Hamborner REIT AG

XETRA:HABA

Earnings Call Analysis

Hamborner REIT Weathers Tough Market

In a challenging market environment, Hamborner REIT has shown resilience with a 4.6% increase in rental income and an over 7% rise in funds from operations (FFO) to EUR 54.7 million despite a 10.5% decline in property valuation. The company's EPRA vacancy rate edged up slightly to 2.8%, while the Weighted Average Lease Term (WALT) nudged down to 6.4 years. Expenses were managed with maintenance costs down to EUR 8.4 million and refinancing activities increasing interest expenses. Financial liabilities were reduced to just over EUR 700 million with a stable Loan-to-Value (LTV) of 43.5% and equity ratio of 55.1%. The tenant structure remained solid, the company continues with no substantial reletting risks, and they have committed to a comprehensive decarbonization strategy, with 2021 as its baseline emission year.

Weathering Economic Headwinds: Hamborner's 2023 Performance

Despite facing significant challenges in the market, such as ongoing inflation and a lack of economic growth, Hamborner exhibited resilience with operational performance and managed to achieve growth in revenue.

Steady Financial Growth with FFO Increase

Hamborner's Funds From Operations (FFO) rose by over 7% to EUR 54.7 million for the year. Although the company's Net Asset Value (NAV) per share declined, mainly due to property portfolio impairment, the financial position remained strong.

Resilience Amidst a 10.5% Portfolio Valuation Decline

The market value of Hamborner's property portfolio declined by 10.5% on a like-for-like basis, influenced by the rising interest rate environment. Despite these adjustments, the company remains optimistic about its property quality and tenant base, contributing to rental growth stability.

Maintaining Low Vacancy Rates and High-Quality Portfolio

Investments in 2023 including two large-scale retail properties helped maintain the portfolio's stability and quality. The EPRA vacancy rate experienced a slight uptick to 2.8% but stayed at a comfortable level, supporting the continued quality and stability of Hamborner's property portfolio.

Slight Decrease in WALT Reflecting Portfolio Consistency

The Weighted Average Lease Term (WALT) encountered a minor reduction to 6.4 years, indicating minor changes and ongoing consistency in the portfolio's lease situation.

Enhancements in Rental Income and Controlled Maintenance Costs

New property acquisitions and index adjustments led to a 1.9% like-for-like increase in rental income, totaling EUR 90.2 million. Moreover, the total maintenance expenses decreased due to the postponement of some measures to 2024, summing up to roughly EUR 8.4 million.

Solid Financial Structure Amidst Liability Management

The company effectively managed its financial liabilities, with Loan-To-Value (LTV) and equity ratios standing at 43.5% and 55.1%, respectively. These stability indicators, along with strong net debt to EBITDA and EBITDA interest coverage ratios, underline the firm's robust financial framework.

Confidence in Tenant Structure and Retail Portfolio

The tenant base remains reliable, marked by long-term commitments from reputable tenants. The incorporation of two additional assets has incremented the retail sector share within the portfolio. Furthermore, the company is not confronting substantial risks in its upcoming lease expiry schedule, maintaining a WALT of 7.6 years for the retail portfolio.

Commitment to Decarbonization and Net-Zero Emissions

Aligning with national goals, Hamborner plans to reduce energy-related emissions by 50% by 2030 based on the 2021 baseline. The long-term vision includes attaining net-zero greenhouse gas emissions at both corporate and portfolio levels by 2025, with targeted investments in real estate optimization to aid in achieving these objectives.

Proposing Attractive Dividends Looking Ahead to 2024 Expectations

The Executive Board intends to propose a 2023 dividend of EUR 0.48 per share, confirming the attractive dividend policy. With a positive outlook, Hamborner anticipates further income increase for 2024, with expected rental and lease income between EUR 91 million and EUR 92.5 million and an FFO forecast in the range of EUR 49 million to EUR 50.5 million.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome to the Hamborner REIT Preliminary Results 2023. My name is Natalie, 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, CEO and CFO, to begin today's conference. Thank you.

[Niclas Karoff, executive]

Good morning, ladies and gentlemen. Sorry for the short delay, and welcome to our preliminary figures 2023 earnings call.Warm welcome also from my colleague, Christoph from IR, who will be available as usual for any subsequent questions regarding our [ figures ]. Unfortunately, my colleagues, Sarah is not able to join the call today. For that reason, I will provide all relevant information on our business development and results.As usual, we would like to share with you some information that relate to the transmission [Technical Difficulty] in our invitation to this call, we recommend that you only use one of the dial-in options here, either follow the presentation live via webcast or by telephone. Dialing via webcast and via telephone at the same time, there will be a technical delay. Be aware that you can only ask questions over the phone.But now let's start with the presentation. After a short overview of the preliminary key figures of 2023, I will provide you with more details on the company's earnings situation as well as our current financial circumstances followed by outlook going forward.Let's start with the key figures. The 2023 financial year was characterized by significant [Technical Difficulty] on the investment market continuing substantial inflation and overall lack of economic growth. Despite such a challenging environment, Hamborner has managed to [Technical Difficulty] operational performance [Technical Difficulty] growth in revenue and [Technical Difficulty]Compared to year-end 2022 income from rents increased by 4.6% [Technical Difficulty] property addition [ explains ] rent increase. Our revenue figure is affected by reclassification of items within our income statements. As part of the preparation of this year's P&L, we recognized tenant prepayments for property taxes and insurance, which were previously reported under income as passed under revenues.The earnings side, FFO rose with a plus of more than 7% to EUR 54.7 million corresponds to an FFO per share of [Technical Difficulty] have been decline in the NAV per share, which particularly results from the impairment of the property portfolio as part of the annual evaluation. However, despite the challenging month that lie behind us for financial position [Technical Difficulty] very comfortable.Let's now take a more detailed look at the portfolio evaluation that was carried out at the end of last year. On this slide, you can see a bridge showing the portfolio development in 2023. It includes effects from our transaction activity and external portfolio evaluation, which, again, was carried out by our external [ footprint ].Basis of this reappraisal, the market value of our property portfolio declined by 10.5% on a like-for-like basis. The decrease relates to both asset classes, strongly influenced by the development of the interest environment, which is reflected in the higher discount and cap rates shown on the right-hand side.However, yes, despite the value adjustments made, Hamborner remains confident in the quality and resilience of its property portfolio. Yes, this confidence stems from several factors, having a solid tenant base comprising we know companies focused on local supply, along with the stable and creditworthy office tenants. Yes, this is a key asset that contributed to this development of our property portfolio. In addition, indexation effect contributed to the stability of rental growth.Let's now turn to Slide 4 with the preliminary key metrics for our portfolio for 2023. In the 2023 financial year, we made investments in 2 large scale retail properties, one in Offenburg and the other in Hanau. Besides the acquisitions and the sale of a smaller property in the first half of last year, there has been no other changes to our portfolio. It remains relatively stable and consists currently of 67 properties.The EPRA vacancy rate slightly increased to 2.8% but continues to remain at a comparatively low level. Yes, having only 1.3% vacancy rate in our core portfolio at the end of December is, in our opinion, a clear indication of the overall quality and stability of our property portfolio. Compared to year-end 2022, WALT has decreased only slightly to 6.4 years.As you can see on the next slide, the acquired assets in Hanau and Offenburg contribute around EUR 1.6 million to our annualized rental income. Based on year-end of 2023, our portfolio has experienced a like-for-like increase of 1.9%, mainly as a result of the index adjustments.Positive effects from vacancy changes in our retail portfolio were countered by negative results on the [ asset front ]. Total annualized rental income amounted to EUR 90.2 million.As I already outlined at the beginning, the increase in rental income in our portfolio was primarily driven by 2 main factors, namely property additions and indexation effects. The mentioned P&L reclassification of tenant prepayments led to an increase in income from rents and leases of around EUR 2.2 million. The revenue figure for the 2022 financial year was also increased by around EUR 2.1 million.Total maintenance expenses decreased year-on-year to around EUR 8.4 million due to the postponement of measures to 2024. Personnel expenses are slightly above previous year's level. One reason is that in 2023, Supervisory Board remuneration increased following an AGM resolution. And at the same time, was recognized under personnel expenses. It used to be recognized under administrative expenses.The increase in interest expenses is mainly due to refinance loans with higher loan volumes and for higher interest rate. Interest income totaled EUR 1.8 million and mainly results from the investment of liquid funds in overnight fixed-term deposit accounts. Obviously, the positive effect from the changed interest environment. Compared to previous year, we saw an increase in CapEx, essentially caused by measures implemented in connection with the reletting of the property in Mainz.The next slide presents our current financial situation. Compared to year-end 2022, our financial liabilities have been reduced to slightly more than EUR 700 million, slightly more than EUR 700 million. Most of the reduction refers to a large part of the bonded loan taken out in 2018, which we decided to fully repay last year.LTV development in 2023 was negatively affected by the dividend payment in May as well as the revaluation of our portfolio. Despite additional effects from the acquisitions closed in 2023, LTV and equity ratio have slightly changed compared to mid-year and remain at solid levels of 43.5% and 55.1%. Further relevant indicators, such as net debt to EBITDA and EBITDA interest coverage amount to 10.1x and 5.5x.On the next slide, we are now going to provide you some detail on our current tenant structure. Hamborner's tenant structure remains very solid and reliable, which is also characterized by the long-term commitment of renowned tenants with strong credit rating.A significant proportion of rental income generated the company that are lesser dependent on -- lesser degree on economic cycles, good retailers in particular. The transfer of ownership of the 2 additional assets last July led to a further increase in the share of the retail sector within our portfolio. As of year-end 2023, it's contributed to around 1/3 of the company's rental income.With the reletting of base in our manage-to-core property in Mainz, the local authority moved up to 10 place replacing [indiscernible]. Apart from that, there were no significant changes in the tenant structure or sector distribution within our portfolio.Next slide, we will provide you with some details from the current leasing situation. Operationally, we can look back on a very successful year 2023. Compared to the third quarter of 2023, the WALT of our retail portfolio decreased slightly to 7.6 years. However, the overall portfolio was remained at a very comfortable level of 6.4 years. 2023, 28 new contracts were concluded, which means that the total rental space of around 14,000 square meter was let to new tenants.In addition, as a result of lease extensions and the exercising of options, the total area of around 96,000 square meter could be contractually continued. Also in the next year, Hamborner does not see itself confronted with any substantial [indiscernible] risk with regard to upcoming reletting. This is nicely demonstrated in the graphic below showing our actual lease expiry schedule.After my explanations on our operational performance as well as our financial situation, at this point, let me go into a little more detail about our [ region's ] major sustainability.Last year, our sustainability activity focused on the development of a company-wide decarbonization strategy. Understanding where Hamborner currently stands in terms of its carbon footprint and sustainability efforts, yes, it was crucial for setting realistic decarbonization targets and a reliable strategy.The basis for its target is, therefore, the diligent balancing of its greenhouse gas emission in terms of carbon dioxide equivalent. Following a systematic evaluation of past carbon level and in view of the relatively high availability and quality of consumption and emission data, 2021 has been chosen as the base year for defining long-term decarbonization goals. The resulting corporate CO2 balance clearly shows that our administration has negligible impact on our total balance.Relevant drivers of emission are our contractual energy procurement and emissions from other sources. Most emission are attributable to tenant managed and energy consumption. Energy consumption accounts for the lion's share, just under 89% of all emissions directly through the purchase of gas and heating oil, indirectly through the supply of the district heating and electricity, and on the tenant side through energy purchases in which we are not contractually involved. Therefore, reduction and decarbonization of energy consumption across the entire portfolio [Technical Difficulty].Given the extraordinary importance of energy for our emissions level, in the first step, Hamborner will focus in the decarbonization effort on emissions from energy consumption. The company aims to reduce energy-related emissions at proposed level by 50% by the end of 2030 compared to the base year 2021. This corresponds to a reduction in emissions intensity from 56.4 kilograms of carbon dioxide equivalent in the base year 2021 to 28.2 kilogram of carbon dioxide equivalent in 2030. It requires an average annual reduction in energy emissions of 5.6%.In the long term, we are expanding our decarbonization ambition to include all our sources of emission. At the same time, with these targets, we are also supporting the national decarbonization target. Hamborner has made a commitment to achieving net-zero greenhouse gas emissions at corporate and portfolio level by the end of 2025.The visualization of the target along with the decarbonization pathway underlines the ambitious reduction targets for the [ company ]. Decarbonization pathway of the risk assessment to CRREM, which stands for carbon risk real estate monitor in its current version and with the objective of limiting global warming by 2 degree Celsius serves as the target for the medium-term reduction by 2030 across the portfolio.The long term, Hamborner aims to reduce its emissions well below this target. Nevertheless, the company is expecting low residual emissions at corporate level until 2045 and beyond, which are to be compensated via carbon dioxide.Yes. On the next slide, we will take a closer look at the expected costs for working on this target. To optimize our real estate portfolio, we are primarily focusing on CapEx spending this year, assuming a total of around EUR 1.7 million to EUR 2 million. For the years 2025 and 2026, an average of EUR 1.2 million to EUR 1.5 million maintenance expenses and EUR 800,000 to EUR 1.2 million CapEx per annum after that.For these years, cost for tenant improvements are excluded as the [Technical Difficulty] measures necessary because of the new tenancies are -- yes, they are [ too large ] to be considered.Hamborner is currently striving to focus on areas of action that combined high decarbonization potential with the lowest possible cost and at best, low complexity in implementation. And intensify tenant dialogue to further improve data quality and the decarbonization of energy supplies can leverage high potential.In addition, several maintenance measures that arise as part of the scheduled operation of our properties also have a positive impact on the portfolio emission intensity. Yes, in this way, cost increases due to measures exclusively for decarbonization and the planning years can be limited. So overall, as we think ambitious goals. However, we are committed to work consequently on the execution side, which, yes, will also require a good part of perseverance.Let me now conclude the presentation with a brief outlook. Based on last year's results as well as the overall corporate and market situation, the Executive Board intends to propose to the shareholders to distribute for the financial year 2023, a dividend of EUR 0.48 per share. This would represent a FFO payout ratio of approximately 72%, slightly lower than in the previous year, but a further confirmation of our reliable and attractive dividend.Now looking forward fundamentally, in view of our high-quality property portfolio, the solid financial earnings and liquidity situation, yes, we are still looking positively into the future. For 2024, we expect a further increase in income, assuming income from rents and leases between EUR 91 million and EUR 92.5 million. FFO is expected in the range between EUR 49 million and EUR 50.5 million.Total income from rents and leases should be positively influenced both by the acquisitions made in 2023 and by further index base rent increases as a result of inflation.On the other side, we expect a lower FFO compared to 2023, especially driven by expected uncertainties on the letting markets and higher costs, including shifts from last year. Please keep in mind that this guidance does not include [ tax ] from potential transaction.Yes. Ladies and gentlemen, with this, I would like to end the presentation and move on to the Q&A part. Thank you very much for your attention, and we are now looking forward to your questions.

[Operator]

[Operator Instructions] We will now go to our first question comes from Kai Klose from Berenberg.

[Kai Klose, analyst]

Just a quick one on the comments on the last page on Page 14, you see is influencing sector support from indexation effects. At the same time, you mentioned uncertainty on letting markets. Could you give more details what you expect on your renewal profile or let's say, lease expiry profile? How is this likely to come out in terms of tenant retention rates and/or lease renewals to the up or to the down side?

[Niclas Karoff, executive]

Yes. I mean, if you see that the volume of expiries [Technical Difficulty] as of today, we still believe that the retention rate should remain on a high level. Our [Technical Difficulty] general driven, firsthand because what we see is generally on the letting market certain signals that bring us [Technical Difficulty].

[Kai Klose, analyst]

Hello? Hello? Hello?

[Niclas Karoff, executive]

Kai, can you hear…

[Kai Klose, analyst]

Hello?

[Niclas Karoff, executive]

Sorry, Kai. Can you hear me? There might be a problem.

[Operator]

Yes. It looks like Kai has disconnected. [Operator Instructions] We will now take our next question from the line of Ventsi Iliev from Kempen.

[Ventsi Iliev, analyst]

Unfortunately, I just joined, so I'm not sure if these have been asked yet. But first one, on yields in the transaction market. So we've seen parts of an EDEKA portfolio recently refurbished, transacted 6.5%. And also now Branicks is selling a portfolio at 6.7% growth. And if I'm not mistaken, your portfolio currently valued is 6.1% or 6.2%. So do you expect further yield expansion in 2024? Or is it a quality difference?

[Niclas Karoff, executive]

Yes, thanks for your question. I think there are a couple of effects or a couple of the points that you have to consider. One is for obvious reason, it always depends on the individual assets, site, location, condition, et cetera, and you always have a certain range here in Europe within different companies and classes and other factors, tenant structure, et cetera, et cetera. So therefore, the -- you already have the range that you're moving in.Secondly, with the core portfolio, we feel very comfortable with our own quality here. Looking at the market as a -- yes, I think it would be fair to assume that there might be some additional expansion on the yield side during the course of this year. How much is difficult to estimate for obvious reasons. Of this point, I think, is that based on the fact that the transaction market is, yes, rather limited so far. There are not too many data points available. And I mean many market participants, I would assume are hoping that as we do that the market gets up to a different speed again that we see more data point and then it should be also easier to make any kind of prediction.

[Ventsi Iliev, analyst]

And then second one would be on the FFO guidance. So at the midpoint, there is basically a 7% decline, and that's excluding one-offs, so the positive one-offs from '23. In euro terms, that is EUR 3 million to EUR 4 million. And then looking at maturity, there's limited maintenance, of course, is postponed, but then in '23 and '22, it was already higher than '21 and 2020. So then I would assume that you're also a bit more cautious on the top line. Can you share the assumptions you're working with?

[Niclas Karoff, executive]

Yes. I mean, I think we are on the top line, we expect some positive effects from the 2 acquired properties of last year, of which the rent obviously was not fully reflected last year as the transaction happened during the course of the year based on the time of transaction. So we expect the full effect in our P&L on a year basis here in 2024. And secondly, we also expect some additional effects from indexation.But overall, considering the like-for-like development, as of today, we would -- yes, we would rather expect a bit lower level than in 2023. But that's just a guess at the moment because we have so many influencing factors as of today. Yes.

[Operator]

We currently have no questions coming through. [Operator Instructions] There are no further questions, so I'll hand this back to Niclas Karoff to conclude today's conference.

[Niclas Karoff, executive]

Yes. Thank you very much for participating and for your patience, a bit longer today to present the presentation of our decarbonization strategy. And should you have any questions later on, please feel free to give us a call and/or get in touch with us.And apart from this, also on behalf of Christoph and our team, yes, have a good remaining day and a good day. Thank you very much.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.