Hamborner REIT AG

XETRA:HABA

Earnings Call Transcript 2020-Q1

[Niclas Karoff, CEO & Chairman of Management Board]

Yes. Good morning, ladies and gentlemen. I'm here together with Hans Richard Schmitz and Christoph Heitmann, and we all like to welcome you here to our Q1 earnings call.First of all, to those who I didn't have the pleasure to meet yet here, let me quickly introduce myself. My name is Niclas Karoff and I joined company as CEO in March this year. Meanwhile, I'm working in the German commercial real estate market here for more than 15 years. And should you be interested in further details on my professional background, please just have a look at our website, which I will recommend or please feel free to contact me directly, of course.So even though I feel proud here working in my new role together with the colleagues in this call here and obviously, the remaining team of HAMBORNER, the immediate start at the company -- the immediate start here had been rather sad and unusual. Sad because just before I start, Rüdiger Mrotzek used to be a member of the Board here since 2007, so for a very long time. He passed away completely unexpected. And jointly with Hans Richard, he had a very strong share, obviously, in the success of the company over the last years. And for that reason, I would like to use the opportunity here of this introduction to remember him. Yes, and the unusual part of my initial phase, obviously, came by the start of the corona crisis here and its consequences for all of us.With this, just let me go to the slides showing and providing an overview here on the main figures. And despite the operational challenges since the extensive shutdown in the German industry, the company has been able to generate very good results during the first quarter year of 2020.As you can see here, in the quarter-on-quarter comparison with last year, the operational business has developed relatively strong, leading to an FFO per share up by almost 9%. On the portfolio level, vacancy remains on a very low level, providing additional stability to the business. Equity and LTV level remain almost unchanged. ITR, by the way, is well above 4.5 NAV per share, up by approximately 7%, and Hans Richard will provide you further details now on the next slide, and for that reason, I would like to hand over to him at this point in time. Thank you.

[Hans Richard Schmitz, Member of Management Board]

Thank you, Niclas. Good morning, ladies and gentlemen, and a warm welcome from my side as well. I must now take a look at our results in more detail. As already mentioned by Niclas, we generated income from rents and leases of EUR 21.8 million by the end of March, an increase of 3.4%, which was mainly due to the investments in the course of the last year as well as the property transfers at the beginning of this year. For the same reason, income from incidental costs charged to our tenants were 4.5% higher and came in at EUR 5.4 million. Current operating expenses arose only slightly compared to previous year's first quarter with EUR 5.4 million, an increase of 1.6%.The expenses for the maintenance of our property portfolio fell by roughly 17% to EUR 1.2 million. The cost related to ongoing maintenance and various minor plan activities. About 1/4 of the expenses incurred in connection with the new leases and lease renewals.After deducting the costs, net rental income amounted to EUR 18.7 million, a plus of 5.7% compared to the previous year. Administrative and personnel expenses increased by 5.1% to EUR 1.6 million in total. Accordingly, our operating cost ratio, which is defined as administrative and personnel costs in relation to income from rents and leases arose slightly to 7.4% compared to 7.3% in previous year. Other operating income amounted to EUR 0.6 million. The rise in income essentially related to contractual agreed compensation payments due to delays in transferring ownership of the office property developments in Aachen and Bonn.Other operating expenses amounted to roughly EUR 0.5 million in the first quarter of 2020. This item includes legal and consulting fees of EUR 240,000, which mainly relates to expenses in connection with filling the position of our new CEO.The financial result is nearly unchanged compared to previous year's first quarter as a result of scheduled repayments and the refinancing of loans on better terms following the expiry of the fixed rate interest agreements. As a result of income and expenses, the FFO increased by 8.8% and amounted to EUR 13.3 million in the reporting period. The corresponding FFO per share increased to EUR 0.17, EUR 0.02 above the value of EUR 0.15 from the first quarter 2019. The further disproportionate raise in FFO compared to rental increase once again proves our cost discipline.The next chart includes a few remarks to the portfolio changes. During the first quarter, 2 recently completed office property developments in Neu-Isenburg and Bonn were transferred to our portfolio. The total investment volume was EUR 42.1 million. Including the 2 additions, the company had a portfolio of 81 properties with a fair value of around EUR 1.64 billion as the end of March.The 2 assets will contribute to rents with EUR 2.3 million a year, increasing the annualized rental income to EUR 87.7 million. Considering the tough environment on investment market during the previous month, the gross initial yields of 5.5% and 5.3% are very attractive. The properties are located at established and well-connected office locations and are characterized by a modern building design with a high energy sustainability.They have been built using high-quality materials and meet the very latest standards. The office in Neu-Isenburg is currently in the process of being certified by the German Sustainable Building Council, DGNB. It has already been pre-certificated at the DGNB's highest level, platinum. The other channels of both assets of the insurance company, Barmer and the IT service provider UBL are established companies with strong financial standing and enter long-term lease agreements. The transfer of the newly built office property in Aachen, which was originally scheduled for the first quarter is still pending due to a delay in completion of the building and ongoing contract negotiations of the developer with an additional anchor tenant. The asset with the gross initial yield of 5.2% is already predominantly leased to the Barmer Insurance. Transfer of ownership is scheduled for this month.Moving to the next slide to give you further information on the NAV development. As a result of the portfolio additions, net asset value according to EPRA increased to EUR 932 million as at the end of the first quarter, a plus of 7.1% compared to the corresponding point of the previous year. NAV per share amounted to EUR 11.69. Considering the share price development during the last weeks, the current NAV discount is around 30%.The next slide gives an overview of our letting situation. The weighted remaining term of our rental agreements for the whole portfolio amounts to 6.6 years. The average maturity of our retail contracts is 7.6 years, but the average term of our office deals is 4.8 years.Having a look at the lease expiry schedule, we see that expiries are evenly distributed throughout the next years. Regarding the rent agreements ending in 2020, we achieved a number of letting success in Q1 and cite follow-on leases for most of the expiries. The remaining share of leases expiring until the end of this year accounts for just around 1% of the total rental income of the company. The outstanding extensions basically refer to office contracts which expire at the end of the year.On the next slide, we shall look at our tenant structure. There were no changes in our top 10 tenant list since the beginning of the year. HAMBORNER is currently benefiting from its high share of tenants in systematically relevant areas. Edeka, Kaufland, REWE and Real are still leading our top 10 list with a share of around 28% of our total annual rental income.In sum, food retailers currently account for around 1/3 of the company's total rental income. Other retail tenants, drugstores, pharmacies or do-it-yourselves stores, including the European market leader ALDI, contribute around 12% of our rental income.Our others tenants, including medical care facilities, medical practices, educational institutions and public authorities like the agency of unemployment generate around 1/3 of total rental income. Our solid tenant structure is the basis for our cash inflows even in economically difficult times such as these.With the upcoming transfer of the office in Aachen, the Barmer Insurance and other tenant of high creditworthiness will move to our top 10 list.With the next chart, a few words to our financing situation. Despite the current global crisis, the company's financial and liquidity situation is still comfortable. REIT equity ratio amounts to 56.7% and LTV to 42%. At the end of March, HAMBORNER had cash and cash equivalents of EUR 43.6 million. In addition, the company had another financing commitments or credit facilities of EUR 32 million. Furthermore, we hold various unencumbered properties that can be used to generate additional funds if necessary.For the first time, average cost of debt is below the level of 2% at 1.98%, while remaining term of our loans slightly decreased to 5.3 years. We also do not have any pressure due to financial covenants in the past. We didn't accept any covenants on our mortgage loan agreements. In connection with the EUR 75 million bonded loan taken out in 2018, we have given the creditors assurances that we will comply with an EBITDA-to-interest coverage ratio of at least 1.8. Currently, the ratio is around 4.5.Moreover, there are no further financing requirements in 2020 as all [ lease ] agreements scheduled for refinancing have already -- the refinancing activities for 2021, debt maturities are already in progress.So far, my explanations to our Q1 results. And I would like to hand you back to Niclas for an overview of the current business situation.

[Niclas Karoff, CEO & Chairman of Management Board]

Yes. Thanks, Richard. And let me continue with my explanations on the next slide. Yes, business situation. As pointed out before, I think it's fair to say that Q1 overall has been a successful start here for the company. However, because of the, yes, ongoing social restrictions and economic uncertainties concerning the corona crisis here, we decided to withdraw the forecast to postpone our AGM and to put the dividend amount here also under renovation.If I look to other market participants here, we find ourselves, I think, in good company with this careful approach. Nevertheless, I can assure you that this hasn't been an easy discussion for us. As most of you know, HAMBORNER has a long track record here of reliable predictions and announcements. However, this is pretty tightly why we decided as we did, as we still don't have a reliable picture yet how the corona effects -- how these effects are going to develop in the next weeks and months. We still think it's best to wait. We had to wait until we have a bit more visibility here on the relevant drivers, especially letting and investment market.Yes, and on the next slide, which you can see now we would like to provide you with an additional short update here concerning the previous effect here of the pandemic on our operational business.Yes, regardless of the major public shutdown, including, obviously, large parts here within the commercial real estate market, we think that our portfolio, our defensive portfolio so far has presented itself comparatively resilient. In April, as you can see here, on the overview, we received approximately 85% of our contractual rents. And as you can imagine, our asset management here had numerous additional conversations on top of their regular communication here with our tenants and is working extremely hard in finding individual solutions here within this unique situation.With reference to the -- concerning the group of tenants, we haven't transferred the rent. The overview shows also here split up by sector, which I hope will be helpful for you to get a better understanding here. Yes, hardly surprisingly, the vast majority here concentrates considering the tenants who didn't pay their rent yet, concentrate on the nonfood retailers, which, next to the restaurant business, obviously, have been hit especially hard here by the ordered restrictions.Yes, overall, we are convinced that the strong portfolio focus here on market-leading food retailers and on the other hand, other tenants here with strong financial profiles will help to find a good way through the current situation here.Yes, after the recent loosening of shopping restrictions just a couple of days ago here across Germany, currently, 95% of our total annual rent are not only -- yes, are not only partially affected by closures. We think that this is a pretty interesting additional information. Yes, as we all know, soon we'll be way back to normal business nevertheless, and I hope we get this across as well supported by these numbers here, we remain confident.And last but not least, just a quick outlook. Yes, a few words on this topic. As pointed out before, once we have more clarity, we have more visibility on the lasting effects from corona, we'll get back, obviously, with an update on forecast and AGM and including, obviously, as well dividend. And until then, we will further focus here on our day-to-day business tasks including, for instance, as mentioned before, an intensive and hands-on tenant management as well as the, for instance, the finalization year of the remaining refinancing for next year. In addition, we intend to use these unusual market conditions to develop our strategy further in any case with a clear goal to grow the company further.Yes, and with this, we would like just to sum up here. We hope that this is a good overview for you, providing you some additional information on the current status here of HAMBORNER and happy to receive your additional questions from now. Thanks so much.

[Operator]

We will now take your first question from [ Gerhart ].

[Unknown Analyst]

[indiscernible] I have 1 question, first regarding your vacancy development. It's interesting that the vacancy rate, including rent guarantees, came down to 1.6%. While not including rent guarantees, the vacancy rate is up. Is this due to the guarantees from the new acquisitions? So is there some vacant space in it?

[Hans Richard Schmitz, Member of Management Board]

Yes, that's correct. This is [indiscernible] from our new acquisitions in Neu-Isenburg and in Bonn. That's correct.

[Unknown Analyst]

And what amount of space needs to be filled in these 2 buildings?

[Hans Richard Schmitz, Member of Management Board]

Sorry, you haven't understand this right?

[Unknown Analyst]

How many square meters need to be filled in these buildings? On what -- what's the vacancies in these 2 new buildings?

[Hans Richard Schmitz, Member of Management Board]

In the meantime, in Bonn we have at the moment around 25% vacancy and in Neu-Isenburg it's around 12%.

[Operator]

Okay. And then I have a question regarding your maintenance expenses, it's very low. So is this -- do you expect the usual pattern that there is some more later this year? Or is this due to the current situation with probably less tenant turnover, let's say, is a general reduction against the previous year?

[Hans Richard Schmitz, Member of Management Board]

No, this is not a general reduction. This is, I would say, normal that you see over the year, different amounts for this target. So refurbishment and so on. That's mainly a part what we have do for tenants, for example, and the demand in the first 3 months was not so high.

[Unknown Analyst]

And then regarding your -- the high depreciation, you mentioned, there are some EUR 960,000 impairment losses on the valuation of properties?

[Niclas Karoff, CEO & Chairman of Management Board]

Yes, that's right. That's related to a couple of smaller nonstrategic assets here for which we have processed additional information between Q1. Yes, but in total, if you see that, it splits up [indiscernible] very small, yes.

[Unknown Analyst]

And then you mentioned you are working on your new strategy. Am I right to assume that you currently do not have an acquisition portfolio -- acquisition pipeline, sorry?

[Niclas Karoff, CEO & Chairman of Management Board]

I mean the acquisition itself is regular business here within HAMBORNER. I think you have to differentiate here a little bit. Concerning further acquisitions, obviously, we are currently scanning the market. We have assessed and opportunities we have a closer look to, but no -- nothing under [ exclusivity ] at the moment. Obviously, we are a little bit shy at the moment because the market is not fully transparent, the investment market, as I pointed out before. But we're clearly looking forward, want to acquire further assets, I mean, that's for sure.And the other topic is strategy in general, and that's more what I was referring to during -- with my comments that I said, okay, we want to use this corona crisis as well a little bit on reflecting our investment and business strategy and see if there might be points where we like to change looking forward. But that's something we are discussing here at the moment internally. And yes, once we came to conclusion, then we would communicate this, of course.

[Unknown Analyst]

Then regarding the development on 4 more openings. Also now I've heard a reference in [indiscernible] are allowed to open probably. So can we expect that probably in summer, you will get then nearly 100% of your contractual rents? Or is -- or are there any clients where you think they will see substantial difficulty for them to paying rents if -- even in case that the business reopens?

[Niclas Karoff, CEO & Chairman of Management Board]

Yes. I think I mean that's obviously difficult for us at the moment to do any real reliable predictions. I mean please consider that the numbers we presented to you here only reflect the rents we received for the month of April. The month -- the rents for the month of May are just coming in at the moment. So within the next couple of days, as any other landlord, I think we will have a better view on this. And as we don't know how the corona crisis is going to continue at this moment, pretty tough to make a call here because, obviously, we have so many different influencing factors. I mean the restriction, the formal restrictions for the public authorities are one thing. But on the other hand, obviously, the business for each of the retailers is different and indeed will, I think, also depend on how the operational business is really coming back to normal and what you can call normal.So there are different influencing factors. It's not just the formal setting of the authorities to open the shop or not, that's my guess, which will where you can directly, on a linear basis, can try to evaluate how many rents will be paid. I think this would be a jump. It would be too easy. That's my personal guess.But I think -- I mean I think with 85% coming in, in April, I think that's a pretty -- I mean, considering the overall situation, it's a pretty good number. And yes, let's see how this is going to further develop here within the next couple of weeks.

[Operator]

We'll now take your next question.

[Kai Malte Klose, Analyst]

It's Kai Klose from Berenberg. I've got 3 quick questions. The first one, it's regarding the recent acquisition on Page 4 of the presentation, shown on page 4 of the presentation. Could you indicate how -- if all of those properties have already been refinanced in the smallest loans? And what kind of terms you have negotiated?And second question would be on the debt expiry schedule here for 2021, particularly with 9.5% of debt due, [indiscernible] interest, do you expect this just to extend by mortgage loans? Or would you consider to increase the portion of unsecured debt and then repay the loans and then take up capital bond or promissory note?And last question would be on the CapEx spend on Page 3, shown in the presentation. Could you [indiscernible] reduction compared to Q1 '19, I think, there might be a bit of an overflow from '18 into '19, that's why CapEx in Q1 less.

[Hans Richard Schmitz, Member of Management Board]

This month, so there is nothing to do, and this is an average interest rate of around 1%. Second question was acquisitions...

[Niclas Karoff, CEO & Chairman of Management Board]

Expiry is -- loan expiry is in 2021.

[Hans Richard Schmitz, Member of Management Board]

Loan expires in '21 here. Here we work on this. And hopefully, that we will have a solution in the summer. I'm very optimistic here that we will -- can do this, and we will do this with secured debt, not unsecured, unsecured is more than an option for further growth.

[Operator]

[Operator Instructions] It appears there are no further questions. I would like to turn the conference back to you, sir. Please go ahead.

[Niclas Karoff, CEO & Chairman of Management Board]

Yes. Thanks so much. And on behalf of the HAMBORNER team here, thanks for your attendance and looking forward to continue our conversations with you. Yes. Thanks. Have a good week, and please stay healthy. Bye-bye.