S Immo AG

VSE:SPI

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the S IMMO conference call regarding the Q3 results 2020. [Operator Instructions] No I hand the call over to Ernst Vejdovszky. The floor is yours.

[Ernst Vejdovszky, executive]

Good afternoon, ladies and gentlemen, and welcome to our conference call for Q3 2020. I think we can all agree that 3 very challenging quarter is now behind us. Obviously, the COVID-19 pandemic has a major impact on the results we are presenting today. And we will give you some more insight into this during our presentation, but, for now, let me tell you that S IMMO is well prepared for the upcoming year.

We remain optimistic that there will be a vaccine in the near future, and that things will start to relax and to improve. In the meantime, we are card to limiting the impacts of the crisis at task, which is facilitated by the fact that we have a strong, well-diversified portfolio. But let's go into some more detail and how our business model puts us in a good position to deal with the crisis and flip over to Slide 2.

If you ask me who we are and how we do things, here are the general answers. In our portfolio management, we take the long-term view and apply to a value-generating strategy in combination with a diversification across use types and geographies. In difficult times, it helps tremendously that we are an established player in the market, and that we have great, in-house expertise and a strong asset management. We follow a very sustainable financing strategy with a well priced maturity profile and has a land bank with quite some potential.

Apart from that, project's something we do opportunistically. All of that translates into a high-quality portfolio and balanced risk reward ratio, continuing dividend payments even in difficult times and a stable credit rating. I talked about diversification on the next slide. You can see just how diversified our portfolio is.

Our total book value of EUR 2.4 billion is composed of 31% residential, 40% office, 19% retail, 8% hotel and 2% of land plots. As you can see on Slide 4, geographically, about 2/3 of our portfolio allocated in Germany and Austria and about 1/3 in CEE. The book value of our project pipeline amounts to about EUR 77 million in Germany and about EUR 12 million in CEE. The book value of our land bank corresponds to a potential lettable area of 400,000 to 600,000 square meters. I think it is pretty obvious just how much potential such a figure holds.

Also, from the geographical distribution of our project pipeline and land bank, it's quite clear in which direction we are headed, namely Germany. In Germany, we are not only present in Berlin, but have expanded also to cities like Latvik airport over the last few years, where we identified significant potential.

But let's now go to details of our results. For the second quarter, our diversification helps significantly to mitigate the effects of the corona crisis. On this slide, you can see that total revenues decreased from EUR 154.5 million to EUR 129.9 million. Partly surprising, the majority of the impact comes from our hotel business, where revenues declined from EUR 42 billion to EUR 14.7 billion due to the hard-hit shareowner heads on city raging wildfires. However, could also reduce costs from EUR 28.6 million to EUR 14.8 million, meaning that our project was not impacted partly at the top line of this.

Our rental income increased from EUR 88.2 million to EUR 91.5 million. However, corona led to an increase of bad debt of about EUR 3.5 million. As we cut back on other cost items, property operating expenses only increased by EUR 0.8 million over prior year. Still, our gross profit decreased from EUR 82.5 million to EUR 71.5 million. This is nothing to be happy about, and we will continue our strong efforts to limit the impact of the crisis. However, things could be much for us. And what has been much worse we had not had the portfolio we have, and if we have not done our best operationally to minimize the corona impact.

In line with gross profit, EBITDA went from EUR 67.8 million to EUR 57.3 million.

So flipping over to Slide 6, you can see that despite the effects of the corona crisis, and due to our diversified portfolio valuations, we're positive and reached EUR 3.4 million. Of course, we couldn't make the record high of last year, and we have ups and downs within this number. But to have a positive net figure is something we are quite happy with given the circumstances.

Our financial result is negatively impacted by the missing dividend payments. In comparison to prior year, the overall shortfall in dividends from our stock exchange dated investments amounts to about EUR 10.7 million and explain most of the net change in the financing area.

On the tax line, you can see an improvement of about EUR 21.2 million, which is mainly due to the shortfall in property valuations compared to prior year. Overall, therefore, our consolidated net income came to EUR 22.3 million as opposed to EUR 158.9 million last year.

To summarize the main driver behind these developments, lower but still positive property valuations and a reduced net LTV.

Flipping over to Slide 7, you can see that our cost of funding, including funds and hedging costs, came to 2.29%. The average weighted final maturity of our long-term loans amount to 5.5 years. The average weighted maturity of our bonds is as much as 6 years. In addition, we can draw unused credit lines of EUR 63.3 million.

As at September 30th, total LTV came in at 47.7% at quarter end. Splitting it up, the LTV for secured financing was 32.6%, and the LTV for unsecured financing came to 15.1%.

I've told you that the average maturity of our loans is quite long, but I'm also quite happy in times like these that the individual maturities are spread out over relatively small manageable packages.

On Slide 8, this fact is shown in more detail. Our next somewhat bigger maturity is as far out as 2024, and even that is just EUR 100 million. In general, this is a profile I will not lose sleep over even in challenging times.

Flipping over to Slide 10 (sic) [ Slide 9 ]. We'd like to give you a bit more insight on our investments in CA Immo and IMMOFINANZ. Both companies are valued at their respective market price, a book value of about EUR 383 million at quarter end, which, as you all know, was heavily impacted by the corona crisis, and was at a very low level compared to right now. At yesterday's prices, the value of the total investment would be significantly higher and would amount to about EUR 428 million.

But in the real estate industry, the midterm perspective is represented by NAV and EPRA NAV, which are significantly higher than the current market prices for both companies. The valuation of both shares is booked for other comprehensive income and doesn't impact our P&L via valuations. The cumulative purchase price of those investments was about EUR 477 million, and, so far, we received EUR 42.7 million in dividends.

On Slide 10, you can see some of our KPIs in a yearly comparison. To start with, EPRA NAV was impacted by the negative valuations of IMMOFINANZ and CA Immo and came to EUR 23.7 per share as compared to EUR 25.09 as at Q3 2019. A book value per share amounted to EUR 18.53 per share. Our FFO I was EUR 33.3 million. If we back out the dividend income from both this year and prior years, FFO will improve comparability, we are talking about the decrease of about EUR 8.9 million.

Given the record high valuations of last year that we didn't have now, our earnings per share came down at amounting EUR 0.31 per share. On the other hand, our equity ratio increased from 41% to 44%, but LTV remained on a similar level and stood at 47.7%.

Let me now spend a few ads on the development of our share price. On Slide 11, we plotted the share price development since the beginning of the year. Of course, like everybody else, our stock took quite a hit and devalued by about 34.9%. This is quite in line with the general market development and a much better performance of the IATX.

And with that, let me now hand over to Friedrich, who will talk about the COVID situation and our project pipeline and land bank.

[Friedrich Wachernig, executive]

Thank you, Ernst. Good afternoon, ladies and gentlemen, and a warm welcome also from my side. Before I start to explain the impact of the COVID-19 pandemic on our business, let me emphasize once more that S IMMO is well equipped to handle the current challenges. We have a high-quality portfolio, an experienced and competent team in all markets and are constantly in close contact with all of S IMMO's stakeholders.

Obviously, the pandemic still has an impact on our portfolio, especially given the current rise in infection numbers and restrictions. We are in the middle of the field second wave in Austria. Hotels, restaurants and shops are closed again since a few days now. We see similar developments in many other European countries as well. It seems likely that the situation will worsen before it recovers, but it will recover, for sure. Let me give you a quick overview of the effect COVID-19 has on our business.

As for rental income, we had to make valuation allowances of EUR 3.5 million in the first 3 quarters of 2020. Regarding our hotels that are operated through management agreements, for the first 9 months of this year, GOP was down by about EUR 13.5 million compared to the same period last year. Still it is positive to note that we could compensate the vast majority of the income loss by reducing expenses and ended the quarter with a GOP of about 0.

Another impact is that due to COVID, not all expected dividends were distributed. And I'm sure you're aware of, IMMOFINANZ decided to waive the dividend for 2019. CA Immo paid out the dividend as planned. Therefore, the dividends received by us dropped significantly below last year's figures.

On a positive note, we can confirm that we don't see any impact on debt financing markets. And even better news came from the vaccine market during the last days.PAUSE At least 2 vaccines are me inches away from starting the approval and authorization process. This makes us very optimistic that we will see a steady recovery in the economy starting in spring 2021.

Still, there are a lot of uncertainties, and we cannot really estimate the full impact of the pandemic on our way of living, working and socializing just yet. But let me tell you our assessment of the various asset classes. Let's start with the residential segment. Here, we do not see any impact on the rent levels or vacancy rates. Quite to the contrary, we are already seeing positive effects on demand and price increases.

Moving on to office. These last few months have shown us that remote works can be useful in comparison to working in a physical office, but offices will remain essential for collaboration and representation. Apart from that, we need to distinguish between various industries and work requirements. Not every job can be done from home. Over the last years, also the square meters per workstation have increased throughout our portfolio. It is safe to say that the concept of modern office and open office spaces might be worth reconsidering. If at all, we have only seen marginal effects on our office portfolio so far, and I am very convinced that offices will not see a significant decline in demand, especially if we -- if they are well located, efficiently planned and reasonably priced.

Now the retail segment. It's not a secret that there has been a trend towards online retail for some time now. That actually started long before COVID-19 was an issue. Obviously, that differs a lot between different types of retail and retail properties, but I cannot stress this part enough. Shopping centers and high streets offer a shopping experience that cannot be replaced by any online shop, and multichannel retailing will remain very attractive. It is, therefore, our conclusion that classic retail and online retail will continue to complement each other in a way that is beneficial for both, as we have seen this in the past already.

As for hotels, it is clear that it will take this segment the longest to reach the pre-crisis level again, but we are sure that there will be a strong recovery and a lot of catch-up effects as soon as there is a treatment or a vaccine against COVID-19. At the same time, it is not to be feared that not all hotels will outlive this crisis. So the number of competitors will decline, and the quality and location will be even more decisive. We expect a total recovery within the next 2 to 3 years.

As an overall conclusion, let me emphasize, this crisis, as all the others have, will pass. And our business is, by far, strong enough to master this, and we are very optimistic to be back on the growth track in 2021.

Speaking of growth, let me now tell you about our latest acquisition. We purchased the Zagrebtower office complex in Croatia's capital. This acquisition is a logical continuation of our commitment in Zagreb market is developing very well, and the demand for state of the art offices has risen briskly in recent years. The complex will enhance our CEE portfolio and make a key contribution to our earnings.

Now some facts on the building. This complex was completed in 2007 and consists of a 22-story office tower and a 9-story, low-rise building. Total area totals about roughly 26,000 square meters, all of it fully let out. The tenants include the Croatian Ministry of Economy and Sustainable Energy, buyer -- the company's buyer and Deloitte, just to name a few. The property is located in the Eastern business district, which represents one of the most highly sought after locations in Zagreb. It offers excellent connections to the public transportation system, meets high sustainability standards and has a BREEAM excellent certificate.

We are very happy to have it in our portfolio, but that is not the only way to grow. We are also focusing on project development like on the next slide. Perhaps you know that we purchased an area of roughly 9,000 square meters at the beginning of last year and are planning to develop a modern and sustainable office building with a total area of up to 38,000 square meters. So this building is going to be located on Váci út, one of the main hubs for office space in the Hungarian metropolis, very close to the metro. We are heading for the building commission for next year.

As I'm sure you already know, we are also focusing on Germany, as Ernst already said, especially on the commuter belt of Berlin.

On the next slide, you can see that we own a land back of about 2.4 million square meters of undeveloped plots by now. Currently, we have around 30 projects for medium- and long-term development. Mostly, we are striving for residential usage. 5 of these projects are currently underway. The average acquisition costs amounted to roughly below EUR 14 per square meter, one for EUR 14 per square meter. The purchases in the Berlin's commuter belt are priced precisely in line with our strategy of buying on an anti-cyclical basis and securing earnings for the future.

We see very attractive, long-term opportunities and significant value enhancement potential in these developments. At the same time, the downside risk of these investments is quite limited according to the low purchase prices. And I think it is safe to say that the pandemic has brought new dynamic for this area with the demand for residential units with enough space and green location constantly rising.

Moving on to the next slide. Let me summarize our investment strategy, and this is the last slide. S IMMO has been pursuing a sustainable and prudent business policy for more than 3 very successful decades with the aim of constantly creating future income. We apply a business model that is directed towards 3 dimensions of time, anticipating property cycles and benefiting from them. So in the short term, we evaluate at what time it makes economic sense to buy standing properties that generate immediate revenues. Currently, we are only investigating very selectively, but in all of our markets.

In the medium term, we search for properties that allow for quick planning and construction progress. This means that we -- that the project is ideally completed within 3 to 5 years. At the moment, we do not have a project under construction, but we focus mainly on zoning and planning activities in Bucharest, Budapest and in Berlin. For this end, our local experts continuously monitor the markets where S IMMO operates and anticipate trends in the property sectors.

And finally, in the long run, we are going to work on our land bank in the outskirts of Berlin.

With that, let -- with that, I would like to thank you for your attention, and we are looking forward to discussing your questions right now.

[Operator]

[Operator Instructions] And the first question comes from Andre Remke from Baader Bank.

[Andre Remke, analyst]

Yes. 3 questions from my side, please. I prefer to do one-by-one. The first question is on the acquisition of the Zagrebtower. Did I get it right that this is already included in the balance sheet as of September, i.e., the rental income will contribute in full for the first -- the last quarter? And could you give an indication on the acquisition yield? This is the first question, please.

[Ernst Vejdovszky, executive]

So you are precisely right. Already -- it's already on the books of S IMMO, and that will contribute for the revenues. And regarding acquisition yield, you know that we made quite an interesting yield as it is more or less fully let, quite well built, building. And it's in the range between 7.5 and 8.

[Andre Remke, analyst]

Okay. Excellent. And you mentioned to look at further acquisition probably more selectively. Is there a change in the overall strategy for now given the second phase of the pandemic? Or in general, could you elaborate a bit on your current pipeline? Could we expect more to come probably already until year end? Or do you really believe that buying opportunities could arise more next year? So as you very experienced in your markets, any indication here would be helpful.

[Ernst Vejdovszky, executive]

Both. I guess, we are always cherry picking all over where we are active in all of our markets. So definitely, Berlin, and also the secondary cities. For the outskirts of Berlin, we are shopping around, cherry picking and taking opportunities. So our strategy will remain the same, but we will be active on standing properties. And perhaps there will be also some more acquisitions on that side, but, also, we stick to our strategy on acquisition of land for building and constructing within the midterm. And definitely, the outskirts of Berlin will remain very interesting for the mid- to long-term also for our company. So no change in the strategy.

[Andre Remke, analyst]

Okay. And the last question on your slightly negative valuation result in the third quarter, I calculated EUR 7 million, does this relate to -- it's not a huge number, I know, but does this relate to CEE? Or if so, is this slide for certain assets or type of assets or buildings? Or is this just in general to reflect higher yields in such markets? And very last follow-up here. Do you expect further valuation movements on your portfolio with the year-end valuation, at least from today's perspective?

[Wilhelm Bayer, executive]

Yes. Thanks for the question. This Wilhelm Bayer speaking. The answer is it's -- like you said, it's small valuations individually. There's no general yield shift that we booked in our financials. Most of it relates to CEE. The vast majority of the EUR 7 million in the specific properties that are -- majorly by the crisis, which is a retail shopping center in Romania. And the rest is our hotels that are not booked at cost in Slovakia, in the Czech Republic. So to the second wave, that's the reason.

Yes. And your last question, what do we expect for year-end? If only we knew. Let's see what the situation will be like at the end of December and how everything falls out. I think you hinted at it. The major piece will be yield expectations of the appraisers. And that's something we simply don't know yet.

[Operator]

So next up is Stefan Scharff from SRC Research.

[Stefan Scharff, analyst]

Yes. Stefan here from SRC from Frankfurt. I have just 2 small questions. The first question is the write-downs of the rents receivables. You stated it was about EUR 3.5 million in the first 9 months. Perhaps you can say a little bit here more if you expect some of the money coming to a later point in time and perhaps something about the situation in October or now at the beginning of November. What could be the color or the picture for the final quarter?

And my second question is the EPRA NFO per share. EPRA NAV was a bit below the half year level. It was 23-point something -- I think 23.20 or something, but a little bit below half year. I assume it has to do with the lower share price levels of CA Immo and IMMOFINANZ at the September 30 reporting date or have there been some other effects here?

[Wilhelm Bayer, executive]

Yes, Stefan. So to answer your first question about the write-downs, what we see -- maybe to elaborate on this a little bit, what we've seen is that our open receivables thing has come down in total compared to Q2. That's a good development. And you've also probably seen that there has been hardly any change from Q2 to Q3. The expectations for the write-downs that we booked there is that, of course, we try to portray the future as we believe it will come to bid. That's the principle behind the accounting. But of course, there's some hope that we will be able in the future to release some of those provisions. And the provisions are in, to some extent, on receivables and, to some extent, on the technical item on lease incentives that we granted to our tenants, to some of our tenants, and that we also to get an assumption that some part of those will not be collected going forward.

[Stefan Scharff, analyst]

Okay. Am I right if I say that at least, let's say, 60% of the EUR 3.5 million come from the CEE region?

[Wilhelm Bayer, executive]

I don't have the percentage in -- at my finger tips, but that sounds about correct. Okay. And to your second question, the EPRA NAV, you guessed right. It's about the further deterioration on the stock exchange, and the majority of the shift compared to Q2 comes from the devaluation of CEE on IMMOFINANZ. But at the levels we see today, it's also in the presentation, there would already be a recovery right now.

[Stefan Scharff, analyst]

Okay, Okay. I see. Yes, it's quite stable. It's not too much.

[Operator]

The next question comes from Pavel Ryska from J&T Bank.

[Pavel Ryska, analyst]

There will be a couple of them. The first, you are related to rather the financial side of the business. So the LTV stands somewhere slightly below 50% at the moment. At this level, are you comfortable with more acquisitions that would potentially increase the LTV?

And a little related to this first question, the second one is, as the situation stands at the moment, and with the knowledge that there is a second wave of COVID-19 and that it will impact the performance of retail and hotels mainly, are you comfortable with the repetition of the last dividend amount next year? So that would be the first 2.

[Ernst Vejdovszky, executive]

Perhaps I'll answer the second question. The dividend in the last years was always a percentage of our FFO I, so in an amount of about 75% of FFO I. It's distributed to our shareholders. And we are a company within -- with a sustainable dividend policy. And if you look at the figure of our FFO I for the first 3 quarters, it's about...

[Wilhelm Bayer, executive]

EUR 33 million.

[Ernst Vejdovszky, executive]

EUR 33 million. So we will see what is the FFO I for the full year. And this is the basis for our consideration of the dividend for 2020.

[Friedrich Wachernig, executive]

Yes regarding the LTV level, okay, it's up 47% for the time being. We have seen LTV level of above 60% already in the past. We came down below 44% already. So we feel very comfortable with that kind of level. We could easily increase. That's 24% our mortgage financing, so we could easily increase in case we would use the leverage effect and find some nice interesting opportunities. So we do not see any problem on that aspect.

[Pavel Ryska, analyst]

Okay. 2 more questions, more property-related. I remember last time we spoke in August, I was asking about the potential effect of home office on the performance of offices. Has there been any change in your perception of the situation? Do you see your office tenants maybe withdrawing from their plans? Or do you think the situation is stable, and that home office will mainly have some long-term effect, but not a very sizable one?

And the very last question, the situation currently in retail, given that there are some closures of shops in -- or shopping centers in CEE, do you expect that there will be discounts given to your tenants maybe similarly to the spring of this year?

[Ernst Vejdovszky, executive]

Yes, let's start with your first -- or third question regarding office. From our point of view, the situation is quite stable. So there are no tenants, and which left or buildings or reduce their spaces for the time being. They are paying their rent all over our portfolio. Everybody is now waiting how the things are clearing up in the near future when the vaccine is available and everything is more or less turning back to normal, what we expect for the next year.

Definitely, home office and remote work was already a big issue in the past, and a lot of companies have introduced that kind of work -- work live or work-life balance or work balance or life balance in their schemes. And especially if you look for young workforce, you will -- anyhow will have to provide that in your businesses. But from our point of view, we see, even if there is a long-term trend, that some of the companies would use more and more efficiency and reduce potential office space for these kinds of additional home office or remote work. Definitely, also, it will be, let's say, counterbalanced with more and more space, which is needed for the remaining people. So we do not see a big inflow from that, not in the midterm, not in the long term. It will be a part of the future PAUSE office developments, how to arrange, how to plan very efficiently for all the different companies and industries. So it's a very individual business. We have already included all that kind of thinking and planning in our new developments. So what we expect that there will be not such kind of huge expansion what we have seen before the COVID pandemic situation for the time being, but probably not a downturn at all.

Regarding the retail, I would always say, in case if companies are able to make turnovers, they will be able to pay the rents. And if they are not able to make turnovers due to regulation from the different states as they were closing down or having the lockdowns, what we have seen right now here in Austria for the next 2 weeks still definitely, it's not easy to make turnovers. And then the different tenants will have to think about how they could structure their businesses. On the one hand side, there are a lot of help, let's say, measures from the different states, which could support their business -- the different businesses. And on the other side, what I always say, and this is also well for the offices, if you have a good location, you will always win also, and you will also have a sustainable long-term business.

And especially for our shopping center in Bucharest bookers. For example, we were -- as far as I know, we were on the shopping center after the first lockdown where all the shops were reopening. And this has not happened in all other shopping centers in Bucharest due to the situation that we were flexible to our tenants, and we try to support them so that they are able to make the turnover to pay their rents. And as we have a very good location with the only shop, which is the ownership we can with a direct metro access, so we are pretty convinced that the turnover possibilities to make turnovers for our tenants will increase as soon as there is a sustainable recovery regarding the vaccine and the medication.

[Operator]

Now we're coming to the next questioner. It is Jakub Caithaml from Wood & Company.

[Jakub Caithaml, analyst]

Jakub from Wood. I would also prefer to ask one by one. Firstly, to follow on Pablo's question regarding the LTV, I wanted to ask if there is any specific range or any specific LTV level at which -- or above which you may be strongly considering whether -- kind of whether or not to withhold dividend altogether for some time or whether even around kind of 50%, 55%, you would still see it as comfortable to pay at least some percentage of the FFO out?

[Ernst Vejdovszky, executive]

You're precisely right. It will not impact clients paying our dividend, but an LTV level below 55% is a level that we feel comfortable. And if you look at our balance sheet, we own shares of CA Immo. And this is a kind of reserve in liquidity, derivatives and other opportunities.

[Jakub Caithaml, analyst]

Sure. Then a broader question with regards to the development pipeline. I mean, could you update us, please, on the more advanced projects that you have? And what are kind of the completion dates, how much you need to spend there for the projects, which, I mean, not necessarily the commuter belt or on Berlin, which is a very long-term project, but regarding the more committed ones?

[Ernst Vejdovszky, executive]

Sure. So the -- we have projects in Berlin within the city center of Berlin. So there are 3 or 4 projects where we aim, PAUSE let's say, starting the construction or starting the schemes in 2022 and 2023. The same situations for the plots what we have acquired in Budapest, and in Bucharest, where we aim a building permission by the end of next year 2021. So the first contributions of rental income take 2 more years from that time. So this is a quick orientation for the projects, which are more clear and more precise in our portfolio.

[Jakub Caithaml, analyst]

Understood. And could you roughly indicate how much did you pay for the box plot per square meter of buildable area?

[Ernst Vejdovszky, executive]

We do not disclose that kind of figures.

[Jakub Caithaml, analyst]

Understood. And last question. Regarding the situation with IMMOFINANZ, which has been already dragging for a very long time. In the past, you have suggested that you would prefer a cash goal relative to a share merger given, among others, the difficulties arriving at a fair merger ratio. Could you indicate what price level or what range would you see as acceptable in relation to both the current NAV, but also for the level of the real estate companies in Europe or currency now trading it?

[Ernst Vejdovszky, executive]

I'm afraid, at this moment, we cannot comment any ideas, but be sure that we try to do the best for our shareholders. We cannot say any number.

[Operator]

At the moment, there are no further questions. And for any additional questions...

[Ernst Vejdovszky, executive]

Ok.

[Operator]

No more questions at the moment.

[Ernst Vejdovszky, executive]

No questions. So if there are no further questions, I would like to thank you for participating in today's call. Our next call will take place in April 2021 when we will present the annual results for 2020. Until then, I wish you all a merry Christmas and especially crucial this year, a successful chart in what hopefully is going to be a much better good New Year. All the best. Stay safe save, stay healthy, and bye-bye from Vienna.