TAG Immobilien AG

XETRA:TEG

Earnings Call Transcript 2019-Q2

[Operator]

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

[Martin Thiel, CFO & Member of Management Board]

Yes, thank you very much, and good morning, everybody. This is Martin from TAG. Welcome to our half year 2019 earnings call. Thanks very much for dialing in. I'm sure you all had a chance to download the presentation that we published on our website this morning. Let's go through the presentation, and as always, afterwards, of course, we have enough time to answer your questions.And then let's start with Page #4 with the highlights slide. Starting with the FFO development, which was, from our point of view, very positive in the second quarter and increased by EUR 1.3 million. If you compare the first half of 2019 with the first half of 2018, this was an increase in absolute terms and on a per share basis of more than 13%. Like-for-like rental growth also looks nice, 3.0% total like-for-like rental growth, including vacancy reduction and 2.5% the basis like-for-like rental growth.Looking at vacancy in the residential units as well in the total portfolio, the second quarter results were on a stable basis compared to the first quarter. We'll come back to more details on vacancy and like-for-like rental growth later.The EPRA NAV increased strongly. This was mainly the result of the half year valuation that we carried out. As also in the past -- in the last year, we had a half year valuation. The full portfolio was valued by CBRE, and it ended up at a total valuation gain of EUR 211 million. This equates a 4.4% semi-annual uplift. The new valuation levels are now at nearly EUR 1,000 per square meter and looking at the in-place yield at 6.3%.Quick comment on acquisitions. Already now nearly 1,000 units acquired in the first half at what we think attractive multiples.Looking at the disposal side, just disposals from the ongoing disposal business, a total of 149 units were disposed. Total selling price a little bit more than EUR 5 million with a slight book profit.And let's turn to Page #6, the income statement. And looking at the main developments here, first of all, you'll see quite a strong increase in net rental income quarter-on-quarter. This is, of course, on the one side due to higher rent, but the main effect was from cost savings that we had in the second quarter of 2019 compared to the first quarter. As always, there's a little bit of seasonality, a little bit of swing depending on the timing of, for example, maintenance costs or from other expenses, from property management costs. Generally, the trend is quite clear that we get more and more cost efficient that's according to -- or in line with reduced vacancy rates, the cost base is reduced quarter-on-quarter, that's clearly the long-term effect that we observe. So therefore, net rental income was increased quarter-on-quarter by nearly EUR 1 million.And on the other side, the second main driver of the results, at least when we look at cash numbers, was the improved net financial results. Don't be confused if you look at the net financial results in the second quarter 2019 compared to the first quarter of 2019, which was lower, so $19.6 million compared to $12.3 million. The only reason for this reduction in net financial results was a valuation effect from the equity component of our convertible bond. If we look at cash metrics, that's the one which is relevant for FFO, the net financial results quarter-on-quarter improved by EUR 0.4 million. So if you want to make it very simple and if you want to analyze the FFO development quarter-on-quarter, a total improvement of the FFO of EUR 1.3 million. Main reasons, firstly, the increase or the improvement in net rental income, mainly due to cost savings of EUR 0.9 million and then EUR 0.4 million in financing costs.Then on Page #7, where we showed EBITDA, FFO and AFFO calculation. I already mentioned the main drivers of the EBITDA are the higher net rental income and the main driver of the FFO. This was additionally improved financial -- the net financial results. But important to point out as well that we also improved our AFFO quarter-on-quarter now at EUR 26 million compared to EUR 24.3 million in the previous quarter. So we are definitely in line also with our CapEx target, with our maintenance targets and you will see an improvement in the AFFO throughout the whole year.Turning to Page #8, the balance sheet. That's worth to mention that we issued a new promissory note, Schuldscheindarlehen, in June 2019, honestly, a little bit opportunistic. We simply wanted to use the very attractive interest rate environment and replaced by a private placement EUR 102 million at an average maturity of nearly 6 years and the average coupon -- a complete fixed-rate coupon was 1.18%.Looking on Page #9, where you'll see the EPRA NAV calculation. Worth to point out that the NAV growth, if we exclude dividend payment, which led to a reduction of NAV of EUR 0.75 was nearly 12% in the first half of 2019. So a very positive valuation result, of course, contributed to this strong development. Therefore, the NAV now is at EUR 18.59 compared to EUR 17.32 at the beginning of the year.And now on Page #10. We see the financing structure, including now the new promissory notes with 2 maturities 5 and 7 years, plus important to look at the right side of the slide that we still have further refinancing potential. So looking at the bank loans that are maturing over the interest terms are ending in the next 2.5 years, they still add up to more than EUR 380 million. And looking at the coupons of these bank loans, they are between 2.1% and 3.6% per annum. That's, of course, clearly much higher than current financing conditions. For example, at current financing conditions, for 10-year bank loans, mortgage secures are at around 1%. Obviously, even slightly lower, having in mind that the swap rate is already -- for 10 years is already negative today. So therefore, we expect a further reduction in the average cost of debt, which was already down to 1.8% at the end of the second quarter that compares to 1.9% average cost of debt at the beginning of the year. And this is still combined with loan maturities, which are now on average 7.5 years for the total financial debt.On the Pages 11 and 12, you'll see the development of the average cost of debt, of the loan-to-value, ICR, net financial debt-to-EBITDA and net financial debt in euro per square meter. I think you noticed very positive development from the last quarters. So therefore, I will not comment on that in detail. We're clearly, in the meanwhile, below our LTV target of approximately 50%. So LTV was down now to 46.2%. And of course, LTV is always a reflection of the current valuation, and we feel very comfortable with an LTV of 46% based on a still moderate valuation of even a little bit less than EUR 1,000 per square meter. So let's wait how the development of LTV, how the development of the valuation results will continue in the next quarters. And then perhaps at one point in time, it's also necessary to redefine the LTV target if simply the valuation result has strongly reduced the LTV, but there's nothing to expect to come very shortly in the next weeks.Then I'm now moving to Page #15. Basically, more details on the rental growth and the CapEx allocation in the first half of 2019. First, looking at the like-for-like rental growth, and we can show the year, very positive development. The total like-for-like credit growth was up to 3% compared to 2.6% in the prior financial year, and this breaks down in the basis like-for-like rental growth of 2.5% and a contribution from vacancy reduction of 0.5%. And further analyzing this basis like-for-like rental growth of 2.5%, you can see the details on the bottom left of this Slide #15. We have numbers of 1.3% rent increases from existing tenants and 1.1% from tenant turnover. Only a slight contributions of 0.1% from the modernization surcharge for existing tenants. So you see our CapEx strategy is absolutely unchanged, still the very largest part of our CapEx goes to vacancy reduction and not to modernization surcharge for existing tenants.Top regions, you see more details in the appendix on Page 26. And when we look at like-for-like rental growth, it was, once again, the Berlin region, which is, in our case, completely the Berlin commuter belts with a basis like-for-like rental growth of 3.3% and a total like-for-like rental growth of 5%. And interestingly, again, Salzgitter with the basis like-for-like rental growth of 3.5% and the total like-for-like rental growth of 3.8%. So I think very interesting number and still continuing the positive trend in Salzgitter from last year that we achieved here a 3.5% annual like-for-like rental growth without any effects from vacancy reduction.And the bottom of Page #15 on right side shows you the allocation of maintenance and CapEx by region. And you can see that the Chemnitz region, including the city of Döbeln is the region where we currently invest most of our CapEx not far away from that, and we are spending here more in the next 1 or 2 financial years, these 2 Berlin regions. So these 2 regions are clearly the focus of our investments currently.Then moving on to Page #16. We will see the development of the vacancy rates in the first half of 2016. Vacancy rates increased a little bit at the beginning of the year as you noted from the first quarter and were stable in the second quarter. We already had a slight reduction in July 2019 to 5.1%, and we stick to our targets of -- for the year-end. We expect a further reduction by approximately 50 basis points. So we should end up somewhere between 4.6% and 4.7% vacancy rate in the residential units.Again, in the appendix on Page #26, you'll see a more detailed split by regions. So the top regions in terms of vacancy reduction were the regions Berlin and Chemnitz and in the Rostock region. So in the northeastern part of Germany, where even there's quite sound increase in vacancy rate, but it is not any trend. This is the outcome of new acquisitions, acquisitions that we had in 2018. And where it took, honestly, lower than expected until we have fully integrated, as you know, our property management systems in 2019. So we are very confident that we will see also in the Rostock region vacancy reduction in the next quarters.Then I'm now on Page 18 where you'll see the acquisitions from the first half of 2019. All in all, we acquired 1,000 units in 4 transactions. If you look at -- multiples to average multiples that we paid, that was definitely effective 11.8x. So to speak, it was 8.5% gross yield.Looking in the pipeline for perhaps upcoming acquisitions, you should expect that this gross yield is perhaps more moving towards 8% or even below 8%. The average gross yield last year was around 8%. So of course, we see price increases also in our regions. And therefore, it's 8.5% gross yield in the first half or is perhaps something more exceptional. But of course, you noted we are price disciplined and -- but it should move more towards the 8% or even below that.Vacancy rates on average in these portfolios was nearly 11%. All the acquisitions were in Eastern Germany. All the acquisitions were in locations where we already are, especially in Halle, and also in the meanwhile in Greifswald, Stralsund, where we own larger number of units. So therefore, we were very happy to close this or to sign this acquisition. Closing is, in most cases, at the end of the third or fourth quarter.So 1,000 units in the first half. If you compare that with the financial year 2018, I think we are quite on the same way we acquired 2,700 units in the full financial year 2018. And the first half of 2018, the number was quite small. It was 200 units. So therefore, I think we are on a continuous successful rate regarding our acquisitions.Then let's move on to Page #20. We'll see the results of the semiannual valuation done by CBRE. Again, the full portfolio was valued by CBRE. And the result was quite comparable to the last result from the half year valuation or from the second half valuation of 2018 to EUR 211 million semiannual uplift. This equals a 4.4% uplift, and looking at split, the main part, and it's also nothing unusual, it's coming from yield compression, 77%. The in-place yield is now down from 6.5% to 6.3%. And perhaps also important to point out, once again, the 6.3% is really based also on the current rent, that means, including or taking into account the vacancy rate of -- in the full portfolio of 5.6%. But also, operational performance was again a very nice driver of the valuation results with a share of 23% operational overperformance, means, in this case, that we are better in terms of vacancy reductions, better in terms of rent development than assumed by the valuation -- last valuation.Looking at the values now. In total, I already mentioned, nearly EUR 1,000 per square meter, in-place yield of 6.3%. That looks still really, let's say, moderate. So therefore, we are very optimistic to receive further uplifts in the next valuations. And the next valuation will account as in the previous year at year-end 2018.On Page 21, you'll see further valuation details. The region with the strongest valuation uplift was not surprisingly Berlin, which is again, in our case, completely Berlin commuter belt with EUR 48 million valuation gain, out of which was $33 million from yield compression. And looking at the region with the lowest valuation, that's also not that surprisingly, that was Gera, but still with a positive valuation contribution of EUR 4 million.And then finally, on Page 23, some words on our guidance for the financial year 2019. We left the guidance now unchanged. So it's still at EUR 155 million. If you look at the half year results, where we had an FFO of approximately EUR 80 million in annualized debt, we are already above our guidance. So this easy calculation would lead to an FFO -- an annual FFO of EUR 160 million. So therefore, the guidance is perhaps more on the conservative side, but also we have to have in mind that we have closing of some disposals now in the next weeks to come, disposals that we signed already last year, and the acquisition that we presented today have a closing at the end of the third quarter or even at the end of the fourth quarter. So the contribution to FFO of the acquisition is perhaps only to a very small part in 2019.But all in all, it's clear that we're very optimistic with the -- concerning the achievement of our guidance. That's it from my side, a quick overview of about -- or regarding the half year results. And now I'm, of course, happy to take your questions.

[Operator]

[Operator Instructions] And first up, we have Andre Remke who's calling from Baader Bank.

[Andre Remke, Co]

Basically, 2 questions. First, regarding your planned disposal program. In the last sentence, you've mentioned it. Well, is it completely on plan? So the original target of 2,100 units, when will be the closing of the 700 units from last year? Will this be 1st of July? Or can you give some indication here? And the remaining part, could we expect this in several smaller deals or in one larger deal? And -- well, what is your impression? Is it, at the moment, more difficult to sell such units? So this is the first question.

[Martin Thiel, CFO & Member of Management Board]

Yes. Thank you for the question, Andre. And well, you're correct, the disposal assumed in the guidance were 2,100 units. The 719 units that we signed last year, the closing will be at the end of August. And so we've got a remaining log of approximately 1,300, 1,400 units, which we're selling really in small parts. And if you want to, we are here behind what we assumed for the guidance, which is not really a problem. So we're selling that in small parts. I mean, what's, let's say, a little bit difficulty for this disposal, we have here a lot of big locations. So -- and therefore, the original idea to sell this in one block was simply difficult. So therefore, we're doing this in smaller tranches. And we're very confident that we will sell that successfully in 2019 and perhaps in 2020. So therefore, perhaps what we assume for purpose of the guidance as disposal in 2,100 -- in 2019 to 2,100 units was a little bit large, but it would not be a material difference. So part of this 2,100 units, perhaps some 400 or 500 units will be sold then in the financial year 2020.

[Andre Remke, Co]

So in other words, also from that side, the guidance is -- this will be more supportive for the FFO guidance for this year?

[Martin Thiel, CFO & Member of Management Board]

Yes, you're correct.

[Andre Remke, Co]

Yes. And a follow-up question on that. You mentioned strategy to go into smaller deals. Has this changed your approach here? And what is the reason here? Is it pricing or interest in larger blocks?

[Martin Thiel, CFO & Member of Management Board]

Simply, it was a question of pricing. So when we brought the portfolio to the market, and of course, there was interest there, but we've seen from potential investors that have said, well, the portfolio that we had in the market was very diversified. And honestly, this was the background why we sold. Our thought is -- or why we want to sell this portfolio is because we have some smaller locations in small cities where we think perhaps today, everything is okay, but in the future, potentially, perhaps it's more difficult in these regions to do the successful business. So therefore, we changed our plan, and said, okay, then perhaps more local buyers are our target. So sizes of 50 to 100 units are more appropriate, and that's what we're doing right now.

[Andre Remke, Co]

But at the end, these price expectations are still the same as you -- in comparison to the start of your thoughts to sell these properties?

[Martin Thiel, CFO & Member of Management Board]

Yes. Yes. So we don't expect any losses in comparison to our book value. So that's where we see that.

[Andre Remke, Co]

Okay. Okay. Then again, you also this -- you mentioned in your presentation on the acquisition side, you're still expecting a similar size to last year, more or less?

[Martin Thiel, CFO & Member of Management Board]

Yes. And perhaps once again, we have no official acquisition target. So still unchanged. Last year, we had approximately 3,000 units. This should be a good estimate. But it is then the fourth quarter of 2019 that brings us some larger new units or the first quarter of 2020. So it is difficult to predict. But we're very confident that we'll end up in similar sizes, let's say it like this. And if we look at the acquisitions that we're doing, for example, in the first half, this will be also more typical for the second half. We're talking here about smaller sizes of 400 to 500 units, that's in the meanwhile that typical acquisition size.

[Andre Remke, Co]

Okay, perfect. And then my last question on the proceeds from the Schuldscheindarlehen. Is there a short-term concrete use of the proceeds? And the account of the question is to avoid too much cash on your balance sheet.

[Martin Thiel, CFO & Member of Management Board]

Yes. We will finance acquisitions that we signed right now with the Schuldscheindarlehen. And we, of course, have some money left. So if you want, we increased a little bit the share of unsecured financing when we issued the Schuldscheindarlehen.

[Operator]

Your next question comes from Thomas Neuhold. He is calling from Kepler Cheuvreux.

[Thomas Neuhold, Head of Research of Austria]

Actually, I only have 2. First level, I was wondering if you can give us your view on the regulatory risk in your business. I know you don't have big exposure to the Berlin City itself, but you have assets in federal states, you have lift in government. What are the political trends there? are other governments thinking about implementing also their own rent regulation. What is your view on this, and potentially, but I think it's maybe a little bit too early, what impact this regulatory risk has on your acquisition and CapEx strategy?

[Martin Thiel, CFO & Member of Management Board]

Thank you for the question, Thomas. First of all, to make it very clear, the current discussion, the current proposals around regulation have no impact on our strategy. And I think that's the important point to point out or the good news.I mean our strategy goes not to investment in the very large cities in Germany, like Berlin, Hamburg, Munich and so on, and goes not to modernization projects for existing tenants. Both cases are, from our point of view, they're really center of any thoughts about new regulations.So therefore, I think the TAG's strategy is something that also in a world with tighter regulation will be a successful strategy. So therefore, having that in mind, from there on, it's just more or less a private opinion. I would personally be surprised if this whole cash that we have currently in Germany will go off the table without any results. So I probably do not expect something extreme like we currently see in Berlin with a total rent fees for the next 5 years, leaving aside the debate whether this is in line with the law or not, but that we have something around perhaps new much bigger regulations that we have, perhaps some additional rental caps in large cities. Without having any concrete resolution in mind, I think the risk is clearly there. So -- and then again, that's not really our business, not our investment focus. So therefore, we are, in this regard, really not in a position where we have a big concern that new regulation hits us.

[Thomas Neuhold, Head of Research of Austria]

Okay, understood. And my last question is on Page 6, you mentioned that the personnel expenses are going up a little bit because you're carrying out more caretaker and craftsmen services internally. Can you remind us what is currently the share of this internals craftsmen and caretaker services? What the cost savings roughly are versus marketing services and your long-term targets? How much you want to do internally and what else do you want to source externally?

[Martin Thiel, CFO & Member of Management Board]

The last part of that is clearly the caretaker service, where we have currently approximately 50,000 units that is managed with our own caretakers. And this should be increased to approximately 19% of the portfolio. So where we have just a smaller number of units, that's makes no sense if we do it with internal caretakers. But our strategy is very clear to do the very largest part of the portfolio with internal caretakers. And I think we have also details there in the annual report, for example, regarding the FFO contribution from the caretaker service. Yes, clearly it's positive. But we talk here about some, let's say, EUR 400,000 to EUR 500,000 per year positive FFO contribution, which is, of course, a nice number, but the main aspect of our internal caretaker service is improving the quality because especially if you think about the properties that we buy with high vacancy rates, that's badly managed before in regions where it's really important to have good services for tenants than the caretaker, which is -- who is perhaps their customer or tenants who are most often -- it's really an important person. So therefore, improving the quality of the caretaker service is definitely the main argument and then a second argument, but really the second is the internal or general cost savings.

[Operator]

The next question comes from Georg Kanders, who is calling from Bankhaus Lampe.

[Georg Kanders, Investment Analyst]

I wonder why there is such a higher rent in Greifswald of more than EUR 9 per square meter. Is it something special with the units you bought there?

[Martin Thiel, CFO & Member of Management Board]

Yes. And good question, Georg. This is a kind of student apartment that we'd require there. It's not in the sense of fully and managed student apartment house, but the rooms that we rent are very small. And typical tenants there, they are students. So therefore, it's a product that completely fits the students, and therefore, the per square meter rent is nearly double to what we have normally.

[Operator]

Next up, we have Manuel Martin calling from ODDO BHF.

[Manuel Martin, Analyst]

One question left. Have you planned for the second half year more spending or more rental expenses to decrease vacancy? And could this affect the FFO in half year 2?

[Martin Thiel, CFO & Member of Management Board]

No, not really because the total investments are now over the last, I'll say, 2 years, stable. And if you put together maintenance and CapEx to be around EUR 19, and the investments that we're doing basically right now or that we did in the first quarter and second quarter will then lead to vacancy reduction in the third and fourth quarter. So it's not the case that we need to increase the investments strongly to achieve any further vacancy reductions. So you should expect this more or less in line in the next 2 quarters.

[Operator]

The next question comes from Kai Klose, who is calling from Berenberg.

[Kai Malte Klose, Analyst]

I've got 2 quick questions. The first one is, could you indicate what is the current debt -- the current amortization rate based on the current debt structure, which I think you'll have to change following the issuance of the promissory note? The second question if that's what you said, if I understood you correctly that, in the future, you are planning to spend more on CapEx, particularly in the Berlin region, the point is located in the Berlin region. Just wondering given the fact that there is less -- more or less lower vacancy rate in the portfolio, is it that you're aiming in these -- for these properties for higher rents? Or are you planning to, let's say, do a bit more new construction? Or why are you not spending more in a way in the regions where vacancy rates are still above the portfolio average level?

[Martin Thiel, CFO & Member of Management Board]

Thank you for your question, Kai. First of all, your question regarding the amortization rate, of course, the unsecured financing debt is 0. Regarding the bank loans that's between 2.5% and 3% per annum. So currently, for us, it's absolutely okay if we have a new bank loan to have even a higher amortization rate of up to 3% because looking at the total cash flow that we repay with our debt if we have, sort of, interest rates that makes sense to repay the debt a little bit quicker than perhaps 2 or 3 years ago. So 2.5% to 3% in the bank loans, that's the current amortization rate.And then, yes, it's true that the Berlin region will be one of the regions or perhaps the region beside Chemnitz, where we have the highest share of our CapEx and the more concrete location will be Brandenburg an der Havel. And with -- in this Brandenburg an der Havel portfolio, there's one quarter of the cities, which is called Garden perhaps you remember that because it's been there at our Capital Markets Day, where we had in some streets or still have high vacancy rates. So this around 5% vacancy rate in Berlin is, of course, an average of, I'm simplifying a little bit, more 15% in Brandenburg an der Havel and perhaps 1% or 2% in locations like Nauen, Eschweiler or Strausberg. So therefore, we're really now targeting locations and quarters of the city where we still have higher vacancy rates. And in this case, Brandenburg an der Havel is from our point of view a very promising point -- city to invest.

[Kai Malte Klose, Analyst]

Okay. And maybe a quick follow-up on the amortization rate, when talking about the EUR 318 million of refinancing of the bank loans that are coming to you over time. What are the amortization rates there in new mortgage loans, which you are currently signing. Are you in for the lower one or banks will ask for similar rates, just to get any indication?

[Martin Thiel, CFO & Member of Management Board]

Yes. And let's say it like this, for us, a 3% amortization rate is absolutely no problem if you achieve them really in nice financing conditions regarding, of course, the interest rates, regarding covenant structure. And that's something that we of -- currently quite often agree to our banks. I mean the current cash flow is not really the problem. So therefore, the very simple idea of repaying debt perhaps a little bit more early in times where interest rates are low, that's what we do right now.

[Operator]

[Operator Instructions] Okay, we have another question from Andres Toome, who is calling from Green Street Advisors.

[Andres Toome, Research Associate]

I have one question regarding the valuation. And is there any particular reason why regions such as Chemnitz and Salzgitter show kind of less dynamic valuation growth versus last year? And also, do you expect these regions to pick up in the year-end valuation?

[Martin Thiel, CFO & Member of Management Board]

Yes. Thank you for the questions. Well, also for the second half of the year, we perhaps expect a similar valuation result, that means, just a moderate increase in Gera and Salzgitter. We are very satisfied with the development in these 2 regions, especially with the Salzgitter region. If you remember what I said about the like-for-like rental growth that increased soundly in Salzgitter, and it is in the meanwhile, without vacancy reduction of 3.5%. So this is definitely a positive development, and also reduction in vacancy rate was very strong.Gera is a more challenging market, that's clear. But also here, we have very sound underlying fundamentals, but we're very honest. I mean Salzgitter and Gera are regions or these are cities, where our transaction volumes are definitely lower and where especially institutional investors are not that much investing there. For example, in -- it's the case in our Berlin portfolio or in our Dresden portfolio. And so therefore, it should be very natural that also in the next year, this is more a place for, let's say, professional investors, real estate companies, like we are, who are to invest long term and want to achieve an attractive cash flow, which we're having right now.

[Andres Toome, Research Associate]

Just a follow-up on that. Are you seeing -- what are you seeing in terms of the transaction market? Is the transaction activity picking up? Or is it more subdued versus the last year in these less liquid locations?

[Martin Thiel, CFO & Member of Management Board]

The trend is more, and it's picking up. So we see more and more transactions in Salzgitter and also in Gera. So that's really a general trend, looking at our locations, which are mainly B or C locations that liquidity or the transactions are picking up. But of course, still lower than in a location like, for example, Hamburg or Berlin.

[Operator]

Okay, Mr. Thiel, it looks like we have no more questions today.

[Martin Thiel, CFO & Member of Management Board]

Okay. So thank you very much all for dialing into our call. As always, if there are any questions left, please feel free to contact Dominique from the IR department or myself. And thank you very much, again, and have a nice day. Bye-bye from Hamburg.