Adler Real Estate AG

XETRA:ADL

Earnings Call Transcript 2020-Q1

[Operator]

Thank you. Good afternoon, everyone, and welcome to the analyst and investor presentation for the Q1 2020 results for ADO Properties and ADLER Real Estate. Presenters today are Thierry Beaudemoulin, Co-CEO of ADO Properties; and Maximilian Rienecker, Co-CEO of ADO Properties and Co-CEO of ADLER Real Estate. [Operator Instructions] I would now like to hand over to Thierry Beaudemoulin.

[Thierry Beaudemoulin, Co]

Thank you for all joining today. It has been 2 months since publication of 2019 figures. We hope that you are all doing well. Some of you might already start to work from your office again. At ADO and ADLER employees are now back at work in the office by rotation. Let's start on Page 4. Earlier this month, a group of 200 members of the Parliament have asked the German Federal constitutional court to look into the legal position of the Berlin government to implement the rent freeze for a period of 5 years. Key concern of the politician are the rent freeze is against landlords' right and that local government can't deal with tenancy law.Over half of the value of the combined portfolio is located in Berlin. Only 29% of our rental income is impacted by the Mietendeckel.The impact of COVID-19 has been so far limited. First, because the German government has been very supportive to the German household to offer employees 60% to 67% of their net income for hours they couldn't worked and have given housing allowance. Residential tenants have continued to pay their rents and deferred rents are really low, almost 0%. We have a total deferred of 1.7% of our total income, which is only coming from commercial tenants, which are slightly more impacted by COVID-19. So we are in discussion with them and we think COVID-19 will not have material impact on our 2020 FFO and we expect that rental growth will continue in our portfolio outside ADLER. Our liquidity position remains strong with EUR 500 million cash at hand and no significant refinancing before the end of 2021. The low value of EUR 1,600 per square meter of our portfolio appears to be very resilient in this challenging time. If we move now to Page 6. So the acquisition of ADLER has successfully been completed, with settlement of the offer having taken place on 9th of April. This date will also be the official date for consolidation of accounts. That's the reason that today, we are still reporting separate figures. We anticipate to execute the EUR 500 million rights issue in Q2 or Q3, as previously communicated. And we are filing a domination agreement for ADLER, which most likely will come into place in September. We have the possibility to exercise a conversion for exchanging ADO for Consus share that currently account for 51% of the outstanding shares with Consus. This option will be valid until June 2021.On Page 7, we would like to give you further update on the progress that we have made on the acquisition of ADLER and the steps we have taken. ADLER has EUR 3.5 billion debt outstanding that are of change of ownership clause. Nearly all owners of the debt have waived that clause as expected, which is important, as this means that the potential refinancing requirement of the combination have significantly been reduced. The non-euro debt had already been refinanced and no major refinancing is coming due until the end of the next year whilst we have nearly EUR 500 million of cash at hand at Q1 2020. After having set all the public offer on April 9, ADO currently owns 95% of ADLER. The free float weight of ADO in the EPRA Europe Index has significantly increased from 0.3% to 0.5% as per 16th of April. With the settlement, Maximilian Rienecker joins the Board of ADO as Director on 9th of April and integration and synergy between ADO and ADLER are started. We are ahead of realizing our synergies, and we expect the run rate to be at least EUR 6.5 million at the end of 2020. The domination agreement for ADLER has been filled the 28th of April and will likely be implemented in September 2020. Following the successful offer for ADLER, we have started to further simplify the ADLER structure by making a public offer for the remaining 3.1% of Westgrund, which will result in account EUR 30 million cash out and is expected to be complete in 3 weeks. The EUR 500 million rights issue is subject to market conditions and will potentially result in ADO to enter the MDAX index when possible.A further 51% in Consus can be acquired against shares in ADO at a fixed exchange ratio of 0.239 until June 2021. The exchange ratio will be adjusted for the impact of the rights issue of ADO. Page 8, we appreciate the recent transaction that has been announced by Consus. A total of EUR 2.3 billion of projects in noncore location have been sold, of which the majority of the area was scheduled to be used for commercial purpose. The sales price are more than 10% above book value, which confirm our view on the quality and the further upside potential of the Consus portfolio. Additional benefit of the sales are the reduction of the total exposure. Post transaction, the top 9 German cities will account for 95% of the portfolio of Consus, with the residential component increasing to more than 57%. As a separate state, the corporate structure of Consus will be simplified. The CG Group subsidiary will be renamed Consus Real Estate AG will be fully incorporated with the acquisition of the 25 minority stake and by Mr. Gröner. The term of this transaction has been set 2 years ago when Consus took over CG Group. As a result of the acquisition, Mr. Gröner will resign from the Supervisory Board of Consus. The total consideration paid for the asset is EUR 690 million, which will immediately result in a debt reduction of EUR 475 million higher-yielding debt, which will be transferred along with the asset. The net loan-to-value of Consus will be reduced as a result of this transaction and with a decrease in book value in a similar proportion of GDV. On Page 10, for those who dialed for the first time, we would like to quickly summarize that the combination of ADO and ADLER will result in an EUR 8.6 billion portfolio, of which, half of that is located in Berlin and in strong metropolitan region of North Rhine-Westphalia, Lower Saxony and Saxony-Anhalt. Page 11. As always, you will find there an overview of our portfolio metrics. Berlin accounts for almost EUR 4 billion of value in our portfolio, which is more than half of the EUR 7.8 billion of our total German portfolio. Together with other metropolitan area, the top 13 cities account for 75% of our combined residential portfolio. Occupancy has increased year-on-year by 1% in the top 13 cities and remains stable in the overseas. Occupancy has significantly increased in Wolfsburg and Göttingen, which show improvement of 3.2% and 2.8%, respectively. Both cities are part of one of the more attractive metropolitan regions in Germany. And our portfolio will be renovated and extended via redevelopment there.The average rental income in the top 13 cities show an average like-for-like net rental growth of 3.2%, with strong figures again involve Wolfsburg and Göttingen that both had a record year with more than 6% coming -- 50% from indexation and 50% from reduced occupancy. Leipzig, our second largest city, recorded 5.5% like-for-like rental growth; Halle, 4.4%; and Berlin still reports 3.3% over the last 12 months, but will show negative figures as a result of Mietendeckel with the full year 2020.Maximilian Rienecker will now continue with the Q1 performance on Page 13.

[Maximilian Rienecker, Co]

Thank you, Thierry. And hello, everyone. So on Page 13, I would like to run you through the key figures for the first quarter of this year. The net rental income came out at EUR 88 million in Q1 2020 versus EUR 99 million in Q1 '19. And this is purely the impact of sales at ADO and ADLER level in 2019. As you can see, all underlying rental KPIs have improved over the last 12 months. The average rent per square meter increased to EUR 6.20 and has further reversionary potential. The like-for-like net rental growth has come out at 2.7%, which is lower than last year's like-for-like, due to the impact of the Mietendeckel for the Berlin portfolio. The vacancy rate came down 50 basis points year-on-year, which is very positive. FFO I of both companies combined is EUR 30.6 million. Other relevant progress has been made on the letting at Riverside. That is our Berlin development, which was concluded in Q4 2019, where occupancy currently is at 56%, and that is in line with our projections.ADO condo sales continued to show high margins of 27.5% in the first 3 months of the year. And we do expect that interest in condos will continue to increase as all major landlords have announced to see maintenance levels for Berlin apartments to be decreasing. Therefore, we expect that more tenants will start considering homeownership, and therewith, maintaining demand for condo sales.CapEx and maintenance in Berlin have come down significantly year-on-year or by coming from very high levels, given significant reversionary potential. Outside Berlin, CapEx and maintenance levels have increased in Q1 as we have made efficient use of the slowdown in the letting process by exerting maintenance into our properties.The total value of the portfolio, as mentioned earlier, is currently EUR 8.6 billion, of which, EUR 3.6 billion relates to ADO and EUR 4.9 billion are attributable to ADLER. As you know, no external valuation has taken place in Q1, but the entire portfolio will be valued by 30th of June 2020. The average cost of debt has come down by 10 basis points year-on-year to 1.8%, mainly due to a lower cost of debt on the ADLER side. And we have the clear objective to get to the 50% loan-to-value target, which will be realized via a combination of rights issue revaluations and disposals.We're moving to Page 14. You can see that both companies together have more than 75,000 units, allowing for operating at the right economies of scale. In the investment properties, together with the inventories, are at EUR 8.6 billion, as I mentioned earlier, which is based on an average value of just over EUR 1,600 per square meter.At EUR 6.20 rent per square meter, we are amongst the top 3 of the large listed German resi companies. And relative high rents, low vacancy and scale result in higher EBITDA margin, which is obviously one of our key objectives. The vacancy rate is 5.3%, that's lower than a year ago, whereby we always see a seasonality effect in Q1.Turning to Page 15. We have the circa EUR 300 million non-euro bonds at ADO Group level that we repaid at par in February this year. And at the beginning of April 2020, so after reporting, the bridge has been moved to ADO level. That is EUR 885 million, as planned. 100%, and that is a very positive, of the EUR 3.5 billion debt at ADLER level, i.e., the EUR 2 billion in unsecured bonds and the EUR 1.5 billion of secured bank debt with a change of control clause, have been waived by mid-March, which means there is no refinancing requirement at ADLER level. Only EUR 885 million of debt has been drawn under this bridge, which, as you know, we have received from a syndicate of 3 banks.The loan-to-value of the combined entity stands at 54.6% or 52.4% when excluding the convertible bonds. Interest coverage ratio is at 2.7x, well above the highest required covenant levels of 1.8x. Let's move to Page 16. We hardly have debt maturities in 2020, in which only EUR 172 million will expire, and of which, EUR 100 million is under negotiations with banks. In particular, loans with an amount of EUR 51 million have already been refinanced or repaid and the other EUR 49 million are under advanced discussions for refinancing. We also have already started discussing bank debt expirations in 2021 together for a total of EUR 433 million. As such, the key maturity will be the EUR 500 million bond that expires at the end of 2021 and the bridge loan that expires in end of 2022, but which we expect to be repaying earlier. S&P recently updated their views on ADO, as you might have seen, in which they confirmed that the risk profile remains unchanged and that it moved to the better end of its satisfactory category. So the anchor score or anchor rating, which is relevant for the debt, is at BBB- based on our financial and business risk profile. As said, we are working on the integration between ADO and ADLER and have further simplified corporate structures whilst also reiterating that it is anticipated that additional EUR 500 million of cash will be generated via a rights issue.Now I would like to hand back to Thierry, who will discuss our real estate development.

[Thierry Beaudemoulin, Co]

Thank you, Max. Our top 13 cities currently account almost 80% of our portfolio, and we would like to increase the focus of our portfolio in the largest 9 German cities.So the best way to increase our exposure to the larger cities in Germany is via development in our view. And as a side effect of COVID-19, our clients, which have stayed more time in the house as part of the lockdown, are now more keen on investing a larger portion of their income in their house. So I think high-quality new development in major German cities where you have the highest housing shortage is really key for the future. If we move now on Page 19, we would like to summarize the pillar of our development strategy. EUR 300 million of extension and redevelopment in our leasing portfolio with attractive IRR. EUR 700 million of development to hold in Berlin instead of in Potsdam. Strategic land position in Berlin, in Dresden for future land bank and a stake and the co-option in Consus, which provide us access to the most attractive development pipeline.If we move now to Page 20 to update you on the progress of our project in Wolfsburg where the work have officially started and the construction in Göttingen will start next quarter. EUR 200 million will be invested in both cities, which are one of the most attractive metropolitan region in Germany. We will add almost 500 new units in this city, and we will be one of the largest contributor to solve the housing shortage, which has been evaluated at more than 3,000 units. We expect double-digit leverage higher on this investment. Together with the recent completion of Riverside in Berlin and smaller completion, our total development completion will be close to EUR 1 billion. And now Maximilian will continue.

[Maximilian Rienecker, Co]

Yes. Thank you. So on Page 22, we'd like to show you the building blocks for our rental income and FFO I. And please be mindful that ADO has technically only acquired ADLER on the 9th of April 2020, so post reporting date. And as such, ADLER will only be shown in the accounts as per that date. However, I can imagine that in your models and analysis, you will report both in order to be able to compare with 2019 pro forma and also for 2021.As you can see, ADLER makes a significant contribution to the combined FFO I. But in our full year 2020 accounting, you will see that the EUR 90 million of FFO I will be missing, as just explained. Key drivers for FFO I in the next quarters will be the rental indexation outside of Berlin, the further lease-up of the project that both Thierry and I mentioned earlier, Riverside in the coming months and the lower costs as a result of synergies. Moving to Slide 23. We would like to end this presentation with the guidance section and the outlook for 2020, and we would like to reiterate our previous outlook in which the companies combined are expected to report between EUR 340 million and EUR 360 million of net rental income over 2020, which is anticipated to result in FFO I with a range of EUR 120 million to EUR 140 million. That is on a pro forma basis for both entire 2020. So to summarize, the acquisition of ADLER has successfully been completed. Consolidation will take place as from 9th of April onwards. Integration of both companies is well on its way. Leverage at Consus has been significantly reduced following the recently announced disposal of 17 projects. COVID-19 has only limited impact on our FFO I in 2020. And our outlook for 2020 has been confirmed. So thank you for all, or thank you all for joining the call. And I would like to open up for the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from [ Ofmanela Rica Ricky from M&G ]. And the question is, given recent credit rating downgrades to below investment grade, are you still committed to investment grade? You said in the past that you would exercise the option on Consus only if you remain investment grade. Is that still the case?

[Maximilian Rienecker, Co]

Okay. Thank you. [ Ofmanela ], I will take that question. So as you know, the acquisition of Consus has been a strategic point for us from the very onset, as we believe in the long-term benefits of this acquisition for scale, growth, profitability. And this remains true despite the recent downgrade. And I think we should mention here that rating agencies have recognized the improved portfolio diversity and financials being aligned with a BBB-, so the anchor rating of an investment grade. However, they have added negative modifiers for relative cash flow generation compared to peers and lack of continued track record. But I think ADO and ADLER have gone through -- or are going through strategic shifts over the last 6 to 8 months. And I think once the structure is in a stable form, we will believe -- or we believe that we will be able to address these concerns, in particular, on our track record. And as announced at the time of the transaction, we intend to exercise the call option once our strategic long-term interest concurs the with combined company's target capital structure of 50% and below in LTV, et cetera. So I hope this answers your question.

[Operator]

Yes. The next question is from Michele Fiumara with Helikon. And the question is, please explain this note in relation to the call option on 51% of Consus, in referring to your comments, prior to announcement of contribution in kind.

[Maximilian Rienecker, Co]

Okay. Thank you, Michele. I will take that question. So the call option is based on -- it's a call option on the number of shares. And that number of shares, as for today, relate to 51% of Consus. Now with the recent transaction that Consus announced i.e. the 17 -- the disposal of the 17 projects, they, at the same time, announced the acquisition of a 25% stake in CG Group, one of their holdings. And so they intend to issue new shares at Consus level to buy out those 25% minority position in CG level, which means that there is an increased number of shares at Consus level, and at the same time means that our 51% call option gets diluted down. And so that is why it means prior to the announcement of contribution in kind. I hope this answers your question.

[Operator]

Our question is from Nicolas [ Punin ] from Natixis Wealth Management.What is the plan for the remaining non-tendered ADLER shares still listed?

[Thierry Beaudemoulin, Co]

So we have achieved now a high rate of 95%. So we will first target to put in place a domination agreement in order to materialize the synergy. And the next step will be the integration of the company, and we will update the market on due course about the next step. I hope this answers your questions.

[Operator]

The next question is, again, a further question from Michele Fiumara from Helikon.Are the targeted operational synergies for ADO-ADLER confirmed?

[Thierry Beaudemoulin, Co]

We are well on track in regard to materialize the operating synergy between ADO and ADLER. So we confirm the global target and we have already identified and secured for 2020 EUR 6.5 million and already EUR 3 million has been achieved in Q1.

[Operator]

The next question comes from Michael Chakardjian from Franklin. If you were to exercise your option on Consus, would you deem having an IG rating as a condition? Or would you still undertake that acquisition while rated in half year?

[Maximilian Rienecker, Co]

So thank you, Michael. I will take that question. So for us, what is important is the target capital structure that we want to have post exercise of the call option. I think it is very positive that Consus has announced the disposal of significant amount of what we would deem noncore assets because they are more towards the commercial side of the project development. So that delevering event, obviously, supports the credit metrics of the entire group. And I think that is what ultimately counts for us. It is the target capital structure that needs to be met.

[Operator]

And the question is from Edouard Enault from Kepler. And the question is, could you give us the main drivers behind ADO and ADLER's decline in NAV per share in Q1, please?

[Thierry Beaudemoulin, Co]

Yes. Thank you, Edouard, for that question. That is to do with mainly the impact from one-off costs related to the transaction. We also, you have to bear in mind here, did not have any revaluation of our portfolio, so there was no impact from revaluation gain. At the same time, since the Consus shares are marked-to-market have seen a decline in Q4 '19 by some EUR 2.28 per share, that obviously had its impact on our NAV per share in Q1.

[Operator]

And the next question is from Keval Dattani from Aberdeen.And the question is, thanks for the presentation. You said that the exchange rate on the shares in the Consus transaction will be adjusted to reflect the ADO rights issue. Does this mean that you will only exercise the option on Consus once the rights issue has taken place?

[Maximilian Rienecker, Co]

Thank you, Keval. I think what needs to be noted is that the rights issue and the Consus call option are not linked to each other per se because the exercise of the call option only entails the issuance of new shares. So it's an all-share deal. There needs no -- there are no proceeds or cash proceeds that are required for the exercise of the call option. And I think we reiterate here that once our target capital structure is met, we would be inclined to exercise a call option. If that means that is with the rights issue, then so be it.

[Operator]

The next question is from Florian Rainer from Matejka.And the question is, what influence does the recent Gröner-Consus deal, the sale of 17 projects to Gröner have on the planned acquisition of Consus by ADLER?

[Thierry Beaudemoulin, Co]

Thank you. This transaction is positive because first, it's reduced the leverage at Consus level. Secondly, it's reduced the share of commercial project. And third, it's focused Consus of the top 9 cities, which is the strategy where ADLER going forward. So we think this is a positive step in the cooperation, the 2 groups are adding together.

[Operator]

The next question is from [ Marco Annuti ] from Nexstim.And the question is, why did you decide to proceed with a domination agreement? Is it necessary if the 2 boards would be composed of the same members? What is the expected annual payment to the remaining ADLER shareholders and/or purchase price of the ADLER shares? If the shares purchased exceed 95%, what will the real estate tax to be paid? This appears to contradict with de facto, the statement, not to proceed with the squeeze out of the remaining ADLER shares in the ADO-ADLER share exchange perspective.

[Maximilian Rienecker, Co]

Thank you, Marco, for that question. So we will implement a domination agreement for now. The squeeze-out is currently not planned, although it is something that we could technically or potentially pursue. We will still need to decide whether it will distribute a dividend going forward. I think what we need to be mindful of is that currently, we have mandated 1 of the big 4 to evaluate the value of both ADLER and ADO. And so those shareholders in ADLER that would not be willing to take up or to accept the domination agreement would be either paid out in shares of ADO or would be receiving a dividend going forward. So this is currently under evaluation. When it comes to real estate transfer tax, we've mentioned in the past also that there is, at ADLER level in the SPVs, red lockers in place, which would allow for taking up more than 95% at holdco level without triggering real estate transfer tax.

[Operator]

And the next question comes from Prateek Gupta from Goldman. Can you please talk about your plans for the capital structure? How do you plan to refinance the bridge loan and deal with the upcoming maturities over the next 2 years?

[Maximilian Rienecker, Co]

Okay. Thank you, Prateek. The company has EUR 500 million in cash and has no material maturities pre-December 2021. As such, the company has adequate liquidity to meet all the expenses and upcoming maturities in the near term. We are already in advanced discussion to refinance almost all of the secured debt at both ADO and ADLER level. In particular, those that are maturing in 2020 and '21. There's a 3-year bridge available. And hence, there is adequate flexibility for issuance. Moreover, we can easily access the secured or [ Schuldscheindarlehen ] market where funding is available at very attractive levels, and the combined entity has adequate secured headroom for such refinancing. I think and I hope this answers your question here.

[Operator]

The next question comes from Emmanuel Besson from Deux-villes.Can you give more details about the current Berlin situation of frozen rents? What are the future developments in the city?

[Thierry Beaudemoulin, Co]

As we have mentioned, this law has now a more limited impact on the group because only 29% of our rent are subject to Mietendeckel, and the impact will be limited in 2020 with less than EUR 1 million FFO decline and the impact will be more in 2021. As we have seen parallel is the process to challenge this law in court as start by FDP and CDU parliament, and we are confident to have progress on that in the coming months. In parallel, we have implemented specifically growth scheme to make sure that in case this law is canceled, that we can get back from the tenant, the market rent and not the reduced rent. So I hope this answers your question about Berlin Mietendeckel.

[Operator]

Thank you, everyone, for joining the call this afternoon. That concludes the call. And thank you for joining, and you may now disconnect the lines.