Hamborner REIT AG

XETRA:HABA

Earnings Call Analysis

Hamborner REIT AG Reports Stable Q3 Growth Amid Challenging Market

Hamborner REIT AG achieved a 2.8% increase in rental income, totaling EUR 69.8 million for Q3 2024, despite a slight decline in FFO by 1% to EUR 41.8 million. Their annualized rent remained stable at EUR 90.5 million. The firm anticipates full-year revenues to be between EUR 92 million and EUR 93 million, with FFO between EUR 50 million and EUR 51 million. Portfolio adjustments saw the sale of a Hamburg office property for EUR 8 million, reflecting a 27% premium over its last market value. The company aims to further enhance its portfolio while maintaining healthy financial ratios.

Growth Amid Challenges

In a challenging economic environment, Hamborner REIT AG showcased resilience with continued growth in rental income, which rose by 2.8% in Q3 2024 to EUR 69.8 million. This growth was attributed mainly to new property additions made in July of the previous year. However, Funds From Operations (FFO) faced a slight decrease of 1% to EUR 41.8 million, influenced by both income and cost factors.

Stable Operational Metrics

The company retained solid operational metrics, with a Weighted Average Lease Term (WALT) remaining at 6 years and a vacancy rate of 3.1%. These figures signal a stable income stream, crucial for maintaining investor confidence. The annualized rent income was steady at EUR 90.5 million, although slightly offset by increased vacancies and reduced rent in some relettings.

Cost Management and Expectations

Costs were managed with a rise in maintenance expenses to EUR 5.7 million, an increase of around 10% year-over-year, attributed to ongoing and planned property maintenance. Admin expenses saw a modest rise of approximately EUR 200,000, linked to digitalization efforts. The company anticipates total maintenance costs for the full year 2024 will reach about EUR 10 million.

Future Sales and Portfolio Management

As part of its proactive portfolio management, Hamborner signed a contract for the sale of a non-strategic office property in Hamburg for EUR 8 million, 27% above its last market value. The transaction is expected to close by year-end, with negligible impacts on current year earnings anticipated. Furthermore, the company indicated a sales pipeline of around EUR 40 million, with expectations of minimal deviations from book value.

Guided Revenue and FFO Outlook

The company remains optimistic, projecting revenue and FFO at the upper range of prior guidance. For the full year 2024, expected rent income is between EUR 92.0 million and EUR 93.0 million, while FFO is projected between EUR 50.0 million and EUR 51.0 million. This outlook takes into account stable operational performance and ongoing cost management.

Solid Financial Position

Financially, Hamborner remains strong, with total liabilities reduced to EUR 687 million and an average interest cost of just 1.9%. The EPRA loan-to-value ratio improved to 44.4%, indicating how well the company is leveraging its assets. Their equity ratio also increased to 54.9%, affirming a healthy balance sheet.

Market Dynamics and Challenges

Looking ahead, Hamborner faces a mixed outlook in the rental market, with increased competition in relettings and longer negotiation times noted for larger commercial assets. They are preparing for potential refinancing challenges and are engaged in discussions with banks for upcoming loan maturities, aiming to manage refinancing costs effectively amidst market fluctuations.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to the Hamborner REIT AG Q3 2024 Results Conference Call. My name is Alan and I'll be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions]

I will now hand you over to your host, Niclas Karoff, to begin today's conference. Thank you.

[Niclas Karoff, executive]

Good morning, ladies and gentlemen, and welcome to the presentation of our third quarter results. As usual, I'm accompanied by members of our team including my colleagues, Sarah and Christoph. So before we start, I would like to draw your attention once again to the transmission of this event. As described in the invitation, we ask you to dial in either via the webcast link or by telephone and as usual, active participation in the Q&A session is only possible via phone. But before we start the Q&A, let's move on to the presentation and an overview of the key figures as of 30th of September.

Despite the ongoing difficult environment and sector specific developments, we were able to continue our business as planned and closed the third quarter with further growth in rents and largely stable FFO development. Income from rents and leases increased by 2.8% and amounted to EUR 69.8 million. FFO decreased slightly by 1% due to some income and cost effects, which we will look at in detail shortly. Operational figures, including WALT and vacancy rate, remained largely stable and are still at a solid level at 6 years and 3.1%. As a result of the stable earnings situation, both the NAV and the key balance sheet ratios were positively influenced in the past 3 months. So overall, we look back at another successful quarter.

Let's now go into detail and take a closer look at the rent development. The already mentioned growth rate of 2.8% was mainly a result of the property additions in July of last year. The additional rents are already reflected in the annualized rents as of 30th September 2023, which are shown on the upper left hand side of the slide. Based on a year-on-year comparison, we saw further positive income effects from indexations, which amount to EUR 1.2 million or 1.3% However, indexation effects are offset by negative developments as a result of reduced rents in connection with relettings and an increase in vacancy. In total, annualized rent income was unchanged compared to previous year and amounted to EUR 90.5 million. For the remainder of this year, we continue to expect further, but limited positive like-for-like rent effects mainly from potential vacancy reductions as well as additional index-based rent adjustments.

On the next slide, we will take a closer look at the earnings situation. As previously mentioned, the top line figure increased by 2.8% to EUR 69.8 million. Income from incidental costs passed on to tenants decreased by around 6% mainly as a result of the vacancy increase during the year as well as due to outstanding settlements on ancillary costs. Maintenance expenses increased by around 10% year-on-year to EUR 5.7 million as several planned measures are currently being carried out or scheduled for the Q4. We still expect total maintenance costs of around EUR 10 million for the full year 2024. Admin expenses rose by approximately EUR 200,000, which is a result of our digitalization efforts as particularly software license costs are reflected in this P&L item.

Other operating income is EUR 400,000 or nearly 30% lower as in the previous year. The figure is influenced by compensation payments for early lease terminations, which amounted to around EUR 800,000 in 2023 and approximately EUR 500,000 in the current year. Despite higher interest rates for the recently refinanced fixed interest rate loans, interest expenses were nearly unchanged in the first 9 months of this year. This is mainly due to the repayment of our bonded loan in spring 2023 as well as lower expenses for variable financing. On the other hand, declining interest rates in recent months led to lower interest income from cash deposits which amounted to around EUR 1.1 million in the first 3 quarters. The income and cost effects resulted in a slight decline in FFO of 1% to EUR 41.8 million. So a decline of 1% to EUR 41.8 million.

On the next slide, few words on the development of our portfolio. Since the beginning of this year, there have been no changes to the property portfolio so it still consists of 67 properties. In contrast to the previous year, we refrained from carrying out an external portfolio-wide intra-year valuation, but made a smaller number of individual value adjustments as part of our half year reporting. As announced in recent months, we have been active on the disposal side as part of our active portfolio management approach. And at the end of September, we signed a contract for the sale of a smaller office property in Hamburg, which recently contributed approximately EUR 300,000 to annual rental income. In view of its size, age structure and sustainability standards; we have classified the property as nonstrategic.

And at the same time we were able to achieve a selling price of EUR 8 million, which was 27% above the most recent market value. In light of the still difficult transaction market environment, we think a very attractive pricing. As of 30th of September, the property value has been adjusted to the selling price, which led to a slight increase of total portfolio value compared to June. We expect the property to be transferred towards the end of the year. So the rents and earning effects on this disposal are limited for this year. Yes, the rents and earnings effect for the disposal are limited. Apart from the property in Hamburg, we are currently in sales processes with an additional deal volume of around EUR 40 million. At this point in time, we expect signings rather towards the end of the year or the first quarter of 2025 with the result that we do not anticipate any revenue or earnings effects in the current financial year.

Returning to the KPI overview. I would like to point out that we have made a reclassification within our portfolio and added 1 office property in Ingolstadt to the manage-to-core bucket. The reason for that is the current rental situation with a reduced WALT in combination with the announcement by a tenant to leave the property. The manage-to-core portfolio, therefore, now consists of 4 properties with a value of EUR 55.3 million or 3.8% of total portfolio volume. Apart from that, our portfolio KPIs do not show major changes and developed largely stable during the last 3 months. EPRA vacancy rate rose slightly by 20 basis points compared to midyear and came in at 3.1%. WALT decreased, but still remains at a high level of 6 years with 7.2 and 4.4 years in the subportfolio.

Concerning our tenant structure. In terms of the tenant structure, the past few months have seen minor changes which is reflected on the next slide. And within the Top 10 list, only the food retailer REWE jumped 1 position. Apart from that, both the ranking list and the sector distribution are nearly unchanged. Main reasons for this are the limited letting tasks in recent weeks, which are also reflected on the next chart. The 9-month letting result amounted to approximately 33,000 square meters, only a slight increase compared to end of June, but a significant decline compared to previous year, which was highly influenced by numerous relettings in the large-scale retail portfolio. Apart from our ongoing work on vacancy and early lease renewals, letting tasks will remain limited in the next weeks with only 0.8% of total rents up for renewal until the end of this year.

As in the years before, and please keep this in mind, the remaining expiring leases mainly include contracts that are renewed on an annual basis usually shortly before the end of the year. Next slide shows our current financial situation. Due to limited refinancing requirements and investment activities in the current financial year, our financial liabilities only changed slightly and have been reduced to EUR 687 million while the average interest costs remain at a very low level of 1.9%. In summer, we were able to refinance the remaining expiring loan in 2024 as planned. So the refinancing activities are completed for this year.

We are already in initial discussions for the expiries in Q2 2025 and at this point in time, we intend to regularly repay the remaining bonded loan in an amount of EUR 12.5 million in March 2025. As already indicated, EPRA loan-to-value developed positively in the last quarter. Following the increase as a result of the dividend payment and the portfolio value adjustments in June, LTV decreased to 44.4% as of 30th of September. In contrast, REIT equity ratio rose slightly to 54.9%. The further debt indicators, net debt-to-EBITDA and EBITDA to interest coverage, also developed stable and amounted to 9.7x and 5.4x, respectively. We can, therefore, conclude that the overall financial situation remains very comfortable.

Ladies and gentlemen, as usual, I would like to conclude the presentation with a brief outlook. Taking into account the stable operational business development in the first 9 months of this year and the latest income and cost calculations for the remainder of the year, we see ourselves in a position to substantiate our revenue and earnings forecast. So for the full year 2024, we expect both income from rents and leases and FFO to be at the upper end of the previous forecast ranges now at EUR 92.0 million to EUR 93.0 million and EUR 50.0 million to EUR 51.0 million. So the operational result is particularly influenced by the further development of some cost items, including maintenance, personnel expenses and also other operating expenses.

And with this, ladies and gentlemen, let me finish the presentation and move on to the Q&A. Thanks for your attention and now we are looking forward to your questions.

[Operator]

[Operator Instructions] We will take our first question from Andre Remke, Baader Bank.

[Andre Remke, analyst]

First question, you mentioned a potential disposal volume of EUR 40 million. Do you expect them to come up at around last book values or any material deviations expected from that? That's the first question, please.

[Niclas Karoff, executive]

I think overall it will be around book value from today's perspective. But I mean we will have to see during the further transaction because you can never say if there are any surprises moving more further ahead. I mean the transaction we just signed, which I described before in Hamburg, this was, as we think, a very good transaction. But you shouldn't expect coming from this level that is going on like this. So from today's perspective, I would say around book value. But this is an average assumption so we might come up a little bit. Yes, we will see.

[Andre Remke, analyst]

And if you have executed those further EUR 40 million, will you be then virtually through with your disposal program or will you also define further potential disposals before you start potential acquisitions for next year?

[Niclas Karoff, executive]

Yes. I think it would be fair to assume that we intend to continue our portfolio rotation, as I've outlined before, as part of our regular portfolio change meaning that we identified a couple of assets, which we also intend to bring to the market next year. And then we will see that we get a good timing for recycling the money then in combination with the sales activities by obviously looking to the market on the acquisition side, which we already do now, and then it's more a matter of finding a good timing of combining both angles.

[Andre Remke, analyst]

And do you already see some interesting potential acquisition targets or what are the characteristics what you are looking for?

[Niclas Karoff, executive]

I mean overall, I think it's fair to say that we would wish to see more attractive assets, which would fit to our profile. But at the moment, it's still a bit slow on this side. I mean, however, once in a while sometimes we find something, but it's not the flow that I would have expected at the beginning of the year to be honest.

[Andre Remke, analyst]

Okay. And then what are your expectations for the year-end valuation process, maybe split it by the 2 asset classes? Any indication possible at this point in time?

[Niclas Karoff, executive]

I mean we are just starting now the process concerning our yearly valuation. So hopefully, you forgive me that I don't want to go too much ahead of this because, as I said, we are just starting it. I mean we will see. I wouldn't expect major changes on the valuation side. But as we pointed out also in our Q3 report, we can't rule out that we might see a smaller dip on the total valuation side here.

[Andre Remke, analyst]

And is there a difference between retail and offices?

[Niclas Karoff, executive]

I wouldn't differentiate now at the moment, but I think it's too early to say this. I would say from a risk perspective overall, I would see a slightly higher risk on the office side. But sometimes as it is if you compare portfolio level and asset level, there can be 1 asset or 2 assets which might have -- especially if you come from a rather overall low effect, which might have an impact. So it could be. But if you look at the total portfolio level for this asset class, it wouldn't make a major difference where 1 asset might make a substantial difference, but on a total portfolio level it's rather limited. So it's always a question where you come from. But overall on a total portfolio level [Audio Gap] asset classes, if we would see some effects, I would rather expect them on the office side than on the retail side.

[Andre Remke, analyst]

Okay. And the last question, did I get it right that you mentioned that you're expecting a lower vacancy for the remainder of the year until year-end? Did I get it right?

[Niclas Karoff, executive]

Yes, we expect. But please, we are talking about really limited effects here and this is also in connection with what I pointed out that some effects are or some rental contracts will be signed here within or we expect to be signed within the next couple of weeks and having an effect from there. But it's a limited effect. It's not a major effect that we expect.

[Operator]

We will take our next question from Thomas Neuhold, Kepler Cheuvreux.

[Thomas Neuhold, analyst]

I have 2. The first is I was wondering if you could provide more color on the conditions on the rental market for commercial assets. You mentioned that reletting rents are slightly down. What is your expectation? How this could develop in the next couple of quarters given the current economic situation in Germany? And the second question would be on the refinancing costs. I understand you don't have a lot of debt to refinance in the near future, but I was just wondering from your talks to banks, what kind of all-in refinancing costs you would currently face? These are my 2 questions.

[Niclas Karoff, executive]

Okay. So on the letting markets, we currently see no major -- not major differently picture than we have seen a couple of months ago. What I would say is especially concerning larger more complex letting situations, negotiations tend to take a bit longer and of course our tenants have made up their mind based on experiences post the corona time and the experiences from flexible work as well. So we see and that's what we expect in the future also, additional need for very intense communication to take up the needs of the tenants. Also concerning sustainability topics, which obviously is also 1 factor which might lead to negotiations which take a bit longer. But having said all this, apart from this, we see no major changes here on the letting side at the moment.

And concerning the financing and the refinancing that you see is ahead of us. If we talk to the banks -- I mean we started this process in light of what we have ahead of us very early on and have had several discussions already with banks and we made a very good and reliable communication so far. So we have no reason to believe as of today that we have here any points. And we are discussing obviously concerning the development on financing costs here because that's something will be of importance for us here. On concerning financing costs as of today, I mean we see where we are at the moment and it's difficult for me to predict financing costs here. We also come from -- we simply come from today's level and then we will see where we end up until end of next year considering the financing market. However, overall, I think we are in a good phase and a good communication and it works out so far as planned.

[Operator]

We will take our next question from Philipp Kaiser, Warburg Research.

[Philipp Kaiser, analyst]

Just a couple of questions from my side. With regards to the Hamburg sale, you mentioned the premium of almost 30% from the latest fair value. Could you give us an indication from when the latest fair value is as a reference?

[Niclas Karoff, executive]

Yes, of course. The reference or the relevant value comes from end of last year from our full year valuation.

[Philipp Kaiser, analyst]

And the next question is related to the mentioned EUR 40 million sales pipeline. It might be too early to get a real number, but having a ballpark of the effect on your LTV when you sell those EUR 40 million, you'll get a significant impact or a mild impact on your leverage? That would be helpful.

[Niclas Karoff, executive]

Yes. I think if we would conclude with all these sales which are behind this volume, you should expect just a very slight decrease on the loan-to-value side. So we do not expect any substantial LTV effect from this.

[Philipp Kaiser, analyst]

Okay. Very helpful. And the last one with regards to the maintenance cost. You already mentioned that you expect to reach the budgeted EUR 10 million and that means the majority will come in the last quarter. Do you have an indication of the amount of measures already kind of started or to get a bit a broader picture of what might be already fixed of the left EUR 5 million roughly or what might come due to negotiation?

[Niclas Karoff, executive]

I'm not in a position to give you more details on this at the moment. But what I can assure you is that we have had a very intense discussion internally and a very intense look in this topic because we know from past experiences obviously that this is something which, for someone like you or other stakeholders here, might cause questions considering the fact where we are or where we have been at the 30th of September and it's just a couple of weeks until end of the year. However, as of today, we think that the roughly EUR 10 million is the number we are working with and that's all I can say at the moment because there are so many influencing effects on this topic. But I can assure you we have spent a lot of time on working before we came up with the number and as of today, hope that this should be the right number more or less.

[Operator]

[Operator Instructions] There are no further questions on the line. So I will now hand you back to your host for closing remarks.

[Niclas Karoff, executive]

So from my side, thank you very much for your attention. And if you have any further questions, please just let us know or get in touch with Christoph, and hope to talk to you soon. Thank you very much and have a good remainder of the week.

[Operator]

Thank you for joining today's call. You may now disconnect.