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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining the Adler Group Investor Call First Quarter Results. [Operator Instructions] It's my pleasure to turn the conference over to Gundolf Moritz, Head of IR. Please go ahead.

Yes. Thank you, [ Francie, ] and good morning, everyone, and also thank you for joining us today. As [ Francie ] said, my name is Gundolf Moritz, and I'm heading the Investor Relations for Adler Group. With me today are Thierry Beaudemoulin, our CEO; and Thomas Echelmeyer, CFO, who will guide you through today's presentation. At the end of the presentation, we have reserved time for a Q&A session, where Thierry and Thomas will answer any questions, you may have. Please note that this call will be recorded and made available on the company's website after the call. And as always, we will keep the call limited to approximately an hour. With this, I would like now to hand over to Thierry. Please go ahead.

Thank you, Gundolf. First of all, I would like to thank everybody for joining us here today. I would like to start today's presentation with a brief refresher on our strategy as well as an update on the considerable progress achieved we've been aiming for our 5 strategic pillars. In portfolio strategy, we are continuing transitioning to Berlin-anchored portfolio with limited development exposure. To do so, we have, and we'll continue to execute orderly disposal of selected portfolio and development projects in the in the time to come. In asset management, we will finalize committed CapEx and development. Additional sizable CapEx commitment has been put on hold. For our financing strategy, our [ ambition ] is to have [ essentially ] stable platform to be able actively to delever. In that regard, the implementation of the restructuring plan and the access to the New Money Funding provided sufficient headroom to stabilize the platform. In April, we replaced the EUR 500 million ADLER Real Estate 2023 bonds with the liquidity provided by the New Money Funding. Then on the 9th of May, we launched a tender offer and consent solicitation to the order of EUR 300 million ADLER Real Estate 2024 notes, which will expire on 6th of June '23. As per 22 May 2023, 93.4% of the outstanding notes have been tendered. In our corporate structure, we continue to focus on simplifying our group structure as well as streamlining the platform. [indiscernible] have been taken in the recent months. We have successfully delisted our solitary Consus Real Estate. [indiscernible] finished as a resolution [indiscernible] share of minority shareholder passed the ADLER Real Estate's general meeting. We continue to review all options with regard to our holding BCP. In corporate governance, the appointment of Rödl & Partner as ADLER Real Estate auditor has been initiated and the appointment will be implemented by the [ Board. ] We continue our search for an auditor for the rest of the group. Thomas Echelmeyer, Dr. Heiner Arnoldi and Stefan Brendgen, who are all seasoned professional in the real estate industry and [indiscernible] market expertise are proposed for election as additional board member of the AGM scheduled for 21 June 2023. Finally, the Chief Restructuring Officer will be appointed to the senior management. Let's move to Page 6. For this, I hand over to Thomas now.

Thank you, Thierry. And also from my side, a very warm welcome to everybody joining us today. In addition to the updates on the significant progress made on our 5 strategic pillars, please allow me to update you on the restructuring plan. In April, the New Money Funding was initially drawn for an initial amount of EUR 637 million with the purpose of repaying the ADLER Real Estate bond of EUR 500 million and to provide additional liquidity of EUR 80 million. The ADLER Real Estate bond of EUR 500 million was already repaid on maturity on 27th of April. In parallel to that, the issuance of new shares in Adler Group to the New Money lenders was settled in an amount of 22.5% on a fully diluted basis. The amendments of the terms and conditions of the notes have been successfully implemented. As part of the amendment, the deadline for the submission of audited annual consolidated financial statements for the years 2022 and 2023 have now been extended to September 2024. Also, we do no longer have ratio-based incurrence covenants. These are replaced with a maintenance LTV covenant, which will be tested for the first time on the 31st of December 2024. On 9th of May, we launched a tender offer and consent solicitation in respect of the EUR 300 million ADLER Real Estate 2024 bond. 93.4% of the outstanding notes have been validly tendered as per 22 of May. As a reminder, the offer will expire on the 6th of June. Now moving to the key highlights on Slide 8 and back to Thierry.

Thanks, Thomas. Our development portfolio continues to show strong operational performance in the first quarter, supported by solid underlying rental fundamental. The like-for-like rental growth in the first quarter has been 2% year-on-year, resulting on an average rent of EUR 7.5 per square meter per month. We will [indiscernible] rental growth drivers in a moment. Vacancy remained at a very low level, standing at 1.5% at the end of Q1, reflecting the high [indiscernible] strong Berlin [indiscernible]. On valuations, due to the absence of portfolio appraisals in Q1, in Q1, the fair value of our portfolio has no change compared to the end of [indiscernible]. Moving to our financial performance. Net rental income came in EUR 53 million compared to EUR 71 million in Q1 2022. FFO from rental activity totaling EUR 16 million compared to EUR 30 million in the same period of 2022. This corresponds with FFO 1 per share of EUR 0.13 versus EUR 0.25 in 2022. Both NRI and FFO 1 revenue impacted by the significant reduction in our yielding portfolio due to the disposal of the remaining part of the Eastern portfolio to Velero/KKR. The Waypoint portfolio as well as [indiscernible] portfolio sale at BCP level at the end of 2022. [indiscernible] stood at EUR 2.3 million or EUR 20.3 per share at the end of the first quarter of 2023 compared to EUR 2.4 million or EUR 20.7 per share as per Q4 2022. [indiscernible] as the company met LTV metric going forward as recommended by the [indiscernible] EPRA LTV increased by [ 0.9 ] percentage points to 75.4%. Cost of debt continued to remain stable at 2.3% at a slightly higher level as per the end of last year. Of course, on the back of the New Money Funding [ and the withdrawal ] on 24th of April, the cost of debt will increase significantly. Our EUR 235 million cash balance, which is excluding cash at the BCP combined with the New Money Funding, which has already been partially [indiscernible] put us in a solid liquidity position to continue our operating activity as well as servicing our debt obligation, bringing Adler into standardized position. With regard to the development activity, we have continued our effort to strengthen our balance sheet and to reduce our development exposure further. In Q1 2023, one project [indiscernible] one project had been closed and 4 projects had received offer [indiscernible] exclusivity. More specifically, the forward sale project Köningshöfe is handed over successfully in Q1 2023. The sale of Parkhaus had been closed in Q1 2023 with total gross profit amounting to EUR [indiscernible] million. In total, we have an additional EUR 423 million [indiscernible] development project with offer received, LOI, or exclusivity, including the project Quartier Kaiserlei, Grand Central, Mannheim No. 1 and Staytion- Forum Pankow. [indiscernible] operational performance. The quality of our portfolio remained high with most of the asset [indiscernible] out of 26,000 units in our portfolio, over 18,000 are located in the German capital. As per [indiscernible] March 2023, the average fair value for our selling portfolio stood EUR 2,943 per square. This is 3.4% lower on a like-for-like basis compared to Q1 2022. Let's move on to next page. So like-for-like fair value is close to 0 at the end of the first quarter year-to-year [indiscernible] basis due to the absence of appraisal this quarter. Comparing to 1 year ago, our yielding portfolio showed low single-digit value decline of 3.4% on the back of a negative revaluation [indiscernible]. For H1, we anticipate [indiscernible] the magnitude of the single-digit percentage number reflecting the current high interest environment. During the same period, vacancies stood at 1.5%, roughly in line with the 1.3% posted on December 2022. It is also similar [indiscernible] when vacancy was [indiscernible]. Moving to Page 12. At the end of the first quarter, we have realized [indiscernible] growth of 2% compared to 2.1% [indiscernible] impacting our [indiscernible]. 1.8% decline originated from new vacancy [indiscernible] related to vacancy reduction compared to last year, of which 1.7% come from unit with CapEx investment. 0.4% rental growth come from re-letting [ at market trend ], of which 0.2% from unit with CapEx investments. Finally, 1.3% [indiscernible] indexation of existing [ assets ]. All in all, if we exclude the effect of new vacancy, we can say that rental growth would have been 3.8%. With this, our average rent [indiscernible] per square meter per month [indiscernible]. I would now like to hand over to Thomas to [indiscernible] our financial performance.

At the end of the first quarter of 2023, we had a portfolio of about EUR 5.2 billion worth of yielding asset as well as approximately EUR 2.1 billion worth of [indiscernible] development project. Given the fact that we anticipated the sale of [indiscernible] in BCP, helped by our subsidiary ADLER Real Estate, we continue the [ classification ] of all of these assets and their associated liabilities as assets and liabilities held for sale. As such, our EUR 7.3 billion total GAV excludes BCP. In the absence of portfolio appraisals in the first quarter, the GAV is impacted by the sales of single yielding assets located in Berlin and the handover of the forward sale project Köningshöfe [indiscernible]. Please join me now on Page 15. The EPRA LTV of the group increased to 75.4% compared to 74.5% at the end of last year. The increase between Q4 2022 and Q1 2023 is mostly explained by: first, project disposals related to the closing of the sale of Parkhaus; second, interest payments and debt amortization; third, CapEx related to development projects and other items, including operational income and extraordinary advisory fees related to the restructuring plan. Let's have a look at the debt maturity schedule on the next page. At the end of Q1 2023, we had EUR 868 million of upcoming maturities in 2023. Out of this, we recently repaid the EUR 500 million of ADLER Real Estate bond with the New Money Funding. Furthermore, EUR 7 million of bank debt has been repaid at BCP, another EUR 35 million was extended. The remaining maturities for 2023 includes the Adler Group convertible maturing in November and the additional [ debt ]. These maturities will be covered through a combination of EUR 235 million cash on hand as per Q1 2023 with additional EUR 210 million cash held at BCP, the New Money Funding, expected capital recycling measures, including further refinancing efforts and additional disposals. On this last point, we are currently in discussions with lenders to refinance a big part of the [indiscernible] 2023. Looking at the 2024 maturities, we wanted to highlight 2 things. Firstly, the maturity of the ADLER Group of EUR 400 million maturity in 2024 has been extended to 31st of July 2025 as part of the restructuring plan. Secondly, as already mentioned, we have a process to repay the EUR 300 million of ADLER Real Estate bond [indiscernible] launched the tender offer. All of this puts us in a solid position towards our maturity calendar. Let's now turn to Page 17. Our gross debt position remained roughly unchanged at EUR 6.6 billion at the end of Q1 2023 compared to the end of last year. We continue to have a mostly unsecured financing structure with 67% of our total debt, the remaining being mostly secured debt. When it comes to the cost of debt, the average cost of debt has increased to 2.3% with a fixed and hedged debt of 99.2% and with an average maturity of 3.1 years. The additional liquidity provided under the bondholder agreement will come with [indiscernible] new profile and [indiscernible] component of 12.5%, which, together with the coupons [indiscernible] the bonds affected by the restructuring plan will increase our cost of debt. Moving on to the covenants. We have already discussed in detail the EPRA LTV in the previous slide, so let's focus on the interest coverage ratio. Our ICR decreased to 0.8 below the debt incurrence covenant level of 1.8x. The unencumbered asset ratio decreased to 87.5% from 91% in the last quarter, below the 122% (sic) [ 125% ] required level. For the [indiscernible] Adler Group S.A. has no longer had covenants in the way it previously did [indiscernible] as a result of the restructuring plan [indiscernible]. Moving forward, the maintenance-based LTV covenant, which will be tested for the first time on 31 of December 2024 is in place. Let's move now to Page 18. We ended the quarter with a cash position of EUR 235 million, below the EUR 387 million we had at the end of last year. Please let me remind you that the EUR 235 million excludes EUR 210 million of cash held at BCP level, which is classified as available for sale at group level. With that, we would get to a position of EUR 445 million cash at hand per 31 of March 2023, excluding the New Money Funding, which was drawn on [indiscernible] of April 2023. There have been 3 main factors affecting the cash position during the first quarter of 2023. EUR 30 million cash out was related to the acquisition of [ ADLER Real Estate ] as part of the squeeze-out. A negative financing cash flow of EUR 54 million. This includes [indiscernible] interest payments of EUR 47 million, repayment of bank debt of EUR 7 million and smaller amortizations. We spent EUR 42 million in CapEx related to ongoing development projects at the Consus level. Lastly, we have paid EUR 38 million in connection with the restructuring and related fees. The remaining net cash flow of EUR 6 million mostly related to operational cash flow. We closely monitor our obligation and the impact on the cash position going forward. We have everything in place to meet our obligations. Given the uncertainties in the market and [ sale ] transactions, we refrain from providing the detailed cash projection. Thierry, now back to you.

Thanks, Thomas. We would like to end the presentation with some positive remarks. Following the approval of the restructuring plan, we have drawn New Money Funding and repaid the EUR 500 million ADLER Real Estate bond, covering most of the group's 2023 maturities. We announced tender offer and consent solicitation regarding the EUR 300 million ADLER Real Estate bond. The offer will expire on 6th June 2023. 93.4% of the outstanding notes have been tendered as per 22 May 2023. The appointment of Rödl & Partner as ADLER Real Estate auditor has been initiated and will be appointed by the [ Board. ] We continue our search for an auditor for the group's financial statement. We have had a strong operational performance in Q1 with a 2% like-for-like rental increase year-over-year. Operational vacancy of the total portfolio [indiscernible] at a structurally low level at 1.5%. We have solid liquidity position, including EUR 235 million cash at hand at the end of the quarter to be expanded with [indiscernible] secured through the agreement with our bondholders. Lastly, we can confirm our NRI guidance provided in the previous quarter. The [indiscernible] EUR 207 million to EUR 219 million for full year 2023. With that, we would like to conclude the presentation and open the floor for any questions you may have. Thank you all for your attention. Gundolf, over to you for the Q&A.

Thank you, Thierry, and directly over to [ Francie, ] please.

[Operator Instructions] Our first question today is from Wolfgang Felix from Sarria.

Congratulations for having made it through the last month. I have only 2 questions really today. One is regarding your ongoing search for an auditor. I was wondering if you're perhaps changing anything -- if there's anything we can look forward to that should make us comfortable or more positive that you will find an auditor. And obviously, you've been looking for one for a long time for the group. So I don't know if there are any changes or so that you could perhaps point to that -- make it maybe more likely going forward? That's my first question. My second question, I think you've already spoken about it, but I must admit the audio quality on the call today was so horrendous. I could not understand [indiscernible] what you were saying. This is about any sales of the development assets going forward. I believe you were talking about it. If you could just perhaps summarize one more time...

Okay. Thank you, Wolfgang for your questions. I will handle the first question with the ongoing search for an auditor. So as I mentioned in my presentation or in our presentation, yes, we have initiated the appointment of Rödl & Partner as auditor of the Real Estate [ to sanction two ] financial statements, which have to be approved by the court. So Rödl & Partner will take over the ADLER Real Estate's auditor of financial statements. They [indiscernible] Adler Group because they do not have any representation in Luxembourg. With respect to the group financial statement, we continue our dialogue with a number of parties after KPMG rejected the judicial appointment as auditor for the audit of financial statements for the financial year 2022. So we can assure you that management is fully engaged and will use commercially reasonable best efforts to appoint an auditor. We cannot say any further detail at this point in stage. But once we have reached a solution here, we will, of course, put the things to the public domain directly.

Okay. So on your second question, of course, to [indiscernible] is our priority #1. To sell our development portfolio is also one of our priorities because we don't intend to develop most of this project. But of course, as you have seen with the evolution of [ forward valuation ] on the back of the increase of interest rate, we are still [indiscernible] in the market. And with our restructuring plan, we have now more time to dispose our development portfolio. So we are actively monitoring on the market to get the best outcome out of our development that is a benefit of all our stakeholders. As you have seen, we have a large project under exclusivity [indiscernible] we will continue for closing this transaction in the course of the year and of course, initiate good transaction, but we don't have immediate pressure to sell this asset at any condition. So that's why we do have seen a slowing down in this regard.

Next question comes from [indiscernible].

One question from my side. And you may have answered this before, but I think the audio quality is really difficult to hear. I just wanted to ask, is there an update on the disposals? And have you guys seen any improvement in terms of the transactions in the market that are happening? I know previously there was a presentation that talked about minus 35% below bid offers that you guys were getting. Is there any improvement on that? If you can just talk us through disposals and what you guys are seeing in the market.

So our strategy is with the restructuring plan to [indiscernible] to sell asset at the best moment and at the best price. Today, in the market, what you see is the volume of the transaction are decreased. And on the back of the increase of interest rate, you see still bit wait-and-see mode in the market. So what we are seeing is long-term equity investor, which are not using [ funding ] are back again into the market because, of course, they have more opportunity at the moment, but they are very conservative buyer and transaction with this kind of investor takes time. And on the other [ view of opportunistic funds, ] which are looking for this [ trend ] buyer. So with our restructuring plan, we have time to dispose our assets at the best timing and at the best price. And we have to [indiscernible] that will happen in the course of the year and to see how the volumes are picking up and how the price are stabilizing. But this is not yet the case at the moment. So that's why we have a [indiscernible] larger transactions at the moment. But of course, [indiscernible] one quarter to another. So we are very close to the market and to all the participants [indiscernible] opportunity.

Okay. Understood. Just one follow-up on that. The presentation says 4 development projects have either received an offer. Can you give us any clarity on what value that offer is? Is that a book value, much lower than book value or at a premium? Any color on that?

We are in due diligence phase and in negotiations. So our interest is, of course, to get the higher value [indiscernible]. So I will not comment on that. But of course, when these transactions are going to be completed, you will get [ this answer ]. So we expect that in the course of 2023.