Branicks Group AG (0QGG.IL) Earnings Call Transcript

Good day, and welcome to the DIC Asset AG Conference Call on the 2019 full year results. Today's conference is being recorded. At this time, I would like to turn the conference over to Sonja Wärntges. Please go ahead.

Yes, thank you very much. Good morning, ladies and gentlemen. A very well warm welcome to DIC's full year results conference call. Today, I'm here with Dirk Oehme, our Head of Accounting and Taxes; and our Investor Relations team headed by Peer Schlinkmann, our Head of Investor Relations. As usual, I will give a quick presentation of our results for the 2019 full year, followed by a Q&A session. I will start my presentation with a simple sentence, which you may have heard many times, but it fits better than ever to our successful activities in the past financial year. DIC Asset was extremely successful in 2019 and achieved important milestones and records in the history of the company. As you can see from the multiyear overview on this slide, we've again improved on all key figures. As recently announced, our key earnings figure FFO reached EUR 95 million. As of the balance sheet date, our loan-to-value ratio was 47.8%, was significantly below 50% even without taking into account the capital increase we made in January 2020. Our adjusted net asset value, including the full value of the Institutional Business, has risen to a total of EUR 1.6 billion and reflects the growth and value enhancement in the Commercial Portfolio as well as the expansion of our Institutional Business, not least due to the acquisition of GEG in June 2019. For our shareholders, we are therefore proposing an attractive dividend of EUR 0.66 per share for the 2019 financial year, which corresponds to a dividend yield of 4.2% at the year-end price. Before we go into the details of the results for the past 2019 financial year, let's have a look at the DIC share performance. With a closing price of EUR 15.90 at year-end and including the dividend payment in the 2019 financial year, we had a total shareholder return of more than 80% and have thus clearly outperformed all major benchmark indices. The high momentum is visible particularly in the second half of the year. After a short period of site removement between August and October, we picked up further speeds towards the end of the year. In November, for the first time in DIC's corporate history, our market capitalization rose to more than EUR 1 billion since DIC is listed on the stock exchange. With the realignment and the clear 2 pillar strategy, our analysts have also significantly adjusted their share price targets over the course of 2019. The consensus price for our share rose from EUR 10.63 to EUR 18 at present. At the beginning of 2020, the positive price development continued up to a current price of EUR 16.86 per share. It was the closing price on the 4th of February. We took advantage of the good momentum and raised further capital in January 2020 with a capital increase and accelerated book building process. These funds will enable us to finance our growth targets particularly in the Commercial Portfolio and to implement them with a great possible flexibility. The new share were placed at EUR 16 per share and carry full dividend drive. The shareholder structure is virtually unchanged after the capital increase since the 2 major shareholders, Deutsche Immobilien Chancen Group and RAG Foundation, participated in the transaction. In addition, Ketom AG notified us about a stake of 3.8%. Overall, we were able to generate gross issue proceeds of EUR 110 million. Now let's take a brief look at the commercial property market and the economic conditions in the past financial year. Economic environment, the GDP grew by 0.6% in 2019, has weakened compared to previous years. The global downturn in the industrial economy was the main reason for a subdued growth, while the primarily domestically oriented services and construction industries in Germany experienced a strong upstream. For the coming years, the ifo Institute is expecting a stronger increase, again, with economic growth of 1.1% in 2020 and 1.5% in 2021. The labor market in Germany has developed robustly despite economic weakness and remains at a very low level with an unemployment rate of 4.9%. To the letting market. Despite a slowdown in economic momentum, the office letting market remained extremely robust, with a space turnover of just over 4 million square meters. The previous figures result was exceeded by 1.6% and the second strongest turnover result after 2017 was achieved. The situation on the letting market continues to be strongly influenced by the lack of supply. With an increase of 21% year-on-year and an aggregate of around 1.1 million square meters, the highest volume of completions since 2010, was achieved. But it is still not enough to clear the backlog of demand, especially for new construction spaces. One of the consequences of this was that the aggregated vacancy rate fell by a further 0.6 percentage points year-on-year to just 3%. Berlin has shown the lowest vacancy rate of 1.8% in Germany, being the leader among the top 7 cities. Some words to the transaction market. The transaction volume in the commercial real estate sector, once again, broke a record of EUR 68.3 billion and, at 13%, is significantly higher than the previous year's level. The last quarter, in particular, went down in the history book as the strongest quarter. Yield has continued to decline as the market dynamics have remained strong. At the end of the last year, the average prime office yield, according to JLL research within the top 7 cities was 2.93%, another 18 basis points below the previous year. Before we now take a detailed look at the performance of our management platform and the results of the individual business segments, let us summarize the highlights of our operating and financial performance in the last year. Our FFO reached a new record level of EUR 95 million and increased by 40% year-over-year, with EUR 102 million, rental income from the Commercial Portfolio was slightly above our forecast. Management fees increased by 87% to EUR 63 million, not least due to the acquisition of the GEG Group in June 2019. At EUR 2.2 billion, our transaction volume also reached a new record in our company history. Independent appraisals have determined the valuation effect of 7% for the Commercial Portfolio and an average of around 11% of our entire portfolio under management at the end of the year. Our adjusted NAV, the EPRA NAV supplemented by the full value of our Institutional Business, reached EUR 22.26 per share. We were also able to improve our financial structure further and reduced our LTV ratio to 47.8% at balance sheet date. For 2019, we proposed a dividend of EUR 0.66 per share. As in the previous year, our shareholder can choose between scrip dividend or cash dividend. Let's have a look at the performance of our operating unit and the strength of our property management platform. Our assets under management increased significantly from EUR 5.6 billion to EUR 7.6 billion, reflecting the high acquisition volume in the fiscal year 2019. This does not yet include the club deal acquisition of the Stadthaus in Cologne of more than EUR 500 million for institutional investors, which was reported at the end of the year. Here, the transfer of ownership took place in January. We currently manage, in total, 180 properties, including 93 properties for the Commercial Portfolio, with a market value of EUR 1.9 billion and 87 properties in the Institutional Business, with a market value of around EUR 5.7 billion. Slide 10 shows over EUR 2 billion transaction volumes, another record for DIC Asset. Our investment teams are highly successful in 2019. We are very delighted to have such a dynamic team on board. In total, we acquired 21 properties with a total value of EUR 1.9 billion and sold 15 properties with a total value of EUR 300 million. In the Commercial Portfolio, in addition to the sale of 3 properties with a total volume of around EUR 127 million, Düsseldorf and Hamburg, we also disposed several smaller nonstrategic properties with average sizes ranging from EUR 1 million to around EUR 5 million. With 4 sales in the Institutional Business, particularly from the DIC Office Balance I and II funds, we generated attractive capital gains for our clients in the Institutional Business. On Slide 11, we show you a selection of our acquisitions in the Commercial Portfolio. Last year, we have acquired properties in Berlin-Mitte, Duisburg and Bremen that are fully let and have WALTs of around 5 to 18 years. In Offenbach, near Frankfurt, we have also secured a further property via a forward deal, which is already fully let to the AXA Group and will be part of our portfolio beginning in 2021. In Stockstadt, we have bought an interesting retail property with 2 anchor tenants, supermarket Rewe and Drogerie Müller, which will ensure the local supply in the region. The WALT is around 11 years. In total, all purchases for the Commercial Portfolio generate annualized rents of around EUR 12 million. In the Institutional Business, our focus in 2019 financial year was also on acquiring office properties with strong cash flow for our investors. The largest acquisition was the Stadthaus in Cologne for 5 institutional investors with a total investment volume of over EUR 500 million and a lettable area of 100,000 square meters. A long-term tenant is the City of Cologne. In addition, we invested a total of EUR 1.1 billion for our investors in the other top 7 locations such as Berlin, Hamburg, Düsseldorf, Frankfurt and Munich, and outside the top 7 cities, in cities such as Augsburg, Leipzig, Ulm, Bonn, Bremen, [ Kiel ] and Regensburg. But we were not only successful with transactions. Our letting teams were also able to significantly improve the quality of our managed property portfolio, again, in 2019. Approximately 211,000 square meter of new or renewed leases were concluded, with the average rent of signed contracts increasing by 14% compared to previous years. Overall, we achieved an annualized letting volume of just below EUR 33 million. Now looking at the operating performance of the individual business segments. You see on Slide 15 the development of the key performance indicators of our directly held portfolio, our Commercial Portfolio. We were able to further optimize our portfolio by disposing smaller properties and replacing them with attractive acquisitions. In 2019, the market value of our direct hold portfolio grew from EUR 1.7 billion to EUR 1.9 billion. We reduced our EPRA vacancy rate by a further 70 basis points to 6.5%. The WALT rose slightly by 0.2 years to 6.0 years, and like-for-like rental growth reached 2%. The vacancy reduction accounted for approximately 50% of this like-for-like growth, indexations in our leases for approximately 30% and increases of in-place rents for approximately 20%. The acquisition of the GEG in June last year paid off. In addition, our transaction business is highly dynamic. In the Institutional Business segment, our real estate management fees, therefore, increased significantly by 87%. Of the total of EUR 62.9 million, we earned EUR 21 million through fees for the asset, property and development management, while around EUR 41.9 million came from fees from transactions, reflecting our successful investment activities last year. In addition, we generated EUR 5.4 million for our own equity returns from our minority interest in the managed investment ratings. Also successful year reflected in our income statement. All income streams, including gross rental income, profits from disposals in the Commercial Portfolio, real estate management fees and profits from associates, grew significantly compared with the previous year, thus, more than offsetting the increase in operating costs resulting from the integration and takeover of the GEG. Around EUR 3.4 million is attributable to one-off transaction costs from the GEG acquisition. We reduced our net interest expense by 12% by further optimizing our financial structure and reducing our financing costs. With EUR 80.7 million, the profit of the period increased by 70% over the previous year. It's not a surprise that our key operational performance figure, funds from operations, shows the same strong performance. As previously mentioned, our FFO rose by around 40% to EUR 95 million, which was mainly driven by the strongly increased real estate management fees, an increase in the share of the profit of associates, higher net rental income and an improved net interest result. On a per-share basis, the FFO reached EUR 1.33, which marks an increase of 36% over the previous year. Also the FFO developed in the individual segment. The FFO increased in the Commercial Portfolio as well as in the Institutional Business segment. In particular, the strong contribution from real estate management fees led to significant FFO growth by 66% in the Institutional Business segment. For the last time in 2019, the dividend from our TLG investment also contributes to the total full year FFO. The FFO in the Commercial Portfolio increased by 9%, mainly due to the higher net rental income, while operating costs remained virtually unchanged. Our balance sheet as of 31 December last year reflects, on the one hand, the growth in our Commercial Portfolio as well as the sale of our TLG stake and the acquisition of the GEG Group. Approximately EUR 178 million were reported as goodwill from the acquisition of GEG. Shareholders' equity rose by EUR 73 million to around EUR 970 million as a result of the strong profit for the period and the increase in capital reserves from the scrip dividend. At the end of last year, the equity ratio was around 36.5% despite an increase in total assets. Dear audience, for the first time, we have shown you the full value of contribution of our Institutional Business on an NAV basis, with the Q3 results presentation in 2019. At the end of the year, we fine-tuned the calculation of the value of the Institutional Business using a verified and audited DCF valuation and added the contribution for the EPRA NAV calculation. Based on an EPRA NAV of EUR 17.23 per share, we added a value of EUR 7.71 for the Institutional Business and reduced the value of the goodwill and intangible assets from the GEG acquisition of EUR 2.68 to avoid [ top ] accounting. So we came to the adjusted NAV of EUR 21.26 (sic) [ EUR 22.26 ] per share. In our view, this is a fair intrinsic value of our business model, which is based on the 2 [ equivalent ] profitable pillars, Commercial Portfolio and Institutional Business. In addition to our operating performance, we further strengthened our financial structure and credit profile last year, also by establishing new sources of financing. With the initial placement in June and the top-up of the promissory note in November 2019, we have raised a total of EUR 180 million at an average of 1.55% from around 14 national and international investors. The 14 banking corporate bond was EUR 175 million and a coupon of 4.622% (sic) [ 4.625% ] was also repaid in September. We were thus able to reduce our average cost of debt by 50 basis points to an average of 2.0%. Our loan-to-value ratio fell by a further 530 basis points to 47.8% mainly due to the valuation results of the balance sheet date. But let me highlight one thing, which is key to our future financial policy. We want to keep our LTV ratio at a sustainable level of around 45% in the future, which is also below the previously targeted and announced level of 50% in the last years. Including the proceeds from the capital increase, the LTV to date stands at around 43.2% on a pro forma basis and reflects our newly available firepower for our acquisition. So before we now jump into the Q&A session, I'm pleased to present you our forecast for 2020. After an exceptionally good fiscal year 2019, we have set a new ambitious target for 2020. The signs are clearly pointing to growth in both segments. We intend to expand our Commercial Portfolio significantly to over EUR 2 billion. In the Institutional Business, we intend to maintain the good momentum from 2019 and, in addition to servicing existing mandates, also want to launch new investment vehicles in 2020. Last summer, at the time we announced the acquisition of GEG, we presented you our medium-term goal of expanding our assets under management to EUR 10 billion within the next 18 to 24 months. Since then, we have outperformed ourselves. After the acquisition of the Stadthaus in Cologne at the end of last year, we already have, today, at the beginning of 2020, assets under management of EUR 8.1 billion. I'm therefore confident that with a targeted notarized acquisition and sales volume of EUR 1.6 billion to EUR 1.9 billion and around EUR 400 million planned for 2020, we will be able to achieve this goal in early 2021. But how is this reflected in our operating earnings figure? For the first time, we expect to generate a triple-digit FFO and are therefore planning with an FFO of EUR 104 million to EUR 108 million -- to EUR 106 million, sorry, in 2020. We are fast, reliable and flexible. And as we have proved in 2019, we are proceeding dynamically and, as usual, with high performance to reach our next milestone. We call it dynamic performance. Many thanks for your attention. We are now ready to take your questions.

[Operator Instructions] Our first question today comes from Andre Remke of Baader Bank.

A couple of questions, starting with the first one on your acquisition target of EUR 500 million to EUR 600 million for the Commercial Portfolio. But following the [ cap hike ], what could we expect concerning the time line of using the proceeds [ on the way you want ]? Do you already have a meaningful pipeline at this stage? This is the first question, please.

Andre, thank you for your question. Yes, we have a significant pipeline at the moment. So in total, for the 2 segments, we have around EUR 1.5 billion at the moment. And we have 4 assets for the Commercial Portfolio already under exclusivity, so with around EUR 200 million. So that we want to start early this year with -- yes, with acquisitions for the Commercial Portfolio and plan to have around about half of our total volume we want to acquire at the end of Q2. So we are in a good shape with our acquisition pipeline. Other than in previous years, we have already a lot of offers on the table. So as mentioned, around about EUR 200 million on the exclusivity and another EUR 200 million to EUR 300 million which we -- where we are in a deep due diligence at the moment.

And if you think half you want to already have to reach by the end of the second quarter, does it belongs to the Commercial Portfolio?

Yes. Yes. At the moment, we see a lot of smaller investments for the Commercial Portfolio. The bigger ones for investors -- for institutional investors take normally a little bit longer to proceed all the due diligences and so on.

Okay. Perfect. And second question, more general, in general, on your Institutional Business after the acquisition of GEG, do you consider further external growth, probably midterm, long term? Or do you see further opportunities in this market? Or will it focus on internal growth for the time being?

No. Also for our Commercial Portfolio as well as for Institutional Business, we, at a first point, look on organic growth, definitely. But on the other hand, we are also looking for inorganic growth. So we want to improve the business, and we want to grow the business. So if there are chances to do it inorganically, we will definitely look at it, yes. But at the moment, we have nothing in our view, so to say, so we are focusing on organic growth. But if the chance is there, we will definitely look at inorganic growth.

What -- with respect to that, what could be areas to be interesting to add to your Institutional Business? I recognize that almost 90% of your portfolio for Institutional Businesses is in offices. So do you consider, long term, a broader approach to other asset classes? Because I would believe that investors are also looking for the diversification of their investments. So do you see any need to expand this approach?

Yes. We are looking at other asset classes at the moment. In our Institutional Business, we have 85% of offices. So we do not want to expand retail at the moment. Besides, it's there for daily convenience, there is a good chance. But we also want to grow in the hotel area. And we definitely look on logistics, but it's not clear whether we are in the right time in the cycle, so we are discussing this a little bit. But we want to grow in hotels, and we want to grow in specific areas in Germany. So we are looking in the Western region of Cologne and Düsseldorf. It's done. We have bought it. We seek asset in Cologne. And -- yes. And some of the investors also asked for Pan-European chances. But at the moment, we stay in Germany, so that we only broaden our assets on a class basis in Germany.

So if you would slightly step in, in such areas like logistic or hotel or also when it comes to the Pan-European approach, I would assume that you also have to increase your expertise in terms of adds for the teams or so. Is it right to assume?

Yes. And we have also hotels in our portfolio, so we have also a little bit of experience there. But you're right. We are looking for hotel expertise at the moment. And as I said, if we want to go in this logistic business, but we have not decided yet, we also definitely have to have extra fee because it's a total of our business and offices or retail, yes.

Okay. And then I have a last question. You mentioned the trade value of your Institutional Business with this 7 year -- 70. How often will you provide an update here? Only once a year? Or will you provide some more figures at the half year stage or so?

Yes. Every quarter. So every 3 months.

So every -- if I'm right, this is based on the EBITDA of expectation of the Institutional Business. And then looking at the discount -- reasonable discount factor, and this will be checked every year quarter by an external appraisal, right?

So we have the appraisal once a year, but we calculated further every quarter. Does this answer your question?

Yes. Yes. Because the calculation depends on the business outlook for the Institutional Business. So it's probably a bit more difficult to value rather than announce on the outstanding portfolio, right?

Yes. Yes. And the other thing is that the appraisals are not done at the end of the year, but during the year. So when we have bought it in March, then the appraisal comes in March of next year and so on. So we do the appraisals and then we calculate every quarter the outlook for the next quarters and months.