Good morning, everyone. Thank you for joining our Q2 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. Thank you for joining our H1 earnings call. If we look at Instone's business performance in the last quarter, I think it is fair to say that we once again delivered a very solid operating and financial performance. We have shown once again that we are managing the market crisis well. The results in the first six months also give us further confidence that we are well on track to achieve our financial targets for full year 2024. The market is currently stabilizing. After the demand shock we have experienced, the market seems to have found a bottom in terms of transaction volumes and also in terms of prices.
We are currently experiencing a moderate demand recovery, a trend which has also continued in the second quarter. Sales are up in our retail customer business and are above previous year's low levels. The stabilization of mortgage rates and residential prices is clearly supportive. We are also seeing the first positive effects from the tax incentives of the Growth Opportunities Act. Overall, we expect demand to further accelerate in the second half of the year. The institutional market is still difficult. There is definitely a rising level of interest from institutional investors, but most remain reluctant.
Nevertheless, having already closed an institutional deal in the first quarter, we expect to conclude at least one in the second half of the year as planned. Typically, H2 is the more active half of the year for institutional deals. On the supply side, the inflationary pressure continues to ease, while there are quite some differences with regard to individual craftsmen's work and construction services. Generally, costs for larger new construction projects are mostly stable due to decreasing demand and higher competition.
Instone has shown strong resilience during this real estate market crisis. I think we have done our homework pretty well. We maintained a very strong balance sheet, high liquidity, and leading profitability. This allows us to act from a position of strength, and we can now take advantage of a favorable environment for land acquisitions. This year, we have signed the first two land acquisitions since 2022 in attractive A cities. We are very confident that these acquisitions have the potential to generate significantly above-average margins and returns.
I would also like to emphasize that we have made further progress on our corporate financing in a market environment where it is still difficult to raise new financing. In this context, we have succeeded in smoothing out our maturity profile by partly extending maturities of our promissory note loan of EUR 100 million, which was previously due in 2025. Accordingly, we have further strengthened our financial profile. Let's now take a brief look at our financial KPIs for the first half of 2024.
Our adjusted revenues amounted to EUR 255.4 million, slightly below previous year's level, but fully in line with our expectations. Our gross margin remains at a high level of 25.7%. We expect our gross margin to come down a little in the second half of the year in line with our budget, but we still see it as a good indicator of our operational excellence and leading profitability. The basis for such superior margins is our special expertise in construction and project management, as well as our discipline in the purchase of land.
Our adjusted earnings after tax amounted to EUR 20.5 million. We are well on track to reach our full year earnings target. Finally, a brief word on sales. In the first half of the year, our sales rose by around 71% compared to previous year to around EUR 122 million. As already mentioned, we expect the recovery to continue in the second half of the year. Against the backdrop of this very solid start of the year, we are also reiterating our guidance for the full year 2024. Moving on to slide 4 in our presentation. As usual, this chart provides you an update on our sales momentum in the retail business.
The recovery has continued compared to the previous year, although we have seen more of a sideways movement in recent months. Our retail sales increased from EUR 21 million in H1 2023 to more than EUR 57 million in H1 2024. This is also illustrated in the chart we have added at the bottom of the slide. We have experienced the initial effects from purchases from buy-to-let investors due to the Growth Opportunities Act. However, due to its complexity, such as the ability to combine different depreciation schemes, it will take some time before we see any significant effects.
We have also made adjustments to our projects in order to benefit from the full scope of upsides in connection with the Growth Opportunities Act. We will start the sales of the first of these projects very soon during the second half of the year. The tax incentives allow for very attractive after-tax returns and provide a significant payback of capital within a short period of time. In the appendix, you will find a scenario calculation giving an indication of the level of returns that could be achieved by the buyers. In the institutional market, we do not see major changes so far.
Interest is clearly rising, but the majority of institutional investors remains in a wait-and-see mode. Nevertheless, we are in talks regarding a number of deals, and we expect to close at least one additional deal in H2 2024 in line with our plan, after having closed the first deal, as you know already, in the first quarter of 2024. We therefore remain very confident that we will achieve our sales target of at least EUR 300 million in 2024. On the following slides, five and six, we provide you with an overview of relevant macro indicators for our business.
As you all know, the historic rise in interest rates has triggered a correction in residential property prices. The price discovery process was associated with a high level of uncertainty and very low transaction volumes. I think it is fair to say that this uncertainty is slowly going away, and the picture is becoming much clearer. There are now numerous data points that confirm the prices for new-build properties in attractive metropolitan regions have bottomed out. The dynamic development of rent prices, combined with the fact that we have passed the peak in interest rates, are certainly key drivers for this.
The rising awareness that house prices are no longer decreasing should also help demand to improve. I would also like to emphasize once again that new-build flats have significantly outperformed the German residential property asset class as a whole, with only a moderate price correction from peak to trough. A key reason for this is the superior energy efficiency. This also leads to better rental development. Institutional investors also recognize and appreciate this higher stability. 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 that CPI is flattening. The market, however, shows a differentiated picture. On the supply side, there is currently much greater competition for larger new construction projects, the market segment which is relevant for Instone. Based on our own on-the-ground experience, we currently expect costs to move sideways in 2024. All of our construction projects are on budget.
As already mentioned, the continuous dynamic rent growth in the German residential market, combined with the widening demand-supply gap, is a key factor for the rise in property yields and stabilization of residential prices. On the chart at the bottom of the slide, we provide you with an update on the new-build rental growth data from Bulwiengesa for the top seven cities. Other data providers such as ImmoScout see rents rising even faster. Compared to the broader market, prices for new builds are also more stable because rents are growing more.
Apart from the mentioned better energy efficiency, a more favorable rent regulation for new builds is an important reason for this. In good locations, landlords of newly built properties are able to negotiate inflation-linked rental contracts and therefore allow for attractive inflation-protected returns in the current environment. Moving on to slide seven. Our industry has been caught in a perfect storm over the last two years.
The main reasons why Instone has weathered this crisis so well are its very strong balance sheet, industry-leading margins, and a high sales volume. Instone can continue to profit from the high level of pre-sales of its projects under construction, which sets us apart from our peers. Our high level of pre-sales also provides high visibility for our projected 2024 revenue and earnings targets. Projects worth EUR 2.9 billion are currently under construction, of which 90% have already been sold.
This provides a stable source of future revenues of approximately EUR 540 million, as well as for secure future cash flows of more than EUR 330 million. 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 H1 financials in a bit more detail, starting with page nine. As Kruno has already pointed out, we are pleased that we are once again able to deliver a solid set of results in a tough market environment. This also shows that we are well on track to achieve our annual targets. One, as in the previous quarters, the main driver of revenues in H1 was the construction progress of our pre-sold units. Our revenues dropped slightly below previous year's level, which is fully in line with our expectations and is mainly due to the expected decrease in construction output.
Two, we continue to achieve high gross margins of more than 25% in H1. When comparing this with margins of our peers, I believe it is fair to say that this is outstanding. We are benefiting from the quality of our existing project pipeline, our cost advantages from our in-house construction management, and from the fact that, unlike many of our competitors, we fortunately do not suffer from any financial pressure. As already flagged in our last call, due to change in the project mix over the course of the year, we expect our full year gross margins to drop slightly during H2.
However, we clearly see more upside than downside risk to our communicated 2022 margin target for 2024, while this has no impact on our full year earnings guidance. Three, with the start of the crisis in the industry, we shifted focus on cost and cash preservation early on and achieved very good results. We were able to reduce platform costs in an overall inflationary environment to an analyzed volume of circa EUR 70 million. In H1, platform costs increased compared to H1 2023, mainly due to our share price-linked valuation of the LTIP provision.
Please remember that in H1 2023, the platform costs also benefited from a positive one-time de-consolidation effect of one of our projects. Four , our JV results have improved slightly, mainly a reflection of the positive contribution from our Berlin-based JV. Five, we report a significant improvement of our interest results, mainly linked to the decrease in net debt. Net debt has decreased by almost EUR 120 million on a year-on-year basis. six, we achieved adjusted earnings after tax of EUR 20.5 million.
And although we expect some margin decrease in the second half, the H1 result confirms that we are well on track to reach our full year earnings target of EUR 30 million-EUR 40 million. Moving over to page 10. Due to our ongoing positive operating cash flow, we maintained a strong balance sheet in the second quarter. The LTC stays at a very low level of 15.8%. Our net debt to EBITDA ratio also remains at a very moderate level of 2.5x, considering that we are at the earnings trough. This gives us ample headroom for acquisitions in an attractive competitive environment.
We have just started to capitalize on our strengths. We have recently made 2 bargain land plot acquisitions in the attractive A cities of Frankfurt and Düsseldorf, with a GDV of around EUR 260 million. We expect these projects to have significantly above-average margins and returns. These projects already have planning permission. Expect to be able to start pre-sales next year. We believe that the market for distressed sales is yet to gain momentum. We are therefore continuing to act with caution, but we are looking at one or the other situation, which we hope to still realize in 2024.
Moving to the next slide. We continue to generate substantial operating cash flow from our pre-sold projects under construction, and we stick to our guidance of achieving positive operating cash flow for the full year 2024, subject to potential attractive land investments to come. As just mentioned, our strategy is currently shifting carefully from a focus on cash preservation to future growth. The table on the right-hand side of this slide gives you an indication regarding our financial firepower for future growth investments.
We have a very strong liquidity position of more than EUR 250 million and therefore remain net cash positive on a group level. In addition, we have access to revolving credit facilities totaling EUR 160 million. We also have contractually secured undrawn project finance lines of more than EUR 190 million for our projects under construction. We intend to continue to finance our acquisitions partly with debt, and the aforementioned largely secured cash flows from projects under construction will further improve our financial firepower. But we remain very disciplined.
We are currently screening a number of investment opportunities, but we believe that there will be an even more attractive opportunities, that there will be even more attractive opportunities becoming available in 2025. We also want to see a further demand improvement before doing acquisitions on a larger scale. We will not give up our strategic strength of a strong balance sheet. This will remain a key pillar of our business strategy also moving forward. Chart 12 provides you an overview of our financing structure.
As already indicated in previous calls and by Kruno earlier on, we wanted to address early on our bullet refinancing structure of the EUR 100 million promissory notes during 2025. We have now further improved our financial profile in the last quarter by successfully smoothing our maturity profile. We will redeem EUR 35 million in 2024, while at the same time, we are able to extend maturities of EUR 35 million to 2026 and 2028. In return, we will pay a moderate increase in interest rates starting as of August 2025.
The detailed terms are also outlined in the footnote on this slide. Once again, we have demonstrated that we have access to both secured and unsecured financing, which is quite an exception in our industry in the current market environment. Finally, turning to page 13.
As already pointed out by Kruno, on the basis of our very solid performance in the first six months, combined with our high visibility on revenues based on the 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.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. 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. Questioners from the phone are requested to disable the loudspeaker mode while asking a question. Anyone who has a question may press star and one at this time. Our first question comes from Andre Remke and Baader Bank. Please go ahead.
Yeah, good morning, sir. Basically, two questions from my side. If you're talking to institutional clients, what are their arguments not to invest now? Of course, we all overhear a lot of things from the market, why not to invest, but your clients you're talking to, what are their concerns? Is it simply pricing or the fact also that their investment shares in properties are high enough after years of investing?
And a related question you mentioned, prospective deal in the second half, what could be a ballpark number for such a transaction? Is it smaller size or bigger size? Just an indication would be helpful. That's the first question.
So when we talk to our, let's say, different groups of clients, we made a lot of business in the last years. There are different groups. You have the co-ops, which have a, I would say, decent equity capitalized, where we have also done the first deal in the first quarter this year. So they are still having appetite, and they are picking out the right projects. What's set in stone here, and this is also what we get as feedback from investors, that there are only a very limited number where they can be sure that the project will be finished.
So this is an argument for us, maybe being in a better situation than the biggest part of our competitors. You have, on the other side, investors who are still on the sideline, and these are investors like the big pension funds where they have to source out what to do with their portfolio. They also have a lot of commercial developments in the books, and I think they are currently trying to figure out how to proceed with the overall portfolio. The appetite for resi is still there. So if they would be free of all the old stuff, they would buy new-built resi. But they are limited with barriers from their real estate investments.
Then you have the classical fund structures. They have been struggling with people taking out the money. So here, the confidence has to come back from their investor circle to start investments again in resi. So this is, I would say, the current overall situation. What is important to mention is that projects where you have a significant portion of social housing, this part of the market is still very attractive due to the fact that the cash-on-cash yield, not everywhere, but there are parts in Germany where you get very favorable subsidies for social housing.
There we still see a lot of appetite from investors. So this hopefully answers your first part of the question. The second is for us, I would say, I can't answer it precisely because we have currently a number of projects where we are in discussion with institutional buyers, mid-size, but also larger projects. We think that the institutional deal should be above EUR 40 million. That's what I can say. It could be significantly higher, but let's assume that it's minimally a mid-size project volume sale we plan for the second half of this year.
This is based on a specific marketing of specific projects, right?
Yeah, we are. We have projects which are, let's say, in the status we can't start the sales process. We have, as we always do, we talk to our, let's say, steady clients. Here, we already see the first positive feedbacks. Then we decide where to push further and to initiate a full sales process after the first feedback rounds we get.
Overall, the time to come to end of negotiations, what would you say in comparison to the last two years, let's say? Of course, there were almost no deals last two years, but comparing this to the past.
I think the time period you need is usually between the first initial contact with an investor and with the signing of the contract is between three to four months. Of course, in a market where the appetite was extremely strong, the timeline was a bit shorter than the timeline we currently see. I would assume that in the past, we could get deals closed maybe 2 or 3 months. Now, it's taking 4-6 weeks longer. So if the appetite is there and the initial decision to go further with the process, then you have a more technical process of due diligence, which has to be completed. But let's assume 3-4 months is the time period you're currently needing between the first presentation of the project and the signing.
Okay, excellent. Then the first question on your perspective further land investments, how does your pipeline look like? You mentioned you have several projects, but probably you can refer a bit in terms of regions, in terms of size of such potential projects, and what are the main requirements before you want to invest?
We are currently focusing on, I would say, two different types of projects. The biggest appetite is for projects where the zoning is already completed and we can ask for a building permit, which means that these projects are more short-term oriented. Here, the two examples we purchased recently are very good examples. We bought a land plot in Frankfurt and the other one in Düsseldorf. We focus on the top A metropolitan or the top A cities, also the attractive B cities, but clearly good locations with a more short-term duration being already zoned. This is one, let's say, part of our focus.
And the second is we also look at, I would say, more long-term oriented projects, but here clearly, we want only to step in if there is a solution for us not to employ immediately capital, but when the zoning is finished. So these are the two types, I would say. And from the regions, as mentioned, we look at all the top metropolitan areas. We see a lot of increase of offers due to the fact that many are under stress, and this stress will further increase. And that's the reason why we think in the next 80 months, it will be really an excellent situation for buyers of land due to the stress in the market.
Excellent. Thank you very much. Very helpful. That's from my side.
Thank you.
As a reminder, if you wish to register for a question, you may press star and one. Our next question comes from Philipp Kaiser and Warburg Research. Please go ahead.
Yeah, thanks a lot. Congrats to the found results and for taking my questions. With regards to your outstanding gross margin, you already pointed out that you expect a slight dilution in the second half of the year. I think it's, or my guess would be, a higher contribution from the Westville project. So is it fair to assume that you envisage gross margin around 18%-90% for the second half of the year to meet your reiterated gross margin guidance?
So I think thank you for your question. I think it is correct that the driver for the mix is Westville when we have lower gross margins. I think what we can say is we will have a dilution going down, but probably what we see today is that the dilution will not take us to the level of gross margin that we gave as a guidance, but we see some upside to this. But we can become more clear on where we hope to end up at the year end, probably in Q3.
Okay, perfect. Thanks a lot for the clarification. And good work from my side. Thanks a lot.
Once again, to register for a question, you may press star and one. Ladies and gentlemen, there are no more questions at this time. Thank you for your participation. If you need further information, please do not hesitate to contact the R&R team also after the call. Thank you.