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

Good morning to everyone. My name is Gundolf Moritz, and I'm Head of Investor Relations at Adler Group. I would also like to welcome all participants on the Internet as well on the phone call to our H1 2022 results presentation. With me today are Stefan Kirsten, Chairman of the Board, Thierry Beaudemoulin, CEO; and Thomas Echelmeyer, CFO becoming effective on Thursday. They will guide you through today's presentation. [Operator Instructions] In total, we have scheduled up to approximately 1 hour for the call. At the call itself will be recorded and made available on our website after the call. And as always, of course, I would like to draw your attention to the disclaimer slide at the end of the presentation, which you can download on our Internet. With this, I would like now to hand over to Stefan. Stefan, please.

Thank you, Gundolf. Dear investors, the stakeholders, ladies and gentlemen, I hope that you have all had enjoyed the summer holiday, and I'd like to thank you for joining today's call. After quite exhausting first half year for the company and the holiday now, it's good to be back. Please join me on Page 4, where I will run you through some of the key highlights from a corporate governance perspective, and I'll limit my comments today to corporate governance. On the year-end order, the tender process was started immediately after the AGM in June, which has now been completed, although unfortunately not leading to any results. This was disappointing, but not surprising for us. Therefore, we are currently in direct contact with a number of auditing companies. We can assure you all that the Board and the management is fully engaged, and we are doing our best to find an auditor with the goal of having audited financial accounts for the fiscal year 2022. We will keep the market posted when we have a reportable outcome. On personnel, we have now added to our senior management team. I'm happy to announce the appointment of Thomas Echelmeyer as we did within a talk note yesterday as a CFO, shutting his interim role and becoming a permanent fixture for the group. With his expertise, especially in the real estate industry and as an auditor, he is exactly the right man at the right time for Adler. In the few months as an interim CFO, he has demonstrated all capabilities and leadership to bring Adler forward. And the Board will also put him forward for Board membership at the next AGM or EGM. This is not happenstance, ladies and gentlemen, as a result of the search process with more than 30 candidates interviewed of a longest of 200 culminating and 4 highly qualified individuals whom we interviewed through the Board, and this was one-by-one exercise. So congratulations, Thomas, and we will hear from him later. A few remarks about outstanding Board Projects. White & Case by the way, peer reviewed by Linklaters, are still coming through the forensic special report, no findings so far which will lead to any liabilities or legal action. We will keep the market posted as soon as any action derives from this exercise. PricewaterhouseCoopers has nearly -- has been nearly through with the analysis of our compliance system. The result is quite positive. We're tying down the last loose ends in the diagnosis phase. We will then identify with PwC to gather the remaining gaps and close those in due course, also everything on track. Lastly, the Board of Directors, together with management, started the announced strategy review process today here from Luxembourg, this call is from our Board offsite meeting. We are having a 2-day offsite with advisers, which will be followed up by a series of meetings so that we are able to present to you as previously indicated, results from the process with or around the publication of the consolidated results for the third quarter end of November 2020. That's it on government. And now please allow me to hand over to management and especially to Thierry. Thierry, please.

Thank you, Stefan. Also from my side, I would like to thank everyone who is joining us here today on the call. And you are well aware, the last few months have not been an easy ride for us. We have had to work on making important decisions and take numerous steps to reshape the group and [indiscernible. Slide 5 show very clearly that we have been busy, but also that we have made significant progress on our corporate governance. On the simplification and reorganization of our structure and also our disposal program. I will not go through all these events, and Stephan already touched upon the corporate governance, but please allow me to touch upon a few items. On the group reorganization, we have announced the upcoming delisted of Consus as well as a squeeze-out of ADLER Real Estate. Furthermore, we have taken some measure to optimize processes and structure and, in particular, the intra-group management of cash and assets. On the disposal side, we have almost completed the sale of the East portfolio to Valero/KKR, and we have sold several project and portfolio such as the Waypoint portfolio in Berlin, which generated a cash inflow of EUR 170 million. Lastly, I would like to touch upon BCP. On the 3rd of August, LEG announced that it will not buy the remaining stake in BCP, held by our subsidiary ADLER Real Estate. This leads to a current situation where ADLER Real Estate own 63%, NHG, 35% and a free float of 2%. We and ADLER Real Estate are reevaluating our position and we continue to consider all our strategic options. We will inform you about any further development as soon as we can. I would now like to turn to Page 7 to focus on the key highlights of the first 2 quarters. I would like to start with our operational performance, where we can say that Adler has a good first half of the year, supported by a strong portfolio performance. The like-for-like rental growth in H1 2022 has been plus 2.3% year-on-year, resulting in an average rent of EUR 7.47 per square meters per month, reflecting the high quality of our assets and our Berlin home base. Putting the number into perspective, since December 2021, our yielding portfolio has experienced 2.3% like-for-like fair value appreciation. The vacancy rate continued to be at historically low level at 1.6%, a substantial decrease from 3.8%, a year ago. Net rental income came in at EUR 131 million compared to EUR 174 million in the first half of 2021. Return from operation from rental activity totaling EUR 50 million compared to EUR 68 million in the same period of 2020. This corresponds to FFO 1 per share of EUR 0.42. Both NRI and FFO 1 were mainly impacted by the significant reduction in our yielding portfolio due to the completed disposal of 15,000 units to LEG and the sale of circa 14,000 units to KKR/Velero. The EPRA NTA as per June 2022 amount to EUR 3.53 million or EUR 30.08 per share compared to EUR 4.19 million or EUR 35.72 per share as per March 2022. The LTV ratio of Adler Group went up to 58%, 52% at the end of the first quarter, despite positive regulations of the yielding portfolio and from disposal, the LTV was affected by ride-on of receivable, impairment of goodwill as well as negative revaluation of development projects. Thomas will tell you more about this in a few slides. Our EUR 771 million cash balance, excluding EUR 130 million at [indiscernible] BCP puts us in an adequate 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 of end of March. Our ICR decreased from 2.2% to 0.7%, mostly affected by the sales of our high-yielding assets and by the negative revaluation of development. Thomas will give you more details in a bit. On the development activity, we have continued our effort to strengthen our balance sheet and reduce our development exposure. Ostend Quartier and LEA B were closed with EUR 166 million proceeds. Quartier Kreuzstraße was signed, and proceeds amount to EUR 17 million were received in Q2 2022. Sale of Neues Korallusviertel was signed in Q3 '22. We are in exclusivity or LOI NewFrankfurt Tower, Vitopia-Kampus Kaiserlei and Colonial III. In total, we have over EUR 400 million GAV in development project. However, we have offer received LOI or exclusive design. However, we reflected a lower amount in our cash bridge. And we will show you the detailed age. Finally, we have updated our guidance on NRI and FFO on the assumption that our stake in BCP will finally not be disposed this year. I would like to turn to Page 9. As a result of the significant disposal of part of our portfolio, the quality of our remaining portfolio continued to improve with most of the assets and core building. Out of 26,000 unit in our portfolio, close to 19,000 are located in Berlin. This high quality of our portfolio is well reflected in the fair value per square meter. As per end of June 22, the average fair value of our standing portfolio stood at EUR 3,061 per square meter, well above EUR 2,016 per square meter of the year ago. Let's move on the next page. The like-for-like share value growth stood at 2.3% at the end of the second quarter on a year-to-date basis, which again is the full signal of the quality of our portfolio. Comparing to 1 year ago, our yielding portfolio showed value growth of 6%. During the same period, the vacancy stood at 1.6%, somewhat above 1.1% at December, '21, following delays in the refurbishment for decommissioned units. Nevertheless, this is significantly lower than a year ago when vacancy was 3.8%, representing a 2.2% dec by year. Moving to Page 11. You see that our residential brands are currently at EUR 7.47 per square meters per month on average, which is 14% higher than the EUR 6.55 per square meter a year ago. The 2.3% like-for-like rental growth year-on-year mainly result from Circa 0.7 indexation and circa 1.6% from reletting at market rents, combined with CapEx investment, and we made a healthy mix between Berlin and overseas. I would now like to hand over to Thomas, who will update you on our financial performance.

Thanks, Thierry. First of all, I would also like to thank everybody for joining today's call. I'm also thanking the Board to entrust me with the CFO role on a permanent basis. This reflects trust in me and also indicates to you that after 3 months in the group, I'm still thrilled to be part of this corporate turnaround. Now back to business. Moving to Page 13. I would like to touch upon some items that have significantly impacted our net profit for the first 6 months of the year. Despite reporting a positive and healthy NOI rental income of EUR 150 million, our net profit stood at minus EUR 604 million. This has to do mainly to the following points. To start, we have decided to depreciate most of our receivables. This write-down reflects the reassessment of the realization potential of these receivables. Constantly monitoring our assets and liability is at the heart of our management exercise. Nonetheless, I can assure you that we won't lag on our efforts to maximize collection of these receivables. By the way, this new assessment of the receivables can be seen in depth on Page 33. Secondly, we have other expenses including, among others, the write down of the remaining goodwill attributable to Consus for an amount of EUR 91 million. We have provisioned to have payments in relation to BCP and we have some losses related to forward sale projects. This is netted with a EUR 19 million income due to the deconsolidation of the Waypoint portfolio. Lastly, we have experienced a total negative revaluation of EUR 147 million, which despite positive revaluation of the yielding portfolio, has been offset by the impairment of development projects driven by construction cost increases and extended construction times. Furthermore, I would like to highlight that these have been one-off and noncash impairments. Despite all of this, our operational income continues to be strong, as reflected by the EUR 97 million NOI generated in the first 2 quarters of 2022. Now please join me on Page 14. At the end of the second quarter, we had a portfolio of approx. EUR 5.4 billion yielding assets, pre-disposals, together with the development GAV of EUR 2.5 billion. Given the fact that we anticipated the sale of the remaining 63% stake in BCP helped by our subsidiary, ADLER Real Estate, we reclassified all of these assets and their associated liabilities to assets held for sale. As such, this EUR 7.9 billion total GAV excludes BCP. During the second quarter, we have tended over a number of projects and sold the Waypoint portfolio while new Frankfurt Towers, VauVau and Vitopia-Kampus Kaiserlei development projects have been bought back. Furthermore, we have experienced a total negative revaluation as explained earlier. I would now like to move to the next page. The loan-to-value ratio of the group increased to 58% compared to 52% at the end of the first quarter. This increase is mostly attributable to the impairment of receivables and the negative revaluation of the development pipeline, as just discussed. Again, let me remind you that these have been one-off and noncash impairments. On the other hand, the disposals of Waypoint and Kreuzstraße have had a positive effect. Let's have a look at the maturity schedule on the next page. As you can see, our debt expiration calendar is backward loaded with only 4% and 15% of debt expirations in 2022 and 2023, respectively. In the recent months, we have repaid a large portion of our debt maturing in 2022. In April, we repaid the EUR 400 million ADLER Real Estate bonds, while EUR 64 million project at Consus level was repaid in July. The remaining debt maturing this year consists of the EUR 120 million Consus convertible bonds maturing in November as well as bank loans mostly related to BCP. These upcoming maturities are well covered through the EUR 900 million cash on hand as per Q2 2022 as well as our active disposals. Here, we refer to cash including cash at BCP level as debt maturities has been shown, including the debt at BCP level as well. Let's turn to Page 17. Our gross debt position at the end of the second quarter stood at EUR 7 billion. We continue to have a mostly unsecured financing structure with 64% of our total debt with the remaining being secured, bank debt as well as a EUR 120 million convertible bond at Consus level maturing in November. When it comes to cost of debt, we remain at an average of 2.2% with a fixed and hedged debt of 98.5%. This puts us in a privileged position given the current environment of raising interest rates. Moving on to the governance. We have already discussed in detail the LTV in previous slides, so let's focus on the interest coverage ratio. Our ICR decreased from 2.2% in Q1 to 0.7% below the debt in covenant required 1.8% level. The main explanation for this is the sale of our higher-yielding assets, combined with a negative revaluation of our development pipeline. The unencumbered asset ratio decreased to 107% from 125% in the last quarter, below the 125% required level. This is mostly driven by the impairments of receivables and goodwill as well as the negative revaluation of the development portfolio. For the avoidance of doubt, these are in current space covenants, which means that crossing the required level does not constitute an event of default. Adler Group is restricted from debt income while we are below the required levels. Let's move now to Page 18. We ended the second quarter with a cash position of EUR 771 million, very similar to the EUR 760 million at the end of the first quarter. Please let me remind you that the EUR 771 million excludes EUR 130 million cash held at BCP level which is classified as assets held for sale at group level. With that, we would get to a position of EUR 901 million as per 30th of June 2022. The two main factors affecting the cash flow in Q2 have been, by the one hand, the EUR 639 million disposal, including KKR, Waypoint as well as a remainder part of LEG. By the other hand, we have had a negative financing cash flow of approximately EUR 600 million. This includes the EUR 400 million maturity at ADLER Real Estate level, some project debt repayments and the EUR 100 million intra-group loan to BCP. For the second part of the year, we expect project sales of at least EUR 450 million to EUR 550 million, whereby more than EUR 200 million are already closed or signed as we speak. The remainder are projects where we have received an offer, we are in LOI process or exclusivity. Here, we have been prudent in the sales realization for this year, taking a lower figure compared to the EUR 438 million GAV, as you can see on Page 32. Also note that we have conservatively not accounted for any further sales where we are already in marketing process. Most remarkably, we have not accounted for the potential sale of our stake in BCP for which we are actively exploring options. In addition to that, we expect approximately EUR 320 million financing cash outflow based on remaining maturities, circa EUR 140 million development CapEx and circa EUR 220 million of a variety of other items, including operating cash flow, receivables, buybacks and the receives out of ADLER Real Estate. All in all, we expect to end the year at a range of EUR 534 million to EUR 634 million, excluding the cash at BCP level. Thierry, back to you.

Thanks, Thomas. We would like to end with the guidance for 2022 with some concluding remarks. Due to the later development, we have updated our NRI and FFO guidance assuming our stake in BCP is not disposed by year-end. The result in NRI full year guidance is, therefore, EUR 233 million to EUR 242 million compared to the scheduled EUR 203 million to EUR 212 million. And the FFO 1 is EUR 84 million to EUR 86 million compared to the previous EUR 73 million to EUR 76 million. In the past, we wouldn't find a guidance on our dividend in this section. For previous reasons, we and the Board believe that any dividend policy leading to cash flow is dependent on unqualified audit opinion, which has a put a moratorium on the dividend policy. To summarize, we have had a strong operational performance in H1. The yielding asset portfolio value increased by EUR 124 million, resulting in a 2.3% like-for-like value uplift in the first 3 months of 2022 on the back of 2.3% like-for-like rate increase. Operational vacancy of the total portfolio continued to be at very low level at 1.6%. Adequate financial position with EUR 771 million cash balance at the end of June with an additional EUR 130 million at BCP level. After the launch of our audit tender, we are approaching individual audit company and we are working hard to get audited account for 2022. We have continued our determination to improve our corporate governance. We have taken several steps towards the reorganization and improvement of the group. Finally, we will communicate a strategy update on the company's future perspective around or with the Q3 disclosure this year. With that, we conclude the presentation. Thank you all for your attention. Gundolf, if you may please coordinate the Q&A.

Yes. Thank you all. And Frank, if you could start coordinating the Q&A session, please.

[Operator Instructions] . We have the first question from [ Laksham Havendrun ] from ExodusPoint.

I just wanted to understand the asset sales in a little bit more detail. And it's just a classification on Page 36 that I want to unpack compared to how you've classified assets in the Q1 presentation, Page 33 on the Q1 presentation. So just as an example, if we look at the Q1 presentation, Page 33, there were six projects classified as having been sold and there were two projects classified as having been sold in Q1. As of today or today's presentation, rather, there are six projects that have been classified as being sold, but you're missing key projects. And so if we look at Page 33, Q1, it looks like the new Frankfurt towers, VauVau and the Vitopia-Kampus campus projects have been reclassified as having been sold and now they're classified as offer received LOI exclusivity, et cetera. And whilst I haven't gone through everything because obviously, the spec only came out relatively recently, I just wanted to understand why those projects have been reclassified? And if you could just maybe use those as a vehicle to give us a little bit more color on how much cash is coming in before year-end in relation to project sales with 100% certainty and a little bit more color on where everything else sits would be useful?

Yes. Thank you for the question. So we have in our cash presentation present the status of our upfront sales. So six projects has been -- have been sold. Two projects where we have an initial sales contracts have been canceled, which is the project of Kaiserlei, which are now again on the market. So what we have provide in terms of disclosure is we have EUR 438 million of projects, which are either we offer received, where we are in discussion with the buyer, with LOI signed or in the exclusivity. So that's the status of today. And we have guided with our liquidity targets based on our sales activity.

Okay. Perfect. That makes sense. And so just to understand, when we look at these numbers, so for example, offer received LOI exclusivity obviously, there was a bunch of things that you classified as being in that bucket in Q1. And indeed, there were a bunch of things that you've classified where you expect to sell in 2022 in Q1. So that's going back all the way to March. Now we're in August. How many of these offer received LOI exclusivity type projects have you actually converted into a sale? Because again, if I just compare Q1 to Q2, you really just basically got the same projects that have been sold. It doesn't really look like there's been much progress. So I'm trying to understand tangibly, what can you comment on in terms of the conversion rates here?

So in terms of conversion rate, so we have cash in two development projects, Ostend and LEA B for EUR 166 million. And we have cash in Waypoint of EUR 173 million, which show that we are able to convert a sales contract in cash. Of course, in real estate transaction, you have always time lagged between the offer, the LOI, the exclusivity and the cash conversion. So we are in this process. And as we have mentioned, we expect part of this EUR 438 million to be convert before the end of the year, remaining at the beginning of the year.

Yes. And sorry, I just have one quick comment and a quick follow-up question. I guess, where the questions are coming from is some of these have been classified as having an offer received or being in a status of LOI or exclusivity. Some of those have had that classification for well over 6 months. And I'm just trying to kind of get some color from you. So if I ask the question a little bit differently, what you have -- the projects that you've currently classified as being offer received, LOI, exclusivity, how many of those do you expect to move into the project sold category by year-end?

We have the view of a disclosure on the amount, which we expect to receive. After that, I will not comment individually on each transaction as these are commercial sensitive information, but we have closed Ostend and LEA B in April, which were previously classified as offer LOI, which show that we are able to convert from LOI to cash proceeds. And we will give additional depth in Q3 on this project.

The next question comes from Pranava Boyidapu from Barclays.

I have a few questions. Firstly, with the ICR having dropped so much, is that on the back of impairment? And how do you expect it to evolve over time, specifically next quarter? Do you want to go one by one maybe?

Yes. Thank you very much for the question. So the ICR dropped mainly because of the negative result of Consus in the first half year, where we did not have sales of projects, but we incurred obviously our costs. Then we have the sale of the yielding assets. You know the KKR and the LEG portfolios to be named, which reduced our income from rental activities. And on the other side, the interest remains basically unchanged. So that means this, all in all, left to the decline of the ICR.

Okay. And then moving on to the financial receivables. I see you've taken a write-down of EUR 275 million. A large part of that comes from partners immobilien. When in Q1, you report, you had mentioned that there was a reversal. How much of the receivable has been written down compared to the valuation of the asset itself because I would assume if you're reversing, you take the asset back as well?

So our intention was to take this asset back to reverse the transaction in order to recover our receivables. We have reconsidered our position in order to keep our liquidity position and not to get additional [ zero ] -- asset on our balance sheet. So that's why for the moment, we don't intend to cancel these contracts and get the asset back. So that's why we have fully impaired the amount. And we will consider in the future if we may change this position, but from a balance sheet point of view, the situation is clear.

Okay. Sorry, just so I understand clearly, you've written down the entire position from a receivable standpoint, but you haven't really accounted for the valuation itself. So in the future, there could be either receivable or the property back as well?

No. If I understand, Thierry, correctly and what he tries to express is we could have taken the asset back. This would have been detrimental to our cash position. And we have a stable legal position there. So by making the conscious decision not to take it back at the moment as long as the cash position has not improved, it is a prudent and conservative stance. That's why we have a new CFO, to write these things off. But as Thomas rightly pointed out, we will, of course, chase the assets. And once we are in a better position from a financial point of view and have more security and safety in our liquidity numbers, we will, of course, revisit the matter and get the asset back in. So in the end, it's a commercial decision. We don't pull at the moment because we don't want to put more burden on the balance sheet. The reaction to this is we have to write it down. Our legal position has not changed, just our attitude towards it.

Got it. And I assume that is what is extending to the rest of the impairment as well because there's no other big ticket, but you have reduced most of your receivables at the moment and the same ones that KPMG last year had said it tested recoverability?

Key point is that in the quarter, we had a couple of situations where newly negotiated payment terms have been missed by the players on the other side, which means we are tacking up. So going into more legal action. But again, for prudent reasons, we are writing these things down now. So we may have been a touch overly optimistic on a couple of our contractual partners there. And Thomas has made this review very thoughtfully and went through it to really see what can we recover short term. The most important point for me is there is not a single point where we lost a legal position. That's for me the important thing. So in the end, as I said, our legal stayed the same. Our attitude towards it has changed.

Got it. Sorry, I've got two more questions. One is on the financing from LBBW and Commerce Bank, which you mentioned that there is a right determination with respect to the publication of consolidated statements. But I understand you have published the full year '21. So are the covenant waivers in place for full year '22? Or is it -- are there additional covenants that we are not aware of?

No. We have some of our secured financings include under savings relating to the audit opinion. This is basically related to the LBBW, as we saw it also in the half year report. And in these two specific instances, which are disclosed in the report, we have appropriate waivers from the respective creditors. So we appreciate the continued and constructive approach.

okay. And final question on Bafin's statement regarding Gerresheim. I understand you're appealing that, but if for whatever reason, Bafin doesn't relent, would that mean that you would be restating your Q3 2019 in specific? And what would that mean for you?

So as you know, we have appealed against the decision of Bafin with regards to the 2019 account of ADLER Real Estate. And -- so additionally, it should be taken also into account here that the entire transaction was reversed in the 2021 accounts already. So that means for us, it doesn't make sense now to make a restatement of the 2019 account and this has not been approached by BaFin to us as well.

Okay. Sorry, just going back on your financing terms. The way -- how long is a waiver for? And you mentioned the audit opinion, is that the unqualified audit opinion that you actually need eventually to get out of the waiver?

The waiver is until 30th of April 2023 currently, so relates to the audit opinion.

Can we get the next question, please?