alstria office REIT AG

XETRA:AOX

Earnings Call Analysis

Steady Growth and Strategic Adjustments

In Q1 2024, the company saw revenues rise by 7.5%, while FFO dropped 20%. Leasing activity slowed slightly to 25,000 square meters, but new leases increased. The balance sheet remained stable with equity rising and net financial debt decreasing. Rental revenue increased 7.5%, and the firm secured a new €120 million mortgage for refinancing. The outlook remains positive with a robust leasing market despite a subdued investment market.

Company Performance Overview

During the first quarter of 2024, alstria reported a revenue increase of approximately 7.5% year-over-year, driven by a combination of consumer price index (CPI) adjustments and favorable leasing results from the previous year. However, the Funds from Operations (FFO) fell to EUR 20.2 million, which is a 20% decline compared to the same period last year. This drop is attributable to increased leverage on the balance sheet. The leasing results reflected 25,000 square meters leased, which is a decrease from the same quarter last year but included a higher number of new leases from their development portfolio. Overall, the company is performing within its expectations despite the mixed results.

Leasing and Portfolio Developments

The company's leasing volume showed a noticeable shift towards new leases rather than renewals. The average rent declined slightly to EUR 14.54 per square meter, largely due to the addition of 8,000 square meters from a refurbishment project. The overall EPRA vacancy rate stands at 7.7%, suggesting stability in the leasing market. Notably, contractual rent increased to EUR 197.9 million due to post-reporting rental increases attributed to additional indexation, signaling potential for future revenue growth.

Financial Health and Capital Management

Alstria's balance sheet remains relatively stable. The company reported a slight reduction in net financial debt as a result of successful bond buybacks, which has also led to improvements in their equity ratio, inching toward the 45% required by REIT laws. The current loan-to-value (LTV) ratio is now at 57.6%. Earnings per share (EPS) were recorded at EUR 0.11, marking a decrease from the previous year but reflecting the company's deleveraging activities.

Debt Refinancing and Cost of Capital

In Q1, alstria signed a new mortgage loan totaling EUR 120 million to refinance existing debt. The company is maintaining a cautiously optimistic view on financing opportunities with an average cost of debt stabilizing at around 2.9%. The company is preparing for future refinancings, with significant maturities scheduled for 2025 and beyond. This proactive approach is intended to secure favorable terms amid fluctuating market conditions.

Outlook and Market Conditions

Looking ahead, alstria remains positive about the leasing market and anticipates continued rental growth, aligning with inflation for newly refurbished spaces. However, the overall investment market for office spaces is currently subdued, with limited activity expected until at least the end of 2024, pending clarity on interest rates from the European Central Bank. Despite this, the company is confident in its robust reversion pipeline, presenting opportunities for growth given favorable underlying market fundamentals.

Strategic Vision

Alstria's strategy focuses on optimizing their portfolio by prioritizing high-quality, refurbished spaces that command higher rent. As companies seek to improve workplace quality, alstria aims to align its offerings with market demands, emphasizing ESG performance as a key differentiator. Overall, the management views the current challenges as temporary, with expectations of a favorable long-term outlook as the real estate market stabilizes.

Earnings Call Transcript 2024-Q1

[Operator]

Hello, and welcome to the Results Q1 2024. [Operator Instructions] Please note, this call is being recorded.Today, I'm pleased to present Olivier Elamine. Please begin your meeting.

[Olivier Elamine, executive]

Thank you very much, and welcome from sunny Hamburg and hot Hamburg today. My name is Olivier Elamine. I'm the CEO of alstria, and I'm here today with Ralf Dibbern, which is heading our Investor Relations to walk you through the Q1 '24 results for alstria.Before we go into the presentation, let me once again draw your attention to the disclaimer and the statement regarding forward-looking statements and the duty to update. And then without undue delay, moving on to the highlight of the quarter.The business have developed pretty much in line with the company expectations with our revenue up around 7.5% year-on-year, which was a combined effect of some CPI, which went through our P&L as well as some of the leasing results from the year before. The FFO is at EUR 20.2 million, which is down 20% year-on-year. Again, here, it doesn't cover the price as this is essentially resulting from the increase in leverage on the balance sheet of the company.Our leasing results is around 25,000 square meters for the quarter, which is less than the same quarter last year. However, with a completely different mix as we have a substantially higher number of new leases within our development portfolio and a bit less lease extension, which is mainly due to the structure of the current leases. We have less leases that comes to renewal in the first quarter of this year. And all in all, that gives us on the balance sheet side, an EPRA NTA of around EUR 9.30 per share and an LTV slightly down at 57.6%, mainly as a result of the cash generated and the value stability in the portfolio for the first quarter.Moving on then to the portfolio update. The portfolio itself has not changed materially. There was no transaction this quarter. I'll come back in a minute on the transaction market. The average value per square meter is still, from a market perspective, where we achieved below EUR 3,000 per square meter with a Valuation yield stable, slightly short of 5%. The EPRA vacancy rate at 7.7%. And our contractual rent is currently standing at the date of reporting at EUR 197.9 million. It's probably a bit higher right now, given that after the reporting date, rental have increased following some additional indexation that kicks in.On the leasing side, the letting volume we've discussed briefly before around 24,000 square meters, a clear shift to our new leases, and we're seeing a material increase in the new lease pipelines. We had less renewals than last year, which is not to speak about the fact that tenants are leaving. It's more -- it has more to do with the fact that we have less lease due to renew and therefore, less renewal for that matter. And the average rent per square meter actually keep on going up, the slight decrease that you see at EUR 14.54. This quarter is essentially linked to the fact that in the course of the quarter, we have registered an additional 8,000 square meters of office space in one of our refurbishment projects, which brought down the average rent. If you were to correct from those 8,000 square meters, we would be roundabout at the same level than the quarter before.If we move now to the balance sheet on the investment property, there is no material change. There was no external valuation for the portfolio in Q1, the small changes that you see here mainly reflects the CapEx that were spent on the portfolio over the Q1 in our development project. The equity is, again, here relatively stable. The slight increase that you have here is essentially reflecting the net income for the quarter. And the net financial debt is slightly down quarter -- compared to year-end, and that's again reflecting on the bond buyback that we have done, which have reduced slightly the amount of debt on the company balance sheet.The G-REIT equity ratio, which is basically looking at the investment properties value in relation to our total equity is improving slightly and getting closer to the 45%, which is required by [ REIT laws ], which we need to correct within the next 2 years. The net LTV is slightly down, again, same [ cause ] leading to the same effect. That reflects both the cash balance of the company and the fact that there is a bit less debt following the debt buyback and the EPRA NTA at EUR 9.30 is essentially impacted by -- marginally impacted by the net income on the -- for the quarter.If we move now to the profit and loss, the FFO per share come up at EUR 0.11. It's down compared to where it was a year ago. And again, this doesn't come as a surprise. It's a full year impact of deleveraging that we have done on the balance sheet of the company. The rental revenue on their end -- on the other hand, are up 7.5%. We've discussed that briefly before, which is a combined effect of a bit of CPI and the leasing results. And the SG&A are down and that again is reflecting the fact that some of the effects from the Brookfield transaction have been fading away, and we are keeping most of the cost of the company under control.If we move now to the financing side, and I know there's probably a lot of people out there which are focusing very much on that front. We have basically a sign up in the course of Q1 for a new mortgage loan for total nominal amount of EUR 120 million. As we've discussed previously, we are using 100% of that amount to refinance our existing indebtedness. We have been buying back some of our bonds and the table on the right side of the chart is basically summarizing all those buybacks. The new debt that we have taken on board has a maturity of 5 years and a margin of 145 basis points over Euribor. So we're still in a position to access a decent financing on the mortgage side of life at the price, which is substantially more attractive than what we could find right now in the public debt market.So if we look and zoom out a bit from what happened last quarter and we look at the overall debt portfolio of the company, our average cost of debt is again slightly up, which reflects the fact that we're borrowing new debt, which is more expensive than the debt we are currently paying. So we are at around 2.9%. The company has around EUR 2.5 billion of nominal debt, which is EUR 2.3 billion if you look at the net debt. And our maturity profile, putting aside a small [ '24 ] maturity that we're in the process of finalizing as we speak. The next large refinancing that we have is the bond that mature in 2025. And then '26, '27, we basically have the ongoing maturities, which have not materially changed since last time we spoke.If we move on finally to the outlook here, again, there is no material change in the underlying market. On the positive side, we still have a strong and active letting market, which is really functioning well. We're still leasing up and have a very decent lease pipeline, especially but not only on our refurbishment portfolio. On the investment market, we still see very limited activity when it comes to the office space. There are -- there have been some transaction announced in the residential space. But in the office space, we're still seeing a very limited number of activities, and we don't expect that this is going to restart massively between now and the end of 2024.I think a lot of that is also hinging on whether or not the ECB is going to move interest rates in June as I think the market is expecting probably a lot of market participants are trying to get some kind of direction of [ trial ] on the interest rate before jumping back in. And from a company perspective, we still have an impressive reversion pipeline, which offer us tons of opportunity, which we're trying to size as much as we can. And given the nature and the amount of the return demand that we have for those space, I think there is still a really interesting opportunities here to move the company forward.So to summarize, there was, I think, nothing really unexpected in the course of the quarter. The company has developed pretty much in line with what we would have expected. The markets themselves have not materially changed from where they were a few months ago with a leasing market still dynamic and the investment market is still a bit subdued.With this, I would now hand over and welcome the question, if any.

[Operator]

[Operator Instructions] The first question comes from the line of Kai Klose from Berenberg.

[Kai Klose, analyst]

Two quick questions from my side. The first one is on Page 5 of the presentation where you said that new leases had [ award ] of 4.5 years. In the additional information in the chart book you mentioned there are 2 larger leases having award of 10 years, if I see that correctly. Maybe could you explain the difference or why so many other leases have been signed at apparently much shorter leases?

[Olivier Elamine, executive]

Kai, you said you had another question?

[Kai Klose, analyst]

Yes, yes. And the second question is also on lettings is what do you currently see as a kind of normalized level of incentives, of course, it's different asset, but what's your current experience in the markets?

[Olivier Elamine, executive]

Yes. So to the first question, I think what we're showing in the additional information is all the leases which are higher than 1,500 square meter. And on all those leases, these are [ essential re-leases ], which are in the new development portfolio, most of them are coming from development portfolio, we are usually achieving substantially higher [ awards ]. I mean you mentioned the 10 years, and that's between 7.5 years and 10 years is what we would usually achieve in those kind of spaces.On the other new leases that we have signed, it has also to do with the fact that on some of the assets where we're trying to synchronize the end of the leases with the time period where we're going to bring the asset back to a development stage. So to give you an example, we have an asset in Dusseldorf, which is going to be empty around 2027. So if we have a vacant space today, we're going to start to lease it around 2.5 years to 3 years, not more than that because we are trying to kind of synchronize all the leases and have the asset vacant at the given moment in time for us to be able to refurbish it and retrofit it when it's fully vacant.So the difference between the 2 numbers that you have seen and the reason why we have lower [ awards ] on some of the smaller leases less than 1,500 square meter is usually explained by that mechanism where we're just trying to optimize the cash flow at the company level and therefore, lease on a short-term basis while we wait for the asset to be empty.On the incentive side, look, it's the -- it's still pretty reasonable, I would say. And I don't think the incentives have changed materially from where they were even before COVID. We're still looking at somewhere between 8% and 10% of the value of the lease that you're providing as incentive, especially on newly refurbished space, which is more like a rare commodity right now in the market. The need for high incentive is not as strong. The letting market itself remain reasonably balanced.So we are not seeing right now the balance of power shifting neither towards the landlord nor towards the tenants. So we have a reasonably balanced conversation with the tenants. And I would expect that this balance is going to remain as we move forward. Again, this is mainly in space, which is refurbished as you have space, which is older and where no CapEx has been spent, the situation might be a bit different, but that's usually not the -- that's not the kind of space that we're putting on the market.

[Operator]

The next question comes from the line of Pranava Boyidapu from Barclays.

[Pranava Boyidapu, analyst]

As you mentioned on the debt maturities, you don't have a lot due this year and really, it's just a bonds due for the next 3 years. So have you started engaging with bondholders to understand how -- what are the options available to you? Or are you planning to refinance with secured debt?

[Olivier Elamine, executive]

Yes. I mean, we have not engaged with bondholder because I, and I assume every bondholder which is listening to this call is assuming that we would repay on the date where the bond is going to be due and all buy back some of the bonds on the way to that date. And the intention and that has not changed is to refinance that essentially through the mortgage market, correct.

[Pranava Boyidapu, analyst]

And if I could just follow-up, I think you've mentioned before that the holdings you've declared as a related party from Brookfield of these bonds are independent of the bond buybacks that you have done. Is that still the case?

[Olivier Elamine, executive]

Yes. So Brookfield is an independent entity compared to us. We have different governance. And what we show on our website is our holdings, we do show the holding of Brookfield within our financial reporting because we have to report them as related party transactions, but those are 2 independent holders essentially. The bond that we hold for ourselves are basically going off our balance sheet. When you look at our financial -- consolidated financial statements, whereby the bond of Brookfield, all bond Brookfield are the same than the bond that any third-party investor would have.

[Operator]

[Operator Instructions] The next question comes from the line of Guillaume Langellier from Columbia Threadneedle.

[Guillaume Langellier, analyst]

Sorry, I joined late. Could you just confirm that there's not going to be any cancellation of your bond holdings as far as you're concerned, not Brookfield.

[Olivier Elamine, executive]

Yes. So for the time being, we are keeping the bonds that we own on the balance sheet, we're not canceling them. That's not to say we always have the option to cancel them, but we have not done that. And from today's perspective, the likelihood is we're going to hold them to maturity and then cancel them at the date of maturity. But there's -- I mean there is no kind of commitment to do that to put it this way. For us, there is no difference between canceling them and keeping them. We just keep them because it basically allows us to book the profit on the buyback at the point in time where we feel it's the most appropriate for the company. So the main driver for us in canceling or non-cancelling the bonds is the moment in time where we want to book the profit. So I don't know if it makes sense what I'm saying.

[Guillaume Langellier, analyst]

Yes. But so should we think of them as also investments for you? So could you actually resell them in the market, if you could book a higher profit?

[Olivier Elamine, executive]

No, I think that's not the intent. The intent is not to resell them Again, the only reason why we have not canceled them yet is because there's a timing consideration about at what moment in time we're going to pay -- we're going to generate the profit. And the reason why the timing is relevant is because, as you know, as a REIT, we need to distribute 90% of the profit that we generate. And so we want to make sure that at the moment where we book that specific profit, either we have loss, we can offset it with, or we have the cash to pay the dividend.

[Operator]

The next question comes from the line of Thomas Rothaeusler from Deutsche Bank.

[Thomas Rothaeusler, analyst]

Yes, actually I have one question. Just wondering if we could get any color from you on the broad outlook for values and operational performance. I mean, if you look at values, I mean, do you think we are through most of the downward adjustment and on operating performance just regarding vacancy and rental growth, what is your expectation?

[Olivier Elamine, executive]

Well, thanks for the question, Thomas. I appreciate the trust and our wisdom and reading into the future. Look, on the rental market, I'm very positive on the prospect of the rental market, including the prospects for rental growth at least in line with where inflation is when it comes to like new repurposed space. What we're seeing right now in the letting market is that most of the corporates are looking to upgrade the quality of the space in which they are. And that doesn't mean that everybody is going to end up into luxury office, but everybody is moving up a bit the value change when it comes to the quality of the offices that you have. And that's basically still driving rental demand and also rental growth for those specific assets.Again, if you have an assets in which you're not investing anything, it's unlikely that it's going to generate any growth from a rental perspective. But if you do your homework and you provide an asset which has good credential from a new workspace concept and from what people call ESG performance, it's likely that you're going to see rental growth trickling through.On the value of the real estate and the yields that is going to come to the real estate, I think it's still too early to say whether we have seen the [ chart ] or we -- or they could go lower from where they are now. And the reason why I'm a bit cautious here is we haven't seen yet most of the distressed transaction going through the market. If you remember, or if you listen to the call that we had for the year-end results, our view is that you first need to see some of the distressed transaction going through. And for the time being, a lot of the investments and a lot of the money, which is looking to invest in offices, it's sitting on the sideline because it's waiting for those kind of cheap distressed assets to hit the market before the investments start again.And then depending on when the distressed assets are going to hit the market, it might then have an impact on how value are looking at lives. So the closer you are to your end and the closer you see some of the distressed transaction trickling through the market, the more likely it is that the value are going to say, oh, now, value are down. And then it's going to take a few months or maybe a year before values start creeping up again.So from a very short-term perspective, there might be some pressure left on the value of real estate. But then if you take a step back and you take more like a 5- or 10-year view on where we are, we're probably much closer to the bottom than we are to the top. And so it's just the next few months where you can still see some pressure and selling pressure on the assets. But as soon as the distressed will be flushed through the system, I'm confident that you're going to see the value recover because the underlying fundamentals and the underlying economics are still relatively good.

[Operator]

[Operator Instructions] Since we have no further questions registered. I'll hand the conference back to you, Olivier.

[Olivier Elamine, executive]

Well, thank you very much. Thank you for your interest in the company. Your interest still in the company. We appreciate you taking the time to be with us today. We will be speaking again for the half year presentation, I think, in the course of August, early August. And in the meantime, if you have any follow-up questions, by all means, please feel free to drop us the line or call us either Ralf or myself, we would be happy to accommodate. Thank you very much for your interest. I wish you a good end of the day and looking forward for the next time. Thank you. Bye-bye.

[Operator]

Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.