TAG Immobilien AG

XETRA:TEG

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the TAG Immobilien AG Conference Call regarding the Interim Statement on the First Quarter of 2019. [Operator Instructions] Let me now turn the floor over to your host, Mr. Martin Thiel.

[Martin Thiel, CFO & Member of Management Board]

Yes. Many thanks and good morning, everybody. Welcome to TAG's Q1 2019 Conference Call. And I think today, we can make it quite short. The last call is not so long ago. Just last month, we talked about the full year figures for 2018. Today, we're already in the Q1 2019. I think most of you already had a chance to take a look at our press release and our presentation. And everything is, I think, clearly on plan. And operationally, it looks quite nice. So let's go through the presentation, which is also available on our website. And of course, afterwards, we have a lot of time to discuss any questions.Let's start on Page 4 of the presentation, just the highlight slide. A quick look on operational performance. Vacancy development in the first quarter, very comparable to last year, a little bit up from -- in the residential units, 5% to 5.2%; and in the total portfolio, from 5.3% to 5.6%. That's not unusual for a start in the year. And as always, after inclusion of new acquisitions and with starting new CapEx programs for vacancy reduction, if you remember last year's development, a slight increase in vacancy. But clearly, the plan is and obviously the expectation is that we're going to reduce vacancy as of last year over the course of the year. So nothing unusual.Like-for-like rental growth developed nicely, and the like-for-like rental growth including vacancy reduction picked up from 2.6% to 2.8%. The basis like-for-like rental growth was unchanged at 2.3%. A strong increase in FFO I. If you compare that year-on-year, that's a more than 12% increase. Compared to the previous quarter, FFO I increased by EUR 1.7 million to 39.5%.Looking at NAV and LTV, I would say very normal development during our quarter without any valuation. Of course, there was -- as in the past, we have no valuation in the first quarter. The next valuation will take place at half year, the next full valuation. So therefore, NAV was up from EUR 17.32 at EUR 17.54. And the LTV decreased by approximately 50 basis points because of our ongoing results and ongoing amortization from 47.3% to 46.8%.So far, no acquisitions and no disposals in the first quarter, or I should better say, no major acquisitions and disposals. If we take a look in our Q1 report, on Page 6, you'll see that we have just acquired a small number of units, 35 units; and disposed some 12 units. So just light disposals and acquisitions. But this is also very normal development for the start of the year that should not set a trend for the full year. And as always, we think that acquisitions, as in last year, will pick up during the course of the year.Then let's take a closer look at the income statement. I'm now on Page 6 of the presentation. The net rent increased by EUR 2.5 million. Two main effects: first of all, net effect from portfolio transactions. This was an increase by EUR 2 million. And we had the closing of the largest parts of the acquisitions last year, all in all, 2,500 units in the fourth quarter. So for the first time, these acquisitions have been cleaned up. Like-for-like rental growth contributed approximately EUR 0.5 million to the total net rent growth. Net rental income increased by EUR 1.9 million, and as we discussed, result of higher net rent of EUR 2.5 million. And as an opposing effect, we had slightly higher expenses from property management, mainly vacancy costs and also some impairment losses on rent receivables. And it's also a very normal effect for the start of the year as vacancy rates slightly increase.If we look at the development of other operating income and compared it with the previous quarter, you could see a strong reduction. But if you remember, we had a one-off effect in the fourth quarter 2018, where we could release a provision for real estate transfer tax risks from prior years. And this was an effect of EUR 6.2 million. So excluding this positive one-off effect in the previous quarter, you will see the numbers are very comparable. I already mentioned, valuation results was basically 0 this quarter, and we will have the next valuation at half year. Please understand that we can't give you no concrete guidance for the next valuation at half year. We will discuss the first results with CBRE during the month of May. Generally, we expect that the positive trends from the past 3 years clearly will continue. We see no stagnation of prices or anything similar in our markets. So therefore, we expect definitely a positive development of the valuation results. But I hope you can understand that it's today too early to give any concrete guidance in million of euros or in percentage.Personnel expenses increased quarter-on-quarter by EUR 700,000 mainly due to the ongoing growth of our internal caretaker service. Mainly in this case, in Salzgitter, we acquired or we had an additional maybe 100 caretakers that started. And so therefore, the clear trend of internalization of the caretaker service continued. Other operating expenses decreased by EUR 600,000. Here, we have one main accounting effect. For the first time, we had the application of IFRS 16, a new accounting standard that treats leasing contracts. And therefore, we'll be, from now on, capitalizing leasing contracts in our balance sheet. If we take a look in the balance sheet, we'll see approximately EUR 9 million of capitalized leasing contracts. In prior years, this was directly expensed in other operating expenses and to a certain part, also in expenses from services. This is now -- and this is an effect of approximately EUR 400,000 capitalized. So therefore, our EBITDA increased this year -- or this quarter by EUR 400,000 because of the first-time application of this new accounting standard.What you will see in a second when we discuss the FFO development, that we eliminate this effect from our FFO calculation. So the FFO is unchanged. We eliminated this EUR 400,000 increase in EBITDA because we think this pure accounting effect should have no effect on the FFO calculation. Thus, let me say this, additionally, we will see how this is treated within the peer group. And perhaps during the course of the year, we will change this treatment, not from the accounting side but perhaps from the FFO calculation. Not really a material effect, it would be approximately EUR 1.6 million for the full year. But for now, the FFO calculation is unchanged and absolutely comparable with our FFO calculation in the previous quarters.Net financial result. Cash after one-offs improved quite nicely, about by EUR 600,000 quarter-on-quarter. And the cash tax expenses in the first quarter of 2009 (sic) [ 2019 ] were slightly higher than the previous quarter at EUR 1.3 million compared to EUR 500,000 in the fourth quarter of 2018.And I'm now on the next page, on Page #7. And here you can see what I just mentioned. We included a new line to reverse the effects from first-time application of IFRS 16 leases. That's the EUR 400,000 that I already mentioned, which is now deducted. So this new accounting standard does not affect our EBITDA calculation or FFO or the AFFO calculation. I already mentioned that the FFO increased by EUR 1.7 million, mainly as a result of our higher EBITDA, which increased by EUR 1.6 million. And not only the FFO increased, also the AFFO increased even a little bit stronger by EUR 2.3 million. That was the increase in the AFFO after all CapEx, so after capital maintenance and after modernization CapEx in comparison to the previous quarter.I'm turning now to Page #10, the financing structure. As in the previous quarter, the interest rate -- or the average interest rate for the total financial debt was, again, reduced slightly from 1.92% at the end of the fourth quarter now to 1.90% at the end of the first quarter 2019. And there's still refinancing potential. If we look on the right side of Page #10, you will see that we indicated the further refinancing potential. All in all, we have EUR 408 million of bank loans maturing over the interest terms ending in the next 3 years. And the average coupons of this bank loans are between 2.6% and 3.7% per annum. If we look at today's financing positions for a 10-year bank loan, if we talk perhaps about margins, I would say on average between 80 and 90 basis points. And you could put the 10-year fixed bank rates on top of that, which is currently around 50 basis points, we end up at approximately 1.4% for new 10-year bank loans all-in. So therefore, we should clearly have, additionally, refinancing potential in the future. I'm now coming to Page #12 and taking a quick look at the -- what we think a very strong development of the financing metrics. It's not only the LTV that has been reduced over the last years, and it's in the meanwhile, below 47%. Also -- and perhaps for us even more important, the cash metrics improved nicely. We gave you here an actual numbers for first quarter 2019: the ICR now strongly above 4x at 4.6x; and net financial debt in relation to the EBITDA, now for the first time, below 11x at 10.9x. Net financial debt in euro per square meter at a very low EUR 446 per square meter. And our valuation in the portfolio is unchanged at EUR 940 per square meter, which is from our point of view, clearly conservative, applying the current LTV of below 47%, this ends up to the EUR 446 per square meter, which is, as far as we know, the definitely lowest net financial debt per square meter within the peer group. Then on Page 15 of the presentation. Let me give you a split of rental growth and our CapEx allocation, starting with rental growth. I already mentioned that the total rental growth including vacancy reduction increased from 2.6% now to 2.8%. The basis like-for-like rental growth is unchanged at 2.3%. And also unchanged is the split of this basis like-for-like rental growth, which you see in the small chart on the bottom left. So rent increases for existing tenants from -- in Leipzig, for example, was 1.3%. The effect from tenant turnover was 0.9%. And the modernization surcharge for the base modernization programs for existing tenants, as in the previous years, still at 0.1%. This is clearly an outcome or result of our modernization strategy. As you know, the very largest part of our CapEx goes to vacancy reductions and not to modernization programs for existing tenants. And therefore, if you look on the bottom right of Page #15, it is not surprising that the largest part of our CapEx and maintenance goes, in the first quarter and in the previous year, to regions where we have higher vacancy. In this quarter, on this case, especially in the Chemnitz region with a share 20% of the total investments from the portfolio. Looking into total investments, maintenance and CapEx development in euro per square meter. You see this on the top right of Page #15. You see that we are, in fact, unchanged. So analyzing the numbers from the first quarter 2019, we end up at EUR 19. That's absolutely comparable to the EUR 19.20 from 2018, and we expect to beat this number in this region for the full year 2019. On Page 16, you see the development of vacancy rates. As I already said, a slight increase from the integration of the newly-acquired properties that have, of course, a higher share of vacant apartments. It was more than 12% average vacancy rate that we acquired last year. So therefore, the development, very comparable to what we saw last year, where we saw an increase in vacancy rate -- or a slight increase in the first quarter, and then vacancy rate decreased in the coming quarters. So that's also what we expect for 2019.And then to our final words on Page 18, on the guidance. First of all, the guidance for the financial year 2019 is unchanged. So the midpoint of the guidance is, in absolute terms, at EUR 155 million. If we look at the results for the first quarter of 2019, which is EUR 39.5 million, we are absolutely on track and the guidance looks absolutely manageable. But remember that we have included disposals in our guidance. And perhaps this is where -- to make it a little bit more clear because we receive some questions after the full year conference call. You see that in the first bullet point that the guidance assumes, first of all, as always, no acquisitions. And secondly, planned disposals of 2,100 units. And these disposals lead to a total FFO reduction in the guidance of approximately EUR 3 million. And we assume the guidance -- the closing of these disposals in the middle of the year, in June 2019. 719 units are already sold. That's the disposal that we published with the full year figures signed in December and closing as planned in June. So after 2,100 units, 719 units are already sold. And the 2,100 furthermore include, as always in the previous years, 500 units from our ongoing disposal business. If we go to remaining part of this mainly noncore assets, so what's left after the 2,100, less the 719, less the 500, in smaller parts. So what we have seen is that we have here a lot of vacations that we bring to the market. And therefore, it is perhaps the most likely and the best way to sell it in smaller parts. But that should happen, let's all clear the expectations, during the course of the year 2019.Anything else is unchanged. So FFO I, as I said, at EUR 155 million. And the dividend per share is, for the financial year 2019, unchanged at EUR 0.80. We're paying out now a dividend after the AGM next month in May of EUR 0.75, a dividend which is, by the way, tax-free. And compared with today's share price, that's a 3.5% dividend yield, which we consider, especially as it is tax-free, a very attractive dividend yield. That's it from my side, a short overview about our first quarter results. And of course, I'm now happy to take your questions.

[Operator]

[Operator Instructions] And the first question for today comes from Manuel Martin who's calling from ODDO BHF.

[Manuel Martin, Analyst]

Just 2 questions from my side. One is a bit to refresh my memory. Could you remind me who were the sellers of the 2,500 units approximately, which TAG bought end of 2018?

[Martin Thiel, CFO & Member of Management Board]

Yes, Manuel. Looking at the disposals, I would say from the last 3 years, we have not one typical seller. I mean, of course, we cannot disclose any names. Basically, I would say there are 2 types of sellers. And generally, these are actual private persons with larger real estate portfolios as well as institutional sellers. The 2 types of sellers are, on the one side, sellers that are perhaps limited from a financial perspective. And then that's of, course, not easy if you're operating a portfolio with higher vacancy rates. What you clearly need to do is to do modernization work and to modernize the apartments, not a luxury modernization, but we have to invest, and this needs to be done, in most cases, especially at the beginning, in a first step, in full from equity. So this is for us, as a listed company, not really a big issue. But for especially a private person or a smaller company, not always possible. And the second type of seller is the type of seller that has enough cash but is perhaps not the asset manager, for example, private equity companies sitting not directly in the regions where the properties are. That's what we think is very important if you really wanted to reduce vacancy, that you are close to the market. So therefore, that's our advantage because we have that we combine on the one side, the financial power of a listed company; and on the other side, really a very decentralized and very local asset management. So it's not one typical seller. There are at least 2 groups. And within the groups, I would say they're really different, different parties that sell to us.

[Manuel Martin, Analyst]

I see. Okay. My second and last question, if we -- I mean there's a lot of discussion going on around Berlin expropriation, et cetera. Do you experience any spillover effect to your locations on what's going on in Berlin?

[Martin Thiel, CFO & Member of Management Board]

Not a really extreme trend in the last 2 weeks since this discussion came up. But we clearly see the spillover effects in our Berlin commuter belts, I would say, since the last, perhaps, 2 years, even 3 years. If you look at our like-for-like rental growth in the Berlin region, which is Berlin portfolio or a portfolio completely consisting of Berlin commuter belt -- or cities in Brandenburg and not in Berlin City, you will see that the like-for-like rental growth without CapEx programs, without vacancy reduction, was on average, around 3.5%. So we already see this spillover effect. Perhaps, there will be an even stronger spillover effect if we see further regulations in the large cities like Berlin; and on the other side, no rent regulations, for example, in cities like Brandenburg or Nauen or Strausberg or even Freiberg where our portfolios are located. But that's just a short period since we had this discussion. So generally, yes, a spillover effect. If this will come in the future from this discussion about expropriation or from further rent regulations, could be likely but not really observable at the moment.

[Operator]

The next question comes from Kai Klose calling from Berenberg.

[Kai Malte Klose, Analyst]

First question on CapEx elements as you mentioned that you're doing on Chemnitz. Could you indicate a bit what's the volume and the type of investments you're doing there? I'm just asking because in the last year, you've been investing there already. So maybe can you give an indication how that has been progressing? And also when do you expect that at which extent vacancy rates to realize positively on your CapEx spending there?

[Martin Thiel, CFO & Member of Management Board]

Yes. I mean thanks for the question, Kai. Chemnitz is a region where we're very optimistic to reduce this. Interestingly, in the Chemnitz region, included is also the quite small city of Döbeln with more than 20,000 inhabitants, which was in the past not really, let's say, the top location of the portfolio, but developing extremely positive in the last 2 years. So therefore, the CapEx programs also include a larger part, what we call, quarter management. For example, in Döbeln, we already -- we also built a small supermarket, not because we want to achieve an extremely interesting return from the small supermarket, but it helps, of course, the quarter of the city to develop because it's attractive for tenants if things like what you need for your day-to-day lives are available just around the corner. And there are a lot of programs, and this refers more to Chemnitz, for -- it's not a nursing home. It's more the idea of making it possible for elderly people to stay longer in apartments. When we, for example, modernize a full apartment block, in the basement of the apartment block, we have a kind of nursing service, which is not our own service but something external where we have a cooperation with. So very targeted programs, for example, for everyday people, and in the case of Döbeln, more targeted programs for younger families.

[Kai Malte Klose, Analyst]

And then could you maybe identify or define...

[Martin Thiel, CFO & Member of Management Board]

Sorry, I missed this. Just to add this, the volume should be comparable with last year's volume in Chemnitz. And Chemnitz is, beside Gera, definitely again, in 2019, the region with the highest CapEx because we have here a nearly double-digit vacancy rate. And we should -- probably, we should expect a reduction of the vacancy rate in Chemnitz, which was 9.6% at the beginning of the year, definitely more towards 9% or even lower during the course of the year.

[Kai Malte Klose, Analyst]

Yes. That was supposed to be my second question. Is it more -- or is it reasonable to assume that we might see a bit of a stronger vacancy reduction in both regions in the next -- more in the next year once you have completed this, yes, quarters management activities?

[Martin Thiel, CFO & Member of Management Board]

Yes. It should already take place in the second half of 2019.

[Operator]

[Operator Instructions] Our next question comes from Thomas Rothaeusler who's calling from Jefferies.

[Thomas Rothaeusler, Equity Analyst]

Just a question on refinancing. Can you give us a rough idea, rough schedule what we can expect in the near future and what you have considered in the guidance?

[Martin Thiel, CFO & Member of Management Board]

Yes, Thomas. First of all, in the guidance, there is no -- not showed any additional early refinancing. The guidance just assumes refinancing and if the bank loans become due. So any early refinancing of debt would lead to a higher FFO contribution in 2019. And what you should perhaps not expect is a very large refinancing exercise. I think we have done this in 2017, in 2018, looking at the current interest rates development. I mean, of course, we have very effective low rates, and we don't expect that these rates pick up in the next month very, very extremely. So therefore, our strategy that we've followed in the past, that in -- as close to their maturities as possible to avoid higher breakage fees, should also be something that makes sense for 2019. Let's see how this develops during the course of the year. And it could also be the case that we do perhaps a little bit more than necessary when we are refinancing acquisitions. But I shouldn't expect the EUR 400 million maturing bank loans in the next few years to be refinanced in the next month.

[Thomas Rothaeusler, Equity Analyst]

So it's more a topic for 2020 efficiently, I mean, for P&L?

[Martin Thiel, CFO & Member of Management Board]

Yes, yes. That's a fair assumption.

[Operator]

[Operator Instructions] Mr. Thiel, it looks like we don't have any more questions for today. I'll turn it back to you.

[Martin Thiel, CFO & Member of Management Board]

Yes. Thank you, operator, and many thanks to you all for listening to our call. And as always, if there are any questions left, please feel free to contact me or the IR department. We're happy to answer this. Have a nice day, and bye-bye from Hamburg.