alstria office REIT AG

XETRA:AOX

Earnings Call Transcript 2023-Q1

[Olivier Elamine, executive]

So welcome to the Q1 result from alstria, I apologize for the technical mess that we're having right now. And let me go through the transition without waiting.

First, a few moments on the disclaimer and the forward-looking statements and duty to update.

And without any delay, let's move into the quarter. The operating business has developed pretty much in line with what we're expecting with revenue at around EUR 45.5 million and FFO down 7% year-on-year at EUR 25.4 million. I will comment a bit more on that, but this is linked to the increase in leverage that we have been implementing last year, which has been the increase there for the company and had an impact on the FFO, which was again, we did have a busy quarter on the leasing side and I think on the leasing front, it's something which is still very positive in the overall German market with overall activity of around 34,000, 35,000 square meters of leases. A bit slowdown in the new leases but increase in the lease extensions. And in overall, relatively [indiscernible] in terms of total amount of income secured. I'll come back to that in that compared to the same period last year.

The balance sheet, I don't think there's much to report [indiscernible] stable compared to what as well at the end of the year for NTA at EUR 14.40 per share and an LTV stable compared to year-end at 43.7%.

Moving on to the portfolio. I think here again, extremely new goal. There has been a little portfolio activity in the first quarter. The investment market itself is pretty much stall right now with very little transactions taking place. We did sell or come back to the small asset in the course of the quarter. But overall, the portfolio is very much what it was in the end of the year with an average annual at EUR 3,300 per square meter, which we feel very comfortable with at this point in the cycle. An average weighted lease length of 5.6 years and interest rates, stable estimate 4%, then compared to rent, slightly short of EUR 296 million.

Going back into the letting, we discuss that briefly. As you can see on the slide, our average rent per square meter is going up nicely and reaching at the end of Q1 2023, EUR 14.19 per square meter. The -- all the leases that we have extended during the first quarter will generate future income was around EUR 46.5 million. That's compared with EUR 30 million for volume that we have signed last year. And that links to the fact that we have been able to sign leases or extend leases usually at a higher rate or longer term than what we did a year ago.

On the transaction side, really nothing exciting to report. We did sell a small asset that we own in Eschborn, which was vacant assets. Eschborn is operating markets where we have either a lot of expertise or a lot of believe in the future. So we are just exhibiting as part of the finalizing the strategy we started about buying the center and selling the periphery. So here, we are clearly selling the periphery. And we're still selling the end that provide small outset at the premium to year-end value, which will also reflect the premium to year 2022 book we had.

If we move to the P&L and the balance sheet, starting with the balance sheet. The balance sheet has remained very stable in the quarter-to-quarter with the investment properties slightly up, potentially reflecting 2 effects. One of them is the increase in France in Hamburg and the state of Hamburg would have a negative impact on the value prop.

And the second one was the investment that the company has made with the investment property portfolio, which led to the increase of the value. Equity is rather stable at EUR 2.5 billion. It's going slightly down, again reflecting the change in investment properties, the devaluation to the increase in [ transpac ] and our net financial debt, very much where it was at the end of the year at EUR 2.4 billion, and I'll come back on the financial debt, most of which happened after the close of the quarter.

If we look at the P&L, I mean we did change and adjusted our accounting policy in the first quarter of 2023 to align with the accounting policy of our shareholders that helped us to simplify our internal processes, the reporting requirements. And in that process, we have and I pursue to look into our Q1 results, if you want to do a bit more. We are now capitalizing part of the interest of the development project that we're doing. We're also capitalizing part of the G&A, which relate to the development project, and we have shifted part of the LTV which are linked to real estate operations to the net operating income.

So all those changes do not have an impact on the overall bottom line. It's more like a shift in position between one line and the others.

If we put aside those accounting policy change, our gross rental income have remained relatively flat at EUR 45 million. Funds from operations as discussed before is down, which reflects the increase in interest rates on the debt. We have increased the LTV compared to where we were in Q1 2022 and that obviously have an impact on the overall FFO, which was clearly expected.

Our SG&A are down, and that's also as expected. If you recall, at the end of the year, we have discussed the fact that 2022 was impacted by a lot of transaction-related SG&A costs, which were one-off and we're not deem to repeat in 2023, and this is what you're seeing right now in the numbers with the reduction in 25% in the SG&A cost.

On the debt side, we're showing you on this slide the level of LTV and the debt structure at the end of the quarter. As we discussed, very little change compared to if we were at the end of the year. And most of the work that took place on the [indiscernible] happened after the close of the quarter, which is what we're showing on this next slide. We have been repaying EUR 325 million bond, which has matured early April. And we're in the process of repaying a EUR 37 million Schuldschein in the next few days. And we did that by entering into 3 new loans, 2 7-year loans for a total amount of EUR 278 million of mortgage loans, which includes the EUR 278 million, include EUR 48 million extension of an existing loan and so top up of an existing loan and EUR 188 million new loan and a new 5-year loan for EUR 100 million of [indiscernible]. And we have a weighted average margin of 177 basis points on those loans.

We are showing you also how it basically shifts on debt maturity with no maturity left in 2023 and around EUR 220 million of maturities in 2024 million which we are currently working on pushing back.

What is interesting, I think, is the ability of the company to tap the mortgage market, which, at least from what we can see still are a liquid at a price and the margin, which is clearly very, very competitive compared to anything you can find in the inventory debt markets. And we are actually very happy that we've been able to do that.

I think it has to do also with the fact that we're dealing relatively small amounts, which do not nearly require a lot of syndication from a banking perspective and also offering our banking partners portfolio with a number of assets they can diversify into -- which allow us to basically open the line to the mortgage market.

So this is a market we're looking at how the public bond market is developing as long as it's trading where it's currently trading, it's clearly from a company perspective, much more interesting to gain into the mortgage market, both from liquidity and a pricing perspective.

Following those refunds, our debt has been slightly down, and that's essentially reflecting the fact that we remain borrowing a bit less in repaying. But our intention is to keep being healthy closer to the 45%, 50% over time.

Before I open the call to Q&A, just a few words on the outlook, as we discussed, the leasing market remain very, very active and strong despite the volatility we have in the financial market, one of the major change and shift that we have seen in the market, have been the fact that tenants are renting rather smaller space than bigger space. So we have less very large demand compared to 2 or 3 years ago. But there's also volume of demand that we have. It's still pretty much stable.

And within alstria portfolio, we also have a way to accommodate all sorts of demand, so we are pretty comfortable that we're going to be able to tap in the existing liquidity in the lending market that we put, which is still very, very supportive.

The investment market on the other hand, remain with very low activities, and we don't expect it to recover materially in the quarter of 2023. I think we do expect transaction to restart actually in 2024.

From a company perspective, we're still focusing on our alstria pipeline, which offer us a number of opportunities to upgrade and transition our assets to what the tenant needs, and we still have a number of projects to work on. And so we are pretty much occupying into improving and increasing the value of the portfolio. And our intent is to continue to do so.

As you know, we are not dependent on the transaction market half of this. We're more dependent on the negative letting market, which we still have. And so we are pretty comfortable to deliver on the performance of the company. We are confirming our guidance, which is revenue of EUR 190 million for the full year and then around EUR 79 million. And we're pretty comfortable to deliver that and continue to grow the value of the portfolio over the years through active management across the assets that we're currently on.

That's it on my side for the Q1 presentation summary really from an operation everything has moved in line with our expectation. From a market perspective, leasing market still virtually dynamic considering the overall rather than [indiscernible] market expect is more subdued. The interesting part there is an active financing market with a mortgage bank at least for company [indiscernible] group, and we have been able to tap into that market pretty actively.

We'll now hand back to the operator for Q&A, and I apologize again to the technical difficulties at the beginning of the call. Thank you very much.

[Operator]

[Operator Instructions] Okay. Our first question comes from Kai Klose.

[Kai Klose, analyst]

So the second presentation, which you put online with the additional information on the Q1 results regarding the refurbishment project. Could you maybe give an indication if the expected construction cost or refurbishment costs are still valid? Or have your rental assumptions relating assumptions changed in the light of the successful lettings in Q1? Just to get an impression how the costs you're targeting of 6.1% of the construction phase might come out.

[Olivier Elamine, executive]

Well, thank you, Kai. The table you have, the initial information the table reviews, we published before at year end. We did not this year because we changed EBITDA reporting. So there shouldn't be anything unexpected in that table.

On the construction cost side, I do not mention that during the call, but we are currently seeing that there are -- at least they stop increasing and then to some extent, they start easing here and there.

I think the construction industry is one of the industry, which has the weakest forecast in terms of confidence in the way the economic situation is going to evolve. So we are seeing a substantial meeting in the construction cost. And the number that we have published are the number that we expect to achieve.

On the leasing side, as we have also a targeted number that we expect to achieve. We are, in principle, moving ahead of those numbers because there is clearly strong demand for refurbish and reposition assets.

So all in all, I think if you the [indiscernible] of the additional information that we have published. This is still our current expectation as we speak.

[Kai Klose, analyst]

And a very quick follow-up on Page 6 of this second handout. Question on the renewals. I saw that the rental levels were either unchanged or slightly lower. Was this due to some specific reasons on the -- for the existing -- for the expected assets? Or is it a general trend you see in the market that tenants when it comes to renewals that you as a landlord, you're not able to increase renewals.

[Olivier Elamine, executive]

Yes. So on the renewal, essentially, you're talking about options, which are being utilized by tenant. I mean, there's obviously was a question whether it's renewal an auction, we will classify the magnitude. And in the auctions, as you know, in the German context, basically, the tenants just decided to continue the needs on its current [indiscernible]. There might be a bit of competition with the tenants here and there. But essentially, that's the reason why the terms remain unchanged. Whenever we have communication with the tenants including the existing tenants, and this might involve usually a change of the amount of space or us doing more CapEx or improvement in the asset for the purpose of the tenants. In that case, we wouldn't classify that new lease and then show the increase rent most of the time when [indiscernible] release.

[Operator]

[Operator Instructions] Our next question comes from the line of Niraj.

[Unknown Analyst]

I just had a quick question on your cash. I see the pro forma cash is EUR 351 million. Do you have any plans of sort of liability management exercise or how do you think about your cash position? And given the fact where your bonds are trading, do you have any plans further on that.

[Olivier Elamine, executive]

Yes. So the cash position that [indiscernible] at the 31st of March is essentially -- you need to be in line that we had we refinanced EUR 325 million of bonds and EUR 37 million of Schuldschein adjusted today after the quarter. So is this a kind of cash position was it can here to us to cover for the refinancing yields which we have done. We use our cash -- I mean, our cash on the balance sheet essentially to invest in the portfolio, and we have around EUR 150 million of investment that we do on annual basis on the full year basis.

Now that we have refinanced the bond essentially through the through the mortgage loan that we have put in place, we have basically been rebuilding our cash position. Obviously, there is a question in terms of the amount, the usage of the cash, it's operating to keep such a high amount of cash from a capital management perspective.

And so if you remember, we did mention that we intended to return capital to shareholders in an amount of around about EUR 1 billion. We did so far returned around EUR 750 million. So we have EUR 250 million to go. We do have, as I mentioned before, the investment we need to make in the portfolio, which is around EUR 150 million and there is also potentially the opportunity to look back at the bonds, which are trading at a special discount to their nominal value, which can offer also attractive opportunity to the company.

So we don't lack investment opportunity for the cash and we probably don't attempt to keep such a high amount of cash on a current basis and beyond what we think for the portfolio investment on the balance sheet. And so this is something which we're still looking at what's the best most efficient use of that cash going forward.

[Unknown Analyst]

Got it. That's helpful. And my second question is on the S&P rating. Do you have any comments or thoughts on that to share?

[Olivier Elamine, executive]

Sorry, could you repeat the...

[Unknown Analyst]

Yes. I'm just asking about the current S&P rating, which is BBB- on stable outlook. Do you feel any risk of downgrade in the current environment? Or do you have any thoughts to share on that side.

[Unknown Executive]

Did you understand the question?

[Olivier Elamine, executive]

I'm sorry, you're talking about [indiscernible] rate?

[Unknown Analyst]

Yes, I'm just talking about your S&P rating and how you're thinking about it?

[Olivier Elamine, executive]

So look, I think we are an investment-grade rated company, and we're doing whatever we can to remain an investment-grade rated company. I think our intent is not to get ungraded by S&P.

On the other hand, if I look at what's happening in the broader market, in the office side of life, there is -- are a number of changes, and I think more of the real estate rating entities or the rating agencies we're looking at commercial [indiscernible] , you should be concerned about how the office market is evolving, whether office and the future or not, whether value are going to drop or not.

As we discussed, we feel pretty comfortable with the future business of the company. We feel pretty comfortable with the fact that the value of our portfolio is very much protected on the downside because of the nature of the portfolio that we own and the fact that we have room to improve the value investing into it and we also have a platform to achieve.

So from our perspective, the credit risk of the company has no materially changed by itself. If anything has changed is the overall environment in which we have formed. And there is nothing much we can do on the exogenous changes around us. We can only work on [indiscernible] risks that we're managing ourselves.

And so from that perspective, I feel pretty comfortable in the credit quality of the company. whether or not S&P share a view only for them to confirm. But we have a regular data we did. And I think that they have a reflection of growth in commercial real estate, where I feel pretty comfortable that the credit of the company is still just as strong as it was 6 months ago.

[Operator]

At this time, we have no further questions. Please continue.

[Olivier Elamine, executive]

Well, thank you very much for your interest. I will be looking forward to speaking to you for the next quarter results on the half year results. If you are a shareholder of alstria, I just wanted to remind you that we will be holding in 2 days, our general meeting, and I will be also looking forward to speaking to you then hopefully with better technicals than today.

So again, I apologize for a bit of the technical side, but thank you very much for your interest in the company, and I'm looking forward to our conversation in the future. Thank you. Bye-bye.