Patrizia SE

SWB:PAT

Earnings Call Transcript 2019-Q1

[Karim Bohn, CFO & Member of the Managing Board]

Good afternoon, everyone, to the earnings call on the financials for the first quarter of 2019. We had a solid start in 2019 with further improved quality of our operating income whereas our assets under management were virtually stable at EUR 40.9 billion. We have increased our recurring management fees year-on-year. Operating income is down 43.9% due to an extraordinary strong first quarter in 2018. However, the first quarter of 2018 benefited from a high positive impact from net sales revenues and co-investment income, mainly from the disposal of remaining principal investments. In the first quarter of 2018, we produced EUR 24.6 million of sales income compared to EUR 2.5 million in the first quarter of 2019. If you adjust this effect -- if you adjust the effect from the sales of legacy assets, our operating income is actually up 18.4% year-on-year which -- with management fees up 24.2% and all the transaction fees up 18.7% year-on-year, even though the markets have declined to almost 30% in the first quarter of this year. For 2019, we confirm our given guidance. Our target growth is EUR 3 billion to EUR 4 billion net, or in other words, a growth of 7% to 10%. Our total AUM are expected to land between EUR 44 billion and EUR 45 billion, and we expect an operating income of EUR 120 million to EUR 130 million.With that, I'd like to take you to Page 3 of the presentation to talk about the operating income in a little more detail. Our total service fee income is up 9.2% to EUR 71.1 million compared to EUR 65.1 million in the first quarter of 2018. Our management fees, primarily attributable to the consolidation of the acquisition of Rockspring, grew 24.2%. Transaction fee grew 18.7%. And in line with expectations, we had a strong contribution of performance fees, however, they are down 17.6% compared to the first quarter of last year because the performance fees in 2019 were higher than the performance fees we are expecting for this year, but they will remain at a very high level of between EUR 70 million and EUR 80 million. As I said at the beginning, net sales revenues and co-investment income of EUR 2.5 million is down compared to the first quarter of 2018. The principal investments in the -- the sale of the principal investments contributed EUR 1.3 million in the first quarter compared to EUR 14.1 million in the previous periods, and the co-investment income or the co-investments contributed EUR 1.2 million compared to EUR 10.5 million in the first quarter of 2018. We do expect, in total, net sales revenues and co-investment income of EUR 30 million for this year, and we do confirm that guidance even though the first quarter was comparatively low, but was in line with expectations. Our operating expenses were up 9.7% also due to the consolidation of Rockspring and that was well below the growth rate of management fees of 24.4%.The components of our total service fee income are described in more detail on Page 4. As I said, total service income is up 9.2% to EUR 71.1 million mainly driven by growth in assets under management, acquisition of Rockspring, of course, the transactions we carried out for our clients and again a superior and very strong investment performance we produced for our clients. The management fees of EUR 46.4 million are up mainly because of the management fees Rockspring generated and fees generally are included in revenues with 44.1% (sic) [ 44.1 million ] and party in income from participations with EUR 2.4 million. The management fee contribution in total amounts to 57.4% in the first quarter of 2018 and that increased to 65.3% in the first quarter of 2019. Transaction fees again are up 18.7% and performance fees of EUR 18.7 million are somewhat lower than the first quarter of 2018. We do confirm the guidance for our total service fee income of EUR 307 million to EUR 330 million. Let's talk about transaction fees on Page 5. Transaction fees are up 18.7% from EUR 5.1 million in the first quarter of '18 to EUR 6 million in the first quarter of 2019. That compares to an increase in the closed transaction volume from EUR 700 million to EUR 1.1 billion, almost 50%, or on signed transactions, from EUR 0.5 billion to EUR 1 billion, so basically doubled compared to a market backdrop of almost 30% year-on-year. Now we all know in our industry the first quarter is usually slower than the remaining of the year, and we also -- we're also confident and we believe that the market will again pick up throughout the year with the majority of deals usually happening in the second half or even the last quarter of the year. Our performance fees of EUR 18.7 million are down 18%, but they still remain on a very high level, and we do expect EUR 70 million to EUR 80 million performance fees for this year and that compares still to a very attractive weighted average IRR of 11.1%, but we do expect for 2019 performance fees on a more -- on a rather normalized level in particular compared to 2018. We continued to improve our total cost ratio and that is displayed on Page 7 of the presentation. We improved our total cost ratio from 53 basis points in '18 to 47 basis points in the first quarter of 2019. Mainly because of timing differences, we do expect the total cost ratio of 48 to 52 basis points also depending on the level of AUM at the end of the year. And that compares to a more normalized EBITDA margin for 2019 of anything between 37% and 41% or excluding principal investments of 35% to 39%, a little lower compared to 2018 mainly because of lower performance fees. We do remain and keep a very high available cash position of EUR 49 million with very strong balance sheet ratios. Our equity ratio is 64.8% on a gross basis, remains very strong on a net basis. We displayed a net equity ratio of 77.8%. Now I'd like -- before we go to Q&A, I'd like to close the presentation again with an outlook and the confirmation of our outlook for 2019 on Page 9. We do expect management fees of EUR 180 million to EUR 185 million, transaction fees of EUR 55 million to EUR 65 million and performance fees of EUR 72 million to EUR 80 million and a net sales revenue and cost investment contribution of approximately EUR 30 million compared to the EUR 2.5 million we produced in the first quarter of this year.Net operating expenses will be between EUR 207 million to EUR 222 million. And we again confirm the cost efficiencies we realized and identified in the last year. They now come into full fruition in 2019. That is all based on a transaction volume of EUR 6 billion to EUR 8 billion and a target assets under management of EUR 44 billion to EUR 45 billion. With that, I'd like to hand over to Arianna for the Q&A.

[Operator]

[Operator Instructions] The first question is from Andre Remke with Baader Bank.

[Andre Remke, Co]

So first question is concerning your AUM growth on transaction volume. Well, the composition of the first quarter in terms of disposals and acquisitions so it equaled. How optimistic are you that this will change over the year to be able to generate net growth in assets under management because you guided for EUR 3 billion to EUR 4 billion. So will -- of course, acquisitions will pick up but are you not expecting that also disposals will pick up. So will the ratio change over the year? Do you have already pipeline or so some more visibility on that?

[Karim Bohn, CFO & Member of the Managing Board]

Andre, thanks for your question. What we're already seeing and have visibility on is on the deals we have signed already. And we currently have EUR 2.2 billion of signed acquisitions, of which approximately EUR 800 million will close in 2020, but the remaining EUR 1.4 billion will close in 2019 and that compares with signed sales of EUR 700 million. So on a net basis, we are EUR 700 million positive on -- at balance. And as I said, what we usually saw in all the previous years is that the majority of the deals usually happened in the second quarter, and we are confident that 2019 will be no different to the previous years. And we also believe that given that we have a stronger platform this year with a broad European network, we are confident that we'll be able to achieve our growth rate and our growth target.

[Andre Remke, Co]

And more, in general, from your experience in the market and with your clients, how they are positioned themselves at the moment and the current market situation with again falling bond yields, et cetera, are they willing to take profits or are they waiting? So to get a better feeling of that net growth is really well funded or supported that over time, you will receive more disposals from your book and with that, of course, afterwards, lower management fees. So is that the risk?

[Karim Bohn, CFO & Member of the Managing Board]

Yes, well, I mean the risk you're describing, I think, is only a timing risk because the -- first of all, when clients decide to sell assets or follow our advice to sell assets, they usually leave the money with us for redeployment. So we're not sitting on a melting ice cube. The opposite is actually the case. The majority of the money and you can see -- I think we talked about the high ratio of repeat clients last year and that remains to be the case. The majority of clients is interested in expanding their allocation to real estate, and the ones that are selling real estate, they mostly decide -- if not all of them decide to stay into real estate, but they simply want to take profit and recycle their money into real estate. So from that perspective, it's really about timing, but on a -- at balance, there's still an overhang of people wanting to -- or investors wanting to increase their allocation to real estate. The trend hasn't changed and if you look at the current environment, yes, the transaction markets is influenced by the fact that there is uncertainty coming from Brexit, from a potential slowdown of the global economy, from a potential uncertainty from the trade war. But at the same time, it also delivers a lot of arguments to invest into real estate because cash equities, as you know, gives you -- actually has underperformed and the bond market gives you nothing and that's for us the important angle. The trend is still intact and we see that trend to continue for the next years to come.

[Andre Remke, Co]

Yes. Okay. I get it. Okay. Perfect. Then a question regarding the transaction fees. The EUR 6 million you received in the first quarter is only, let's say, 50, 55 bps on the closed transaction volume, so your target on almost, let's calculate, 90 bps or so for the full year. So the same question here, how realistic is that fees for the upcoming transaction will compensate for that? Or could it be the case that this is a new normal with regard to transaction fees that we not strive for 1 percentage points but only for half of that? Or is there a certain trend in the market?

[Karim Bohn, CFO & Member of the Managing Board]

Well, I'll answer your first question first. We are confident that we're going to reach our transaction fee target. If you look at last year, the first 3 quarters, we are also lagging behind our full year target. However, what you -- what we saw in the first quarter -- the best answer is, no, there is no fee pressure on transaction fees. However -- and we talked about this a few times, Andre. The fee structure for German and international money is different. And a lot of the deals we signed -- a lot of sales we signed or closed came out of the deals of former Rockspring funds, which do not -- which didn't produce a disposal fee. But generally, when we collect a performance -- a transaction fee, it is still around 1%, and based on the funds we're filling right now, we believe the EUR 55 million to EUR 65 million is an achievable number.

[Andre Remke, Co]

So the compensation for -- of the lack of disposal fees we will then potentially see in the performance fee, right?

[Karim Bohn, CFO & Member of the Managing Board]

Some of it, you will. Some of it you will, some of it you won't because when we bought Rockspring, we didn't buy -- for the Rockspring funds, we didn't buy the carries of the existing funds, so that will -- these carries will go to employees with new funds we're setting up at Rockspring, such as Trans VII fund, we -- a new fund with which we are in marketing at the moment. For those funds, PATRIZIA will be eligible for performance fees.

[Operator]

The next question is from Kai Klose with Berenberg.

[Kai Malte Klose, Analyst]

I've got a question on Page 2 of the presentation. Maybe could you explain why and how much of the EUR 24.6 million income in the Q1 last year from net sales revenues and co-investments you now have adjusted them to compare to the EUR 2.5 million and why? And then how should we read your targeted EUR 30 million on Page 8 -- on Page 9, EUR 30 million income from net sales revenues and co-investment. Is this for you then also noncore or is it a one-off? And the second question would be on Page 8 of the report where you say that EUR 300 million of equity was waste. When and at which extent will this show up as AUMs in your total AUMs? Maybe you could give more guidance on that.

[Karim Bohn, CFO & Member of the Managing Board]

Kai, now the -- let me answer your first question first and that is with regard to the 24.2% -- sorry, the adjustment we took out to compare on a like-for-like basis, right? And the adjustment is actually described on Page 3. The principal investments of EUR 14.1 million last year and the EUR 10.5 million from co-investments, but the majority -- but what we have excluded is the EUR 14.1 million sales from legacy assets. The EUR 30 million for 2019 is probably half-half, half co-investments and half profits from legacy assets -- from sales of legacy assets.

[Kai Malte Klose, Analyst]

Sorry to interrupt but why is this for you now not core anymore? So why do you now describe it as kind of one-off fee in Q1 '18 result?

[Karim Bohn, CFO & Member of the Managing Board]

The principal investments, as you know, will run out the co-investment income. The reason our co-investment income was so low in the first quarter was mainly because the majority of that co-investment income will come in the rest of the year. In 2018, the revenues from co-investment income came from WohnModul. And those -- and WohnModul will again contribute to our co-investment income this year, but later in the year. That's the main reason.

[Kai Malte Klose, Analyst]

So the only thing which you would -- if I read that correctly, would -- should be seen as nonrecurrent of these EUR 14.1 million.

[Karim Bohn, CFO & Member of the Managing Board]

Exactly. That's correct. That's correct.

[Kai Malte Klose, Analyst]

Because I couldn't remember that in the last year, you described it as onetime or one-off, so just wanted to be clear. And the second question on this EUR 300 million of equity waste you mentioned in the report. How should we read that to be show up as AUM, as wasted AUMs or -- and could you give a time frame when this may be invested on behalf of your clients?

[Karim Bohn, CFO & Member of the Managing Board]

Well, the EUR 300 million is just 1 part in addition to the outstanding commitments, which will be invested in our target net growth rate of EUR 3 billion to EUR 4 billion.

[Kai Malte Klose, Analyst]

If I make them up and say we have EUR 300 million waste and EUR 500 million of assets sold and EUR 600 million bought, why have the AUMs then marginally but slightly blocked by EUR 100 million compared to year-end?

[Karim Bohn, CFO & Member of the Managing Board]

Because we closed more sales than we have closed acquisitions. And remember, committed -- raised capital is money we raise and do invest, but do not count as assets under management. Assets under management are only -- we only consider invested in -- money invested in real estate as assets under management. So committed capital is not part of our assets under management as compared to U.S. companies. U.S. companies usually consider capital commitments as part of the AUM. We don't. We think -- we only consider invested money into real estate as assets under management. And on top of the EUR 300 million, we have roughly EUR 1.4 billion or EUR 1.5 billion of outstanding capital commitments which we expect to be deployed this year.

[Kai Malte Klose, Analyst]

And a last question on that, may you could indicate from which region and from which kind of client -- from what kind of clients these EUR 300 million relates? Is it new clients, existing clients, new German or Asian clients? Just to get a feeling on how the fundraising has been developing following last year's acquisitions?

[Karim Bohn, CFO & Member of the Managing Board]

It was -- the EUR 300 million were raised from Dutch regions, so German-speaking regions and repeat clients, repeat clients.

[Operator]

Your next question is from Martin, Manuel with ODDO BHF.

[Manuel Martin, Analyst]

Sort of 2 questions, if I may. One follow-up question on Andre's questions on the transaction volume and the growth in AUM. Could you remind us on your organic AUM growth guidance? You said EUR 3 billion to EUR 4 billion. Is that including or excluding valuation gains? That would be the first question.

[Karim Bohn, CFO & Member of the Managing Board]

Manuel, the AUM -- the target AUM growth is -- usually comes out as the mix, but the target we have at the moment, the EUR 3 billion to EUR 4 billion is the net of acquisitions. And remember in the -- over the past years, except for 2017 and '18, usually, the valuation -- or the revaluations across the portfolio remained below 1% [indiscernible] GBW.

[Manuel Martin, Analyst]

Okay. Okay. All right. Then second question, last question would be about -- in the inorganic growth, what's the current situation? Do you still have targets on your radar screen maybe for this year or next year? Or how would you describe the current situation for you?

[Karim Bohn, CFO & Member of the Managing Board]

Well, I mean, of course, we do look at M&A. We have a functioning M&A team, which does nothing else but screening the market and having discussions with potential targets or partners. As you know, our focus is really on buying complementary businesses that add value to our product base and ultimately add value for our clients. With regard to timing, I do not want to give guidance because timing is not really our focus, but I think we have shown over the past years that we do deliver on M&A. But I can't tell you whether it's going to be '19 or '20. It is -- it would be the wrong focus to focus on timing rather than the quality of the company we're buying.

[Operator]

[Operator Instructions] The next question is from Georg Kanders with Bankhaus Lampe.

[Georg Kanders, Investment Analyst]

I have one question here. Do you expect additional performance fee from Dawonia? Is it reflected in your guidance? And the second question I have, you had still some restructuring costs in Q1. Is this is now the end of restructuring costs?

[Karim Bohn, CFO & Member of the Managing Board]

Georg, from -- with regard to performance fees, we do not expect additional performance fees coming out of Dawonia this year. We have collected EUR 18 million in performance fees from Dawonia already this year and the remaining performance fees will come from other vehicles across the various funds. With regard to reorganization expenses, we will still incur reorganization expenses this year, maybe leftovers from last year but it will be in the single million area, single digit million area.

[Operator]

Gentleman, there are no more questions registered at this time, and I hand back to Karim Bohn for closing comments.

[Karim Bohn, CFO & Member of the Managing Board]

Thank you, Arianna. Thanks, everyone, for attending the call on our financials for the first quarter of 2019. We're looking forward to talking to you on this call when we report on the second quarter of 2019 or the first half 2019. In the meantime, we're looking forward to seeing most of you on the road over the next weeks. Thank you very much.