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

Dear shareholders, [Foreign Language]. On behalf of the entire Board of Directors, I welcome you to this presentation following the 2022 Annual General Meeting of Adler Group S.A. We meet in truly exceptional times, both for the economy and society as well as for our company, the Adler Group. Amongst others, there are 2 aspects I wish to share with you at the beginning. First, in the light of the exceptional circumstances surrounding the COVID-19 pandemic and in application of Article 1 of the Luxembourg Law of 23 September 2020 as amended by the Luxembourg Law of 17 December 2021, on measures concerning the holding of meetings in companies and in other legal entities as amended, the company held its Annual General Meeting today in a nonphysical manner. Shareholders who have committed to exercise their rights at the Annual General Meeting exclusively by appointing a special proxy holder designated by the company. Therefore, we would like to give this presentation now instead of a presentation which we would have ordinarily given at the general meeting and also to report briefly on the outcome of this Annual General Meeting. Second, in light of the allegations made in Viceroy report against our company, we have initiated a special investigation by KPMG Forensic. During this investigation, I was co-opted to the Board on February 16 and became Chairman. I stood for election by the shareholders today as well as the current board for reelection. The results of the special report have been made public in April and we have extensively reported in the public. During my presentations, I had mentioned 5 measures and steps to put Adler Group on track as a sustainable force in the German real estate sector. Today's Annual General Meeting was a very important milestone on our journey of recovery from the most difficult period of Adler Group's systems. The Board did not only stand for reelection, in my case for first election, but it also put forward important decisions for your approval in order to foster structural and procedural changes for a better corporate governance of our company. Today marks, as I said many times over the last 4.5 month, the conclusion of the fourth of 5 measures and steps. As you signed off the changes of our governance, we can pursue with Adler's new strategic positioning in the German real estate sector. Our ambition is to restore full trust amongst all stakeholders in general and you as shareholders in particular. How do we do that? We simply deliver on our promises in a maximum transparent manner. Let me update you on our corporate governance along the lines of Slide #3. Most important to note, we are on our implementation on track. On the left-hand side, it's supported by the timeline, you can see all major recent events and all decisions. I'd like to draw your attention to a the red one, the offered resignation of all 2021 Board members. While I expected the resignation of the former Chairman, Dr. Peter Maser; and the Board members, Ms. [ Aza Akemic ] and Mr. Claus Jorgensen; as well as the Co-CEO, Maximilian Rienecker, I've asked Mr. Thilo Schmid and Mr. Thomas Zinnocker as well as CEO Thierry Beaudemoulin to stay on to continue to serve the company and stand for reelection today. On the right-hand side, you can see that we have successfully appointed Mr. Thomas Echelmeyer as Interim CFO as of June 1 on a consultancy basis. We made changes in the company's organizational structures, named PricewaterhouseCoopers as additional help to improve our compliance system as well as to work on the legal and regulatory situation of Adler Group. And finally, we have initiated a process to name a new auditor for the 2022 financial statement as KPMG Luxembourg is no longer available for us. Our clear aim is to obtain an unqualified audit opinion for the fiscal year 2022. Our tender processes are starting directly after this AGM. It's a matter of course that the events of the last month had caught the eye of our regulators and other stakeholders like the credit rating agencies. Here, we will cooperate in an utmost transparent manner, and will report publicly about any outcomes. Once all final appointments, including the CFO, will have been made and approved by the shareholders, the Board should consist of 5 members. Next to me as your Chairman, Thierry as CEO; and a new permanent CFO. Thilo Schmid should lead the Audit Committee; and Thomas Zinnocker, the Investment and Finance Committee. If I may say this, such a Board will suit the governance of Adler Group and will meet all necessary requirements. The new CFO may be appointed at any future EGM or AGM once we have selected the right candidate. Please allow me also to reflect on our economic situation. It cannot be missed that the economic environment in general and our sector in particular are suffering. The main driver is inflation, the measures or the potential measures to counter it and the accompanying uncertainty. Uncertainty is toxic in stable but capital-intensive business areas like Adler's. The company is reacting to that situation by focusing on liquidity stabilization programs and increasing its flexibility to react in the market. We prepared prudently for every possible situation. I was frequently critical about the complex structure of our group. Please read the delisting notice of Consus Real Estate AG as well as the squeeze out project towards Adler Real Estate AG in that context. This is the beginning of an alignment of these entities, TATA with Adler Group S.A. In parallel, we will restructure the Consus balance sheet as they're principal shareholders in a basically cash-neutral way. As for today's AGM, I'm pleased to report that all the proposed resolutions have been adopted by the majority of the shareholders represented in this AGM. For a complete overview of the resolutions adopted, please refer to the Pages 19 to 22 of this presentation. Therewith, I hand you over to our CEO, Thierry Beaudemoulin, for an update on the recent operational performance. Thierry, please go ahead.

Thank you, Stefan. Also from my side, I thank everyone joining us today for this presentation. Looking at our operational performance, it's fair to say that the company has had a good start of the year, resulting in strong Q1 2022 figures. So like-for-like rental growth in Q1 2022 has been 2.1% year-on-year, resulting in an average rent of EUR 7.46 per square meters per month, reflecting the high quality of our assets in our [ Berliner ] base. Putting the number into perspective, since 31 December 2021, our yielding portfolio has experienced a plus 1.4 like-for-like fair value uplift. The vacancy rate continue to be at all-time low at a level of 1.2%, a substantial decrease from 3.8%, years ago. Net rental income came in at EUR 71.1 million compared to EUR 84.3 million in the first quarter of 2021. Funds from operation from rental activity totaling EUR 29.7 million compared to EUR 32.3 million in the same period of 2021. These correspond to FFO 1 per share of EUR 0.25. Both NRI and FFO 1 were mainly impacted by the reduction in our yielding portfolio due to the complete disposal of 15,500 unit to LEG. The ongoing sale of 14,400 unit to KKR/Velero, which is now 97% completed, will affect our KPI in Q2. The EPRA NTA as per March 2022 amount to EUR 4.1 million or EUR 37.7 per share (sic) [ EUR 35.7 per share ] compared to EUR 4.26 million or EUR 36.3 per share as per December 2021. The loan-to-value ratio of Adler Group was broadly stable at 52%, 50.9% at the end of 2021. We continue pursuing a sustainable financing strategy with an LTV target of below 50%, more than half of the debt expiration in 2022, but extended or repaid already in April 2022, including the EUR 400 million Adler Real Estate maturing bond. Our EUR 760 million cash balance, and I'm talking Adler Group cash, excluding BCP puts us in a strong liquidity position to continue our operating activity as well as servicing our debt obligation. Meanwhile, our cost of debt continued to be stable at 2.2% remaining at the same level as the end of December. On the development activity, we have made significant progress since the start of the year in our effort to strengthen our balance sheet and reduce our development exposure. Projects in the material construction level will be finalized with the sales of land bank and early construction project. In Q1 2022, the Magnolia in Leipzig Condominium and forward sale project have been successfully hand over to the buyer. The sale of Späthstraße has been signed in Q1, while LEA B has been signed in April 2022. Furthermore, additional progress had been made on the Covent Garden, Eurohaus, UpperNord Tower and Office project where exclusivity has been granted and the LOI has been signed. Plans approval for Holsten Quartier and VAI Campus are under discussion with respective municipality. While at the same time, alternatives are being explored. I turn to Page 5. As a result of the significant disposal of nonstrategic part of our portfolio, the quality of our remaining portfolio continued to improve with most of the assets anchored in Berlin. Out of 27,000 units in our portfolio, close to 20,000 are located in Berlin. This high quality of our portfolio is well reflected in the fair value per square meters. As per March 2022, the fair value of our standing portfolio stood at EUR 3,060 per square meters. As an illustration, this represents 58% increase compared to Q1 2021 before the portfolio disposal. Let's move on to the next page. As per March 2022, the total interest-bearing nominal debt amount to around EUR 7.6 billion. Due to further proceeds from disposal of investment property, the liquidity position of Adler Group grew by more than EUR 200 million over the last 3 month to a solid EUR 760 million as per March 2022. More than half of the debt expiration in 2022 are repaid on schedule or extended, including the EUR 400 million Adler Real Estate bond, which matured in April this year. The loan-to-value of the group stayed broadly stable at 52% compared to 50.9% at the end of 2021. The slight increase is mainly attributable to closing effect related to the sale of the Eastern portfolio to KKR as well as interest and CapEx payment. In addition, we currently expect that the sale of Kreuzstraße project, the buyback of Partners Immobilien Capital management and the anticipated sale of BCP will bring us to an LTV of 47.2%, below our target of 50%. As at Q1 2022, our average interest rate on all outstanding debt is 2.2% with a weighted average maturity of 3.7 years. We are monitoring our covenant on a permanent basis, and we'll react swiftly if problems occur. We have had meeting with most of our bondholder by value and will foster this very constructive dialogue. Now let's continue with our outlook for full year 2022 on Page 7 and 8. The recent disposal of yielding assets to LEG, Velero, KKR as well as the anticipated public takeover of BCP by LEG are the biggest driver for estimated net rental income in full year 2022. On the next page, you will find the estimated development of FFO 1 in the course of full year 2022. A word on BCP. All 3 participant in the prospective sale BCP, Adler Group and LEG are stock listed, so that's limit my remark. The economic case is clear and well known. We are all in a very constructive discussion to create a win for everybody. Now please follow me on Page 9. We would like to reiterate our previous outlook and continue to expect to report between EUR 203 million and EUR 212 million of net rental income over 2022, which should result in EUR 73 million to EUR 76 million in FFO 1. With regard to current and future sale, the headwind in the market is increasing. Nevertheless, achieved book price are still oscillating around the fair market value for a single project. Portfolio sale under pressure due to difficulty of buyer to raise equity. So we expect moderate discount. We are also selling a few development project at a moderate loss to valuation to avoid disproportionate risk in the future. To summarize, we have had a strong operational performance in Q1. The yielding asset portfolio value increased by EUR 79 million, resulting in plus 1.4 like-for-like value uplift the first 3 month of 2022 on the back of plus 2.1% like-for-like rent increase. Operational vacancy of the total portfolio stands at a low level of 1.2%, solid financial position with circa EUR 600 million cash balance end of May. And finally, our outlook for 2022 has been reiterated. Please join me briefly to Page 11 and 12 where you will find a simplified version of the 2021 financial statement. The full statement can be found in our 2021 annual report on the Investor Relations section of our website. As you are aware, the financial statement have received a disclaimer of opinion from our auditors. On Page 11, you can see that our net rental income in '21 has grown from EUR 293 million to EUR 346 million on the back of the consolidation of Adler Real Estate in April 2020, partly offset by various disposal throughout full year of 2020. The loss for the period of EUR 1.16 million include the effect of an impairment of the goodwill relating to the acquisition of Consus in the amount of EUR 1.08 million within other expenses. The need for impairment was mainly due to effects from increased construction costs and a significant reduction in the expected project development volume. On Page 12, the balance sheet reflect the impairment of the disposal of the Northern portfolio to LEG and the reclassification of the available KKR and BCP portfolio to noncurrent assets held for sale. The goodwill relate to the acquisition of Consus and was tested for impairment as per end of 2021. Following the impairment, the remaining goodwill in the consolidated balance sheet of Adler Group as per 31 December 2021 amount to EUR 91.4 million. The following page show our financial KPI for full year 2021, which we covered in our Q1 2022 current trading update at the beginning of this presentation. Now turning back to you, Stefan.

Thierry, thank you. For a complete overview of the adopted resolutions, please refer to the Pages 19 to 22 as I mentioned before this presentation. The detailed voting results on each resolution will be published on the Adler Group Investor Relations website later this afternoon. Dear shareholders, [Foreign Language]. My colleagues and I would like to thank you for your endorsement and your trust. We will do our utmost to implement our strategy for Adler. It's our conviction that until an unqualified audit opinion and the squeeze out of Adler Real Estate as executed, the company has to consider further sales to cover upcoming financial obligations. Nevertheless, a significant gap to the current market capital stay even if the current market situation will result in less pressure on asset values. Ladies and gentlemen, I hereby end our presentation and my remarks, and we thank you all for joining us virtually. For any questions that might arise, I refer you to our Head of Investor Relations, Gundolf Moritz. All the best, and have a good day.