alstria office REIT AG

XETRA:AOX

Earnings Call Transcript 2021-Q4

[Operator]

Dear ladies and gentlemen, welcome to the conference call of alstria office REIT-AG regarding the full-year results 2021. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. 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, Chief Executive Officer, alstria office REIT-AG]

Thank you very much and welcome everybody to the full year 2021 result presentation from alstria. I'm here in Hamburg on a sunny day with Alex Dexne [indiscernible] (00:00:46) and Julius, which is from an IR team, to walk you through the financial result. Before we start, just a short look at the usual disclaimer on the forward looking statement and the duty to update, and as it is our habit before the annual results presentation, we just wanted to kind of start with a bit of a business update and some thought about what had happened in our markets over the last few years during the COVID pandemic.

And one of the – one of the thing I think which was kind of interesting and I have – I think answered a number of question that we had about the office market prior to COVID is this kind of dichotomy where on the one hand you can argue that no one actually really need an office. I think we went into that pandemic and when there was a first lockdown and everybody went back home and then the office world did not collapse and we were able to work and produce report and things were just working fine despite the fact that everybody was at home.

But then on the other hand, we also figure out after a while that being at home, you could do a number of things, but then there was a number of elements that you were missing. And those are the elements I think that everybody which is keen in going back to the office today is looking for. And where this is interesting, if you're an office owner, is from our perspective, what the pandemic has done and what this kind of very unfortunate social experiment we all went through has done, it has highlighted basically why tenants are paying rent in an office. What is the added value that the office have? And why do – why should tenant pay and what should they expect?

And the reality is, they're not paying for the four walls and the roof and the desk that you got to put in there, but they're paying for something different. And you could call it creativity, you can call it teamwork, you can call it culture-building. There's a number of things that can be structured or color on that. But this added value of the office, I think, has been made very much apparent in the – in the pandemic. And I assume that tenants which are looking for office space today, are trying to value whether or not the office they're going to rent is going to be able to deliver that.

So we're moving away from the office, which is a commodity and getting into a place where you're trying to pay for something which is going to add value to your business. And this is really at alstria something we've been working on for – for quite a while and we intend to capitalize on that trend as much as we can, going forward.

It's also hard to speak about two years of the pandemic and not touch on the ESG topic. As you know, this is a topic we as a company have been discussing quite a while, including in our annual calls, and one of the point which is actually has been, I think is a major innovation in the last year has been the introduction of the EU Taxonomy. And fortunately, and this is really my point of view, so please disagree if you want to, the Taxonomy might be a very good idea in terms of sector and real estate and is missing the point by a margin.

So, what the Taxonomy does and what it's going to do, it's very likely that it's going to be pushing capital in a place with limited supply and where they have actually little ESG benefits, and it's going to starve capital in a place where there's actually a need for capital and where there's huge supply. So, if you look at how the different regulation are set up, if you look how the SFRD is set up, so the reporting obligation of investors, you would realize that in actual fact, in order to be Taxonomy compliant and – and my understanding is like everybody wants to be Taxonomy compliant today, basically, you need to own brand new buildings, which are considered as compliant.

But, if you are actually intending to transition buildings, then you're very, very unlikely to be Taxonomy compliant. And this, we believe, is going to create a tremendous market opportunity. You – for people who are going to be able to walk next to the Taxonomy and bypass the – the needs of being compliant or the urge of being compliant, the market of building to be refurbished, which is vast with a lot of supply, is going to be starved for capital, and therefore there's going to be a lot of interest and opportunity to invest in that market. It's not yet the case, but it's coming.

And the market where those building, when they are refurbished, you would be able to sell them to, which is a market with very limited supply, is going to be where there is all the capital flowing and little assets that actually ticks the box on offer and we think that the ability of a company like alstria to take this contrarian view while still sticking to its ESG targets is going to be a unique market opportunity that that we can take with us.

And you know that we have been very much leading the way on ESG and on the thought process around that. So, we believe that, you know, we can still fulfill our purpose and transition buildings from the old world to the new world, take into consideration not only the ESG, but also the new work concept that we've discussed a bit before, and that I think it is going to generate a substantial opportunity.

This needs – I mean, the reason why I'm kind of highlighting that is, is because it need also to be put in the context of the transactions that we just executed with Brookfield. Our view, and rightly or wrongly, and let me maybe start with the fact that we had an incredible time in the public equity market and we have enjoyed continuous support by our public shareholders since the company IPO'd and none of us would be there today if it was not for that support. So we're very grateful for everything that happened.

But we came to the conclusion that in the current market, the public equity would be relatively inefficient because the change that are happening are too radical for the public equity to take a view and to take a strong conviction of what's going to happen. If you speak to individual investors, they have, so lot of them, strong conviction, but the market as a whole is not in a position to take conviction. And my belief is that public equities in the office side, I don't know for other part of real estate, but the office side are going to be struggling to try to convince the concern about ESG and the concern around the future of office, are going to [ph] weight (00:08:15) heavily on the – on the share price going forward.

What we find in Brookfield is a partner that actually share our conviction about where the market is going and that sense is going to help the company to be able to make the best of the opportunity we've described before. We share the view of what the opportunity is, and we share the view about how to tap that opportunity going forward. And we believe that at least for the coming years or so, the private market are going to be more efficient because they are able to take stronger conviction than what the public market will be able to do going forward.

So, what changed for us is not fundamentally as the business we're doing. Our purpose doesn't change, for that matter of the fact that we change shareholder, doesn't change the market in which we operate. But what change is our ability to allocate capital differently, to be able to make use of the – of the market opportunities that we're seeing. I think the best illustration of that is the fact that, you know, we're going to pay a minimum dividend or we're proposing to the AGM to pay a minimum dividend this year of €0.04 per share, compared to €0.52.

And so, they're going to be retained earnings here and moving forward, the ability of the company to do more of – and invest more in its portfolio is going to allow us to tap into the refurbishment opportunity, and try to benefit as much as we can of that change and transformation in the markets and we're really looking forward for the next chapter of the company in that respect.

And finally, and just to spend a few words on that, we have published today – or yesterday, actually, next to our annual results presentation our carbon accounts. I would encourage you to look at them if you're – if you're interested. What the carbon account shows is that the balance sheet, our carbon balance sheet has doubled in size and that's really related to the increase in price of carbon in the course of 2021, which increased by almost 150% in 2021.

And from my perspective, the main lesson that we learned when we look at our carbon account is, the very low impact of the price of the carbon that we emit from our direct operation compared to the change in value in the embedded carbon and that highlight is that's still necessary, but it highlights the fact that the challenge in real estate, at least in the office market is not so much into the efficiency and the operations and the emission in operation, but it is in the embodied carbon discussion which I'm glad is taking prominent space today and in the conversation about real estate ESG. But this has been our belief through the years, and now it's showing the right to be strongly in number. The challenge for real-estate company is and managing the embedded carbon and not so much into – or not anymore into the operational emission which are pretty much under control.

What's also interesting to look at is in the operational carbon, at least when it comes to alstria the vast majority of the carbon saving that we have made relates to change which are unrelated to us. So this is basically decarbonization of the grid and that also highlight the need for interaction with different players across the value chain, if we want to effectively manage our carbon exposure over time.

If we move back to the more standardized reporting and the operation, we had in 2021, a relatively strong year from a financial perspective, which is – which is always at least looking retrospectively, interesting if you think about the fact that for most of the year, the vast majority of our buildings were barely occupied. I think the resilience of the company is something that – that is – is very welcome and I think underlines the strength of the portfolio. With our revenue up around 3.7% year on year, a strong growth in the FFO at around 7.2% and also a nice leasing result. And I'm going to come back to those number in a bit in more detail.

We ended up the year almost balanced from a sale and acquisition perspective, and we have invested €121 million in the portfolio in terms of CapEx, which again, is something we intend to accelerate in the future as part of the repositioning of the asset and trying to size the market opportunities that we're seeing. The NAV is at round about slightly short of €19, which compared to €19.50 of the offer that was made and actually accepted by the vast majority of our shareholder by Brookfield.

The portfolio itself is still very much the same. The value is €4.8 billion. We do like relatively small assets in terms of size 12,000 square meter, 13,000 square meter on average per asset. Capital value, €3,400 per square meter, which offer ample opportunity to spend money on refurbishment and improve the rental income. And we have a contractual rent of €205 million in the portfolio. Our rent collection rate in 2021, despite the pandemic was at 100%.

Letting volume was relatively strong again, considering that we were in the market, which was pretty inefficient from a letting perspective. The market is doing better as we speak. There is clearly more momentum in the letting markets, but the letting volume at 155,000 square meter is nothing I think we need to be shy of. The average rent per square meter on the portfolio has continued its trend upward and we have secured €120 million of future income through the different leasing that we have executed across the year.

And all of these letting activities have led to a like-for-like rental growth of 2.8% in the course of 2021, bearing in mind that, I mean, we had a bit of inflation in 2021, but nothing compared to what we're having right now, and that inflation is clearly going to have a material impact on the way. The revenue of the company are going to be moving forward.

On the transaction side, we have been continuously selling some of the assets that we had in the periphery, and 2021 was the year where we basically finalized that process, the asset in Trier, which was one of the last nursing home that we had, has been disposed and that basically terminates the sale of the non-core assets which we acquired from the office together with the company in 2015, and so we're done with that process.

And on the acquisition side, we've been again here consistent with the view of acquiring buildings that require repositioning. Acquiring two property was in Berlin and marrying them and the other one in Frankfurt and [indiscernible] (00:16:07) which are two properties that we intend to reposition over the years and which offer a substantial value potential from our perspective once the repositioning will be done.

Moving on to the financial and the numbers, I'm going to go very briefly through them, investment property is up year-on-year by around 5% and that's essentially reflecting the market – towards the CapEx that we have spent on the property and the OMV gain. Our equity is up slightly again here. We're going to go back to the NAV bridge in a minute and our net financial debt have increased again, which is essentially the reflection of the investment that we have made during the year through the bond that we have issued back in 2019 at the very beginning of the pandemic.

If we look at the EPRA NAV bridge, just to highlight, I don't think there is going to be a lot of surprises here. In essence, the dividend payment is nicely balanced by the operational profit and the change in NAV is being reflected or impacted by both the revaluation and the disposal gains, those being disposal gains being realized gains and revaluation unrealized gains. So, what – I mean, if you were likely to look at the same bridge next year, well, the dividend will not be there anymore and the rest will – I mean, not giving any guidance on the revaluation, but the rest would be probably looking in a similar way. And so the – retaining the dividend is just going to have a positive impact on NAV.

Going forward, if we look at the debt, well, first of all we are kind of very happy that S&P has confirmed our Investment Grade rating at BBB minus. We still – we're downgraded following the transaction, but we remain at the investment grade level. The current debt structure which is shown on the – on this slide, is going to change in the coming weeks. Our intention is to increase the overall leverage of the company again in order to be able to adjust the capital structure to the opportunities that we're seeing.

But that you have on that slide the structure with a net LTV of slightly short of 30% at the end of 2021, with our intention to move that closer to the 50% level as we go through the 2022 level, and then finally, if we look at the profit and loss position across the company, we've briefly touched base on that before. We have a strong increase in the FFO of 7.2% and a slight increase in the SG&A which essentially reflect the higher kind of cost in the employment market in Germany, and some of the virtual shares and the non-cash item linked to the employee participation program, which is reflected in those numbers.

That's it from my perspective for the year-end presentation I would now open for the questions.

[Operator]

Thank you. Ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] One moment, please, for the first question. And the first question is from Kai Klose at Berenberg. Your line is now open. Please go ahead.

[Kai Klose]

Yes, hello. Good afternoon. I've got three questions if I may. The first one is on page 31 of the company report. Just want to understand the amount of maintenance CapEx which you deduct from the FFO towards your AFFO wasn't really lower compared to 2020. What was the reason for that?

[Olivier Elamine, Chief Executive Officer, alstria office REIT-AG]

Hi, Kai. It's nice actually to speak to you. Well, the main reason is, I think we've discussed that in the Q3 numbers and because of the pandemic, obviously, there was a slowdown in the – in the amount of work we were doing in the buildings, and that's basically what you see reflecting in the number here. So, we expect that there's going to be a catch-up of that in the course of the year 2022.

[Kai Klose]

And the slowdown was so significant that it's more than half – less than half compared to the 2020 numbers?

[Olivier Elamine, Chief Executive Officer, alstria office REIT-AG]

Yeah. But that's exactly it.

[Kai Klose]

Okay. And the second question would be on the refurbishment pipeline, which you show also in the report. Just to understand, the number, so there are more properties included, but the – there's a completion date. It's only [indiscernible] (00:21:45) precise for a few numbers. Could you explain why?

[Olivier Elamine, Chief Executive Officer, alstria office REIT-AG]

Why we don't provide the more specific date for full completion?

[Kai Klose]

Yes, I think we have about 20 stocks – 20 properties on page 25 in that tables, but only for about half of that, you mentioned the expected completion date, just on [ph] the third point (00:22:07)?

[Olivier Elamine, Chief Executive Officer, alstria office REIT-AG]

Well, so I think what you would notice if you read through our report is that there is probably much less information that we use to put in the past and I think that also reflects the fact that we're slowly moving to a place where we have a single shareholder, and therefore we're not necessarily providing as much information as we used – we used to do previously. So, I mean, there's a number of things that you would not find in the report this year, and I can highlight them. So you will not find the list of the properties with OMVs, et cetera. And that really highlights, I think, the change that we had from a shareholder structure, which then have an impact on the way we're reporting and the way – and the transparency of the company going forward.

So, I think you need to expect probably a bit less information from us going forward. So – I mean, I appreciate it's bit weird looking at it from today's perspective, but this is something that we will – you will continue to see going forward. There's less need for us to basically allow the market to have a better view of what we're doing and how we're doing it.

[Kai Klose]

Okay, and then, the last question, maybe, as you mentioned the downgrade to BBB minus, what can we expect regarding financing costs regardless of the higher interest rate levels in general, as they are now being listed investment grade weighted but slightly lower. And how this could affect the targeted yield on cost, you mentioned of 5.5% for the development project?

[Olivier Elamine, Chief Executive Officer, alstria office REIT-AG]

So, our yield on cost is not going to be impacted by that because it's an unlevered. As you know, we always underwrite our asset from an unlevered perspective. So, our cost of financing doesn't have an impact on the way we're looking at life. I think if you look at the – at the spread on the – where our bonds are currently trading, they're obviously trading wider than where we were, BBB plus, which is kind of an obvious statement to make.

So, the – I would expect that the cost of financing – I mean our marginal cost of financing would be probably somewhere around 50 basis points wider from where we currently is. Having said that, the – I mean, there is also a bit of technicalities in where our bonds are currently trading. You know, a number of investor have assumed that we would be downgraded beyond investment grade and so, one of the arbitrage that was possible was to buy the bonds and then put them back to the [indiscernible] (00:24:46), which – which didn't work.

So, there was a bit of downward pressure on our bonds in the – in the few weeks after the announcement of S&P that we would remain investment grade, but I would expect overall, and I think this is what you would see if you take the average of our – of the curve of our – where our bond was trading, to be around 50% higher than what we are. What we – what we will clearly also do a bit more now than we were doing in the past is mortgage financing and from that perspective, this would probably be pretty much in line with the cost of financing that we have.

[Kai Klose]

Understood. Many thanks.

[Olivier Elamine, Chief Executive Officer, alstria office REIT-AG]

Thanks, Kai. [Operator Instructions]

[Operator]

And the next question is from Manuel Martin, ODDO BHF. Your line is now open. Please go ahead.

[Manuel Martin, Analyst, ODDO BHF AG]

Thank you for taking my question. Just two questions from my side. One is on the dividend policy. Is it fair to assume that alstria would keep a minimum dividend payment for the next, let's say, near-term future, giving the financing with your investment program?

[Olivier Elamine, Chief Executive Officer, alstria office REIT-AG]

So, that's – I mean, that's really clear what I think we've been – I think what was in the offer documents and what we've been guiding. As a market toward the – in the communication around the Brookfield transaction and that also what's reflected in our proposal to the AGM this year. So, I would assume that the operational profit that we will generate – we have to pay, we've been paying much more than the 90% required by the [ph] re-legislation (00:26:35), but I think it's a fair assumption to assume that the operating profit is going to be distributed to the minimum extent legally required.

[Manuel Martin, Analyst, ODDO BHF AG]

Okay. Okay. Understood. My second and final question, it's about future plan. I mean, if I understand that correctly, Brookfield hold more or less 95% in alstria. Is there any scenario of a delisting possible of alstria, given the situation?

[Olivier Elamine, Chief Executive Officer, alstria office REIT-AG]

Well, I think, again, if you look into what Brookfield has announced in the offer document, they have not ruled out the listing, but they have also not mentioned that we'll be doing – they would do a listing. I mean, one thing maybe you want to – because, I mean, given that they have now 95%, there might be some speculation about a potential squeeze-out, which actually is not possible, because the – the – I mean technically it's different entity which owns the 95%. So, if there is conversation about the delisting, it's really not going to be through a squeeze-out process.

But at this stage, at least as far as I know, as far as I'm involved, there is no discussion about – I mean – or no decision made about the delisting and the – but – but the option I mean, clearly has been on the table and at the time of the offer and as far as I'm concerned, it's probably still one of the possible option. Looking at the success of the takeover.

[Manuel Martin, Analyst, ODDO BHF AG]

Okay. Okay. I see. Thank you very much.

[Operator]

And there are currently no further questions. [Operator Instructions] And we haven't received any further questions. I hand back to the speakers for closing remarks.

[Olivier Elamine, Chief Executive Officer, alstria office REIT-AG]

Well, thank you very much, everybody, for joining us today and I'm looking forward to the next quarterly result presentation that we're going to make. Thank you very much for your interest in the company and, yeah, looking forward for the next time. Cheers.

[Operator]

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