Branicks Group AG

XETRA:BRNK

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Branicks Group Q1 Results 2024. [Operator Instructions]

Let me now turn the floor over to your host, Jasmin Dentz.

[Jasmin Dentz]

Thanks a lot, operator. Welcome, everybody, to our Q1 results presentation for 2024. This call will also be webcasted live on our website, and a replay of the call will be available there also shortly after the end of the call. So your participation in this call implies your consent with this.

Our CEO, Sonja Warntges, will now give you an overview of our financials, our guidance and the current market environment. After the presentation, we will be happy to take your questions.

Please note that management's comments during this call will include forward-looking statements, which involve risks and uncertainties. For a discussion of risk factors, I encourage you to review the safe harbor statement contained in today's presentation. All documents related to our Q1 reporting has been made available on our website.

I now turn the call over to Sonja for her remarks. Sonja, please, the floor is yours.

[Sonja Wärntges, executive]

Thank you, Jasmin. Good morning, ladies and gentlemen. Also from my side, a very warm welcome to Branicks Q1 2024 Results Conference Call. Today, as usual, I'm joined by my colleagues from the accounting and Investor Relations department.

As we just published our full year results 2 weeks ago, today's presentation will rather be a short one. Nevertheless, of course, we underline that our focus on operational strength and value creation remains on top of our heads. With our operating business in the first quarter, we are on track with another strong operating performance. Following the consistent reorganization of our financial structures, we have set the course to be at the forefront when the industry recovers.

Now we are concentrating on the further development of the quality and sustainability of our portfolio within our portfolio focus areas, office and logistics and on the development of the new asset class renewables. As per usual, during our quarterly calls, I will give you an overview on what has been achieved in Q1, and our key numbers, and we will also offer you the possibility to ask questions afterwards.

Dear all, in terms of a rough Q1 overview, I would like to highlight the topics mentioned on Slide #2. Also, our market environment remains challenging. We deliver on our promises. During the call 2 weeks ago, I presented in detail what we have achieved in terms of the successful extension of our promissory note loans as well as our bridge financing. Our focus remains on reducing liabilities further with a continued concentration on our liquidity situation, laying the foundation for shaping the company in the future.

Our commercial portfolio shows a positive momentum. Our clear strategic focus on office and logistics real estate is once again reflected in the high percentage rate. These 2 asset classes constitute with regards to their market value. As in former quarters and years, our commercial portfolio generated stable and predictable rents benefiting from new leases and trend indexation. So again, we report a like-for-like rental growth of 4.6%. And in addition to that, the value of our assets remained very stable without any negative valuation effects in the first quarter.

With EUR 9.4 billion, the assets under management, our institutional business remains the second strong pillar of our business model. We announced partnership with Encavis regarding our new asset class renewables has the potential for further successful activities supporting profitable growth within this sector.

We also saw further progress in the implementation of the Performance 2024 action plan. After a reduction of 16% already in full year 2023, OpEx were again further reduced on a quarterly basis by 7% from EUR 16.7 million in Q1 2023 to EUR 15.6 million in Q1 2024. Hence, we are planning further cost savings to strengthen our financial situation.

With regards to our financial maturities profile, let repeat this point were decisive year. At the end of the reporting period, the lenders of the 2024 promissory note loans amounting to EUR 225 million voted in favor of the company's restructuring plan. And in doing so, the promissory note loans in question were extended to June 30, 2025.

On the other hand, with the lenders of the bridge financing for the acquisition of the shares in the...

[Technical Difficulty]

[Jasmin Dentz]

We will go back at the beginning of what we've said on Slide #3. Sorry, Sonja, if you could just repeat what you said from the beginning, sorry.

[Sonja Wärntges, executive]

No problem. So I start again with our Slide #3. And with regards to our financial maturities profile, let me repeat the points that were decisive here.

At the end of the reporting period, the lenders of the 2024 promissory note loans amounting to EUR 225 million voted in favor of the company's restructuring plan. And in doing so, the promissory note loans in question were extended to June 30, 2025. And on the other hand, with the lenders of the bridge financing for the acquisition of the shares in VIB completed in 2022. We agreed an immediate repayment in the amount of EUR 40 million and an extension of the term concerning the remaining EUR 160 million until December 31, 2024. The extension has been achieved on almost unchanged conditions.

Let me also underline that our focus to deleverage our balance sheet while monitoring our green bond covenants remains one of our highest priorities. With 57.3%, the bond loan-to-value covenant should have peaked in Q1 and will improve due to disposals and the planned redemption of the bridge financing over the course of the year 2024. We are aiming to reduce our LTV further in 2024 to achieve an even bigger headroom in the midterm.

This 2.0x, the ICR covenant had also enough hedging to the 1.8x threshold, and we are confident to keep our interest cover ratio stable, with even an improvement expected in 2024, also due to the planned redemption of the bridge and, of course, above the 1.8x threshold.

In terms of our average interest rate that you also find on this slide, it is important for me to underline that also our average interest for 2024 growth, the total amount of [indiscernible] in 2024 could be significantly reduced, but goes along with an absolute reduction of total interest expenses to be expected in 2024. To sum it up, this slide shows that following the agreed achievements, we are sustainably and sufficiently financed until at least 2026.

Let's now take a deeper look at the results of our real estate platform in the first 3 months in 2024, shown on Slide #4. As already mentioned, our like-for-like rental income remained strong, and our teams once again performed exceptionally well. The like-for-like rent income rose by 4.6% for the entire portfolio under management. Both in the commercial portfolio was up plus of 2.3% and the institutional business with a plus of 5.6%. Immense increases were realized primarily through indexations.

In terms of square meters, the letting performance of the Branicks platform in Q1 2024 declined by 12% year-on-year to 109,000 square meters, mainly due to the disposal. In total, the assets under management with EUR 13.1 billion were slightly down compared to last year's end, mostly due to the disposals which became effective in the course of the year.

The commercial portfolio decreased from EUR 4.1 billion, down to EUR 3.7 billion, which was a direct result of the disposal activities year-on-year. The institutional business was also affected by the end of a larger property management mandate. As of today, only 1.9% of the total annualized rental income would expire in 2024, if lease contracts were not prolonged.

On our next slide, let me highlight the development of our main income streams. Net rental income fell to EUR 38.5 million, primarily because the prior year quarter still included rents from properties in the VIB Retail Balance fund, the same effect resulted in increase of income from associated companies. It mainly consists of deferred income from fund shares and in contrast to Q1 2023, still contains the share of profits in VIB Retail Balance I.

Real estate management fees decreased from EUR 10.5 million to EUR 9.7 million. This number solely comprise recurring assets, property and development fees. As in the prior year quarter, no fees were generated from transactions. Therefore, our recurring income on the platform was slightly lower year-on-year and the share of recurring income in relation to the total income composes 100% in Q1.

Now let's take a closer look on the development of the FFO year-on-year that were overall in line with our guided expectations. The net rental income saw a decrease of around EUR 5.5 million. And as previously mentioned, this was due to the fact the prior year quarter still included trends from properties in the VIB Retail Balance I fund.

The development fees, the share of the profit from associates and our OpEx development as well as our net interest result had a positive contribution to our FFO. All in all, this resulted in FFO of EUR 9.0 million for the first quarter of 2024.

In view of our expectations for the current business year, we did not make any changes. We still expect a gross rental income in the range from EUR 160 million to EUR 175 million, real estate management fees between EUR 40 million and EUR 50 million, and FFO I after minorities and before taxes of 50 to -- sorry, of EUR 40 million to EUR 55 million, acquisitions of EUR 150 million to EUR 300 million, whereas we expect all of them in our institutional business. And last but not least, disposals of EUR 650 million to EUR 900 million, whereas EUR 500 million to EUR 600 million in our commercial portfolio and EUR 150 million to EUR 300 million in our institutional business.

Beyond our unchanged guidance for the current year, our midterm ambition also remains unchanged. We strive to transform Branicks Group towards a profitable ESG focus in value-generating asset expert with sustainably strengthened cash flow and financial position. Our ambitions are clear, and we are working hard to achieve them. We want to substantially improve our earnings and cash flows and returned to net profit and positive net cash flow in 2026. And in doing that, we want to monetize our ESG expertise. And we have a clear midterm ambition to further reduce our debt, but we will go along with improving the respecting KPI.

And having said this, I would like to hand over to the moderator for your questions.

[Operator]

[Operator Instructions] First question comes from Mr. Clark McPherson, Clearance Capital.

[Clark McPherson, analyst]

I have a couple of questions. First of all, on the -- of the cash that is disclosed as of Q1, how much of that cash is actually restricted? Second question would be, can you give us some more color on the timing of disposals going forward? And third point, if we got to the VIB full year results, on the slides that we downloaded before the earnings call, on Page 16, there was a point that referred to substantial intercompany transactions between Branicks and VIB. However, the slides that were presented during the call had this...

[Sonja Wärntges, executive]

Sorry, sorry to interrupt you. I cannot really understand you. So the line is not very good. Can you repeat? I couldn't hear what you say. So this is -- I can answer this directly. The restricted cash is around about EUR 58 million.

[Clark McPherson, analyst]

Hello, can you hear me now?

[Sonja Wärntges, executive]

Yes. So I can answer the first question directly. So the restricted cash is around about EUR 58 million. But the second question, I didn't hear really. So if you can repeat it.

[Clark McPherson, analyst]

Sure. And second question, could you give -- would you be able to give me some -- give us some color on the timing of disposals going forward? And then finally, if we go back to the full year results, the presentation that we downloaded before the call on Slide 16, had a point that referred to substantial intercompany transactions between Branicks and VIB. However, the slides on the earnings call had this point removed. So I wonder if you could just explain to us why this point was removed. Is the point -- was the point inaccurate? Or are there indeed plans for further inter-company transactions?

[Sonja Wärntges, executive]

I got it. Yes, the disposals, as said in the call 2 weeks ago, so we have a very clear plan, and we have also started all our action purposes at the end of last year. So I think for the time being, we are in a very good position here in the discussions. So we have also LOIs on some of the processes. And I think we will get the first things done end of June. And then it will -- yes, will take time over the next quarters until the end of the year. Because we have a big program, so to say, and we have the one or the other portfolio, which we sell as a deal, so to say.

And it takes time due to due diligence. And as I said in the last call, the actual buyers are very professional buyers with very clear processes, but they take sometimes a little bit longer than in the past. And therefore, we have started to summarize it. We have started other processes. I think we will see the first things coming at the end of June, so at the end of Q2 and then the rest coming over the next quarter. And the disposal of the assets.

From Branicks commercial portfolio to VIB commercial portfolio. So we did a transaction in the first quarter and we reported about this. And so we have the one or the plan here. So we are discussing this at the moment between VIB and Branicks. And definitely, we will broaden the -- or VIB will broaden their portfolio also with commercial assets, so to say, not only logistic, to broaden also the income stream, the asset classes, but there is no final decision taken here.

[Clark McPherson, analyst]

Could I just push you a little bit on the point of why that was actually removed from the original presentation?

[Sonja Wärntges, executive]

I do not really see -- I do not really know what you mean. But when I got it right, it was -- yes, so to say that you got it on.

[Clark McPherson, analyst]

I mean there was a presentation released at 6 a.m. or 7 a.m. in the morning that had that point in there, but the presentation on the earnings call, had that point removed.

[Sonja Wärntges, executive]

Okay. As well, this was a result of the revision of the presentation we had brought it. Yes, my failure, so to say, in our webcast, but we had to revise it. And so this was the final part that we have loaded up then. So -- in discussion and so we could not report really the figures and numbers at the moment.

[Operator]

The next question comes from Mr. Andre Remke, Baader Bank.

[Andre Remke, analyst]

A very short follow-up on the disposals. Clark meant to asked for. Could you give us probably a kind of part number for what you expect ahead of the summer force, i.e. you mentioned June because after that, it could be the case again that there will be a further time pause until the next ones occur. So it would be helpful to see whether this will be already kind of meaningful number.

[Sonja Wärntges, executive]

Andre, you're asking the right question. I asked my colleague from transaction every day, so to say. As I said, we are working on the process, and I cannot really say that as said, when the process will be over. But we plan to have at the end of June, around about EUR 200 million to EUR 300 million as sales transaction done here. Whether it will be closed or not, I do not really know, but that's the number we have in place here where we have put discussions, so to say.

[Andre Remke, analyst]

Okay. Excellent. Then second brief question on your LTV target, your plan of below 50% in 2025. Does this refer to the adjusted LTV, including the institutional business or the total LTV?

[Sonja Wärntges, executive]

That's the plan for total LTV, not adjusted one.

[Andre Remke, analyst]

Okay. And last question on your interest expenses of EUR 28 million in the first quarter. Is this the kind of run rate for the next quarter? Or will this increase in the second quarter due to the refinancing activities and higher interest costs? Or could it be already be lower due to the EUR 200 million exchange from cash into repayments of debt?

[Sonja Wärntges, executive]

No, I think that's a clear answer to that was -- that should be and is the highest number in fourth quarter in 2024 because on the one hand, we have the full bridge here in, so to say, because we paid EUR 40 million end of March. So the total number was in for the first 3 months. So the interest rate or the bridge was little bit down after the discussions with the Bridge Bank.

So they go down even if we would have the same absolute number of the Bridge, but we have EUR 40 million less. The normal -- recall the normal secured financing stayed the same besides we are doing disposals. So they would even go down if we have disposals. And when we pay back the bridge, we plan to pay back during the year, if it's possible. So the amount for the bridge financing will also go down. So at the end of the day, to sum it up, should be the highest number for the quarter in 2024.

[Operator]

The next question comes from Mr. Jochen Schmitt from Metzler.

[Jochen Schmitt, analyst]

I have two questions, please. Firstly, on adjustment in FFO. Could you explain which adjustments you made in Q1? I guess it was slightly below EUR 2 million, if I'm right. And which amount should we assume for the full year '24? And second question on the EUR 129 million of bank debt maturities in '24, which you state on Slide 3 of your presentation. When will this amount come to you? And are you currently in loan prolongation talks? These are my questions.

[Dirk Oehme, executive]

This is Dirk. The FFO adjustment relates to the Bridge financing and amortization items there. And yes, that's pretty much all. It's EUR 1.6 million, I guess, that we adjusted here.

[Sonja Wärntges, executive]

And the second question, yes, we are still in the discussions with the banks for the secured financing. So we have started them already in January. And these are 2 financing, so to say, with 2 different banks. And yes, the discussions are good and very -- yes, very, very how do you say in English, it's constructive, yes, so to say. So I think they will be refinanced with the same banks. We also talk to others as you can imagine. And they are in place end of September and beginning of November.

[Jochen Schmitt, analyst]

Just one follow-up question, if I may, on the adjustments in FFO. Could you give an indication of which figure we should expect for the full year?

[Dirk Oehme, executive]

For the Bridge interest expenses, you can think about EUR 17 million to EUR 18 million overall because we have some cost that we now amortize over the maturity that will come to the P&L over the next couple of months.

[Andre Remke, analyst]

So sorry, just if I got it right, EUR 17 million or EUR 18 million during course of '24. Is that right?

[Dirk Oehme, executive]

Yes.

[Operator]

The next question comes from Mr. Engel Hillen, MMI.

[Unknown Analyst]

It's about disposals, and I think this question has been asked, but -- on one hand, I think we are a little bit disappointed -- disappointment as there is nothing concrete, but we noted that there will be, I think, Mr. Andre said it like 3 or 4 times end of June. So did I get it right that end of June, your except taxation is that there will be signing of some contracts, whatever?

[Sonja Wärntges, executive]

Latest, yes. It's the expectation.

[Operator]

Next question is coming from Mr. Stefan Scharff, SRC Research. The next question is coming from Mr. Nick Linnane from Sefton.

[Nick Linnane, analyst]

Firstly, in relation to the announced sale of 8 properties to VIB announced at the end of March. When is that expected to close? And how much cash do you actually expect to receive from that net of -- I guess you're selling shares, so you just get some amount of cash for that, but how much is that? Second question is in relation to the EUR 116 million or so of loans to related parties that's on your balance sheet at March. Do you expect any of that to be recoverable in the next, say, 1 to 2 years? If so, how much do you think could be recovered? And roughly what is the loan-to-value ratio on those loans?

[Sonja Wärntges, executive]

So we understand you hardly here. So if I understand the first question right, you asked what -- we did in the first quarter to VIB?

[Nick Linnane, analyst]

Yes.

[Sonja Wärntges, executive]

What comes on cash wise.

[Nick Linnane, analyst]

Yes.

[Sonja Wärntges, executive]

Round about EUR 60 million.

[Nick Linnane, analyst]

Okay. And roughly when?

[Dirk Oehme, executive]

It already -- it's already closed. So it was a deal in...

[Nick Linnane, analyst]

Okay. That's already closed. Okay. And the second question was around the related party loans on the balance sheet.

[Sonja Wärntges, executive]

So yes, we have around about EUR 137 million there. And we are still in negotiation for one of the contracts, so to say. And the others have maturities during the end of the year and the next year, [indiscernible] so to say. And then we expect them to come back besides the one we are discussing at the moment.

[Nick Linnane, analyst]

Is there any collateral for any of the main loans?

[Sonja Wärntges, executive]

Yes, they have all collaterals, yes.

[Nick Linnane, analyst]

Roughly, what would be the sort of loan-to-value ratio you would estimate on those loans?

[Sonja Wärntges, executive]

I haven't hear it. Maybe you call us later and we find that out and can give you the answer there.

[Operator]

There are currently no further questions. [Operator Instructions] We have another question coming from Mr. Philipp Kaiser from Warburg Research.

[Philipp Kaiser, analyst]

Just one quick question left from my side with regards to your OpEx. You already reduced it on a quarterly basis by 7%. Is there a more reduction to come in the course of the year? Or can we just take the Q1 OpEx as a run rate for the current year?

[Sonja Wärntges, executive]

Philipp, thank you for the question. So if you look on the split between personnel and administrative expenses, you can see that we have smaller, higher number in administrative expenses. This is the result of our negotiations and transactions we did in the first quarter with SSDs and Bridge Banks. So this rate or this number will go down because these were more or less, yes, one-off, so to say. The personnel expenses will also go down a little bit.

So I think for run rate, it's a little bit too high, but it will not go down by 20% or something like this because it's step by step done. And so we will reduce it further according to our Performance 2024 plan. And as said, in Q1, we had one-off in the administrative expenses here. So I think will be -- expectation will be a little bit more than 7%.

[Operator]

The next question coming from Mr. Stefan Simros from Simros Capital.

[Unknown Analyst]

Sorry for the voice, I managed to catch a cold in the summer. So just for the restructuring, you use StaRUG to prolong the current loans that were pretty small, so that was successful. Looking at the bond that's still outstanding. Would you consider to use StaRUG to change the payment details of the bond as well? Would that be something that you could do in 2025? Or would that be a new StaRUG restructuring program or this all procedure that you already initiated, could that be extended into other securities?

[Sonja Wärntges, executive]

So I'm not a lawyer. At the end of the day, I can only tell what we have done. So once again, we used the StaRUG as a technical process, so to say, only and just to say clearly only for SSDs here, not for the total liabilities. Because we had 34 SSDs in place here, and we had a short time period. So everybody needs a little more time or less time, so to say. And therefore, we said we wanted to convince every one of the SSDs to see the restructuring plan as a good plan and which they can follow.

But at the end of the day, it will bring 34 SSDs under one head within 6 weeks, so to say, it will be complicated. And therefore, the StaRUG was taken in place from the government 1.5 years ago that if you have a majority of 75% of the SSDs on your side. And they follow you the court can say, I take the decision for the rest of the 25% and the restructuring plan is good and you can do this. So we got more than 93% on our side. So at the end of the day, the court said, "This is a good plan for the next 3 years. We think you can do this. So please do it." And decided that the restructuring plan should be made, but only for SSDs.

We do not plan to have a new restructuring plan, a new StaRUG or something like this because we planned for the next 3 years on a very good basis. But everything will happen as it was written down here because we all do not know what is in 1.5 or 2 years. But this is a plan, and we have some options if one or the other thing does not come. But this is our plan, and we do not work on another restructuring plan or another StaRUG or something like this.

We are refinanced. Now we have got the decision from the court, but also from the neutral consultants who did the independent business review. They supported the plan and said this is a good plan, and we are working on doing what we have planned. That's it. So no other plans in place here.

[Operator]

Another question coming in from Mr. Engel Hillen from MMI.

[Unknown Analyst]

You just reiterated that there will be disposal June and then you said end of June latest. So basically, you said within the next 6 weeks. So maybe you can give us some color of the range or the size you imagined to disposals. Are we talking about like EUR 100 million or more like EUR 500 million or something between that would be helpful. When I about to close or about to sign or to sign something within 6 weeks, there must be a pretty good impression of what you will dispose or how much you will dispose?

[Sonja Wärntges, executive]

Exactly. Therefore, I answered the question, some minutes ago, EUR 200 million to EUR 300 million.

[Operator]

Another question is coming in from Mr. Jochen Schmitt, Metzler.

[Jochen Schmitt, analyst]

Sorry to ask again on the adjustments in FFO, which you applied for the Bridge. Could you briefly explain what is precisely adjusted and why? I just want to get a better understanding for the rationale behind these adjustments?

[Dirk Oehme, executive]

So under IFRS, we have this amortized cost method, and we do linear or do it on a proportionate basis, all the costs we had in relation with the program we did in the first quarter. And therefore, all the transaction costs with that prolongation and all these kind of things are now coming into the P&L month by month.

And these adjustments, the so-called effective interest rate adjustments, we adjust for FFO purposes because that's something that is not on a regular basis because that was kind of a one-off. So if we wouldn't have the possibility in terms of recognizing these costs over the maturity, we would have a onetime impact in the P&L in Q1, and we would have adjusted that as well. And that's the reason why we adjust the FFO because it's a nonoperating...

[Jochen Schmitt, analyst]

Okay. So these adjustments also refer to the promissory notes, prolongation in the StaRUG procedure. If I got you right?

[Sonja Wärntges, executive]

All after...

[Dirk Oehme, executive]

Exactly.

[Operator]

The next question is coming from Mr. Chris Aristidou from [indiscernible].

[Unknown Analyst]

So I had two follow-ups and one new question. My first follow-up is regarding related loans. You said during discussions for one to extend and the rest are maturing this year, next year. What is the size of the one that you're discussing to extend?

[Sonja Wärntges, executive]

EUR 32 million.

[Unknown Analyst]

Okay. And the other clarification I'd like to ask is, you mentioned EUR 58 million of restricted cash. What's the unrestricted cash at the Branicks level, i.e., excluding the VIB cash?

[Sonja Wärntges, executive]

So we have a consolidated balance sheet. So we consolidated this, and this is the total amount. So I think that's what we report and that's what we are talking total here, the total cash.

[Unknown Analyst]

You cannot disclose the restricted cash at VIB level yet before the financials come out?

[Sonja Wärntges, executive]

No.

[Unknown Analyst]

Okay. I understand. And my last question, what is the balance of the loan from VIB to Branicks, please?

[Sonja Wärntges, executive]

EUR 250 million.

[Operator]

There are no further questions, and I will hand back for the closing to Jasmin Dentz.

[Jasmin Dentz]

Thank you. So this concludes our Q&A session, and thanks a lot for joining us today and stay healthy and talk to you soon. Thank you.