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

Good afternoon, and welcome to the analyst and investor presentation for the third quarter 2021 results of Adler Group S.A. Presenters today are Maximilian Rienecker and Thierry Beaudemoulin, Co-CEOs of Adler Group. Today's presentation is available for download via the icon on the left-hand side of your screen. If you are unable to join the webcast, you can access the presentation from Adler Group's website. The call is also being recorded and made available at the company's website after the call. I would now like to hand over to Maximilian Rienecker. Please go ahead, Max.

Thank you, operator. I hope all of you are doing well in light of the surge of the COVID-19 pandemic we are currently facing throughout Europe. Today, we intend to keep the presentation somewhat shorter than usual as most of the transformational news were already covered and released over the course of October. Now let's start on Page 3 of the presentation. Looking at Adler's operational performance year-to-date, it is fair to say that our performance on the yielding portfolio is very strong. During H1 results, we increased our guidance. And with the strong Q3 performance, we will reach our full year net rental income guidance of between EUR 340 million to EUR 345 million. A similar picture holds true at FFO 1 where we will comfortably reach our guidance of between EUR 135 million to EUR 140 million. Our net rental income increased by 28% to EUR 259 million as a result of the acquisition of other real estate and the strong like-for-like rental growth of 3.9% during the first 9 months of this year. FFO 1 came out at EUR 101.9 million and increased by 36% versus the first 9 months of 2020. Our loan-to-value increased temporarily 57% as we retained the Gerresheim project, paid out our dividend in July and spent CapEx in our development projects. Clearly, this number is not in line with our midterm target, but proceeds from our ongoing strategic disposals will allow us to reach an LTV level of below 50%. Our portfolio has appreciated by 8.7% year-on-year on a like-for-like basis, which is also one of the drivers of our 12.7% increase in NTA to EUR 42.6 per share. The average in-place rent of EUR 6.61 per square meter is the second highest of the larger listed companies in Germany, reflecting the quality and the locations of our portfolio. and is being driven upwards by 3.9% like-for-like rental growth. Vacancy also improved by circa 60 basis points year-on-year to 3.3% at the end of September. As mentioned before, we continue to work on improving our balance sheet on the back of the strategic portfolio review as announced on the 4th of October, which has led us to engage in 2 substantial portfolio transactions of circa EUR 2.4 billion. The proceeds of these sales will be mainly used to reduce our leverage. Now please allow me to hand over to Thierry, who will run you through our operational results on Page 5.

Thank you, Max. As we announced over the course of October, we are currently in advanced stage of negotiation with both LEG and the leading alternative investment firm in order to complete strategic divestment of circa EUR 2.4 billion increased just under 3,000 -- 30,000 residential unit. Both transactions will contribute to achieving the strategic objective of enhancing our focus on Germany top 7 city, while reducing our exposure to medium-sized city in the Central and Eastern part of Germany. We are also making concrete steps in our development pipeline. We are very pleased that the city of Hamburg has given us the urban plan for the Holsten Quartier. This is a very important development project for the city of Hamburg and for Adler. The project is currently in our books at EUR 364 million and requires further EUR 382 million of CapEx. And we are keen to be able to announce that on-site preparative works has started. Moreover, 3 forward-sales projects with a total GDV of EUR 172 million are on track to be completed by the year end, are about to be hand over to their investors. Upfront sales nonstrategic development progress -- projects are also progressing well. In parallel, on our operating performance, the yielding portfolio saw an increase in value of nearly EUR 626 million or 8.7% by the end of September, mainly coming from 3.9% like-for-like rental growth and investment. Vacancy on -- of the portfolio decreased further from an already low 3.9% to 3.3% at the end of the quarter. Now I would like to take you through some more detail on our portfolio, Page 6. Our portfolio is constantly in motion despite the number of units remaining more or less the same. In the last 12 months, we have sold more than 6,000 units located in several cities, while reinvesting the process in high-quality development in Berlin and Potsdam. Since 2018, we have been selling the last strategic part of our portfolio, recycling it into higher quality being reflected in the increase of value per square meter from EUR 1,550 to EUR 2,065 per square meter. When we look at GAV at the end of Q3, we observed a year-on-year value increase of EUR 1.3 billion, mainly driven by the completion and letting of our development project in Berlin regional site as well as a EUR 626 million revaluation on our yielding asset year-to-date. Let's move to the next page. So like-for-like fair value growth increased to 8.7% at the end of the third quarter and is a clear signal of the quality of our portfolio. Compare it versus 1 year ago, our yielding portfolio actually showed double-digit value growth of 12.3%. During the same period, vacancy improved by 60 basis points to 3.3% at the end of the quarter on the back of the disposal of the Omega portfolio, which had 17.6% embedded vacancy rate. Moving now to Page 8. You see that our residential rents are currently at EUR 6.61 per square meter on average which is after the combination of Vonovia and Düsseldorf, the highest in Germany. The 3.9% like-for-like rental growth mainly results from circa 1.3% indexation and circa 2.6% increase from relating at market rent combined with smart CapEx, and we've made a healthy mix between Berlin and others. As you can see on Page 9, we have 14 development projects at the venture of our portfolio in the coming year, only being located in the top 7 cities. Currently, construction is ongoing for 5 projects for EUR 705 million gross development value, of which 36% construction is completed. Let's move to Slide 11, where Max will share more detail on our financial performance.

Thank you, Thierry. Let me quickly run you through the key financials achieved by the end of the third quarter '21. Net rental income was up 28% year-on-year as a result of the full consolidation of Adler Real Estate and the 3% -- 3.9% like-for-like rental growth. Total revenues increased by 5%, while EBITDA from rental activities increased by 26%, which was -- which has been lagging the net rental income growth only marginally. FFO 1 has increased by 36% as a result of cheaper financing costs. Let's move to the next page to go through the developments on our debt side. We've been very active on the debt side, realizing significant reductions on our cost of debt. By the end of Q3, we have issued and arranged EUR 3 billion of new bonds and bank loans out of EUR 8.3 billion of debt at the end of the quarter. Our debt KPIs have improved significantly with our average cost of debt coming down from 3% at financial year end 2020 to 2.1% at H1 2021, and remaining stable throughout the third quarter. Our average debt maturity increased by more than 1 year over the last 12 months, whereas the loan-to-value increased temporarily to 57%, including our convertibles on the back of the retention of the Gerresheim project, the payment of the dividend in July this year as well as CapEx spent on our development projects. The transactions with LEG and the leading alternative investment firm are expected to generate liquidity of around EUR 1.4 billion, which clearly will be used to deleverage and which should lower our LTV into our target range of between 45% and 50%. We do not have any refinancing risk as most of early maturing debt has been refinanced and the remainder of 2021 can be settled using cash on hand. Upcoming maturities are well covered with cash on hand, disposal proceeds and liquidity facilities. We see a favorable secured lending market at attractive terms to further improve debt KPIs, complementary to our corporate bond program. Further cash inflow is expected from receivables, still to sell developments and further capital recycling measures. On the next slide, I will go into more detail on the key financial KPIs. Our total debt is EUR 8.3 billion at the end of the third quarter, which translates into a net loan to value of 55.4% or 57% when including the convertibles and bears an average cost of debt of 2.1%. Almost all our debt is fixed and 62.4% is unsecured, resulting in an unencumbered asset ratio of 130%, which means we can attract another EUR 340 million of additional secured financing. Our bond covenant loan-to-value is at 53.4%, well below the 60%. The secured debt is at mere 21.3% of total assets, whereas the ICR is comfortably at 3.2x, well exceeding the required 1.8x. Let's have a look at the maturity schedule on the next page. As you can see, our debt exploration calendar is backward-loaded with only 3% and 10% of debt expirations in 2021 and 2022, respectively. Most of the 2021 refinancing that we see here has been completed. EUR 95 million convertible at other real estate level have been repaid in July, and the EUR 170 million other real estate bonds will mature in next week and will be repaid with cash on hand. Bank loans worth EUR 30 million are in the process of being extended. And as we speak now actually has been extended, and of the remainder of EUR 5 million has been repaid while EUR 17 million will be repaid using existing liquidity. In April 2022, 1.5% other real estate bond will mature. And in November 2022, EUR 120 million, 4% bonds is convertible -- convertible bond will mature. EUR 237 million of loans are currently in advanced extension discussions. We have ample room to cover both with the expected EUR 1.4 billion of net cash proceeds of the ongoing portfolio transactions. Let's turn to Page 15. Our loan-to-value has shown some swings as a result of the integration of the development portfolio and the retention of the Gerresheim project. Very good progress is being made to reduce the LTV from 57% today to below 50%, following ending sales in the first half of 2022. Since the half year '21, we see a 1.8 percentage point effect on our LTV by the retention of the Gerresheim project at a book value of EUR 270 million, leading to the unwinding of the associated financial assets and investment in real estate companies whilst adding back the project debt. During the quarter, a revaluation gain of EUR 158 million was realized on the yielding asset portfolio only, which lowered the LTV by 0.7%. Accordingly the dividend payment in July, our CapEx spend on our development projects brought LTV to the 57% we post here at the end of Q3 '21. For the remainder of the year, we expect to receive payments from the nonstrategic disposal to LEG with net cash proceeds of circa EUR 800 million. Lastly, we have proper visibility on the final revaluation this year where we expect another 2.2% value increase to materialize in the last quarter of this year. There we're bringing the total up to a solid 10% for the year. Throughout 2022, we will continue our efforts to lower LTV and foresee also the closing of the East portfolio transaction with potential net cash proceeds of circa EUR 600 million expected towards the end of the first quarter next year. Finally, I would like to conclude with a short summary and the guidance for '21 in the next chapter. As indicated during our H1 results, we increased our guidance on both net rental income and FFO and on the back of our strong operational results and happily reconfirm that guidance today. On net rental income, we expect to end up well within the range of EUR 340 million to EUR 345 million, while the increased FFO 1 guidance range of EUR 135 million to EUR 140 million will also be comfortably met. As we have a target of 50% payout ratio, you could derive that the dividend over '21 most likely would come out between $0.57 and $0.60 per share, which is a significant 27% increase from the EUR 0.46 paid last year. For the midterm, we target a like-for-like rental growth of circa 3%. And as explained earlier, we are strongly committed to reduce our LTV to below 50%. Please allow me to end the presentation with a page on recent events. To conclude the presentation, we would like to stress a number of elements that occurred after the closing of the quarter. Firstly, the contemplated portfolio transaction with LEG regarding circa 15,500 units and a total value of circa EUR 1.4 billion is in the final stages of negotiation and could materialize promptly. Secondly, negotiations on the portfolio transaction with a leading alternative investment firm for circa 14,000 units and a total value of above circa EUR 1 billion are progressing well and should lead to a closing in Q1 2022. Then in order to streamline our development operations, we happily announced the appointment of Dr. Bernd Schade, who has been appointed as Chief Development Officer as of November 1. Lastly, and perhaps most importantly, the Board has appointed KPMG's specialized Forensic Accounting Division to review amongst others, certain historical transactions. Adler Group will receive a report from KPMG, upon completion of its review, and KPMG will in the meantime immediately notify Adler Group's Board of any material findings. Thank you for your attention during today's short presentation, and we look forward to speaking to you soon.

That will conclude today's presentation. Thank you for your participation, ladies and gentlemen, and you may now disconnect.