Immofinanz AG

VSE:IIA

Earnings Call Transcript 2019-Q1

[Operator]

Good day, ladies and gentlemen, and welcome and thank you for joining the IMMOFINANZ Conference Call on the Q1 2019 figures. [Operator Instructions] I would now like to turn the conference over to Dr. Oliver Schumy, the CEO of IMMOFINANZ. Please go ahead, sir.

[Oliver Schumy, executive]

Thank you. Dear ladies and gentlemen, welcome to our conference call on IMMOFINANZ results for the first quarter of 2019. These results demonstrate that we are continuing the very strong development from the previous year.

On Slide 2 is a summary of our highlights for the first 3 months, and we are quite satisfied with the improvements. Our properties had a solid occupancy rate of roughly 95%, and rental income increased by more than 10% to EUR 65.2 million. Adjusted for the effects from the initial application of IFRS 16, we see a plus of 4.1%. The result of asset management rose by nearly 12% to more than EUR 50 million.

The development of our sustainable funds from operations also underscores our stronger earning power. FFO 1 from the standing investment portfolio increased by 35% to EUR 28 million. With these results, we are well on track to meet our goal and generate FFO 1 of more than EUR 100 million in 2019.

Our financial profile has also grown stronger. Cash and cash equivalents increased to more than EUR 670 million, and gearing, based on the net loan-to-value ratio, now stands at around 38%. We also achieved a further reduction in our financing costs. Including hedging costs, we are now at 1.94%. So as you can see, we are making good progress. This is also reflected in the investment-grade rating assigned to IMMOFINANZ at the start of 2019 by Standard & Poor's Global Ratings.

I would now like to ask my colleague Stefan Schönauer to present the results to you in detail.

[Stefan Schönauer Bakk, executive]

Hello also from my side, ladies and gentlemen. Let me guide you through our profit and loss in more detail on Page 3 of the presentation.

As already mentioned, rental income increased by 10.5% to EUR 65.2 million. Our expenses from investment property declined by 17.3% to EUR 11.3 million. This was basically achieved due to the deduction -- the reduction in fit-out costs. Our results of asset management increased by 11.8% to EUR 50.4 million, our results for property sales came in with EUR 1 million and results of property development with minus EUR 4.6 million. Other operating expenses improved significantly by 37.2%., or if you adjust for the extra bonus payment in the year 2018 by 17.8%, if you take this adjustment from the previous year into account. So we came in here with minus EUR 10.7 million compared to EUR 17 million in previous year. Results of operations, we came in with EUR 36.8 million compared to EUR 35.5 million in 2018.

Revaluation results were positive, and this was predominantly achieved due to the acquisition of the second half of our joint venture in Na Prikope in Prague. And we here had a gain of EUR 7.1 million positive valuation result.

Operating profit or EBIT was EUR 43.9 million, and here, we've improved by 38.5%. Also again, our net financing costs were -- it reduced by 5.5% to minus EUR 14.2 million. Foreign exchange effect and other financial results were negative with minus EUR 9 million. This is predominantly because of the mark-to-market valuation of derivatives that formed around about EUR 7 million negative effect here. Our gains and losses from equity-accounted investments were roughly EUR 5 million, and this results to -- with EUR 4.5 million through the earnings contribution from S IMMO.

Finally so, our financial results were minus EUR 18.4 million compared to minus EUR 4.5 million in 2018.

Our earnings before tax of EUR 25.6 million, our taxes for the Q1 are 0, how come? This is because the positive deferred tax results outweighed the current income tax of round about EUR 3.8 million. So the net profit from continuing operations is EUR 25.6 million, and they are significantly higher than in the previous year.

Also, our discontinued operations contributed positively because we achieved or we received the reimbursement of taxes from our former Russian business. So we have roughly EUR 5 million of positive earnings contribution as a one-off result in this line. And this brings us to the net profit of the period of EUR 30.4 million compared to EUR 1 million in the previous year.

Let's now have a look on Page 4 into our FFO 1. As already mentioned, we see here fantastic improvements, again, compared to the previous year. Our FFO 1 came in with EUR 28.1 million. This forms a 35% increase, and this reflects also a 36.8% increase in FFO 1 share. So we are on a very good track to achieve our guidance for FFO 1 2019 that is more than EUR 100 million, excluding any kind of dividends from our interest in S IMMO.

For your information, we also stated here an adjusted FFO 1 that takes into account an accrued interest of the corporate bond 2023. As you all know, we issued this corporate bond in January, and the first coupon payment of this corporate bond will be due in January 2020.

So for not overstating this FFO, we took here the portion of potential coupon payment or interest on this corporate bond into an adjustment FFO 1 and there with the result of FFO 1 is EUR 25.8 million as stated in this table on Page 4.

Let's -- and then on Page 5, have a quick look on our maturity profile. We have a solid cash base still and could further increase our cash and cash equivalents to EUR 672.5 million. We also are in line with our guidance and target in terms of net LTV with 38.3%. We have, as already mentioned, successfully issued these benchmark-sized bond in January 2019 with EUR 500 million. And these proceeds, we used to repay more expensive bank financing. There was increase in unencumbered asset base to EUR 1.9 billion end of March. This includes also the stake in S IMMO that is unencumbered. And with the bond proceeds and this repayment of bank financing, we were again able to further decrease financing costs from 2.14% end of 2018 to 1.94% financing costs, including the cost of hedging. Our hedging quota, we were also again able to increase, and it is -- we're now already very close to 90%, with 89.2%, as you can see, at the bottom of Page 5.

Let me now again hand over to Oliver Schumy for the outlook.

[Oliver Schumy, executive]

Thank you. Ladies and gentlemen, as you can see, we have kept our promise. IMMOFINANZ is extremely well positioned, and we are, therefore, looking to the future with a great deal of confidence. Our robust balance sheet and our liquidity give us sufficient freedom for further acquisitions to strengthen our standing investment portfolio.

With respect to STOP SHOP, we plan to grow to around 100 locations, and thereby, consolidate in the mean -- or at the same time, our market leadership. In the office sector, we are currently evaluating acquisitions in CEE capitals like Warsaw, Prague and Budapest. We see this market as promising locations, which we know well. We are also very highly satisfied with our investment in S IMMO. The company recently presented good results for the past financial year and the first quarter. And we'll recommend a substantial increase in the dividend at the coming Annual General Meeting.

At our Annual General Meeting last week, IMMOFINANZ shareholders approved an increase in the dividend to EUR 0.85 per share. Our share buyback program is also continuing. We currently hold roughly 8.5 million treasury shares.

We would now be happy to take your questions.

[Operator]

[Operator Instructions] Our first question is from Jakub Caithaml of Wood & Company.

[Jakub Caithaml, analyst]

This is Jakub from Wood & Co. I wanted to ask about the amendments to the Articles of Association of S IMMO, which have been proposed a couple of days ago. Specifically, I would like to ask 3 questions. Firstly, why should other S IMMO's shareholders vote in favor of the amendments, which will, I'm afraid, use their say and what is going on in the company? That is, why do you think that the amendments will pass?

Secondly, what specific actions would you be pursuing with the kind of increased voting rights in the company? I mean, should it pass through? I mean what is the reason? What kind of changes would you like to see at S IMMO? And then thirdly, do you think that perhaps this could somehow undermine the cooperation between the 2 companies and the good nature of the talk?

[Stefan Schönauer Bakk, executive]

Jakub, this is Stefan speaking. Thanks for your questions on that one. Well, first of all, why is this now on the agenda? Why was this point addressed? We had our AGM, as you know, last week. We also received your strong recommendation from our shareholder base to have this point addressed in the agenda. So what we here plan to do is that we make use of our shareholder rights to bring this point to the agenda. It will be then, for sure, a decision of the shareholders present at the AGM of S IMMO to vote for this. We have -- we don't know yet if this will pass or not. I think this is something that we now put to the agenda. What we, however, know is that in the last AGM, when we already had signed the contract of acquiring this 29% stake in S IMMO, and this was also publicly known, the company S IMMO and all shareholders, except one large block, voted for this point on the agenda. And I think this is also a common consent on capital markets, it's a common principle in capital markets that one share should have one vote. And I think this is the answer to the questions. We also do not see here any harming point in the cooperation between IMMOFINANZ and S IMMO on working further on our plans that we communicated and working further on testing a combination of these 2 companies. And as you know, we are not able to say anything else than that we are working on this thing. So far, it's still confidential talks. But this was also confirmed by Ernst Vejdovszky yesterday on Bloomberg, I think, that this is something that will not stress somehow the relationship between the 2 companies.

[Jakub Caithaml, analyst]

I see, I see. Understood. And perhaps are there then any kind of any specific action that you have in mind that you'd like to pursue with the kind of influence that this could grant you? Or is this just a broader thing that you think it's correct that one share should have one vote?

[Stefan Schönauer Bakk, executive]

I think's it's one share that should have one vote. Then let's discuss next steps when we know how the AGM decided.

[Jakub Caithaml, analyst]

Okay. And perhaps just finally, is it correct that you would need additional -- essentially that you can use just around 10 million, 11 million votes, currently, you can't use your whole stake because of the 15% limit? So the turnout would be, as it was last year, you need another 12 million, 13 million, would that be correct to put this through?

[Stefan Schönauer Bakk, executive]

It is the following way. We have a limitation on our voting rights to 15%, but our capital, that means the 29%, will be fully reflected in such a voting exercise. And what is necessary to get this point through is at least 50% of capital voting -- sorry, 50% of voting rights, voting for this and 75% of capital. And we will have 15% of voting rights, and we will have 29.14% of capital in this AGM.

[Operator]

The next question is from Thomas Neuhold of Kepler Cheuvreux.

[Thomas Neuhold, analyst]

I would like to start with 2 questions on the P&L, if I may. Firstly, I noticed that expenses from investment properties were again down in Q1. Can you remind us what you think is the reason for run rate going forward?

[Stefan Schönauer Bakk, executive]

Yes. Expenses from investment property were again down. We also outlined that this was predominantly because of less spending on fit-out cost. I think we discussed this several times on this call. The last quarters in, let's say, the last 1, 2 years, IMMOFINANZ strongly increased the occupancy of the portfolio. And this was also accompanied with additional spending on fit-out, additional spending on maintenance.

As our portfolio is now already in very good shape as we have achieved nice and high occupancy levels, by nature, the spending on this level is going down. This is exactly what we also predicted when we gave FFO guidance. And I think we just see now this reflected in the figures as promised. Q1 was very good and very solid figure. I would even think that this is a little bit below average than what we will see in the total year.

[Thomas Neuhold, analyst]

Okay. And next question is on like-for-like rental growth. If I look on Slide 8, it looks like that in Austria and Poland and Romania, you had a negative like-for-like rental growth. I was wondering if you can give us generally an update of what you think in the key markets, how does the rent in your portfolio compare to market rent? Do you think you are at the market levels or do you see significant potential for decreasing or increasing rent once contracts expire?

[Stefan Schönauer Bakk, executive]

I think in all these 3 markets you mentioned that the reason for this negative like-for-like rental growth is because of some tenants moving out of property and we have to replace this tenant. This is not due to, let's say, an over or under-rented thing in the market. So this is not visible. I think in general, we see very positive markets in the office and in the retail segment. In the retail segment, we also have quite positive like-for-like rental growth everywhere. In the office segment, it is where larger tenants moving out in the one or other properties that we are already currently working on, on replacing. But it is not something like a structural thing. It's more a specific tenants that are moving out, and we are trying to get this filled again.

[Thomas Neuhold, analyst]

Okay. Understood. And my last question is on the development pipeline. Can you remind us? trivago, I think, was handed over to the tenant last year. Did it fully contribute to rental income already in Q1? And FLOAT and Düsseldorf, I think, was handed over in April. Will it contribute to rental income in Q2 already and then fully in Q3? And then, generally speaking, can you give us an update about the current status on new development in your development pipeline?

[Stefan Schönauer Bakk, executive]

Well, we have fully handed over trivago, as you correctly summarized, in 2018. We have handed over FLOAT during the beginning of 2019, with the last of the 6 building blocks handed over end of April. So from, let's say, Q3 onwards, you can expect these 2 assets being fully contributing to rental income. Our largest development that is currently ongoing is myhive Medienhafen. The tower that we built very close to trivago Campus in Düsseldorf with additional 22,000 square meters that will be finished in 2021 will be our first myhive building in Germany.

And other than that, we have -- and this is also visible or something that you can look up on Page 15 in our Q1 report that was published yesterday evening. It's on our website that you can see on Page 15. The other larger development exposures that we have are the one of the other STOP SHOPs that we construct and built and some redevelopments that are also under construction. For example, also, in Austria, the hotel at Wienerberg at our headquarter that will be finished this summer and will be fully operated from September onwards.

Other than that, no big development plans, no big developments in the pipeline in terms of, let's say, a couple of hundred million. We will use this instrument development to further grow our STOP SHOP portfolio and very selectively to grow on the one of the other land plot that we have still in the portfolio. But we will not start now very aggressively into big development exposure in a very mature and late stage of the cycle.

[Operator]

[Operator Instructions] The next question is from Christine Reitsamer of Baader Bank.

[Christine Reitsamer, analyst]

Christine speaking from Baader Bank. I have a follow-up question on the like-for-like rent development. You mentioned, Stefan, that very positive environment in general. I mean you have high occupancies overall. So when you look now for the next 1 to 3 years, would you expect that to be clearly positive for the group overall? I think we see other companies with 3% to 5% like-for-like rental growth at the moment, so maybe, I don't know, something that's for you in the cards as well going forward. That's the first question.

And the second question relates to what you mentioned regarding consolidation here, STOP SHOP follow-up acquisitions and development to consolidate the market. Could you just put a bit more color on that? If there -- what further types of products in terms of volumes are out there for you to acquire? Is that -- how difficult is it? And what are the yields? What do you expect to spend in developments and acquisitions over the next years? I mean I know acquisitions is -- it's difficult to forecast, but, yes, if you would have a wish list, where would you see yourself in, let's say, 2 or 3 years regarding that topic?

[Stefan Schönauer Bakk, executive]

Okay. I will start with -- thank you very much, Christine, and welcome back actually. Thank you very much for the question on like-for-like. Yes, we see positive development in these markets. And wherever there is the chance of renegotiating rent contracts, when contracts expire, we try also to make use out of this. Strongest like-for-like growth we see currently in the retail segment. We reported also roughly 5% rental growth 2018 compared to 2017. I think very strong figure here. We will also benefit from the strength if it continues, especially in CEE where we see market environment. Very positive at the moment in the office and in the retail segment and also in the transaction areas, where transaction volumes are increasing. So yes, I think we are in a positive environment and this something we also want to benefit from. Your second question regarding acquisitions that we plan, I think Oliver will take the one about STOP SHOP. Yes?

[Oliver Schumy, executive]

Yes? Welcome back, Mrs. Reitsamer, also from my side. Concerning your questions on our STOP SHOP portfolio, today we have 80 locations. I'm pretty confident that this year at least 5 to 7 locations will be added to the portfolio. Let's say, on average, we build 3 to 4 locations per year, always depending on suitable land plots and suitable catchment areas available. I have to say that the product is a quite good one and there are still a lot of catchment areas in different regions available where we can enter the market without, let's say, significant competition. So for this year, I'm quite confident that we can reach our target here. The main areas of interest are Poland for us. In Poland, we could add a few more locations. And of course, countries where our network is already dense and where, with an additional acquisition in this market, we can increase the number of our locations, but at the same time, eliminate competition. A good example for that was the STOP SHOP enlargement, which took place in November 2018, where we enlarged the number of locations. But also, at the same time, in the Serbian area, took out a direct competitor. So there is room for growth in a number of countries, and we're quite confident that we can go on here.

[Christine Reitsamer, analyst]

And when you say 5 to 6 added in 2019, is it only developments or including acquisitions, not only development?

[Oliver Schumy, executive]

It's, I would say, 50-50.

[Christine Reitsamer, analyst]

Okay. It is 50-50.

[Oliver Schumy, executive]

Not always that -- it's not always the chart, but I would say it's 50-50. There are still opportunities to buy. As our network is getting bigger, it's sometimes easier because we are, of course, now being actively watched from smaller competitors that eventually want to step out there.

[Christine Reitsamer, analyst]

Okay. And -- but also there, I guess, prices increased clearly over the last year. Is that -- or is that an unknown product that's not -- that wasn't that much in the focus of the investment markets?

[Oliver Schumy, executive]

At the moment, that we, by far, in our region have the biggest network and the maximum number of locations. It is possible to acquire retail parks for quite attractive rents, yes. This makes it so attractive for us to do so, and then, of course, benefit from the standardization that we bring to this product. So I would say there is still 1, 2 years more room to grow with the tendency that, in the west, the yields are compressing. In Germany, for instance, a retail park yield is around 4.5% at the moment.

[Stefan Schönauer Bakk, executive]

But on the other hand, let me add to this, we just did a nice and large acquisition for roughly EUR 90 million, and this was done on an 8% yield in the STOP SHOP area. So I think it's unique and outstanding growth opportunities for very attractive yields that we can still buy and where we also see this room for growth. This is something that we want to make use of in the market environment that we are in at the moment.

[Operator]

Sir, we have no further questions at this time. And I would like to hand the conference back to Oliver Schumy for some closing comments.

[Oliver Schumy, executive]

Ladies and gentlemen, thank you for attending the call, and thank you for questions. And hope to see and hear you after the summer break to our quarter 2 results. Thank you very much.

[Operator]

Thank you very much, sir. Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.