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

Dear ladies and gentlemen, welcome to the conference call for the First Half Figures 2020 of DIC Asset AG. Today's conference is being recorded. I now hand you over to Sonja Wärntges, CEO of DIC Asset AG. Please go ahead.

Thank you very much. Good morning, ladies and gentlemen. A very warm welcome to DIC's Half Year Results 2020 Conference Call. Today, I'm here with my colleagues, Patrick Weiden; Dirk Oehme, our Head of Accounting; and our Investor Relations team headed by Peer Schlinkmann. I am very pleased to welcome our new Board member, Christian Bock today. He will join beginning of August, representing the institutional business on our Board. He is a very experienced guy in this sector, and I've worked with him for a long time. So a very warm welcome to him. Ladies and gentlemen, presently, there is one crucial question that everybody asks. What will our work look like after COVID-19? How is it changing our future? And how will the new normal look like? And this is exactly the time we can show what we mean by dynamic performance. Therefore, before we go through the half year results and the development of the individual business segments, I would like to briefly summarize what we have done since the outbreak of the COVID-19 pandemic and what our expectations are for the coming months. What have we achieved since March? We immediately adjusted to the new situation and started a dialogue with our affected tenants, included a major tenant such as Galeria Kaufhof. We signed new rental agreements and by that, we secured rental cash flows on a sustainable basis. But at the same time, we have continued our performance and growth with a letting volume of nearly 89,000 square meters in Q2 and 128,000 square meters in the first 6 months. We have not only managed the crisis, but also worked on the progress of our business. We have acquired 2 attractive assets for our commercial portfolio, which will bring us additional rents in the second half of the year. And we drove our institutional business and more than doubled the management fees. In July, the rent collection was already at a level comparable to the level before corona. So as you see, we are well on track on achieving our annual targets. What are our expectations for the second half of the year and beyond? With regard to the attractiveness of our -- of investment locations, we are firmly convinced that Germany will keep its profile a safe haven and will outperform other European countries. Investors are still in high demand for properties in Germany, last but not least, driven by a low interest rate and a lack of investment alternatives. This is also currently evidenced by a renewed increase in transaction activity on the market. Without a doubt, there will be a trend towards more working from home, but home work will not completely replace the office. Future office spaces have to be more flexible to meet the needs of their tenants. There will also be a need of more space through social distancing and the desire for more meeting zones for collaborative work. With the vacancy rate of actual 3.1%, there is almost full occupancy in the office market in Germany. In addition, developments are already pre-let on high levels, and new developments in the early stages are currently on hold due to corona. But what does this mean for DIC? We are well prepared for the new normal, I could say. We have a high level of liquidity available to achieve further growth of our assets under management. We currently look at an acquisition pipeline of over EUR 1.6 billion, of which we have around EUR 300 million in exclusivity and run the due diligence intensively for both segments. Our investor bases in the asset management business aims to further expand its investments. That's why they have entrusted us with more than EUR 500 million in equity that is readily available. Our own property management and local presence is more important than ever. With over 200 people on the ground, we are able to respond efficiently and actively to the needs of our tenants. We strive to change our asset class mix. In the midterm, we will put additional focus on other asset classes, such as logistics, and decrease the share of retail exposure, and we will focus on the key future trends, such as digitalization, extended services and ESG to stay close to tenants' requirements. Ladies and gentlemen, we act quickly, reliably and with creativity. This is exactly what we mean with dynamic performance. We have proactively sought a dialogue with our tenants in order to create mutual agreement and the best possible win-win situation for both parties. Despite COVID-19, we showed a very strong letting performance, especially in the second quarter. And we are reliable. We started very early to analyze the potential impact of COVID-19 on our business model and issued a new guidance for the financial year 2020 beginning of April. Altogether, this has enabled us to present a strong operating and financial result for the first half year of 2020. I am proud of our teams who have reached this success in the last month as you see on Slide 4. Our letting performance increased by 55% compared to the previous year, including a large number of major leases in both business segments. With 2 acquisitions, with strength after the balance sheet date, we increased the market value of the commercial portfolio to over EUR 2 billion. We have more than doubled our real estate management fees. This was driven by the further expansion of our assets under management through new vehicles and acquisitions and the full consolidation of last year's acquisition GEG for the full 6 months of the first half year 2020. And all this has resulted in a significant increase of our FFO by 18% to EUR 50.6 million. Our adjusted NAV, which also takes into account the full value of the institutional business, stood at EUR 22.07 per share as of the balance sheet date today. Our loan-to-value ratio decreased by 350 basis points to 44.3%. If you include the full value of the institutional business, the adjusted LTV decreased to 38.9%. Now we are looking into the development of the first half year results in each business segment. On our real estate platform, we were able to increase our letting output by 55% to 125,800 square meters. Only the second quarter contributed 70% of this increase. What we have recognized was a greater trend towards renewals, which together account for around 76% of the letting performance of the first half year. We were able to conclude numerous larger leases. One example is the early lease of 17,900 square meter with a total lease term of 8 years for a cooperative state university in Mannheim. Also in the institutional business segment, we extended a lease of around 14,000 square meters with the insurance company Allianz in Karlsruhe by 8 years and ahead of schedule until 2030. At the end of the day, we were able to conclude all renewals of the first half year at 4.9% higher rental conditions on average. For the rest of the year, only 1.1% of the rents are due to expire, more than 74% has a remaining term until 2024 or longer. Overall, our assets under management have grown year-over-year from around EUR 7.1 billion to EUR 8.5 billion. In the first half of the year, we notarized the total transaction volume of EUR 495 million. The single largest transaction was the Infinity Office property which we acquired in a forward deal and placed to several institutional investors in a club deal in April 2020. The latest acquisition for a commercial portfolio in Frankfurt/Eschborn and Hanover will increase the market value of the commercial portfolio to over EUR 2 billion after the balance sheet date. To continue the further growth in our own portfolio and to further diversify our tenant structure, we notarized acquisitions of 2 high-quality office properties for total investment costs of around EUR 160 million, respectively. EUR 108 million, excluding acquisition costs at the end of the reporting period. The so-called SAP Tower in Frankfurt/Eschborn was built in 2018 and is fully led to the software company, SAP, with an average lease term of around 8 years. The property in Hanover is of a very high quality with a total of around 9,350 square meters and fully rented by the international bank ING-DiBa. The average lease term is 9.5 years. Both properties together generate an annual gross rental income of around EUR 4.5 million. The transfer of the ownership of the SAP Tower has -- was beginning of the month, the other one we expect for the end of July. So now let's have a look into the specific development of each business segment, starting with our commercial portfolio. Overall, the portfolio has shown a very stable development. EPRA vacancy rate was reduced to 7.5%, and the WALT is more or less stable at 6.3 years. Like-for-like, the rents changed by minus 0.6%, mainly due to rental changes in the retail properties and due to temporary rent adjustments in Q2 caused by COVID-19. Some words to our biggest challenge throughout corona, Galeria Kaufhof. There are tenants in 3 properties in our commercial portfolio, Chemnitz, Leverkusen and Bremen. Right after they had to seek rescue in a protective sheet procedure in April, we started the discussion with them to find a suitable solution. As of today, we can say that we have sought the situation in the best possible way for our shareholders. We have concluded new rental agreements for Chemnitz and Leverkusen. As a trade for reducing the rent by 25%, we have increased the average term of leases from 6.5 to 13.6 years. Over the entire term of the new leases, we will generate approximately EUR 42.1 million rental cash flow versus EUR 27.1 million that we could have generated on the basis of the former contract. The new agreement has enabled us to stabilize the future rental cash flows at a long-term level and thus has also ensured that the inner city areas of Chemnitz and Leverkusen do not lose their appeal. In addition, up to 200 shops at Galeria Kaufhof will be safe due to the continuation of operations at the 2 locations. For the third one in Bremen, Galeria Kaufhof has given notice. They use 60% of the total space, and we are in good talks with new tenants for these spaces. On Slide 10, you can see how our top tenant bases will look like in the next month. Overall, we have a diversified tenant base with long-term maturities. In our commercial portfolio, we managed a total of 800 tenants with around 900 rental agreements. Our top tenants, shown in the table, account for around 39% of the annualized rental income and occupy 19 properties. Our top tenants are long-term tenants with a WALT of 9.3 years and 81% of the top tenants are office tenants. Among the top tenants, roughly 45% of the annualized rental income comes from the public sector, such as the City of Hamburg with long contracts and sustainable cash flow. Coming to Slide 11, we give you some details on the asset classes and show how our future strategy of each of them will look like. Office properties are the biggest asset class of our commercial real estate portfolio. Roughly 40% of these properties are located in the Top 7. We will retain this focus and expand our investments further by acquiring additional strong cash flow generating properties. Approximately 17% by market value is related to mixed use properties, which combine several type of uses. We believe that this asset class also has advantages in, of course, corona area, as it can offer our high-quality of stay for users and tenants based on a balanced mix of different types of use. Within the retail part of our portfolio, we have focused on food retail and daily life goods, and we are satisfied with the existing portfolio. We will keep the scope of our investments stable. However, by growing the other asset classes, the share of retail properties relative to the overall portfolio will become increasingly smaller. Our investments in the logistics sector currently only account for roughly 2%, but we see strong potential for further investments. Our properties include nonstrategic properties mainly residential and undeveloped land plot. Ladies and gentlemen, in recent weeks, there has also been the question of how our institutional investor base will behave. Will they withdraw equity, just wait and see, or will they even increase their interest and intention to invest in our commercial real estate? The answers are as follow. Our investor base shows a high loyalty and has not withdrawn any equity. This is not at least due to the fact that the interest rates will remain low for the foreseeable future, making real estate investments with the yields more attractive compared to other investment alternatives. How does the segment look today? Around 73% of the properties managed are office properties. A further 16% are also classified as infrastructure assets. These are properties that provide basic public services with systematically relevant and mostly public tenants. 87% of all managed properties are so-called core properties, which will stay in high demand among institutional investors. We also have managed to core, value-add and opportunistic investments to the managed vehicles on a case-by-case base and use our real estate expertise to leverage and create additional return potential. Finally, we are well prepared for future expansion and already have more than EUR 500 million in equity available, enabling us to realize further acquisitions worth more than EUR 1 billion for our clients. So the diversification of our income streams and their crisis resilience are reflected in our half year figures. Our gross rental income increased by 3.4% to EUR 51.4 million compared to last year. The net rental income is EUR 41 million, EUR 2 million lower than last year. This is caused by additional allowances for rent receivables to account for potential rent losses from deferred rents. The additional valuation allowance of EUR 3.1 million is the result of unpaid rents and a provision for rent deferrals from April to June 2020, not knowing yet whether the provision is completely needed. That means the COVID-19 effect for the commercial portfolio is completely reflected in our results. At the same time, our real estate management fees more than doubled to EUR 42.1 million and thereby more than compensated a one-off effect of lower rent -- net rental income. In addition, we generated a sales profit of EUR 2.5 million and profit from associates of EUR 6.3 million from our core investments in the institutional business segment. The reduction of profit from associates is linked to the discontinuation of our former TLG investment, which we sold in 2019. This was also overcompensated by the strong fee growth of our growing platform. The FFO, which increased by 18%, reflects this positive development in the first half of the year. The main drivers are the increased contribution of real estate management fees and the ongoing optimization of our financial structure, especially due to the repayment of the 14/19 corporate bond in the second half of 2019 as well as the issue of promissory notes which resulted in an overall reduction in interest expenses year-over-year. The increase in operating expenditures is mainly due to the first-time consolidation of GEG for 6 months in the first half of the year. If you look at the segments in detail, the commercial portfolio delivered roughly EUR 0.9 million of lower FFO than in the prior period due to the higher valuation allowances and slightly higher administrative expenses. In the institutional business segment, the inorganic growth resulting from the acquisition of GEG and a subsequent launch of new vehicles is reflected in the real estate management fees and operating expenditures. In the previous year, the TLG dividend of EUR 12.9 million was still included in the share of profit from associates. Without the dividend, the share of profit from associates rose from EUR 2.7 to EUR 6.3 million. In total, the institutional business segment shows a strongly increased FFO contribution of EUR 28.5 million in the first half of the year. Now coming to Slide 16, we take a look on the change in our balance sheet equity and the adjusted NAV. Shareholders' equity per share increased as of June 30, partly due to the positive half year result and partly due to the capital increase in January 2020. Taking into account the market value of our commercial portfolio, the EPRA NAV rose to EUR 17.48 per share. The adjusted NAV, which takes into account the full value of the institutional business segment, was EUR 22.07 per share at the end of June. Our financial structure continues to show a strong credit profile. Through the course of the first half year, we fully refinanced our maturities 2020. As of today, we have no debt maturities in 2020 and only a limited portion to be refinanced in 2021. The weighted average term of loans and borrowings stood at 3.9 years. Our average interest rate is nearly unchanged at 2.1%. Our LTV is in line with our strategic level of 45% and 350 bps lower than the value of end of December last year. Including the full value of our institutional business, the adjusted LTV is even below 40% at 38.9% compared to 41.8% end of last year. Our strong liquidity position with EUR 417 million enables us to further fund our growth. We recently used part of it to buy the 2 office properties in Frankfurt/Eschborn and Hanover after the balance sheet date. For those 2 acquisitions, we secured financing for a total of EUR 58 million at 0.85% cost of debt and a 7-year tenor. Before I close my presentation with the outlook for 2020, let me highlight another important topic, which we will focus on, our commitment to ESG. We have since many years now a proactive and long-term approach to environmental sustainability, aiming to reduce CO2 emissions and minimize resources and costs of consumption. Every year, we report in detail on our ESG activities in a separate sustainability report. This year the first time as a digital report. We follow the most important reporting standard, such as GRI, and the best practice recommendations of EPRA, and report regularly to the carbon disclosure project. In addition to the digitalization of our buildings to enable us a better understanding and allow deeper analysis of consumption patterns of our managed properties, we also want to increase our exposure in green building. As of today, we developed a future green building, Global Tower, in the CBD of Frankfurt. Just recently, the project was awarded with a WiredScore certification for best digital connectivity that evaluates the quality and drivability of the digital infrastructure in buildings. The latest acquisition for the commercial portfolio, the SAP tower in Frankfurt, is also the first LEED Gold certified acquisition in our commercial portfolio. So as usual, I'm closing my presentation with the outlook for the year 2020. We are confirming our recent guidance from April 2020, which targets an FFO of EUR 94 million to EUR 96 million. All other targets for gross rental income, real estate management fees and transactions remain unchanged as well. Ladies and gentlemen, we don't yet know what a new normal will look like, but we know what is required to succeed in the world of tomorrow. Agility, team spirit and high-quality management has never been more important. Our aim is to continuously strengthen our profitability and prove that we can deliver a strong set of operational and financial results as we did in the past and as we show you today. Many thanks for your attention. We are now ready to take your questions.

Our first question comes from the line of Stefan Scharff of SRC Research.

I have a couple of questions. The first question is about the logistics pipeline. You talk about to strengthen the logistics part of your portfolio. Can you tell us a little bit more what you have in mind here for the following quarters, also for next year? The second question is about the July rent collection and rent collection in general. You talked that the July rent collection was back on the pre-corona level, that's fine. Can you go more into detail for the month, April and May and June, perhaps? The next question is about the FFO forecast. You leave it unchanged, despite a very good picture of the first half of the year with a strong increase. So I assume higher FFO for the full year is in reach. So what makes you to stay with the old forecast for the moment? Perhaps you wait for more stabilization to come in the commercial portfolio in the third quarter. And perhaps my very last question is about the financing conditions in general. If we see the Slide 17 of your presentation, the average interest rate was more or less -- is now more or less unchanged. The LTV is a little bit down. But if you are in talks with the banks, what is your impression about what happens to the LTV, let's say, in the next year?

Stefan, definitely a lot of questions. So I hope I've got them all. So I'll start with the sentence of -- to the logistics. What I would like to say is that this is a strategic goal. So as of today, we have around about 70% of offices and around about 17% of retail. And we see us as a commercial real estate company, and we have only 8 assets in the segment of logistics. So what we think is that strategic wise, in not short-term but midterm range, we will increase our part of logistics and stay stable with our part of retail. So we are also, by the way, satisfied with our retail part with the food anchored assets. But logistics is a very interesting asset class also today and also for the future as we see the urban city logistics and such things. So we think this is an attractive asset class, knowing that this was an attractive asset class over the last months and years. But we think it's not too late. So strategic wise, we are caring about this as a class and looking for a pipeline developing people that we have also logistic experts in place and here in DIC. And yes, we'll focus on this, but not tomorrow, so to say. And for July rent collections, I can say that we have -- we are back to normal as we have it before corona. What does it mean? It means around about 99% of our rents. You can see this also in our report that we have nearly every year around about 1% not collected during the year where we have allowance at the end of the year, and we see this also in July. So back to normal. And to your question, April to June, we had deferrals of around about EUR 400,000 per month without Kaufhof. Kaufhof didn't pay the rents in April to June. And according to their situation, we don't expect a lot to come there because it's a quarter. And we will see what comes there, but we have the allowance for 100% of the EUR 1.8 million coming from Kaufhof. So to sum it up, we have the allowance for Kaufhof of EUR 1.8 million and the allowance for all the deferrals we saw during the 3 months. EUR 400,000 each means EUR 1.2 million, and we have our normal allowance in our net rental income included. The third question, if I got it, was according to the FFO and the forecast, why isn't it higher, seeing that we have reached EUR 50.6 million during the first 2 quarters? Yes, as I said, we are sure that we have -- yes, we included all the effects of corona in our first half year and also have this FFO. But at the end of the day, we do not know what's going on during the second half of the year. So we have -- I think we are very professional on our system. So we were able to do this forecast in the early stage of the corona crisis beginning of April. And we have not -- we will not change this. What we can say is that we expect to be on the higher end of the range we have given. So as I said, we have acquired the 2 assets where we will see the rents coming latest in August. So we got them. And if no further corona effects come, we are very sure to reach this forecast, and yes, we will see, maybe a little bit higher. And the financing conditions, there, I can say, I've talked a lot with the banks and also the management board of the banks. And I am very, very proud to say, on the one hand, we got all the liabilities we want to get, and we have done the best rate we have done ever with one of our financings with 70 basis points. So I see no problem here to finance it. Do I see a big decrease of our interest rates for the future? No, I think with an overall interest rate of 2%, we are fine. To be seen what we are doing on the bond side in the future, as you know, we have 2 bonds outstanding. And if we refinance them, maybe we get a lower interest, so we decrease our overall interest rate. But I can say at the moment, we get the liabilities from the banks we want to get on a very low interest rate basis.

We will now move to our next question from Andre Remke from Baader Bank.

Also from my side, a couple of questions, starting with the Kaufhof topic, especially in Bremen. What are the expected shortfall in rent for this year and probably also on a per annum basis, at least prior to new tenant agreement? This is the first question, please.

Andre, thank you for your question. So Kaufhof has given notice on the space in Bremen, as I said, means 60% of the total space in Bremen. And this will be -- this will effect November and December for this year, meaning that's around EUR 0.5 million for this year, but also included in our forecast. And as I said, we are in discussions with new tenants. So yes, it was a little bit surprised, but we are in discussions with 3 tenants already, which wants to come in, in this space. If you remember, 40% of the spaces are led to other tenants. And they have told us they want to stay, respectively, want to grow in the building because you have to remember, this is a very attractive building in the inner city of Bremen, and it has very attractive ways for the trucks to bring their goods in. So it's a very attractive asset. And I think we will get tenants in beginning of next year. We will do a little bit of refurbishment to use the time. And I don't think that we decreased the rents for the asset also with new tenants because we are on a low rent level here.

Okay. And do you not expect any huge CapEx measures for the tenants, probably the 3 tenants you are just talking with today?

No. No, I don't expect them, because on the one hand, Kaufhof has to do something when they go out. We are also in discussions with them according to this theme. And we had some CapEx planned for this asset this year. So we do not expect a lot to do there. And I can say 2 of the 3 tenants, which are interested, want to do it by themselves. So I don't expect a major increase in CapEx for refurbishments for this asset year.

Okay, excellent. Then coming to the transactional activities, you mentioned, let's say, regained momentum. Is this a more general observation? Or are you in more concrete negotiations? You mentioned 300 million [ LOIs ] as the exclusivity. Are there already more transactions in the pipeline, which makes you confident to reach your acquisition target this year?

Yes. Yes, yes, we have a strong acquisition pipeline. And what we see is that the last 3 months, April to June, they are a little bit, I would say, observing in the market and see what's going on here. And now we see that a lot of offers are back, some on a very, very high price level. So we are not looking for them. What we are looking for are chances. As you know, we have a good team of refurbishment people here. And so we are looking for chances. How can we use the situation for our commercial portfolio on the one hand and for the institutional business on the other. And it will be a mix of doing some work in the -- as well buy it, as Infinity, and finish it. And then bring it to the institutional business or keep it. And on the other hand, acquiring core/core plus assets like the SAP-Turm in Eschborn to stabilize the commercial portfolio and to get good rents out of it. But we have, at the moment, around about 300 million LOIs in place, and we are negotiating some other at the moment. So we are very confident that we will reach our goals for this year.

Okay. Perfect. Then the third question is a follow-up question on Stefan's question on logistics. Will this only be a topic for the institutional business? Because I guess there the amount is very high? Or could it also be a topic for the commercial portfolio?

No, this is definitely a topic for both of the segments. Because as I have said, if you say it, black and white, logistic assets for some guys are not really assets. So it's a total different story. And you have to know it exactly if you start to have this as an asset class in your portfolio. Therefore, we need a team and we are acquiring this team at the moment, so that it makes sense if you get not only one asset, but you get some assets in place to get the rate of the cost right. And therefore, it makes sense to have this asset class in both of the segments.

Okay. Then the very last question. I guess you did not run out portfolio valuation in full in June. Nonetheless, what are your expectations concerning the portfolio valuation and compare it to the last -- latest data valuation? So especially on the current market environment. Do you see any risk for any of your asset class?

No. We do not run -- you're right, we do not run valuation for our commercial portfolio during the year, but we are in discussions with our evaluator. If we buy a new one, we have bought two. And in the institutional business, we are during the year in discussions with the evaluators because they are doing the evaluations during the year according to the time when we have bought it, means if you have bought it in April, then the evaluation is due in April the next year. And so we have discussions with them. And I can say that there is no doubt of the values. So as the VDP also announced that they see no decrease in the values at the moment. And I think our portfolio, on the basis we have done it last year, it's a very conservative valuation. You have seen it in the past. If we had sold things, we have sold them at the average 8% to 12% over our evaluation at market. So none of the evaluators see a problem there at the moment. Where we might see a decrease in the valuation will be Kaufhof in Chemnitz. We are in discussion with our evaluator there, but we cannot say how much this will be at the end of the day because they are also evaluating Galeria Kaufhof as the tenant in the asset and they will wait until the process there in now for insolvency is completed at the end of October. We expect there a little decrease in the evaluation. But overall, no decrease in the total portfolio.

We will now move to our next question from Jochen Schmitt from Metzler.

I have one question on the provision of your EUR 3.1 million for unpaid or deferred rent. If I got your remarks right, this covers virtually 100% of this part of gross rental income in your P&L, which you did not receive or collect in Q2 '20. Is that right?