Earnings Call: Q2 2021

Aug 11, 2021

Dear, ladies and gentlemen, welcome to the conference call of Tehagi Mobienagi regarding the publication of the interim report Q2 2021. At our customers' requests, this conference will be recorded. As a reminder, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask May I now hand over to Martin Thiele, who will lead you through this conference. Please go ahead. Yes, many thanks and good morning, everybody. This is Martin from TEG. Thanks for dialing into our Q2 2021 conference call. Yes, as always, let's jump directly into the presentation with the highlights slide Page number 4. First of all, a quick look on the operational performance on the German portfolio. I would say vacancy rates Like for like rental growth on a solid way, vacancies slightly decreased by 10 basis points after the increase that we saw in the first Which was roughly 60 basis points. So we are more or less now back on track, and we are quite confident that we can reduce this vacancy rate Even more during the second half of twenty twenty one. The total portfolio regulatory rate remains stable at 6.1%. Like for like rental growth, a little bit higher than in the Q1. So 1.6% was the Actual number including and excluding vacancy reduction after 1.2% and 1.4% in the first quarter. FFO1 slightly increased by €300,000 quarter on quarter. And if we compare the first half of twenty twenty one with the first half of twenty twenty, The FFO1 increase was around 6%. Good development of the EPRA NTA per share, Up by 8% on a semiannual basis after the good valuation results that we saw at 30 June 2021. This valuation result came up with a total valuation gain of around SEK 310,000,000. Yes, of course, the largest Part of that still is attributable to the German portfolio, which is clearly in total number much larger €305,000,000 but also not a bad sign even in the quite small Polish portfolio, and we saw a slight valuation uptick by around €5,000,000 Of this €305,000,000 renovation gain in the German portfolio as in the past relations, the largest part was coming from yield compression. But still, we receive valuation uplifts from the operational performance. New relation levels stand now at €11.50 per square meter in a 5 5% gross yield, this should be still something where we could expect further valuation gains in the future. Coming to the next page, look on our operational performance in Poland. Let's say, we're here, we're very happy what happens Currently important with our business, not only that the selling business is in a good way, also the renting business has now actually started. Will come back to that a little bit later. The first tenants have moved in now. In total, we achieved results operation in Poland in the first half of twenty twenty one of €4,500,000 and this is a strong increase in comparison to the previous year. This SEK 4,500,000 currently is coming solely from the selling business. The builds to hold units pipeline increased, So contractually secured pipeline stands now at 8,200 units. The build to sell contractually secured pipeline is Roughly stable with 3,700 units. So we are currently a total contractually secured pipeline. That means acquired Land plots or contract with secured land plots or projects even under construction of nearly 12,000 units. JV, the Polish portfolio is growing now at EUR 260,000,000 after EUR 191,000,000 in the first quarter. Yes. Just a quick comment on the COVID-nineteen business update. More or less, everything unchanged, the rent deferrals instead of minor impact. We have seen we have discussed this in our last call, vacancy increases during the lockdown. Now this is absolutely stable again and hopefully then It's reduced in the second half of the year. And also in the Porsche portfolio, we have good news. I mean here it was, of course, also for us a little bit unclear How does unregulated markets react in such times, but sales prices and volumes in our markets have even seen a strong growth in the Q2 of 2021. And the rental markets, at least in our regions, like for example, in Wartsila have been very stable. All the construction sites in Poland are still running, So no delays are expected. And as I said, the first build to hold projects are now completed. Also very positive that we received Very nice ESG rating from Sysco Analytics in the end of last week. We are now rated In the best category, the score of 9.9, and that puts us among the top 3 of all real estate companies worldwide. Let's go to Page number 7 and perhaps some comments on the income statement are worth mentioning. If you look at development of the net actual rent, we saw a slight decrease in the net actual rent quarter on quarter, but this is the result of ongoing sales that we signed in 2020 and is closed in 2021. So the better picture is to look at the first half of 2021, we compare this range with the first half of twenty twenty, where we saw a total increase in our net actual rent of 3.9%, of which 2.3% refers to net acquisitions and 1.6% as I said is coming from the like for like rent to go. The net income from sales in the Q2 of 2021 was quite strong with €4,500,000. In total, we achieved EUR 7,500,000 net income from sales in the first half of twenty twenty one, and this is mainly coming from our activities in Poland. So out of the €7,500,000, euros 6,700,000 are coming from Poland And this €6,700,000 are after effects from purchase price allocation that we still have reduced this result by €1,800,000 If you compare the personnel expenses quarter on quarter, we see an increase by €800,000 This is mainly coming from the effect from the settlement of the long term incentive plan 2018 to 2020 and the new management board compensation after the Approval in H and M in May 2021. So this refers to the compensation in TEG shares that all the 3 board members have received or will receive in the future. The net financial result produced in H1 2021 in comparison to H1 2020 by nearly €15,000,000 but this is mainly driven by the valuation of the equity option of the convertible bonds, The net financial result cash after 1 offs improved by €800,000 during this time, and this net financial result is relevant for our FFO calculation. And as in the previous quarters and years, the income tax still mainly contains deferred taxes. The cash taxes in the first half twenty twenty one amounted to EUR 3,800,000 after EUR 5,600,000 in the previous year on the comparable Period of the previous year, and that's interesting, out of this €3,800,000 just €700,000 Coming from the German business, you will still benefit from positive tax effect that we have after repurchasing of the converted bonds last year. On the next page, we can take a look at the EBITDA, FFO and AFFO calculation. As I said, the AFFO1 was slightly increased by €300,000 quarter on quarter. It increased by €5,000,000 so nearly 6% year on year. And here, we benefited from the higher EBITDA that we achieved from the lower net financial Result that I mentioned and also from lower cash taxes by €3,000,000 The AFFO development is very positive quarter on quarter, And it was slightly reduced by €700,000 But if you compare the first half of twenty twenty one with the first half of twenty twenty, We see a quite significant increase due to the higher FFO and also to the lower CapEx. To make it clear, this CapEx number is More or less temporarily lower by €8,300,000 if you compare the first half twenty twenty one with the previous period. So we expect that we will use a little bit more CapEx in the second half of the year, but I think the general message is definitely positive That we don't need to invest too much to achieve our like for like rental growth that we currently have. Page number 9, balance sheet, perhaps just a short comment on the cash position. So the cash position is definitely strong It's around EUR 270,000,000 in the balance sheet. So that means even after the dividend payment in May 2021, For 2021, there are no urgent financing needs. Everything that we want to do, especially in Poland, is for the next And that's definitely already financed. Page 10 shows the EPRA NTA calculation. As I already said, 8% uplift. If you exclude the dividend payment from this EPRA NTA calculation, the uplift was even by 12%. And just to remind you, this EPRA NTA calculation is without an impact of transaction costs. If we would do that, You see this on the footnote of this page, the upper NTA would increase by roughly €3.44 Page 11 shows the financing structure. We are now with an LTV of 44.1% below our LTV target Of 45% or more or less FD LTV target. So this is everything as it should be. We still have further refinancing potential €365,000,000 of bank loans, you see this on the right side, are maturing over the interest terms ending in the next 2 years. Average coupons of these bank loans are still north of 2%. If we finance today bank loans for 10 years, the coupons are clearly below 1%. Let's move to Page number 13, which shows the portfolio total. The units in Germany are still at 88,300, so this is more unchanged from the beginning of the year As we had no acquisitions in the first half so far, components, the secured pipelines that was really acquired, We secured increased quite strongly to, as I said, nearly 12,000 units from 8,700 units at the end of the last financial year. Page 14 shows the like for like rental growth. 1.6%, including an excluded vacancy reduction And the composition is, as usual in our company, shown above this chart and is mainly coming From rent decreases for existing tenants and tenant turnover and just to a very small part, 0.2% from the monetization surcharge. As we have spent in the first half of twenty twenty one, a little bit less CapEx, we are now at total investments on a per square meter basis Annualized at €18.80 You see this on the top right of the page after roughly €20, €21 In the financial years 2019, 2020, for the full year, this number should be a little bit higher, but more or less in line to what we have invested in the previous years. Page 15 shows the development in vacancy rate. We are now in June at 5.8 percent in our residential units, so a slight reduction in comparison to the Q1. And as I said, we're quite confident that we will achieve Further reductions in our vacancy rate in the second half of twenty twenty one as we are now hopefully in a more or less Normal mode and hopefully not any lockdowns in Germany on the horizon anymore. Page 17 shows summary of the valuation results. 5.2% valuation uplift was quite strong. It was definitely much more than what we have seen in H1 2020 and also in H2 2020 where we achieved relation uplifts of around 3%. This is clearly a reflection of the market that we see out there. And what is the good news on the valuation side is, of course, not so good news on the acquisition side. So the competition is incredibly tough. And you know that we are very disciplined. I mean, clearly, we have portfolios now Under review in due diligence processes, but it's really extremely difficult now to talk about larger acquisitions at attractive prices. 5.5% is the valuation growth sheet now, €11.50 per square meter. So if you ask us, well, What should we expect for the second half of twenty twenty one? I mean, it's clearly difficult to predict, and we are not giving any concrete guidance. But for us, it seems clear that this is not the end of the road. So therefore, we expect further valuation uplift to what size ever In the second half of the year twenty twenty one. On Page number 19 and the following, we I'll show you the slides that you know from us regarding the Polish portfolio. We have changed some things a little bit. 1st of all, from now on, we will only talk about really the contractually secured, that means acquired or secured projects. In the past, we have also presented planned projects. That means where we have not signed a contract, but we are perhaps looking at this project There are more or less general plans provided for the land banks. As we have now really received already significant Number that we have acquired, we think it's better and simply more based on facts Hard contracts, that's how we look at it also internally, and to look at the contractually secured projects. So don't be confused if perhaps you missed some numbers from previous quarters. If you compare it with previous quarters, you should always look at contractually project that we have called current projects in the past. We saw quite nice increase in our contractually secured pipeline. You look at the build to hold projects, we are now above 8,200 units. That compares with 5,900 units in In the Q1, the main reason for that is that we have now acquired land banks in a 4th location, which is Gdansk in the northern part Of Poland, that means that we have now all in all 4 locations in Poland after besides Gdansk And as you know from past, what's left, Poznan and Lodge. What we have also adjusted is the estimates for the total investment cost Per square meter and also for the rents. This is then more or less an experience that we have made, not so much Because of increasing construction costs, that's also the case. We see currently construction costs that have been increased by roughly 5% in comparison to the previous year, But we simply are building apartments from a little bit higher standard to what we have planned before. And therefore, we also expect higher rents in comparison to what we have achieved before, and this is also something that we have seen now these numbers in the actual projects. In total, the gross yields that we expect are unchanged, so still 7% to 8%. But please see this as an update to be more accurate Page number 20 shows the Berthold pipeline in Poland. Here the time schedule is more or less unchanged. As I said, now our 4th Location in Gdansk in the northern part of Post. On Page 21, you see the 1st rental units that we have in offer. At the end of July, roughly 400 units are in the offer. You can take a look at the homepage, rainthedrange.pl To get a first impression, it's also available in English. And we are absolutely happy that these projects are not only ready, but that they Within the time schedule, that they have been within the budget and that we achieved the rents that we have expected. By the way, the first Project with 57 units that you see on the left side of the sort of very first is already fully rented out. I mean, it's clear these are still small numbers. But for us, it's good to see that this first proof of concept, if you want so, It works, and we are very optimistic on our renting business in Poland. And everything that we've seen so far was really very positive. Page 22 shows the growth of cell pipeline. Also here, we have a second location from the land plot that we acquired in Gudanske. Also some project stages will be dedicated for the selling process. Page 24 shows summary of the EHT ratings, as I said, and we are very happy that we received even an upgrade from Sysdalenlytics Now at the beginning of August, that puts us among the top 3% of all real estate companies worldwide. And in January, We can tell you that we're really working hard on these ratings. And it's, of course, good for us that nearly every rating agency This is what we're doing regarding the ESG activities. Yes, finally, on Page 26, quick look on the guidance. FFO and dividend guidance remain unchanged. If we look at H1 FFO of €91,500,000 And compare that with the midpoint of the guidance of €180,000,000 it should be clear that we are absolutely on track and that this guidance That should be not too challenging. That's it for me. As a summary of the H1 results, Thank you so much for listening. And now of course, I'm happy to take your questions. Dear ladies and gentlemen, we will now begin our question and answer session. 21. We have a first question. It's from Sonderbank Barclays. The line is now open for you. Hi, good morning team. Thanks very much for that. Two topics, I guess, I wanted to ask about. The first one is indeed on Poland and your pipeline. Thanks for the clarification that you already provided somewhat during the conference call. But I was just interested to get a bit more color in terms of the units that Were previously included and now are excluded, kind of is there a way to get an apples for apples comparison compared to the last quarter. And also just more looking at your time line of the plant completions then It looks there looks to be a bit of a slowdown compared to before. And basically, do you expect that then to ramp up as you get more contractually agreed units in there. And lastly, within that, also it looks like the average apartment size has reduced Quite dramatically from I think previously it was between 45 to 55 square meters to now around 40 square meters. So There looks to be quite a few moving parts within the pipeline. I was just wondering if you could give a bit more color around that. That's the first thing I wanted to discuss. Yes, clear. Good morning, Sandler. Well, what we have done right now is simply an update as we have now really more or less in the business. You know that the first estimates are from November 2019 when we acquired Vantage. And something changed, I would say, that changed perhaps not Dramatically. So if we talk about, for example, an apartment size of 40% compared to 45%, we simply came to the conclusion that a little bit More apartments are perhaps more off in the market. And so it's now hopefully more and more accurate, As I said, important in total, the yields that we expected are not that have not changed. We expect even a little bit better EBITDA margin on the letting processes. That number was increased now from 70% to 75%. So if you want, so the first real observations from our now finished projects Let us to the conclusion, okay, let's do an update here and put the numbers on a more, let's say, accurate basis. I think the time period or the time line of planned completions in both Pipelines, so the ready for rent and the ready for sale business should not have changed too much. Perhaps there are slight changes. But in general, we are not aware of any Construction delays, so the projects are working as expected. And if you look at the build to sell projects, the number of units, And you should be aware that we are also selling units and are handing over units. So for example, in the first Half of twenty twenty one, if I remember correctly, we have already handed over 400 units roughly. So the build to sell project has 2 dimensions or 2 directions. The first one is a continuous reduction from handing over apartments. The second one is then an increase from VanPlus that we acquired. And as I said, in the build to hold project, We saw quite a strong increase by more than 2,000 units in the contractually secured pipeline. And there are from quarter to quarter also those Changes that we redefine some projects from build to sell but build to hold, but we're talking here not about large numbers. We're talking here perhaps about 200, 300 units during the quarters that, that may shift. So I think these Numbers are stable and hopefully this is now clear with these explanations. Okay. And just from my understanding, so previously, I think the build to hold pipeline was around 10,700 units. That is now 8,200 units. The delta is purely units that were that are not yet contractually Agreed. So that 10,700 unit number is has remained broadly the same. Is that fair to say? Yes, Oded. You're absolutely right when looking at it this way. So this number, if you would continue this kind of presentation, would be more at 12,000 units. Sorry, how many units, sorry? It would be perhaps around 12,000 units. So what we have done is to say, well, let's Stick really to what we have acquired, what we have secured. This is already a substantial number and perhaps it's not that relevant as it 24, 18 months before to give more an outlook where we want to go to. And if you want to, with the 8,200 units that we have in the pipeline, We have already achieved what we wanted to have at a minimum size. You know the 8000 to 10000 units that we want to build in Poland, and so we're not stopping there. But it's good to say and it's clear we need to build the apartments and we need to rent out. But the kind of minimum investments If we want to do in Poland, the basis is already there. Okay. Fair enough. So basically, in total, if you were looking to apples Apple's stand, the portfolio has actually increased as opposed to reduced. Is that fair to say? Yes, that's correct. Okay. And just sorry, another slight technicality on that. I'm just trying to square the maths here. Because the number of units has reduced And as a result, your total investment cost has reduced accordingly, which is fine. But the midpoint average apartment size previously was around 50 square meters, it's now 40 square meters. So that would actually imply that on a per square meter basis, your costs would have increased quite dramatically. What am I missing here? Well, the increase in costs in average Total investments per square meter in the build to hold pipeline is roughly, if we remember correctly, €300,000, €200,000,000 to €300,000 And also the average rent that we expect has increased now to an average roughly €11.50 And before that, it was more towards €10.50 So it's and as I said, it's not a reflection of dramatically increased construction costs. It's more the decision that we are building apartments which are of a bit higher standard that leads then also to higher rents. Okay. So you said the cost has increased by €200,000,000 to €300,000,000 per square meter. Is that correct? Yes. And again, it's a decision To, for example, put furnitures into this apartment as well to build the apartments of a higher standard. This is not just a construction cost inflation topic. Okay. That's clear. Great. Thank you very much for the clarification. And then one second quick one actually It's just on your ESG upgrade that you referred to. I was just interested to understand what has led to that additional upgrade in terms of what is the Additional bits what are the additional bits that you have provided? Or what are the additional bits that the rating agencies have looked at That led to an improvement in your sustainability rating. Just a bit more color on that would actually be useful. Yes. I would say this is more or less a continuous improvement in especially in the E and also in the E and S. I mean, we're doing Things in Poland regarding new construction business that have then also positive impact on our East Coast. We have also more data that we simply can provide to the rating agencies. So I would not point out any special thing that led Then to this increase, it's more or less an overall improvement to the categories. Okay, that's great. Thanks very much. That's very helpful. Our next question is by Dirk Loeuse, Berenberg. The line is now open for you. Yes, hello. Good morning. It's Kai, Thoeuse speaking. I've got a question on the adjusted EBITDA margin. And could you indicate why that decreased by 200 bps year on year? It's on page 8 To 68.8 percent after 70.8 percent in H1 last year. Good morning, Karl. That's indeed correct. I would say the EBITDA margin in H1 2020 was above average. If I remember this correctly, we had some cost reductions, which were a little bit more seasonal like maintenance in H1 2020. So if you compare the EBITDA margin of the first half twenty twenty one with financial year 2020, we are more or less stable And it's roughly 69%. And then of course, next question would be where do we expect this EBITDA margin to go? We are clearly looking for improvements. We have here also seen some things like absolute We can see reduction and expected that have net then contributed to the EBITDA margin in H1 2021 is expected. As I said, this EUR 1,300,000 from the share based payment of the management compensation weighed a little bit on the EBITDA margin. So I would not say that we saw a direct strong reduction as a general trend. And this is more or less in line with what we have achieved in 2020 in the full year, and we should or you should expect So there will be slight improvements in the next quarters. Thank you. And second question, if I may, on Page 21 sorry, 29 of the presentation. Could you give a bit more flavor and a bit more color where Do you see on a regular basis the vacancy rate to improve then in the second half? We saw that CapEx was spent in the first half, particularly In Latvia and in Rostock, which may which might explain the increase in vacancy in Rostock. But could you see would you give me a bit more details kind of initiatives we have taken regionally to see an improvement, a bit of a stronger improvement in the second half? Yes. Well, what we are currently seeing is especially positive development again in Zellegetta. If you look at Page 29, you see that we had Negative like for like vacancy reduction in SARS KITTER in the first half of twenty twenty one, it was minus 0.3%. The vacancy rates have increased slightly. Now when we look into our current numbers, That's on a much better way. These are regions where we saw during the lockdown, of course, a slowdown in tenant rotation, and this is Clearly also one location where we hopefully attract other tenants or tenants from other landlords as we have hopefully the better apartments there. So in, let's say, the more challenging markets like, for example, Sarskita and like Gera, we should see a good development in the second half of 2021. And the regions that contribute quite significantly to the like for like rental growth like Berlin, which is in our case the Berlin Commutables, should also see a good performance in the second half of twenty twenty one. Okay. But May I ask again, have you taken any special initiatives in some regions, cabinets where you spent a lot of CapEx over the previous years? We're making sure it has also starting to go up in the first half. Just asking, is it a kind of a, It's a general trend or is it because of COVID in the first half that the former previously relatively strong reduction back into it separately Probably not continued. Yes, I would say it's a mixture. So one part, for example, SARS KETER, perhaps that's the best example was COVID driven. Then we have in the Chemicals region, We had quite significant CapEx investments. So if you ask me what are the regions that are more cold Certain, I would say, yes, I think the regions like such Ita or Weststock where we have a higher share of students. And if you ask me, well, what are the regions where that CapEx programs are now finished or will finish And that will lead to a continuously good like for like rental growth, I would mention as the 2 most important examples, the Berlin and KEMET. Great. Many thanks indeed. The next question is by Simon Stebig, Warburg Research. The line is now open for you. Good morning. And lots of questions have already been answered, especially around the pipeline. I just want to clarify 2 things, please. First one would be in regards to construction costs. You mentioned 5% increase or on a per square meter basis €200,000,000 to €300,000 So if you would split out this furniture and the construction costs increase per square meter, how much would be the construction cost increase? Is that possible? The pure construction cost inflation, that would be Based on roughly EUR 1600 that we had previously and 5%, so something around, let's say, EUR 80 to EUR 90, EUR 90, EUR 90 per square meter. Okay. And if you will continue this simple calculation, perhaps on top of that €200 or €220 Then the outcome of putting in furniture in there and bringing apartments to a higher standard and so on. Okay, great. And then to clarify the second part in regard to the pipeline. So the overall increase, what you just mentioned, the 12 ks units And let's say to the 10.7 ks units for year 2020 you reported, minus the 200 units Variations, so that would be roughly 1.3 ks to 1.5 ks units in overall increase. Is that roughly right Within the build to hold pipeline? Yes. And the main part is coming from this new acquisition in Gdansk with 1400 units. So it's the right calculation. This is absolutely correct. Okay. Perfect. And then maybe last question in regard to pipeline. And do you expect to expand further in other regions within Poland? Or is it more that you The BUWOG style or ex BUWOG style, where you focus really on those 4 locations. So how can I see the strategy going forward? Yes. If we look at the larger cities in Poland and If we say, which is still the case, that perhaps the yields in Warsaw as the capital city are not that attractive and the competition is extremely high, You are more or less left with perhaps a last location or 2 locations, which is Katowice and Cacao. And we look at these markets. If we are really successful in acquiring there, if we find something, I mean, that needs to be seen, But then that's it and that would absolutely fit into what we have planned and as we enter the market. So we always said At least 4 locations make sense. A 5th location might follow, but we should not expect that we really now are Spread into a lot of locations and in Poland in the next years. Okay, perfect. Thank you very much. And then I would have In regard to German inorganic growth, you mentioned that you it's very competitive and surely I totally understand that and it's better to Stay disciplined. I totally agree on that too. But just one thing I was wondering about is, Do you what locations are you looking at? And what size and units would that actually mean If you have something on the due diligence and the portfolios you're looking at, then maybe also what years Are they well, would they be transacted currently? Well, what would be a typical Acquisition today, that's unchanged to last 3 years. That stands sizes of perhaps 500 units. These are then in most cases locations in East Germany. These are then cities that are not like in Dresden. This is more something like Schwereem, Halle sizes like that With the vacancy rate, which is largely extreme, but perhaps between 10% 20% and with gross yields Taking into account this vacancy rate of perhaps, let's say, 6% to 6.5%, That would be something typical we look at, at the moment. Okay. Great. And then if I may, one last one. In regard to revaluation, I mean, that was really, really strong first half year revaluation. I just wonder what is your view going forward? Do you think this is more for the next year front end loaded revaluation Where it might be lower in the coming years or also in H2 2021? Or do you have any view On that, it would be great to get your insight on that. What I would generally say, the whole market benefited really from in this regard, From the COVID-nineteen pandemic, as you know that simply a lot of investors have looked at German Residential in the last year Because the business remains extremely stable. So and what happened in the last year is now more or less reflected in the H1 revaluation. Is there anything on the horizon that this trend could get into a negative direction? That's clearly not the case. Have you seen an unusual strong market development now in the last quarters? I would say yes. So just as a This is personal opinion. I would expect that we see valuation uplifts also in the future, but we have seen Perhaps we've seen something really extraordinary now in the last quarter. Okay. Thank you very much. There are no further questions. And so I hand back to Martin Thiers. Yes, many thanks from our side. Thanks for dialing in. As always, if you have any questions, please feel free to contact me or our IR department. Have a good day and bye bye from Hamburg.