Peach Property Group AG (PEAN) Earnings Call Transcript

Hello, and welcome to Peach Property Group August 27 Conference Call and Webcast. [Operator Instructions] I will now hand over to Gerald Klinck, CEO. Please go ahead.

Good morning, everybody. So unfortunately, my voice is a little bit weak today because I have a little bit of a cold. It sounds a little bit like [indiscernible]. But I think we can do that, and hopefully, I can give all good answers to your question, which we can take after the presentation. For the agenda for today, we try to do it in the same format than the last ones, that you feel hopefully comfortable to work through here the slides. So we have some slides for Peach at a glance, which we also put in last time, comments on operational and financial performance, a short update on ESG, you will find a lot of slides in the appendix, and some words for our guidance. So I start with the first topic here. You see that the main KPIs of our portfolio and the company. I would put here light on 3 highlights, which changed to last time. The first thing is the rent, the rent increase. If we compare that like-for-like, and that means we carved out the portfolio sale, which we had last year. Then we come from EUR 630 million up to EUR 658 million at the balance sheet reporting date here. That is an increase of 4.4% which is very good for us and which is focusing here on our operational performance, especially in the next quarters here of the company. That is, I think, a good move. The other good KPIs here, the vacancy and the strategic portfolio dropped first time below 5%. We see here the first good news of the letting team and our new COO, Stefanie. That is also good that we are heading here totally in the right direction. And last but not least, and that is, I think, the main topic also in the couple of the last quarters, the refinancing issues. We were able to repay almost EUR 200 million here, a little bit less in the unsecured debt part. All the other numbers, I think you can run through it afterwards, but I think these are the main takeaways. On the next page, also some KPIs of both buckets, the strategic -- nonstrategic compared to last time this year, not really a big change here. So coming to the first milestones of the last 6 months here, of the first half of the year of 2025, also very driven by our balance sheet issues. So we were able to repay in January and March, so in the first quarter, roughly EUR 180 million of our unsecured facilities. So the promissory notes are history and also the maturing bonds in November is also repaid more than 30%. The next thing is also in June, we were able to find a signing here with one of the big major German companies lenders. So that is also the tick of the box here. So this was a very big success, I think, for the team and for Peach to win back here the trust of banks in Germany, which will be in future times, very important partners for us in our balance sheet because as we all know, we want to go back to the secured financing facility here for the whole group, so to simplify our financing structure here. I think having said this, that was the debt financing. The other topic for us is here to focus on operational improvement, and that was also underlined with the announcement and the start of our CEO of Stefanie, who joined in March this year. So she's now a little bit more than 3 to 4 months here on the ground. What happened so far since the 30th of June, I think that is also important for you to have here a full picture of Peach in terms of balance sheet transformation. In July, we were able to successfully complete here the equity raise of a little bit more than EUR 50 million, and the funds are blocked here for the repayment of the convertible bond. So we have here the funds to repay that. That's also good. Second thing, and that was the big topic for us after the EUR 120 million facility signing of the Castlelake facility of more than EUR 400 million that occurred in August. That gives us EUR 100 million free liquidity. So that means EUR 310 million of secured facilities who will mature in the next 36 months. We do that ahead of maturity. That will have an impact. So we do not have the attractive coupons for the next couple of months here for these things, but this will come due also in the next 1 to 3 years. And therefore, we have now the new coupon of Castlelake to do that. And I come to that later on the FFO guidance that will have an impact on that, but I come to that later. But I think the good thing is here with the remaining EUR 100 million of free liquidity, we are able to fully repay the outstanding bond in November. And we will do that hopefully a little bit ahead of maturity. So our team is preparing ourselves here to repay that as quick as we can. In terms of -- and there, you see the [indiscernible] that is really done, but what we will do in the next couple of days, maybe also weeks, but days means the EUR 110 million facility will be drawn in 2 tranches. The first tranche we will draw in the next days, maybe this week, maybe latest beginning of next week. That is EUR 100 million. We can repay EUR 30 million of existing debt, and then we have the first EUR 70 million of free cash, as I mentioned before, ready to repay the outstanding bond ahead of maturity. The last EUR 20 million is linked to some CPs given that we have here to fulfill our conditions here on the land register that is taking place then afterwards. The Castlelake facility is signed. We are working at the moment at the CPs. You can imagine there's a lot of CPs, but maybe the main driver here also landfill [indiscernible] stuff. We expect drawdown of that facility which gives us also EUR 100 million of free cash in September, October, so let's say, 4 to 6 weeks. And then I would say, with that, we were able to fulfill our, let's say, obligations to repay the unsecured facilities. Last but not least, and that is in September, the remaining EUR 200 million of existing secured debt where the interest rates will mature end of September. We're in a good shape here with the bank, and we will expect all these things in terms of signing off from the banks at the beginning of September. So I see here no red flags on that. That is also coming into -- in line with our expectations. So a little bit more details on the financing later on. But with that, I jump to the operational performance. As you see on Page 10, that will be our EBITDA bridge. Unfortunately, compare us with the last reported date, we have this major impact of the sales. So there's a little bit of transparency what impact of the portfolio sales in terms of rental income and other income of these things compared to the adjusted EBITDA last year, we show the red box here. And then the major changes in these lines where we have some additional information on the next slides. On Page 11, you'll see our impact on our top line, the most important thing. I think overall, we can say the rental growth in terms of euros is in line with our expectation, 3%. I mentioned before, the 4.4%, that is euro per square meter if you compare both states, but this is here the whole-time frame of the 6 months. This is in line with our expectations. You see the details in the chart above. I think that is good. Potential catch-up to market rents remained stable. You see these numbers roughly at the EUR 7.36 which is the market rent compared to the EUR 6.58, which is the existing rent. So we have still upside here to catch up to market. I mentioned that before, vacancy is down. That is also good. We are heading here into the right direction. Our main focus now is really to improve our performance in terms of our bad debt losses and our ancillary cost management. These things are not in line with our expectations and there we put in the next couple of weeks together with the team and the CEO full pressure on it to increase that performance. The next Page #12 shows you also some details for the upside for the market rents what I mentioned before. So there's still some headroom left in both clusters in the strategic and the nonstrategic portfolios. So we are in line with that. Next page on 13. I mentioned that a little bit more details on the vacancy. The less than 700 units which are in terms of the vacant positions, that is a very good decrease. The main driver was our decision to sell the last big portfolio. We lost a lot of vacancy there and a lot of costs which are linked to vacancy. So that was I think the right decision to do. And then also the first effect on operational performance given that the CEO is in place since March, we see here the first results also in that topic. So overall, 6.5%, still too high, but mainly driven from the non-strategics. Also some information where does the vacancy come from the non-strategics. It is really our scattered portfolio. That's the main driver. Reason for that is too far away from our Peach point. That's the reason why we want to get rid of these assets. They are not bad assets, but they are very hard to manage it from, let's say, our Peach points. Having said this, we jump to the next page. Development of expenses from letting. I think we have here 2 main line items that is the maintenance expense. I expect a little bit lower number to be fair. But here are an effect in it roughly together with EUR 500,000, given that we have here some one-off charges, which are linked to the 2024 period. You can say it's a one-off. Hopefully, it doesn't come back here and not covered insurance damages also with that timing impact. So I would say, that's a one-off. It gives you roughly 5% of the overall repairs and maintenance, and that should be, let's say, not an impact for the second half of the year. So these numbers should be lower in the second half. In terms of expenses from unoccupied investment properties, in terms of the vacancy things, that is really something that I mentioned before. These 2 things, the lost income due to collection risk and our ancillary cost management, which is linked to the vacancy and also to income losses, that is our main topic where we want to put focus on. These numbers are not, let's say, good for us, and there we have to improve our performance. Other operating expenses, I think that we are heading here into the right direction. One main driver is the capital taxes. That is driven by our equity increase. That number is linked to the Swiss tax regime. That is one driver where we have to compare here the taxes compared to the last period. That is almost double of size here, but all the others, I think, are heading into the right direction. Personnel expense on Page #16, we lost 30 people, and we also improved here our teams, especially in these both, let's say, departments with ancillary cost management and also the income losses. This team is, let's say, increased by FTEs. So we invest in these teams that we have better terms in that position in the next period. Page 17 gives you an overall information of what I said before. I think that is a little bit of a service from us to see that on one slide. In terms of financial performance and with our investments, Page 19 gives you a good feeling how we invest in our assets. We spent roughly EUR 20 million of CapEx in the first 6 months. 2/3 are linked to our tenant improvements with 2 categories. One is really to bring down the vacancy, which is still there for a long period of time to invest in these assets, in the strategic, especially. And the other 1/3 is CapEx, which you will see, which is not linked to repairs and maintenance. We repair here some stuff, especially the roof, facade and windows. And overall, we expect a range of a little bit less than EUR 30 per square meter to invest overall in 1 year. So if you annualize that number, we end up with more than EUR 40 million of CapEx at the end of the year. That is in line with our expectation. That is, let's say, still a higher number compared to previous years. I think that is also a little bit of a catch-up where in years like 2023 and also 2024, given we have our challenges on the refinancing, it's a little bit of a catch-up due to this year. In terms of sales on the next page, I think I mentioned that before in my last call, we are in a good progress here to be successful with the first sales in the second half of the year for our Peach points are impacted. We are working here together with 2 external brokers, one for [indiscernible], one for Dortmund. There's another Peach point involved, which is more here in the North Rhine-Westphalia area [indiscernible]. This is a portfolio which we think we can sell to one investor. I think that's the only part of the nonstrategic portfolio where you can really create a portfolio deal out of it. I think the team has a lot of experience, and we want to try to do that by our own. And the aircraft is a little bit, let's say, driven by good financing stuff. So there are attractive coupons on that, not the biggest one. We put it on the priority #2. We want also to increase a little bit the performance of these assets in that area due to higher vacancy so that you will see on the priority, which is a little bit behind the other 3 clusters. Having said this, the first signing has taken place in [indiscernible], it's more than EUR 7 million deal. And other 3, we are shortly to notarize here in the next days. So overall, this is not the highest number right now, but you see the starting point of the sales program here has started after end of June. Valuation is, I think, the next topic on 21. We changed the appraisal. As you know, we were -- our valuer before was Wüest Partner, who is a very specialist in the Switzerland area. In Germany, it's not the #1, that it's not the problem, but we try to find here someone who should confirm our valuation. We thought that is a good approach also to give you the feeling that our values are stable and correct. Let's say, CBRE is a little bit more granular compared to the Wüest Partner valuation. You see that in our report. So we have EUR 60 million where we have some upside and other EUR 60 million where we have some downside in valuation in these assets. The overall impact is slightly the same valuation like what we saw with Wüest Partner, but I would say, we have a little bit more granular approach here. And the graph shows you that in the strategic valuation, we are slightly above the values from Wüest Partner and is non-strategic, and that I think not a big surprise. CBRE is a little bit more conservative. I think that's the main takeaway. But overall, our values are confirmed by CBRE. On the next page, you see there a little bit of more numbers for your analysis. I want to put here the highlight on the value per square meter. Over the last, I would say, 2 to 3 years, we have stabilized here on the EUR 1,300 plus per square meter. And the yielding on the target rent is in the ballpark of 6. And the multiple based on actual rent, and that's given by rent increase, the multiple is here decreasing, which gives us, I think, a fair valuation of our portfolio. Debt structure. I jumped from this slide very shortly to the other one, but this is really the actual numbers on the end of June numbers. So there will be slightly here on the 2024 things, the secured one, which I mentioned before, the EUR 200 million and the remaining piece of the unsecured bonds, the EUR 173 million. And in 2026, the dark blue one is the convertible. I want to show you what is the impact afterwards with all the effects which I mentioned before, and this is on another slide. There, you will see -- wait a moment, please, technical issue here. Page #24. We have a technical issue here. So I hope you see that Page 24 on your desk. In the upper part, that is the situation here at the end of the year 2024 where we start this year. And the lower shows you what is the impact if we execute the signed documents with the German bank here [indiscernible] facility. And that shows you that everything is sold out in 2025 and '26. There's only a small impact in 2027. You see the EUR 310 million, which will mature in 2026, '27, '28 is now part of the 2028 maturities. That looks maybe a little bit weak because EUR 480 million is really here highlighted number. But let's put it that way, the EUR 410 million of the Castlelake portfolio is also impacted by non-strategics, which we want to get rid of in that time frame. You can assume it's roughly EUR 60 million. So that will drop then down to EUR 350 million. And then we have 2 extension options, which we can use if necessary so that we are able and we feel comfortable here also with the team to refinance the Castlelake things at maturity or maybe also a little bit ahead of that. So we see here as a team, that's not really an issue given that we have also the possibility to split that portfolio into pieces and find maybe also other lenders or to extend it with Castlelake, which also would be good. So what does it mean in terms of the weighted average cost of debt? We come at the moment from 290 given that we have here now the actual coupons. That's an increase by roughly 1%. So we expect an overall cost of debt a little bit slightly below the 4%. In terms of hedging, we are not covered here. We are -- we will be hedge these positions with swaps and also with caps so that we have here, let's say, a clear focus on planning of our costs in future times. Next page. This page is well known in the appendices last time. We put it in here because I think it is helpful for you, maybe you saw that on Fitch and also Moody's, who are our rating agency for the corporate and the outstanding bonds. They put us now under a positive outlook. So we feel comfortable when we execute the refinancing of the unsecured parts that we have here, hopefully an increase of our rating, which helps us in our reputation in the market. On Page 26, overview of some financial KPIs. You know that from before. And then we put in '27 kind of a pro forma because we know all that we have in July and that was after obviously, the reporting date, this equity increase and that has an impact on some KPIs. I think we put in here the most relevant ones. The NTA per share is dropping from EUR 20.6 down to EUR 17.8. There was a slightly increase without the impact of equity for the first 6 months. After the equity raise, we dropped up to EUR 17.80 and there is still a lot of discount to our actual share price, as you know. The loan-to-value will drop below 50%. As you know, our midterm target is in the ballpark of 45%. And hopefully, not the market will help us to reach that. But to increase our top line has hopefully also an impact on the valuation of our portfolio. And with that, we should achieve that. The net debt component is also dropping by EUR 52 million. That's a little bit of a technique and the number of shares gives you here the right numbers for your analysis on your side. Share data, I think that is also the slide, which you will -- every time you will see that in the appendix. I think one highlight is here to mention. As you know, we have more or less [indiscernible] hands. So this proportion is not really changing, but there's a change in our shareholder basis. There's one that's left the company, [indiscernible] and Horizon 21 increased the stake into our company. We are happy to have them with us, gives us trust, and that's good for us. So having said that, in terms of ESG, this is a totally different slide compared to the others. Last time we presented you all our, let's say, numbers, which are still in the appendix with all these awards and so on. Here is a little bit approach on the S of ESG. So that is really affordable housing, what we can do here to the society. If you see on the left-hand side, there are 2 reports, which gives us a little bit of an impact of what will be the overall average cost in these states where we are invested. One is the CBRE market report, the other one is another big one here and our Peach property actual rents, we put it also in here. On the right-hand side, it's a little bit of drill down into the cities, especially North Rhine-Westphalia. The overall takeaway is that we have still some upsides to come to the average market, and we are still in the affordable sector. So that is, let's say, from our point of view, good because it's a little bit of catch-up to market in line with the ESG and to provide affordable housing for parts of the society. Coming to guidance. I think guidance are more or less in the same ballpark I mentioned before. You see our key milestones. The first ones are for repaying here our unsecured, I think it ticks the box. The remaining pieces, operational performance and increase in platform efficiency, I mentioned that before, is ongoing. And we also further execution of the sales process also ongoing. That will take us a little bit of time. This is not something which we can achieve in half of a year. I would say this is an ongoing milestone process. In terms of our guidance, we stick to our like-for-like rental growth. We feel comfortable to achieve that over the full year, 4%. The FFO, we decreased the FFO guidance. The reason for that, you can see on the next page. We stick to our guidance and operational performance and so on for our FFO guidance for 2025. I think there's a little bit of, let's say, ambitious things for the second half, but we think that we can achieve that. But we have one impact which we haven't seen at the beginning of the year. That is the Castlelake impact. The decision is here made that we are going into the secured sector as quick as we can. And with that, we have to repay maturing debt of EUR 310 million. This is what I mentioned before. If you do that for 1 quarter impact, the gap between the Castlelake coupon and the secured ones which we have to repay has an impact of roughly EUR 2 million. So we decreased our guidance here to put this impact here into account. Yes, having said this, thank you for your patience here. I'm happy to answer your questions as good as I can, and line will be open. Back to the operator.

[Operator Instructions] And we do have our first question coming from the line of Philipp Kaiser with Warburg Research.

Congrats to the solid operating performance in the first half, and especially with regards to the refinancing topic. And I have one question around the refinancing, especially on the large-scale financing you secured from Castlelake. Could you shed some more light on this financing due to the size, et cetera? It's kind of attracts some interest. Could you give us a bit...

Thank you, Philipp. Thanks. So we had 2 opportunities here to fill the gap of the remaining EUR 100 million of new cash, which were -- which we want to use to repay the unsecured one. One thing is you can do that with a mass piece, then you have, I would guess, in that market circumstances, a double-digit number to pay in the coupon. That is the one thing. You are still then with an unsecured facility in the market. And the security package for such kind of mass pieces, let's say, is very hard and not attractive for a company like us, when you have to drop [indiscernible] on the whole company, you have point of [indiscernible] more force stuff and so on. So we decided to go another way and go for a whole loan. If you do that, then you have to look, let's say, in your portfolio where you can deliver a sub-portfolio where such kind of a lender is the only lender in terms of these assets. And we organize that with that sub-portfolio, but that means we also have to repay existing lenders. Unfortunately, I have to -- I lose them as a good partner in previous years. But hopefully, there will be also some other opportunities in future times for these lenders. And that's the reason why you have to repay them. Otherwise, you have a mixture in lenders in a sub-portfolio, which is not common for such kind of lenders. I think that was the main reason. And then we have, let's say, a security package, which is more linked to a classic secured portfolio that you can provide here land registers, land charges, mortgages, which is more common and the overall component, if you put everything into account, the loss of your benefits of the good coupons for a couple of 1 or 2 years for the secured loans. After then, you have obviously also to refinance that with the market coupons. This is what you're losing. But you gain also a smaller coupon, which is more the mid of, let's say, single-digit numbers. If you put everything into account, we feel better with that solution instead of having the others for the next 1 to 3 years and have an unsecured with a high coupon. So the overall component for us is more attractive to do that with such kind of a structure of lending, which we see here with Castlelake. That was the reason behind it.

So to sum it up, there shouldn't be any material impact on your funds from operation for the next years due to the mid-single digit?

On. Yes, you pointed out here really a good question because we have the problem of the situation that we get rid of almost 20% of our assets, given that the non-strategics we will over the next, I would guess, 1 to 2 years. So we will lose top line and on the other hand, we want to invest the surplus cash into CapEx in the strategic portfolio. And with that, we have, let's say, on the top line growth in the strategic ones. But that will be a timing impact. If I'm very successful in the non-strategics, I lose the top line quicker than to catch up with operational performance of my strategic portfolios. That has definitely an impact of our FFO for the next, I would say, 2 to 3 years, which is then really harder to predict what will be the right number because that is really driven by the speed of get rid of our non-strategics. And I think that will be the challenge also from our side to you guys to give you good guidance and transparency how the strategic portfolio will perform. And there, you can measure the operational performance of the group and the platform in terms of rent increase, vacancy reduction and has a good, let's say, efficiency in our cost structure. And this is something which I think is our challenge in the next meeting with you to show -- give you more highlights on the performance of our strategic portfolio and the non-strategics, but the non-strategics then are not driven by operational performance. It's more than what will be the sales price and what is the speed. And this is what we have to find out together with you. But I think FFO is harder to predict here. I think the more important number will be here our NTA because also our NTA will show you especially the impact on our non-sales portfolio in the NTA number. And I think for us, it's also those numbers, but definitely FFO is important, but I think the NTA component from my point of view, is the most relevant here, especially for the next, I would say, 1 to 2 years.

Yes. Okay. Totally understood, it makes sense. I mean, the main challenge was solving the refinancing problem -- to make it successful. So yes, we will see how the FFO will continue. But yes, I appreciate the details and the information.

[Operator Instructions] And our next question comes from the line of [indiscernible].

Could you please tell us what your strategy is in terms of repayment of the perpetual bond?