S Immo AG

VSE:SPI

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the S IMMO AG conference call regarding the results of the third quarter 2021. [Operator Instructions].

Let me now turn the floor over to your host, Mr. Bruno Ettenauer.

[Bruno Ettenauer, executive]

Good afternoon, everybody. I welcome you to S IMMO Q3 earnings call. Frankly, I'm not in the best mood in the view of the latest development regarding corona, but I'm largely satisfied with the results of Q3. That said, let's go to the details of Q3 results and start with some highlights.

We managed to increase the top line by 10% to EUR 142.9 million. Rental income increased by more than 6% and came in at EUR 97.3 million. Our occupancy rate remained largely unchanged and stood at 93%. Our gross profit, excluding hotels, was again quite satisfactory and came at EUR 76.4 million.

Going to the financials. FFO I per share increased from EUR 0.46 to EUR 0.55 in earnings per share due to our valuation results increased from EUR 0.31 to EUR 2.25 per share. As already communicated in our half year's result, property valuation went up significantly and came at EUR 145.3 million, including an additional EUR 16 million in Q3. With the start of Q4, we were able to sell the [indiscernible] property and realized the Q3 valuation gain. LTV improved significantly and stood at 39.7% at quarter end.

In addition to the already reported activities, sale of S IMMO shareholding, issuance of green bonds and closing of campus acquisition, we started our share buyback program and hold about 3 million treasury shares currently.

As already mentioned, the total revenues increased to EUR 142.9 million including revenues from hotel operations. Overall, I'm pleased that we can present an increase in our bottom line up to EUR 160.5 million. Main driver of the profit gains from property valuation mainly in Germany and our significant reduction of financial results from EUR 28.4 million to EUR 8.3 million.

Let's continue with Slide 6, showing a simplified balance sheet with a higher property value and the higher balance sheet due to our valuation gains and the acquisition of additional properties. The cash position increased due to proceeds from the S IMMO sale to EUR 442.7 million. I mean it's important to mention that this increase also led to a higher equity ratio, which is favorable for our company.

On page -- Slide 7, we reported the FFO I and EPRA NAV starting in Q3 2017. Both figures show a steady rising trend besides a small turn in 2020. And today's NAV, EPRA NAV is even higher than before the pandemic started. We achieved an EPRA NAV of EUR 28.28. The EPRA NAV is close to EUR 28.

On Slide 8, this is one of my favorites, and it demonstrates the long lasting success of S IMMO AG, showing a combined annual growth rate of EPRA NAV of 13.6%, starting with 2011 and the combined annual growth rate of total return of 19.9%. I think that's a success, showing an interesting for long-term investors, even with a small decline within 2020.

Valuation result. As already mentioned, the valuation was one of our key drivers, and it came up with EUR 145.3 million, mainly due an increase in Germany with EUR 108.2 million, Austria with EUR 28.9 million and CEE with EUR 8.1 million. In terms of valuation results by type. I mean it's important to note that residential is the main driver. But also office was dominant, it's EUR 54.0 million. Retail came in at EUR 10.8 million, Hotel was slightly negative with EUR 0.8 million. But all in all, it shows that it is -- multi asset approach is helpful in different times.

And in terms of other financial assets, which also one of our key position in the balance sheet in the previous before -- periods before, we sold already the S IMMO assets and therefore, the bond, too, repeated again and again. I mean it has been successful. The main driver of the days of shareholding in IMMOFINANZ, we increased our shareholding to 14.23% of share capital. And we still own them. We increased our shareholding because of -- as we take part of the settlement of the convertible in October this year. In Q4, we received total -- we will receive dividend payment in the amount of about EUR 30 million, which will be a significant contributor to FFO I in Q4.

Now let's go to the next slide. I mean, slide shows our debt maturity profile, which is quite balanced and holds risk in the foreseeable future. As you might -- can see, I mean we use a mix of bank loans and bonds. Important for us is that the development of the cost of funding is going in the right direction. It shows a steady trend going downwards. We achieved meanwhile, 2.15%, which is, I think, a favorable position, including all hedging costs and also including bonds.

In terms of our loan-to-value, I always stated that we were able to reduce the LTV below 40%, which is also a strong improvement. In terms of inter -- saving of -- in terms of interest hedging, we follow strategy which we fully hedged our outstanding debt in order to be, let's say, protected against an interest increase.

Shareholding, I mean, today is not the perfect time to talk about the share price, because as we see today, we still see a decline and loss. Hopefully, this is only on the moment. If you compare the share price development in the last 10 years when we overcame the situation after February 2020, and we are still optimistic that we can behave in the same manner as we did in that time.

In terms of shareholder situation, there is no change. So IMMOFINANZ is already the largest shareholder, 26.5%, Aggregate is 10.8% and EUROVEA 5.2%. The other is free float. In the research area, all the research houses, see us as a buy or as an [indiscernible] and that the share price expectation and target prices is between EUR 23.50 up to EUR 26.

Let me now hand over to my colleague, Mr. Wachernig. [indiscernible] is yours.

[Friedrich Wachernig, executive]

Thanks, Bruno. Well, a warm welcome also from my side. Bruno has already given you a detailed update on the financials. So let me now guide you through some key figures regarding our portfolio and our current project development. You can see our diversified and balance portfolio on Slide 14. So our total book value of more than EUR 2.7 billion is composed of 44%, office; 30%, residential; 17%, retail; 8%, hotel; and 2%, land bank.

The main focus of all our asset management activities is to generate a strong cash flow throughout our portfolio.

So on Slide 15, you can see that roughly 2/3 of our portfolio is located in Germany and Austria, generating a total revenues of about EUR 80 million in the first 3 quarters of this year. 1/3 of our portfolio is in the CEE region and sums up total revenues of roughly EUR 63 million as of 30 September '21. Properties in CEE generate more cash flow, whereas the portfolio in Germany is the biggest driver of the valuation result out of these 3 regions. We are currently focusing on further increasing our earnings and therefore, are looking for acquisitions that provides strong and immediate cash flow. But Herwig Teufelsdorfer will tell you more about that later in the call.

You can see, the portfolio broken down by asset type and region on the next slide. Obviously, office makes up the greatest part of our portfolio, with almost half of the lettable area, more than 43% of the total book value of our properties. Hotels, on the other side, only make up for 17.6% of our total book value. There is a considerable variety in rental yield regarding the different types of use. So retail delivered a yield of 6.6%, office of 5.7%. Residential is typically well below that, coming in at 3.3%. In the pie chart below, you can also take a closer look at the various asset types broken down by region.

So much on our outstanding portfolio. Let me now tell you more about our currently most exciting project development in Budapest. So we are planning an ensemble, consisting of 3 state-of-the-art office buildings, roughly 29,000 square meters of usable space will be built on Vaci Ut, one of the most important office locations in the Hungarian capital. The most significant structure is an 11-storey building located directly on Vaci Ut. In line with our sustainability strategy, we are planning to obtain BREEAM and WELL certificates.

And despite the current COVID-19 crisis, we see an overall stable market trend in Budapest and believe that the economic growth will resume after the crisis. We are very confident that this development project will be a sustainable, high-quality addition to our CEE portfolio. Intense planning activities will be completed at the beginning of '22 and we expect the construction to start in '22 as well, so that the project is expected to be completed in 2024.

For now, that is all from my side. Let me now hand over to Herwig Teufelsdorfer, who will give you more insights on our acquisitions and our efforts regarding ESG.

[Herwig Teufelsdorfer, executive]

Good afternoon, ladies and gentlemen. I'm happy to give you a brief insight of what has happened in regard of, yes, growing our portfolio and meaning also growing our FFO I. As you may know from our last calls, we've already now incorporated the Campus 6.2 and 6.3 in Bucharest to fully leased Class A office properties with very strong tenants like Microsoft and Societe Generale. LEED Gold and WELL following our ESG strategy in terms of investments. Closing has been done in June. So by second half of the year, the 2 properties were fully incorporated into our portfolio.

In the meantime, we have not been lazy, looking also on other markets besides Bucharest. And so I'm very happy to be able to tell you that we are very close to the acquisition of a new building, which is called BudaPart Gate to the south of Buda -- in Budapest, a new, let's say, business districts being established with, in total, 250,000 square meters of lettable area. We are the building next to the mall, tower mall, the big Hungarian company. Leasable floor is around 20,000 square meters. Just 2 days ago, we got the permission of the Hungarian Transport Ministry and Innovation Ministry, that we are able to buy this. Why do we have to do this? Due to the fact that there is a public parking space, we need this permission from the authorities. This is done. We are very confident that we are able to close this deal within the next fortnight. Also in here, a reputable tenants like [ Novo Nordisk, Doter, SEMICON ] and some others. The building is more or less fully let, and we are happy to have this in our portfolio.

We are at the time, looking also in Austria and in Germany to get into the position to acquire new properties. But as you know, the markets are, let's say, very hot in these areas. And so we're having a look at the market, but at the moment, not tending to buy in a reasonable time.

Let's have a look on the land bank, the commuter belt around Berlin. So we've done a few acquisitions in small amounts just to fill up our portfolio. But the focus will be more switched on this commuter belt on the land bank towards improving the status of the land plots and increasing the value of this and doing either the developments are on -- or even better, selling it off for an interesting price to third parties.

Let me comment on the next steps to sustainability. You know that we have set up our sustainability agenda, completely new, meaning that we have a new colleague by 1st of September this year who is dedicated to sustainability topics full time and bringing together all the ends that have already been existing within the company. So no changes on our Sustainalytics ESG Rating, but what we have done so far is that we established an ESG committee within the Supervisory Board. The management has been set up, as already said. Green bond is well known, that we've issued this by February this year.

We started with smart metering rollout through Germany and Austria, so that we're in a position to get all and every data anytime that we need to work from the ESG point of view on our portfolio. We are also about to establish a data management platform regarding ESG, combined with the digitization of the company itself, expanding our data collection and started also carbon accounting on our buildings so that we are able to fulfill more than the required standards out of the taxonomy, meaning also that from 2021 onwards, our sustainability report will be according to the GRI standards and Sustainalytics already mentioned. But we are having a look on further ESG ratings to be applied on our portfolio.

So that's it so far from our side. Thank you very much for your attention, and we are happy to discuss and to go into details and hearing your questions. Thank you very much.

[Operator]

[Operator Instructions] Our first question is from Stefan Scharff from SRC Research.

[Stefan Scharff, analyst]

Stefan here. I have some questions regarding your cash. The -- your pockets are full for some more acquisitions to come. You announced some days ago, the BudaPart Gate in Budapest, bringing EUR 4 million to your top line from next year on. What might we expect in the next months to follow? Perhaps you can say a little bit more about Hungary?

Also about Romania. I could hear yesterday in the call of CA Immo that they might be willing to sell the portfolio, which is a block of EUR 400 million and perhaps also your opinion on Poland. That's the first question about the acquisitions.

And the second is about your spending portfolio. You have about 45% in office properties. Are there any bigger prolongations to come in next year? And the second question here is about the 17% stake in retail properties, if you get the full rent collection in November despite the corona problems and the lockdown in Austria.

[Herwig Teufelsdorfer, executive]

Okay. Thank you, Stefan. I may start with your question regarding further acquisitions. We are having a sharp look on Budapest as well as Bucharest. So we are in exclusivity regarding a very nice small portfolio of newly-built buildings in Bucharest. We are starting due diligence by next week and think that within the first quarter of 2022, we are able to close this.

We are fully dedicated to invest in newly-established buildings, representing certifications, which also help us to build up the ESG quality of our whole portfolio. That is the reason why we also have to wait for opportunities. But the pipeline is well filled, and we are very confident that we are able to convert the liquidity seen at the moment into FFO I so far.

[Friedrich Wachernig, executive]

Okay. Regarding our offices, Stefan. For the next year, there are just a few very small tenants, which we already know that the contract will end, and we're already in negotiations with other tenants to move in or step in, in that contract. So there, in the general office segment, we didn't -- do not see any big impacts coming for our portfolio for the next year.

But it's pretty stable. As you know that we have very small scale, on average, very small-scale tenants in our buildings. And we do not have a big single tenant buildings in our portfolio, which definitely helps us.

[Bruno Ettenauer, executive]

Maybe the last question you asked is about Poland. I mean, currently, there is no idea in terms of enlarging our activity towards Poland. The reason is quite simple. We have no team there. So we use our, let's say, strength on the ground, which we have in Budapest and Bucharest, and there's room enough for us to maneuver there.

[Stefan Scharff, analyst]

Okay. So just an add-on question on the retail properties. You had a full rent collection in your retail properties for November despite the lockdown?

[Bruno Ettenauer, executive]

Well, we have to put it in context. I mean, the only one in Austria is Arcade Meidling, which is a smaller one. Yes, we know that there is a decision of the Supreme Court in Austria, which says that tenants could be -- not obliged to be leases, if certain circumstances occur. We expect that the fee -- [ we'll get not ] the full payment for these contracts. But that will have no major impact on our incoming in December and then no impact on -- major impact on FFO I at year's end.

[Stefan Scharff, analyst]

Okay. Okay. And just one question for the German market. Germany, I think a lot of the properties is too expensive at the moment.

[Herwig Teufelsdorfer, executive]

It is. But also regarding Germany, we will focus only on Grade A real estate, but let's say the market is more or less completely dry at the moment. And coming back to your first question in regard of CA Immo portfolio, we know the portfolio due to Bruno, on the one hand. But at the moment, we are not in negotiations for this. So this is -- it's not the case as the rumors were yesterday, the Romanian journalist.

[Operator]

Our next question is from [ Jeb Sano ] from [ MYGALE ].

[Unknown Analyst]

It's Jeb Sano here from MYGALE Funds. We've been shareholders in S IMMO for a while now. And the first thing I wanted to say, well, congratulations on a very strong set of results today. So as a shareholder, I'm just quite happy about it. It's just a shame that the results just came out today. It's unfortunate. It's -- obviously, it's not the company's fault, but it's -- I can see the long-term potential for the company, still strong despite the fact that the shareholder -- the share price to be down today. What I'm trying to understand here is just twofold, but basically the outlook for the company and the way the company expand and just get bigger. So the first one is you mentioned that there's some acquisition plans. And I think the word that was used in the statement was that currently involved in concrete talks about some opportunities. Am I right in understanding that these opportunities are only in Central, Eastern European countries? Or this is also in Germany or Austria?

And also the timing. I mean when should we expect these investments to be announced? And are they like in the next month? Or like roughly talking, maybe in Q1 next year? So that's my first question. And my second question, if I may. As far as I can see, S IMMO still has a stake of maybe 10% or 11% in IMMOFINANZ. Are there any plans to sell that stake and maybe get the proceeds from that stake? Is this something that on the agenda at all? And then -- that's just -- that's all the questions I have. Again, congratulations on the results, again.

[Herwig Teufelsdorfer, executive]

Thank you very much for your kind words. You should have seen the faces lightening up in here after your words. Coming back to your first question, we do not have any specific at the moment in Germany. We have a look on a few things here in Austria and Vienna to be invested in, let's say, here in Austria within 2022. What I was mentioning before, what we have very sharp eye on in Bucharest will be announced, I would say, by February, March next year that we start the closing in this.

[Bruno Ettenauer, executive]

And in terms of question about financial assets, meaning IMMOFINANZ. I think we are not, time wise, under pressure because we have currently enough cash to go forward and to grow with the existing cash. And even if we -- let's say, this is not enough for investments, we could also leverage our IMMOFINANZ stake due that there is high liquidity.

Why we are not selling immediately? I mean there is some situation to be evaluated. I think it doesn't make sense to hurry and to make mistakes. What I think is key for us is to get a perfect price for the shares. As you had seen, we increased slightly because of the convertible where we participated. Nevertheless, in long-term horizon makes sense to unbundle both companies. But currently, our, let's say, strategy in terms of acquisition and growth is not -- let's say, it's not dependent on the immediate sale of IMMOFINANZ shares.

[Unknown Analyst]

Understood. Understood. I mean, just a quick one as a follow-up to the first question. So these investment opportunities you mentioned, once they materialize, again, just roughly talking, like what sort of impact should we see in terms of that? Would they -- I don't know, like, would they add, I don't know, maybe 5% or 10% to the company's NAV? Or would they be bigger or smaller?

[Bruno Ettenauer, executive]

Well, I think we are talking about EUR 200 million, EUR 300 million. So we're talking about 10% in the first, let's say, step. Also adding, I would say, somewhere about 6% to 7% rental income and I think it's still rental income. So that will be the immediate impact. We'll see also an impact due to the maybe the closing, which we see even this end of this month, which could also contribute to rental income in December. And this rental income could even, let's say, offset potential disadvantage in terms of the Austria and residential income in Arcade Meidling. And I mean the most driver, I think, for the FFO I in the last is the dividend payment from IMMOFINANZ. So we can add roughly EUR 13 million to FFO I for the quarter's end this month. That's for sure.

[Operator]

Our next question is from Jakub Caithaml from Wood & Company.

[Jakub Caithaml, analyst]

Jakub from Wood. Just to follow up on what has been already discussed from my side. Could you tell us what kind of volume do you see that you have for acquisitions? What kind of LTV would you be comfortable with kind of near term? Would the firepower, if we assume that the IMMOFINANZ shares for the time being, stay with the company and you're not selling those?

[Bruno Ettenauer, executive]

I mean, what we are going for investments, let's say, in the amount of roughly, according to our budget 2022, between EUR 500 million and EUR 600 million. And we intend to use low leverage according to the cash we have on our books. And you have to also keep in mind that our financial assets are still unleveraged. So we would have another firepower, if needed. But all in all, I think the goal is to remain real close to this 40% LTV, which should be a long-term target for the company.

[Jakub Caithaml, analyst]

I see. So EUR 500 million to EUR 600 million without potentially selling IMMOFINANZ to maybe spend next year. Is that correct?

[Bruno Ettenauer, executive]

If we do so, frankly speaking, then maybe the leverage could -- in the middle, could go up. But I think we see that in the long term and the long-term scope, and therefore, I think we should stay and remain on this 40% level.

[Jakub Caithaml, analyst]

Fair enough. And also, congratulations on good results.

[Operator]

Our next question is from Andre Remke from Baader Bank.

[Andre Remke, analyst]

A couple of questions, starting with the hotel business. In the report, you mentioned the receipt of subsidies in this business. If I remember correctly, it was in -- you mentioned this also already in August for the first half. Were there already also an effect in the third quarter from subsidies?

[Bruno Ettenauer, executive]

No, there were no effects. We already booked in the second quarter 2021.

[Andre Remke, analyst]

Okay. So it was a kind of a real profit in the third quarter in this business. And given the new lockdown, especially in Austria, will you likely be able to cover, let's say, at least the costs in your hotels in the fourth quarter? What is your expectation here?

[Bruno Ettenauer, executive]

That is what we learned in 2020 that is possible. I think we had roughly good figures in October, November. And even until the lockdown came. So -- and compared with the period in December 2020, we had also lockdown at that time, so we expect that we can more or less booked in parallel, and we also expect for the subsidies in the first quarter 2022.

[Andre Remke, analyst]

Perfect. The next question is around acquisitions again. Sorry to ask a further question. Could you give us any indication on the volume you are currently more concretely working on? And second question here. You mentioned to look at all 3 markets, for sure. Is it right to assume that you will focus on cash flow producing assets in CEE and for Germany and Austria? Is it an option to focus more on value-add products? Or are they also not available in the market?

[Herwig Teufelsdorfer, executive]

So regarding the pipeline, we would be able, at the moment, to have negotiations up to, let's say, EUR 350 million in terms of acquisitions, which could be closed in a reasonable time within, let's say, the next 4 to 5 months.

And yes, we are focusing opportunity-wise on the CEE market. But also having a look on Austria and Germany, we will not step into value-add properties. We definitely will have a focus on Grade A investments also in these markets. Nevertheless, it is not that easy at the time to acquire or to fill the pipeline up in a way as we see it in CEE. In CEE, we are definitely focused on income-producing properties.

[Andre Remke, analyst]

Yes. Perfect. Then on your valuation result, it was EUR 40 million in the value uplift on your portfolio in the third quarter. What is the main driver here? Is it a special property? Was it the land bank getting any building permissions also? Or was it well split over the portfolio?

[Bruno Ettenauer, executive]

We do the valuation only on year's end and half year. It was one property in Germany, it was in [indiscernible], which was sold in Q4 with a profit gain of EUR 40 million, and this was booked as valuation gain in the third quarter.

[Andre Remke, analyst]

Okay. Perfect. And then also another question on your IMMOFINANZ stake. At previous occasions, you said that the disposal of the -- at least as far as I understood, a disposal of the IMMOFINANZ stake would make sense if they also sell their stake in S IMMO. Is this still a prerequisite for you? Or you are completely -- think on a stand-alone basis?

[Bruno Ettenauer, executive]

I mean, it will be a perfect solution. But as already mentioned, it's depending also on the act. And I mean, we have the ability to sell and as we, let's say, value financial assets on markets whereas you have a different model in place, which I think makes the disposal, I'd say, more complicated for them and maybe also a disadvantage for the balance sheet. So from our point of view, it depends on the, let's say, the outcome of the valuation we do. And I'd like to compare this in hunting. Never shoot at a distance of 300 meters if we can shoot at 100 meters. And we are not at 100 meters currently.

[Andre Remke, analyst]

Okay. And the very last question, also a housekeeping question on your development in Budapest. Could you remind me on the overall investment volume until 2024?

[Friedrich Wachernig, executive]

So we expect an investment volume, depending on the construction, price of roughly EUR 70 million to EUR 75 million.

[Operator]

As of the moment, there are no questions. [Operator Instructions] There are no further questions from the audience.

[Friedrich Wachernig, executive]

If there are no further questions, I would like to thank you for participating in today's call. Our next call will take place by the end of April next year, when we will present the annual results for 2021. Until then, I wish you Merry Christmas and a good start into hopefully, pandemic-free new year. All the best. Stay safe and healthy, and bye-bye from Vienna.