Earnings Call: Q2 2022

Aug 30, 2022

Good afternoon, ladies and gentlemen, and welcome to our conference call regarding the release of the Warimpex report on the first half of 2022. At this time, all participants have been placed on a listen-only mode. There will be an opportunity to ask some questions following the presentation. Let me now hand over to the CEO of Warimpex, Mr. Franz Jurkowitsch, who is joined today by his colleague and Warimpex's CFO, Daniel Folian. Good afternoon. I give my report about the quite good first half year 2022. We sold successfully an office building in Budapest. We acquired, and we closed the transaction in June, an office building in Łódź, and we got the building permit for the Chopin office in Kraków, which we would like to develop in the next couple of months. Furthermore, we finished also the technical finish of the Avia Tower in St. Petersburg. So we got the confirmation for technical finishes and the registration to the land register for the building. On top of it, our construction works in Kraków for the Mogilska phase 3 are going on according to time. We are quite successful with our flexible office development. We started last year in Kraków. You see it on the slide, some photos, some highlights from it. We are fully let with it, and we have even a small waiting list for interesting parties, which would like to join more or less the team of tenants in it. We started with the same concept in Łódź, in the Ogrodowa office, with the big office building we are having. We are also quite successful there. We started in June, and it is already 40% leased, and there is some strong interest also from further interested tenants in it. So we are quite successful with it, and we would like once the Łódź one is full, we will extend it into the neighboring spaces. Maybe, Daniel, you walk us through the key figures? Yeah. So we could significantly increase the revenues from investment properties as well from hotels. The increase in revenues from investment properties was primarily due to the inclusion of revenues from the Jupiter Tower in St. Petersburg that we now fully consolidate as we acquired a stake end of last year, as well as the substantial increase in the ruble FX rate. We sold an office building in Budapest and could realize a profit of more than EUR 2 million from this sale. So, the EBIT improved from EUR 5.9 million to EUR 16.7 million. Also due to a positive revaluation result and a positive financial result, we could profit of around EUR 13 million. Also, the net asset value per share increased by around 40% to EUR 3.69 as of end of Q2. Thank you. When we walk through the list of our assets, I think I don't have to go to more detail. You have it on your screen. You see here the list of our current office portfolio. We have more or less all these assets 100% owned by us. The occupancy rate is, with the exception of Ogrodowa office, more or less 100% or very close. The Red Tower, which we acquired, is not significant because we closed the transaction in June. We have to do some research, and then we will go with it into the market. The hotel portfolio, since we sold our hotels in 2017, it is short. One is Garmisch, but it's not only a hotel development, it's also a real estate development. Commercial real estate, we own there 3 hectares of land, and we have applied for a so-called state plan, the Bebauungsplan, according to the German rules. We applied for. We expect that we get the Bebauungsplan by end of this year for a space of 70,000-80,000 square meters. The Airport Plaza St. Petersburg is our second hotel, which despite the situation with COVID and despite the war, it is still relatively well-performing. We never had negative GOPs. InterContinental is not a property, it's just an operation lease, but we did very well this year. The Steigenberger Hotel Hansa, we have a not very significant stake. I can only say after we suffered there a lot during COVID, the business is now picking up quite well. Let us jump to the development side. I mentioned already trying to go to slide page 9. Avia Tower is a tower of about 16,900 square meters. It's a twin tower to the existing building. We have already a letter of interest from a tenant for the full tower, and we are entering into concrete negotiations. Since we got the permit, the building is finished. These are fit outs, these are the tenant fit outs. We could register the building into the land registry, so we are now ready for finalization of the tenancy agreement. The Mogilska 45 is the neighbor of our Mogilska 43 building. It's about 6,000 square meters, and we are now on the ground floor. We have 3 underground floors, and we expect to finish the handing over. Ready for letting it out by September, October next year. The Chopin office, we got building permit in the first half, so we have to carry for a tender for construction. Same with Białystok. Białystok, we have a building permit for about 40,000 square meters, but it is a new market. It's a smaller city. A university city with about 300,000 inhabitants. But we will stage our development, so we are starting with the first block with 10,000 square meters. Darmstadt, I already mentioned before. So there also we can do the 70,000, but we don't want to go with 70,000 into the market, so we staged it, and we applied parallel to the B-Plan also for a construction permit, and that's for about 11,400 square meters. The Białystok next line is the second phase out of the 40,000. In Darmstadt, it is also for the second phase out of the total of 70,000. You see on page 10, this is a rendering, that is not an existing building. That is what is under construction. Białystok is also a rendering. You see here, we can stage it by blocks. You see here three on the façade, and there is still behind that one, another possibility. At the airport, the Avia Tower is the right tower on your slide. The next one is Zeppelin, which is already established since a couple of years, and which is fully let. And there is a kind of a connection between the two towers. So people can go in when it is cold outside. They drive foot from one tower to the other. Chopin office is the slide on page 13, which is very well located on the junction, on the main public transport junction there. In each street, tramway lines, and the tramways are on an underground floor, but it is not covered. You see here in the rendering. And it is a very good location. It is one station to the train station, two stations to the technical university, and if you walk to town, it is about 10 minutes into the city center. On page 14, you see the renderings for the office building in Darmstadt. What you see here with the trees and the green on the façade is the rendering. What you see in the background where there is written hotel is an existing building. That is the price what we bought. one third of this relatively thick building which we bought, we invested into a full renovation, into a budget hotel, and that is an existing one. Maybe, Daniel, you go through the two sectors and how we split our results in office. Due to the construction in Kraków and St. Petersburg, the stake of development projects increased to around EUR 100 million. So in total, we have around now EUR 500 million of properties. And as the value of our Russian properties increased due to an increase in the exchange rates of Russian ruble, we now have more than 50% of our assets in Russia, and followed by Poland. If I summarize our strategy, we would like to develop for ourselves. So we are not a trade developer who is intending to sell during construction period. We develop for our own pending investment on the projects which we have, you walked through. And we have special focus. One focus is on sustainable buildings, with BREEAM In-Use or LEED Gold or higher standards. And the other focus is that we try to integrate flexible offices. We see there is a very good parallel with these tenants. On the one hand, we got tenants in Kraków in Mogilska 43. Which started as a flexible office tenant and later on decided to stay. They like the location, they like the services, and they would like to enter into a traditional office. On the other hand, we saw that the flexible space is also a service for our traditional office tenants if they have a special project for some time. In the future, we will always make about 15%-20% of newly built space in this flexible office or co-working style, which you have seen also some photos from our existing one. Maybe, Daniel, you go through our green buildings. Yes. Around half of our office properties have now been labeled, and we decided for in-use certificates, which has to be renewed every two years, so that we also receive feedback when we apply for a new certificate. Under construction, we also have two green buildings, the one in St. Petersburg and the one in Kraków. Let us jump in, because the other, the history of if you are interested, you will find on our slides. Let us jump to page 23, the income statement and the balance sheet, and Daniel will walk you through. Yeah. As mentioned before, we could significantly increase revenues and also EBITDA in the reporting period as well as our equity ratio and the total equity and liabilities as we increase our portfolio value. Also would like to mention that we also more than tripled the cash flow from our operating activity in the first half of this year. We are quite confident that the second half will be similar to the second quarter, assuming that the ruble at its rate will stay where it is now. Yeah. I think everything else is self-explanatory, which you can analyze from our slides, and we are open for questions. Thank you. If you would like to ask a question, please press star six on your phone to unmute yourself, or for our online participants, please click on the microphone icon at the bottom of your screen. Hello, this is Crystal from Erste Group. Can you hear me? Yes. Yeah. Very good. I will ask some questions. The first is regarding your revaluation results. I think apart from that comes from Russia, I think you mentioned also that there is something coming from your newly acquired asset in Łódź. Can you maybe give us some details on the revaluation results? Yeah. We have revaluation gains and revaluation losses. The revaluation losses were due to Russian properties, the car park and Jupiter Tower. Not Zeppelin, sorry. And Zeppelin. Due to the assumption of lower rents in the future. The increases in the revaluation gains were due to the Avia Tower in Russia, where we have a building under construction and are realizing development profits, as well as the newly acquired office building in Łódź, as we acquired it below market value. It's more or less equally split between these properties. Mm-hmm. Regarding the Red Tower, I think you mentioned that there's an occupancy of 40% at the moment. What are your plans there? Are you confident that you can increase this occupancy ratio already in the course of this year, or do you have to do some work, or maybe you elaborate a little bit on your plans on that? Look, it will be a two or three-step development. The building was rather poorly managed by the old owners, and they were also not familiar with the Łódź market because they were sitting in Warsaw. We had a relatively successful development in more or less walking distance from this newly acquired Red Tower with Ogrodowa. We have now an occupancy by end of June of 85%, but as it looks now over the summer, we got some new tenants where we are in the finalization of tenancy agreement. I think by end of September, it looks like we will have more than 90% of occupancy. We see also a relatively strong demand for the flexible office spaces. In light of that, and in light that we made a relatively good, we could buy the Red Tower at a good price. Our step 1 is to refurbish two floors and adjust it for flexible office. The rest, we are now preparing for traditional tenants. Some parts, there was a Scandinavian bank in it. They kept their floors in a very good shape, so it has only to be cleaned. There is not much CapEx necessary to re-rent it. For flexible space, you have to do something like I showed you in the slides. We will do the same concept. The ground floor and maybe the first floor, we will also adjust for maybe some retail or some, like Lux Med in Poland. It's a medical kind of daycare clinic, which is also a tenant in our ground floor in our. I think over the next six months, we will prepare the building for re-renting it, and it will be definition in stages. The location is very good. You can even look it on Google Maps. There is a very long pedestrian street, it is called Piotrkowska, which goes in north. It is in our backyard of our Ogrodowa building, and it goes south. It is a couple of kilometers, and we are in the middle of it, next to a junction of tramways. Łódź is a big city with about 700,000 inhabitants, but they do not have a subway. On top of it, there are two train stations. It has a historical reason. There is one in the east with the train to Warsaw, and there is one in the west with the train to Wrocław. These two are now under an EU finance program to connect these two train stations, making two kind of S-Bahn, we would say in Austria, stations in between. There will be also train stations in about seven minutes walking distance from us, which is connected more or less to the suburbs on both sides of Łódź and also to the train to Warsaw. We see a big potential, not only for short-term leasing, but also for the long term, as we have the location in the pedestrian zone. We have a relatively good location to the tramway system, which is like Karlsplatz in Vienna by function. In about two years, this new city train system will start. You should not forget, Poland has decided to make a new Warsaw airport exactly halfway between Łódź and Warsaw. The train and the motorway will connect this airport. That means we can, in the future, once this airport will be built, I hope it will not take so long like the Berlin airport construction. In about four or five years, you can go from us in seven minutes walk to the train connecting you directly to the airport. We see big potential in it. Sounds good. Okay. That is good. It is clear from my side. Thanks. Thanks a lot. Okay. Okay, Christoph. Hi. This is Oliver from RBI speaking. A couple as well from my side. The first one, you mentioned that you are preparing for a tender for the construction of Chopin, I believe. When we look at the construction plans, those are still the same as they have been in the past. How likely do you see that you would get construction prices in the tender that are still attractive enough to start building? How likely would you see a postponement of those developments? Look, we have now the Chopin and the Mogilska 43 and the Mogilska 35. They are all in about 2, 3, 5 minutes walking distance. We have a quite good and recent experience with the prices we can expect from this Chopin. We call it phase 3, but it is the number Chopin, Mogilska 35. We are assuming the prices we expect for the same, let's say price levels as we do it for 35, as we see that the demand for construction in Poland is going back because of the high-interest rates in zlotys. This is primarily hitting the residential developers, but they are very strong for the high-rise buildings in the market. They slow down now. The construction companies are looking for new contracts. We are not pushing too much for it because our focus is now to finalize Mogilska 35. But in the marketing of Mogilska 35, we see sometimes demand which is exceeding what we can offer. We can offer maximum 5,000 sq m. That's why we keep also an eye on the development of the Sopot office space. It will depend then if we get the rental rate which we want in the light of the higher construction cost. Clear. Thank you very much. Then on any potential refinancings of, especially project loans, do you have anything coming up here that is significant and still upcoming this year? Also, what interest rate do you think you could get now on the refinancings? Look, what is under construction is fully financed. That is the Mogilska 35. We have the project finance for the full debt part, and the equity is already spent. On the Avia tower, we also have a local finance for the building, and we have already invested equity first. For project, there is no need. The question, where would be an interest rate? I would say in the. But this is now a guess, because we haven't asked. We are not in negotiations in the last 2 months. But before summer, I would assume around 3 and a quarter percent Poland. For Poland. Okay. Thank you very much. My last one on Russia and on the operations there. I believe, the last time we talked, you mentioned that you can repatriate part of the earnings that you generate in the country. Now that the sanctions seem to be staying, at least for the foreseeable future, what do you plan to do with the remaining cash that you generate there? Do you consider start reinvesting it or keep it on hand there? Any insight on this would be great. Thank you. Two questions to answer. First, we can repatriate 10 million rubles per month per company. On the level of Avielen, we have shareholder loans, and we repay each month 10 million rubles. In fact, we even do it with your subsidiary in Russia. Concerning the parking, so the multifunctional building, there are no further shareholder loans, but there is a profit, so we pay dividends. We can pay every quarter a dividend of 20 million, which we have to distribute within 10 days after issuing the fact that we pay a dividend. When we split it for two months, we can do 20 million per quarter. That is what we are doing. On the other hand, we still have to spend money for the fit-outs for the Avielen, because as I mentioned before, we have it finished as a building shell and core, and the fit-out is depending on the negotiations with the tenant. So we make some reserve for the fit-outs, and we would use surplus cash for servicing the fit-out without taking additional loans. Sounds good. Thank you very much. That is it from my side. Okay. Again, to ask a question, please press star six on your phone to unmute yourself, or for our online participants, please click on the microphone icon at the bottom of your screen. If there are no further questions, I thank you for your interest in Warimpex. I hope that the second quarter will have no further negative surprises on the macroeconomic side. Then we will talk in November for the results of Q3. Thank you very much, and wish you good start into the fall. We have reached the end of our call. A PDF of the presentation you've seen today and the financial report are available for download from our website, warimpex.com. Thank you for joining our call today, and we wish you a pleasant evening. Bye-bye to everybody. Goodbye.