Earnings Call: Q3 2019

Oct 30, 2019

Good morning, ladies and gentlemen, and welcome to the TAG Immobilin AG Conference Call Interim Statement on the Third Quarter of twenty nineteen. At this time, all participants have been placed on a listen only mode. The floor will be opened for questions following the presentation. Let me now turn the floor over to your host, Martin Thiel. Yes, thanks, and good morning, everyone. This is Martin from THG. Many thanks for dialing in into our Q3 earnings call. Today, we will discuss not only the figures for the first nine months of twenty nineteen, but also the new FFO and dividend guidance that we published together with this Q3 results. And as always, we will go through the presentation. It is also available on our website and visible also via the webcast. And of course afterwards, we have enough time to answer your questions. So let's start with Page number four, that's the highlights slide showing the main developments in the third quarter of twenty nineteen. Looking at vacancy and like for like rental growth, the development is definitely positive, especially on the vacancy side. We had a good progress in the third quarter, a reduction by 30 basis points from 5.2% in the previous quarter to 4.9%. Now we see clearly kicking in the results from our CapEx programs. I will come back to this a little bit later. In the total portfolio, that means including the commercial units and also the acquisitions that already closed this year, if we compare the development for the financial year 2019 with the beginning of the year, we had a slight reduction as well from 5.3% to 5.2%. Total like for like rental growth, including the vacancy reduction effects ended up at 2.7%, excluding vacancy reduction at 2%, so quite good and for us, let's say, very normal values. FFO I increased again by EUR 400,000 to EUR 41,200,000.0 after EUR 40,800,000.0 in the previous quarter. Looking at the EPRA NAV and LCV, due to the fact that we had no portfolio relation at the end of third quarter, the developments are, let's call it, quite normal. Slight increase in EPRA NAV per share, which stands now at EUR18.82 and a further reduction in LCV, which is now at 45.5%. Quick comments on our new guidance, I will come back to that later in more detail. The new FFO guidance for 2020 stands at 169,000,000 at the midpoint, that's a 9% increase year on year. The guidance for 2019 is unchanged. Looking at acquisitions and disposals, we acquired so far in the first nine months of 2019, thirteen thirty one units. We will see more details later in the presentation. Looking at disposals, so far, we disposed approximately 300 units at a total selling price of €10,000,000 and that's led to a book profit from these disposals of €600,000 That's one comment on planned and realized disposals. If you remember our guidance from last year, we assumed for purpose of the guidance for 2019 that we sold all in all or we will sell all in all 2,100 units, out of which 1,600 units were so called noncore assets and approximately 500 units was what we called ongoing disposals. What we already did regarding the non core assets is that we sold already last year or signed already last year with closing this year approximately 900 units, plus the additional nearly 300 units so far this year. So on the noncore asset program, which comprised all in all, as announced last year, 1,600 units We sold until now 1,200 units. So that's basically done. So there are 400 units left on the non core side, and this will be done in the future, as we already said in the last calls, now in smaller steps. But I think the main message should be that this is basically done. And the 500 ongoing disposals, that's something where we decided to slow down the disposals. Why? Not because we saw a different development in the market. Simply, we have a lot of cash in the balance sheet, so therefore it was not necessary to sell assets to finance new acquisitions as we did in the past, but this is something that is, of course, clearly to continue in the future. Then we should move to Page six, where you see the income statements. Some comments on the development of the third quarter in comparison to the previous quarter. Net rent was stable or even slightly reduced, but that's not a negative effect from rental development or from vacancy development. The only reason was that we had a closing of disposals in the third quarter. This was one of the portfolios or some of the portfolios that I mentioned signed last year, but the closing then took place in the third quarter. So therefore, we had an offsetting effect or offsetting effects. On one side, of course, the positive like for like rental growth and on the other side, the closing of disposals. So therefore, net rent was, let's call it, broadly stable. Even though net rent was broadly stable, the net rental income improved slightly. We had lower property management costs, mainly resulting from lower vacancy costs, so therefore, get an improvement quarter on quarter by €500,000 Good development in the net income from services that increased quarter on quarter by €1,000,000 if you compare the nine month period 2019 and 2018 and look at the net income from services that even increased by €3,000,000 So that shows you that our service business that preliminary is coming from multimedia, energy services and caretaker service is still growing. Valuation results in Q3 was basically nil. As I said, the next valuation will follow at year end twenty nineteen, so therefore, no effect in the third quarter. On a cost basis, personnel expenses in quarter on quarter broadly stable. If you compare the first nine months 2019 with the first nine months 2018, you've seen increase, but this is then more or less corresponding with the fact that we have more internal services mainly from Caretaker that then leads to higher revenues on one side and to higher personnel expenses on the other side. Looking at the net financial results, the net financial results contains also to a larger part non cash effects from relation of financial derivatives, and this is mainly due to the equity component of our convertible bond. Looking at the FFO relevant financial result, cash after one offs with a slight increase quarter on quarter, but not because of higher refinancing costs or higher average cost of debt. The simple reason board that we issued a promissory note at the end of the third quarter, and so the $400,000 increase was mainly due to the effect that we simply had a little bit more cash on the balance sheet compared quarter on quarter and that led to higher interest costs. The income tax expense in the third quarter was EUR 6,000,000. This is to a very large part deferred taxes. The cash tax expense, really current tax in the third quarter was basically stable at approximately EUR 1,400,000.0 after EUR 1,200,000.0 and EUR 1,300,000.0 in the previous quarters. So we think this is a good message that we're still able to present you with a very tax efficient structure and not a strong increase in income taxes. Looking at the next page, we see the development of EBITDA, FFO and AFFO. I already commented on the FFO development quarter on quarter, the slight increase. Of course, a much stronger increase if you compare the first nine months 2019 with the first nine months of twenty eighteen. Here, the increase in FFO was 12%, So that should be a good development. And it's not only the FFO that increases, also the AFFO showed a very nice development. Looking at the AFFO before monetization CapEx, there was a strong increase by more than €12,000,000 now ending up with €110,000,000 already for the first month for the first nine months. And looking at the AFFO in our definition, that means really after all CapEx, including the deduction of monetization CapEx, we ended up with EUR74.6 million. This is an improvement year on year by more than 13%. On Page eight, you see the development of the balance sheet. That's just one comment here on the development of LTV. You see this on the right side, where the reduction in LTV by 180 basis points. Of course, the main driver of this is the portfolio valuation. But in other words, if you really want to keep it simple, even in a year without any variation results, we're able to keep the LTV stable. So what we pay out for our dividends that leads to reduction in this year, for example, two thirty basis points And all other effects is mainly the ongoing results that in the first nine months already to an improvement of LTV of 200 basis points, fourth quarter will follow. So that shows you that we are well balanced. We are able to keep the LTV in line and don't beat any valuation gains to do this. On Page nine, you see the development of the NAV. As I said, no valuation in the third quarter, so we will have that at year end. But still a strong increase in NAV. If you exclude the dividend payment of €0.75 that we did in May to our shareholders, the NAV growth already in the first nine months without the valuation effect in the fourth quarter that we expect was already at 13%. Coming to Page 10, some comments on the financing structure. We achieved another an additional reduction in our average cost of debt that is now at 1.76%, still combined with a very long maturity of more than seven years for total financial debt. And there's still refinancing potential left, euros $331,000,000 bank loans that are maturing over the interest terms ending with coupons still north of 2% or even 3%. We already did some refinancings in the third quarter, and we're also working on the refinancings already the maturing bank loans clearly for 2019, but also for 2020. So perhaps at year end 2019 or in the first quarter of twenty twenty, we can present you some refinancings that we already did. Of course, the conditions that we achieve for new bank loans are much lower than the 2.1% to 3.5% from the maturing bank loans. Currently, perhaps a ten year bank financing is achievable at around 100 or 110 basis points all in. I will jump over the next slides on Page eleven and twelve. You see here the very positive development of cost of debt, LTV, ICR, net financial debt to EBITDA. That's something that we discussed in the last quarters very much, and you see that the development is still very positive. So then we should look at Page 15, where we give you an overview of the rental growth development and also our investments. But starting with the investments on the top right of Page 15, total investments are still stable. So annualized or if annualized Q3 figures, you end up, if you include really everything that means maintenance and total CapEx at EUR 19.8 that compares with the EUR 19.2 for the financial year 2018. And looking at the CapEx and maintenance allocation on the bottom right of Page number 15, you see that the largest part of our CapEx is and was in the cabinets region. But we can clearly here now demonstrate the success of that CapEx program. For example, we now achieved in the first nine months of twenty nineteen in this region a vacancy reduction by 120 basis points. If you look at the last presentation from the second quarter, this reduction was just 40 basis points, so an additional 80 basis points reduction in the third quarter. So that's what we already announced. And you remember the calls that we had for the first and second quarter that we're doing a lot of CapEx programs, especially in the Chemedist region, and this clearly shows now a very positive effect. Some comments on like for like rental growth, that's on the left side. Already I mentioned that 2.7% total like for like rent growth, 2% like for like rent growth, excluding vacancy reductions, so that should be very normal for us. But important to mention, and that's shown in the small chart above these numbers, just 0.1% from the total like for like rental growth is coming from the monetization surcharge, which basically means monetization programs for existing tenants. So that means that we're still able to achieve effective like for like rent growth without big monetization programs for existing tenants, which is, as you know, heavily discussed in Germany and also then leads to a very disciplined and very effective CapEx approach because this means on the other side that the large part of our CapEx is still and also would in the future go to vacancy reduction. Vacancy reduction is also shown on Page 16. Very positive trend in the third quarter, a reduction by 30 basis points, now up to 4.9% after 5.2%. And also if we look in our internal numbers for the month October, we clearly see that the positive trend is continuing. So therefore, we should have also good development in the fourth quarter. Then I'm now on Page 18 on the acquisition slide for 2019. Three fifty nine units have been acquired or signed in the third quarter. That's what we are announcing today. New locations, Traisund, Traisund and Stadt in, all locations where we already are. Average vacancy of this newly acquired portfolio is 14.4. If you look at the total numbers for 2019, so the total 1,300 units, the average vacancy rate of the acquired portfolios was at 11.1%. So that definitely provides us further upside potential. And we are quite proud that the acquisition multiple is still very attractive at 12.1x the current range, so that means including the current vacancy reduction, and that leads to 8.3% gross yield. Then finally, but important on Pages twenty and twenty one, the new FFO and dividend guidance. First of all, technically comment, the FFO guidance for 2020 is based on the current portfolio as shown to you today. So for purpose of the guidance, no further acquisitions, no further disposals are included, so just the portfolio as it is. We are announcing today a new FFO guidance of EUR168 million to EUR170 million that translate into EUR1.15 FFO per share. If you compare that with the guidance for the financial year 2019, that's a 9% increase. And consequently, we pay out 75% of FFO. That means at least to a dividend per share of €0.87 for the financial year 2020 then paid in 2021. That's also then a 9% increase. What are the main drivers for the guidance that's presented on Page 21? So all in all, a €14,000,000 increase in guidance, and the main driver is the expected improvement in net rental income. That's mainly driven by our like for like rental growth that we already have and that we expect and also from the closing of the already signed acquisitions, that means of the already announced acquisitions. Further positive impact come from a net income from services, so a little bit more than EUR 2,500,000.0. Also, the net financial result will contribute to the positive development of FFO by EUR 2,300,000.0, offsetting higher personnel expenses that is on the one side cost effect through the expected wage growth that we pencil in and also what I already mentioned, the increasing part of our own services. One thing is important to mention, we have a €2,400,000 positive effect from our redefinition of the FFO. We want to bring that in line with the largest part of our peer group. That means if you look at the FFO calculation in 2019, so far, we eliminated any new effects from the new accounting standard IFRS 16. We will change that from 2020 on, so that leads to a EUR 2,400,000.0 improvement in the FFO number by changing that definition. Then there are some slightly other effects. We think good news is that the tax income is just slightly higher or the tax expense is slightly higher than the years before, so we can keep that in, let's say, moderate level. So all in all, a EUR 14,000,000 increase in FFO, 9% compared year on year. That should be good news for the guidance for 2020. That's it from my side so far. Many thanks for listening to the call. But of course, now we're very open to take your questions. The first question comes from Kai Klose. It's Kai Klose from Berenberg. I've got two questions, if I may. Actually, three questions. The first one is on Page six of the presentation. Could you indicate the or could you indicate what was the reasons for the decrease in the expenses for Property Management in Q3 compared to Q2? I assume it might be a bit more regarding maintenance, but if there was anything special which could lead or what was leading to a decrease? Secondly, on Page 23, the increase in vacancy rates for Leipzig, Salzkipper and Wostock, I mean, it's not significant, but how much that's coming from maintenance CapEx spendings? And then the third question would be on the full year guidance. If I look into your full year guidance for FFO compared to the nine months, this would imply quite a strong fall in the Q4 FFO. And maybe you could elaborate a bit more, is there any higher costs you would expect to occur in Q4? Or what might be the reason for the lower quarterly for compared to Q3? Thanks. Thanks for your question, it's Kai. First of all, your question regarding the reason for the reduction in expenses from property taxes. That's on the one side also a slight effect from lower maintenance costs, but the main thing coming here from reduced vacancy costs. So as we have reduced vacancy rates, not only in the third quarter, but also in the second quarter, we are simply able to hand over a larger part of the service charge to tenants. And this, what we call, vacancy cost is, of course, an important part of our expenses from property management. So reduced vacancy cost was the main driver. Then it's correct on Page 24. You can see there are already also regions where we have increased vacancy rates. And I would say in perhaps regions like or in all regions, that's more temporary effect. But we have also individual regions. For example, in Ostrog, we had larger acquisitions last year in Schwerin, and this is and also part of the Ostrog region. And this is nothing unusual that in the first year when after an acquisition, the vacancy rate even increases because you have to take over the property management. We have to really implement our processes. So therefore, it takes some time and we are definitely convinced that we will achieve further vacancy reduction also in the Wassa region, but that's mainly from 2020 onwards. In the Hamburg region, that's a little bit difficult. That's nothing from, let's say, a market perspective. A simple reason that we have, especially in the Hamburg regions, problems with getting craftsmen for even basic things like doing monetization for the re letting to to get them quickly to work. This is something where we are, of course, working on. We don't expect a material effect. But in the Hamburg region, we had now for some months, simply the problem to, let's say, have a quick re letting process because this work from external craftsmen was lead to some delays. But this is also nothing where we expect a material trend to come out. In Salzkitter, yes, had an increase in the vacancy rate, but this is also nothing that is really surprising for us. You know that we had a strong success in South Gitter in the last years and been already below 5%. That's really a good level for So we should expect some swing in vacancy rates in 2019, 2020. But also here, are convinced that this is not a trend in Zanskite. And to the contrary, when we look in our current reporting, we already see here positive effects. And then your last question referred to the full year guidance 2019. You're right. If you put on top of the first nine months results, the Q3 results, you end up above our guidance. That's nothing that will be concretely expect a strong increase in cost positions, but some positions are simply difficult to predict. And this is mainly maintenance, which is to some part manageable, but this is of sometimes a timing effect. And secondly, income taxes is also hard to forecast as precisely. So a swing in both positions of EUR 1,000,000 or 2,000,000 is always possible. So therefore, we decided as we also not percentage wise talking about material amounts to stay with the current guidance for 2019 where it is. But I understand that, but the guidance now implies for Q4, implicitly, a 20% fall in the quarterly FFO. And then you mentioned you had just some smaller items, 1,000,000 or €2,000,000 I'm just was curious if there's anything special which could fall or which could lead to such a strong fall in Q4 FFO? No. As I said, nothing special. Of course, if we have a better view, for example, on income taxes, which is always something that we do during the year, let's say, in our details, but it is an estimate. If you have more visibility on that, of course, this would then lead to the fact that we have in 2020 also a better starting point for the guidance. So again, there's nothing to do The next question comes from Mihael Donchef. Hi, very good morning from sunny Amsterdam. Two questions for me. First off, the Thuringia elections saw a very interesting polarized outcome. Can you maybe so given the 21% of your portfolio is in the region, can you maybe share any risks on your mind? Would you perhaps see the pace of yield compression slowing due to less transactions as people get a little cautious on the region potentially? Or perhaps in the medium term, some thoughts on rent freezes that we saw in Berlin? Michel, thanks for this question. First of all, it's completely correct that our highest exposure with approximately 20% is in Turinia. And we know it's absolutely normal thought that one looks at governments that are similar to the Berlin government. And it was correct that we had in place until the election in place the same governmental, same coalition as in Berlin. So that means a coalition consisting of the party called the left and the Social Democratic Party and the greens. What is changed now after the election is that this coalition lost its majority. So if you follow that thought, that would be good news. But on the other side, we have to state clearly, I mean, we saw absolutely no reaction on investment markets or no really concrete discussions in a material size of important voices regarding things like adapting a similar rental fees. And to the contrary, just to give an example, our context with the local politicians are quite good. I think they completely understand what is necessary in Turinga regarding good property asset management. So therefore, the Minister President of the Federal Republic Of The Federal State Of Turinga also visited two times in the last two or three years our properties in Ghera to inform himself about what we do regarding quarterly quarter management, regarding property management. So therefore, even before the elections, are not concerned that we see a similar development as in Berlin. And after election, just looking at the outcome, perhaps this risk is even lower. That's encouraging. Second question, really a cleanup one. The dispositions, I know there's only EUR 10,000,000 in value, but did you disclose the yield that these were done atmultiple? Yes. The multiple is quite high. That's comparable to our acquisitions. So there's around 13x rent. And this is that's not surprising as we're talking here about noncore assets. And so what we sell is definitely less from less quality than what we buy, especially looking at the locations. So noncore assets, which is, as I said, basically done, that means we are selling assets in smaller cities where we think for the long term, management will be difficult. That's all for me. Thank you. One question comes from Holmats. Yes, good morning. This is Charlotte Holmats speaking. I would like to touch on the Berlin rental fees again. As I understand, your rents in Berlin are so far below the ceiling that you will not have any impacts from that policy development. Is that correct? Or did you do any impact calculations? And second part is, do you think it will hold up legally, the rental fees? Thanks for the question. First of all, it's absolutely correct that we are not affected by the Berlin rental fees. But the main reason is that in the city of Berlin, we just own a little bit more than 300 units. So if you look into our Berlin portfolio, which is approximately 10,000 units, The very largest part is in the federal state of Brandenburg around the city of Berlin. So we talk about locations like Brandenburg and Haftel or like Strasberg or Iversweide or Nauen. And the current rental fees will be implemented in the Federal State Of Berlin. So therefore, from also from a legal perspective or technically, that's just nothing that would hit us. And then your second question, would it legally hold? It's difficult to answer. And as we're not really affected from this Berlin rent freeze, we let's say, like this, we'll be more conservative with any comments on that. But just one thought. Yes, think there are good arguments that it's legally not possible to do this. But the question is, will this discussion stop in Berlin if it's legally not possible? Perhaps not. But as I said, important for us is this Berlin rent freeze does not apply to our portfolio. Thank you very much. There are no further questions yet. So just Mr. Thiel, it seems there are no more questions. So thank you very much for dialing in into our call. As always, if there are any further questions left, please feel free to contact us. Happy to answer that anytime. Thank you very much, and have a good day.