S Immo AG

VSE:SPI

Earnings Call Analysis

S IMMO AG Reports Strong Half-Year Results Amid Challenges

S IMMO AG, despite a challenging economic climate marked by increasing interest rates and high inflation, has delivered a solid set of half-year results for 2023. Total revenues surged by approximately 34%, climbing to EUR 161.4 million. Particularly, rental income saw a significant jump from EUR 73 million to EUR 93.9 million, underpinned by a robust occupancy rate of 91.3% and strategic acquisitions that boosted gross profit by over 35% to EUR 86 million. The hotel sector's gross profit also increased by more than 50%, indicating a rebound to pre-pandemic performance. Nevertheless, the company faced valuation challenges, common across the sector, reporting a EUR 80.8 million loss. Yet, a key operating metric, FFO I per share, increased to EUR 0.71. S IMMO's strategic shift from German residential assets to higher-yielding investments in CEE and Austria is contributing positively to its portfolio's performance.

A Robust Financial Performance Amidst Challenges

S IMMO AG has demonstrated resilience with its half-year financial performance for 2023. In challenging times of high inflation and increasing interest rates, the company has seen total revenues soar by nearly 34% to EUR 161.4 million, with rental income jumping from EUR 73 million to EUR 93.9 million. This marks an increase of EUR 20.9 million, reflecting the success of strategic acquisitions and disposals. Notably, the occupancy rate remains strong at 91.3%, showcasing effective asset management. Gross profit has surged by over 35% to EUR 86 million, while gross profits from hotel operations have seen a more than 50% increment to EUR 8 million.

Significant Operational Achievements with Positive Outlook

EBITDA has reached a robust EUR 68.1 million, an improvement from EUR 48.9 million in the previous year. However, the property valuation resulted in a decline of EUR 80.8 million due to market conditions affecting the entire sector. Despite this, the essential operating indicator, Funds From Operations I (FFO I) per share, has risen to EUR 0.71, evidencing strong operational performance. The company remains optimistic about delivering positive results once the macroeconomic environment stabilizes.

A Strategic Shift in Portfolio Composition for Higher Yields

S IMMO has consciously restructured its portfolio, significantly reducing its residential assets from 30.6% to 11.2% and increasing its office sector holdings from 46.5% to 64.7%. The shift towards higher yielding investments aligns with the company's strategic decisions to exit low-yielding markets, particularly residential properties in Germany, and focus on Central and Eastern Europe (CEE) and Austria for better returns. This portfolio rebalancing is designed to harness higher Loan-To-Value (LTV) financing opportunities and improve cash flows.

Financial Resilience and Conservative Debt Profile

The company's financial resilience is underpinned by a conservative EPRA Loan to Value (LTV) ratio of 35.4%, a slight decrease from the previous 39%, which indicates sound equity ratios. Over 60% of the company's financing comprises noncurrent bank loans, with 92% on a variable rate, which are fully hedged, offering protection against interest rate fluctuations. The average cost of funding, including hedging, has seen a marginal increase to 2.29%, maintaining an affordable cost of capital.

Ownership Structure and Market Stability

Following the acquisition by CPI Group, the company's free float stands at 11.6%, with the rest owned by CPI. The share price has remained relatively stable over the last six months. Market coverage and target prices range between EUR 14.50 and EUR 18, with recommendation ratings skewed towards buy, suggesting confidence amongst analysts.

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the S IMMO AG Half Year Results 2023 Conference Call. [Operator Instructions] Let me now turn the floor over to your host, Herwig Teufelsdorfer.

[Herwig Teufelsdorfer, executive]

Thank you very much. Welcome to the '23 half year earnings call. Hello to everybody. I think it goes without saying that we are living in challenging times and professionality is absolutely necessary. Increasing interest rates levels, high inflation are defining the macroeconomic environment. Nevertheless, we've been able to achieve a very good result on the operating side to be seen in our gross operating figures as well as funds from operations [ one ]. And to step into the details of the financials, please let me hand over to my colleague, Radka Doehring.

[Radka Doehring, executive]

Thank you, Herwig. Let me also welcome you to our conference call concerning S IMMO's half year results 2023 and we are very proud of S IMMO improved key figures, such as significant increase in rental income and gross profit and all of this in this challenging environment.

Please allow me then to give you an overview of our financials starting on Page 4 of the presentation. As I just said, we were able to generate very strong operating results. Total revenues increased by almost 34% to EUR 161.4 million and rental income increased from EUR 73 million to EUR 93.9 million. The occupancy rate entered the satisfactory stable level of 91.3%, which grows our strong asset management approach.

Gross profit has risen by more than 35% to EUR 86 million. In addition, gross profit from hotel operation improved by more than 50% to EUR 8 million, and it is predicted that the hotel sector is to fully recover to a pre-COVID level in this year.

The marketing challenges are mostly visible when looking at the valuation result. This is not a problem concerning S IMMO only, but rather the whole sector. Valuation totals is of a minus EUR 80.8 million and we will be talking about the results in more detail later on. FFO I per share, an important operative indicator has risen to EUR 0.71 per share. EPRA LTV stands at 35.4%. And this is a conservative level that points out our robust equity ratios.

Now moving some more details on Page 5. So the rental income increased to EUR 93.9 million compared to EUR 73 million in last year. This is an increase of $20.9 million. This increase is largely based on acquisition of [ let ] building, this once again confirms our strategic approach of selling low yielding residential assets and we're investing in higher yielding ones.

Revenues and results from hotel operations are also significantly higher, indicating the progressing recovery of the segment after the COVID pandemic.

Property operating expenses naturally increased due to acquisitions, but also higher energy prices. But at the same time, gross profit increased contributable as well from EUR 63.4 million to EUR 86 million. The results from property disposals [indiscernible] depreciation or appreciation are usually already reflected in the results of property revaluation before the actual closing of the transaction.

On the following slides, we see a strong EBITDA totaling EUR 68.1 million compared to EUR 48.9 million of last year.

On the next slide -- sorry, it continues -- EBITDA continues also the beginning of that slide. We see a decrease in the results from property evaluation of minus EUR 80.8 million. And we, later on, on Slide 8, we'll see the division by countries. Overall, the results for the period amounted to minus EUR 40.2 million. Again, the bottom line may be negative, but we want to emphasize once more that the operating figures in the P&L are very positive and that we are confident that we will be able to present significant positive results again once the macroeconomic environment has recovered.

Now on the following slide, we have the development of the FFO I, when we see a strong a strong increase from rental income and the hotel operations, bringing our FFO to EUR 49,856 until we were able to increase the FFO, which is our most important operating key figure, significantly.

On Slide 8, we see valuation results where we see that EUR 80.8 million negative valuation mainly concerns Germany, which is primarily due to the constellation of our portfolio there. Our low-yielding properties are affected most by the rising interest rates and high inflation rents. In Germany, the valuation totaled minus EUR 80.5 million. The valuation result of Austria were also negative, although in a much smaller scale. By the valuation of the results of CEE region was positive at EUR 7.2 million.

Looking now at the growth rate at our financing profile, we see that the average -- weighted average final maturity of our loans is 5.5 years and the average weighted maturity of our bonds is around 6 years.

As you can see, the majority profile is well spread over the next years. The EPRA LTV was at 35.4% at quarter end with a net debt of EUR 1.1 billion corresponding to a property value of EUR 3 billion. This is a significant reduction compared to the end of the year when EPRA LTV stood roughly at 39% and represents a very conservative level.

Broken down, we can also see that a little bit more than 60% of our financing are noncurrent bank loans and 28% are noncurrent bonds. The bank loans add up to EUR 1,033.9 million, 91% (sic) [ 92% ] of which are on a variable rate and 100% of this variable rates are hedged.

Concerning average cost of funding naturally, in the current market, our cost of funding include hedging increased slightly and is now at 2.29%.

And I now hand over to Herwig to walk you through the share data, strategy and portfolio.

[Herwig Teufelsdorfer, executive]

Thank you very much. Due to the -- if we look at the shareholder structure, which is necessary to understand all the other things in this regard. You know that maturity has been taken over last November by CPI Group. So we see at the time a free float of 11.6% and 88%, which is owned directly or indirectly by CPI. This also shows us that there is not [indiscernible] movement within the share price, so we've been improving quite well seen on the long term, starting in 2016. But looking at the last 6 months, more or less, our share price stood stable. Nevertheless, the coverage and with the target prices is between EUR 14.50 up to EUR 18 and recommendations are 2x by a onetime accumulate.

Let me come to the strategy and business model, which has not really changed in a way. The thing is that we're still conservatively investing, trying to keep a high-quality portfolio and building up a bigger portfolio with strong focus on our earning power and established access to the capital markets, which is still necessary and important for us.

What we have been changing in terms of strategy is, in fact, that we've been stepping out of markets where we have quite low yielding, meaning especially with Germany, where we had a big portion of residential so far, but being pulling this off throughout the last 10 months, I think, quite successfully and redeploying the equity out of these sales into CEE and Austria investments, building up stronger returns due to the fact that we can have higher LTVs in financing over there on the one hand as well as also getting rid of our residential portfolio.

Let's have a look at the portfolio on Slide 14. And I think the composition of the portfolio itself is one thing, but absolutely in line what I've been saying in terms of our changed strategy, of the yielding level. So if you just look at residential as of 30th of June, we have a proportion of 11.2% coming from 30.6% as of half year 2022. This is tremendous change and reflects the successful change of our strategy.

On the one hand, the redeployment of the released equity meaning plus 20 percentage points in the office sector starting from 46. 5% and ending up by mid of this year at 64.7%, also reflected in the IFRS book values of these segments starting from EUR 1.379 billion in 2022 and having reached EUR 1.844 million.

If we go on and having a look at the regions, so we've been generating strong earnings and cash flow throughout of adapting our strategy and performing this, meaning that book values in Germany due to the sales have decreased, let's say, almost by more than 50% compared to last year. The share of Austria or the book value in Austria has increased due to the fact that we've been acquiring here as well and decreased -- CEE there was more or less plus 70% in terms of book values. This is also reflected in the total revenues, meaning that we've been deploying the released equity out of Germany, where we had around 3-point-something percent last year into higher yielding 7%, 8% yielding in CEE countries, meaning that we've been coming up from EUR 60 million up to EUR 104 million in CEE countries and also almost increasing our gross lettable area, almost 80% up to 714,000 square meters.

Staying with the portfolio overview, but moving on to Slide 16. If we break it down by regions, residential book value has decreased to EUR 319 million coming from EUR 909 million, meaning that in Germany, we still have 39% of our residential portfolio and Austria was 7% last year.

Retail is more or less unchanged in the regions, but tremendous changes, as already mentioned in office, meaning that Czech Republic is a new part of our office portfolio by a share of 7%, and in Austria the share has come to 13%.

If we look at the yields, this is reflecting more or less the markets as well. So we end up in a rental yield as of mid of this year at the level of 6.7% for office, 4.2% at residential, meaning that there has been a shift of almost 30% coming from 3.3% by mid of last year.

Retail is at 8.4%, hotels 6.4% and in total, there was an increase from 5.3% up to 6.6%. This also reflects innovate change from the low-yielding residential portfolio changing to office buildings in CEE and Austria.

Let's move on to acquisition and sales in the next step. And let me start with the sales. As of 30th of June 2023, we have been signing contracts, sales contracts were 167 properties with a total volume of EUR 617 million. Most of them closed but some still in closing process due to the fact that we are selling off in very small portion. So the average sales price of our properties is that low that it's usually not a share deal, but it is asset deals. And therefore, the closing is happening with the change of ownership in the land registry.

Currently, we are looking at the remaining portfolio and checking the possibility for further sales in Germany with a total volume up to EUR 340 million, including residential as well as commercial properties. And we are also having a look on our Austrian portfolios, maybe getting rid of smaller parts of it and changing into less number of objects, but higher volume per object.

If we move on to Slide 19 and have a look at the acquisitions, starting with Czech Republic, so far, we've only been represented by 2 smaller hotels, in the Czech Republic. We've been acquiring in April 2023, from CPI, the portfolio in the amount of EUR 167.7 million with annual revenues of EUR 8.4 million and this means that this acquisition comes into account for 2 months by half year end results, but ending up innovated another EUR 4.2 million are expected in terms of revenue for the second half within our results time.

We've also been acquiring in Austria, acquisition of the Twin Towers and latest valuation, as you know, out of the [indiscernible] below EUR 200 million. Twin Towers representing 66,000 square meters and EUR 12.6 million revenue, meaning as this was taken over by beginning of July, that an additional EUR 6 million of rental income will be seen in the results of this year.

We have a clear strategy with this acquisition as it is a very prominent building, I think we are on the right way by following the strategy of referring to ESG within -- starting this in a few years in combination with the tube connection, which is going to be established by the beginning of the [ 30s ]. I think that at this time, we have M&A property in a prime location, and it will make a lot of sense for having invested in this.

Moving on to our next chapter, ESG. Let me just summarize the ESG highlights in this regard. So we've been presenting ESG strategy in the third quarter of 2022 and an adjustment and alignment with CPI took place by end of August. So these days, and I think it makes sense within the group to have them aligned and adjusted ESG strategy for parts of the group.

What have been the first implementation achievements in regard of the ESG strategy, the targets of having 40% of gross lettable area, certificated -- was certified in 2025 is already overachieved. So we are at the moment at the level of 50.8%, representing the commercial portfolio.

The integration of the ESG risks in the group-wide risk system was already performed and we are assessing the entire portfolio for compliance with new taxonomy criteria as well as 94.5% of the electricity purchased in 2022 already comes from 100% renewable sources. And again, still proud of it. And the aforementioning, we've been double awarded for nonfinancial reporting at the EPRA sBPR Awards 2022.

The aligned ESG strategy, you will see on Slide 23, meaning that we've been agreeing in the environmental sector on 32.4% reduction of greenhouse gas intensity as well as purchasing electric power on a 100% renewable sources basis by end of 2024, 10% reduction in energy intensity as well as 10% reduction in water intensity, both by 2030 compared to the baseline of 2019.

In terms of social sector within ESG, we've increased the share of certified buildings already mentioned before a group-wide introduction of green lease agreements, agreements always means 2 parties. So this also has to be accepted, but more and more, especially international tenants are insisting on this and we also have implemented completion of 8 hours of training per employee per year and having every 2-year survey on employee satisfaction.

Regarding governance agreements on the code of conduct with employees, mandatory annual employee training in this regard and also looking at all suppliers comply with the group-wide code of conduct of suppliers as well as the management board's remuneration is connected in terms of the achievement of the ESG criteria.

Yes. So that's it so far for the half year 2023 results. Thank you very much for your attention, and we are looking forward to answering your upcoming questions.

[Operator]

[Operator Instructions] So the first question comes from [indiscernible]

[Unknown Analyst]

First and foremost, thank you for the presentation, 2 questions regarding your disposal and also acquisition pipeline. So first of all, on the acquisitions, you mentioned it several times, disposing assets, [indiscernible] Germany, aiming to acquire in CEE and Austria. What do you have in a pipe there right now? Or what can we expect throughout the remainder of the year? And the second question regarding the outstanding disposals in June Germany to the tune of EUR 340 million. So we've seen some devaluations across the board, also the big players, [indiscernible] devalued by more than 5% or 6% and 7% at LEG. So you have a book value of EUR 340 million there. What cash includes do you expect in the end? And also a follow-up question, what is the average LTV you have on these assets, which are up [indiscernible].

[Herwig Teufelsdorfer, executive]

Thank you very much for your question. let me start answering the second one as the first regarding the disposals in Germany. So LTV in Germany is roughly below 30%. So lower than we have in average in the whole company. We've been mentioning that we are expecting to sell off, having a look on potentially selling of EUR 340 million.

What do we expect liquidity-wise in this regard. As a matter of fact, the markets traffic is on a very low level. We do not see any institutional so far. We are not expecting that institutionals are going to buy our portfolio due to the fact that it's in very small portions. And on the one hand and then on the other hand, age-wise, meaning from the building year, we are talking about buildings, which are between, let's say, 80 and 140 years old that we have, and this is usually especially to ESG requirements, not the stuff that institutionals are acquiring. We have seen slowing down the market in this regard.

Let's see how we performed till the end of the year. We are quite positive. We are with several potential buyers for the different assets in negotiation. But honestly speaking, it's very hard to predict where we will end up by the end of the year. I do not think that it will be possible to dispose the whole amount of EUR 340 million by the end of the year, but I'm quite positive that we will perform well till the end of the year if we compare it to the last 10 months that we've been selling off we've been portion-wise selling off, let's say, 2/3 of our residential portfolio within 10 months. And I think this is quite a good result.

So far, my answer on the disposals that become to the acquisition pipeline, we are testing and focusing on the CEE markets as well as on Austria and having let's say, in mind a few hundred million of potential investments throughout the next 6 months for redeploying our liquidity. Liquidity is roughly above about EUR 0.5 billion at the time. And I think that we would definitely be able to deploy a big portion of this throughout the next 6 months.

Let's see where there are opportunities if we see other opportunities within the group, meaning related party transactions. There is definitely one related party transaction in place, which was already announced, it will be the remaining compounds of the Wienerberg around the Twin Towers. This is where we are performing the due diligence at the time. And we are talking there roughly about 50% of the aforementioned EUR 511 million, which we announced a month ago. This will definitely be performed and let's see what is coming up then in the future. But we are open also for acquisitions from third parties if we find it would be in favor for S IMMO.

[Unknown Analyst]

Perfect. And congrats again for the good operational results.

[Operator]

Next question comes from Stefan Scharff, SRC Research.

[Stefan Scharff, analyst]

Stefan here. My first question is about Germany. You know we have a quite deep economic dip here, which makes a recession for the full year more likely and which fosters the banks to make it a stiff financing policy, and this might also translate into decreasing multiples. What is your view here in Germany and could there be a point where it's not good to sell anymore?

[Herwig Teufelsdorfer, executive]

Stefan, Thank you very much for your question. Could be a point where it's not good to sell anymore. I think we always have to have a look on what potential alternatives could be. And coming back to how our portfolio is structured due to the fact that the portfolio is, let's say, the average price of the buildings is quite low. We are selling off to people who are out of the neighborhood, let's say, the tax adviser, the owner of the pharmacy, other people, even small family offices who see that it could be favorable for them being invested. But at the time and reflecting on what you've been saying to the financing market and how the market is evolving in Germany, we are definitely the owners at the time, but I'm confident that we are able to sell off.

Yes, it can be the way. It's not unlikely that the prices are again decreasing. But as I mentioned at the beginning of my answer, it is always a question of the alternative. If we would have, let's say, products out of the 80s, 90s, where you would have the chance to make a refurbishment into EU taxonomy compliant product, it could definitely be an alternative to keep it and wait until the market is coming back, but our products, our buildings are structured. I do not think that this is an alternative because the environment. In this regard, even refinancing conditions are getting better, the interest rates are stabilizing. I think we -- it would not be in our favor missing -- we think waiting for this opportunity because it would not apply to our portfolio, so I would rather say, it is better to act quick even though accepting that the prices are coming down. I would not think that we would benefit from the market coming back and rather redeploying the released equity quickly in higher-yielding markets.

[Stefan Scharff, analyst]

So another question about Hungary. As you know, 2 months ago, CA IMMO said that Hungary is not longer a core market for them. And perhaps you can give us more color on how you see the market in Hungary and what you expect here on the acquisition side or for the total portfolio for the coming year?

[Herwig Teufelsdorfer, executive]

Okay. I think the only thing to say about CA IMMO is that this was a strategic decision stepping out of Central Eastern and Southern Eastern investment markets and concentrating on rather Germany, [indiscernible] Austria. So it's their decision. Doing that, that was the reason that they were stepping out. So it was more or less completing their strategy, their strategy where they have made the decision I think, some 2 years ago. How do we see the Hungarian market, I think that our proportion in there, our market share in the Hungarian market is quite a big one as we have roughly about EUR 750 million deployed over there.

And therefore, I do not think that we will further invest in Hungary. I think this is done for us so far. I think Hungary is very stable. We were not sure how people would react, our tenants would react the inflation, in regard of increasing -- the increase in the range by indexation, we have seen more or less no problems in this regard. And therefore, we are quite confident that the Hungarian market, Budapest market. This is what we are talking about. If you say Hungarian market, will stay stable as it was. But I think, fully invested in Budapest so far.

[Stefan Scharff, analyst]

Okay. Okay. And another question is your revaluation result. This was EUR 100 million swing, but at least the CEE valuation side was a bit positive with EUR 7 million. Can you give us a split here about the EUR 7 million plus, how they stick together?

[Herwig Teufelsdorfer, executive]

Yes. If we -- if you look at CEE the fact is that we are in a process of selling off 2 small objects in Prague and one of them is very close to disposal. So this revaluation is more or less sales driven by one of the smaller hotels impact that we are selling off, but the rest in terms of valuation was rather stable.

[Operator]

So right now, we have no more questions. Back to you, Mr. Teufelsdorfer.

[Herwig Teufelsdorfer, executive]

Thank you very much for your attention, for being interested in our half year results, and we wish you all well. And here you're latest in 6 months with the results on the whole year 2023. All the best, and goodbye. Thank you.