Hypoport SE

XETRA:HYQ

Earnings Call Transcript 2023-Q1

[Operator]

Dear ladies and gentlemen, welcome to the Webcast Results Q1 2023 of Hypoport SE. At our customers' request this conference will be recorded. [Operator Instructions]

May I now hand you over to Ronald Slabke, who will lead you through this conference. Please go ahead.

[Ronald Slabke, CEO]

Yes. Welcome from my side as well. Today, we announced our detailed Q1 numbers, and everyone is excited about getting to know more details. Before we go to these details, you are aware of this that our group is active in three industries, digitalizing credit, real estate, and insurance here in Germany. Right now, there is a pretty strong focus on our core market, the private mortgage market and the home ownership market there. And let's say, we expected this when we saw how Q4 was running.

I can tell you right now already, Q1 was slightly up. So we saw the turning point in this market. Our cost-saving program reduced our cost level by €10 million. And the combination of both made us being profitable in the first quarter, and this in a -- on a pretty low market level.

So this is a successful Hypoport. Thanks to this situation, we are able to look around us, see what's going on and make home decisions about how to optimize the situation in our favor, how to change relations, how to readjust pricing models and go forward and keep taking market share, which we did in the first quarter. So at this stage, let's go into details and see how the different units of the group performed in this market environment.

So talking about market environment, we -- and you are aware of this -- had a long period of growth and since the late summer last year, a sharp decline in mortgage volume, yes. Bundesbank reported for January and February the lowest number for a long period and with a positive trend in March, which was up from the February level. We still ended up as a weak quarter. As I said already, we saw this turning of the market already a couple of months earlier.

The Bundesbank numbers are a little bit late to the party, but they are in line now with this what we see that market slowly found the button, and it starts slowly to recover. What happened in the first quarter, especially in this market? When we look on the numbers, we see that interest rates are now stable for a period of eight months.

Since September of last year we are on the same level, third quarter -- three quarters in a row, you can say. So this huge impact the -- which the interest rate increase there in the last summer, you can say, had -- is slowly phasing out of the market. What we saw as well is an increasing number of properties coming to the market. It slowed down in the first quarter, yes, but there are still -- let's say this report is available on portal, especially, this is what is visible to us. It's on a record level. Still, it's not a lot what is on the market.

And this explains as well why the price pressure is already going down. So actually, we see -- we saw in February a turning point. So while the peak price level was in April, May last year, in January, we saw the lowest level.

In February and March, prices of properties in Germany were going up again. This is earlier than expected by most of the strategic community, let's call it, because the interest rate rise would imply that prices should go down roughly 1/3 to make housing as affordable as it was before. We are now down roughly 10% only from the peak and still -- and are already at this turning point. I think there are two reasons for this on one side.

We see a tough inflation. So as well incomings are getting up and people are acting more cautious than they look in the near-term future and expect still increasing construction costs and increasing above level -- above a stable level of inflation. So something 5% plus is still expected for the next one or two years. So this is already -- this means increasing income as well near time, and this is already priced in a certain way. And the other thing is we see a huge transformation in the German housing market when it comes to the rental side of the market. We put here the numbers of properties offered and already in 2020, 2021, the renting market was really tough.

There was -- it was, especially in the metropolitan areas, more or less impossible to find a new apartment. In the last quarters, it got even worse and rents are fast-rising right now even when they are heavily regulated. Besides the fact that we have an exceeding demand of a couple of hundred thousand units, thanks to migration, a core reason is that a fully regulated renting market has frozen all fluctuation in this market to an extremely low level.

So it's economically not -- doesn't make any sense anymore for someone to give up an apartment you rented a couple of years ago because of a huge jump in rent, a huge gap between the rents you pay and then based on a long-term contract you have and this is what is the current market level. And this gap is freezing more and more this renting market so that there's close to no supply anymore for existing apartments and the ones who are newly built and still come to the market are pretty expensive. Some portals reported just for the last quarter and rent increase of 20%. When we take all portals, we see that it's more something around 5% quarter-to-quarter.

So on an annual basis it's 20%, so far above inflation rate. So rents are fast increasing and there's no availability, which brings people to consider buying a property and changing the property ownership in this market in the next couple of quarters it is expected. So this is stabilizing the pricing side right now, and that's why we saw already the turning point in February.

So at this stage, for the development of the first quarter, how our different segments performed in this. As always, we start with the Credit Platform and here in the center, the Europace system. It's the core product. There are mortgages, but as well as other products in the segment like personal loans and business loans for German corporates. So we start with mortgages, including Bausparen saving products, we see a plus of 7%.

Mortgages only is a plus of 10% above last quarter. Just to make this transplant, we compare right now with the last quarter because to compare with the first quarter of 2022 would mean to talk about a huge slowdown in the market that you're already aware of. So I think from an investor point of view, it's more relevant what happens right now. And so last quarter is a better comparison than the last year, which feels like a pretty long time ago.

So we stick to this in the whole presentation that we compare quarter-on-quarter, even having some challenges in areas where there are some seasonal effects. But better to have this and expect this, that all the time talk about a comparison of two different time zones, which we have in our business here. Okay.

Back to mortgage business on Europace. We were gaining market share in all segments, in all customer groups. I will talk about this in a moment, and we keep innovating. So even with this what we did in cost cutting, in Q3 and Q4, we keep being the most innovative source around mortgages here in Germany. We introduced new cooperations with ImmobilienScout. Based on our past algorithm, the AI behind already the suggestions in the Europace systems.

What is the optimal way to finance someone is now as well used for lead generation for mortgages on the ImmoScout portal to make sure that people get a fair view of what they're able to afford and what the property will cost them. And with this, the quality of leads is improving and Scout is going to monetize on this while Europace partners gets pre-qualified leads with a much higher conversion rate than they usually would get from a real estate portal.

So talking about our development in the different customer groups. In cooperative and savings banks, we grew double-digit, 22% in co-ops, 18% in the savings bank industry and both of them had losses in volume in Q1 compared to Q4. So the relative market share gain here is again back to normal in the mid-double-digit range. And this shows the attractiveness of Europace in these two sectors right now in the current market circumstances. The advantage of Europace is it needs even for the traditional banking branches, more the demand of the consumer to compare and to minimum understand what -- how the offer of a savings bank or cooperative bank looks like compared to the rest of the market.

And if needed, these banks are able to broker a mortgage of a third-party as well this way. But it's more about transparency right now for the consumer and then efficient workflow process in the whole advice process to be able to compete with brokers because brokers are taking market shares right now. They are much more active and much more agile when it comes to finding a way to the consumer, and they are less hit by the current market environment than bank branches.

We see the gap of roughly 15% in the performance between these two types of groups. And we are talking about the ones who are using Europace already. So the ones not -- the bank branches not using Europace are pretty sure even more affected by the current market environment. So thanks to the brokers who took market share and as well a positive development in the private banking industry, transaction volume of Europace is growing in this current environment already. And when I look forward to the next quarter, it is whatever the market will do.

As long as it doesn't lose value, Europace will gain transaction volume because we are gaining market share double-digit even in the current market environment. So even under these circumstances, in a couple of years, Europace and our transaction volume will be back to the pre-crisis level. And if the market is normalizing, which we expect in addition, then we will see higher volume here on the platform in the near future.

Next product area, personal loan business, plus 39% in the first quarter. Some seasonal effects in this, to be fair. And we see as well that business gets more difficult because of recent recession probabilities in Germany. Banks get more concerned and are more critical with their loan portfolio.

But we are gaining market share in a relative turbulent market right now. Core product is white label mortgages for banking sales channels and right now, new corporations with the cooperative banking sector, we roll out GENOFLEX, which was tested last year intensively and now it's all out in the whole sector to enable all cooperative banks to broker third-party personal loans if their own product is not competitive enough. From a pricing. this score card doesn't meet the customer needs.

So this -- lets say, this is a very attractive niche we are working in. There's still a long way to go because banks need to monetize on their client contracts and only to accept underwrite loans, which fits your own criteria is not the best way to monetize if they want to compete with comparison process and more online approach businesses, they need to get better in this monetization, and we are the solution for this, and they know this more and more end users. Third product segment, corporate loans. REM CAPITAL had a wonderful time from summer 2021 to summer 2022, enabling a lot of energy efficiency subsidies to be used in projects, which were prepared and supported by REM CAPITAL.

And you can say, since summer last year, business is back to normal, and we have more work to do, acquiring projects and defining solutions to use, subsidize and finance them. Fourth quarter was weak, really weak. And compared to this, the third quarter was already more peaceful and shows that the business model, even in the environment without a lot of government sponsored programs is working pretty well.

So for now, we are operating on a, let's say, normal operational level. We wait for the necessary subsidy programs from the government side, EU side to be effective to reach especially our climate goals because the whole transformation, which is planned and wished by our political system needs to be financed and to make it through the money which is collected for all this activity and that needs to be spent as well. It needs to be distributed to the industry. And for now, there is still missing the necessary traction in our political system to provide us.

So we are preparing, as you can say, we acquire projects, make them ready and wait for the subsidies to arrive. So this is in mind, total numbers of this segment. On the revenue side, minus 1%, so more or less stable. So mortgages up, personal loans up, corporate loans down, saving products down, and some seasonal effects.

On the profit side, you see that even in the current market environment, we are profitable with this segment, €4 million in EBIT. And is the outlook of an incremental normalization of the market plus market share gains by Europace, we expect this to improve during the year. Next segment, Private Clients, focused on mortgages.

As you know, our franchise system and our brand, Dr. Klein is one of the most recognized ones when it comes to independent advice and Dr. Klein is profiting right now from the trend of the consumer to longer research, more comparison looking for the best deal in the market. With this Dr. Klein was able to grow by 10% in this market environment.

So even without the ability to scale with new additional partners, Dr. Klein could grow similar -- on a similar speed like Europace, that's great. As very good is that a number of advisors stabilized. We saw a sharp drop in the second half of 2022, where you could see that the franchises were adjusted to the market environment, that we're focusing their workforce to the best advisers with the highest conversion rates.

But even when they are still not fully under workload again, it's -- they keep them right now because they feel as well that the market is slowly coming back, and it's very painful to rehire advisors your credit early. So some level of stability in the franchise system, which is very good.

And based on this, Dr. Klein was realizing a pretty good first quarter. On the revenue side, there as well some one-offs in the comparison between Q4 and Q1. You see in the gross profit a realistic perspective out of this 10% additional transaction volume. We gained 8% in revenue in addition, net revenue and EBIT is up by 13%. Most of the cost savings in this unit were already realized in Q4.

So the cost saving impact at Q4 and Q1 was not so large anymore. So next segment, our Real Estate Platform just to focus on two core market segments. I said already earlier that the renting market is under stress. And when we look here on the institutional housing companies, that's the 7 million units, this is an area that we feel this stress as well. So the cooperative and the municipal on the housing sector, you can say, is frozen when it comes to investment. They reduced their project -- their new project on building houses or renovating houses to a minimum level because of the current circumstances.

So interest rate and rent regulation doesn't make it feasible anymore to build something new. So this limits the inflow to the market. It limits as well what we can finance here. We'll come to this in a moment.

For the homeowner occupied market share, which is roughly 42% of the total market, midterm this is good news because the less attractive the German renting market is and small landlords are not acting much different from the institutional housing companies here -- the more -- the highest force for people to acquire the home. Germany had a very attractive renting market over decades. And you can say for the year 2022, it ended.

It's not there anymore. Renting it's like it is in every developed economy, something for short-term use and for some other specific target groups, but not if you are double income households. So if you're in the top criteria of the income side, renting is no option anymore for Europe. And it was up at risk. So people who are triggered needs to buy.

And besides this, what we do in the credit segment -- in the Credit Platform segment, here we support the sales process and the valuation process. First, talking about the transaction platform, is still down 9% in the first quarter.

We feel here the relative -- let's say, less competitiveness of our core target group, the real estate agent of banks. They don't perform pretty well in the current situation where you really need to sell a property. It's not about getting the property as a marketer, but to sell it really. This is a more difficult approach.

You need to do more. And the part which is digital of this, we can help them. And by helping them, we improve and increase our revenue, but still, they are struggling with the market environment they are in right now that you see at this minus 9%. We are solutions and more and more recognize this.

On the other side, it limits their ability to spend money. Is this not helping us -- and so we would be more happy if there's a normalization of the market, it gets us that easier for them to sell properties, and we are able to grow together. Next product area, property valuation.

Here slowly, we feel that the market is shrinking for property valuation because of less number of mortgages, especially with a certain level of time delay, banks need less of these valuations for their portfolio. And so we see a decrease in number of valuations that we had to do in the first quarter already.

And with this, had a small decline in our revenue structure as well. So there's some regulatory changes, again, which are not helpful. Thanks to the cost cutting, our investment got lower, but still this is a challenging market environment, I would say right now. Yes.

And then we are at the housing association area. I said already, they are freezing their new construction site and the renovation site. While we were able last year -- in the second half of the year still to compensate volume reduction of the industry by gaining more clients and expanding our market share in the first quarter, it really included -- and even when we are very active and still are on the path of gaining market share, we feel that the volume -- the financing volume of the housing industry is right now really low. Yes, this can't stay forever like this. Two core reasons. First, they have to build the social housing of the future.

In the German regulatory framework, social housing after 20 years get out of this rent fixation. So they are getting less and less automatically over time. And second, we have a massive net migration to Germany and then exceeding demand of something between 1.5 million and 2 million units and basis the sector which you have to build it. Just they are used to wait for the subsidies to be there to make it profitable for them or, let's say, not unprofitable for them anymore as it is right now. Plus, this is a sector which owns 7 million apartments, which are not as energy efficient as something newly built. Most of these apartments were built 50 years ago.

The energy efficiency class is below the necessary standard. The housing industry expect a necessary investment of €500 billion until 2045 to meet our climate goals. And with more and more regulation in place, the pressure is increasing on the sector to do something.

And let's say that our €2 billion a year, we have roughly a market share of 10% of lending in this area. So usually, they lend 10 billion -- 12 billion per year and -- let's say, €500 billion in 24 -- in 22 years means additional lending needs of more than €20 billion a year. So this shows that there is huge potential in this market here and the huge need for capital in this market to meet the political and more and more legal goals that are set.

And with this in mind, we are happy to use this current time to expand our market share here in a time where banks pull out of this market with their direct sales and we stay in here. The revenue gain in the first quarter. Thanks to some insurance products with the seasonal effect, so the pure mortgage side revenue went down as well. As a total for the segment, we see a double-digit growth. It's an investment case for us still, and we heavily invested in the last years and still spend here a lot of money to expand our platforms here. And let's say, it's a turbulent market right now.

We see that let's say competition is getting less and is getting weaker. And from this perspective, there are some opportunities in this market, mid and long-term, that we want to cover here. Last market, Insurance. You are aware of this, we split our activities here and focus our activities on three types of insurances, in the personal space of insurances with SMART INSUR Tech, our platform to bring brokers, insurance companies and clients together on one database, one data set, synchronize them and have one platform. Yes, still just an incremental growth here. The industry keeps slowly adjusting to the new environment. We are not successful with speeding up this process as well as first quarter, plus 1% only in migration from our own license-based software products to the platform.

Well, we keep experimenting with the way to speed them up. And right now, we are focused on reducing the complexity of our own infrastructure still after the cost reduction program of last year to have lean and fit organization to -- at some moment drive our clients forward again.

In the area of industrial insurance, we develop right now a new marketplace together with our client base, which is pretty important for this industry already. We get more and more partners for this new marketplace already in the user group, which are not users of our ERP system, which is good. It looks like there's going to be a huge success for this industry. For now, it's investment case, still, we are spending money here. In the second half of 2023, we expect first revenues and the real world for this platform and hope that the good feedback we receive right now will then be met with real transactions.

So especially at the end of the year when industrial insurance are renegotiated that our platform plays already a significant role in this industry. Stay tuned, I would say. And last area, employer linked pension market here in Germany. The volume on the platform grew by 4% on a quarterly basis. So on a yearly basis, we are on double-digit growth. It's still a huge market in front of us, but thanks to especially a good approach to realize synergies in sales.

We brought up some industrial real estate brokers, which often has this as an additional area they cover on the system. For instance, Suncorp, one of the larger ones here in Germany is using now ePension and digitalizing their processes with their industry partners.

So incremental step forward. The good news here is, it just gets more the volume on the platform. In this case, when our partners are growing their business or then -- or if they -- let's say, the general pension volume in Germany is increasing, for instance, because of inflation. And so we expect this to grow on a higher level, higher speed in the next years here. For the segment in total, it was, let's say, solid first quarter.

The comparison with the fourth quarter here on the gross profit side is -- has some seasonal effects again, so it's not fully fair. In real we just gained the revenue and traction in all these product segments slightly. Still slightly negative first quarter. For the full year, we expect to be profitable with the segment. So there are some positive dynamics during the year that we feel comfortable that this is just a small loss in the beginning of the year.

We will compensate it still during the year. So for the total group, it was a turning point after the super weak fourth quarter. We are back on growth track. We are profitable even in this market environment. We take market share. And so we are in a position to decide how to proceed with our partners, how to help in the system and getting back on track and which opportunity to take in this market. When you compare our current numbers with our long-term records and in the first quarter, we performed as good as we did as a whole group in 2013, 10 years ago in the whole year.

This shows the dynamic we saw in the last 10 years on one side. On the other side, we know how to operate in a tough market environment. And this was still tough. This was still a past financial crisis here for our business. To get back to the numbers we saw in 2021 as our by now record year and perspective of profitability. We just need to scale our business.

So qualitative growth as we call this right now. And we can work ourselves there back. This just takes time and with little support of the market, it will be faster. So if we have to do this all by ourselves, it may take us a couple of years. With a little bit of support from the market and the normalization, especially in the housing market, this just takes us a couple of quarters.

How many is not certain, but we expect it to be just a couple of quarters left. So from the perspective of how to value Hypoport, the long-term perspective is very attractive. So we will come to this in a moment. First of all, just to make sure that it's clear, we reduced our costs by €10 million compared to the first quarter, down from €60 million to €50 million.

Across the whole group, the split is up here in the different segments that you can see that everyone help. And with this in mind, be sure that we -- with this €50 million are still able to heavily invest in innovative products along the value chain of mortgages, in housing and the real estate and the insurance. And we do this all with the current spending -- on the current spending level.

So we are not breaking on the product side here right now, just our expenditure is down. So then coming to outlook, how this market is going to look like in a couple of years. And the most important thing to understand is how the German housing market works. German is buying his first apartment after a trigger event.

The most serious trigger events are children's or getting -- splitting up, getting divorced because after this kind of events, you have to act. You can't stay in your current renting apartment anymore because it's usually too small. And this is triggered -- this kind of triggers happens more than 100,000 times a year here in Germany.

And for the last 10 years, we saw a less and less transaction based on the trigger events. And from this, we are able to calculate it today between 1.5 million and 2 million households with enough income to buy something are in an unfit situation in a renting apartment and waiting for the opportunity to come.

And up until last quarter, you can say renting was still okay because prices were going down, so you could have to hope to achieve a better deal. Now with prices incrementally going up again and interest rates are stable, there is no incentive to wait anymore.

The challenge is that these families rented usually more than 10 years ago. So they come from a pretty low rent level compared to the location they are living in, and they need to accept that on the current market level, which is just the truth for now and for the future, they can't afford to live in the same area with the same level of quality, the same space per person anymore. And this adjustment from what you are used to when you rented in a very cheap renting market environment to what you have to pay now is this what takes the time and what makes people -- families to hesitate to act because they, in their opinion, lose status, lose quality of life. On the other side, it's not going to be better again.

From here, thanks to new construction numbers and a huge need of labor for our industry and with this a huge net migration to Germany. It's just going to get worse. So the ones who earlier act will be the benefiting ones. And people who are in this market, who are looking right now households, how who are in the search, they feel this that the market is changing already, that they need to act and better act faster. So because of this, the market is coming back to a normal level. What is this normal level?

Let's say, during the period 2015 to 2021, we saw quarterly market volume going up from around €50 billion to around €70 billion. From this and having in mind that prices will not go so fast up anymore. We expect the volume for the normal mortgage market to be something around €60 billion to €75 billion in the near future. Plus €20 billion for energy efficiency, things that are already prepared in the regulation or just coming up from the EU side will trigger additional necessary investments just in the home ownership market of €20 billion. And thanks to the huge value gains in Germany over a period of the last 10 years, this is easily to be financed by the owners, just it needs to be done.

And together with this, we expect midterm market volume of something between €75 billion to €100 billion per quarter of mortgage volume here in Germany. And the only question is how many quarters this is away, not if it's going to happen because the fundamental parameters in our economy are all indicated in this direction. So this site for this year, and this is just a short-term perspective.

We stick with our guidance. We expect a small decline in revenue and the short decline in EBIT. This is -- let's say, Q1 was better and Q4 will be better than -- let's say, we will easily outperform in the second half of last year, but we had a very strong market still in Q1 and even the Q2 was pretty helpful.

To outperform this in the second half of this year, it will be tougher to get close to this. So that's why our expectation stays for the full year below last year. From here and from 2024 on, we expect double-digit growth on top and the bottom line as we did until 2021 in the period where the market was more or less stable.

So at this stage, I will let you open out to -- open now to the operator for some Q&A. I'm happy to answer your questions.

[Ronald Slabke, CEO]

Yes, no problem. All questions answered, I would say. If you have other questions, contact Investor Relations from our site, and we are now focused on gaining market share and doing what is possible in this market environment to improve our results. And we will see or hear here again in just three months for our half year report. Thank you. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.