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

Good afternoon, everyone. Thank you all for joining this call now. So today, we would like to provide you with more color on the 2 milestone agreements we have signed with LEG and then open up for any Q&A. We had hoped that we would have been able to announce these transactions together with our Q3 results and to have the opportunity to share the positive news with you and the market. But the finalization of the agreement was still ongoing during our earnings call the day before. We are very conscious that our investors and other stakeholders have awaited an update on the progress of this transaction and also the Q3 result Q&A. But you will appreciate that for legal reasons, we were not able to do so, and therefore, we decided that it would make more sense to do another call post signing and to also address any questions that may exist. We would also like to extend our apologies to the investors and research analysts that have reached out to us yesterday and the day before. We would have loved to speak with you during these days, but hope that this call today provides you with a required color and further details. Now let me hand over to Thierry for a detailed update on the announced transaction.

Thank you, Max. As announced yesterday, we have seen -- we have signed 2 agreements with LEG. The first one relate to portfolio sale of circa 15,500 residential unit located in the northern part of Germany. The initially announced price of EUR 1.48 billion was well above latest book value and has been adjusted slightly downward to EUR 1.42 billion on the back of working capital adjustment and some minor DD finding. This is still more than 10% premium to latest book value. After adjusting for the deferred tax liability of EUR 135 million, the net sales price agreed with LEG is EUR 1.29 billion, leading to a net cash proceed of approximately EUR 800 million, fully in line with the term sheet signed in October. Given that LEG has also agreed to acquire 100% of the share of the legal entity owning the residential unit, EUR 65 million repayment from RETT blocker will also come out as part of this transaction. As such, the total net cash proceeds will be approximately EUR 865 million. As for the second agreement, we have also agreed to sell circa 7% of BCP outstanding share and executed an irrevocable commitment to sell our remaining share in BCP at a price not lower than EUR 157 per share. The agreed price equal to the reported Q3 2021 EPRA NRV per share and imply a 10% premium to BCP Q3 NAV. The cash consideration for 10% of our stake and the irrevocable commitment fees of EUR 7.5 million by LEG is EUR 82.5 million, with payment being made immediately. As you may have seen, LEG reported that they had simultaneously acquired a 24% stake in BCP from minority investor resulting in a total shareholding of 31% in BCP, which doesn't trigger a mandatory offer. However, as LEG mentioned in their investor call yesterday, it is clear that their objective is to acquire 100% of BCP in due course. Via the irrevocable, we commit to tender our remaining holding in BCP to LEG in case they make a cash public offer and exercise the option by end of September 2022. The sale of the remainder of our stake in BCP could result in a total net proceed of circa EUR 800 million, bringing the total net cash proceeds of the announced transaction to approximately EUR 1.7 billion of which more than half is expected to be receiving in the coming weeks. Signing of this transaction has been a key priority for Adler Group over recent months as sell at a premium to our appraised real estate book value illustrate the strong value of our portfolio, the robustness of our evaluation and strengthen our balance sheet with additional liquidity. It's very important to repeat again that there are many investors that have shown interest in part of our portfolio triggered by the significant trading premium for private residential property portfolio. As such, we have only entertained discussion with investors that are willing to pay a premium to last reported value for our asset. We are currently also negotiating the sale of the third portfolio of circa 14,300 units to a leading alternative investment firm for which closing is anticipated for Q1 2022. As announced during our Q2 or Q3 call, we are also in ongoing discussion on the sale of several development projects. For example, the 2stay project in Frankfurt has been sold for EUR 185 million, with the final payment had been received early this week. We will continue to inform the market on further progress on a quarterly basis. Now Max will take you through some of the detail on how the proceeds from the sale will be applied.

Thank you, Thierry, for the detailed explanation and successful sales update. Upon completion, the net -- or the total net cash proceeds from the sales to LEG will add up to approximately EUR 1.7 billion. This would result in a reduction of the loan-to-value by circa 9 percentage points, thus bringing our LTV down to circa 48%, which is already below our midterm target of below 50%. So please bear in mind that this does not include any potential cash proceeds from further disposals currently under negotiation. In terms of cash planning, we envisage to repay credit facilities and bonds maturing in 2022 and also fund specific CapEx requirements. Repayment of these debt facilities would require around EUR 1 billion, with the additional proceeds to be used to fund our CapEx requirements as well as additional repayments of facilities maturing beyond the year 2022. Now as a matter of policy, we do not comment on any speculations and allegations. However, we are conscious that these allegations have become questions for investors, and this is of utmost importance to us. Therefore, we are happy and rather keen to address them through this call in addition to our focus over the last months of addressing the allegations through successful execution of value-accretive transactions. Regarding the question on our portfolio valuations, the recent disposals at a premium to our book value strongly supports our intrinsic value as a company. Our valuation appraisals were conducted by CBRE, a REIT certified independent appraisal firm, which is also the appraisal for a lot of other listed German and also European peers. CBRE will also be performing our year-end portfolio valuations. To add, a, the sale of the North portfolio to LEG at above book value; b, the sale of BCP at 10% above EPRA NAV; and c, the current negotiations of another EUR 1 billion portfolio at a premium to latest book values are testaments to the values we reported and that we, as a company, stand for. Now regarding our leverage and any near-term maturities. As mentioned earlier, all near-term maturities are well covered. We have further focused on strengthening our financing structure and reducing leverage. The LEG transactions alone, as I stated earlier, will lead to a reduction in leverage by circa 9 percentage points getting us to circa 48%, and this is then well below our target LTV of below 50%. Regarding our development disposals. We have already successfully sold a number of our development projects, Thierry was just mentioning, which do not fit our build-to-hold strategy in selected cities. This helped and will continue to help to reduce leverage and also fund build-to-hold CapEx. Definitely, the speed at which we had intended to execute the sale of noncore developments has not been the same post the pandemic. Development projects have more complexity attached to them than yielding assets. Hence, to address the leverage situation, we decided to sell nonstrategic yielding parts of the portfolio and will help to bring down our leverage to below -- and well below 50%. This gives us time to sell the developments at market values with many good discussions ongoing. Now regarding our receivables. We reported our net receivable position at EUR 563 million at our Q3 '21 call earlier this week. And out of the EUR 563 million, the receivables from so-called RETT blockers exceed EUR 200 million. These receivables are expected to be more than halved via the 2 portfolio sales. And the sale to LEG reduced receivables from RETT blockers by EUR 65 million, bringing it to a total of roughly EUR 498 million. So just like with the RETT blockers, all the other receivables to have underlying collateral. We are in discussions with several counterparties whereby we either receive cash or receive the underlying assets. We have started legal procedures in certain situations to strengthen our position and expediate payment. Lastly, we believe that only with results to the market allegations can be truly put aside. But for sake of reestablishing trust with all our stakeholders swiftly and to provide an independent [ stamp ], Adler has appointed a forensic accounting teams from KPMG to conduct a detailed analysis and review. KPMG is mandated to review all allegations made, especially those relating to historic transactions. Any findings will immediately be reported to the Board, whereby any material findings will be published via ad hoc releases with an executive summary of the final report also being published when completed. We do ask for your patience in this regard as the review of KPMG requires utmost diligence and will -- and cannot be executed overnight. We want the analysis to be completed prior to publication of our full year figures. Finally, and as it has been shown in the LEG transaction, the last month has been about prioritizing our activities and time, and we focus on results being priority number one. We are now going to open up for Q&A.

[Operator Instructions] The first question is from the line of [ Alex Super Greenhill ]. Do you have plans to optimize debt reduction via bond buybacks and tenders?

Okay. Thank you for the question. As you -- what have seen as part of the presentation, now the transaction reduced our leverage to well below 50%. And also mentioned we want to first focus on maturities in 2022. As you will recall, we have one EUR 400 million bond maturing in 2022 in April, to be precise, at Adler-LEG level, which we would be repaying from those proceeds. We will have, of course, additional cash flows in excess of EUR 1 billion, and we would use them to repay further debt and also be able to hold CapEx. We would let you and the market, of course, know in due calls for any bond tenders.

[Operator Instructions] The next question is from [ Jonathan Marden ]. From the LEG portfolio transaction, can you please reconcile the EUR 1.48 million value originally disclosed to the EUR 1.29 million acquisition price as disclosed yesterday by LEG? Your press release state the contract was signed in accordance with the 11 October term sheet, but it seems there has not been a change.

Thank you for the question. So the initial announced price of EUR 1.48 billion was well above latest book value and has been slightly adjusted downward to EUR 1.42 billion on the back of working capital and some minor DD finding, which is customary in a transaction of this size. After adjusting for the deferred tax liability of EUR 135 million, the net sales price agreed with LEG is EUR 1.29 billion, leading to net cash proceed of approximately EUR 800 million, fully in line with the term sheet signed in October.

The next question is from the line of [ Jonathan Morgan ]. The PBC (sic) [ BCP ] transaction was a surprise. Can you say whether you're working on another deal? And if so, give a little details of what they are.

Thank you for the question. Yes, we -- as previously announced, we are currently engaged with a leading alternative investment firm in the portfolio sale of around EUR 1 billion. Other than that, we are also in active discussion on disposal of a number of nonstrategic development projects as part of our strategy to reduce our development exposure and to reduce our leverage.

The next question is from [ Daniel Hosegard ]. Thank you for hosting the Q&A. With your quality trading at such a large discount to book value and bounce over 5% yield, do you think it will be value accretive to sell development assets even if they are not fully completed? Have you had any negotiations around the potential of sales on your development assets?

Thank you, [ Daniel ]. I think definitely a fair point. As mentioned, we have already successfully sold a number of our development projects and are also in advanced discussions for a lot of other development projects. Of course, as I mentioned earlier, we tend to have more complexity around it than yielding assets and any of their disposal tends -- to address the leverage situation, we decided to sell nonstrategic [ gearing ] portfolios, and that will help us to bring down the leverage. We will continue to focus on, however, selling the developments.

The next question is from the line of Thomas Neuhold. Can you please provide us with the details about the special audit mandate and scope you agreed with KPMG? Did you also appoint independent third-party appraiser for your property and development portfolio? What's the remaining receivable for the [indiscernible] at this point paid as accepted in September? Why did you decide to grant LEG the option to acquire your remaining stake in BCP? If the East German portfolio and BCP is sold in 2022, what are your plans regarding to use of the net cash inflow? How do rising materials costs influence the strategy and possibility for your development business?

Okay. That was a long question. Thank you, Thomas. But I will try to answer one by one. On the KPMG point, indeed, they will investigate the allegations made in the report and will, in particular, as I said, look into not only valuation but also into historical transactions. On the independent third-party appraiser, you know CBRE and NAI Apollo are both independent appraisers used by us and also our other listed peers. And in our view, there is no need -- and given recent transactions being above book value, certainly, no need for further valuation. The remaining receivables on the [indiscernible] indeed a point we are actively managing. We have seen a payment in -- post Q3 of around EUR 3 million. We are in discussions on the remaining payments, and we will actively manage that in the best interest of the company. Why did you decide to grant LEG the option to acquire? On this point, this was, of course, part of an integral transaction, whereby we sell out right 10% stake of our position, so 7% of BCP, 10% of our stake upfront, and we feel comfortable also that the achieved euro per square meter of -- euro per share on EUR 157, which is a 10% premium to EPRA NAV as per end of Q3, is a great outcome. Currently, LEG owns -- or is about to own 31% in BCP versus 63% held by Adler, which makes us believe that LEG has the incentive and will make a public offer. On the East German portfolio and BCP sold in 2022, are your plans regarding the use of net cash inflow? So on that point, of course, if both get sold, we will get circa EUR 2.3 billion of net cash and which we will be using for, as we said, priority number one, repayment of debt. We have CapEx investments for the first year. And so that is the plan for, let's say, the inflows. But I think here, it is important also to say that it far exceeds our cash requirements, so the inflows, and we might consider further reduction of debt and also distribution of capital to shareholders. How do rising material costs influence the strategy? On this point, for the forward sales, this has an impact on the profitability. Of course, that is what we are managing closely as well as any other peer. On the build-to-hold, the impact of the increases in rents and multiples have exceeded the impact of the increased material costs. So I think that's a very important point to note. I hope that answers your question. Otherwise, of course, we're happy to be in touch with you after the call.

The next question is from the line of [ Helmut Kurt ]. Can you explain the composition of the receivables still left after the LEG transaction?

Thank you, [ Helmut ]. First of all, important to note that all receivables are backed by underlying assets, showed in the Q2 2021 presentation. We have reported receivables of EUR 573 million since Q2 2021 that have a pro forma of EUR 498 million for the transactions now. Discussions on other receivables are ongoing, whereby we either receive cash or [ in force ] receipt of the underlying assets. Since the collateral base often far exceeds the value of our receivables, we are confident that we will be repaid in full. It is, of course, important to note that the recent transactions with LEG have derisked ourselves from any uncertainty in the timing of receipt of cash flows. So the executed transactions provide us with all the short-term liquidity we need, and we still expect the receivables to crystallize soon. In case there is any change to our assessment of the receipt, we would initiate securing back the asset as communicated earlier.

The next question is from the line of [ Svet Trana ]. BCP holds a lower amount of development projects than the overall Adler Group. On that, you will share the amount of development projects to the remaining group. What are done to mitigate this?

Thank you for the question. So this is correct. As part of BCP sale, we are also selling development projects and reducing our exposure to development. Post completion of both transactions, 65% of our GAV will be yielding asset. But the part we have -- the majority part of our development exposure is project which are earmarked for sale. And Bernd Schade, our new Chief Development Officer, which joined us recently and is very experienced in development, will work hard with us on pursuing the sale of the nonstrategic development project for which the first sale has been materialized this quarter, and we will continue to update you on progress on a quarterly basis.

The next question is from Sander Bunck. You mentioned that the assets are sold are roughly 10% premium to book value. Can you also confirm whether these deals will be EPRA NTA enhancing or whatever the crystallizing tax liabilities offset this positivity? What do you expect the NAV has to be? Can you confirm what the impact will be on FFO I on the back of these deals? And can you give an addition -- sorry, can you give an [ addition ] of the impact on cash flows, loss on rental income versus interest expense and CapEx savings?

Okay. Thank you, Sander, for the question. So indeed, it was sold at a premium to book value. Thierry has -- in the slide itself, there's a -- or in the script, there was a breakdown of the purchase price components. On the NAV per share, we do not give an outlook. I think on the FFO one question, so net rental income for the LEG disposal -- asset disposal is EUR 57 million per year. And for -- in terms of FFO, that is roughly EUR 28 million per year. And of course, in light of -- the combination of the transaction, we will provide updated guidance at publication of our financial year-end results.

The next question is from the line of [ Leon Way ]. In Adler Group Q3 '21 cash flow statement, the EUR 315 million of cash inflow relating to short-term loans received, is that the driving on the EUR 300 million revolving credit facility with JPMorgan, Deutsche Bank and Barclays and lenders? When was the EUR 300 million revolving credit facility drawn?

Thank you, [ Leon ], for the question. Indeed, the EUR 300 million RCF was drawn in Q3 and is part of the EUR 315 million you see in the cash flow statement. I think we get a lot of questions on why the RCF was drawn. And so I think I would want to make the point here that it is a risk assessment of being in the position we were to gain as much financial flexibility as possible. So that flexibility actually has supported us. I would recall also at the beginning of the pandemic, of COVID, a lot of corporates have drawn upon the RCF. So similar situations require similar actions in that respect. So drawing the RCF was a risk consideration rather than anything else. With the LEG transaction right now, we have gained, of course, a lot of stability, and we are looking forward to the next steps.

The next question is from [ June Sia ]. How do you mark the choice between paying a special dividend to shareholders versus a share buyback plan?

Look, look, thanks for the question, [ June ]. For us, as we stated, the priority number one is the delevering. So of course, any proceeds from the disposals are going towards the delevering, covers well for, as I said, next year. Of course, we are mindful of current share price. Our EPRA NTA at EUR 42.60 is a, I think, strong signal for our fundamental values as are the recent transactions. So I think, of course, as we stated, we are monitoring and discussing in terms of any excess cash to be used for bond buybacks and/or share buybacks.

The next question is from the line of [ Ella Kutoglo ]. Can you bridge the net cash proceed of EUR 0.8 billion from LEG sales, please? Q3 '21 mentioned project of EUR 380 million. Deal value is EUR 1,426 million. If EUR 135 million is deferred tax liability, that gives me EUR 0.9 billion of cash proceeds.

Thank you, [ Ella ]. You are correct. The gross profit are around the mid-EUR 800 million level, but we foresee to incur some minor transaction costs, which will bring the net cash proceed a notch above EUR 800 million, a figure which was rounding down to the closest 100 and which is in line with previous communication.

The next question is from the line of [ Damian Marshall ]. If you have already reached you LTV target pro forma post North portfolio and post BCP, why do you proceed with the disposal of the other portfolio? Are you contemplating in the end of complete disposal of the company?

[ Damian ], thanks for the question. Of course, a very good point. We've indeed reached our LTV target following the 2 legs of the LEG transaction. However, looking at the share price and trading at such large discounts to EPRA NAV, selling at a premium and reducing debt, spending on CapEx and potentially distributing proceeds to shareholders is the best thing we can do.

The next question is from Crispin Roy Davis. Can you clarify who is paying the EUR 135 million of the different tax liability on the sales of the portfolio to LEG? Is it being paid by LEG or Adler? So is EUR 1,289 million the post-tax price received by Adler or EUR 1,156 million?

So it's -- LEG has agreed to go from 90% to 100% of the entity owning the residential, which will mean they will have to pay the 6% real estate transfer taxes on top of upfront. And we are paying the EUR 135 million deferred tax.

The next question is from the line of [ Vulcan Felix ]. Will the projects Gerresheim and Grafental travel with Brack to LEG?

Thank you for the question. As part of the sale of BCP, we will reduce our development exposure because the project of Gerresheim, Grafental, Grafenberg and Essen, which are part of BCP, will go to LEG.