Ladies and gentlemen, welcome to the Instone Real Estate Group SE Q1 2025 results conference call. I am Shari, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Burkhard Sawazki , Head of IR and Capital Market Communications and Strategy. Please go ahead.
Good morning, everyone. I would like to welcome you all to our Q1 2025 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. As usual, this will be followed by a Q&A session. With this, I would like to hand over directly to Kruno.
Hello, everyone, and thank you for joining our Q1 earnings call. We all know that the last few months have been very turbulent, both in Germany and also globally. Against this backdrop, we are very pleased that we have made a very solid start to the year. We had general elections in Germany, a temporary significant rise in interest rates, and numerous macroeconomic uncertainty factors such as the ongoing discussion about tariffs. Nevertheless, we have seen very robust demand in our retail sales, which we view as very encouraging. While we had no retail starts in 2024, we decided to start the sales process of three new projects during the first quarter of this year. The sales of the projects in Frankfurt and in Duisburg have been started in March, and the pre-sale start of our Stuttgart project was April.
All three projects have been very well received by the market, and we have actually seen very strong momentum. Two of the three projects were already important contributors to Q1 sales, and for the third project, we have collected a large number of reservations, and notary appointments will start this month once the final building permit has been received. These three new projects are ideally tailored to the tax incentive scheme of the Growth Opportunities Act, which allows for highly attractive post-tax returns for buy-to-let investors. Accordingly, this customer segment has emerged to be the most important buyer group. Traditionally, the first quarter is always characterized by somewhat weaker seasonality. Compared to the previous year, however, we have seen an increase in retail sales of around 52%, which we see as a clearly positive indicator for overall demand. The institutional market is still in more difficult shape.
After a good deal of momentum in Q4, our institutional sales for 2025 are geared towards the second half of the year as planned. Nevertheless, we are already in talks with investors for various transactions, and the initial feedback here is also very positive. We are also currently working on the levers to further strengthen our medium-term growth profile and are looking at a number of acquisitions, some of which are already at an advanced stage of negotiation. While the supply of attractive purchase opportunities was very limited last year, we have seen a noticeable increase in supply in recent months. We are therefore rather confident that we will invest significantly more this year. One of the main events in the first quarter that contributed to a certain overall uncertainty was a general election in Germany.
We now also have a new government, which has presented us with a coalition agreement that also contains statements on the housing industry and residential new construction in particular. While most of the statements are still not very concrete, they at least point in the right direction. Important topics such as speeding up approval processes, simplifying building standards, planned higher investment in social housing, or subsidies for owner-occupiers are at least addressed. I prefer to remain cautious, but there might be upside for our industry. However, our business plan does not take this into account. Let's now take a brief look at our financial KPIs for the first quarter of 2025. We reached adjusted revenues of EUR 105 million in line with our expectations. Our gross margin was at a very high level of 26.8%.
There's always a certain volatility in the margin in single quarters, which may have something to do with revenue contribution or the final billing of individual projects. We are sticking to our margin target for the full year and expect a somewhat lower margin in the remainder of the year. Nevertheless, we definitely see our margins as a strong indicator for operational excellence. Our adjusted earnings after tax amounted to EUR 7.5 million, also a confirmation of our solid start to the year. Our sales in a seasonally weaker Q1 reached EUR 41.6 million. The year-on-year comparison is somewhat distorted by an institutional deal in the same quarter of the previous year, which was also rather unusual at the start of the year. As discussed, the underlying demand indicators currently look clearly positive. In line with our plan, we are also confirming our outlook for full year 2025.
We expect revenue in the range of EUR 500 million-EUR 600 million, a very healthy gross margin of around 23%, and adjusted earnings after taxes in the ballpark of EUR 25 million-EUR 35 million. Our sales target also remains unchanged at more than EUR 500 million. Moving on to slide four in our presentation. Our sales ratio on the upper chart illustrates the sound sales performance of our retail business since February that I have just highlighted. Despite the uncertainties in the run-up of the and the temporary hike in rates, we have witnessed a continued sales recovery with an increase of 52% in our B2C business. In our view, this is a strong signal for the stability of the market's upward trend. Our sales ratio recently reached a level of more than 2%, which is above the long-term mean.
As mentioned, our sales starts in Duisburg and Frankfurt, which have been very well received by the market, were major sales drivers. We will see the sales impact of the third project from May onwards. As the chart shows, the demand trend continued also in April after the reporting date and even accelerated despite the turmoil in financial markets. The most important buyer group are buy-to-let investors. The tax incentives of the Growth Opportunities Act represent a very powerful reason to buy. The potential for double post-tax returns that can be achieved were, for instance, not seriously affected by a temporary increase in rates of 50 basis points due to the strong impact of the tax benefits for buy-to-let investors. General investor sentiment has improved.
The rising awareness that German residential prices have bottomed out, with support from dynamic rent growth, especially for new builds, is also a very important reason for this. This market view is also shared by institutional investors. While there is still a greater reluctance to buy among this group of buyers, we are already in talks for several transactions with a timeline of an expected signing in H2, and we have really received constructive feedback here. We are observing a higher willingness to invest in residential projects. On the following slide, number five, we provide an overview of the sales starts of the last couple of months with their current status. Especially for the project in Duisburg at an attractive micro-location close to the border of Düsseldorf, we have seen very strong demand since our sales starts in March.
Our group subsidiary NU, with its innovative product that is based on digital and modular planning, is responsible for this product. Therefore, low sales prices of around EUR 5,000 per sq m contribute to the attractiveness of this product. Also for the Lahnwarte project in Frankfurt, which we are currently selling just with our internal resources, we are seeing strong demand. The third project, Gefilde near Stuttgart, is in the process of receiving the final building permit, which we expect during the course of May. However, we have already collected a large number of reservations, which makes us very optimistic for this project as well. All of these projects are perfectly tailored to the promotion scheme of the Growth Opportunities Act, and they benefit from both the 5% aggressive depreciation in combination with the 5% special depreciation over four years for energy-efficient buildings.
We are planning a number of additional sales launches in the coming months, all of which are targeting buy-to-let investors and which will profit from the combined depreciation scheme according to the Growth Opportunities Act. This promises an additional sales boost. On the following slides, six and seven, we provide you with an overview of relevant market indicators for our business. Despite the uncertainties in the market, the prices for new builds in the top seven German metropolitan areas were stable also in Q1, which provides another proof point that prices have passed the trough in the last quarters. New-built apartments remain the first choice for investors, also due to superior rental developments. Rising property yields from dynamic rent growth were a main factor for the starting price recovery in the market. Rent growth remains at elevated levels.
This ongoing positive rent trend is also confirmed by the recent data provided by Bulwiengesa. The positive underlying demand trend is reinforced by the decreasing supply and therefore rising scarcity of energy-efficient apartments in good quality locations. Over to slide seven, which illustrates construction price inflation over time. The most recent data from the Federal Statistics Office confirm a continuation of the trend of the last few quarters with a stable and rather moderate CPI growth. As we have stated in the past, we actually believe that the market is showing a more differentiated picture. According to our own on-the-ground experience, the overall cost inflation for Instone is currently lower. There seems to be fiercer competition for the limited number of larger residential projects.
As an example, we are seeing increasing competition among construction companies, particularly for shell construction work, with a rising number of offers, something we have not seen for years. All of our construction projects are on budget. Moving on to slide eight. As discussed in previous earnings calls, Instone has weathered the crisis very well based on its strong balance sheet, leading margins, and a high pre-sales ratio. The latter has provided a sound basis for earnings and cash flow visibility. To give you just a brief update on this, projects worth EUR 2.9 billion are currently under construction, of which 93% have already been sold. This provides a stable source of future revenues of more than EUR 400 million, as well as for secure future cash flows of some EUR 220 million.
Over the past two years, we have already generated substantial cash flows from these pre-sold projects under construction, which has led to further strengthening of our balance sheet. David will elaborate on this in the financial section. As soon as the market reopens more broadly, we will be able to accelerate our sales significantly with an existing land bank with projects that have already obtained building rights of around EUR 1.6 billion. As we already flagged in our last earnings call, we are currently also very actively seeking to enlarge our project pipeline in order to significantly increase our medium-term growth profile. While we were very selective in 2024 due to the limited supply of attractive opportunities, and you know that we have signed a few good deals in Frankfurt and Düsseldorf at very attractive terms, we are now observing that the situation is improving.
We are currently in advanced stages of negotiation for several land transactions. In an environment with low competition, we have gained exclusivity for transactions with a GDV of around EUR 500 million, and we are making progress. We have reason to be optimistic that we can sign attractive land purchases in the coming month. I would now like to hand over to David for the financial section of the presentation.
Thank you, Kruno. Let me now walk you through our Q1 2025 financials in a bit more detail, starting with our adjusted results of operations on page 10. Our adjusted revenues are slightly below previous year's level, as expected. This is mainly attributable to the slightly lower construction output and to the revenue contribution from an institutional deal in Q1 of the previous year, as mentioned by Kruno.
We expect higher revenues in the coming quarters with a rising revenue contribution from new sales and subsequent construction starts. We have continued to produce a very high gross margin of 26.8%. As Kruno rightly mentioned at the beginning, there can always be a certain volatility of the margin in a single quarter due to varying revenue contribution of single projects or the final billing of completed sub-projects. In line with our planning, we expect a somewhat lower margin in the remainder of the year. Our margin definitely remains the benchmark in our industry. Our cost discipline, the vertical integration with our own construction management, and the quality of our projects are important structural drivers. Our platform costs were stable on a yearly basis despite ongoing cost inflation underpinning our full-year cost target. Further down in the P&L, we saw an additional decline in our net interest.
This was again largely attributable to a reduction in net debt of some EUR 65 million year-on-year. We expect a slightly higher tax rate in financial year 2025 due to an expected lower earnings contribution from our Berlin joint venture project, which will be completed this year. Accordingly, we reported earnings after tax of EUR 7.5 million, which in our view also confirms that we have made a very solid start into the year. Over to page 11. As a result of the significant cash generation from pre-sold projects during the crisis, our financial leverage dropped to a very low level, which gives us ample headroom for growing investments going forward. Similar to the year-end level, our loan-to-cost ratio is very low at 11.8% at the end of March. Despite the lower earnings level at the current trough of the earnings cycle, net debt to EBITDA is also only at 2.6x .
Moving to the next slide. As just discussed, in the last two years, we have generated a significant amount of cash mainly from pre-sold projects. The operating cash flow for the two years was in sum around EUR 210 million, which is substantial, and we still expect a significant cash contribution from our pre-sold projects. This gives us significant firepower for acquisitions. Rather coincidentally, as in the last two years, the operating cash flows were slightly negative in the first quarter, but once again, this is not very meaningful. The cash outflow for land payments also contains deferred payments, amongst others, for the acquisition of the Lahnwarte project in Frankfurt, which we acquired in 2024, and which is already in the sales process. I believe this shows that we are able to negotiate rather favorable payment terms in the current market environment, which is clearly a buyer's market.
However, I would also like to remind you of the typical cash flow profile of our projects in our private customer business. When we start construction of a project with a sales level of around 30%, these projects are usually cash flow negative in the initial phase due to the build-up of working capital. These effects partially offset the cash flow from projects that have already been sold in 2025. However, cash flow generation then naturally increases disproportionately as the sales status of a project progresses over time. The strong cash generation of Instone resulted in a strong liquidity position of more than EUR 250 million at the end of the quarter. Correspondingly, Instone has a significant net cash position on corporate level. In addition, we have access to revolving credit facilities totaling around EUR 140 million.
As Kruno has already mentioned, we are already in advanced negotiations on some acquisitions, so we expect that we will certainly put some of the cash to work in the coming months while maintaining a healthy balance sheet. Chart 13 gives an overview of our financing structure at the end of Q1. There were no major changes during the first quarter. Finally, coming to our outlook on page 14. In light of the very solid start to the year and the current sound sales momentum, we are also confirming our forecast for the full year 2025. Our guidance also anticipates that we will successfully close a number of institutional sales in the second half of the year. Based on current indications of interest, we have reason to be confident in this regard.
Accordingly, we expect a sales volume of more than EUR 500 million, revenues in the ballpark of EUR 500 million- EUR600 million, a sustained high gross margin of around 23%, and a net result in the range of EUR 25-35 million. With this, I would like to conclude the presentation and move on to the Q&A session.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one under touch tone telephone. You will hear a tone to confirm that you've entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Anyone who has a question may press star and one at this time. The first question comes from the line of Thomas Neuhold, Kepler Cheuvreux. Please go ahead. Good morning, gentlemen. Thank you very much for the presentation.
I have two questions. The first one is you mentioned the potential new government policies which might come. I was wondering if you can already guesstimate how much time it will take before we have concrete measures being implemented. I was also wondering what is your view on realistically by how much can any kind of changes in regulations and subsidies bring down construction costs in the German research sector going forward? That's the first question.
Hi, Thomas. It's Kruno speaking. I think that from my perspective, it's clear that the government has to speed up to implement measures supporting, let's say, the whole building sector and the increase of delivery of housing units. We think that in the first 100 days, I would assume that the government will be very clear of what are the measures and what are the subsidies.
From my perspective, it's a bit too early to comment on this more in detail because we are currently in the dialogue with the politicians, and we have seen in the coalition agreement the direction, which is from my perspective generally positive, but it's also lack of detail. We have to wait a bit. I think it will get better than it is currently, but what does it mean really in detail? We have to wait a bit.
Yeah, understood. The second question is on your acquisition pipeline. You mentioned, I think, EUR 500 million roughly. I was wondering if you can provide us with more details in terms of what kind of product it is, location, permitting status, also potential gross margins you will achieve with the new projects, and how much you're ready to spend this year on the acquisition of new projects. Yeah.
We are looking at, you can say, in all the metropolitan areas, Hamburg, Berlin, Düsseldorf, Cologne, in the Rhein-Main area. We also have projects in Nuremberg and Munich. You can say that we spread all over the metropolitan areas. We are working and negotiating exclusivities for projects. What is very positive is that the number of acquisition projects increased significantly in comparison to last year. The pipeline we are working on is exceeding EUR 4 billion, and of the EUR 4 billion, we have currently EUR 500 million under exclusivity. The project type, we have two types of projects, the smaller to mid-size, where we have the zoning already installed. Here we are currently, from margin perspective, meeting our margin expectation, 25% for the core business and 20% for the affordable housing segment.
We have the one or the other larger project where the zoning has already been started, and we expect the zoning to be completed in the next two years. Here, the gross margin is significantly higher. We are talking more at the level of 27%-28%. The reason for that is that, of course, we want to meet also our IRR target, which is 20% plus. That is the way how we look at the project, not only from gross margin perspective, but also from IRR perspective. Regarding our target for this year, we think that we have said to the market that we want to buy projects in the next two years for a GDV of roughly EUR 2 billion.
We think that we will get this year to a number which will get there to the ballpark of EUR 800 million-EUR 1 billion of GDV. This is what we are currently expecting. I have to mention it additionally that we are not under pressure. We have still a very comfortable EUR 3.9 billion portfolio, but in the next 24 months, there will be significant investment from our side. That is for sure.
Thank you very much.
You are welcome.
Thomas, maybe just to add on one point you have asked how much land payment there is with regards to those acquisitions. I think what you can take as a typical sort of range for the amount of land payment of the total GDV that Kruno has mentioned, it is around 15%-20%.
Thank you.
The next question comes from the line of Thomas, Ruth Häusler, Deutsche Bank.
Please go ahead. Hi. Yes, a couple of questions. The first one is on your sales outlook of more than EUR 500 million. Just wondering what you think you could solely reach from retail clients only, just to get a rough idea of what kind of level you would need to reach from institutional sales.
Hi, Thomas. Let's say the planned ratio is roughly 50% from institutions and 50% from private clients. This could be shifted because we see currently a very strong demand from buy-to-let investors, so it could be a bit more from the private side. That is what we are currently looking at.
Okay. Okay. The second one is on the tax incentivized product for buy-to-let retail investors. To what extent can you ramp up the number of project starts here, and what is the expected margin level for these products?
We are planning the sales start for 10 projects this year. A bit more, yeah. A bit more, 15. Sorry. Between 10 and 15. Yeah. Could be 15, let's say. The gross margin is for overall, so existing plus new projects, we expect the gross margin to be an average at 23% roughly.
Okay. Okay. Third question is actually on the gross margin. I mean, it has remained at pretty good levels over the recent quarters, but you stick to the more cautious number for the full year. Just wondering what we need to consider there and if it also reflects some kind of conservatism, maybe.
We have guided the 23%. When we look at the two main KPIs, so HPI, growth expectation. Here we are starting to see the first pressure on buy-to-let, let's say, buy-to-let investor sales, where we are seeing a very strong appetite. You have seen the numbers of the three projects, which are very convincing that there is a lot of appetite in the market. It is in the early stage. Is there potential for HPI growth? I would say it could be in the buy-to-let investor space, but we are currently, let's say, not really calculating with that. In the second, regarding cost price inflation, we are in all the projects in budget, and there could be some potential, but I would say it is not significantly changing our margin expectation.
Okay. On the institutional business, I mean, what are the yield and return expectations here by investors? Just to understand the trigger for them to finally sign deals eventually in the second half.
You know that we have signed, let's say, a number of deals last year, and I think the same expectation for the new projects, like a cash-on-cash yield of 4%-4.25%. If you translate this into a gross yield, it is roughly between 4%-4.5%, depending on the social housing element, which we explained also in the past, that the social housing element, let's say, in the one or the other metropole, is very attractive and, let's say, supporting a decrease of gross yields. We think the 4%-4.25% cash-on-cash yield is what the investors are asking for. We think that with the ongoing discussions we have with the investors, we are, let's say, sticking to our sales target for this year. We are confident that we will get there.
From what we are currently seeing in the market and also from the first reactions and the ongoing discussions we have with the investors.
Who are the potential buyers?
There are co-ops we are seeing currently. We also see the one or the other pension fund. There are also discussions with classical fund initiators. I would say that the classical group, but more oriented to co-ops than it has been before the financial crisis started.
Okay. Last question is on the acquisitions of land purchases, what you plan. I mean, you say attractive prices. Just wondering if you could provide more color here. Let's say that we have said to the market that we think that between 2021 and today, the price reduction for zones is roughly 30%.
I think we are seeing this on the ground. I think Germany is, in comparison to other markets, very slow here to accept the new reality. This is the reason why we are in May and still not getting to the EUR 800 million or EUR 1 billion. It takes some time to convince the sellers of the right price, but we are fully, let's say, convinced we will get there. It takes a bit more time in Germany than maybe in the U.K. or other countries where the correction is going faster. I think this is the current market situation. Important here is that the number of projects in the sales process has increased massively.
We are thinking that the pressure on, let's say, stressed developers is further increasing because they are coming out now with really bad results from our perspective, not as good as the Instone results we are presenting to you today. This will increase further pressure to put in more equity. Therefore, we think that 2025 will be a year where the number of sales activities in land will be significantly higher than, let's say, last year.
Okay, great. Thank you.
Thank you, Thomas.
As a reminder to ask a question, please press star and one. The next question comes from the line of Philippe Kaiser, Warburg Research. Please go ahead.
Yeah. Hello, everyone. Thanks for the presentation, and thanks for taking my question. Just a question on the overall picture. This year might be the tough year with regards to earnings, and then you already expect a pickup in top line and earnings. I would guess the major swing here would be a return of the institutional investors. Any signs why this should speed up, especially next year? Any insights here would be helpful.
Yeah, sure, Philippe. I think I would like to add one comment on that because it's not only the institutional buyers who are coming back. It's also that we are significantly increasing the number of sales starts. The second is we are currently focusing on acquisition on short-term oriented projects where we can start the sales process in the short time distance. When you look at the two projects we have bought last year, one is Lahnwarte.
In Frankfurt, we already started the sales in this year, and it's contributing sales volume in the first quarter. The second one was Grafenthal, where we have sold last year already in the same year a significant portion of roughly EUR 70 million to an institutional buyer. That's our additional triggers which push the sales volume and the revenues up in next year. Regarding the institutions, from my perspective, it's a question of time because when you look at the interest rate development plus the rent price inflation, it clearly is increasing affordability for investors and getting them closer to the cash-on-cash yields we commented. We are already in line with that.
From my perspective, it is a question of time when the bigger group of institutional buyers are back in the market, and we are doing, let's say, any effort to be there with the right product.
Perfect. Very, very well helpful. It would help if we would see slightly lower interest rates to then see more institutional buyers properly return to the market. Is that right from my understanding?
Yeah, it would, of course, help from my perspective. Again, I think we are already in line with that. I think the institutions, so the pension funds, for example, they would love to invest into new builds. They also have a portfolio where they have sold the one or the other, let's say, investment from the past in office, etc. They are not holding back because of the, let's say, profitability they are looking at.
It's more like they have to handle their portfolio. There are different reasons why the groups are not fully back, but we think that they will come back. Of course, interest rate development is clearly one of the main drivers for that.
Okay. Perfect. You already mentioned the significant increase in retail sales fueled by your ideally tailored product for the support schemes. Just assuming the institutional market will stay on the current kind of muted level, would it be possible with the significant increase and potentially further increase in retail sales to reach pre-COVID levels or roughly the ballpark of pre-COVID levels? Or is, yeah, the return of entities required for those levels? What's your idea there?
I think when you look at the volume we have achieved already last year, which clearly was not, let's say, the year where the market has been coming back completely. Our expectation for this year, I think it's important to mention that all the products we are currently preparing are fitting into the depreciation program. That I think is important to mention. The second is that the affordable housing segment, so social housing, the appetite for that has been always very, very strong. There was no real impact on social housing. If you ask the question, could we compensate some of this space led by the institutional buyers, I would say clearly yes. We are prepared for this. Of course, when you look forward in the coming years, it would be helpful if the broader institutional market is coming back.
Again, I think we are preparing ourselves to the situation if we need more buy-to-let investor sales activities. We are prepared for that.
Okay. Perfect. Very, very helpful. Thanks for the insight, all from my side.
Thank you.
The next question comes from the line of Manuel Martin from Oddo. Please go ahead.
Hello, gentlemen. Thank you for taking my questions. Just one question. It is about construction prices. I guess that a reduction in construction prices might make it also more attractive for buyers to step forward and buy the product. What do you think are the most or could be the biggest levers that the new government could use to reduce construction prices? And what do you think are the probability that the government will do that?
Maybe I can start with I know that different companies have presented their numbers, and they are talking about what are the costs. To give you only a feeling for our, let's say, current situation. You know that for the affordable housing segment, we have started this year to offer our product to property owners as a general constructor. We are asking for prices for new builds, so completely finished project plus, let's say, very high energy standard, which is KfW 40. We offer this construction for below EUR 3,000 per sq m, including VAT and including our margin, excluding, let's say, the land plots and outside analog. Yes. Outdoor facilities. This is clearly showing that Instone is, let's say, from my perspective, the cost leader in this segment. Now, what can the government do to help us to decrease this cost?
When you invest EUR 1 into the living space in Germany, 37 cents is going to the government tax payments, etc. If the government wants to decrease the cost, this could be easily done by decreasing transfer tax, VAT, etc. There are many, many possibilities for them to lower the costs for living space. They have discussed this type E, which is reducing the quality. From my perspective, this is something which could improve the costs. From my perspective, when we look at our already, let's say, very efficient product, I would say it's in the ballpark of maybe 5%-8%. This is not the main driver. When you look at the bureaucracy and etc., here, you can further improve. The biggest trigger the government has is really to think of, and we are not talking about subsidies.
We are talking about reducing, let's say, the tax payments on, let's say, living space investments. There is the biggest trigger. What is the government planning? When you look at the coalition agreement, there are different, let's say, things that could be interesting. Like guarantees, they are talking about guarantees, giving investors guarantees. They have different possibilities. We have to be, let's say, patient and wait to see what is really figured out here. Okay.
Yeah. Thank you very much. Comprehensive answer. Thank you.
You're welcome.
Ladies and gentlemen, that was the last question.
Thank you for your participation. If you need further information, please do not hesitate to contact the Instone IR team. Thank you. Bye.
Thank you.
Thank you.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.