Hamborner REIT AG

XETRA:HABA

Earnings Call Transcript 2020-Q3

[Niclas Karoff, CEO & Chairman of Management Board]

Yes. Thanks, Cecilia. Good morning, ladies and gentlemen. Yes, on behalf of my colleagues, Hans Richard here and Christoph from IR, I would like to send a warm welcome to you here for our Q3 conference call. First, as usual, I will give you a short overview here of the highlights, and after that, have a little closer look on the key results here for the period. Hans Richard, he will then provide you with further details concerning our operational business as well as the financial part. Okay. Let's start with the highlights so far. Yes, last few months were pretty challenging for all of us, for sure. However, we've been able to generate, we think, very satisfying Q3 results. Rental income compared to last year's period went up 3.9%, mainly influenced by the new office properties here in our portfolio, which have been onboarded during H1 here. Our disposal program, especially concerning our high street retail portfolios, is we think well underway. And the proceeds are intended to be used for future reinvestments. Concerning our daily letting business, yes, we were able to bring the cash collection rate almost back to pre-corona level. And yes, we are continuing an intense dialogue with those tenants who have been hit especially hard by the pandemic situation. And yes, as a result, we agreed with many of them on an individual basis. And up to now, we're able to keep here the volume of temporary rent reductions as well as deferrals at, as we think, a very low level. Hans Richard, yes, he will provide you with more detailed update later during the presentation. As you are used from Hamborner, financial profile remains solid. KPIs, including LTV and interest coverage, have been further improving here within the last quarter. More details on this as well a little bit later on. Yes, there are a lot of topics that should be outlined in more detail during the next minute. So -- however, before we are moving on to that, I would like to give you a quick overview regarding the major KPIs here. Yes, let me add a few comment on the operational KPIs, which you see here in the overview. Rental income, year-on-year, up close to 4% driven by recent additions to the portfolio. I mentioned that a minute before. Year-to-date, like-for-like rental income compared to last year down by 0.6% based on reverse effects within the asset classes for just as additional information for you full retail, mainly driven here by a tenant move-out in one asset, has seen a decrease by minus 1.5%; whereas office like-for-like rents for the same period went up 0.8%. And then together with some other effects in total, you see the number dropping here by 4.6%. Operating results, yes, obviously, driven by the revaluation effects for the first half year. FFO per share, slightly up. Vacancy, once more down to, yes, a record low of 1.7%. Yes. However, I think in the current market environment, you shouldn't expect this level here to be sustainable. Yes, LTV, more or less same level compared to the year before. Nevertheless, just for comparison reason, 60 bps down compared to the H1 number here with 43.1%. Okay. With this, let's continue with a few comments on disposals. Yes, the sale of our retail asset in Osnabrück here has been completed in September. In addition, the property in Oldenburg which we sold is expected to be transferred to the buyer at the end of 2020 or beginning of next year. Total pricing for the assets has been above a 1 valuation and slightly below 2019 values. Given the acceleration here of the transaction markets and the current rise in marketing activities, we expect further disposals in the hedge here. Yes. And with this first initial overview, let me over to Hans Richard for further details on the operational business and the financial effects.

[Hans Richard Schmitz, Member of Management Board]

Yes. Thank you, Niclas. Good morning, ladies and gentlemen, and a warm welcome from me as well. Let us now take a detailed look at the operating and financial figures for the first 9 months of the current year. First of all, a few remarks on the letting situation. The award for the portfolio as a whole is currently around 6.5 years. While the average terms in retail are virtually unchanged at 7.4 years. Office lease terms have slightly fallen to 4.9 years on average during the last few weeks. An average of 8.1 years terms for large-scale retail leases remain consistently high due to the extension of existing leases as well as the conclusion of new leases at high street retail awards increased to 4.9 years compared to 4.1 years at the end of June. The lease expiry schedule still shows that the share of leases expiring remains balanced throughout the next years. At the end of September, the remaining share of expiring rental agreements in 2020 accounted for 0.3% of total leases. So overall, you can say we have done our work for this year. The renewals and new rentals still pending in 2020 essentially relates only to few office leases that expire at the end of the year. Let us now take a closer look at the tenant structure. Erica, Kaufland, Wave and Real are still leading our top 10 list with a share of around 28% of total rental income. Compared to the end of June, Early, another brand known as Food Discounter with a very good credit standing, returned to 10th place of our list to tenants, pushing the fashion retailer C&A out of the top 10. In total, food retailers currently still account for 1/3 of the company's total rents. Other systematically relevant retail channels, such as drugstores, pharmacies or do-it-yourself stores, including the European market leader, OBI, contribute around 12% of our rental income. Our office tenants, including medical care facilities, medical practices, educational institutions and public authorities, such as the Federal Unemployment Agency, generate around 1/3 of our total rents. Our solid tenant structure and in particular, the highest share of companies providing essential services is the basis for our stable cash inflows even in this economically difficult times. Let's move on to the current rental situation at Hamborner. Despite the far-reaching restrictions on public life and the associated impact on individual Hamborner tenants, incoming rent payments have seen surprisingly good performance in the last few months. Following a brief decline in rental income during the national lockdown in spring, income rent ratios recovered quickly. And we're almost -- already almost back at pre-crisis levels in the month from July to October at an average of 98.7%. Hamborner is still in close contact with the tenants concerned to discuss outstanding rental payments for the period from April to October 2020, but agreements have already been reached with most of these tenants. In this context, temporary rent reductions of just approximately EUR 0.7 million have been granted so far. This represents just 0.8% of annualized rental income. Furthermore, we reached rent deferrals in an amount of EUR 0.4 million, which corresponds to a share of 0.5% of total annual rents. During the negotiations, numerous lease contracts were extended. The average term of the agreements in question was extended by around 24 months. In particular, rental agreements with retail and catering tenants affected by the pandemic were extended significantly. The additional rental volume created by all lease renewals totals EUR 11 million. The stability of Hamborner's tenant structure is also reflected in the low number of tenant insolvencies. To date, only 4 smaller tenants have filed for bankrupt. The annual rental volume associated with this comes to around EUR 230,000, representing 0.26% of annualized total leases. These current figures clearly illustrate that Hamborner has a very sound portfolio that has proven relatively resilient even in times of crisis. The next chart will include a few details on our Q3 figures. As already mentioned by Niclas, we generated income from rents and yields of EUR 66.2 million in the first 9 months of the year, an increase of 3.9%, which was mainly due to the property transfers during the first half of this year. For the same reason, income from incidental costs charged to our tenants was 4.8% higher and came in at EUR 10.7 million. Current operating expenses rose slightly compared to the previous year's third quarter to EUR 13.7 million, an increase of 6%. Net rental income amounted to EUR 59.7 million, plus 4.4% compared to the previous year. Administrative expenses increased slightly by around 1.3%. Personnel expenses also increased by approximately 8.3% to EUR 3.9 million mainly as a result of the changes in the management team in spring. Accordingly, our operating cost ratio rose slightly to 7.3% compared to 7.1% in the previous year. This primarily relates to higher personnel expenses in the first half of 2020. Other operating income amounted to EUR 1.2 million. The significant rise in income essentially related to contractually agreed compensation payments due to delays in transferring ownership of the office property development in Aachen and Bonn. Other operating expenses are approximately EUR 2.2 million in the first half of 2020. The item includes corona-related write-downs on trade receivables of EUR 1.3 million and is therefore significantly higher compared to the previous year. As a result of income and expenses, the FFO came in at EUR 42.3 million in the reporting period. The corresponding FFO per share amounts to EUR 0.53. All in all, a slight increase of 2.5% year-on-year. And let me point out once again that we make no corona-related FFO adjustments. Moving to the next slide to give you further information on the NAV development. The NAV calculation shows an increase of long-term assets, which is a result of the portfolio additions in the first half of this year. The position is also negatively affected by the valuation adjustments made at the end of June. As you know, in light of the impact of the coronavirus pandemic, we decided to have our external appraiser, JLL, carry out an additional valuation of our portfolio, which resulted in a 3.2% decrease in the market value of the like-for-like portfolio in comparison to the end of 2019. Short-term assets increased by 6% related to the increases in liquidity and receivables. Long-term liabilities climbed to EUR 686.5 million as a result of additional loans taken out in relation to the newly acquired assets. Overall, NAV saw a slight 1.2% decline as against the end of 2019. NAV per share at the end of September 2020 came to EUR 11.45. Hamborner's financial situation also remains solid and comfortable. The REIT equity ratio slightly climbed to 55.8% and is still well in excess of the 45% required under the German REIT Act. The LTV at the end of September came down to 42.5%, and interest coverage ratio rose to 4.9%. We again managed to reduce average financing costs slightly to 1.87% with the average remaining term of our loans of 5.2 years. We have already concluded all follow-up financing for the current year 2020 and the next year 2021. At 1.8% and 1.1%, respectively, future rated average interest rates are considerably lower than the expiring financing agreements, and Hamborner will benefit from the lower rates in the future. Our liquidity situation remains comfortable as well. After dividend payment, we currently have liquidity of around EUR 50 million, comprising cash and loans that can be accessed at short notice under existing financing agreements. So far from my side, thank you for listening. And let me now hand over to Niclas for a short outlook.

[Niclas Karoff, CEO & Chairman of Management Board]

Yes. Hans Richard, thanks so much. And yes, let me conclude here our short update presentation with some additional information concerning dividend and our outlook. Yes. Following the dividend decision of EUR 0.47 per share in October, the acceptance rate for the scrip dividend amounted to approximately 26%, keeping in mind that this has been a first-time offer and also taking into account the substantial number of private investors in Hamborner, many of whom, yes, I think initially a bit unfamiliar maybe with this additional option. We think that we can be very satisfied with the results. Yes, looking forward and then given the overall performance here during the last month, we are confirming this year's forecast, which had been updated in July as a whole. Nevertheless, the next months are going to still represent a challenged Hamborner and as well, obviously, as many other participants here in the commercial real estate markets, yes.Short-term visibility on several topics has much improved since the summer. On the other hand, the potential longer-term effects from the pandemic have left many questions unanswered here so far. Yes. But in any case, we are determined to keep on handling the COVID-19-related tasks here as we have done it successfully during the last few months, and at the same time, clearly here to fully implement our strategy update, yes. So with this short overview, I hand over to you as the listeners, and we are open to take your questions. Thanks so much for now.

[Operator]

We will now take our first question from Dennis De Jong from Kempen.

[Dennis De Jong, Research Analyst]

Dennis De Jong. Actually, just one question from my side. Looking at the sales prices of the assets that you have sold compared to recent book values and then compared to the full year numbers, would you say that maybe the revaluations have been a bit too strong downwards, I mean?

[Niclas Karoff, CEO & Chairman of Management Board]

Yes. Thanks for the question. I don't think so at the moment. I mean what you see in the market concerning our high street assets, and we are obviously in various conversation at the moment bidders, is that you have a pretty widespread on the valuation side concerning the initial valuations, the offers we get. And we see this as a reflection, obviously, of some uncertainties in the market. And so coming from this point and based on the experience we make here during these conversations and the transaction so far, we try to get it -- we try to narrow that down, obviously, these variations here. But so far, we feel comfortable clearly with our valuations here thus far.

[Operator]

We will now take our next question from George [indiscernible] from Banco de La Pampa.

[Unknown Analyst]

So. I have one question regarding what is your firepower as you have now sold also this property in Oldenburg? And regarding with this, you mentioned that you have -- more or less are working on a sales pipeline on the side street assets. Do you also have acquisition pipeline for replacing these assets? And the third question I have on the maintenance costs that were very low in Q3, is there something that comes then back in Q4? Or is this an even further delay?

[Niclas Karoff, CEO & Chairman of Management Board]

Yes. Maybe I give answers to the first 2 questions, and maybe Hans Richard can comment a little bit on our maintenance strategy and our operational here. Concerning firepower, as pointed out before, Georghe, the -- concerning firepower, it always has 2 sides. I mean, obviously, theoretically, our firepower, if you take it from our REIT ratios and other metrics, obviously, is quite substantial. On the other hand, we said that we don't -- in the past, also that we don't want to stress this theoretical firepower that we have -- simply because we want to be -- remain cautious on LTV and try to balance it out in the right way. So what we do right now is -- and yes, I can confirm is that we are -- definitely, we have an acquisition pipeline, which is pretty good, progressing at the moment. So what we intend to do is that as soon as possible to replace the divestments that we do by replacing them by new investments that we find in the market. Obviously, this won't always happen on the same day or the same month. But at the moment, looking on the investment market from the sales perspective as well as from the acquisition perspective, we feel pretty good. And so that's step by step within the sale of the assets in the upcoming quarters here. We try to replace it as good as we can, apart from, obviously, using the proceeds from the sales process also for other investment measures within the portfolio.

[Hans Richard Schmitz, Member of Management Board]

Yes. Then I take the question regarding the maintenances in Q3. Indeed, relatively low, and we expect in Q4 a much more higher number. I think that's normal what you can see in every year in Hamborner's figures. So here, we had in Q3 some delays inverts for tenants.

[Unknown Analyst]

And in respect with this, is this then -- yes, is this then probably more than EUR 2.5 million in the fourth quarter or...

[Hans Richard Schmitz, Member of Management Board]

No. No, no. For maintenance, in Q3, we had EUR 817,000, and we expect a number, 1 -- around EUR 1.3 million, perhaps up to EUR 1.5 million. In this range.

[Unknown Analyst]

But is this -- regarding this number, then I think your guidance for the FFO is rather conservative? Or do you expect some rental losses in Q4?

[Hans Richard Schmitz, Member of Management Board]

At the moment, we don't expect rental losses, but you never know. It's all our forecast here. We can't say exactly what will happen with the pandemic at the moment. So it may be a little bit conservative, yes. But at the end, you will see that we would like to fulfill our forecast.

[Operator]

[Operator Instructions] We will now take our next question from [indiscernible] from [indiscernible].

[Unknown Analyst]

I have 2 questions. Firstly, for new acquisitions, do you think about other assets categories like logistics, less retail, more others? And second question, how about -- what do you think about the ESG criteria in your portfolio?

[Niclas Karoff, CEO & Chairman of Management Board]

Yes. Maybe let me answer this. So concerning new acquisitions, I mean, currently, we're looking at retail and office assets based on our strategy. And we intend to follow this path. So logistic is not part of our investment strategy. Would we rule out to change our investment strategy, to adjust it in the future? Of course, not. But particularly, clearly, we just did a strategy update during the course of the year. And we think with 2 -- with these 2 asset classes, we have a clear set here. And within the retail part, obviously, we are looking, especially for food-anchored assets, DIY source, et cetera, so away from high street assets and the similar. So clearly, we stay with office and retail. And we are comfortable on this side here. Concerning your second question, I mean, obviously, I'm not quite sure what you mean with ESG criteria concerning our portfolio. I, mean obviously, the ESG topic is a very relevant one. We are spending a lot of time of it. We are going to publish our new ESG report shortly. But maybe you could be a bit more specific what you are referring to if you have something especially in mind concerning ESG criteria in the portfolio?

[Unknown Analyst]

I think about the standing of the individual assets concerning sustainability and the other criteria of ESG.

[Niclas Karoff, CEO & Chairman of Management Board]

Yes. I mean what...

[Unknown Analyst]

The qualification of every asset.

[Niclas Karoff, CEO & Chairman of Management Board]

Yes. I mean what we have done -- I don't want to say too much because, obviously, we want to publish shortly here on our ESG topic. What we have done is we have done a very thorough internal analysis concerning our ESG strategy looking forward. And part of the strategy definitely is that we have a very close look concerning our existing portfolio as well as how we handle further investments into the portfolio being it on the CapEx, so maintenance side or being it by adding new properties. So that we, in the future, will have a kind of internal guidelines, how we -- that we are going and procedures, which reflect ESG-related topics when we held our internal investment decisions. So the ESG topic will have a much stronger operational impact here within the company and this goal all major areas like acquisition and sales, asset management, letting business as well as, obviously, the technical department, which has to fulfill them as well additional standards. Does this help?

[Unknown Analyst]

Thank you.

[Operator]

[Operator Instructions] We will now take our next question from [indiscernible] from [indiscernible].

[Unknown Analyst]

I would like to put some questions concerning Your first experience versus scrip dividend payments. 26% of the shareholders decided to get the dividend in shares. Is this acceptance rate of the scrip dividend what you have expected? Or is it disappointing for you? Because I guess, one of your goals is to maintain and to generate new capital. And what will the 26 percentage mean for your plans concerning your dividend strategy in the future? And it is mentioned in your presentation that the liquidity advantage generated through the scrip dividend is EUR 6.8 million pre-transaction costs. What are the transaction costs? What is the amount of these?

[Niclas Karoff, CEO & Chairman of Management Board]

Yes. I'd be happy to answer this. So as pointed out at the later -- or earlier in the call, based on the fact that we did this the first time, we are pretty happy with what we achieved here concerning the acceptance rate, yes. For the future, our hope is clearly that we are able to increase this. If we -- obviously, we did quite an intensive analysis before we decided to recommend this to the shareholders that we -- based on the fact what has happened with other companies and how they were handling it and their experience -- the experience they made in the past with this one. And based on this, I think the acceptance rate is -- for our first time is pretty good. Yes, you see different results here, different ranges across the last couple of years. But for the first time, I think we can be pretty happy. Concerning costs, the total cost for the transactions here have been around EUR 380,000. Nevertheless, I think it's fair to assume that as a first timer, you typically have a bit higher cost than what you -- compared to if you repeat this. So we would expect in the future to be able to reduce this a little bit. And obviously, within -- hopefully increasing -- further increasing acceptance rate, the relation here between cost and what we get back will be even better. I hope that this helps for additional information for you.

[Operator]

[Operator Instructions] As there are no further questions at this time, I would like to turn the call back to your speakers for any additional or closing remarks.

[Niclas Karoff, CEO & Chairman of Management Board]

Yes. Thank you very much then to all of you. Stay healthy, and wish you a good remaining week and you are -- see you soon. Thank you very much. Bye-bye.

[Hans Richard Schmitz, Member of Management Board]

Yes. Thank you very much from my side, too.