Adler Group S.A. (ADJ) Earnings Call Transcript & Summary

Good afternoon, and welcome to the analyst and investor presentation for the half 1 2020 results for ADO Properties. Our presenters today are Maximilian Rienecker and Thierry Beaudemoulin, co-CEOs of the group. As we will be using the webcast system for questions, please feel free to start submitting your questions from the start of the presentation. The link to the webcast is available in the press release from yesterday. [Operator Instructions] If you are unable to join the webcast, you can access the presentation from ADO's website. This call will also be recorded and made available at the company's website after the call. I would now like to hand over to Maximilian Rienecker. Max, please go ahead.

Thank you, and thank you all for joining us today. It has been 2 months since the announcement of our successful EUR 457 million rights issue. And during today's presentation, we will discuss our resilient set of first half 2020 results and the various transactions we have executed successfully year-to-date. Please join me on Page 4, where I would like to run you through the key highlights for the first half of the year. Net rental income came out at EUR 114.8 million in H1 2020 versus EUR 67.5 million in H1 2019. Clearly, this effect is caused by the consolidation of ADLER into our accounts. Towards the end of the presentation, I'll illustrate what the composition of the reported net rental income looks like. But let's have a look at the underlying KPIs. The average rent per square meter increased by EUR 0.10 year-on-year to EUR 6.20 and has further reversion potential. The like-for-like net rental growth has come out at 1.9%, which is lower than last year's like-for-like, mainly due to the impact of the Berlin rent freeze. Vacancy increased marginally to 5.6%. FFO 1 amounts to EUR 44.3 million versus EUR 33.4 million in the first half of last year. As of today, rent deferrals relating to COVID-19 stand at 1.3% of our monthly rent amounting to circa EUR 374,000 and are mainly related to the commercial parts of the portfolio. The letting process at Riverside, which is the ADLER development which got concluded last year, has progressed further with overall occupancy now at 74%. Interest for micro flats has decreased slightly on the back of the COVID pandemic. Letting of the ordinary apartments is, however, well underway with occupancy at 84%. Clearly, we continue to invest in our portfolio and have spent EUR 3.4 per square meter on maintenance and EUR 8.10 on CapEx. CapEx investments were lower compared to last year as we thoroughly reviewed the CapEx plans of our Berlin portfolio in light of the Berlin rent freeze legislation. The semiannual revaluation result came in at plus 2.3% for the total portfolio with Berlin showing resilience with fair value remaining stable. The uplift was, as such, completely driven by the 4.7% uplift in valuation of the portfolio outside of Berlin. As a result, the portfolio is now valued at EUR 8.8 billion. Net NRV stood at EUR 4.3 billion at the end of the period, EUR 5.5 billion pro forma when accounting for the rights issue and for the full consolidation of Consus, which happened post reporting date. For more detail on the transition from EPRA NAV to EPRA NRV, I'd like to refer you to the appendix. At the end of the period, the weighted average cost of debt remained stable at 1.84%. On the back of the EUR 400 million bond issue, the weighted average cost of debt increased slightly by 11 basis points to 1.95%. At the balance sheet date, LTV stood at 52.2% excluding and 53.5% including convertibles. Now I'd like to hand over to Thierry, who will run you through the transactions we have executed this year.

Thank you, Max. On Page 5, you can see that starting in December with the public offer for ADLER and the acquisition of strategic minority stake in Consus, we have embarked on a journey of creating a fully integrated Germany-wide residential REIT real estate platform. After a successful public offer, we now own 95% in ADLER. And with settlement of the offer having taken place on 9 April, we have start to consolidate both sets of accounts. As such, you will see the ADLER Q2 2020 results being consolidated in our first half 2020 figures. When we come to the operational synergy, we are happily reconfirming that we are on track and upgrade our expectations as we now expect to achieve EUR 9 million run rate in savings by the end of the year. On June 29, we announced to exercise a call option for 60 million shares in Consus for an aggregate holding, increasing our stake to 65% in total. As we aim to take full control of Consus, we anticipate to follow through with voluntary tender offer for the remaining share outstanding likely in Q4 of this year. On top of that, we have completed our EUR 450 million right issue with a takeup of 98% in the second half of July. As a result of the strong pricing in the rump placement, the total gross proceeds increased to EUR 457 million. On July 29, we have also successfully placed a EUR 400 million single tranche bond with a 5-year maturity and a fixed 3.25% coupon. In light of our proposal to suspend the dividend payment in light of the size of the rights issue, we do want to stress that we will hold on to our dividend policy for '21 onward and strive for a payout ratio of 50% of FFO 1. Now please allow me to highlight the rationale behind the Consus transaction once more on Page 6. With the acquisition of a large part of Consus at the end of June, we are becoming the fourth largest German and the fourth largest European listed resi company with EUR 11.7 billion portfolio and approximately EUR 2.7 billion market cap, forming a strong platform for future growth. The integrated model of a build-to-hold give us organic growth opportunity below market rate. Our exposure in the top 7 cities will grow to 2/3 of our portfolio by addition of EUR 4.7 billion to EUR 5.3 billion of high-quality new built. We catch 2 birds with 1 stone as both with the quality of the location as well as the quality of our building will improve. Ongoing forward sale and completion of the more than 10,000 apartments will result in EUR 1.2 billion to EUR 1.8 billion value uplift, which immediately becomes clear when looking at the 4.5% yield on cost for top 7 cities only versus 3.9% yield on our existing portfolio. New build is attractive in many ways. We not only start at a relatively high rental yield but also at relatively low cost, resulting in the 85% to 90% EBITDA margin, which will result, in turn, in much higher cash conversion than our existing portfolio. We target EUR 90 million to EUR 104 million synergy for Consus alone 2020, 2021. More importantly, the synergy from conversion from build to sell to build to hold and the refinancing of the expensive debt. Finally, we continue to be committed to our investment-grade credit profile with the objective to get the IG rating in the midterm. On Page 8, we would like to quickly summarize that our portfolio amounts to 75,000 units and EUR 8.8 billion of investment property with approximately half of the value build location in Berlin. The other half of the portfolio focus on metropolitan region of NRW, Lower Saxony and Saxony-Anhalt. As always, please find a detailed overview of our portfolio metric on Page 9. Berlin accounts for almost EUR 4 billion of value in our portfolio, which is more than half of our EUR 8 billion value of the German residential portfolio in operation. Together with other metropolitan area, the top 13 cities accounts for 77% of the combined residential portfolio. Occupancy has improved marginally by 0 -- 2% in the top 13 cities and decreased slightly in the other cities, bringing the total vacancy to 5.6% at the end of the period. The average rental income in the top 13 cities show an average like-for-like net rental growth of 2.2%. As expected, LFL rental growth is slowly coming down as the impact of the Berlin rent freeze become more apparent, but still results in a solid 1.9% LFL rental growth year-on-year. Page 11, let's look further on. Where our top 13 cities currently account for almost 80% of our portfolio, we would like to increase our focus to the largest 9 Germany cities. The best way to increase our exposure in the larger cities in Germany is via development in [indiscernible]. By offering high-quality new apartment in the cities of Germany, we have the highest housing shortage, we hope we can contribute to this increasing need of the German population and become an integral part of the solution. On Page 12, we summarize the 4 pillars of our development strategy. Close to EUR 300 million of extension and redevelopment in our existing portfolio at attractive investment return ratio. EUR 400 million of build-to-hold in Berlin, Düsseldorf and Potsdam. Strategic land position in Berlin and Dresden. Holding 65% majority stake in Consus provides access to the most attractive development pipeline in Germany through our ongoing strategic cooperation. We anticipate to follow through and launch an offer for all remaining share in Consus outstanding in Q4 of this year. Looking at the map on Page 13. This is exactly where we would like to acquire new development at a discount to market rate. The projects in Düsseldorf, Stuttgart and Hamburg will anchor the strategic pipeline and balance the current Berlin exposure with the top 7 cities. In the table on the left, we give you detailed overview of the 11 projects, which we all visited and worked out detailed plan for. The Grand Central in Düsseldorf has closed post balance sheet date and doesn't have a GAV as of yet as PPA has not been completed. Other projects that are under auction, but do not meet our criteria, will not be purchased once we have the contract. The total book value of the portfolio currently is circa EUR 1 billion, and with an anticipated value of completion of EUR 4.7 billion to EUR 5.3 billion, paving the way for future organic growth. Let's move to Page 14. In the next 2 page, I would like to zoom into the value creation we identify within the build-to-hold pipeline of the 11 projects and on the previous slide, the recurring value of circa EUR 1 billion. The cost of construction are around 50% to 60% of the value. This clearly differs our project with high-rise having a relatively high construction cost versus landbank. This construction cost will be financed through a combination of completion of the forward and condo sale, sale under the nonstrategic project and at a target leverage of 50%. The value uplift from the difference between market yield and construction yield is around 20% to 30% of the value. The total value creation will be EUR 1 billion to EUR 1.6 billion, realizing net rent of between EUR 160 million and EUR 180 million. On Page 15, at the top of the left-hand graph, shows the EUR 1 billion figures as displayed on the previous page. In the bar, we translate this to per square meter price. The current square meter value of the build-to-hold portfolio is approximately EUR 1,250 based on EUR 1 billion value and 800 square meters to be built. We anticipate average construction costs between EUR 3,250 and EUR 3,750 per square meter, which results in a total cost of EUR 4,500, EUR 5,000 per square meter. Based on an average market rent of EUR 18 used to this market, we expect to achieve a yield on cost of around 4.5%. Applying market yield of 3.2% to 3.6% of the portfolio compared to the current 4.1% for the existing rental would result in a value of EUR 5,800 to EUR 6,600 per square meter. Here we're implying a revaluation potential of EUR 1,200 or EUR 2,000 (sic) [ EUR 1,200 to EUR 2,000 ] per square meters being circa EUR 1 billion to EUR 1.6 billion for the entire portfolio in future. I would now like to hand over you back to Max for more information on the actual revenue.

Thank you, Thierry. Now at Page 17. As said, the portfolio currently is valued at EUR 8.8 billion, which is based on an average value of close to EUR 1,700 per square meter. At EUR 6.20 per square meter, we're amongst the top 3 of the listed German resi companies. Relative high rents, low vacancy and scale results in higher EBITDA margin, which is one of our key objectives. The vacancy rate remained solid at 5.6% or by marginally higher than last year. Then moving on with CapEx, I'll hand back to Thierry.

Clearly, one of the key pillars of our strategy is to continue investing in our portfolio. On the left-hand side of the page, you do notice that we have spent about EUR 20 million less on CapEx and maintenance combined. With the Berlin rent freeze legislation entering in effect, we have become more selective on the CapEx program on the Berlin portfolio. As a result, refurbishment and capital maintenance dropped from EUR 32 million in the first half of last year to a meager EUR 6 million this year. Maintenance increased by 9% to EUR 3.4 per square meters versus EUR 3.1 per square meter last year.

Thank you, Thierry. I will take the next slide on Page -- Slide #19. The circa EUR 300 million non-Eurobonds at ADO Group level have been repaid in February by increasing the EUR 710 million bridge facility with EUR 175 million. And as we know, at the beginning of April, the EUR 885 million bridge has been moved to the ADO level. Obviously, a sound financial structure is instrumental to our success, and we continue to target a 50% LTV in the midterm. The loan-to-value at the end of the period stood at 53.5% or 52.2% when excluding the convertible bonds. And accounting for the rights issue and Consus, our LTV is around the same levels of circa 54% as reported at the time of the transaction. The interest coverage ratio is at 3x, well above the highest required covenant levels of 1.8x. Let's move to Page 20. We have managed to refinance and/or repay short-term debt maturing in a total amount of EUR 419 million, of which EUR 172 million, 2020; and EUR 247 million, 2021 maturities, respectively. We continue to be in an ongoing dialogue with our financing banks, and building on the successes in the first quarter, we are now discussing bank debt expiration in 2021 for a total of EUR 339 million. As such, the key maturity will be the EUR 500 million bond that expires at the end of 2021 and the bridge loan that expires in 2022, but which we expect to repay or refinance before. Post the H1 2020 balance sheet date, on 29th of July, we successfully placed a EUR 400 million single tranche bond with a 5-year maturity and a 3.25% fixed coupon in order to refinance the existing debt and further extend the maturity profile. On Page 22. Here, we would like to show you how the reported half year figures reflect the contribution of ADO and ADLER as ADO has technically only acquired ADLER on 9th of April 2020. As such, the consolidated number for both net rental income and FFO 1 only consolidates the second quarter figures of ADLER. Page 23. We would like to end with the guidance and the outlook. We feel confident to reiterate our previous outlook in which we anticipate to realize between EUR 340 million and EUR 360 million of net rental income, which should result in EUR 120 million to EUR 140 million of FFO 1 on a pro forma basis. On a reported basis, we expect to be able to achieve an FFO 1 of between EUR 105 million to EUR 125 million. To summarize, the acquisition of ADLER has been successfully completed. The integration between ADO and ADLER is ongoing and starting to yield the first benefits, allowing us to increase the anticipated run rate synergies for 2020 to circa EUR 9 million. We realized a fair value uplift of a total of 2.3% despite the Berlin rent freeze legislation coming into force. And we have successfully completed EUR 457 million in rights issue post reporting date, where we reached circa 98% takeup and placed the rump successfully. We placed the EUR 400 million 5-year bond to refinance existing facilities. We have exercised the call option for Consus and currently hold 65% of its shares. And we continue to see a limited impact of COVID-19 on FFO. And finally, our outlook for 2020 is reiterated. Thank you all for joining us today. And I would now like to open up for questions.

[Operator Instructions] The first question in is from [ Gerolamo Vinacati Sansovino ]. And the question is, A, what is the plan on how to fund the CapEx needed to build the landbank pipeline? How much debt and what about capital increases? B, why has consolidation of Consus had such a negative impact on the NRV? And C, we suggest also the old EPRA NAV definitions, values are reported at least for some time aside to the NRV to improve transparency.

All right. Thank you. [ Gerolamo ], thank you for your question. I will take this one. So for the entire build-to-hold portfolio, as shown on one of the slides, we expect to have between EUR 2.5 billion and EUR 3 billion in construction costs over the next 6 to 8 years. So although not linear, but let's take an average of the construction cost per year, we would probably have between EUR 300 million and EUR 350 million in need for cash. How do we fund it? It is given that we expect between 20% to 30% EBITDA margin. We can have between 60% and 70% construction loan in line or to stay or remain within our financial policy of 50%. And only the rest would have to come from existing cash, which is recycled cash from ongoing sales that we have, for example, at ADLER level. So there's no equity -- a fresh equity raise needed for the funding of the build-to-hold portfolio. That's the first part. On the second one, the reasons the consolidation of Consus has had such negative impact on the NRV. I think it is important to state, as at 30th of June, we had took a 25% shareholding in Consus. So we had the shares marked to market in line with IFRS. And since we exercised the call option at the very end of June and settlement only happened in July, you have a certain negative impact from that consolidation, given that the share price of Consus was lower than what the NAV per share is. So you will see that in the next quarter, when Consus is fully consolidated, given we, at this point in time, own 65%, you will see a reversion in the value that was lost in Q2. Difference on the EPRA NAV, EPRA NRV. Indeed, we show the EPRA NAV and the NRV. Just I think the -- well as we know, the difference is the real estate transfer tax mainly, but point taken, and thank you for your suggestion. We will take this up for the next time, and we'll also show the EPRA NAV on a pro forma basis to give a like-for-like. I hope this answers your question.

The next question comes from Julius Stinauer. Why are maintenance and especially CapEx lower year-on-year? What is the reason for the strong increase in financing costs? As the tax rate looks higher than in previous periods, what tax rate can we expect for full year 2020? What will be the impact of a consolidation on Consus on the balance sheet?

For -- thank you for the questions. So for the point A, as the Berlin rent freeze entered into effect and our rental growth is constrained, we have been more selective in CapEx program for the Berlin part of the portfolio for the reletting CapEx, but also for the modernization CapEx. And Berlin portfolio is 50% of our portfolio. And on top of that, there was significant effort from the company in '18 and '19 to get additional rent increase to benefit from the Berlin market. So our capitalized maintenance dropped from EUR 32 million in the first half of last year to EUR 6 million this year. On top of that, we have also a slight impact of COVID-19, which has delayed during 2 months on refurbishments. So this will also has a minor impact, but most of the impact is the rental decrease. So now I leave Max for the rest of the answer.