Hello, and welcome to the Instone Real Estate Group SE Third Quarter 2022 Results conference call. My name is George. I'll be your coordinator for today's event. Please note this conference is being recorded, and for the duration of the call, your lines will be in listen- only mode. However, you'll have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your question. If you require any operator assistance, please press star zero and you'll be connected to an operator. I'll now hand the call over to your host today, Mr. Burkhard Sawazki, Head of Investor Relations, to begin today's conference. Thank you.
Thank you, George. Good morning, everyone. Thank you for joining our Q3 earnings call. Our CEO, Kruno Crepulja, and our CFO, Foruhar Madjlessi, 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.
Good morning, everyone. I'm glad you could join us for Q3 2022 earnings call. In an overall challenging environment, we achieved very solid results which were overall in line with our expectations. We are benefiting from a high share of pre-sold units which are currently under construction. We currently have projects under construction worth around EUR 2.7 billion, and thereof EUR 2.6 billion, 97% have already been sold. In an overall uncertain environment, this forms a strong basis for earnings and cash generation in the years to come. We expect free cash flows of more than EUR 600 million from the projects under construction. We have already secured revenues of around EUR 550 million for the year 2023.
What is also very important for us, we have always had a strong focus on margins, and therefore we are glad that we continue to achieve a high margin and a leading profitability also in Q3. Nevertheless, it is also fair to point out that the overall tough macro environment with high inflation and a sharp rise in interest rates has left its traces, and we are currently experiencing a noticeable slowdown in our sales build. Many institutional, but also private investors currently prefer to stay in a wait-and-see mode despite the still healthy underlying demand situation, especially for new- build properties. However, let me start our presentation with a summary of the highlights of the current business performance on Slide 4. As just mentioned, the most important topic is currently the development of the situation.
Our sales ratio on the retail business has dropped below its long-term mean, and institutional investors are in a wait-and-see mode despite general positive commitment to our asset class. We are also getting investor feedback that for many of our customers, new-build properties remain the preferred sub-asset class due to compliance with ESG criteria, superior energy efficiency and, as a result, the positive outlook for rental growth. In this more difficult environment, we still managed to successfully sign two smaller deals with institutional investors. Despite the decline in transaction volumes, the pricing for our products stayed stable also during the Third Quarter. We are currently not making price concessions for our projects under or pre-construction. The situation in our procurement markets remains tense, although availability of material has improved somewhat over the recent months, and inflation, as expected, is slightly receding.
However, we still expect further cost increases over the next 12 months, mainly due to rising energy costs, but rising labor costs will also play a part. The German home- builder market is highly fragmented, and we believe that especially in the current market environment, many smaller regional and highly levered players will suffer from tighter financing markets and rising costs of capital. We are therefore confident that good acquisition opportunities will therefore arise in the next 6-12 months. We are therefore currently keeping our powder dry. Our strong balance sheet gives us a competitive edge in the current environment. Let's now take a brief look at our financial KPIs the first 9 months of 2022. Our Adjusted Revenues amounted to EUR 441.9 million, still above previous year's level, thanks to the high volume of pre-sold apartments.
Our gross margin stayed at a high level of 20.58%, which is still slightly above our target margin across the cycle and in line with our target for the entire financial year. This key figure again reflects leading profitability in the sector. Due to the decreasing margin from a very high level last year and slightly higher tax rate as well as financial expenses, our Adjusted Earnings After Tax dropped to some EUR 34 million. On the back of our nine-month result, we can also confirm our full year's financial targets. Hence, we expect Adjusted Revenues of EUR 600 million-EUR 675 million, a Gross Margin of at least 25% and Adjusted Earnings After Tax of EUR 40 million-EUR 50 million. The payout ratio is expected to remain stable at 30% of EAT.
Despite a negative operating cash flow in the first nine months, we expect a positive operating cash flow for the entire financial year 2022. To provide some more insight into the current demand situation in recent months, we have provided you an update of our retail sales ratio on Slide 5. This chart demonstrates a certain stabilization at the level of approximately 0.7%, which is below the long-term mean. After a moderate recovery after the summer break, a sharp rise in interest rates in September triggered another setback. We are observing a higher share of buyers with a moderate leverage. After a positive price development in Q1, our prices remained overall stable so far in Q2 and in Q3. We are sticking to a high price discipline. We have a preference to maintain high margins over a short-term push of sales volumes.
On the following Slide 6, we provide an overview of relevant macro indicators. We all know that the market environment has changed over the last month. The overall deterioration of the macro environment during the energy crisis in the past month has had an adverse impact on overall consumer sentiment. The historic jump in interest rates is affecting affordability for certain customer groups, and this is contributing to a short term rise in uncertainty for both private and institutional investors. As a result, we have seen a significant drop in transaction activities. Nevertheless, recent market data show, and this is in line with our own sales activities, that headline prices for new-build properties remained overall stable so far also during the Third Quarter.
Again, we believe that the superior energy efficiency of new-build properties and the significant decline in new construction activities will help to mitigate the risk of major price corrections. The chart on the right-hand side shows that currently around 15% of all residential projects have been canceled, and we believe there is more to come. The increasing financing constraints in combination with the slowdown of the sales speed and rising construction costs will especially affect the construction start of lower margin projects of the highly levered and smaller players. This will lead to a massive reduction in supply. The significant increase in material costs and the material bottlenecks since the Russian invasion of Ukraine still persist, weighing on construction speed. In recent months, however, there have been signs of some easing. At an elevated level, CPI growth is decelerating.
For 2022, we stick to our forecast for CPI growth of around +15% year-on-year. Due to the high share of fixed price contracts and due to the subsidies for energy efficient building, we are less affected by this and therefore we can still confirm our margin target of at least 25%. Against the backdrop of rising energy and labor costs, we expect a further cost increase in 2023, although at a much slower pace. In the current market environment, we would like to emphasize the defensive characteristics of our business model, which may not yet be fully recognized. Currently, there are projects with a GDV of EUR 2.7 billion under construction and thereof some 97% have already been sold.
This forms a strong basis for sound and predictable cash generation over the coming years. After deducting all operating costs and taxes, we expect the cash contribution of these projects of more than EUR 600 million, which will be realized over the coming years. Additionally, we have already sold properties worth around EUR 300 million, which are in a pre-construction phase. Another pillar of future cash generation is our land bank. The book value of our unsold but already paid land bank at historic cost is around EUR 440 million. On the back of an envelope, this gives you a net cash flow of more than EUR 700 million, a value as you can see which is significantly above our current market valuation.
Please bear in mind that on a per share basis, this value should be divided by a lower number of shares due to our share buyback. This rough calculation, of course, does not yet include the value of our platform and the future potential of our business. These described future cash flows will be available for future growth investments and for the return of capital to shareholders. Chart 8 illustrates the timely distribution of the cash flows from the projects under construction. You can see that only from the expected de-risk cash flows from projects under construction, we could, for instance, repay our entire debt within the next 18-24 months. On Chart 9, we have once again summarized some arguments that clearly speak in favor of investing in new-build properties.
One of the most important issues in an environment of strong rising interest rates is the question of the appropriate yield of an investment. There is growing evidence that good properties in tight housing markets can be rented with rent indexations. In Munich, for instance, index-linked rents now already dominate new leases. Ne w-build properties also clearly fall into this category. new-build properties thus offer investors an attractive growth profile and inflation-protected real returns, a clear differentiator to nominal yields in the bond market. The fact that the energy consumption of new-build properties is some 80% below the average of existing properties clearly contributes to high tenant demand and to a positive rental outlook. Moving to our portfolio section on Slide 11. Our project portfolio increased slightly year to date.
As of end of September, the Gross Development Value of our portfolio stood at around EUR 7.8 billion, and this forms a strong basis for secured revenues and cash flows in the coming years. On the right-hand side of the chart, you find the projects we have added to our portfolio year to date. Some of them have already been originated last year. In the present uncertain environment, we have become very selective on new acquisitions, and in the current financial year, we will clearly stay below our former investment targets. As already mentioned, we expect that attractive opportunities will arise in the coming months, and therefore we are keeping our powder dry. Slide 12 provides a breakdown of our current project portfolio as of the Q3 reporting date. The portfolio is made up of 53 projects with some 16,600 rental units.
Some 86% of the GDV is distributed to the most attractive metropolitan areas of Germany and the remainder in very attractive B-cities. This chart does not include our JV projects which come on top. The proportionate GDV of our three joint venture projects amounts to some EUR 500 million. On the right-hand side, you can see the usual breakdown of the current development status of our portfolio. As already mentioned, of the nearly EUR 7.8 billion of GDV, which is shown here, around EUR 3.2 billion is already under construction or pre-construction, and thereof, 93% or some EUR 2.9 billion has already been sold. With that, I would like to hand over to Foruhar for the financials.
Thank you, Kruno, and welcome to everyone from my side. Let's start with our adjusted results of operations on Page 14. On 9 months, revenues of EUR 441 million are 9% ahead of the 2021 comparable period. Q3 has benefited from revenues associated with 2 smaller institutional forward deals. Our gross margin for both the Third Quarter as well as for the 9-month period to September amounts to almost 26%, in line with our full-year guidance for gross margin in excess of 25%. As we had already pointed out in our half-year results call, we are tightly managing costs and have successfully kept platform costs at a level of EUR 61 million, slightly below previous year's EUR 65 million for the first 9 months.
We continue to expect full-year platform costs to come in EUR 10 million below our original EUR 90 million forecast, i.e., in line with 2021 full-year platform costs at around EUR 80 million. New hires, non-project related and admin expenses, as well as variable compensation are the key levers to manage our cost base for 2022. Considering the operational headwinds we are facing in the current market, we are satisfied with our 13.8% EBIT margin. Interest expenses have increased, reflecting an increase in project financings as we have stepped up and progressed with our construction activity. Please note, 1,000 units are currently under construction, up from approximately 4,800 units at the start of the year. This has resulted in project-related financings to increase from EUR 190 million to EUR 320 million.
Turning to Page 15, for the final quarter of 2022, we are expecting new sales contracts at a level similar to Q3, including 1-2 institutional sales. With that, we remain fully on track to hitting our targeted EUR 600 million-EUR 675 million revenue range. As is illustrated on the right-hand side of the Page, the majority of our Q4 expected revenues are based on construction progress as opposed to new sales, providing for a high degree of certainty to achieving at least the lower end of our targeted revenues, almost regardless of our sales successes. Over the Page 16 provides a snapshot of our balance sheet and leverage. As you know, we use Loan-to-Cost as well as Net Debt/EBITDA to measure our leverage. Both figures remain at moderate levels, demonstrating our financial strength and providing for downside protection.
Page 17 provides an overview of our operating cash flow pre- and post-land acquisitions, as well as our liquidity position. Operating cash flow has been slightly negative at EUR 27 million for the first nine months of the year, and taking into account new land investments. Pre-new land investments, our nine-month operating cash flow amounts to a positive EUR 47 million. For the full year, we are expecting a low positive operating cash flow after land investments and a low three-digit million positive cash flow pre-land investment. Moving to the right-hand side of the Page, you can see our current liquidity position. Next to EUR 155 million of cash, we have undrawn committed credit lines of EUR 170 million. In aggregate, we have secured access to EUR 325 million of corporate funding.
In addition, it is important to stress that all of the construction-related future funding requirements of our under- construction projects are fully secured based on our existing project debt financing agreements with ample headroom covering, in each case, the full construction expenses. The next Page provides an overview of our financing structure. As you can see, following our refinancing earlier this year, we have no material debt maturities left until August 2025. By nature, our project financing lines carry variable interest rates, resulting in a substantial portion of our debt costs to be linked to short-term EURIBOR.
Page 19 provides a brief overview of our share buyback activities. We have completed our initial 2022 buyback program with a targeted purchase of 5% of our outstanding shares. Considering the share price development, we have only spent about half of our original budget of EUR 50 million. Consequently, the management board has resolved a second buyback program equivalent to the residual EUR 25 million and covering the full remaining 1.3 million shares available as part of our buyback authorization. Note that assuming completion of the buyback program at current share price levels and including our dividend, we will have returned an aggregate of EUR 65 million to shareholders this year. It is important to stress here that we do feel comfortable returning these amounts based on our leverage, liquidity, and future cash flow generation, which Kruno has alluded to in much detail earlier.
Over to Page 21. Just reiterating once again, we confirm our outlook for fiscal year 2022 with revenues of EUR 600 million-EUR 675 million, a gross profit margin exceeding 25%, and earnings after tax of EUR 40 million-EUR 50 million. We continue to expect 2022 new sales contracts for approximately EUR 350 million. I'd also like to point out once again that visibility in relation to our 2023 financial results is currently limited. Consequently, we expect to provide full guidance only with the announcement of our 2022 results in March of next year. However, let me stress one more time that revenues for 2023, based on construction progress alone and assuming no incremental sales can be achieved, are expected to come in at or above EUR 550 million.
As previously explained, the key driver for our 2023 revenues will be associated with a return of institutional buyers to the market, the extent and timing of which remains uncertain from today's perspective. With that, I'd like to pause and open the call for questions.
Thank you much, sir. Ladies and gentlemen, as a reminder, if you'd like to ask any questions, please press star one on your telephone keypads. If your question has been answered, you may remove yourself from the queue by pressing star two. Once again, please press star one for questions. First question today is coming from Mr. Thomas Rothäusler, calling from Deutsche Bank. Please go ahead, sir.
Hi. Actually one question on demand. I mean, it seems like it's rather weak currently. What can we expect regarding new project starts? I guess it's rather tricky to start new projects at 30% pre-sales ratio nowadays given the weak demand. Also with this regard, do you have building obligations from municipalities, and what is the penalty if you don't stick to it?
Hi, Thomas. The first question regarding the preparation of the sales starts. You are absolutely right. We have an uncertain environment currently, where we
Mm-hmm.
We discuss with institutional buyers regularly for projects, and they are clearly currently waiting. I personally think that we will see the first sales starts of the project in the second quarter. My personal view is that we will have a bit more clarity what are the multipliers the institutional buyers are willing to pay, what are the decisions we are making regarding the different sales channels. I think second quarter next year is a realistic scenario. Regarding building obligations, we of course try, you know, to negotiate with the cities not to be in a building obligation. For the majority of the projects, we don't have any obligations.
Where we have obligations, we don't have any financial penalties agreed. Therefore it's more like, you know, we have to discuss with the city what to do. Do we need more time? There's no incremental risk, I would say, coming from any obligations we have agreed with the cities.
Okay. Thank you.
Thank you much, sir. Next question today is coming from Manuel Martin, calling from Oddo BHF. Please go ahead.
Yes. Thank you for taking my question. Actually, one question from my side. Could you elaborate or describe to us how is the situation on your construction sites? Is the activity picking up? And combined with that question, how is the situation with the supply chain? Do you receive enough material to construct, enough workers? Briefly, what's going on in the bricks and mortar world at Instone?
Sure. You know that we have guided for this year, a 15% cost price inflation. On a year-over-year basis and what we see currently on the ground is that we are strictly in line with our budgeting for this year. Additionally, we see some kind of easing of, let's say, cost inflation due to the fact that construction companies have to fill their order books again through a lot of cancellations we are currently facing in the market, so people postponing their project, canceling their projects. I would say there is some positive development here. But we stay conservative in our assumption also for the next year.
We have calculated a 7% cost price inflation also for the following years. You can say we have a conservative approach. I also think that the labor cost inflation has to catch up with the current inflation numbers we are seeing, so therefore there will be some reaction from this part, I would expect. Regarding material scarcity, this is still a task, but the number of the materials affected is reduced to, I would say, mainly insulation and parts of technical equipment, but these are manageable. If you like, the material scarcity is currently not as tense as we have seen it maybe six months ago. Hopefully I have answered your questions. Maybe if anything is open, please ask them.
Yes. Perfectly answered. Thank you.
Thank you very much, Mr. Martin. Ladies and gentlemen, as a reminder, if you have any questions or follow-up questions, please press star one at this time. The next question today is coming from Celine Siu-Huynh, Barclays. Please go ahead.
Hi. Good morning. Thanks for taking my question. I only have one. Could you comment on the small deals you closed in Q3 and will close in Q4 with all these institutional investors? Who are they? What kind of yields they're buying at? More importantly, is that an early sign that they're coming back to the German living market? Thank you.
Hi, Celine. Thanks for the question. I can try to answer that. The two transactions that we have closed in the institutional market are based on longer-term conversations we've had for a while. I don't think can be taken as representatives. We have two more of these situations in the pipeline. There remains an elevated level of uncertainty whether or not we will be able to close those. I think what Kruno said before about the institutional market is I think the sort of full picture of how the market works.
Thank you very much.
The aggregate amount of both these sales, by the way, has been around EUR 80 million, so it's not a dramatic number.
Yeah, okay. Thanks a lot.
Thank you very much for that. We'll now take questions from Mr. Philipp Kaiser, Warburg Research . Please go ahead, sir.
Yeah, man. Thanks a lot for taking my question. I have a couple of follow-up questions. Would prefer to go through them one by one. Starting with the first one. Construction costs, as you already mentioned, like 15% year-on-year increase in construction cost overall. Could you shed some light on the construction cost per square meter? Ideally between kind of your Value Home project and your core projects.
Currently I would assume for the core business that we have. Here it's I think I have to specify it. If you have an average project with one garage floor.
Mm-hmm.
Well, it's cost for construction, so 300 and 400 costs due to the DIN in Germany. I would assume that approximately you have to calculate between EUR 2.5 and EUR 2.8 per square meter.
Mm-hmm.
Of net space.
Okay.
Which means this is related or it's based on single awarding, which we, you know, in majority do. If you hire a general contractor, you have to of course calculate significantly higher costs, which are then about EUR 3,000 per sq m.
Okay.
For the new business, we are calculating more at a level of EUR 2000 per square meter, roughly.
Okay. Perfect. Very helpful. My next question regarding the revenue. The nine-month figures were driven by construction progress and pre-sold projects and the sales, especially the retail sales, continued at a muted level. Could you kind of help me to understand how this will kind of be in the last quarter and also in the next couple of months? When does kind of the muted demand from retail and also institutional investors will be affected negatively the Adjusted Revenues? Or will we see like the split of construction progress in the next couple of months at the same levels?
Philipp, let me try to answer that. If you look at Page 15, I think you can get a good grasp of what we're seeing currently and what we're expecting for Q4. We've had EUR 105 million of sales in Q3 in aggregate. The majority, if you look at the right-hand side of the chart again, of our revenues was not related to the sales but was related to the construction progress much as we expected to happen for Q4, where you
Mm-hmm.
where we have made the split explicit. I think it's difficult for us to be precise about when demand is gonna pick up again. What we can say for 2023 is that ignoring any sales, the revenues that we have locked in based on construction progress and the pre-sales we have already agreed, will be EUR 550 million.
Okay. For next year without any additional sales. Okay.
Correct.
Fully understood. Additional sales will kind of add up those numbers, but there will be no negative effect, as you have already said, like EUR 550 million. Okay. Very helpful. The last one is regarding the gross margin. It's like a superb gross margin despite the current challenging environment. As far as I understood, it's also kind of a benefit from early purchases, construction service, et cetera. I think that's for this year. How does the entire construction cost increase will affect margins for the next years, as I think it's the same mechanism than the last years, it's like early purchases. Any insight on that?
We are assuming 6%-7% construction price increases for the next 12 months and frankly for 24 as well. On that basis and assuming we sell additional units, our margin will be slightly below 25%. That margin will be diluted to the extent that we sell additional projects that tend to have a slightly lower margin. You know, I think 23%-25% is probably a good range at this point, but we'll be firming this up when we provide full guidance next year.
Okay, perfect. Thank you very much. Very helpful. This was all from my side.
Thank you, Mr. Kaiser. As we have no further questions at this time, I'd like to turn the call back over to Mr. Sawazki for any additional or closing remarks. Thank you.
Thank you for your participation. If you need further information, please do not hesitate to call the Instone IR team or to send us an email. Thank you and goodbye.
Thank you.
Thank you much, sir. Ladies and gentlemen, that will conclude today's presentation. Thank you for your attendance. You may now disconnect. Goodbye.