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

[Foreign Language] Dear shareholders, on behalf of the entire Board, I would like to welcome you to this presentation following the 2021 AGM of Adler Group S.A. In light of the exceptional circumstances surrounding the COVID-19 pandemic and in application of Article 1 of the Luxembourg Law of September 23, 2020, on measures concerning the holding of meetings in companies and other legal entities as amended, the company held its Annual General Meeting earlier today in a nonphysical manner. Shareholders were permitted to exercise their rights at the AGM exclusively by appointing a special proxy holder designated by the company. Therefore, we would like to give this presentation now instead of the presentation, which we would have ordinarily given at the general meeting and also to report briefly on the outcome of the AGM. Before we start, I would briefly like to look back on what has been a moving year. Clearly, the COVID-19 pandemic has changed the daily lives of many. We are fortunate to find ourselves amidst a very resilient real estate market segment. More specifically, the core of our business sees very little pressure with rent deferrals only at 1.2% of our monthly rent. Berlin rent freeze has, on the other hand, had a significant impact on our business, and we, therefore, welcome Federal Constitutional Court decision in April earlier this year to annul this controversial act on rent restrictions in Berlin. We believe this decision restores the clarity, legal certainty and confidence in the housing market in Berlin, which is in the interest of tenants, housing providers and investors that are crucial for new housing construction. Since the reelection of the Board members at the Annual General Meeting in September 2020, the Board of Directors has deepened its work looking to improve corporate governance with a new composition of its existing committees. The Audit Committee, the Nomination and Compensation Committee, the Investment and Financing Committee, the Ad-Hoc Committee. The audit denomination and compensation as well as the investment and financing committees are entirely composed of independent directors and therefore, act as independent bodies without participation of the senior management. As for today's AGM, I'm happy to report that all proposed resolutions have been adopted with the required majority. For a complete overview of the resolutions adopted, please refer to Pages 30 to 33 of this presentation. There is -- I would like to hand you over to our executive team, Thierry Beaudemoulin and Maximilian Rienecker. Max, please go ahead.

Thank you, Dr. Maser. During today's presentation, we will discuss our resilient first quarterly 2021 results and the various transactions we have executed successfully in the year-to-date. Please join me on Page 5, where I would like to run you through the key highlights for the first quarter of the year. Net rental income came out at EUR 84.3 million in Q1 2021 versus EUR 27.9 million over Q1 2020. Clearly, this effect is caused by the consolidation of ADLER into our accounts since the 9th of April 2020. Let's have a look at the underlying KPIs. The average rent per square meter increased by EUR 0.16 in a year compared to Q1 2021 to EUR 6.34 and has substantial further reversion potential. Despite the Berlin rent-free legislation entering into effect, we were able to realize a like-for-like net rental growth of 1.3%. Vacancy decreased slightly to 3.8%, down 10 basis points compared to Q1 2020. We have achieved an FFO 1 of EUR 32 million in the first quarter of 2021, translating into a 2021 run rate of EUR 130 million, which is in line with our guidance for 2021 of between EUR 127 million to EUR 133 million. As of today, rent deferrals relating to COVID-19 stands at 1.2% of our monthly rent, amounting to circa EUR 330,000, of which 95% relates to the commercial part of the portfolio. Riverside development is now fully let after signing a contract with a co-living operator for all remaining vacant 213 micro flats. Clearly, we continue to invest in our portfolio and have spent EUR 1.30 per square meter on maintenance and EUR 6.10 per square meter on CapEx. Maintenance expenses were lower as we now have a more optimized structure. At the end of Q1 2021, after revaluation gains, the combined group held EUR 11.7 billion of real estate assets and embedded a net asset value of EUR 5.4 billion, which translates into an increase of 3.6%, compared to Q4 2020. For more detail on our EPRA NAV and EPRA NRV, I'd like to refer you to the appendix. On to financing. At the end of the period, the weighted average cost of debt stood at 2.58%, which is significantly below 3.2% at the end of the third quarter, when Consus was fully consolidated into the group for the first time. After the repayment of the high-yield bond, we could decrease our financing costs further to 2.2%, a significant reduction of around 40 basis points. The lower -- I have to restate that sentence. So the lower cost of debt has been mainly achieved by the refinancing enabled by the EUR 1.5 billion dual-tranche bond issued with a 5- and 8-year maturity at a weighted average coupon of 2.075% at the beginning of January and further issuance at the end of April this year of EUR 500 million with a coupon of 2.25%. At the balance sheet date, net LTV stood at 50.4% excluding convertibles, a decrease from 50.7% as of Q4 2020 due to recent positive revaluation development. Now please allow me to hand you over to Thierry on our operational performance on Slide 6.

Thank you, Max. On Page 6, we would like to at least summarize that our portfolio amount to 17,000 units and EUR 8.5 billion of investment property with approximately half of the value being located in Berlin. The other half of the portfolio focused on other metropolitan region in NRW, Lower Saxony and Saxony-Anhalt. In light of the recent market turbulence, we feel very comfortable with a fair value of roughly EUR 1,900 per square meter, which is well below current replacement value. As always, we provided detailed overview of our portfolio metric on Page 7. This page clearly shows how well the rental portfolio is performing and that we continue to reap the benefit of our integrated asset management platform. Average rent per square meters increased by EUR 0.60 per square meter to EUR 6.34 per square meters in Q1 2020. As we indicated before, like-for-like rental growth is affected by the Berlin rent-freeze legislation, which has an impact on circa 37% of our rental portfolio. Outside of Berlin, we have been able to generate solid rental growth of 3.8% and we were able to end the quarter at 1.3% like-for-like for the portfolio as a whole. For the year-end, following the cancellation of the Berlin rent freeze, we expect like-for-like rental growth to add up around 4% for the total portfolio. The downward sloping trend of our vacancy rate continues as we post a 10 basis point improvement to the Q1 in the prior year. This quarter, we have a vacancy of 3.8%. Partly this drop is caused by our intensive letting effort and the integration of our letting department, but also on the back of recent disposal with high embedded vacancy number. Now on Page 8. As I said, the portfolio is currently valued at EUR 8.5 billion, which is based on an average value of over EUR 1,900 per square meters. At a rent of EUR 6.34 per square meter, we are among the top 3 of the large listed German residential real estate company. Relatively high rent, low vacancy and scale result in higher EBITDA margin, which is one of our key objectives. So vacancy rate remained solid at 3.8% albeit marginally lower than last year. Please follow me to Page 9. Clearly, one of the key pillars of our integrated asset management strategy is to continue investing in our portfolio. On the left-hand side of the page, you do notice that we, in Q1 2021, have spent about EUR 33.4 million on CapEx and maintenance combined, which is largely in line with Q1 last year. CapEx investments were higher and maintenance lower compared to the same period last year, as we have now a more optimized structure. For the full year 2021, we expect our investments in our yielding portfolio to be largely in line with prior year. Now I would like to hand -- turn you back to Max for some additional color on our financial structure.

Thanks, Thierry. Let's continue on Page 10. At the end of Q1 2021, our LTV stood at 53% or 50.4% when adjusting for the outstanding convertibles and has increased by 110 basis points and 90 basis points respectively, since first-time consolidation of Consus in Q3 2020. This positive development reflects our sustainable financing strategy, which targets an LTV ratio of 50% in the midterm. Clearly, we adhere to our goal to deleverage the company further. Further strengthening the KPIs on this slide remains a top priority, and we foresee ample opportunity to realize these improvements going forward. In the medium term, we target weighted average cost of debt of around 2% and a total amount of debt of circa EUR 6.5 billion. The debt reduction to EUR 6.5 billion can be achieved by selling mainly nonyielding assets and does not include any capital increase. Let's move to Page 11. After closing the books for the quarter, we successfully placed the EUR 500 million bond with a 6-year maturity and a 2.25% coupon at the end of April. The proceeds were used for repayment of EUR 450 million Consus high-yield bond with a coupon of 9.625%. As you can see, our financing activities in 2021 further improved and smoothened our maturity profile since year-end 2020, bringing maturities for the rest of 2021 down to mere EUR 598 million, well covered by our cash balance of around EUR 740 million. The sources of funding chart indicates a diversified split between the different financing instruments while more than half of EUR 4.6 billion in absolute terms of our financial liabilities are unsecured, illustrating a well-balanced portfolio and an unchanged trend compared to Q4 2020 figures. Back to Thierry for some more information on the transactions we have executed in the last year.

Thank you, Max. On Page 12, you can see that starting in December 2019 with a public offer for ADLER Real Estate AG and the acquisition of a strategic minority stake in Consus we have embarked on the journey of creating a fully integrated Germany-wide residential real estate platform. After a successful public offer, we now own circa 95% of ADLER Real Estate AG and with settlement of the offer having taken place on the 9th of April 2020, we have started to consolidate both sales of account. On June 29, 2020, we announced we exercised the call option for 69 million shares in Consus from Aggregate Holdings, increasing our stake to 65% in total. As of Q1 2021, ADLER Group owned circa 94% of Consus as we aim to take the full control of Consus. We anticipate to follow through with the domination agreement later this year. On top of that, we have completed our EUR 450 million rights issue with a take-up of 98% in the second half of July 2020. As a result of the strong pricing in the bond placement, the total gross proceeds increased to EUR 457 million. Since July 2020, until today, we successfully completed placement of number of bonds with a total accumulated value of EUR 2.8 billion. In light of our proposal to resume the dividend payment from 2021 onward, we strived 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 13. With the acquisition of a large part of Consus at the end of June last year, we have become the fourth largest German and 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 price. Our exposure in the top 7 cities will grow to 2/3 of our portfolio by addition of EUR 4.7 billion of high-quality new builds, both the quality of the location as well as the quality of our building will improve in the future. 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 4.3% yield on cost for top 7 cities versus 3.9% yield on our existing portfolio. New build is attractive in many ways as we now only start at a relatively high rental yield but also relatively low cost resulting in 85% to 90% EBITDA margin, which will in turn result in a much higher cash conversion than our existing portfolio. We achieved EUR 129 million in synergy for Consus loan since July 2020 up to today. More importantly, the synergy from conversion from build-to-sell to build-to-hold and the refinancing of 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. Let's move to Page 14. Looking at the map, this is exactly where you would like to have your development pipeline located. The project in Düsseldorf, Stuttgart and Hamburg will anchor the strategic pipeline and balance the current growing exposure within the top 7 cities, as I have illustrated on the previous page. In the table on the left, we give you a detailed overview of the Page 11 of our high-quality projects in the pipeline. The total book value of the build-to-hold project is circa EUR 1.3 billion and exhibit a GDV of around EUR 4.7 billion, on which we expect to realize a 4.3% yield on cost. Let's move to Page 17 with Max sharing some concluding remarks.

Thank you, Thierry. And we would like to end with the guidance and the outlook for 2021 on Page 17. As we show in detail on Page 15 and 16, we feel confident to reiterate our previous outlook in which we anticipate to realize between EUR 325 million and EUR 339 million of net rental income, which should result in EUR 127 million to EUR 133 million of FFO 1. So to summarize, the acquisition of ADLER Real Estate AG has been successfully completed. We realized a fair value uplift of 2.7% despite the Berlin rent-freeze legislation coming into force. We have successfully completed EUR 457 million of rights issue post reporting date, where we reached a circa 98% take-up and placed the ramp successfully. This year alone, we successfully placed a number of bonds with a total cumulative value of EUR 2 billion. We have exercised the call option for Consus and currently hold circa 94% of its shares. We continue to see a limited impact of COVID-19 non-FFO. And finally, our outlook for 2021 is reiterated. Please join me briefly to Page 19 to 20, where you will find a simplified version of the 2020 financial statements. The full statement can be found in the 2020 annual report on the Investor Relations section of our website. On Page 19, you can see that our net rental income in 2020 has grown from EUR 134 million to EUR 293 million on the back of consolidation of ADLER Real Estate in April 2020. On Page 20, the balance sheet reflects the combined effect of a positive revaluation as per December 31, and consolidation of ADLER Real Estate and Consus. Now turning back to you, Peter.

Thank you, Max. Before we conclude this presentation, I would like to note that in case of any further questions on the AGM and the topics that have been discussed today, we, of course, remain at your disposal. Please address any questions you may have to Tina Kladnik, from our Investor Relations department. Finally, I would like to thank you each and everyone of you for joining us virtually for this presentation. It has been a great pleasure, and we hope to see all of you soon. We wish you a good rest of the day. Goodbye.