alstria office REIT AG

XETRA:AOX

Earnings Call Transcript 2018-Q1

[Operator]

Dear ladies and gentlemen, welcome to the First Quarter Results 2018 of alstria REIT office AG Conference Call. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Olivier Elamine, CEO of -- who will start this conference? Please go ahead, sir.

[Olivier Elamine, Chairman of the Management Board & CEO]

Thank you very much, and good morning, everybody. Welcome from finally sunny Hamburg this morning. I am Olivier Elamine, CEO of alstria. I'm sitting here with Alexander Dexne, which is alstria's CFO; and Ralf Dibbern, which is the Head of Investor Relations, in order to walk you through the 3-months results of the company.Before we go into the presentation itself, a short reminder on the disclaimer and the forward-looking statements and the duty to update. And then without undue delay, moving on to the presentation itself.I mean, the first quarter have developed pretty much according to plan. And from my perspective, I think one of the most significant achievement that has been done during the quarter, which have translated into our number, has been the reduction of the LTV, which is coming now at around 35% net LTV following the payment of the dividend. And this reduction of LTV basically is fueled by mainly the capital increase that we've done in the first quarter and the conversion of the convertible bonds, which is now almost fully finalized with total EUR 200,000 to go.On the other part of the business, I think we've developed according to plan. We're still operating into an environment which is supportive, with a strong leasing pipeline, a strong dynamic in the market. The investment market is still very much supportive when you're a seller. It's a bit more cumbersome when you are looking to buy assets. So our overall situation on the ground would have not fundamentally changed since last time. We've been speaking and again, the main -- the core message today from my perspective is the fact that we've been, again, able to reduce the LTV quite substantially. Investment property -- if we move on some of the selected balance sheet position, investment property is slightly up, which mainly reflects the acquisition that we have closed during the first quarter, the 2 assets that we've acquired, and we funded through the capital increase. The equity is substantially up, again, here. Main impacts are the capital increase and the conversion of the convertibles. You need to bear in mind that, as we speak, we've paid EUR 92 million of dividends or EUR 0.52 per share. So our equity on the first quarter, I mean, as we speak, is probably EUR 92 million lower than what you have on the slide. And obviously, the net debt is down, and again, from us, what is important is not necessarily that the LTV go down but the absolute quantum of debt on the balance sheet of the company continue to go down. And the LTV -- the financial debt is down, obviously, following the conversion of the convertible bonds.If we move on to the P&L position, and I will spend a bit more time on that in a minute when we discuss the FFO, but our gross rental income is up year-on-year, up 6.3%. Fund from operations is up 6.6%, and our SG&A are slightly up as well. And I think it's kind of counterintuitive to show you first quarter numbers which are going up whereby our year-end guidance is down from where it was last year. And that's mainly related to the fact that a number of the assets that we are vacating in order to refurbish them are being vacated as we speak. And therefore, we do -- we did have rental income in the first quarter, which is going to disappear in the course of the coming quarters, which explain why despite the fact that we have growth in our number on the first quarter, we do expect that the overall top line is going to go down over the year.Again, from my perspective, here are the main messages from the call today, and they may change over the last few months, the fact that deleveraging of the company has been going on quite steadily. We believe this is an important process we need to take care of, and the reduction has been mainly linked to the conversion of the convertibles.As you can see from our maturity profile, we do not have any major maturity now hitting our balance sheet before 2021. But we keep on monitoring our debt position and taking advantage if we can and when we can of the capital market. But we're pretty happy now with the situation of the balance sheet of the company, which we feel is a pretty strong position as we currently speak.Looking at the guidance. And this is another slide we usually put in our quarterly presentation, but just as a reminder, so we do confirm our guidance of EUR 187 million of revenue, EUR 110 million of FFO. As I've mentioned before, the main reason, and this is what we try to show probably not that perfectly on that slide, but out of the EUR 16 million of lease expiries that we are predicting for the year, we basically only had EUR 2 million which hit our balance sheet in the first quarter. So that explained why our numbers are up for the quarter despite the fact that we expect them to be overall down over the year. But we are confirming our guidance of EUR 187 million of revenue and EUR 110 million of FFO. That's something we still believe is going to reflect the performance of the company over the full year. The portfolio have not fundamentally changed since last time we've met. I think the main changes here relate to the EPRA vacancy rate, which again is consistent with the message I just gave before. So the assets that we're supposed -- which are going to be vacated are being vacated as we speak, which basically increased the vacancy rate from 9.4% to 11.2%. As a reminder, our vacancy rate tends to fluctuate between 8% and 12%. Whenever it gets closer to the 8%, 9% number, we increase it back to the 11%, 12% to be able to have some prior material to work on. The portfolio size have increased slightly following the acquisition, and I'm going to come back to it in a minute. And the overall number have not changed compared to where we were at year-end.On the leasing side, a very supportive market too in Germany despite the fact that the first quarter overall in the market has been slightly weaker than last year, but we still have very strong fundamental. We still have a relatively strong pipeline. With around 14,000 square meters of new leases signed and 18,500 square meters of lease extension, we're doing good in the first quarter of 2008 (sic) [ 2018 ], and we're looking forward for a strong leasing quarter in -- as we speak. I think the very recent press release that we issued was very strong leasing, and the momentum building development project in Düsseldorf, which is now almost 50% let, and we started the marketing of that asset around November last year, is I think a testimony of the strength of the market and the ability of the company to lease up space. I think if you have the right product in the current market, I mean, finding tenant is not the most challenging part of the business.We've been also disposing assets. We were mainly selling a number of noncore assets which were part of the Deutsche Office portfolio, and I just wanted to kind of stop for 2 minutes on one of the assets we sold in the Hamburg Harbour. For those of you who are not familiar with Hamburg Harbour, this is not really within Hamburg. It's on the other side of the Elbe asset. It's a different market, a different dynamic. It's an asset we've acquired in 2007 for EUR 3.5 million, and it generated EUR 250,000 of rental income. It was a mixed use asset, which is 50% residential and 50% offices. We just completely vacated the building in 2014 to start a full-fledged refurbishment project. We spent EUR 4.2 million of CapEx on that building, and through that process, we basically doubled rental income from EUR 250,000 to EUR 500,000, and we just agreed to sell the assets for a total price of EUR 10 million, which is an 8.1% gain on the latest appraisal value and reflected by yield on cost of 4.7%. Although the holding period of that asset, which is around 11 years, we generated an unlevered IRR of 8.3% completely in line with the target of the company. I think it's always nice from time to time to go back to the roots and look at how the company is performing on a single asset basis, and for 2007 acquisition vantage getting this kind of return, I think it's something which is worth noting and reflecting very strongly, on the work that's done by our real estate operations team.Having said that, I would like to open the floor for your questions. And thank you once again for joining us and your interest in the company.

[Operator]

[Operator Instructions] The first question is from Rohit Saxena, VictoriaPartners.

[Rohit Saxena]

I have a question on the leasing activities and the like-for-like rental growth development during the quarter. Could you please provide us with the year-to-date like-for-like rental growth figure and, if possible, further split this into your contribution from indexations and relettings.

[Olivier Elamine, Chairman of the Management Board & CEO]

I mean, we do not provide for quarterly like-for-like rental growth figure. This is a figure we produce on an annual basis, so I cannot provide you with that figure. And sorry, what was the second part of your question?

[Rohit Saxena]

Just a split between the contribution from -- periodic contribution from indexations and from the reletting activities that include, obviously, the effect from vacancy.

[Olivier Elamine, Chairman of the Management Board & CEO]

I mean, we did have some indexation which hit our balance sheet this quarter. I mean, as you know, I mean, something which have changed compared to the last few years is that now, inflation is back into play. So we will have some positive impact from indexation. Our guidance for the like-for-like is that we strive to achieve between 1% and 1.5% like-for-like rental growth above the inflation on average on the portfolio of the company over time.

[Rohit Saxena]

Okay. And just to follow up on the new leases that you have secured, 14,000 square meters. What has been, on average, the rent uplift on these leases relative to prior rent levels?

[Olivier Elamine, Chairman of the Management Board & CEO]

I think the -- I mean it's -- I mean, it depends on what you're looking for. If you look, for instance, on the asset and momentum, the rent uplift is around 80%. But that's, again, from my perspective, a meaningless number because this 80% comes with a substantial investments. And we're generating around 8% incremental yield on the investment that we do in the portfolio. If you look at some of the renewals, for instance, the renewal that we had in Stuttgart, I think the rent uplift is around 10% to 15%, which comes with some kind of rent fee but not so much CapEx. So I think the spread between, like, the previous rent and the new rent can be extremely wide depending on how much CapEx you spend on the assets. And the most economical way for us is really to spend money because the incremental return that we get is substantially higher than anything we can achieve currently in the market.

[Operator]

The next question is from Kai Klose, Berenberg.

[Kai Malte Klose, Analyst]

Just a quick question on the cost in the first quarter. SG&A, as you mentioned, were up. Is this because of the opening of an office in Dortmund? Or are there any other reasons? And the second question, on the P&L number. You mentioned [ acquisition ] and the minus 16 from expiries will materialize mainly in the coming quarters. Could you indicate how comfortable you are with the increase for the other contribution, to the increase in FFO from exit from new leases and from lower costs? And is this still valid? Or are we in target -- or are you still in line to reach these numbers as predicted? Or are there any changes to come?

[Alexander Dexne, CFO & Member of Management Board]

Kai, here's Alex. I'd like to take the first question relating to the SG&A increase. We unfortunately suffer from, and we figured out a meaningful way to take out this volatility out of the P&L presentation, is that due to the share-based compensation we have for employees and also for management board. You have a decline in the share price in the previous year Q1. You have an increase in the share price this first quarter. You just have big, big swings. And I think the main difference you see in the SG&A expense is just due to those noncash items, which are based on share price performance and the share-based compensation. The impact of the company opening office in [Audio Gap] in place local infrastructure is, like, hardly visible. It probably accounts for like, whatever, EUR 20,000 year-on-year. So that's clearly not the main driver we're seeing. So it's mainly a swing, the volatility in the share price that is also going through the SG&A expenses in the P&L.

[Olivier Elamine, Chairman of the Management Board & CEO]

And on your second question, with respect to whether or not we think we can achieve the lease up and the saving in the cost, I think, I mean, the answer is yes. We believe we're still on track, otherwise, we would not be confirming our guidance. So we are, again, as we mentioned during the presentation, confirming the guidance on both sides, on the vacation of the asset and on the lease up and the cost reduction, we're still pretty much on track.

[Kai Malte Klose, Analyst]

[so I was just thinking is the} component of the guidance might have changed, that's supposed to be the first question. And the last question, if I may, we had about EUR 0.6 million gain from disposal of investment properties. Does this refer to the sale of Harburger Ring? Or is this coming in the second quarter?

[Olivier Elamine, Chairman of the Management Board & CEO]

Yes, that reflects the sale of Harburger Ring.

[Operator]

The next question comes from [indiscernible] Deutsche Bank.

[Unknown Analyst]

Two questions please. One question is -- the first question is, would there be any change in your financial policy, for example, loan-to-value ratio, considering that you're well within your target? And my second question is do you target a higher rating?

[Olivier Elamine, Chairman of the Management Board & CEO]

I mean, we're -- as you rightly said, we're comfortably within our targets now in terms of LTV, so there's not going to be a massive change in our financial policy. We do not drive the company based on what the rating agency are looking for. We drive the company based on what we believe is going to produce higher returns overall for the company and the shareholders. So I think if what we do end up getting us a higher rating, it's great. But we're clearly not driving the company based on what the rating agencies are expecting from us.

[Unknown Analyst]

Okay. And just to add on to my question. So is there a possibility that you would relevel from where you are currently?

[Olivier Elamine, Chairman of the Management Board & CEO]

Not in the current market environment, no. I mean, our view is the market today is extremely expensive, and from an asset perspective, the debt might be very, very cheap. But I mean, in essence, we don't want to use cheap money to buy expensive assets. We rather in the future use expensive money to buy cheap assets.

[Operator]

The next question is from Thomas Effler, ODDO BHF.

[Thomas Effler, Analyst]

Just a question regarding your P&L. The other operating income was EUR 3.4 million roughly, but it's behind that compared to 2017 where you have an increase roughly of EUR 1.4 million?

[Alexander Dexne, CFO & Member of Management Board]

We were actually able to settle, finally bury if you like, a lawsuit that we inherited from the Deutsche Office times. There was still an accrual that was more than EUR 1 million that we had as a provision for this lawsuit. This lawsuit was settled without any further place in our direction so we were able to basically reverse this accrual, that is a big part in the other income. Another big part is that in many cases where tenants leave, they have an obligation to put the space in the same condition as the space was when they entered into the lease and they took over the space. We usually release the tenants from this obligation to do like their own kind of remodeling of the space and rather agree on a cash payment because usually it is more efficient for both sides because then we can take this money and invest it into building the way the next tenant wants it. But since this is like nonrecurring kind of income, we show this under other operating income and that'd be the main positions we're showing there. So it's really contributions from tenants leaving and the reversal of an accrual related to a lawsuit that didn't materialize.

[Thomas Effler, Analyst]

Any thoughts to open? Or is this mainly for the final ones you have now?

[Alexander Dexne, CFO & Member of Management Board]

That was -- I mean, in terms of the bigger ones, this was really the main outstanding. I mean, you obviously have smaller stuffs where you argue potentially, but there's no financial impact to be associated with pending lawsuits that I can see right now.

[Olivier Elamine, Chairman of the Management Board & CEO]

But we also have a different policy than what Deutsche Office had. So whenever we have a lawsuit, it's because usually we think we're going to win, and so that going to lead for an accrual. So if we don't think we're going to win, we settle.

[Operator]

The next question is from Georg Kanders, Bankhaus Lampe.

[Georg Kanders, Investment Analyst]

I have this question on the nonrecurring tenant compensation payment. Are there only lease obligations of the tenants that would have to do, otherwise construction work, and -- I'm just asking, and you would not adjust normal compensation payments when the tenant is leaving early? Or is this also part of this adjustment to the FFO?

[Alexander Dexne, CFO & Member of Management Board]

If the tenant is leaving early, I mean, to tell you the truth, we haven't had that situation for a long time, because most of the tenants terminate, and then they figure out that they cannot leave the building on time. So we more have the opposite direction. If a tenant would leave early and pay the rent the tenant owes to us in one shot, I would probably show this in the revenue line. But it is really shooting from the hip on what really -- because this is a contractually agreed rent, and that's rental income for me, that's probably more like how you accrue this and allocate it over the periods. But basically, I would show this in income.

[Georg Kanders, Investment Analyst]

So then I understand why you do these adjustments then. Okay.

[Operator]

At the moment, there are no further questions. [Operator Instructions]

[Olivier Elamine, Chairman of the Management Board & CEO]

So if there's no further questions, I would like to thank you for joining us this morning and your interest in the company. We're going to be on the road in the coming weeks on a roadshow, and we would be happy to take over your discussion in one-on-one meetings. With the new method regulation, if you have any specific needs about meeting us, please don't hesitate to get in touch with Ralf. I mean, we usually try to adapt a little bit our route plans to be able to see as many investors as possible. And obviously, if you have any further question, you can always reach out to us or to Ralf at any given moment in time. Thank you very much for joining us this morning, and we are looking forward to our further conversation.

[Operator]

Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.