alstria office REIT AG

XETRA:AOX

Earnings Call Transcript 2020-Q1

[Operator]

Dear ladies and gentlemen, welcome to the conference call of alstria office REIT-AG regarding the First Quarter 2020 Results. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Olivier Elamine, who will start with today's conference. Please go ahead.

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

Thank you very much, and welcome, everybody, from sunny Hamburg today. I'm here with Alexander Dexne, which is alstria's CFO, to walk you through essentially the first quarter result of alstria in 2020, and more importantly, an update on the situation related to the COVID lockdown. We have reshuffled a bit our presentation for the quarter, the -- I mean we will spend some time on the first quarter results, but we will be focusing much more on what's going next, considering that the first quarter was the moment in time where the overall COVID situation had a very limited impact. We thought it's more useful to spend the time discussing about what we're seeing right now and how we're seeing the future rather than focusing on what happened on the first quarter. A brief overview on the disclaimer before we start. And then without undue delay, I'd like to start the presentation. I think, again, it's fair to say that before the outbreak, we started the year on a very strong footing with our operating plan developing in line with our expectation and still had a strong letting result and FFO and revenue developing in line with the full year guidance. There is, however, and we have entered since the COVID situation in a very high degree of uncertainty with respect further economic development, and we'll come back to that in a few minutes. But we believe that the company is currently relatively well prepared to navigate those uncertain times. Our pipeline is funded. It's 70% prelet essentially to government tenant on long-term lease basis, and we are entering the situation with a low LTV of 26.1% and EUR 120 million of free cash once everything else has been settled. So from a company perspective and on a relative basis, we feel that alstria is well prepared to navigate what we believe is going to be a very uncertain time in the coming months. As we usually do, and we'll try to walk through that again in the presentation, we try to evaluate in which kind of environment the company will operate and then adjust to that environment. And we feel right now that even if you take a worst-case scenario, the company is very well prepared to go through those time. Looking briefly at the first quarter in 2020. We had revenue of EUR 44.3 million. FFO, slightly up year-on-year at EUR 29.4 million. Our EPRA NAV at EUR 18.08 with, on the 31st of March, obviously very little impact from the COVID situation on the valuation of the asset. As you know, our next valuation will take place in June, and we will probably have more information about how the market is developing at that moment in time. We have signed new leases for around 29,000 square meter. We have extended leases for 23,400 square meter, and our EPRA vacancy rate was 8.1%. At this stage, we are not moving our guidance of revenue, EUR 179 million, and FFO, EUR 108 million. Obviously, considering the situation, there is more pressure on the downside than there is on the upside. But we also feel that there is too much uncertainty at that moment and stage to be able to move the guidance with some kind of certainty, and we're also not giving up on the ability for the company to deliver on this guidance. We are still delivering new spaces to tenant, we are still discussing new leases. Over the last 48 hours, for instance, we did deliver 24,000 square meter of new spaces to tenants who took them over. So life is going on despite the difficult time we're in. So on the guidance side, we will review it if necessary going forward. But at this stage, we're still -- and we'll do our best to meet it by year-end. Moving on to an update from the last update that we gave you. We have collected 89% of our rent in April. We are now running the process in May. And the first indication that we are, although it's very early in the process, is we are moving up pretty much in line with the April rent collection. What you are seeing on this slide, and if we look at the bar charts, going from the left to the right, at the left side, you have the tenants which are the more sensitive to the lockdown. And the more you move to the right, the less the tenant are sensitive. In essence, what we're trying to show here is the more the situation lasts, the more likely are the tenant on the right is going to be hit. And obviously, the longer it lasts, the more you're going to have the hit moving on the right side of the chart. As of today, we had 144 tenants which asked us to suspend the rents, and that represent EUR 1.9 million of rental income per month. Out of those 144 tenants, there is 47 of which we agreed to waive the rent for 3 months, which represent around EUR 600,000, slightly more than EUR 600,000 over the 3 months, which will be the overall impact on alstria's P&L. And for the other EUR 1.7 million, the rent is not paid, but it's still due, and we still expect to collect it at a later time, sometimes with penalty interest. And as I said, we are in the middle of collection for rent in May. And the first indication that we have are that we are running trends, which are pretty similar than the one we had in April. If we look at how the situation have developed over time, you can see that the number of requests for rent suspension that we're getting from tenant is decreasing. While on the other hand, the value of each and every one of those requests is increasing, which is the translation of what I was mentioning before. The smaller tenant, which has been hit initially in our portfolio, has been realized already. And now the few tenants which are coming back to us are more established company, which are either feeling real pressure on cash flow or just -- and that's very unfortunate to actually see that -- just trying to use the situation to bargain something or to play around with the situation. With respect to the economy, I think it's pretty clear now for everybody that we're going to have a difficult year 2020 with projection of GDP dropping by 6.3%. But I think the uncertainty is not so much into what's going to happen in the next 6 months. I think that's pretty clear for everybody. It's more about what's going to happen next and how the situation is going to happen next. And we basically showing on this slide, 3 different views of the market. One of them, which is the most optimistic slide with a V-shaped recovery where everything goes back to normal very, very rapidly. You have the middle scenario with the U-shaped recovery. And for those of you who are not old enough to remember Dr. Doom, Nouriel Roubini, have an I-shaped recovery, and I'll let you guess what he means by I-shaped recovery.So there is really like a wide range of view about how long the impact is going to last and how deep the impact is going to last. And we're really trying to figure out how the company will fare in any and each of those scenarios. And again, we feel that we are well equipped to navigate any of those scenarios. And we don't, as a matter of fact, have a view on which one of those scenarios is going to be the most likely scenario. But the main point we're trying to make here is that there is no doubt about the fact that 2020 is going to be a difficult year from an economic, macroeconomic perspective. Where there is uncertainty, is more on what happens next and how the recovery is going to take place after that, and we really need to be prepared for all those different options. We -- our preparedness, first, if we looked at the worst-case scenario where things last for a very long period of time and cash becomes scarce available across the economy. We are obviously looking very carefully at our cash situation. This is a slide we showed you before and we're just showing it again here. What have mainly changed since last time is that we have actually closed all the deals that were supposed to close in Q1 so we did sell all the assets, and we have EUR 82 million of cash inflow. So this is real cash on the balance sheet right now. And as you can see, is once we have paid all our -- funded for all our CapEx and pay back all our debt liability in 2020 and 2021, we're left with around EUR 120 million of free cash. The running cost at the company level right now is around EUR 5.5 million per month. And that's basically allow us to last for a reasonable amount of time before we run into any cash issue on the company level. We obviously -- the second most important thing we're looking at is, in terms of risk management, is where we stand in terms of covenant. So first is the cash because usually companies enter into trouble because of cash issues. Second is covenant to see how well we fare on our different debt obligation. And here, again, we feel extremely comfortable with where we are today. Our LTV is at 26.1%. We could bear devaluation of 48% of the portfolio, which would bring the capital value for our asset to EUR 1,650 per square meter, which is probably as low as it would have ever been. It would be lower than the values that we reached in 2008. And before we breach any EBITDA covenant, we would need to have a permanent loss of rental income, meaning that basically the leases would be finally terminated for around 40% of the current portfolio of the company. Again, and there is probably a likely scenario where all those things happen, but it feels the far-fetched scenario, so we feel very comfortable when we look at our covenant as well as our cash position on both sides. And finally, we're also looking at where we stand in terms of our operations. And essentially, on the development pipeline that we have, obviously the long-term leases where the tenant is in -- represent basically, I mean, little risk except for the risk of the tenant not paying its rent, which is -- sounds not so little currently. But there is more risk in the development pipeline and both in terms of funding and ability to deliver. Our current pipeline is fully funded. As we mentioned before, and we are planning to spend EUR 194 million of CapEx between 2020 and 2021. As we speak, our current development site are working and progressing according to plans. Those developments are prelet for 70% out of them. And we expect new leases, which start in 2020 and '21, to generate around EUR 28 million, of which 50% is coming from government-backed tenant. We're also providing you with the delivery schedules because obviously the guidance that we gave is also dependent on our ability to deliver on the delivery schedules. As I mentioned before, in Q2, we have, over the last 24 hours, delivered 24,000 square meter of leases. And that's -- so, so far, we're still on time with our delivery and the tenants are taking over the space that we are delivering, which I think is also a strong signal that despite everything which is happening out there, there's still some kind of functioning markets, and the operation are still running relatively smoothly considering the overall situation. What has slowed down, on the other hand, is obviously the tenant request and demand. So everything you have on this slide, I think, which are signed and sealed, but we are seeing a slowdown in the amount of tenant request. And so if the situation was to last for a much longer period of time, then there would obviously be a kind of a blip into the letting market as it is harder to lease up an asset if you can't go and visit it as much as you want. So all in all, I think to summarize the presentation that we are presenting today. I'd just like to recap the 3 introductory points. Q1 numbers were pretty much in line with the expectation, and the guidance was starting on a strong footing for the year 2020. But obviously, Q1 is a quarter of its own, and 2020 and Q2, Q3 and Q4 are evolving in a different environment. We feel there's still a massive uncertainty about the outcome, not the short-term outcome more the long-term outcome, on how and when there will be a recovery and then at what pace the recovery is going to come up. But we also feel that we are relatively well positioned in these circumstances to be able to weather the storm and navigate through this because of the number of actions that we've been taking in the past. And we also believe that eventually, at the end of the day, there are going to be some more opportunity that's going to come out of the situation. So with that, I hope, a positive view on how the future is going to look like for alstria. I'd like to open up the Q&A.

[Operator]

[Operator Instructions] And the first question is from Thomas Neuhold at Kepler Cheuvreux.

[Thomas Neuhold, Head of Research of Austria]

Thank you very much for the detailed presentation. Actually, I only have 1 question. So far, your business seems to hold up pretty well. Can you please share your thoughts on the potential dividend payment this year? Has there been any change in your view recently?

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

So I mean the dividend is something we discuss on a regular basis. And I think we're really and knowingly making use of all the time that we have. As we said in the presentation, we feel that there is no doubt about the fact that 2020 is going to be a difficult year, but there is enormous doubt about what's going to happen next and how long this is going to last. The government in Germany has given companies the chance to postpone their general meeting up to December. And I think every day that goes by give us more information about how and what we need to do to better prepare the company. And we really intend to use all the time that we have to basically make an educated decision just before we call the AGM, which is going to be 4 weeks before the AGM date. So I cannot answer your question right now because -- but like everything, remain possible from my perspective. And everything means situation stay as it is. We don't pay a dividend. I mean we're really going to look it up based on the information that we will have at that point in time. I don't believe I would be helping you right now in giving any kind of indication simply because I don't have all the information at hand to make that call as we speak.

[Operator]

The next question is from Mr. Kai Klose, Berenberg.

[Kai Malte Klose, Analyst]

Yes. Kai Klose from Berenberg. I've got a quick question regarding the completed disposals you show on Page 3 in the interim report. Could you maybe provide a bit more details on the relatively wide range of the disposal prices, meaning the gain to book value? Obviously, there's different size companies, but you can give a bit more details what was the letting levels? Or was there any specific reasons behind why the range of the gains or some minor losses to the latest book value have been if you don't mind?

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

Yes. So Kai, I mean just to walk you through briefly through each and every of those property. Werner-von-Siemens-Platz in Laatzen was an empty property or about to be empty, which is in the outskirt of Hannover, so outside of our core area and which needed to be redeveloped. So we sold it to a developer. The asset in Bremen is actually a condominium asset, which has its own complexity from a condominium perspective. The other assets are our assets which were rented -- regularly rented assets. And the Recklinghausen asset was a nursing home with a longer lease with a health care provider. So you basically have a wide variety of the nature and the occupancy level of the asset. The only 2, like, pure-office assets that were in there is D2 Park in Ratingen and Meerbusch, the asset which is a headquarter of Medtronic in Germany.

[Kai Malte Klose, Analyst]

I see. And I know you have the right to be opportunistic in disposal strategy, but do you have anything more? Or did you have anything more on the agenda of assets you would have liked to dispose in this year before the crisis start to materialize?

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

Yes, so we did have more disposal in sight. The thing that we have uttered before the lockdown, we're still in discussion on some of them. But obviously, we did not start any new marketing of assets after the lockdown starts. It's obviously kind of difficult right now to run through due diligence, et cetera, and there is also massive uncertainty of where pricing would end up. So everything which we started before, we're still working on, and we have some assets in the pipeline with that respect. Although there is also much more uncertainty right now on whether any of those can or would close. And just for the sake of completeness, we did not buy anything, and we're not considering buying anything right now.

[Operator]

Your next question is from Andre Remke, Baader Bank.

[Andre Remke, Co]

Only 2 questions. First question, Olivier, you mentioned the running monthly costs of EUR 5.5 million for the company. What is included here? Is it admin, personnel costs, also property and financing costs? And do you see any possibility to reduce cost here and there? Or would you say with the running business, you are still extremely keen on that? That's the first question, please.

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

So this would be an estimate of basically all the costs that we need to pay. So it includes the property cost, SG&A and interest-based cost, et cetera. There are costs which are reducing by nature. I mean typically, our travel costs are down to 0. And that's something we -- which is happening by nature. We are reducing costs, for instance, on operating assets. I mean if the asset is empty, we're not heating them as much as when they're being operated, if there is less people in the asset. So there are a number of costs that are being reduced. On the other hand, because of the pandemic, there is also area where costs are increasing, typically cleaning of assets, et cetera, which are costs that are going slightly up. One thing which we have not done is obviously play around with personnel cost. I think it's actually in the time of crisis like this, where a company like alstria need to be faithful to its employees. We're asking a lot of them during the good times, and they have delivered a lot over the past, and I think we owe them to have their back when things are more difficult. So we're not looking into cutting costs at this stage in this area. But what I wanted to highlight above everything else is we still have ample of cash, so we're not running the company in a situation where feel that this is a life-threatening situation for the company. So we're still pretty comfortable with the current situation of the company going forward.

[Andre Remke, Co]

Okay. Second question is more, let's say, beyond-the-lockdown question. How do you think about potential structural changes in office demand? What is currently widely discussed is the topic of home office with potentially, let's say, negative impact on space demand? Do you have a view on that currently?

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

Yes. I mean my view is it's clearly too early to assess the overall impact. I think it's obvious that what we're currently living is going to have an impact on the office demand, on the nature of the office demand. And whether that impact is going to be long-lasting or in the short term, in the next couple of years, I think the leases and the tenant demand once the lockdown is over and the thing is behind us is going to change by nature. But I think all the discussions that I'm seeing right now are way too early. And in a situation like this, we tend to react on impulse and basically believe that the situation we're currently living in is going to last forever, whereby, if history is any guide, basically, things tend to revert to the mean quickly, rapidly. So I think my answer would be, yes, there's going to be an impact on the office demand. How and in which direction this impact is going to be is way too early to assess simply because there is too many forces moving into different direction. I mean typically, if I look at our own offices, which we are restructuring to maintain social distancing, what's going to happen is we're going to lose probably 15% to 20% of the workstation we currently have because we're going to reduce the density. And that's probably going to be the amount of home office that we're going to have as well. So overall, the change is not going to be massive in terms of need or space. On the other hand, if we did not have the home office, then we would need more space. So in essence, what I'm trying to say is it's way too early.

[Operator]

The next question is from Manuel Martin, ODDO BHF.

[Manuel Martin, Analyst]

Just one question. What's the scenario? What are your assumptions regarding office price and office rents for the next time, for example, for H2 and going forward in view of the corona crisis?

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

So when it comes to office valuation, I think we touched base on that earlier and in the previous call. We will be running a valuation of our portfolio in June. The indication that we have so far, because we also receive inbound inquiry about people wanting to buy some of the assets, is that there has not been a massive shift into the value of the asset. But again, it's very, very early to say, and I would not expect to see a massive shift before -- if it happens before somewhere down the chain. And on the other hand, also, as we discussed on the last call, interest rates being where they are and likely to go up anytime soon now, I think that's really clear as far as I'm concerned, the -- we will most probably end up in a situation where we're going to go back to very, very low interest rate environment, which means that yield on real estate are going to remain pretty low going forward. What I think is now pretty evident, on the other hand, is that the rental growth story is probably going to be more -- I mean, harder to sustain. And as you all know, I hope, we've never been a big supporter of the rental growth story. So the average rent on alstria portfolio is around EUR 12, EUR 12.50.What we do is we invest in our assets in order to improve their quality and adapt them to the tenant demand. Well, the tenant demand might change, but the fundamental of our approach is still the same. So we will adapt the assets to whatever new tenant demand is out there. And then we will be able to rent them, maybe not at EUR 30, but at EUR 20 or EUR 22 or EUR 23. But there is such a gap between where the rent for an asset was going to be in line with the tenant demand and the current trend that we're having on the portfolio that we feel very, very strongly that we're going to be able to adapt to it without any major hiccup. And so you need to remember, we never bought an asset simply because we saw the market trend was going to go up. I think we've been kind of very widely criticized for that. But I guess it makes sense now.

[Operator]

At the moment, we have no further questions. [Operator Instructions] And we have another question from [ Paul Rus ].

[Unknown Analyst]

Can you hear me?

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

Yes.

[Unknown Analyst]

Can you just give a little bit more color on the rental negotiation right now with the tenants? I mean what are the direction of the tenants? Do they all try to get a lower rent? In this case -- if this is the case, do they accept to have a longer lease? I mean what kind of tools do you have for the negotiation? And on the pipeline, too, I mean do you expect lower rental? Can you reduce your construction costs? And how do you see the market? And what kind of tools do you have to weather the storm?

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

You mean on the existing tenant negotiation, right?

[Unknown Analyst]

Yes, both on the existing portfolio and then on the pipeline.

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

So on the existing situation, I think in Germany, the situation is pretty clear. Unless we are willing to negotiate, there is nothing to be negotiated. The lease are still enforced, and the rent is still what it is. So -- and we have a very, very strict view on that. I think we need to enforce our contracts. This is why contracts are for. They are for, I mean, basically explaining how things work when nothing else is working. What we are doing, however, there are situation where we might agree into extending the lease or changing the -- I mean how costs are shared between landlord and tenant. And so there are situation where we can agree, and we're open to discussion. If a tenant comes with an idea where there is an economic benefit for alstria, then this is something we will do. But the only time where we agreed to basically waive the rent, so allow the tenant not to pay rent at all and not to pay it back in the future are for small shops and tenants which are usually single- or 2-person organization, which has been a tenant of the company for a long term, which we know cannot pay the rent for no fault of their own. And it would be more expensive for us to let them go bankrupt by insisting on getting the rent, then supporting them during this period because we know that once the lockdown is going to stop, their business is going to thrive again. You have hairdressers, restaurants, small retail shops, et cetera. But for the regular office tenants, I think we're just sticking to our contracts. Whether some... Sorry.

[Unknown Analyst]

Yes, excuse me. When you are negotiating a new lease, is there some -- much pressure now? I mean do the tenants ask you to reduce rent? I mean do you have any color beyond the market?

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

So on the new leases, for the time being, I mean the -- first of all, very little new leases we're discussing. But on the new leases we are currently discussing, we have not seen a fundamental shift. What we are rediscussing now with tenants with whom we were discussing is more how the layout is changing in the asset, et cetera, but not so much about -- so tenant are, for instance, saying I need more space or less space because of home office, et cetera, but we're not rediscussing the fundamental economics of the transaction at this stage with new tenants.

[Unknown Analyst]

Okay. And so on the pipeline, if you are in a situation where rents will go down, do you have some, I would say, operational margin to lower the cost of the construction or stuff like this? I mean...

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

So on the pipeline, I mean, 70% of that is prelet. So the economics are fixed right now and mainly the construction costs are also fixed for most of it. And for the new letting, I think what we're doing right now is more thing about how we can adapt the building to potentially new demand, and then we will take it from there. So the -- how much we need to adapt the building can have a positive or a negative impact on cost, and we will adjust the situation on the 30% remaining when we need to cross that bridge.

[Operator]

The next question is from Thomas Martin, HSBC.

[Thomas Martin, Analyst]

Thomas Martin from HSBC. I have 2 questions left. Another one on the valuation and the next valuation round. Did you -- I mean, the uncertainty is quite -- is great and is quite huge and for all participants and also for the external appraisal. But did you receive any indications how they intend to manage that uncertainty with their models? I mean if transaction market is not existent currently, and you have no comparables really, how they manage that currently? Is that in what they plan to do with ERVs? What -- how does the GDP contraction kicks in their remodel just here maybe would be helpful if you have -- if you can share any indications you have probably received from your appraisals.And then another question I would have on your pipeline. I mean you have your committed projects out, so remaining CapEx is clear. It's fully funded. It's all fine. I think until February, you definitely -- some more projects in your pipeline or assets where you thought it makes sense to transfer those when the lease breaks to your pipeline and to refurbish to invest. Do you plan further? Do you have current plans to transfer further assets to the pipeline? Or you would say, no, we are cautious and we wait when -- yes, I don't know, if we return to normality and the situation stabilize and we start decide then. Maybe these would be my 2 questions.

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

So I'll start with your last question and then I'll go back to the first one. We do have assets that we're planning to transfer to the pipeline. And obviously, we are still working on that because life continues. And so what have changed, and I think the main difference between the committed and not-committed pipeline is obviously for all the assets we're still working on, we can still materially change how much CapEx we want to spend. We can still materially change the planning, the internal layout, et cetera. So those are things we are very cautious about at this stage. But there are clearly some assets that we -- I mean, simply because, as you mentioned, they're just going to be vacated at one point in time, and we will need to be working on them. So what is more important to us, and that's going to lead me to the second part of your question, what's more important to us now is to better understand whether or not there are going to be a massive change in the nature of the tenant demand, whether or not there's going to be a massive change in the ERVs in the market and what the impact of everything we're going through right now is going to be over the longer term. We still have substantial gap between where the ERV are today and where our current rental income is. So even if the ERV was to drop 15%, 20%, 30%, we could still spend money on the assets and generate positive return, obviously less money, but still generate positive return on the assets. And that's where the uncertainty lies. When it comes to the valuer, I can tell you the way they manage uncertainty is with a disclaimer. It's not necessarily with anything in their model. So far, I think they are like everybody else, they're waiting to see evidence of transaction in the market. They're waiting to see new leases being signed to better reflect on what the impact is going to be on the actual assets. The little evidence that we have today, so people who are calling us and asking to buy some of our assets, tend to show that, at least on a certain category of assets with long-term leases or very centrally located, there have not been, at this stage, a massive shift of the price downward. Actually, there might even be a shift upward of values for some of the asset. But this is just anecdotical evidence of 1 or 2 assets, it doesn't mean anything on a portfolio-wide basis. How GDP is going to play into every value, I think the valuer are trying to agree among themselves right now, and there is guidance from RICS in Germany, and I think RICS in other countries about how valuer are supposed to deal with this uncertainty. My understanding is this is mainly going to be done through a disclaimer, which I know is not helpful, but...

[Operator]

As there are no further questions, I would like to hand back to Olivier Elamine for some closing remarks.

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

Well, thank you very much for being here today at this presentation. We will start to do more virtual road shows, which we're trying to plan and restart our IR activities also with much less travel, so we will probably have the opportunity to discuss, going forward, on a one-on-one basis. If you have any further questions, we're obviously still available to answer your questions. Thank you very much. Have a wonderful afternoon and stay safe. Bye-bye.

[Operator]

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