. I have two questions. The 1st question would be on M&A. I mean, you are in a good position to, to benefit from, from distressed situations. Maybe you could give us further feeling there, and would you rather look to, to take over an entire company, or are you rather looking to, to take over certain project developments? Maybe you can give us some color on that, please.
Yeah, sure. You know, we have been always cautious regards to M&A transactions because you are buying portfolio, but you are also buying people with different mentality and, and, and, and quality, et cetera. Therefore, we, we think that there will be plenty of chances to buy let's say, attractive land portfolios, and that's clearly our focus.
Okay. That's, that's clear. The 2nd question would be on your shareholder structure. Are there of any news, or are you in contact with your major shareholder, ActivumSG as does he have some plans with you, which you could share us, or is there a kind of exchange of information or conversation with ActivumSG?
What, what... Let's say we are in regular discussions with ActivumSG, as we are with other shareholders. You know, that Stefan Mohr is, is, is a new member of the supervisory board. There are no other information, let's say, here to be mentioned from my side.
All right. Okay, thank you very much.
Welcome.
Again, it is star and then one to ask a question. Our next question will come from Philipp Kaiser of Warburg Research GmbH. Please go ahead.
Yeah, thanks for taking my question, and congrats to the sound result. Just only one additional question left from my side, and it's on the construction prices. Could you remind me the percentage of the construction costs already fixed for this year? For the remainder, are there kind of, can we expect kind of positive impact on earnings due to the fact that the costs are clearly easing since the start of the year?
Yeah, sure. Yeah, sure, Philip. You know that, that construction costs are roughly 40% of, of, of the, of the total, let's say, amount of revenues. We have already secured 80% of, the construction works for this year. There's only, I would say, a limited upside potential here. We, we see that, you know, we, we are in budget or slightly below, and there is some potential, but it's clearly limited. You know that we have assumed a construction cost inflation for this year, an average of 45%, which, from my perspective, seems to be really a realistic, maybe conservative approach.
Mm.
For the coming year, 2024, we think that we have two different, I would say, developments. One is the material cost inflation, clearly going a bit down, but we don't have to forget that, let's say, staff costs by the high inflation rate-
Mm
should go up. I think we still calculate a single, a smaller single-digit construction cost inflation number for the coming years. The question is, of course, what happens with hopefully, the war in the Ukraine someday really ending. Here, the sources we are using in Germany, I would say they are parts of which also will be used in the Ukraine. I wouldn't be too optimistic that the construction costs go below the level we are today. It will be some inflation. That's our view on construction cost inflation.
Okay, perfect. Thanks, very helpful. All from my side.