Good morning, and welcome to our webcast. This is David Greenbaum, CEO of CPI Property Group. I'm pleased to be joined today by my colleagues, Pavel Měchura, Group Finance Director, Tomáš Salajka, Head of Acquisitions, Sales, and Asset Management, Martin Matula, General Counsel, Martin Němeček, Senior Advisor, Mindy Lee, Director of Corporate Strategy, Petr Mizera, Head of External Reporting, and Moritz Meyer, Manager of Capital Markets and Investor Relations. Today's webcast was arranged to discuss three short seller reports about CPI Property Group that were published in November and January. Before we begin, I want to sincerely thank our stakeholders for all the feedback, advice, and messages of support we have received over the past few months.
The short seller reports were unpleasant to read, but now I see the experience as an opportunity to show our stakeholders that when the bright glare of the spotlight is shining on CPI Property Group, we will respond with integrity, clarity, and professionalism. So onto the agenda for today. We won't spend too long on part one of the short seller report. We published our reply back in December, so you've all had lots of time to read and understand it. In general, the investor feedback from our reply to part one was no further questions. We were all glad to hear that. Our response to the second and third short seller reports was published only 90 minutes ago, so we'll spend more time covering that. From my perspective, today's webcast is just another example of how CPI Property Group is open and transparent with our stakeholders.
This is one of many opportunities to hear from us. We are in regular touch with many of you. In fact, I believe we spoke to about 200 investors one-on-one or at conferences between November and January. In keeping with the practice of all our investor events over the past five years, we are conducting today's call as a webcast. You should see a tool for asking questions. We always try to answer every question, and we are happy to spend as much time as needed. When it comes to the Q&A, we are also happy to answer questions unrelated to the short seller report. You have the whole team here, so why not? Just keep in mind, we release our annual results at the end of March, so we won't be able to say very much, but we'll do our best.
Lastly, before we begin, I want to encourage any investor to come and visit our properties. Come see for yourself the quality of what we own and how well CPIPG manages our portfolio. Similar to last year's event, we will be arranging a series of investor days in Warsaw, Prague, and Berlin during April. Please reach out to Moritz to express your interest or preference for certain dates. So let's begin. I'll start with a few comments on part one. Our reply was published in December. Let me remind you that CPIPG is a large, diversified landlord with a portfolio of about EUR 20 billion spread across Central and Eastern Europe, where we are the market experts. We are a 30-year-old company, closely held, with our founder, Radovan Vítek, owning nearly 90% of our shares and Apollo about 5%. Our shares rarely trade.
We are a professionally managed, closely held company. We are experts in Central and Eastern European real estate, and we operate at the same transparency level as a public company. The first short seller report was based on the idea that CPIPG engages in related party transactions and therefore we must be doing something bad. However, this is simply not the case. Unlike some other companies, CPIPG has always been open about related party transactions, and our disclosure is extensive and accurate. All the transactions we do as a company have a clear business rationale, and related party transactions are subject to extra scrutiny and a higher level of due diligence. The short seller says that our founder is squeezing or looting money from the company. This is false and misleading.
On the contrary, our founder contributed EUR 1.4 billion to the company as of the date when this presentation was published in early December, and closer to EUR 1.7 billion after the recent contribution of assets in late December. That's consistent support over a 10-year period, and our investors should expect more support to come. Nothing that the short seller raised in part one demonstrated any errors from an accounting or valuations perspective. All our valuations are conducted annually by reputable third parties, and we have completed more than EUR 2 billion of sales in the last two years at prices, on average, above book value. The sales have covered all our geographies and sectors. I cannot think of a better example than sales to demonstrate that our prices are correct or even conservative.
If you listen to the short sellers podcasts, or if you listen to much of the American rhetoric these days, ESG is treated very suspiciously. The short seller has called ESG a delusion. We see it differently. In fact, through our engagement with fixed income investors over the years, through the issuance of green bonds and sustainability-linked bonds, we have really changed our practices as a company. The board is more independent than ever before. We created an internal audit function years ago, and we did a total review of our compliance policies.... On the right-hand side of this slide, you can see a mention of the role of White & Case. Let me update you on what's happening there. Following the short seller report, we asked White & Case to review our compliance, governance, related party transactions, and other policies, plus the specific allegations raised by the short seller.
White & Case is in regular contact with our auditor, EY, and the process is supervised by our London-based independent director, Jonathan Lewis. So far, I can say the dialogue has been excellent. Because the work is thorough, it will take some time, but I will update you once the report has been completed, I hope before the summer. To wrap up on part one, Muddy Waters raised four allegations in a fishing expedition, which all proved to be completely wrong. The first allegation covered two development assets in Prague. Muddy Waters claims there was a related party transaction that was undisclosed, which is wrong. They claimed that the valuation could not be justified. That was wrong. We were able to to do it easily based on market data and permitting progress. We own this real estate, and we know what's happening on the ground.
The second related to CPI hotels. Once again, our disclosure was accurate, and there was no conflict of interest or undisclosed related party transaction. Was it a complex deal? Absolutely, but that does not mean there was something wrong with it. The first two allegations cover transactions which took place quite a long time ago, but both brought significant value to the group, and our disclosure, as I said, was accurate. The third allegation was about the purchase of IMMOFINANZ shares. Once again, this was clearly disclosed with a clear rationale involving fair treatment of all shareholders. The short seller also tried to use a typo in our financial statements, also easily explained, to allege price manipulation, even though a bit more research would have revealed correct disclosure in the offer document.
The fourth allegation relates to a deal in Italy for the acquisition of 10 assets, including Maximo Shopping Center in Rome. The deal was complex, and because of regulatory issues, included purchasing some assets which did not fit CPIPG's portfolio that have already been sold or will be sold in due course. Here, too, our disclosure was correct, and the transaction brought excellent value to CPIPG. Now, let me move on to part two. In this part, I will ask some of my colleagues to take over speaking duties. Our first impression upon reading the last two reports was that the short seller simply does not understand real estate. What the short seller does understand is how to use inflammatory language and get attention. All the allegations raised in part two and part three were poorly researched or used incomplete information.
In the coming slides, we will address the allegations raised, and we will respond with facts. That's all we can do. I think you will quickly see how absurd some of the short seller's allegations are. Now, let me turn the floor over to Mindy. Mindy?
Thank you, David. So the first allegation deals with Reuchlinstraße in Berlin. Investors who have visited our assets in Berlin know that these are not shiny, newly built towers. Our portfolio in Berlin includes assets which were built before World War II or even World War I. These are former factories in West Berlin, large in scale, and were converted into offices by the city of Berlin after the end of the war, when Berlin was divided in two. Our assets in Berlin are historical in nature, but that does not mean they are poorly maintained. Our performance says the opposite, and in fact, our assets are perfectly suited for the SME and start-up culture in Berlin. Our space is more affordable, better located, and more flexible than many other options on the market.
The short seller alleges that Reuchlinstraße is overvalued, mostly because they are looking at an index of German property prices, which covers the whole country, whereas Berlin has been a strong outperformer. Plus, the short seller is completely ignoring the actual performance of the asset. The fact is, average monthly rents in Reuchlinstraße increased by 85% between 2018 and 2022, from EUR 7.42 per square meter per month to EUR 13.7 . By the way, the average rent in the city of Berlin is now about EUR 26 per square meter per month, which shows that our space is more affordable. To achieve higher rents, we invested significantly in Reuchlinstraße, about EUR 2.2 million in total between 2018 and 2023. This is quite a large property, 49,000 square meters. The short seller published a photo in their report.
They found one tiny corner which looked less beautiful to imply poor maintenance. I can assure you that we have very happy tenants, and the property is very well maintained. Real estate valuations on income-producing assets are typically done on a discounted cash flow or DCF method. There are multiple factors that contribute to the output of valuations, primarily rental income and cap rates. As you can see, market yields compressed significantly during the period. You can also see that yields rose in 2023, which means that naturally the values should drop somewhat.... Although valuations are not just about cap rates, yields, or discount rates, but also about the potential for rental increases. Next, the short seller claims that our property, that our occupancy rates are exaggerated based on their internet search of rental listings in our properties.
Our reaction, and that of many other observers, was that the short seller does not understand how occupancy and leasing work. Like most European real estate companies, our disclosure of occupancy rates follows EPRA guidelines. We are confident that our reporting is accurate. EPRA vacancy, which is how we calculate occupancy, uses the following equation: You take the estimated rental value or ERV of vacant space, divided by the ERV of the whole portfolio. This is a standard calculation. We are confident that our reporting is completely accurate. Please also keep in mind, we have recently completed many bank loans across our portfolio, and the banks always check the occupancy, rent rolls, and income in great detail. The basic error the short seller made is that spaces listed for rent do not correspond to vacancy.
Our teams on the ground are very proactive with leasing strategies that are aimed to minimize downtime and maximize earning power. Future and potential vacant spaces are often advertised well in advance of any lease expiration dates. Listings may be advertised as one whole area or simultaneously as smaller units to attract tenants with differing needs. We also frequently utilize multiple brokers when accessing the market. So if you aggregate every listing together, you end up with double, even triple counting. This is an error in analysis and judgment that no real estate professional would make. Listings do not equal vacant space. In the spirit of transparency, we have shown occupancy of select properties on page 12, 13, and 14. We see stable occupancy in our core office portfolio in Prague, Warsaw, and Berlin, and we have our finger on the pulse with constant and active leasing management.
Now, I will turn the floor over to Tomáš . Tomáš ?
Thank you, Mindy. Now, I will briefly discuss Bubny. We always like talking about Bubny because this is a very unique long-term development opportunity in Prague. For those of you who have visited us in Prague, you would have seen this brownfield site, and you know that it's in a perfect location, 200,000 square meters in central Prague, which is otherwise quite dense. The short seller is questioning the value of the land. Our value is JLL, which is a very highly respected global company. The comparable transactions used by JLL were chosen by JLL, not by CPIPG, out of a huge database, which is representative of the market. The short seller bases their argument on something called the Prague Building Land Price Map.
However, everybody who is familiar with real estate in the Czech Republic already knows that this map is purely for tax purposes, and the value for tax purposes are way below the market values. This map is never used for valuations. Now, let's spend a minute on the fundamentals of Bubny. As I mentioned earlier, this site is more than 200,000 square meters. You can see it on the map. It's a large area, just on the other side of the river from the central business district of Prague, Prague 1. We are in active discussions with the City of Prague about a master plan for the site, and a hearing is expected still in Q1. We expect a change to the master plan to take place in 2025.
This is the same year that a new Prague Bubny station will open with a link to the airport. This whole part of Prague can be transformed over the next five to10 years. The potential future value of Bubny is in the EUR billions. We estimate that the group would be able to build approximately 700,000 square meters of office, retail, and residential space. It's a huge opportunity. We have received several offers over the years, as well as recently, to sell Bubny, but we see it as a unique growth opportunity in Prague that we are happy to continue owning for the time being. Okay, so back to Polygon BC and NQM, which were mentioned also in the first report. The short seller keeps mentioning terms like questionable fair value gains without really understanding the market.
When you own land and you receive a permit to develop, the price goes up, particularly in the Czech Republic, where permitting is very difficult. This has huge value.... During the period covered by Muddy Waters, 2017, 2022, prices rose 82% for residential assets in the Czech Republic. There is a huge housing demand in the country, and because the permitting and construction happens so slowly, the prices have been going up a lot. Development is already underway. We have sold 165 of 246 apartments for about EUR 45 million. The total expected sales volume is EUR 64 million. When the project is done for a total cost, about EUR 36 million, we expect to book a profit of about EUR 28 million after all the sales are complete.
As you can see on the timeline, the values increased due to two factors. The first is time. Simply, residential prices and land prices rose over the period. The second factor is permitting and the start of construction, which both greatly influence the values. Seen from another angle, look at the development of apartment sales prices in Prague over the past 10 years. Many other countries have seen big jumps in pricing, but one thing that makes Prague different is there is simply very limited construction, and it's impossible to keep up with demand. Now, let me turn the floor back over to David. David?
Thank you, very much, Tomáš. Okay, so I will pick this up again. So the next allegation of the short seller relates to an Italian acquisition called Collina Muratella, the former headquarters of Alitalia, which has been rezoned for residential development. We continue to see an attractive long-term opportunity in Rome, where modern housing stock is severely limited. This was another complex transaction involving a portfolio of non-performing loans that were restructured through the purchase of both equity and debt. Here, the short seller just did not read the financial statements correctly. The transaction is spread over two years, 2020 and 2021, but only the 2021 statements were referenced. There is no cash missing, no receivables are missing, all numbers reconcile, and the transaction created significant value for CPIPG's shareholders.
The basic figures are as follows: In 2020, we paid EUR 20 million for EUR 75.1 million in receivables. In 2021, we paid EUR 8.54 million for a nominal of EUR 25.3 million in shareholder loans. These were loans by the original shareholder to their company, which went bust and needed to be restructured. Other costs were about EUR 1.7 million. So EUR 20 million for receivables, plus EUR 8.54 for shareholder loans, plus EUR 1.7 of costs, plus EUR 4.9 million to buy shares for a total of EUR 35.3 million. You can see that the bank loans and shareholder loans had a notional of EUR 100 million. That easily, easily shows you we got a price well below where this was valued just a few years prior. There is no cash missing, no miscalculation.
The short seller just needed to read the financial statements properly. The next allegation by the short seller relates to a villa in France purchased by CPIPG in 2019. As many of you know, CPIPG has a long history of owning luxury rental real estate in France, the UK, and other places, even if it's just a small part of our portfolio. The allegations cover two basic things. First, Muddy Waters found it strange that the seller of the property provided a EUR 4 million financing at the time when the property was initially purchased by our shareholder in 2013. Well, such seller financings are actually fairly common in real estate, and frankly, are the sign of a great deal for the buyer. The seller was an older French lady holding the asset in a Swiss company, and she wanted to get out.
The property had lots of running costs, which she could not afford, and was not in a good state of repair. Because of the seller financing and the availability of bank lending for the asset, our shareholder was able to buy the asset. Mind you, this was more than 10 years ago. He was able to buy it for no cash. That's what I would call a good real estate deal. Our shareholder invested quite a lot in that property, which, as I mentioned, was not in a good state of repair, and transformed it, transformed the villa into what it is today. CPIPG purchased the asset in 2019, and frankly, it's really a fantastic asset for rent.
The video that our short seller referenced in their report, and which I know some of you watched, that video is there for a reason, because the property is for rent. Also, if you, if they saw kids by the pool, that's because the villa is rented. I'm surprised we even need to explain that. Our shareholder's kids are mostly grown. Perhaps the silliest part is that the short seller tried to make some connection between the seller of the property and the Panama papers because of the lawyer she hired. We really struggle to follow the logic for this one. Somehow, this all means money laundering, even though nobody involved was ever accused of anything. It's a horrible and unfounded allegation, which I am surprised anyone can make without evidence, and I cannot imagine that any investor takes it seriously.
For such a small deal, the short seller continues to spend a lot of time attempting to find problems. Here, they tried to claim that changes to the auditor meant something bad was happening. Well, first, the original auditor retired. He was old. This is the circle of life, so someone new was appointed. Second, our short seller missed the fact that in May 2019, France passed a law raising the threshold for appointing a statutory auditor. The company owning the property was under that threshold and therefore no longer required a statutory auditor, so we could go with a cheaper option. That's it. There's nothing more to it. Any sensible investor would have done the same. The rest of the allegations deal with how this villa, Figuier, along with the other rental assets in France, were acquired by CPIPG.
Stated simply, CPIPG acquired assets of EUR 25.8 million for EUR 1 from our shareholder. The total transaction included both real estate assets and shares of CPIPG. As usual, everything was done on an arm's length basis, and as you can see, this was good value for CPIPG. We gained good quality rental assets, and our capital was increased. The rest of the short seller report becomes a little garbled here. I don't really understand what they are after. The value of these properties has been very consistent over time. Frankly, they are held on our balance sheet at values which are probably well below the market. There was no impairment, no write-down. You see more evidence around this in the following slides. Finally, the short seller takes issue with our share buybacks. We have always been 100% transparent about this.
We are a closely held company, and our shareholder has invested significantly over the years. Apollo is also a shareholder, and they've done well on their investment. It's only natural that shareholders want to take distributions over time, and we do it through share buybacks. The final slide in part three was some ridiculous comment involving Pokemon trading cards and something about the differences in share buybacks and issuance prices. Look, there's never been a difference between a share issue price and a share buyback price in the same calendar year. Beginning in 2019, we standardized the pricing to correspond to EPRA NAV. Well, that's basically it. We've discussed all of these so-called allegations. While these reports have been an unwelcome distraction, we remain focused on what matters the most, which is our reputation, our tenants, our properties, our bondholders, our banks.
Despite the noise, I know CPIPG is a great company, and the quality of our people and assets cannot be matched. Now, I realize the report was only released this morning, so there might not be too many questions just yet, but we are ready to begin with the Q&A, and I see a few have arrived. So, Moritz, would you like to read the first question?
Sure. Thank you, David. So the first question: Hi, you mentioned that you did not pay EUR 10.1 million for the Pietroni acquisition to Vitek, but in your response, you say that part of the acquisition included your EUR 10.1 million in payables to Vitek, which you settled. How were they settled? If it was via cash payment, wouldn't it be correct to say you did pay Vitek EUR 10.1 million as part of the transaction?
Martin Němeček, would you like to answer that one? Martin, would you like to answer, or shall I answer it?
David, please, please answer that one. I can answer the number two. Sorry, I was muted.
Okay. No, no problem. So we settled the outstanding loans provided by Mr. Vítek to the entities. Given that we, that these liabilities were deducted from the gross asset value, it was accurately accounted. Hence, we paid EUR 1 for the net identifiable assets. I mean, Martin, anything else you want to add there?
Mm-hmm. I can just clarify that really, CPIPG paid EUR 1 for the shares of Pietroni, and Mr. Vítek's shareholder loan was deducted from the share price as a liability, which is a standard process. Post-acquisition, the shareholder loan of Mr. Vítek was duly settled and replaced with an intra-group shareholder loan. Therefore, we reported EUR 1 acquisition price for Pietroni and EUR 10.1 million cash outflow for refinancing of the shareholder loan.
Going to the next question. Can you address the claim that as part of the Pietroni acquisition, you reacquired 67 million of your shares at EUR 0.54, which resulted in EUR 29.8 million premium to Vítek's original purchase price? Did that happen or not?
Mm-hmm. Okay, I can, I can answer this question as well. So as part of Pietroni acquisition, CPIPG acquired its own share, valued at the debt time, EPRA NAV. We took this approach to demonstrate arm's length terms and price, and we fully disclose it as part of related party transaction with Mr. Vítek. The EPRA NAV and NRV, now NRV, has increased-
... since the acquisition, and therefore, the acquisition of, the shares, through Pietroni was value accretive for the company. Would like to remind you that Mr. Vítek originally subscribed the shares in CPIPG in order to provide the company with equity, needed to strengthen the company and obtain the investment grade rating. It was a successful strategy. The company has grown, generated value, and since then, EPRA NAV has increased significantly as a result.
Thank you, Martin. Going to the next question, well done on how you handled the Muddy Waters. Is there anything from the Muddy Waters report that may lead you to change any processes, practices, etc.? Can you please provide us with an update on the Cyprus court case?
So I will handle the first part, and there's another question here, which I will read out, actually. It says, "Overall, your responses are well justified and reasoned, but our concerns remain around the number of related party transactions between CPIPG and Mr. Vítek. The volume of these may evaporate investor confidence. Have you taken any action to reduce or eliminate these related party transactions between you and your main shareholder? Do you plan to do this in the future? Or if not, do you plan to instigate any new processes for third-party vetting for future third-party transactions?" So I appreciate this question, and so I'll answer this one and the first part of the question that Moritz just read.
Let me just say the following: You know, we, we've taken a lot of pride in listening to our investors over the years, and so we have heard over a long period of time, you know, the sensitivities around related party transactions, and that is why we have been so open and transparent about everything that we do. The question I have is, why is there a natural assumption that related party transactions are bad? In fact, we just did a related party transaction at the end of the year, where our shareholder is contributing assets to the company. That went through a very rigorous process with an independent valuation that was then reconfirmed by PwC, reviewed by the board, and as I said earlier, the board is more independent than before, so we're subjecting all of these things to scrutiny.
And our shareholder might be contributing additional assets in the near term. So I'd say not all related party transactions are bad, but certainly, you know, we are very sensitive to this issue. Our shareholder intends to reduce the volume of shareholder transactions over time and related party transactions over time. You know, at the end of the day, we will listen to the feedback of our investors, and we will be very thoughtful about how we do this in the future with extra scrutiny applied. The other thing I want to mention is that all of our policies are being reviewed by White & Case. You know, we do believe our governance framework is appropriate, but we will look at this from a policy perspective, and we will keep all of you updated on our thinking.
That's really the most I can say, is that we hear you, we're thinking about it, we're very sensitive to it. So, so that would be my answer there. Moritz, do you want to go on to the next question?
Sure. David, I think only the second part of the question wasn't covered. Can you please provide us with an update on the Cyprus co-
Ah! Right. Martin Matula, General Counsel, would you like to cover that?
Yes. Thank you, David. I'm happy to take this one. The hearing on the Cyprus interim order took place on 1st February. The hearing took over five hours. The parties presented their arguments orally and also submitted their written submissions to the judge. The judge reserved to issue the judgment. There is no deadline for it, but our counsels expect a decision in the next month, and obviously, we will update the market accordingly. I might take the second question as well, which deals if we're going to sue Muddy Waters. We are currently focusing on our 2023 financial results, transaction and business in general, but we will eventually revisit this option later in the year. There is no decision made at this point in time. Thank you.
Thank you, Martin. And then going to the next question, why have the exit cap rates of your GSG Berlin portfolio compressed so much versus prime office in Berlin cap rates?
Moritz, I think you can answer it yourself if you like.
Okay, sure. So basically, it has compressed by about 50 basis points, both on Reuchlinstraße property, as it did with the Berlin market, but proportional, the compression is less as the exit cap rate is higher. And probably also just to highlight, we will publish or the next valuations are for year-end 2023, which will be updated with our reporting. Then the next question: Hello, and I might have missed this, but regarding the Prague building land price map, I thought all transaction prices will be reflected in this municipality-created map. What could be the possible reason that not all transactions are reflected in this map? If CPI completes the transaction of the land in Prague, will such transaction be shown on the map?... And Tomáš, do you want to answer this?
Yes, I, as I mentioned before, the Prague building land price map is made only for tax purposes, so it doesn't reflect any transaction values. Even if CPI completed transaction of land in Prague, this transaction is not shown on the map. This is a kind of created map for tax purposes only, nothing to do with any real transactions.
Okay. Thank you, Tomáš . Next question, and why did the company buy the French properties from Radovan Vítek? What is the expertise of CPI in ultra-luxury French properties?
Well, can I just say one of the French properties that was referenced by the short seller was at Palais Maeterlinck, near Nice, which, you know, has, was a development of Orco Property Group, I believe, and has been, you know, something that we've had for a decade. And in fact, you know, really over the last decade, we've had luxury rental assets in France. And then in 2018, we bought luxury rental assets in the UK. So this is a very small part of our business, but it's a market that we understand very well. You know, we're not in every market, but we have certain places where we feel we know the market very well. And that was really the rationale behind it, and we've done very well with these rental villas over time.
Thank you, David.
It's also worth noting that we've been successful in disposing these properties over time, too. Sorry, Moritz.
No worries. So the next question: Could you dig a bit deeper in the regulatory issue, which led to your need to purchase non-core assets with the shopping center acquisition in Italy? Why did you have to buy the shipmaker?
Martin Němeček, would you like to take that one, maybe?
Yes, I can. The regulatory issues related to the onboarding and KYC by UniCredit Bank, which was the primary seller of the credit, as well as the equity. The entity that was suitable and eligible for the bank to take on the acquisition was, for some reason, also included these small and really not material assets in it. As part of the acquisition, we also acquired these assets, and as we already reported, we disposed them back to Mr. Vítek.
Thank you, Martin. The next question: Have any of your banking partners reached out with concerns as they relate to the short seller report, in particular, with regards to allegations around money laundering?
I'll happily take this one. The answer is, of course, investors, banks reached out to us when the first report was published. But I can tell you, all of our stakeholders have been very well satisfied by our responses. So when parts two and part three came out, the silence was deafening. We really heard very little, from our banking partners or other stakeholders about parts two and part three. And of course, it was really in part three that this term, money laundering, was thrown around. But as I mentioned during the webcast, all there was, was this kind of ridiculously flimsy connection that the seller might somehow be connected to Panama Papers through her lawyers, and that somehow this implicates us and even the bondholders. You know, even though the transaction took place in 2013, we didn't issue bonds till 2017.
It's just kind of ridiculous. So no, not a single investor or bank has asked us about money laundering because nobody believes that that is even relevant here.
Thank you, David. The next question: How does these short seller reports impact your ability to maintain IG rating at Moody's? The Moody's adjusted EBITDA, ICR was around 1.9x as of H1 2023, below the downgrade threshold of 2.5. Do you think all the deleveraging efforts will be enough for you to preserve the IG rating? I will probably start with the answer, and David, if you want to add further. So I think, with the Moody's rating, we're currently rated Baa3, with a negative outlook. It is also true that our ICR is below what their threshold is.
I think what is important to see about the financial year 2023 is that we started the year with EUR 1.6 billion of floating rates and very expensive bridge financing or loans from our acquisition of IMMOFINANZ and S IMMO, and we significantly repaid it to below EUR 600 million and refinanced it also at the end of November. So we expect, as on the one hand side, we repay expensive debt, and on the other side, we continue to grow EBITDA, that this ratio will improve. I think, as we also stated, we're looking at several ways to strengthen our capital structure and reduce our cost of debt, also through the recent and very successful disposals. Will it be enough for preserving the IG rating?
We will do whatever we can, but obviously it's not our judgment call. And I think, as you see, we're progressing quite a lot across disposals. So, we would hope the rating agencies to give us some time to further execute. And I think on the impact of the Muddy Waters report, the rating agencies, we're in contact with them. They see our answers, and I think they also saw part two and part three of the report. And we hope with our answers we help them to clarify everything. David, anything-
Yeah, I would just add that simply protecting our investment grade rating is, you know, 90% of what I think about on many days, okay? We are absolutely focused on this. And, you know, I think right now it's more about, you know, putting the right deals together that do the job and that get the job done to protect the rating and to hit the leverage targets that we have in mind. I think we have more than enough interest on the table for equity and equity-like transactions, and simply we need to find and settle on the right things to do. But simply, I would say, we are working on this, all of us, every day. We take it very seriously. We want to preserve this credit rating as really one of the top priorities of our business.
Thank you, David. The next question, I think we already answered it, but we can repeat it: When do you expect to provide an update on White & Case findings and any changes made as a result? And as mentioned, we anticipate the work of White & Case will be completed before the summer.
But again, this is one of those things where, you know, if an investor wants to know what's going on, you know, I'm sure we will update you again after our full year earnings webcast. If you have a question in the interim about what's going on, you're more than welcome to call and ask, and we can keep you posted.
Okay, thank you. And next question: You used the word modest decline. To me, that suggests mid- to low-single-digit, which would be at odds with wider market expectations. Can you comment? Valuations are conducted by third-party appraisers. That was the next update for year-end 2023, reporting is expected to show a modest decline in value. And-
Look, I really wish I could provide more color to the very clever investor who asked that question. But frankly, we're trying to give you a bit of guidance that we will... You know, we've said it's reasonable to expect some valuation declines. We think our portfolio will perform better than most, but simply we can't give you any further guidance because we have our 2023 results coming up, so you'll just have to wait for that. I'm sorry about it.
Next question. On the Reuchlinstraße yield slide, can you clarify that the Berlin prime office yield is a market net or gross initial yield number, and the exit cap rate is the input in the valuation DCF?
I can take that. We will need to confirm with Savills on the Berlin prime office yields, whether it's net or gross yield. And yes, the exit cap rate is one of the many inputs in the valuation DCF.
I think also one comment on this one. The graph was actually shown to see the evolution and actually the impact for the valuation. It was more about the evolution rather than actually net or gross.
The next question: Can you explain fact number three in more detail in the Pietroni acquisition? Did you pay the EUR 10.1 million payable, or was it waived or something else?
I can, I can take this one. Mm-hmm.
Go ahead, Martin. No, I think you answered it already, but let's try one more time.
Yes, exactly. So once again, CPIPG paid EUR 1 for the shares of Pietroni. The share price was calculated in the standard way as related transactions are done. So value of the properties and other assets in the company, in Pietroni, minus bank debts and other liabilities, and other liabilities included EUR 10.1 million of shareholder loan provided by Mr. Vítek. Then post-acquisition, CPIPG paid Mr. Vítek the liability, so we paid EUR 10.1 million to Mr. Vítek and replaced the shareholder loan with intragroup shareholder loan. So the overall acquisition was EUR 1 for the shares and EUR 10.1 million to replace shareholder loan of Mr. Vítek.
Thank you, Martin. The next question: Thanks for your comprehensive and detailed presentation.... Has any authority started any investigation into CPI post the short seller allegations? Have you started any legal actions against Muddy Waters?
Martin Matula, you want to take it?
Yes, sure, David. We already answered the legal action part against Muddy Waters. In terms of the regulator, our primary regulator, the CSSF in Luxembourg, asked a very small number of questions about some details of the Muddy Waters report, as you would expect, but we heard nothing further. We provided all the answers. We think any sensible reader, they can see that the short seller report is not very well researched. That will be the actual status quo of this question. We're not aware of any formal investigation in that respect. Thank you.
The next question. On the ICR, what is the direction going forward of this ratio with regards to covenants? Can you remind us how much and for how long your debt is fixed for? Could you provide us an update on your deleveraging plan?
Moritz, do you want to take this one?
Sure. So, in general, as of at the end of Q3 2023, 80% of our debt is fixed or hedged, with the remaining 20% floating. And of this floating part, basically half was represented by the bridge. Our debt is typically, so when we take on new debt, which is floating, we fix it at maturity, at issuance, and basically, the debt is fixed till maturity. And from an ICR standpoint, it's really we expect the ratio to stabilize as we progress with disposals and repay the expensive bridge debt. So, 2023 was really a transitional year, and we expect for 2024, really to stabilize and for improve again the ratio.
Regarding to the covenants, I think the covenant for the EMTN bond program is at least 1.8 times ICR.
1.9.
Point nine. And basically, on the update- Mm-hmm?
I think you basically covered it. I did want to jump in and mention that, you know, since Q3, we did fix out more of our debt. So on the 28th of December, I believe we actually hedged quite a bit of debt. So we had a bit of floating rate debt that we fixed out on the twenty-eighth of December, which proved to be a really good point in the market to fix out. So I think the total percentage went from something like 80%-84%, and again, the bridge is still a very large component of that. So, you know, in reality, the fixed proportion of our debt is very, very high. Sorry, Moritz, I interrupted you.
No worries. And maybe jumping to the next question: Your major shareholder and multiple listed entities like, IRR, so IMMOFINANZ and S IMMO. Does it make sense to keep all these listed entities? How about consolidation also for the sake of cost savings?
Look, from this question, you know, speaks directly to our hearts. You know, we agree. We have been looking at many options for how to address this situation. I think we would all agree it's not an ideal situation forever. So I would call one of our top priorities of 2024, after saving the rating, our next priority would be reducing complexity of the organization and streamlining the organization. This is very much part of this. So, you know, we are definitely looking at it. But nothing to say now, no immediate plans.
And the next question: Hello, thank you for this, as usual, very helpful disclosure. Any update on disposals as we're slowly going through Q1?
I can maybe mention that we are on track with our plan for disposals, and we will provide update once once different transaction will come through and through the time. So we are on track.
Thank you, Tomáš . The next question: Good morning. Thank you for these very comprehensive responses. Should you be downgraded to high yield despite all the efforts, what would be financial implications besides step up in coupon on some bonds, if any, of course? Thank you.
So the implications of a downgrade, which we have looked at, because we are sensible people, and we're planning for any eventuality, the actual impact on our business is actually fairly minor, day one. We have a few bonds left that have step coupons, our revolving credit facility, the pricing will increase. In our bridge, the pricing will increase, but that's basically it. And there's no, you know, there's no facilities that get canceled, there's no puts, there's no liquidity that drops away, nothing like that. So, you know, I think it's really a question of cost, and I would not characterize the cost as huge from our perspective. Even so, you know, we are really willing to do, you know, whatever it takes to defend the rating within reason.
And so certainly, you know, what we're more concerned about, frankly, is the reputation of the company. You know, we want our bondholders to be happy. This has been our stated objective. We're doing everything we possibly can. But I would say, if we are unsuccessful, you know, we believe the company is still in very good shape.
Thank you, David. The next question: Do you expect equity asset contributions from Apollo?
Look, that's a question I can't answer. All I can say is Apollo has been a very good partner to us. We have really benefited from having their appointee on the board of directors. He's been a great addition to us. I think he's helped us up our game in many ways. So we're really happy with Apollo. They've been very supportive. We're always seeking ways to work with them in the future, and that's probably the most I can say at the moment.
Okay. Thank you, David. The next question: Does the current volatility in German banks related to Deutsche Pfandbriefbank AG affect your access to bank liquidity in any way? Are you making any contingencies?
Well, let me touch on this one and say, we have been following the story. The good news for us is our German refinancing is basically done. So you would have seen at the end of last year, we extended EUR 400 million of loans in Berlin with Berlin Hyp, and really that takes care of our German bank financing for quite a long time. You know, Deutsche Pfandbriefbank had been active in other parts of Central Eastern Europe, but they're not a huge lender to the group. On the other hand, you know, we believe that there's plenty of bank interest. You know, European banks are still very well capitalized. I think investors in Western Europe badly misjudge the depth of the banking system in Central and Eastern Europe.
You know, the fact is, we have a real banking ecosystem in Central and Eastern Europe. So I'm really quite comfortable that the bank appetite is still there, that we can continue borrowing in through the secured loan market at spreads that are substantially better than where we can borrow senior unsecured. So at the moment, it's not causing us any particular issues, but we are watching it carefully, and simply, we're glad that we, we got our, our Berlin refinancing done at the end of last year.
Thank you, David. I think that's what I have. I see on the screen on my list. If there's anything else... Yeah, there's-
I don't think so. I think we've really covered all the questions. There were a few questions that were asked that we might not completely understand. I will reach out to one or two of those investors directly, just to clarify. But look, I would just say thank you to all of you who listened to the call, who asked questions. We really appreciate the support of our investors. We really care about our reputation, and we believe our responses to Muddy Waters should close the door on this episode, because you can see, you know, what professionalism looks like. We hope you are satisfied with our responses today, and if you are not, you are welcome to reach out to us. We are here. We will speak with you, and thank you very much.