Earnings Call: Q1 2019

Apr 25, 2019

Good morning, ladies and gentlemen, and welcome to the TAG Immobilian AG Conference Call regarding the interim statements on the First Quarter of twenty nineteen. At this time, all participants have been placed on a listen only mode, and the floor will be open for questions following the presentation. Let me now turn the floor over to your host, Mr. Martin Thiers. Yes. Many thanks, and good morning, everybody. Welcome to TIG's Q1 twenty nineteen conference call. I think today, we can make it perhaps quite short. The last call is not too long ago. Just last month, we talked about the full year figure for 2018. Today, already the Q1 twenty nineteen, I think most of you already had a chance to take a look at our press release and our presentation. Two things, I think, clearly on plan. And operationally, that looks quite nice. So let's go through the presentation, which is also available on our website. And then, of course, afterwards, we have a lot of time to discuss any questions. Let's start on Page four of the presentation, just the highlights slide. If you look on operational performance, vacancy development in the first quarter, comparable to last year, a little bit up from and retention with 5% to 5.2% and in the total portfolio from 5.3% to 5.6%. That's not unusual for a start in the year. And as always, after inclusion of new acquisitions and with starting new CapEx programs for vacancy reduction, if you remember last year's development, a slight increase in vacancy. But clearly, the plan is and our clear expectation is that we will reduce vacancy as in last year over the course of the year, so nothing unusual. Like for like rental growth developed nicely. And the like for like rental growth, including vacancy reduction, picked up from 2.6% to 2.8%. The previous like for like rental growth was unchanged at 2.3%. A strong increase in FFO I, if you compare that year on year, that's a more than 12% increase compared to the previous quarter. FFO I increased by €1,700,000 to 39.5 Looking at NAV and LTV, I would say very normal development during a quarter without any valuation. Of course, there was as in the past years no valuation in the first quarter. The next valuation which is placed at half year the next full valuation. So therefore, NAV was up from $0.01 $7.03 €2 at $0.01 $7.05 €4 The LTV decreased by approximately 50 basis points because of our ongoing result and ongoing amortization from 47.3% to 46.8%. So far, no acquisitions and no disposals in the first quarter or I should not say no major acquisitions and disposals. If you take a look in our Q1 report on Page six, you see that we have just acquired a small number of units, 35 units and disposed some 12 units. So just slight disposals and acquisitions, but it's also very normal development for the start of the year and should not set a trend for the quarter full year. As always, we think these acquisitions as in the last few years will pick up during the course of the year. Then let's take a closer look at the income statement. I'm now on Page six of the presentation. The net rent increased by 2,500,000 and two main effects. First of all, net effect from portfolio transactions. This was an increase by CHF 2,000,000. We had the closing of the largest part of the acquisitions last year, all in all, thousand 500 unit in the fourth quarter. So for the first time, these acquisitions have been in the field up. Like for like venture growth contributed approximately €500,000 to the total net rent growth. Net rent income increased by 1,900,000.0 as we discussed, result of higher net rents of €2,500,000 And as an opposing effect, we had slightly higher expenses from property management, mainly vacancy costs and also some impairment losses on rent receivables, also a very normal effect for the start of the year as well as fee rate slightly increased. If you look at the development of other operating income and compare that to the previous quarter, you will see a strong reduction. But if you remember, we had a one off effect in the fourth quarter twenty eighteen where we could release a provision for real estate transfer tax risk from high years, and this was an effect of EUR 6,200,000.0. So excluding this positive one off effect in the previous quarter, you will see the numbers are comparable. I already mentioned valuation results was basically €0 this quarter and we will have an acceleration at half year. Please understand that we can give you no concrete guidance for the explanation at the half year. We will discuss the first results with CVRE during the month of May. Generally, we expect that the positive trend from the past three years clearly will continue. We see no let's say, stagnation of prices or anything similar in our markets. So therefore, we expect definitely a positive development of the operation result. But I hope we can understand that it's today too early to give an increased guidance in million of euros or in percentage. Further expenses increased quarter on quarter by €700,000 mainly due to the ongoing growth of our internal Care Tech service, Mainly in this case in Saskatoon, we acquired or we had an additional maybe 100 caretakers that started. So therefore, a clear trend of internalization in the caretaker service continued. Other operating expenses increased by 600,000 Here, we have one main accounting effect. For the first time, we had the application of IFRS 16, a new accounting standard that treats leasing contracts. And therefore, we are, from now on, capitalizing leasing contracts in our balance sheet. If we take a look in the balance sheet, you'll see approximately CHF €9,000,000 of capitalized leasing contracts. In prior years, this was directly expensed in other operating expenses and for certain parts, also in expenses from service mix. This is now and this is an effect of approximately €400,000 capitalized. So therefore, our EBITDA increased this year or this quarter by €400,000 because of the first time application of this new accounting standards. What you will see in a second when we discuss the FFO development that we eliminate this effect from our FFO calculation. So the FFO is unchanged. We eliminated this €400,000 increase in EBITDA because we think this pure accounting effect should have no effect on the FFO calculation. But let me say this additionally, we will see how this is treated within the peer group. And perhaps during the course of the year, we will change its treatment not from the accounting side, but perhaps from the FFO calculation. Not really a material effect. It would be approximately €1,600,000 for the full year. As for now, the FFO calculation is unchanged and absolutely comparable with our FFO calculation in the previous quarter. Net financial results. Cash after one offs improved quite nicely by €600,000 in Q3 quarter on quarter. And the cash tax expenses in the first quarter of twenty nineteen were slightly higher than the previous quarter at €1,300,000 compared to €500,000 in the fourth quarter of twenty eighteen. Then I'm now on the next page, on Page seven. Here you can see what I just mentioned. We included a new line, the reversal effects from first time application of IFRS 16 leases at €400,000 that I already mentioned, which is now deducted. So this new accounting standard does not affect our EBITDA calculation, our FFO and AFFO calculation. I already mentioned that the FFO increased by €1,700,000 mainly as a result of our higher EBITDA, which increased by 1,600,000 And not only the FFO increased, also the AFFO increased, maybe a little bit stronger by CHF 2,300,000.0. This was the increase in the AFFO after all CapEx, so after capital maintenance and after modernization CapEx in comparison to the previous quarter. And turning now to Page 10, the financing structure. As in the previous quarter, the interest rate or the average interest rate for the total financial debt was again reduced slightly from 1.92% at the end of the fourth quarter now to 1.9% at the end of the first quarter twenty nineteen. And there's still refinancing potential. If you look on the right side of Page number 10, you will see that we indicated the further refinancing potential. All in all, we have $4.00 €8,000,000 of bank loans maturing over the interest terms ending in the next three years. And the average coupons of these bank loans are between 2.6 and 3.7 per annum. If you look at today's financing provisions for a ten year bank loan, we talk perhaps about margins, I would say, on average between eighty and ninety basis points. If you compare to the ten year mid swap rate on top of that, which is currently around 50 basis points, we end up at approximately 1.4% for new ten year bank loans all in. So therefore, we should clearly have additionally potential in the future. We're now coming to Page 12. A quick look at what we think very strong development of the financing metrics. It's not only the LCV that has been reduced over the last years and is in the meanwhile below 47%. Also, in fact, for us, even more important, the cash metrics improved nicely. To give you here an actual number for the first quarter of twenty nineteen, the ICR now strongly about 4x at 4.6x, the net potential debt in relation to the EBITDA now for the first time below 11x at 10.9x. Net financial debt in Europe per square meter at a very low €446 per square meter And our valuation in the portfolio is unchanged at €940 per square meter, which is, from our point of view, clearly conservative applying the current LTV of below 47%. This ends up to the €446 per square meter, which is, of course, we know definitely the lowest net financial debt per square meter within this year group. And then on Page 15 of the presentation, where we give a split of rental growth and our CapEx allocation starting with rental growth, I already mentioned. The total rental growth, including maintenance reduction, increased from 2.6% now to 2.8%. The basis like for like rental growth is unchanged at 2.3% It's also unchanged at the split of this basis like for like rental growth, which you see in the small chart on the bottom left. So rent increases for existing tenants from the niche people, for example, was 1.3%. The effect from tenant turnover was 0.9%. And the modernization surcharge for the base modernization programs for existing tenants had in the previous years still at 0.1%. This is clearly an outcome or result of our modernization strategy. As you know, the very largest part of our CapEx cost to reduce reduction and also to modernization programs for existing tenants. And therefore, if you look on the bottom right of Page 15, it's perhaps not surprising that the largest part of our CapEx and dividend growth in the first quarter and in the previous year to regions where we have higher vacancy in the quarter. In this case, especially in the Chemex region, there's a share of 20% of the total investments from the portfolio. Moving to total investments, maintenance and CapEx development in Europe by square meter, you see this on the top right of Page 15. You see that we have a effect unchanged. So analyzing the numbers from the first quarter of twenty nineteen, we end up at €19 That's actually comparable between €19.2 from 2018 and we expect to be this number in this region for the full year 2019. On Page 16, you see the development of vacancy rates, as I already said, slightly increased from the integration of the newly acquired properties that have, of course, a higher share of vacant apartments. It was more than 12% average vacancy rate that we acquired last year. So therefore, the development is very comparable to what we saw last year where we saw an increase in vacancy rates or a slight increase in the first quarter and then the vacancy rate decreased in the upcoming quarters. So that's also what we expect for 2019. And then our final words on Page 18 on the guidance. First of all, the guidance for the financial year 2019 is unchanged. So the midpoint of the guidance is in absolute terms at 155,000,000 If we look at the results for the first quarter of twenty nineteen, 39,500,000.0, we're absolutely on track and the guidance looks absolutely manageable. But remember that we have included disposals in our guidance and perhaps this is worth to make it a little bit more clear because we received here some questions after the full year conference call considered in the first bullet point that the guidance assumes, first of all, as always, no acquisition. And secondly, plant disposals of 2,100 units. And these disposals lead to a total FFO reduction in the guidance of approximately €3,000,000 And we assume a guidance that the closing of these disposals in the middle of the year in June 2019. Seven nineteen units are already sold. That's a proposal that we published with the full year figures signed in December and closing as planned in June. So out of the 2,100 units, seven nineteen units are already sold. And the 2,100 units furthermore include madeovers as in the previous years, 500 units from our ongoing sales business. We will do the remaining part of this mainly non core assets. So what is left after the 2,100 less the $7.19, less the 500 in smaller parts. So what we have seen is that we have here a lot of occasions that we bring to the market. And therefore, it is perhaps the most likely and the best way to sell it in smaller parts, but that should happen as our period expectation during the course of the year 2019. Anything else is unchanged. So FFO I, as I said, at €155,000,000 and the dividend per share is for the financial year 2019 unchanged at €0.80 We're paying out now a dividend half of the AGM next month in May of €0.75 a dividend which is, by the way, tax free. And compared with today's share price, that's a 3.5% dividend yield, which we consider, especially as it is tax free, is a very attractive dividend yield. That's it from my side. A short overview about our first quarter results. And of course, I'm now happy to take your questions. And the first question for today comes from Manuela Martin, who's calling from ODDO BHF. Over to you. Morning, Mr. Thiel. Just two questions from my side. One is just to refresh my memory. Could you remind me who were the sellers the 2,500 units approximately which TAG bought end of twenty eighteen? Yes. Good morning, Manuel. Looking at the disposals, I would say, from last year, we have not one typical seller. And of course, we cannot disclose the remains. Basically, I would say there are two types of sellers. Generally, these are several private persons with larger real estate portfolios as well as institutional sellers. The two types of sellers are, on the one side, sellers that are perhaps limited from a financial perspective. And then that's, of course, not easy if you're operating a portfolio with higher interest rates. What you clearly need to do is to do modernization work and to modernize the apartments, not a luxury modernization, but it has to invest. And it needs to be done in most cases, especially at the beginning, first step in full from equity. So this is for us, it's a business company, really a big issue. But for especially a private person or a smaller company, not always possible. And the second type of seller is the type of seller that has enough cash, but is perhaps not the asset manager. For example, private equity companies sitting not directly in the regions where the properties are. That's what we think is very important if you really want to reduce vacancy that you are close to the market. So therefore, that's our advantage that we have that we combine on the one side the financial power of a listed company and the other side really a very decentralized and very local asset management. So there is not one typical seller. There are at least two groups. And within the groups, I would say they're really different parties who sell to us. I see. Okay. My second and last question, if we I mean, there's a lot of discussion going on around Berlin, expropriation, etcetera. Do you experience any spillover effect to to your locations on what's going on in Berlin? A very extreme trend in the last two weeks since this discussion came up. But we clearly see this bit over effect in our Berlin commuter bus, I would say, since the last two years, even three years. If we look at our like for like rental growth in the Berlin region, which is Berlin portfolio or a portfolio completely consisting of Berlin commissible or cities in Brandenburg and not in Berlin City, you will see that the like for like rental growth without CapEx programs without leakage reduction was on average around 3.5%. So we already see this spillover effect. Perhaps there will be an even stronger spillover effect if we see further regulations in the large cities like Berlin. And on the other side, no rent regulations, for example, in cities like Bantou and Harf, or Nauen or Strasbourg or Eberspais, where our performance allocated. But that's a short period since we had these discussions on. Generally, we get the spillover effect if this will come in the future from the discussion about extrapolation or from further interrelations would be likely, but not really observable at the moment. Okay. Thank you very much. Thank you. The next question comes from Kai Close calling from Berenberg. Just a quick question on the CapEx elements. As you mentioned, the jet planes and cabinets. Could you indicate both the volume and the type of investments you're doing there? And just lastly, because in the last year, you have been investing there already. So maybe you can give an indication how that has been progressing? And also, when you expect to watch the potential spend as it relates to positively on your CapEx target there? Yes. Mean thanks for question, Kai. Chemed is a region where we are very optimistic to reduce it. Interestingly, in the Chemed region included is also the quite small city of Durban, which is a bit more than 20,000 habitants, which was in the past not really, let's say, the top location of the portfolio, but developing extremely positive in the last two years. So therefore, the CapEx programs also include a larger part what we call quarter management. For example, in Durban, we already we also co built a small supermarket, not because we want to achieve an extremely interesting return from this small supermarket, but this helps, of course, the quarter of the city to develop because it's attractive for tenants if things like what you need for your day to day life are available just around the corner. And there are a lot of programs and that this refers more to candidates for. It's not a nursing home. It's more the idea of make it possible for elderly people to stay longer in apartment. When we, for example, modernize a full apartment block and in the basement of the apartment block, we have a kind of nursing service, which is not our own service, but something external where we have a cooperation with. So very targeted programs, for example, for elderly people and in the case of children, more targeted programs for younger families. Thank you. And to maybe Sorry, just to add this, the volume should be comparable with last year as well in Kenneth. And cannabis is, besides Geva, definitely again 2019 in region with the highest CapEx because we have here nearly double digit vacancy rates. And we should expect a reduction of the vacancy rate in Cambridge, was 9.6% at the end of the year, definitely more towards 9% or even lower during the course of the year. You. Because that will be my second question. Is it more is it reasonable to assume that we might see a bit of a stronger vacancy reduction in both regions in the next over the next year once we have completed these continuous management activities? It should already take place in the second half of twenty nineteen. All right. Thanks a lot. You. Okay. Our next question comes from Thomas Gaulteisler. He's calling from Jefferies. Just a question on refinancing. Can you give us a rough idea, rough schedule of what we can expect in the near future and what you have considered in the guidance? Jakob, good morning, Thomas. First of all, in the guidance, there's no we've not assumed any additional early refinancing. The guidance just assumes refinance and it's the bank loans behind you. So any early refinancing of debt would lead to a higher FFO contribution in 2019. What you should perhaps not expect is a very large refinancing exercise. I think we have done this in 2017 and 2018, looking at the current interest rates development. I I mean, of course, we have very attractive low rates, and we don't expect that these rates pick up in the next month very, very extremely. So therefore, our strategy that we followed in the past, setting as close to the maturities as possible to avoid higher breakage fees should also be something that makes sense for 2019. Let's see how this develops during the course of the year, and it could also be the case that we need to invest a little bit more than necessary when we are refinancing acquisitions, but I shouldn't expect the €400,000,000 maturing bank loans in the next few years to be refinanced in the next month. So it's more topic for 2020 efficiently as we hope you know. Yes. Yes. That's a fair assumption. Okay. Thank you. Thank you. Okay, Mr. Thien. It looks like we don't have any more questions for today. So back to you. Yes. Thank you, operator, and many thanks to you all for listening to our call. As always, if there are any questions left, please feel free to contact me or the IR department. I'd happy to answer this. Have a nice day, and bye bye from Hamburg.