Patrizia AG

XETRA:PAT

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, welcome to the PATRIZIA's 3-Months 2024 Conference Call. I'm [ Morris ], the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast.At this time, it's my pleasure to hand over to Martin Praum. Please go ahead, sir.

[Martin Praum, executive]

Thank you, [ Morris ], and welcome, everyone, to our analyst and investor call for the first quarter results '24. This is Martin Praum speaking, Head of Investor Relations and Group reporting. I'm happy to have our CEO, Asoka Wohrmann; and CFO, Christoph Glaser, in the room with me today, who will present you an overview of the operating business, the market environment and the financials for the first quarter.We will during today's call refer to the results presentation, which you will find on our website in the IR section, [ Home ] under most recent publications. And as usual, this call will be recorded and will be made available on our website later. We will also offer a call transcript for further reference later today or tomorrow.With that, I'd like to turn over to Asoka to start the presentation of today. Asoka?

[Asoka Woehrmann, executive]

Thank you, Martin. Also, a very warm welcome from my side. After releasing our quarter 1 earnings results yesterday evening after stock market closed, I would like to briefly today comment on market as well as our business development topics.For us, the overall business development in quarter 1 remained muted. We saw overall low levels of capital raising and transactions in the market, but also early signs of stabilization and slow recovery. We see more deals recently, but below or around EUR 100 million, which means more transparency for price finding and price setting.Equity rates increased to more than EUR 300 million in quarter 1. If you want to express it positively, you can say 10 times more than last year, but we have to say last year was extremely historical low levels. So therefore, EUR 300 million is also in part what we are saying is quite muted market in general.Our transaction volume is increasing. More than EUR 320 million of signed transactions, up over 20% compared to the last year. In real estate sector we have seen more than 50% of transaction volumes, predominantly sales. Clients reducing exposure to commercial real estate sectors, mainly or precisely saying in retail as well in office space.In the infrastructure sector, the infrastructure what we have seen and what we had mainly transacted was acquisitions fully in line with, what we are calling -- in some second I will explain that, but in line with our megatrends what we analyzed for the future strategy.Increased fund of funds. The business, what we are seeing, there's also more life and more traction there, and we are successfully expanding our platform -- our Danish platform there.Our outlook remains cautiously optimistic. In infrastructure, we see increased demand for investments in megatrends, [indiscernible] digitalization and energy transition. Real estate sector, there is more focus on the value-add products and particular in residential and logistics and some areas, we would say, in alternative sectors.To sum up, the investors are testing -- recently in last 3 months and the last 4 weeks, testing the waters and are slowly returning to the market. The good news is more participants means more deals and also more pricing transparency is super relevant compared to the last year situation.And other most important advantage is PATRIZIA will use our significant dry powder to invest in attractive market opportunities for our clients.Looking forward into 2024 and beyond, we are well positioned to take advantage of the megatrends of our time. We are on track to develop our strategy and a new mid-term plan. We will update the market once we are ready. Our goal is to present our strategy update in quarter 3.We have the clear ambition to become a key provider for smart real asset solutions, and that is something what we are really working on. And I'm seeing also more and more significant conversion of the both key sectors, real estate and infrastructure.And smart investments in both real estate as well as in infrastructure area reflect the major transition teams of our time, digitalization, urbanization 2.0, energy transition and modern living. And I do think we are seeing already some of the key transitions there is already traction. And especially in digital transition, it's accelerating the next-generation high-speed connectivity and intelligent networks, [ edgy ] investments in fibre networks, 5G and data [ centers ] and some way more in the U.S., the last topic than Europe, but I'm sure that these trends will come very fast over to European topics too.The second -- the transition -- urban transition 2.0, we should really -- we are realizing more or less 80% of the population will live in cities in 2050 in Europe. An investment in modern technology, modern infrastructure for new businesses, knowledge shops, cultural exchange and innovation will be the key themes in this urban transition 2.0, and I think we feel we are well positioned for that.Energy transition is one of the most driving topics, especially in Europe, and we are seeing [ EUR 9 trillion ] [ a year ] needed to finance energy transition with huge reliance on private capital for decarbonization, renewables enabling infrastructure. And as you might recognize, PATRIZIA recently executed the EV charging project in Germany called Corymbia. There is -- we are also involved in a battery storage, energy from waste, the Greenthesis investment. And also, we are more and more working on circular economy.The energy transition will play in our view in Europe in a very dominant theme and a transition of what we want to be. And a modern living transition driven by demographics, future housing needs, affordability themes, but also new work needs. All that is driving the modern living transition. Additional to that, the increased social services, but also new diverse lifestyles, all that is a very core themes of the living transition. And I do think with our heritage that we are very strongly executed in the last 40 years in residential and in living area, I do think we felt that is an area we want to focus on. And therefore, I'm coming to the end -- our heritage and our Board expertise in real estate as well as in infrastructure enable us to offer attractive investment opportunities, also in the smart sectors for all the 4 megatrends, as discussed earlier. I would ask you all, stay tuned for our strategy update in quarter 3.And with that, I would like to hand over to our CFO, Christoph Glaser, to present our financials in detail.

[Christoph Glaser, executive]

Thank you very much, Asoka, and welcome, everybody. Good afternoon. I will spend some time with you on today's call to discuss the first quarter financials and also our view on guidance regarding the total year of '24.With that, if we go to Page 6 of the deck, let's start and talk a little bit about assets under management. The good news here is that our AUM base is quite stable and the resilience of our assets under management can be considered confirmed. There has been positive developments regarding transaction intensity in the first quarter, albeit at a fairly high -- sorry, fairly low level in absolute terms, netting out to an effect on AUM of 0.On top of that, we have seen, as expected, a bit of remaining valuation impact to the tune of EUR 0.5 billion which left our AUM at the end of the quarter around EUR 56.7 billion, which is, in essence, a stable position.Now the good news here is that the stable AUM base keeps supporting our recurring management fee income, which I will allude to a little bit later.On Slide 7, you can see the composition of our assets under management. There is not a lot of movement here in terms of the split by geography. And going forward, I guess, once transactions come back, we expect to be a net buyer and we expect to grow in pretty much most of our geographies. So there will be no specific area that will be faster or slower. But if and when growth comes back, we'll probably see it across the board.When you look at the asset class, clearly, again, a lot of stability here in terms of the composition of the AUM. If and when transactions come back, we expect pretty much all sectors to grow, maybe with the exception of Office where we would only make a move if we get our hands on assets that we consider intrinsically valuable and coming at a reasonable price. So we'll tread carefully in that space.Now when it comes to risk style, again, stable compared to the recent past. Going forward, we expect the value add in the Core plus segment to grow faster. We expect in the foreseeable future the Core component to remain somewhat stable at least in the foreseeable future.If we turn to Slide 8, which is summarizing our total service fee income picture, first of all, it is, of course, still reflected at this point in the year of continued low market activity. Again, we expect that to directionally change later in the year. Key question is when.Management fees have dropped from EUR 62 million to EUR 57.7 million compared to last year, but it's probably important to note here that if you correct this number in this year for the fact that we had an exceptionally high level of management fee income from development services in the first quarter of '23 as well as a couple of one-offs in 2 of our flagship funds, which all add up to EUR 5.1 million, if you normalize the starting point for that, we're actually seeing management fees growing in the Core by 0.9% or 1% roughly.So normalized for these exceptional matters in the first quarter of '23, we see stable or very mildly growing recurring management fee income right now.Transaction fee income is -- needless to say, it's an all-time low, close to 0. Not surprisingly so. We believe that the first quarter of this year and perhaps still also the second quarter of this year will be fairly mute in terms of transaction fee income. Some people call it the silence before the storm in a sense of transaction activity rebounding later in the year and people staying put for the time being. Let's see how that unfolds.Performance fees have moderately declined as expected, just given the nature of the cycle. So total service fee income in aggregate has been reduced compared to prior year by 13.3%. Again, if you normalize it for the anomalies in the starting point of the management fee discussion, the number is a little bit more favorable, but still negative. And the outcome of the first quarter is predominantly driven in terms of absolute numbers by management fee [ headers ] and by the annual carry payments from the Dawonia co-investment , which makes up the majority of the performance fee income.So with that, we can transition to Slide 9. Clearly, when it comes to cost, there is a mixed picture here because we feel very good in terms of our performance regarding general and administrative expenses, which we continue to compress and to reduce and to lead to long-term low levels. So that's the good news.The staff expense side is a bit of a mixed bag because it's reflective of a constant battle between the positive effects of the restructurings we undertook and the negative effects of the inflation pressure we face for the remaining 90% of the organization, which is not insignificant.Broadly speaking, when it comes to staff cost, we see a flat development regarding fixed salary lines, again, driven by mutually offsetting positive effects from restructuring and negative effects from inflation.We see a bit of increase in variable comp because we are deliberately lumping more variable comp into long-term tools or long-term incentive schemes for which we, of course, accrue as we make decisions, and we're directionally behaving a little bit more conservative or harder when it comes to short-term and closer to cash short-term incentives.I think -- we think that's the right mix of an approach to keep the organization incentivized, but keep them incentivized in the medium and long-term through the cycles and not in the short-term through cash. So that's really it on that topic.Overall, we did not manage to offset some of the pressure in the staff expenses linked to inflation through a very good story on general and administrative expenses. But we are managing well, and the cost containment certainly stays on top of management agenda. And as we're going to update you later on in the year on our strategic direction, that will also come with an update on certain structural questions regarding the company, which should in the medium and long-term also yield a more favorable cost/income ratio, but we will brief you on that when we get there.With that, turning the page to Slide 10. Overall, looking at EBITDA, the development of EBITDA is in line with management expectations in a not surprisingly still somewhat challenging market. it's down year-over-year by not so insignificant amount, which is, in essence, market-driven predominantly. And net sales revenue and co-investment income are down as rental revenues could not compensate for some of the negative earnings from temporary consolidated and equity investments.Other than that, there is, of course, a comment here to be made on other income. That's largely driven by us being a bit harder ultimately on '23 short-term incentive payouts, which resulted in a small release of liabilities. And then there is a deconsolidation effect that are positive from a temporary warehouse product. So that's it on that topic.So overall, at a level of EUR 17.3 million, the EBITDA of the quarter is on track to reach the guidance range that we have communicated for the year. There's not really much to add to that. And as promised before, as we go through the year, we will update you on where we think we'll directionally come in inside the range.Balance sheet remains one of the strong points of the company regarding both equity and liquidity. Firstly, net cash currently stands at roughly EUR 50 million. We are still enjoying a very high net equity ratio of 69.1%. So not much change in that respect over time. Liquidity is quite strong, adding up bank balances, cash term deposits, subtracting the usual reserves. We have an available liquidity level of almost EUR 323 million.So we will very diligently continue to manage and deploy that, which takes me to the next Slide 12. So we do use our balance sheet to support strategic investment initiatives. They usually have a duration of 6 months to 36 months. When it comes to seed funding, we're probably talking more about 6 months to 24 months. When it comes to warehousing, we are talking more about longer term, like perhaps 24 months to 36 months. And you can see the composition of our major balance sheet investments as of the end of the quarter on the left part of the page.What is probably good to know and also comforting from an investor point of view is that some of these short to medium-term seed investments have started to roll back. So in the first quarter, we've seen another EUR 25 million rolling back in. So the effort is getting traction, and we see some of the cash we have deployed rolling back as expected, which is good.Obviously, some of the seeding and warehousing activities have an impact on the composition and geography of our balance sheet. So in order to enable you to have full transparency there and to read the balance sheet correctly, we have given you a bit of an overview here as to how the seeding and warehousing activities are impacting our noncurrent assets, our current assets and so on and so forth.So long story short, we're enjoying sufficient liquidity, which gives us the freedom to make selective strategic moves, and we're going to continue that. And hopefully, this will pay back nicely as markets will pick up again in first and second closings, third closings and certain vehicles will occur at speed.We are preparing for the annual meeting, which will be hosted in June -- on the 12th of June. So here's an overview on Slide 13 regarding that topic. The Management, Board of Directors, quite importantly, will propose a dividend per share of EUR 0.34 for the fiscal year 2023. That's the sixth consecutive increase in dividends and represents a 3% year-over-year growth. We are expecting to trade ex-dividend on the 13th of June, and the dividend will be payable 4 days later.So in a nutshell, there is sustained dividend growth backed by solid balance sheet, sufficient liquidity and a positive operating cash flow. I would like to stress that last point again, despite our fairly compressed income statement given the fact that we are having to deal with a lot of noncash effective P&L items, especially below EBITDA, we are enjoying actually a healthy operating cash flow. So the proposal to pay a dividend at the magnitude described here is quite well supported by both the balance sheet and the operating cash flow regardless of a temporarily compressed income profile.Last but not least, when it comes to guidance for the year, I already briefly alluded to that. At this point, we are confirming our guidance. We remain cautiously optimistic for the full year. Dr. Wohrmann already alluded to the fact that we are transacting, albeit in absolute terms, low level. There is movement in the market. Other market participants up and until yesterday were releasing some information indicating that deals are in the making, pipelines are being created. So we look forward to the second, third and fourth quarter of the year.Our AUM guidance remains between EUR 54 billion and EUR 60 billion, perhaps for the time being through the middle of the year somewhere in the middle of that range. EBITDA outlook remains between EUR 30 million and EUR 60 million, and EBITDA margin remains between 11% and 19%.Maybe one more comment on the short and medium-term expectations. The second quarter we expect still to be a muted one because transaction activity will be in a silent mode, awaiting rate cuts and other activities later on in summer and autumn, which then leads us to believe that the third and fourth quarter could become more interesting and that's what we're focused on. Let's see how the market will develop, but that's where we stand mentally right now.So AUM, as I mentioned, is expected to stay flat at the midpoint in the fiscal year because there is still some valuation pressure in the pipe, but planned organic growth will put a positive spin on that. And then EBITDA is expected to be clearly below the levels of '23 at the midpoint of 2024 guidance due to lower support from other income, but also cyclically driven lower performance fee income.So that's really it for me today on the first quarter financials and our current view on guidance. I assume, Martin, we will transition now to Q&A.

[Martin Praum, executive]

Yes, absolutely. Operator, we're open to Q&A now.

[Operator]

[Operator Instructions] And the first question comes from Andre Remke from Baader Bank.

[Andre Remke, analyst]

A couple of questions, starting with the transactions. The splits in terms of acquisition and [ disposal cost ], almost equal in the last quarter. Could this also be the expectation for split for the upcoming quarters be? What are your indication you receive from -- or plan to receive from your client side? Are there more appetite for disposals or acquisitions at the moment? That's the first question, please.

[Christoph Glaser, executive]

Thanks, Andre. Look, we expect the mix to be more in favor of acquisitions as we go through the year and also the next year. As I mentioned before, we intend to be a net buyer when the market comes back for a couple of reasons. One, we don't see a lot of vehicles in which we would have any pressure to dispose from an investor or PATRIZIA angle. Secondly, we believe to have our hands in general on high-quality assets. So there is not so much disposition dynamics in the mix other than rationally planned ones over a life cycle of certain vehicles. And there is maybe an occasional redemption request driven disposition, but those are really outliers.So that contrasted with an acquisition [ geared stance ]. We will definitely have a favorable mix in favor of acquisitions and also be a net buyer in that respect.The key question from a P&L point of view, of course, will be where the acquisitions and dispositions will occur, because that will drive the occurrence or non-occurrence of transaction fee income. So the more in German the grounded vehicles, the more transaction fee income, the more international flagship vehicles, the less transaction fee income, but going forward, higher levels of all-in management fee income.Second and last point, maybe our infrastructure business is definitely in an acquisition mode. And there I will see a quite healthy acquisition geared transaction mix. So that will put a positively [ exacerbating ] effect on top of the net-net positive real estate mix.

[Andre Remke, analyst]

Okay. The second question also relies then -- refers to the asset under management. You said that [ EUR 4.5 billion ] devaluation in the first quarter was in line with your expectation we all see in the market. In the last call you stated you are expecting some 3% or so could be an indication for this year. Is it still the case? And what are your expectations for redemption, already visible?

[Christoph Glaser, executive]

Look, the last time I checked, we indicated that we expect something potentially up to 5%, so between 0% and 5%. Directionally, I would probably say at the moment I'm seeing something like 3% or 4% maybe, but not more than that. And we believe that, that should then be it in aggregate, again. And now the ranges there will be quite substantial between double-digit impact in the commercial asset sector and close to 0 impact or even positive impact in some residential buckets. So we expect residential to be rather uneventful as we go through '24, in some cases, even positive.We expect logistics and retail to be quite reasonable and office will still continue to see, in some cases, especially in [ B locations ] with ESG capital expense pressure, double-digit devaluation pressure. So that's on point one.With regard to redemptions, I can very clearly say that there are no signs of any major redemptions in the world that we live in. We do see in some of our U.K. vehicles a couple of redemption requests, which are not atypical for those type of vehicles in this part of the cycle. In the continental European environment, we see very, very few redemption requests, and those we are handling so far with almost no negative fallout because of the strength of our investor base, which has a tendency to, let's call it, circle the wagons in some cases, believing in the assets and then dealing with small occasional redemption requests quite effectively.So that's our world. And we know that we positively differentiate ourselves in that respect compared to some competitors. But again, there are a couple of U.K.-based vehicles where you'll see some redemptions, but the [ grander ] scheme of things manageable.

[Andre Remke, analyst]

Okay. The last question on the performance fees. Probably you can explain to me why performance fee could be negative? You had a slight negative -- [ really a ] minor topic, but a negative performance [ fees ] stance here. That's the first point. And the second point, you get the Dawonia carry of EUR 15 million in the first quarter. This comes not as surprise as this is lower than last year. Could this be seen as a new run rate, or will this tail down going forward? And maybe you could also elaborate on the negotiation you indicated in the last call?

[Christoph Glaser, executive]

Yes. Look, I'm not surprised you picked up on a negative performance fee stream to the tune of EUR 0.5 million. The answer to that is quite straightforward. There is a single mandate for which we had to make an adjustment in this period, which calculates a performance fee in certain steps over the lifetime of the mandate and is currently in an unwinding phase, and we had to make an adjustment there. And because this was the only entry of that type, we ended up having a negative number here, which is, a, somewhat unusual, but b, linked to the very nature of the single mandate and probably a rare occurrence of a stand-alone single negative entry. So that's the answer on that one.We still have now -- that said, we still have a 3-digit million "hidden reserves" [ in quotation marks ] in the form of embedded performance fees in our German vehicles. So when you put a corrective entry on a single mandate to the tune of EUR 0.5 million in context of that, we're talking about that versus something north of EUR 200 million of embedded performance fees, just as a little side note.Now on the topic of Dawonia, you rightly observed that the current level of performance fees, which is slightly lower than last year, that is quite natural given the return profile of that vehicle over time. And we have alluded to that before that there is a gradually declining performance fee or annual carry income expected here.Now that said, the question for -- regarding the new run rate, this requires a more holistic answer. We are in very, very active discussions with our Dawonia investor consortium as we speak right now. And we are progressing quite well. And our objective here as asset investment management advisor is to lead these discussions to a new contract with the existing investor base, i.e., to retain the mandate as an AFM and as an advisor for the long-term, to retain the AUM base and to retain a market level conforming management fee in that context.So you can expect a different mix of income in the context of such a deal if and when it gets concluded. And therefore, the question regarding a performance fee trend may become a potentially obsolete question to put it simply. We are on a very good track. And I hope to be able to give you a bit of a more detailed update on the next call.Our objective remains to renegotiate this mandate well within the extension period. And at the moment, we are halfway through the extension period of the old contract, and that's really in that topic.

[Christoph Glaser, executive]

Okay. Looking at the list of core participants and the question queue, I realized that there appear to be no more questions at this point in time. We obviously take that as a sign of a very transparent and clear financial reporting. So I appreciate that sign of confidence and trust and response.Thanks for dialing in. More details will be shared with you, as already mentioned by Asoka Wohrmann, during our Q3 call and hopefully, a bit sooner than that with regard to the Dawonia topic. Otherwise, we will see each other and hear each other again 3 months from now. Thank you very much for joining today and appreciate the questions that were asked.

[Asoka Woehrmann, executive]

Thank you.

[Christoph Glaser, executive]

Thank you.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect. Thank you for joining, and have a pleasant day. Goodbye.