alstria office REIT AG

XETRA:AOX

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome to the conference call of alstria office REIT-AG regarding the results Q1 2022 -- at our customers' request, this conference will be recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. May I now hand you over to Olivier Elamine, who will start today's conference. Please go ahead.

[Olivier Elamine, executive]

Thank you very much, and welcome everybody to a bit cloudy Hamburg today. I'm here in the room with Alexander Dexne, which is altria's CFO. I have also Ralph and Julius from our IR team. And my name is Olivier Elamine, I'm the CEO of Altria. Thank you very much for your interest to the company and before we move into the presentation, just a short reminder on the disclaimer, the usual disclaimer about forward-looking statements and duty to update.

And then without undue delay, I'd like to jump into the presentation.

The first quarter of 2022, I think from an operational perspective was clearly illustrated by a stronger letting market compared to where we were the year before, which also coincides with the relaxation of some of the COVID concerns, not necessarily of COVID rules in Germany, which are still being relaxed as we speak, but at least a bit concern by corporation. And so we have seen increased activity on the letting side, which have transferred into a substantially higher leasing than the year before, we are still cruising below where we were before COVID, but we have been doing substantial progress here. And that obviously translates in our revenues, which are up 3.8% compared to the year before. FFO is slightly down. And that again, if you remember our conversation at the end of last year, reflect essentially the fact that we had higher real estate operating expenses, which are linked to some backlog that we had during the lockdown. But overall, I think the quarter have translated from an operational perspective, pretty much in line with our expectation.

EPRA NTA is up, reflecting the net income for the quarter. The net LTV at 27.7%, and I'm guessing we're going to spend a bit more time on that. And the rest of the presentation, so I'm just going to move on to the next slide. It's been a bit too fast, sorry about that.

The portfolio itself has not materially changed. Our transaction activity was limited to 3 sales, which we're going to discuss in a minute. But the portfolio itself still have, as you know, an average size of around 12,800 square meter per assets. The average value per square meter at EUR 3,400 per square meter is still substantially below replacement cost and I think it's a point I would like to highlight in this presentation, especially at a time where there are concerns about inflation and everything that's going around it. We still have relatively strong portfolio well located in the major German cities with a relatively low capital value per square meter, and we feel very strongly about the defensive constituent of our portfolio.

This is also reflected in our long WAULT of 6 years on leases, which for most of them are CPI indexed.

Our contractual rent is at EUR 193 million, and the EPRA vacancy rate at 7.7%.

Letting, as I said, has been performing relatively well in the first quarter this year. Obviously, the first quarter is not impacted by any of the [indiscernible] event in Ukraine. And it reflects essentially the improvement in letting market following an easement or at least the perception of the COVID pandemic being put behind us. And that has reflected into increased take-up from tenant and increased discussion. We are still seeing, as we speak, this takeup increasing and so we do expect that the full year result are going to be slightly better than what they were the year before. So there's real improvement on the letting market.

We can discuss at the later stage, the investment market, which is probably a bit more volatile right now again, linked to a number of macro events, not necessarily linked to the -- directly linked to the underlying letting market.

So we have signed 34,100 square meter of leases, which represent 11,000 (sic) [ 11,600 ] square meters of new leases and 22,500 square meter of lease extension, which in total represents around EUR 30 million of future income for the company. And we are -- keep on increasing the average rent per square meter on the portfolio, as you can see on the bottom right of the chart.

We have been also active in the transaction market. We have sold 3 assets during the period for a total consideration of EUR 97.1 million. That's a price net to us. The lettable area of that portfolio is around 35,000 square meters, which reflects an average capital value of EUR 2,800 per square meter. And as you know, we are still in the process of what we call selling the periphery and buying the center, which is reflected in the capital value of those assets. And those assets translate into again, to the latest IFRS book value of around 21%.

If we move now rapidly to the balance sheet, very little movement on the balance sheet itself. Investment property are a bit down, essentially reflecting the asset sales. The equity is a bit up reflecting the net income. And the net financial debt is down 4.7%, which reflects essentially the cash inflow of the asset sales and the operating cash flow, which is increasing our cash position, and therefore, reducing the overall net financial debt.

Overall, our G-REIT equity ratio is still pretty strong at around 70.4%. And our EPRA net tangible assets per share is at EUR 19.09.

If we move into the P&L positions, our rental income, as we've discussed before, is up by 2.8%. FFO, we discussed that as well is down 6.3%. SG&A is up materially by around 36%. This essentially reflects the takeover from Brookfield and part of the SG&A has been impacted by the high share price that followed up the takeover, a substantial part of the remuneration within the company -- of everybody within the company actually is share-based or was share-based and that basically has been substantially impacted the SG&A cost for the quarter, which is reflected in the current number. But I guess it should be perceived as a good news for everybody who actually tendered the shares into Brookfield offer.

If we spend a bit of time on the debt side, and I think this is -- I'm going to have another slide looking at the future, this one is more looking at the current situation. We do currently have a net LTV of 27.7%. As you know, we have been reviewing our financial strategy following the takeover for Brookfield and our intention is going to be to increase leverage at the company level going forward and to use some of the proceeds of that increase to pay out a dividend when the increase will be done and/or buy back shares, so basically to return capital to our shareholders.

This graph here is showing our current financial structure with the next bond maturity coming up in 2023. And we are, as we speak, in the process of [ reading ] that in more detail. S&P has confirmed our rating taking into consideration the new targets in terms of leverage at BBB- with a stable outlook. And our new financial policy is summarized on the slide. Our intention is to keep the company LTV in line with investment-grade requirement at around 50%.

We have appropriated already an amount in our German GAAP accounts to be prepared to potentially return capital to the shareholder. And we also intend to manage the LTV of the company in a way that on a look-through basis, if you consider, which is something that the rating agencies are doing, if you consider the debt at the level of alstria, but also the debt [indiscernible] level of our shareholder to keep that LTV below 55%, which would be one of the requirements to remain within the investment-grade in universe, which remain one of our target as we speak.

We -- our dividend policy is going to change and have changed actually. Our dividend for the next AGM has been set to the minimum legally required and we intend to keep it this way in the future. So beyond the repayment of the proceeds of the levering up of the company to around [indiscernible], I mean the regular dividend policy would be to limit the dividend payment to what is required by law and essentially retain as much earnings as possible within the company.

One of the benefits of, I think, our partnership with Brookfield it's going to allow us to accelerate the capital rotation and basically sell more of the mature assets with the sale proceeds being used to, first of all, maintain the investment-grade profile of the company, reinvest in the business. And once the first 2 targets have been met, potentially further optimize the capital structure.

We would be using both secured and secured financing instrument to get to the new financial structure again within the boundaries of the investment-grade rating. And that's something we are currently working on in more detail. I'm sure we're going to have some question about that, and I will be more than happy to address them in the call.

We will hold our next general meeting on June 10, 2022. It's going to be a virtual meeting, which is going to be available on our website for our shareholders and we are really looking forward to receiving your questions. I think we already -- I mean, you can already. Send question to the company that will be addressed during the general meeting. And if you have some questions, please do so.

And then rapidly looking into the outlook and maybe spending a few words on the investment market, which I have not touched based on in the previous slides of the presentation. Letting market, as we discussed, are recovering from COVID pandemic as we speak and improving. Investment markets are more volatile and we expect them to be more volatile in the short run. The different macro changes that are taking place, and that includes the war in Ukraine, that include the inflation, that include the tapering of the financial incentives by the ECB and the asset-buying programs, all of those are creating some volatility in the market and some transactions are being paused, waiting for -- or to better understand what the next financial environment is going to look like. There is still liquidity in the smaller part of the market. But when it comes to larger transaction, which we're not so active on alstria there is clearly more concern and clearly, people are taking a bit more time to decide whether or not they want to move on with the transaction.

One thing which is pretty evident in the transaction market is the increased focus on ESG. As you know, alstria has been leading the space in real estate not only in Germany, but across Europe when it comes to ESG. So we feel relatively strongly about that. And we see that clearly as one of the main growth opportunities that the company has going forward. Our purpose is to buy non-ESG compliant assets to convert them into ESG-compliant assets and then put them back into the investment market.

So that's something we intend to continue doing in the future and we really feel invigorated by what's happening right now around that topic and the way people are being looking into that.

So that's it from my perspective. I would now open the floor to questions.

[Operator]

[Operator Instructions] And we received the first question. It is from Manuel Martin, ODDO BHF.

[Manuel Martin, analyst]

Two questions from my side, please. The first question would be related to the return of capital to your shareholders. Could you elaborate a bit on that move because, I mean, you can use a penny only once. So if you spend it on returning to shareholders, you cannot spend it in investing in the portfolio of alstria. Do you see a contradiction there or maybe not a lot of CapEx opportunities? Maybe you can tell us something on that, please?

[Olivier Elamine, executive]

Yes. So I think if you look at our balance sheet, both at year-end and today, we currently have, and Alexander, correct me if I am wrong EUR 377 million of cash on the balance sheet, which is more than enough to fund for our development pipeline for the next 18 to 24 months. And we also have secured, and I probably did not mention that in the call, a EUR 200 million RCF, which basically provide us with an initial EUR 200 million liquidity line, which is a 3-year revolving credit facility here. So from a liquidity perspective, we are very much in tune with what we need. I think where you're right is, obviously, our preference would be to reinvest the proceeds of the refinancing into more accretive acquisitions or items, which we could buy in the market, which we have been looking at actually since we have run through the balance sheet review. So far, we don't feel that the investment market have adjusted it in a way that appropriately reflects our view of the market and where we feel comfortable into pricing assets.

So we're not seeing today material investment opportunities, which basically trigger for us the view of just returning capital. Where you are right is obviously once you have return capital, well, you don't have it anymore. But we also feel kind of comfortable enough that having today like a dominant shareholder like Brookfield, if the company wants to need more capital, then we would get access to that capital.

Again, there is no commitment, obviously, from Brookfield to do that. But they are in the business of driving and growing the company going forward. So I feel very much comfortable that this would be the case.

So clearly, keeping EUR 0.5 billion or EUR 1 billion of cash on the balance sheet would not be the most optimum capital structure. And as I said, we already have EUR 377 million plus the EUR 200 million revolving credit facility, which is enough cash for us to be running the business in an efficient way from a pure CapEx within our shared portfolio.

[Manuel Martin, analyst]

Okay. I understand. and maybe an additional question to that topic. There might be also kind of bottleneck in the market. I mean even if you would have the cash, you could not spend it on all the refurbishment measures because maybe of lacking craftsmen or whatever. So maybe also a bottleneck on that side?

[Olivier Elamine, executive]

Well, I think -- well, there is clearly a kind of constrained on the construction market today. The way it's translating is essentially by increased construction costs and increased cost into our refurbishment project, which I guess goes hand in hand with the inflation.

The main limiting factor for us in order to accelerate our refurbishment, there's not so much that we're not finding companies. I think alstria's credit is good enough for us to be able to find companies who are willing to work for us. It's more the fact that before we can work in a building it needs to be empty, and that usually takes time.

So it's not that we could vacate the entire alstria portfolio tomorrow morning and retrofit it. So everything we have empty, we are working on right now. But I don't -- I mean, we would not be able to do much more than what we are currently doing simply because the asset are not ready yet to be refurbished.

[Manuel Martin, analyst]

Okay. Understood. My second question would be regarding the interest rate environment. I mean, interest rates have gone up more on the Treasury side, U.S. than maybe here in Europe. However, do you see anything in the market -- or do you see anything in the market regarding property valuations? Any impact coming from the interest rate side?

[Olivier Elamine, executive]

Yes. As I said, we are seeing that for large transaction, for large volumes, which probably require a bit more structuring from the financing side, some people are taking their breath and maybe holding up. We're not necessarily seeing [indiscernible] being pulled off, but it clearly takes more time to structure the deals.

Having said that, we also take a lot of comfort by -- I mean when we look at the valuation, we take a lot of comfort by the low capital value of our portfolio, and we feel very much hedged on the downside from that perspective.

But clearly, I think the assets, which are trading at EUR 12,000, EUR 13,000, EUR 14,000, EUR 15,000 per square meter, I think those are probably much more sensitive to where interest rates are going and to how yield might evolve. I mean, obviously, your yield assume both increase in rent in the future and also some kind of financing. And the higher the capital value, I think the more sensitive you're going to be to where interest rates are going.

[Operator]

So far, we have no further questions. [Operator Instructions] We have no further questions. I hand back to you, Olivier, for some closing remarks.

[Olivier Elamine, executive]

Thank you very much, and thank you very much, everybody, for your interest in alstria. We're obviously available if you have any follow-up questions here to follow up and answer those questions. And otherwise, we look forward to speaking to you again for our half year results presentation. Thank you very much. Have a nice day. Bye-bye.

[Operator]

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