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

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the LEG conference call. [Operator Instructions] I would now like to turn the conference over to Mr. Frank Kopfinger, Head of Investor Relations. Please go ahead.

Thank you, Nairobi, and good morning, everyone, from Düsseldorf. Welcome to our call and our transaction announcement, and thank you for your participation. We have, as always, on the call our entire management team with our CEO, Lars von Lackum; our CFO, Susanne Schroter; as well as our COO, Volker Wiegel. You'll find the presentation document, as always, within the IR section of our home page. Please note that there is also a disclaimer, which you'll find on Page 3 of our presentation. And with this, I hand it over to you, Lars.

Thank you, Frank. Also, a warm welcome from my side. Last night, we announced two deals, which will significantly improve our positioning in our target markets. At the same time, these transactions will also allow us to tap future substantial earnings potential. The portfolio deal with Adler Group allows us to double our footprint outside our home market, North Rhine-Westphalia. Additionally, we significantly increased our asset base in Lower Saxony, Schleswig-Holstein as well Bremen. This makes us one of the leading players in these locations although we have entered some of the markets not more than 2 years ago. Moreover, I am happy to announce that we have secured a road to majority in BCP. BCP is a Dutch company with a listing in Israel and a very strong German residential portfolio of around 12,000 units, most of it located in our target markets. We're enabling a new market entry. By buying a total of around 31% from existing shareholders and by securing a call option for another 63% from Adler, this puts us in a strong position with BCP going forward. The deals are done on the back of our strong balance sheet, allowing for a fully debt-financed transaction. The deals are accretive from an FFO I as well as an NTA perspective. Concerning earnings, we raised our guidance range to EUR 475 million to EUR 490 million from previously EUR 450 million to EUR 460 million. Both deals provide us with free optionality to tap further growth potential going forward, and Volker will share some examples in more detail. Let me now move to the next slide to give you an overview of the portfolio acquisition. We acquired 15,400 units in our core markets outside our home market, NRW, namely in Lower Saxony, Schleswig-Holstein and Bremen. We acquired a very concentrated portfolio. The top three locations, Wilhelmshaven, Wolfsburg, and Göttingen, make up for almost 60% of the portfolio. 1,300 units are earmarked already as noncore, mainly units locations -- in locations in Southeastern Germany. These are up for disposal within the next 12 months. The portfolio is geared towards the higher-yielding markets. A share of 50% is located in such markets. On Slide 11 in the appendix, we have provided some pro forma information on how the year-end portfolio will look like taking this acquisition into account. From a technical perspective, LEG acquires 100% of shares of a total of 13 asset-holding companies and will pay full real estate transfer tax on the deal. The acquisition price amounts to EUR 1.3 billion. On that basis, the transaction is priced at a 19.8x net cold rent multiple. Transfer of ownership will take place at year-end. Therefore, the units will fully contribute to our profits in 2022. The FFO I contribution for 2022 is expected to be around EUR 29 million. This number does not include synergies as we wanted to present a realistic picture for year 1. However, we certainly see significant bottom line growth potential within this portfolio and expect the FFO I contribution from this portfolio to grow by at least 30% within the next 5 years. Volker is going to catch on these growth potentials within the following slides. I am happy to hand it over to him now.

Thanks, Lars, and also good morning from my side. I'm now on Slide 5. Overall, we believe we are the best owner when it comes to affordable living. By that, we are the preferred acquisition partner when it comes to this asset class. We bought more than 6,800 units in Wilhelmshaven. This represents 44% of the acquired portfolio. Wilhelmshaven will be one of our biggest locations in a group context and will be a top relocation within our higher-yielding markets. Wilhelmshaven has similar market characteristics to our other top markets like Duisburg and Gelsenkirchen. So this is why we feel very comfortable with the location, the product and its tenants. We see potential there for modernizations for managing down actively vacancy levels and from realizing synergies by integrating them into our platform, like customer and craftsman services. Additionally, the portfolio will also offer growth potential for major investment projects, which are shown on the next slide. We will continue a very comprehensive modernization program in Wolfsburg and Göttingen. Both locations are among the top locations within this portfolio. This CapEx program will affect around 2,200 units, which represents 14% of the acquired portfolio. We will modernize and energetically refurbish the units and will increase the number of flats by almost 500 units via redensification, heightening and enlargement of buildings. We will add more than 3,500 new balconies and 375 new parking slots and will increase the overall lettable space by over 24%. Our LEG foundation will also be part of the revitalization program and will implement a diverse mix of social initiatives. For this reason, we are proud to announce that we contribute another EUR 5 million to our foundation after EUR 16 million in 2019. Overall, we will increase the quality of those locations significantly while increasing the rentable space. The programs have already been started last year and are expected to be completed in 2026. The overall investment spend is EUR 280 million. Those two bigger investment programs are the driver behind our increased investment guidance for 2022 and at EUR 2.75 per square meter overall. Let me now move to Slide 7 to provide you with some background on BCP. With today's transactions, we could secure a clear road to majority in an attractive asset. We bought a total of 31% from current shareholders, around 24% from Israelian minority institutional investors and around 7% from Adler Group, the majority shareholder of BCP. This stake has been acquired at a discount of around 4% to the last reported NTA as of September 30, 2021. Additionally, we secured a call option from Adler on its remaining 63% stake in BCP, which we can exercise any time between January 2022 and end of September 2022 at a strike price of EUR 157 per share, representing a 10% premium over the Q3 reported NTA. We believe that BCP is a highly attractive asset, which fits perfectly to LEG. BCP is a Dutch residential company, which runs a very attractive German residential real estate portfolio with more than 12,000 units. The BCP portfolio complements our existing LEG portfolio, and it offers additionally -- additional opportunities to enter attractive new regions. Additionally, BCP runs on a strong balance sheet with an LTV of around 36%. At the current shareholding level of around 31%, the stake will be accounted for under an equity method. And this -- with this, I hand it over to Susanne for the financing of the transaction.

Thanks a lot, Volker. I would like to provide you with some details around the financing of those two deals. We currently foresee to pay all-in costs of around EUR 1.38 billion for the portfolio transaction, which was based on a gross asset value of EUR 1.291 million (sic) [ billion ]. As a first step, as it is common practice, the portfolio acquisition will be financed by average financing of EUR 1.38 billion. We are currently planning to refinance that bridge with a combination of debt instruments and the disposal of noncore units. The acquisition of the 31% stake in BCP will be financed from existing liquidity. Based on today's transactions and taking our expected valuation uplift for Q4 '21 into account, our pro forma year-end LTV stands at 42.6%. We believe that this transaction represents a major opportunity as it represents more than 2x our usual annual growth ambition of 7,000 units. Together with our 2021 transfers, which we have already shown you with our Q3 reporting, our portfolio growth by more than 22,000 units is adding around EUR 47 million in FFO I. This represents a growth of more than 11% in FFO I just from those acquisitions alone. If we take net debt to EBITDA on the basis of the last 4 quarters into account, then our ratio stands at 12.6x at year-end. With this, we still feel very comfortable as this number will decrease once the EBITDA contribution from the 22,000 new units is taken into account. And with this, let me briefly touch on the changes in our guidance on Slide 9. As you see, we only changed our FFO I guidance for 2022 and increased the range from 400 -- to EUR 475 million to EUR 490 million from previously EUR 450 million to EUR 460 million. This follows our conservative approach on the integration of that substantial portfolio into our platform. Additionally, we increased our CapEx guidance to EUR 46 to EUR 48 per square meter. While the expected average CapEx for the Adler portfolio is in line with LEG's existing portfolio, the increase is purely driven by the modernization projects in Wolfsburg and Göttingen, representing EUR 2.75 per square meter for 2022. Otherwise, we leave our KPIs unchanged. Our target for 2021 remain unaffected as the portfolio transfer only happens at year-end. And with this, we come to the end of our presentation, and we are now happy to take your questions.

Thanks, Susanne, and I hand it over to you, Nairobi, to lead us through the Q&A session.

[Operator Instructions] The first question is from the line of Rob Jones from BNP Paribas Exane.

Firstly, thank you very much for giving analysts and investors the opportunity to ask questions. I think that's really important, so thanks for that. There's a couple from my side. So one is on the financing of the acquisitions you're making at the moment. It's obviously been very clear, financed through noncore disposals and debt. When we look through 2022, if you end up in a scenario where, obviously, you exercised the option on the Adler remaining stake in BCP, is it not unreasonable to assume that at that point, you might need to raise equity? Is it convertible bundle option? And then the final question from my side was around the portfolio revaluation for 2022. So interestingly, you've given all the range in terms of your expectation for 2022 portfolio revals then get to that pro forma kind of 42% as of end of next year. Can you give us the percentage that's the midpoint for your assumption in that graph? My eyes aren't accurate enough to try and calculate that in terms of that slide.

Thanks a lot for the two questions. So taking the first one on financing. We are currently focused on really financing the acquisitions we have made. I think we will cross the bridge on the financing of the potential option exercise as and when we get to it. And as usual, we will look at all options available at that point in time. On the second question, revaluations. As you are aware, we will not give specific guidance for '22 valuation expectations. What I can say is that we have assumed a conservative number, which is well below the average of the last few years that we have seen.

The next question is from the line of Pranava Boyidapu from Barclays.

I wanted to understand the portfolio that you just acquired from Adler a little better. I think in Q3, you mentioned that you were looking at a EUR 1.5 billion portfolio. I was wondering if that's because you've looked at the portfolio and chose to take a smaller amount of what you like. Or is it that this has always been the GAV and you were considering a higher acquisition price?

Yes. Thanks a lot for your question, Pranava. So the portfolio has stayed unchanged. So we were always looking at the 15,400 units, which we have signed tonight. So there was no change to the portfolio. The price has changed, as always, in such processes as you can easily think. So we had a deep look into the portfolio. And finally and found the one or the other thing, which is around technical things, tax things, et cetera. And then the bargaining starts, and therefore, the resulting amount, which we are now going to pay, is around EUR 1.3 billion. So exactly as Suzanne has explained during the presentation. So it's not that we sized the portfolio down in any way.

So just to clarify, is that below the book value then?

No. So with regards to book value, I think, unfortunately, I cannot give you an answer. You should ask that question, please, to Adler. I can only make a reference to what the final price has been, but I'm not aware of the book values of -- on the other side.

The next question is from the line of Marios Pastou from Societe Generale.

Just a quick question from my side on the acquisition of the Adler portfolio. At the time of the announcement, I think it was mentioned that you were considering a potential share deal acquiring a lower percentage to avoid costs and taxes. Is there a reason why this has now been structured in this way? Can I just confirm the full cost and taxes included within the parameters of the transaction within your Slide 8?

Yes. Thanks a lot for your question, Marios. So the political situation has changed. So concluding from the bigger deal, which is going on in the market, you were seeing that political repercussions have been extremely negative on structuring deals without paying real estate transfer tax. As -- anyhow, most of the deals we are doing are either asset deals or share deals where we are acquiring 100% and anyhow pay real estate transfer tax. We thought ourselves to be well advised to also pay full tax on that deal. So therefore, that was one of the reasons. The other reason is if you look in the coalition agreement, you'll find a statement there that the share deal exemption on RET should be deleted over the course of the next month. Also, that is something where we think we are well advised to not now go into that direction. And finally, as a residential real estate company, we very much benefit from the infrastructure investments of cities and of states and certainly the federal state here in Germany. Therefore, it's also something which we consider to be as good corporate citizens to pay the real estate transfer tax on that transaction. To your second question, whether it's included in all the figures, yes, it is included in all the figures, which we have included in the presentation.

Great. So it's the EUR 88 million effectively on that particular slide.

Exactly. Exactly. Yes, EUR 88 million. That's the number.

Next question is from the line of Marc Mozzi from Bank of America.

I have essentially two questions from my side. Number 1 is how that works, the 36.6% LTV you're quoting for BCP because I'm not sure I'm capable to get that number if we divide basically or multiply basically your rental income by the multiple. Then we find EUR 1.3 billion of cost-added value. And I'm not sure exactly how you can [ sell ] with 36.6% LTV here. That's my first question. And number two, how do you intend to finance this option of the 63% on BCP plus, something you haven't discussed yet, the 7,000 units I get you're still targeting to acquire in 2022?

Thank you, Marc, for the question. So on one, this number actually comes from the Q3 presentation that Brack Capital is publishing. It's available online if you want to refer to that. On the second question, I think I already mentioned that we will discuss and consider the financing of the potential option exercise as and when we get to it. I think you rightly point out that we, of course, will continue to look at other growth opportunities as well. And any sort of financing, we'll need to take into consideration the opportunities we have as well as market conditions in the respective financing markets that we have available to us. And therefore, we can't speculate about this right now. We will look at it when it is relevant.

As a follow-up question, maybe. Are you comfortable to stay at your maximum LTV range of 43%? Or do you -- or let's put it differently, the net debt to EBITDA above 14x? Or do you feel that a more normal level of LTV should be closer to 40% and net debt to EBITDA around in 11?

Yes, Marc. Look, so I think if you refer to our slide on the financing that we published, we expect that naturally, the LTV will firstly reverse back down from the 43% anyway. I think we have a guidance, which is 43% maximum, which also means that we obviously are comfortable to work within that range. Otherwise, we would reduce it to 40% if that was our real target. And when you look at net debt to EBITDA, clearly very important. And I've mentioned that on a number of occasions, we focus on that as well. But the problem with net debt to EBITDA is that it is backward looking. So for example, for this year, we have all the debt for the financing for the acquisitions we have made already reflected, but we don't have the EBITDA contribution yet. So that also will normalize over time when the EBITDA contribution is fully reflected. But clearly, both numbers are relevant, and we will look at both.

Okay. And just to make things absolutely clear for everyone, are you maintaining and reiterating your guidance to acquire 7,000 units on top of all the transactions you announced this morning?

Yes. Marc, as you can easily imagine, I think we are very, very proud that tonight, we've been able to just do the signature on a transaction with 15,000 units. That's pulling in front the acquisition, which we normally would have strived for 2 years. So with a lot of quietness, we will look at the opportunities which come up in the market. Certainly, the 7,000 unit stays in place for next year, but how we will get there, whether it's the acquisition of BCP, whether it's some other opportunity in the market remains to be seen. But yes, we stick to the 7,000 of how we get there. That's still uncertain.

Okay. And sorry, another final question from my side. What is your current pipeline for the acquisition?

Excuse me. I didn't want to cut you short.

I just wanted to be aware and you guys to share with us if you are currently having the pipeline of your acquisition and how large it is.

Yes. So current pipeline has diminished a bit. So unfortunately, we needed to drop the one or the other deal over the course of the last weeks. That was not on purpose, but unfortunately, there has been the one or the other. We've been very active in the market. Pressure was quite high to really reach acquisition targets for 2021. So we unfortunately needed to drop the one or the other deal. So pipeline currently looks a bit lighter than during our last call. We are now talking of a pipeline of around 1,500 units, but that's very volatile, as you can easily imagine, of how much we are really. Then being able to sign remains to be seen over the course of the next weeks and months.

The next question is from the line of [indiscernible] from [indiscernible].

This is [ Jan ] from Kempen. I guess a lot of the relevant questions have been asked. But I'm just looking at Slide 8 and would be interested to know the underlying assumptions under expected valuation uplift 2022. What kind of percentage did you pencil in there to arrive at the 42% level? And also, what amount of euro amounts around disposals and acquisitions? Also keeping in mind, of course, that this doesn't include the kind of at least EUR 600 million you need to still spend on the -- if you lift the option on BCP, which I guess, is fair to assume you will.

Yes. So I think on expected valuation, I already mentioned we won't give guidance for 2022. What we can say here is that we have assumed an uplift for the full year, which is well below the average we've seen over the last few years. So in our mind, a sort of conservative approach. And also, with -- when it comes to acquisitions as well as disposals, we have included ranges, as is highlighted by the faded lines in the chart. I think with disposals, it's always hard to assume an average in our portfolio, [ Jan ]. So that's as much as we can say.

All right. And then did I understand correctly because I think I heard you say EUR 47 million FFO contribution? Is that including the pro rata FFO contribution you expect from back capital?

So the EUR 47 million is the 15,000 units we have just announced from Adler as well as the acquisitions we have already signed in 2021, which are also, to a large extent, only transferring now in the fourth quarter or towards year-end. It does not include contribution from the pro rata stake of Brack Capital, and as Volker highlighted, this will be accounted for as equity, which means there will not be a contribution to EBITDA and also not to FFO.

So you won't report that as financial income.

It will not be. It will be -- we will report the revenue as proportional to the percentage of equity investment but is not included in EBITDA and in FFO.

Next question is from the line of Kai Klose from Berenberg.

I had a quick question. How you see BCP's activities in development and the residential development and retail parks? How these activities would influence your decision to call the option or not? And the second question, if I see that correctly, BCP has around, I think, [ 3,000 ] units or so in -- sorry, [ 4,000 ] units in Leipzig. And now from the Adler portfolio, the properties in Eastern Germany you want to sell. Would you regard BCP's asset in Leipzig as core or also as noncore?

Thank you, Kai, for your questions. So with regards to BCP and the development as well as retail parks, you know that we have just taken the decision to increase our development targets going forward from around 500 units per annum to 1,000 units per annum as of 2026. We consider especially some of those development projects in the pipeline of BCP of high interest to us. They are in our core regions in Aachen, in Düsseldorf. So therefore, that's something which we like and certainly have looked at before now buying into the 31% share. We also had a look at the new retail parks. That's certainly a business in which we have not been doing for the time being. That's something where we would definitely think about. It's something which is not close to residential business. So therefore, we do not see too many synergies. Might be something which we are willing to then sell off if we would really use -- make use of the call option. Second question with regards to the BCP and the 3,500 units in Leipzig, you are absolutely right, and that was one of the references we made during the presentation. And we think that those assets are highly attractive and that we definitely would love to look into that. And most probably if we are calling, and then we definitely would stick to those -- this Leipzig portfolio that would be considered core then. And we would certainly, while making the 1,000 threshold and while it is in an orange market, definitely consider this to be a natural extension of our strategy. With regards to the assets which we are planning to dispose of, you are also right that most of those 1,300 units, which we are bringing to the market in the southern eastern part of Germany, they are of a different nature. They are not in one of those bigger growing cities, and therefore -- and we think that is something which is just too small to have own operations there. So therefore, and we anyhow need to manage them via third parties. That's quite a costly exercise. We are not prepared to do that. So it's just really for an intermediate time, and we are then going to sell off those assets.

The next question is from the line of Thomas Rothaeusler from Deutsche Bank.

Just one follow-up question on BCP. And is it possible that you provide a bit more color of what's the operational upside you see from this portfolio? Also, maybe average rent level just to get a bit of view on the quality locations.

Yes. So thanks a lot for the question, Thomas. I think we should talk in more detail about BCP if and when we are exercising our call option. From the outside and from what we have seen during our due diligence, it is a very strong portfolio. And if you look at where those locations are, it's Kiel, it's Bremen, it's Hanover, it's a lot of North Rhine-Westphalia, which is certainly close to our heart, and it's Leipzig. All of those regions offer substantial rent increase and potential. And so it's a portfolio different to the one portfolio we have just bought from Adler not weighted toward higher-yielding assets but more to the high-growth part. So therefore, you are right to assume that the rent increase potential there is substantial, and this is something which we, from our perspective, can already and say, yes, we share that view.

Maybe last one on Brack. I mean, what is the portion of the nonresidential part?

The nonresidential part is quite small, so it's just 4%.

The next question is from the line of Andres Toome from Green Street Advisors.

I was just wondering what's the potential for vacancy reduction in the portfolio you bought from Adler going forward.

Andre, I have to take this question. We share our view on the FFO increase. So we expect a 30% uplift in FFO on the portfolio within the next 5 years. And we also want to reduce the vacancy by 210 basis points within the next 5 years.

Yes. And how much of the kind of CapEx expenditure you need for that? I guess, is that all coming from what you've described on Slide 6 with the modernization measures?

Well, it's what we also spent on our LEG portfolio, so the bottom line is the same CapEx spend as we have for our existing portfolio with the exemption that we have the two bigger modernization projects in Wolfsburg and Göttingen where I elaborated on the effects on the CapEx spend this quarter.

Perfect. And then maybe last question, just to understand what makes Wilhelmshaven an attractive location in your view because it seems to have quite a large weight in the portfolio?

Well, sure. It's a high-density portfolio. It's very attractive to manage. It has a good technical quality. It has characteristics as we have in Gelsenkirchen we have on Slide 6 or Slide 5, excuse me. We have our track record shown on vacancy reduction in these markets, and we expect and are convinced to show and to deliver on a comparable track record in these markets and are convinced to generate attractive yields in this market.

[Operator Instructions] The next question is from the line of Keshav Prasad from King Street Capital Management.

Thank you for the detailed announcement around the two Adler transactions. I have a couple of questions. Firstly, on Page 4, is there any further breakdown you can provide on the proportional purchase price across the locations? And then secondly, as it relates to both the transactions, why would you not wait in order to buy these at deeper discounts, considering the financial pressures that Adler faces?

Yes. Thanks a lot, Keshav, for your questions. So first of all, we are not prepared to share a deeper analysis of the purchase price being paid per location. But as always, we will give more details then and during our full year numbers on different locations and we have in our portfolio. And then you will easily conclude of what has been included newly and with regards to those locations. With regard to transaction, as you know, we are real estate buyers. So our focus is always on the portfolio and then buying exactly the type of product which fits perfectly our platform. From our perspective, the portfolio we were looking at, the one we have just bought as well as BCP are exactly in line with those requirements. So therefore, we are not prepared to buy on a top level, shares while we are not knowing whether we really have the chance of taking over on or not, but we are doing secure deals on a real estate asset level, and we do a strong quick and very focused integration in our platform. From our perspective, that's more worthwhile for ourselves than trying to do an M&A deal in the market.

The next question is from the line of Thomas Neuhold from Kepler Cheuvreux.

I have two follow-up questions. Firstly, on BCP. I was wondering why you didn't acquire 100% immediately. Was the deal structure request by Adler Group? Or was it your deliberate decision to acquire this 31% stake now and get the option for the rest? And if that's the case, why did you decide to do so? And the second question is on the quality of the acquired assets. Apart from the two large modernization projects mentioned in the presentation, is there any other sizable modernization maintenance backlog in the portfolio?

Thomas, very happy to take your questions. On the first question, why we did not acquire 100% immediately. As Lars already pointed out, we really strive to integrate -- thoroughly integrate the portfolios into our existing platform and to onboard all people in the different roads and to have everything working. So that's why we choose here for -- chose for a more staggered approach to first integrate the 15,400 units and then to have a look at the second option but while also securing our foot in the door. And on the second question on technical condition, it's more or less like we have in -- what we have in our own portfolio. So there's no significant difference.

Next question is from the line of Robert Pohlhausen from Astaris.

Which development properties does Brack include at the moment?

So with regards to Brack, they are certain that the biggest plot is the Gerresheim plot. But there are also others like Grafental. There is a plot in Aachen and some other development products.

There are no more questions at this time. I hand back to Frank Kopfinger for closing comments.

Thanks for your question, and thanks for your participation. And as always, should you have further questions, then please do not hesitate and give us a call or write us an e-mail. Otherwise, please note that our next scheduled reporting event is on March 10 when we report our full year 2021 result. And with this, we close the call, and we wish you all the best and hope to see you soon. Thank you, and goodbye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.