Earnings Call: Q2 2019

Aug 8, 2019

Good morning, ladies and gentlemen, and welcome to the TAG Multilian AG Conference Call Interim Report on the Second Quarter of twenty nineteen. This time, all participants have been placed on a listen only mode. Session. Let me now turn the floor over to your host, Martin Thieu. Yes. Thank you very much, and good morning, everybody. This is Martin from CAG. Welcome to our half year twenty nineteen earnings call. Thanks very much for dialing in. I'm sure you all had a chance to download the presentation that we published on our website this morning. Let's go through the presentation. And as always, afterwards, of course, we have enough time to answer any questions. Then let's start with Page four with the highlights slide. Yes, starting with the FFO development, which was, from our point of view, very positive in the second quarter and increased by 1,300,000 If you compare the first half of twenty nineteen with the first half of twenty eighteen, it was an increase in actual terms and on a per share basis of more than 13%. Like for like rental growth also looks nice. 3% total like for like rental growth due to the vacancy reduction and 2.5% basis like for like rental growth. Looking efficiency in the residential units as well as for the portfolio, the second quarter results were on a stable basis compared to the first quarter. We'll come back to more details on making the like for like rent growth later. Zipper NAV increased strongly. This was mainly the result of the half year valuation that we carried out. As also in the past in the last year that half year valuation, the full portfolio was valued by CGRE and it ended up in a total valuation gain of €211,000,000 This equals a 4.4% semiannual uplift. The exploration levels are now at nearly €1,000 per square meter and looking at an increase yield at 6.2%. A quick comment on acquisitions already now, nearly 1,000 units acquired in the first half and was leased into attractive multiples. Looking at the disposal side, just disposals from the ongoing disposal business, a total of 149 units were disposed. Total selling price, a little bit more than €5,000,000 with a slight or bright. Let's turn to Page number six, the income statement. Looking at the main developments here. First of all, you see quite strong increase in net rent to income quarter on quarter. This is, of course, on the one side, due to higher rent, and the main effect was from cost savings that we had in the second quarter of twenty nineteen compared to the first quarter. As always, there's a little bit of seasonality, a little bit of swing depending on the timing of, for example, maintenance costs or from other expenses from property management costs. Generally, the trend is quite clear that it is more and more cost efficient. Yet according to or in line with reduced savings rates, the cost basis is reduced quarter on quarter. That's clearly the long term effect that we observed. So therefore, net financial income was increased quarter on quarter by 1,000,000 And on the other side, the second main driver of the result, at least when we look at cash numbers, was the improved net financial results. Those are confused if you look at the net financial results in the second quarter twenty nineteen compared to the first quarter of twenty nineteen, which was lower, so €19,600,000 compared to €12,300,000 The only reason for this reduction in net financial result was a valuation effect from the equity component of our convertible bonds. If you look at cash metrics, that's the one which is relevant for FFO, the net financial result quarter on quarter improved by €400,000 So if you want to make it very simple and you want to analyze the FFO development quarter on quarter, a total improvement of the FFO of €1,300,000 main reasons: firstly, the increase was improvement in net financial income mainly due to cost savings of 900,000.0 and 400,000.0 financing costs. And I'm on Page number seven. We show the EBITDA, FFO and AFFO calculation. I already mentioned the main drivers of the EBITDA, so the higher net financial income. And the main driver of the FFO, this was additionally the improved financial the net financial results. But important to point out as well that we also improved our AFFO quarter on quarter, now €26,000,000 compared to €24,300,000 in the previous quarter. So we are definitely in line also with our CapEx targets, with our maintenance targets, and you will see an improvement in the AFFO throughout the whole year. Coming to Page number eight, the balance sheet. As for estimation, that we issued a new promissory note in Schuldschein's balance in June 2019. Obviously, a little bit opportunistic. We simply wanted to use a very attractive interest rate environment and replaced via a private placement of €102,000,000 at an average maturity of nearly six years due to average coupon. The complete fixed rate coupon was 1.18%. Moving on Page number nine, the CPDFR NAV calculation. Worth to point out that the NAV growth, if we exclude the dividend payment, which led to a reduction of the NAV of €0.75 was nearly 12% in the first half of twenty nineteen. So the very positive evolution result, of course, contributed to this strong development. Therefore, the NAV now is at €18.59 compared to €17.32 at the beginning of the year. And now on Page number 10, we see the financing structure, including now the new promissory notes with two maturities, five and seven years. It's important to look at the right side of the slide that we still have further refinancing potential. So looking at the bank loans that are maturing or where the interest terms are ending in the next two point five years, which still adds up to more than €380,000,000 And if compare the coupon of these bank loans, they are between 2.13.6% annum. That's, of course, generally much higher than current financing conditions. For example, current financing conditions for ten year bank loans, mortgages secured are perhaps around 1%, almost even slightly lower, having in mind that the swap rate is already for ten years, already negative today. So therefore, we expect a further reduction in the average cost of debt, which was already down to 1.8% at the end of the second quarter. That compares to 1.9% average cost of debt at the end of the year, and this is still combined with loan maturities, which are now on average seven point five years for the total financial debt. On the Pages eleven and twelve, you see the development of the average cost of debt of the long term value, ICR, net financial debt to EBITDA and net financial debt in Europe per square meter. I think you know this very positive development from the last quarters, so therefore, I will not comment on that in detail. We're clearly, meanwhile, below our LTV target of approximately 50%. So, LTV was down now to 46.2%. Of course, LTV is always a reflection of the current valuation, and we feel very comfortable with a LTV of 46% based on a still moderate valuation of even a little bit less than €1,000 per square meter. So that's why it's how the development of LTV, how development of the valuation results will continue in next quarters. And then at one point in time, it's also necessary to redefine the LTV target if the inventory revaluation results have strongly reduced the LTV, but there's nothing to expect to come day shortly in the next weeks. And I'm now moving to Page number 15. We will give more details on the rental growth and the CapEx allocation in the first half of twenty nineteen. Firstly, looking at the like for like rental growth, we can show a year of very positive development. The term for like for like rental growth was up to 3% compared to 2.8% in the prior financial year, and this breaks down in a basic like for like rental growth of 2.5% with a contribution from vehicle reduction of 0.5%. And further analyzing the basis like for like rental growth of 2.5%, You can see the details on the bottom left of the Slide number 15. Rental numbers of 1.3% rent increases from 50 tenants and 1.1% from city turnover. Only a slight contribution, just 0.1% on amortization surcharge for existing tenants. So you see our CapEx strategy is absolutely unchanged, still the very largest part of our CapEx cost to wage reduction and not for the monetization surcharge for existing tenants. Top regions, see more detail in the appendix on Page six. And when we look at like for like revenue growth was once again the Berlin region, which is in our case in the completely the Berlin Pharmaceuticals with a basis like for like rental growth of 3.3% and a total like for like rental growth of 5%. And interestingly, again, so I've said that with a basis like for like rental growth of 3.5% and a total like for like rent growth of 3.8%. So a very interesting number and still continuing a positive trend in Salceda from last year that we achieved here a 3.5% annual like for like rent growth without any effects from rate of reduction. And the bottom of Page 15 on right side shows you the allocation of maintenance and CapEx by region. And you can see that the Cabinet region, including the City Of Durban, is the region where we currently invest most of our CapEx, not far away from that, and we are spending here more in the next one or two financial years since the current regions. So these two regions are clearly the focus of our investments currently. Then moving on to Page number 16. We received the development of the vacancy rates in the first half of twenty sixteen. Vacancy rates increased a little bit at the beginning of the year, as noted from the first quarter and were stable. In the second quarter, we already had a slight reduction in July 2019 to 5.1%. And we stick to our target so far that for the year end, we expect a further reduction by approximately 50 basis points, so we should end up somewhere between 4.64.7% basis rate in the residential units. Again, in the appendix on Page number 26, you see a more detailed split in regions. So top regions in terms of net income reduction by the regions Berlin and Kemet. And in the Grosstag region, so in the Northeastern Part of Germany, quite strong increase in net income rates, but this is not a trend. This is the outcome of new acquisitions that we had in 2018 and where it took honestly longer than expected until we had fully integrated it in our property management system since 2019. So we are very confident that we will see also in the Rostock meeting reducing production in the next quarters. Right now on Page 18. We have seen the acquisitions from the first half of twenty nineteen. All in all, we acquired 1,000 units in four transactions. If you look at multiples the average multiples that we paid, there was definitely attractive, 11.8x, so this equals a 8.5% cost yield. Looking in the pipeline for perhaps upcoming acquisitions, you should expect that this cost yield is perhaps more moving towards 8% or even below 8% since the average cost yield last year was around 8%. So of course, we see price increases also in our regions. And therefore, this 8.5% gross unit in the first half was there something more exceptional. But of course, you know that you're price disciplined should move more towards the 8% or even below that. Matrix rates on average in this portfolios was nearly 11%. All the acquisitions were in Eastern Germany. All the acquisitions were in locations where we already are, especially in Halle and also in the meanwhile, in the Dutch Harvest Cars one, we own larger number of units. So therefore, we were very happy to close this. Also, sign this acquisition. Closing is, in most cases, at the end of the third or fourth quarter. So 1,000 units in the first half, if you compare that with the financial year 2018, I think we are quite on the same way. We acquired 2,700 units in the full financial year 2018. In the first half of twenty eighteen, the number was quite small for 200 units. So therefore, I think we're on a continuous, very successful way regarding our acquisitions. Then let's move on to Page number 20. We'll see the results of the semiannual valuation done by CBOE. Again, the full portfolio was valued by CBOE. And the result was quite comparable to the last result from the half year valuation or from the second half valuation of 2018. So €211,000,000 semiannual uplift, which equals 4.4% uplift. And looking at the split, the main part, and it's also nothing unusual, is coming from yield compression of 77%. The in place yield is now down from 6.5 to 6.3%. And that's also important to point out once again, this 6.3% is really based also on the current range of means, including or taking into account, the effective rate of in the full portfolio of 5.6%. But also operational performance was again a very nice driver of calculation results with a share of 53%. Operational outperformance means, in this case, if we are better in terms of vacancy reduction, better in terms of rent development than assumed by the value in the last valuation. Looking at the values now in terms of total, I already mentioned nearly €1,000 per square meter, EPS yield of 6.3%. That looks still really, let's say, moderate. So therefore, we are very optimistic that we will see further uplift in escalations, and the escalations will come as in the previous year at year end 2019. On Page 21, you see further validation details. The region with the strongest relation uplift was, not surprisingly, Berlin, which is, again, in our case, completely Berlin committed belt with €48,000,000 valuation gain, out of which was €50,000,000 from net compression and from the end of region with the lowest valuation result. That's also not surprising for Sierra but still with a positive valuation contribution of million And then finally, on Page 23, some words on our guidance for the financial year 2019, with that guidance now unchanged. So it's still at €155,000,000 If you look at the half year results, we have an FFO of approximately €18,000,000 and we annualize that, they're already above our guidance. So this easy calculation would lead to an FFO, an annual FFO of €150,000,000 So therefore, the guidance is perhaps more on the conservative side, but also we have to bear in mind that we have the closing of some disposals now in the next weeks to come, disposals that we signed already last year and that the acquisition that we presented today have a closing at the end of the third quarter or even at the end of the fourth quarter. So the contribution to a forward looking position is perhaps only a very small part in 2019. But all in all, it's clear that we're very optimistic with the concerning the achievement of our guidance. That is from my side a quick overview of about or regarding the half impact. And now I'm, of course, happy to take your questions. And first up, we have Andre Remker, who's calling from Barder Bank. Basically, two questions. First, regarding your planned disposal program in South Central, you mentioned it. Well, is it completely on plan? So it's the original target of 2,100 units. When will be the closing of the 700 units from last year? Will it be July 1 or any different indication here? And the remaining part, could we expect this in several smaller deals or in one larger deal? And what is your impression? It is, at the moment, more difficult to sell such units? So this is my question. Thanks for the question. And well, you're correct that the total assumed balances were the 2,100 units. The seven nineteen units that we signed last year, the closing will be at the August. And so we've got a remaining block of approximately 1,300, 1,400 units, which we sell in medium small parts. And if you want to, we are here behind what we assumed for the guidance, which is not really a problem. So we're selling that in small parts. I mean, what's necessarily a bit difficult for the disposals, they appear a lot of big locations. So therefore, the original idea to sell is in one block was simply difficult. So therefore, we're doing this in small tranches, and we are very confident that we will sell that successfully in 2019 and perhaps in 2020. So therefore, perhaps what we assume for purpose of the guidance as disposal in 2,100 in 2019 to 2,100 units was a little bit large, but it was not a material difference. So part of this 2,100 units, we have some pool of 500 units already sold then in the financial year 2020. So in other words, also from that side, the guidance has this will be more supportive for the FFO guidance for this year? Yes, you're correct. Yes. And a follow-up question on that. You mentioned it's strategic to go into smaller deals. Has you changed your approach here? And what is the reason here? Is it pricing or interest in larger blocks? Simply because of the question of pricing. So when we brought the portfolio to the market, and of course, there was interest there, but we've seen from potential investors that I said, well, the portfolio that we had in the market was very diversified. And honestly, this was the background of this why we sold also this or why we want to sell this portfolio because we have some yet more smaller locations in smaller cities where we think perhaps today everything is okay. But in the future, potentially perhaps it's more difficult in this region to do the successful business. So therefore, we changed our plan and say, okay, then the small local buyers are our target. So sizes of 50 to 100 units are more appropriate, and that's what we're doing right now. But at the end, the price expectations are still the same as you in comparison to the start of your thoughts to sell these properties. Yes, yes. So we don't expect any losses in comparison to our book value of surplus value. Okay. Okay. Then again, you also just mentioned in your presentation on the acquisition side, you're still expecting a similar size to last year, more or less. Yes. And that's once again, we have no official acquisition target. So still unchanged. Last, you had approximately 3,000 units. It should be a good estimate, but it is then the fourth quarter of twenty nineteen with some larger units or the first quarter of twenty twenty. So that's difficult to predict, But we were confident that we end up in similar sizes, let's say, like this. And if you look at the acquisitions that we're doing, for example, the first half, this will be also more typical for the second half. We're talking here about smaller sizes, EUR400 million, EUR500 million that's in the meanwhile at the acquisition side. Okay. Perfect. And then last question on the proceeds from the Schorschandarlin. Is there a short term concrete use of the proceeds? The kind of question is to put too much cash on your balance sheet. Yes. We have the finance acquisitions that we signed right now with the switch and timing, it could cost us some money left. So if you want to be increased a little bit the share of unsecured financing, then you should be switching pattern. Okay. Understood. You very much. That's from my side. Yes. Thanks. Thank you. Your next question comes from Thomas Neuhode. He's calling from Kepler Cheuvreux. Over to you. Good morning. Thank you for taking my questions. Actually, I only have two. First, I was wondering if you can give us your view on the regulatory risk in your business. I know you don't have big exposure to the Berlin City itself, but you have assets in federal states. You have a left in government. What are the political trends there? Are other governments thinking about implementing also their own rent regulation? What is your view on this? And potentially, but I think it's maybe too early, what impact this regulatory risk has on your acquisition and CapEx strategy? Yes. Thanks for the question, Thomas. But first of all, to be clear, the current discussion and proposals around regulation have no impact on our strategy. And I think that's the important point to point out or the good news. I mean our strategy goes not to investment in the very large cities in Germany like Hamburg, Munich and so on. It goes not to monetization projects for existing tenants. Both cases are, from our point of view, the real center of any thoughts about new regulations. So therefore, I think the TAG strategy is something that also in a world that tighter regulation will be a successful strategy. So therefore, having that in mind, from there on, it's just more or less a private opinion. I would personally be surprised if this whole discussion that we have currently in Germany will go off the table without any results. So I do not expect something extreme like we currently see in Berlin with a total rent freeze for the next five years, leaving aside to debate whether this is in line with the law or not. But that we have something around perhaps new niche figure regulations that we have, perhaps some additional rental caps in large cities without having any concrete resolution in mind. I think the risk is clearly there. So again, that's not really our business, not really our investment focus. So therefore, we are, in this regard, really not in a position where we have big concerns that new regulation hit us. Okay. Understood. And last question is on Page six. You mentioned that the personnel expenses are going up a little bit because you're carrying out more KSA current customers internally. Can you remind us what is currently the share of of this internal craftsman and cantaker services, what the cost savings roughly are versus market share services and what your long term targets, how much you want to do internally and what you still want do with us with externally? Well, the last part of it is clearly the Caretaker service. We have currently approximately 50,000 units, which is finished with our own Caretakers, and this should be increased to approximately 19% of the portfolio. So where we have just a smaller number of units, that's not sensible with internal caretakers. But the strategy is very clear to do the very largest part of the portfolio with internal caretakers. And I think we have also details there in the annual report, for example, regarding the FFO contribution from the Caretaker service. Yes, clearly, it's positive. If we talk here about, let's say, 900,000 per year positive FFO contribution, which is, of course, a nice number. But the main aspect of our internal Care Ticker service is improving the quality because especially if you think about the properties that we buy with higher back gains rates, that's unmanaged before in regions where it's really important to have good services for tenants, then the caretaker, which is who is based on the customer, tenant is most often, is really an important person. So therefore, improving the quality of the Caretaker service is the main argument. And then the second argument, but really the second is internal or general cost savings. Okay. Thank you. Thanks. The next question comes from Theo Tanders. He's calling from Bank of Santa. Over to you. Yeah. Good morning from Usanders. I wonder why there is such a higher rent in Greifsmarck of more than €9 per kilometer. Is there something special with the units you bought there? Yeah. And good question here. This is a kind of student apartment that is required there. It's not in the sense of fully managed student apartment house, but the rooms that we end up there are very small. And the typical tenant there are students, so, therefore, it's a product that completely fits the students, and, therefore, the per square meter range is nearly double to what we have normally. Mhmm. Okay. Thank you. Next up, we have Manuel Martin calling from ODDO BHF. Over to you. Hello, Martin. Good morning. One question left. As you plan for the second half year on more spending or more rental expenses to decrease vacancy? And could this affect the FFO in half year two? No, not really because cash and investments are now over the last, let's say, two years stable. And if you put together maintenance and CapEx, are around €19 and the investments that we are doing basically right now or that we did in the first quarter and second quarter will then lead to a basic reduction in the third and fourth quarter. So it's not the case that we need to decrease the investments strongly to achieve any kind of negative deduction. So you should expect this more or less in line in the next two quarters. The next question comes from Kai Sulzer. He's coming from Berenberg. Over to you. Yes. Hello. Good morning. I have two quick questions. First one is, could you repeat what is the current bid the current and modification rate based on the current price structure? I'm checking if there's a change following the issuance of the promissory note. And the second question, just wanted to check if I understood you correctly that in the future, you are planning to spend more on CapEx, particularly in the Berlin region, the quality of business in the Berlin region. I'm wondering, given that there is more or less lower stake today in the portfolio, is it that you're aiming in these properties for higher rents? Or are you planning to, let's say, do a bit more new construction? Or why are you not spending more on a rate basis in which you see like we can the full average level? Yes. Thank you for your question, Kai. First of all, regarding the amortization rate, of course, in the unsecured currency, net zero. Regarding a discount, that's between 2.53% per annum. So currently, for us, it's absolutely the case we have a new bank loan to have a higher amortization rate of up to 3% because, looking, as you talk with cash flow that we repay with our debt, if we have total interest rates, that makes sense to pay the debt a little bit quicker than perhaps two or three years ago. So 2.5% to 3% in the bank loan, that's the current amortization rate. And then yes, it's true that the Berlin region will be one of the regions or perhaps the region in South Cannex where we have the high share of our CapEx. And the more concrete location will be Pannenburg and Harfel. And within the Pannenburg and Harfel portfolio, there's onefour of the city, which is called Garten. You have to remember that because it's been there at our Capital Markets Day, where we had in some streets or still have high vacancy rates. So it is around 5% vacancy rate in Berlin. It's, of course, an average of, we're simplifying a little bit more, 15% in Danco and Hafe and perhaps 1% or 2% in locations like Nhon, Gewersweide or Auschwausberg. So therefore, we're really now targeting locations and quarters of the cities where we still have higher vacancy rate. And in this case, 1.5% from our point of view, a very promising point to purchase to invest. Okay. And maybe a quick follow-up on the amortization rate. When you're talking about the 80,000,000 of refinancing of joint loans coming due over time, And what are the amortization rate there in new mortgage loans which you have for tax planning? Are you aiming for a lower one or is it going to last because rates just to get an indication? That one can let's say, like, this for us, a 3% compensation rate is absolutely no problem. If we achieve then really nice financing conditions regarding, of course, interest rates, regarding covenants picture, then that's something that we often quite often agree to with our banks. The current cash flow is not really the problem. So therefore, the very simple idea of repaying perhaps a little bit more early in terms of interest rates are low. That's what we do right now. Alright. If anybody else would like to ask a question, please press 9 now. Okay. We have another question from Andres Thumar. He's calling from Green Street Advisors. Over to you. Hi. Good morning from my side. I have one question regarding valuation. And is there any particular reason why regions such as Chemnitz and Saltpeaker show kind of less dynamic valuation growth versus last year? And also, do you expect these regions to pick up in the year end valuation? Yes. Thanks for the question. We're also for the second half of this year. We expect a similar valuation result. It means just a moderate increase in G and I and such. We are very satisfied with the development in these two regions, especially with the South Africa region. If you remember what I said about the like for like country growth that increased strongly in West Litter and is in the meanwhile without the introduction of 3.5%. So this is definitely a positive development. And also the production market rate was very strong. JR is a more challenging market, that's clear. But also here, we have very sound underlying fundamentals. But to be very honest, I mean, Sanskrit, ETR, that's a region or these are cities where transaction volumes are definitely lower and where especially institutional investors are not that much in that, example, in the case in our Berlin portfolio or in our Dresden portfolio. And so therefore, it should be very natural that also in the next year, this is more a place for, let's say, professional investors, real estate companies like we are, all there to invest long term and want to achieve an attractive cash flow, which we're having right now. Just a follow-up on that. What are you seeing what what are you seeing in terms of the transaction market? Is the transaction activity picking up or or is it more subdued versus the last year in these less liquid locations? The trend is more than it's picking up. So we see more and more transactions in Musketeer and also also in DRS. So that's really a general trend looking at our locations, which are mainly d or c locations, that liquidity or the transactions are picking up, but, of course, still lower than in a location like, let's say, Thank you very much. Okay, mister Thiers. It looks like we have no more questions today. Okay. So thank you very much all for dialing into our call. As always, if you have any questions left, please feel free to contact Dominik from the IR department or myself. And thank you very much again, and have a nice day. Bye bye from Hamburg.