PATRIZIA SE (PAT) Earnings Call Transcript

Good day, ladies and gentlemen, and a warm welcome to today's earnings call of the PATRIZIA SE following the publication of the first half year financial results of 2025. [Operator Instructions] And having said this, I hand over to PATRIZIA's Associate Director, Investor Relations, Tobias Ender.

Thank you, Sarah. Welcome, everyone, to our today's analyst and investor call for the H1 2025 financials. This is Tobi speaking. I'm happy to have our CEO Asoka Wohrmann and our CFO Martin Praum with us today. Asoka will present you our highlights of the first half of 2025 as well as an overview on the market environment. Afterwards, Martin will guide you through our financials. As Sarah said, this will be followed by a Q&A session. During today's call, we will refer to the results presentation already shared on our IR website and also during the call. In case of questions, our IR team is more than happy to take them. And as usual, this call will be recorded and will be made available on our website. And with that, Asoka, I'd like to hand over to you.

Tobi, thank you very much. Dear ladies and gentlemen, a warm welcome from my side as well. Let us look at our financial performance in the first half of 2025. Most of our top KPIs have either grown or are at the point of growing again. EBITDA almost doubled compared to the first 6 months in 2024. This was mainly driven by continued cost discipline, leading to a lower operating expenses. The EBITDA margin grew by 10.9 percentage points to 21.5%. AUM remained relatively stable at EUR 55.9 billion. Our organic AUM growth is continuing. We successfully converted open equity commitments being a net buyer for our clients. Asset valuations have stabilized in first half of 2025, while currency effects on our AUM prevented a return to AUM growth already in first half of 2025. Despite the stabilization of inflation and interest rates, we see ongoing geopolitical tensions and other uncertainties. Nevertheless, we are at the inflection point like our top KPIs. We are at the beginning of a new investment cycle, but this new cycle will be slower, tougher and more bumpy. So cost discipline and resilience remain crucial to our business success. That's why we adjusted our organizational setup and built key platforms that allow us to scale efficiently. We have established key global platforms to drive our business, including an integrated investment management platform, a fund management platform and a new operations platform, all designed to drive our entire value chain. We will use this operational strength to leverage the upcoming investment cycle for profitable growth. We see that investors demand is coming back to the asset classes where PATRIZIA can play to its strengths. It is our clear ambition to step up fundraising and to increase transactions in the second half of 2025. And we already have seen stronger momentum going into the second half of 2025. Those newly arising opportunities set the stage for pivotal year 2025 for PATRIZIA and the broader industry. Cautious optimism is returning to the markets we operate in. International investor sentiment shifted towards Europe and APAC in the second quarter. Also in terms of asset classes, more capital is flowing back into infrastructure and real estate. And this rising demand plays directly to our strength. We already see increasing demand for the living value-add sector, core and core plus logistics, operated real estate and premium office locations. And we see strong appetite for infrastructure, also driven by the large public infrastructure budgets in Germany and across Europe. This positive market sentiment is evidenced by the transaction volumes in real estate and infrastructure. Volumes have slowly increased over the last 12 months. Investors are more active in seeking opportunities. The improved outlook will lead to growing ticket sizes. More deals will arrive, tempting investors to start looking beyond just re-upping commitments. We have more than 40 years' experience of managing the cycle and cycles of real estate investments and more than 25 years in managing infrastructure investments. And we are confident that we can deliver attractive investment opportunities in smart real assets for our German and our international clients. Real estate has long provided solid cash-on-cash returns, which is something our clients value deeply. As you can see in the last 2 years of the down cycle, especially after the valuation storm, capital returns turned negative. Meanwhile, we have seen 5 quarters of positive total returns with capital returns recently offering additional value on top of overall stable income returns. Looking at the positive trend in valuations, we believe that real estate has passed the performance trough and chances to improve that real estate returns will reach again median performance levels. As you can see, our increased transaction activities demonstrate that clients are reengaging and shifting to buyer side. As a result, our closed acquisitions surged by around 58%, reaching EUR 1.2 billion in the first half of 2025 and a positive trend since first half of 2024. Divestments in contrast were limited to EUR 0.3 billion, underlying growing investor confidence in the quality and the resilience of our real asset portfolios. Most of these transactions were driven by infrastructure. However, real estate investment activity is clearly gaining momentum, particularly in residential and logistics. We remain optimistic about living, which is a strategic growth pillar for us and living today is more than just traditional residential real estate. Living includes promising subsegments like affordable housing, micro living, co-living and senior living. And these sectors are poised for structural growth in 2025 and beyond. And we continue to be excited about growth opportunities in the emerging RE-infra asset class. One year ago, we introduced our new midterm strategy 2030. Our strategy is driven by the DUEL mega trends, digitalization, urbanization 2.0, energy transition and the living transition. Future real asset returns will be driven by the DUEL mega trends and by the transition that our societies and economies are undergoing. We will stay laser-focused on execution for growth in the second half of 2025. And together with our clients, we aim to shape tomorrow by channeling their capital into long-term value creation and new attractive growth opportunities. Thank you for your attention. And now I would like to hand over to our CFO, Martin Praum.

Thank you, Asoka, and hi, everyone, also from my side. Let's continue on Page 11 of the presentation with details about our development of assets under management. The key message here is that overall, we talk about a stable development with a slight decrease in total AUM. Important for me, we've seen net organic growth and positive currency effects were actually a drag on the first 6 months in AUM. But also important, the pressure from valuation has diminished, as you can see in the chart. We do expect to continue to grow AUM also throughout the second half. And one of the drivers is certainly raised equity, but also the existing commitments that we have from our clients that will convert into investments through the second half of the year. Let's go to the next page, Page 12, to look at the overall P&L picture. We see stable management fees, but pressure from market-driven revenues, although transaction and performance fees on relatively low absolute figures. The positive news on this chart is that we see that balance sheet investments contribute more positively to our P&L. This is evident from the significant growth in net sales revenues and co-investment income. And very important, our cost measures show material positive impact on the P&L. In terms of other revenue items, they are down significantly year-on-year. So the quality of the EBITDA that you see here has further improved. And as you can see, as an overall message, the EBITDA has nearly doubled with a better composition and better quality. Let's look at the details of the revenue side. In terms of management fees, as I said, we've seen a slightly decrease year-on-year, but that was primarily driven by lower project development service fees. So overall, a stable development based on AUM and business. Transaction fees down 27%, still a reflection of lower activity, especially for Continental European clients and also especially in real estate. You might remember that Asoka mentioned that a lot of the new acquisitions and activity happened in the infrastructure area. And lastly, performance fees, we see continued lower realizations for our clients. We are more a net buyer for our clients. And also, we expected lower annual carry payments, which is reflective in the performance fee numbers in the first half. On Page 14, we've added for your convenience, a quarterly overview of the revenue development. And I think this nicely shows you how stable the management fee development has been throughout the last quarters and also the volatility of especially performance fees that you see here on a quarterly basis. And that's why I would not recommend to simply extrapolate the EBITDA that you've seen in the first half with EUR 29 million, given we had annual carry payments in the first quarter of EUR 10.6 million, which are unlikely to reoccur in the remainder of the quarters. But overall, the message is still that we do expect market activity and client activity to pick up throughout the second half of the year, and this should especially be evident in transaction fees. Let's look at the cost side of the P&L on Page 15. You know that we've been quite active over the last few quarters to react to the market cycle and to lower the lower client activity, to become more efficient and more profitable. And we can now harvest the first fruits with a decent cost reduction across different cost lines, as you can see here. We might see some year-end catch-up effects depending on business activity. But overall, also based on year-end levels, we expect very good cost reduction percentages compared to last year. On Page 16, we provide you with an update on our segment reporting. We want to further increase the transparency to the capital markets, and we introduced an updated and more granular segment reporting with a clearer distinction between our asset-light investment management business model, the capital deployed in co-investments and seed-investments. And thirdly, with other partially noncash effects driving our P&L, partially stemming from M&A activities, reorganizations or one-offs and consolidation effects. And here, you can see nicely that the contribution from the capital that we have invested from our balance sheet has improved materially. Let's stay with that topic on Page 17. Where have we allocated our balance sheet capital? Around 85% is allocated to real estate co-investments, especially in the areas of living and residential. We have invested around 15% in the infrastructure sector. And if you look at the development between the invested capital at cost and at fair value, you can see a value creation of over EUR 350 million over time. And these numbers are based on the current numbers, i.e., we talk about numbers at the bottom of the cycle. So we think there's further upside to the fair values of the exposure. And that also explains why we've taken some opportunities now at the bottom of the cycle to increase certain stakes in certain co-investments or seed-investments to create value for our shareholders. Let's go to the next page, the balance sheet situation. The key story here is the financial flexibility is unchanged. We talk about a net equity ratio of 68%. Available liquidity with EUR 80 million is down basically due to dividend payments and capital deployments, but access to further financing or funding options is available. We talk about a revolving credit facility of EUR 100 million. And also, in addition, we have the option to use treasury shares just in case. But let me also use this opportunity to talk about our operating cash flow, which has improved material in the first half to now EUR 27 million after close to 0 in the last year, also a driver for liquidity and future cash flow generation. Let's look at the guidance as the last page of my presentation. Let's start with AUM. You can see that if you look at AUM, there's some way to go from the EUR 55.9 million we have at the moment. If you adjust for foreign exchange impact on AUM, the starting base is EUR 56.6 million. But as I mentioned before, we do see rising momentum in client activity. We also saw rising momentum in equity raised, for example, in the month of July. So that's why we are optimistic that together with the committed capital, we can convert that into investments and AUM during the second half of the year. In terms of EBITDA and EBITDA margin, I think we're well on track to meet the guidance range. And certainly, whether we come out at the lower or at the upper end of the range depends on the client and market activity that we realize through the remainder of the year. With that, I'd like to hand back to the operator to start the Q&A.

Thank you so much, Asoka and Martin for your presentation. [Operator Instructions] We received the first virtual hand from Andre Remke.

So a couple of questions from my side, please. First, on the AUM development. You had a 0 valuation impact in the first half. It was minus 0.6% in the first quarter, i.e., there was an uplift in the second quarter. Would you expect further value increases from this point of time until the year-end? Or is this too optimistic assumption? And then further on, on the AUM guidance, you mentioned you are optimistic to reach it, but this will mean a plus of EUR 2 billion to EUR 4 billion. What are your assumptions for reaching this? Are you, see a reversion of the FX or the positive valuation impact? Or should it purely come from net organic growth? This is the first question, please.

Yes. Thank you, Andre, for the questions. First of all, you're right in your observation that the AUM valuation effects have reversed, and we now stand at 0 at the first half. For the remainder of the year, we would guide for 0 to positive or smaller positive development. You know that also if you compare us to other listed companies that, first of all, our AUM are very well diversified and some of our AUM are valued once a year, and this is why you see some trailing effects on valuation through the cycle. So a quick answer is 0 to slightly positive in terms of AUM valuation towards the end of the year. In terms of guidance range, as I mentioned before, first of all, we have existing capital commitments that we can and will convert into AUM. We've already, at this stage, converted EUR 0.4 billion of that into investments for our clients. Secondly, you might have seen that the equity raising level compared to last year was slightly down. I can confirm that in July, we've seen much more activity and these items together make us more optimistic on our AUM guidance. In terms of foreign exchange, that's nothing we can really forecast. There might be some reversal and some normalization, but nothing we depend on.

Excellent. Does the organic growth fit really to the open equity commitments? These are, as of June, below EUR 1 billion, which is probably good for EUR 2 billion, including leverage. And now you are striving for new commitments. But on the time line, is it -- are you really able to close the transaction because only closing is relevant for AUM growth until year-end?

Yes, yes, we are optimistic we can deliver on that. But you're mentioning a fair point that there's always a certain gap between signing and closing, and there could be deals that slip over year-end, but we all work hard to deliver on closed acquisitions until year-end. And again, as I mentioned before, we've seen a clear pickup in momentum in July also versus the first half, which supports our view.

Okay. And further minor question on AUM and particularly the infrastructure part. You reported a share of 18% by the end of June and it was 19% as of March. So it's only 1 percentage point, but around EUR 0.5 billion reduction. How does it fit together with your statements that acquisitions were more related to infrastructure investments?

The reason for that can be partially foreign exchange related. And again, it can also be valuation driven, Andre. So these can be smaller effects that lead to the shift in AUM.

Okay. So the infrastructures would be higher valuation gains and more as usually foreign investments, more FX related. Did I get it right?

You would typically have -- I mean, if you look at the assets that we have with foreign exchange exposure, then yes, infrastructure is more exposed. Also, if you look at our AIP business, then you also have a higher share of U.S. dollar exposure. And then part again of the infrastructure business has Australian dollar exposure, which showed an impact on our AUM after the first 6 months.

Okay. Excellent. And the last question is on your cost reductions. You already mentioned some words here. Would we see a level of EUR 56 million, EUR 60 million, which we saw in the first and second quarter also as a kind of run rate in case business activities would not pick up? Or do you see other way around, would you see further reduction potential in case the business would not pick up?

Thank you for the question, Andre. I think it is fair to work with that run rate for the time being. As I mentioned in my presentation, there might be some pickup in costs over the second half, which is then if you have higher business volume, higher activity. This leads to higher travel and higher overall business activity and can increase then the cost base towards the fourth quarter. But overall, our aim is certainly to keep costs on a super low level throughout the year.

[Operator Instructions] And in the meantime, we move on with Philipp Kaiser.

Starting with an understanding one. With regards to capital allocation in the H1 report, you split or it seems to you, split it, the Dawonia profit entitlements and now adding another line, Dawonia fund. Is the, some of both the profit entitlements? Or how can I understand this split?

Yes, well spotted. We did update the capital allocation because what we did in the first half, I mentioned that we used some of our balance sheet capital to increase exposure to very attractive assets. And we had the opportunity in the first half to negotiate with selected investors in Dawonia who wanted to sell their stake in Dawonia to also be part of the [indiscernible] Group. Also other institutional investors took over the stakes. And this -- while you find a new line in the capital allocation, which is the increased exposure to Dawonia. If you look in detail about our half year report, you'll also see that this also triggered early exit carry payments. So we basically, as a broad picture, we financed this acquisition of the stake with early exit carry payments. And so effectively, we converted exit carry claims into a higher stake in Dawonia in the first half.

Okay. Perfect. So the now EUR 250 million -- broadly EUR 255 million compared to the good EUR 270 million in the first quarter.