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

Ladies and gentlemen, welcome to the Adler Group Q1 Investor Call. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Gundolf Moritz. Please go ahead, sir.

Yes. Thank you, Sandra, and good morning, everyone, and thank you for joining us here today for the Adler Group Q1 2024 Results Analyst and Investor Conference Call. My name is Gundolf Moritz, Head of Financial and Corporate Communications for Adler Group. For me, today, it will be my last call with you. As planned a long time ago, I will leave Adler and embark on a sabbatical. I'd like to thank you for all your support and patience with me throughout these turbulent times. I have always appreciated working with you and have been honored to be part of a great team with extremely skilled and friendly, lovely people. As such and with great confidence, I hand over all responsibilities to my successor, Julian Mahlert, whom you already know very well.

Thank you, Gundolf, and welcome, everyone, here from Hamburg. Along with me, we have Thierry Beaudemoulin, CEO; and Thomas Echelmeyer, CFO of Adler Group, who will now guide us through today's presentation. This presentation will be followed by a Q&A session in which management will answer your questions. Please note that this call will be recorded and made available on the company's website where you can also download today's presentation. With that, I would like to hand you over to Thierry.

Thank you, Julian. Welcome, everyone, and thanks for joining us here today. On behalf of the whole management team, I would also like to thank Gundolf for his tremendous effort over the last couple of years. So it was a great pleasure for us to work together in this turbulent time. We wish you all the best for your next adventure. Let us start now with an update on the restructuring process on Page 4. We told you in our full year 2023 investor call that we had reached a nonbinding agreement on the refined restructuring plan with our bondholders. On Friday last week, we have advanced to a binding agreement with the steering committee of our bondholders to enter in the comprehensive recapitalization. The lockup agreement has been signed by bondholders representing more than 60% of our second lien bonds and is open for additional bondholders to exit. This agreement includes 3 main components. The first component is to extend Adler Group's existing bond maturity to December '28, '29 and January '30. Thereby, we avoid a significant portfolio disposal at unfavorable terms, which we'd be imminently required to deal with our '25 and '26 maturities. The second component is to strengthen the group equity position by converting the majority of our second lien notes of circa EUR 2.3 billion into perpetual notes. These notes will be classified as equity under IFRS. And as a third component, Adler Group will receive up to EUR 350 million of additional liquidity. The main message is that subject to successful implementation, this agreement provides us with an extended runway to execute our strategy, stabilize the platform for the year to come and avoid unnecessary asset disposal too far below their fair value. There is more detailed information on our Investor Relations website such as the investor presentation and the detailed ad hoc notification as published on Friday. We expect this transaction to be implemented and concluded by end of September '24. We will provide you with further update on this topic as we progress. Let's continue the Q1 '24 highlights on Page 6. Our residential portfolio has continued to show strong operational performance in the first quarter of 2024. We achieved a like-for-like rental growth of 5.1%. This was mainly driven by indexation of the current rental contracts and, to a lesser extent, by our reletting activity. Commercial vacancy rates remain at low level, 1.7%, just marginally higher than the 1.5% we put in Q1 '23. The average in-place rent rose to EUR 7.63 per square meter per month at the end of March 2024. This is a slight increase versus the previous year. This increment was achieved despite the sizable disposal of Waserstadt portfolio in Berlin with 700 new-built units not falling under the Mietspiegel. The fair value of our portfolio has not changed compared to year-end '23. As you may know, our portfolio revaluation is done semi-annually. So the next portfolio revaluation will be conducted through Q2 2024. The group net rental income decreased only slightly by 4% from EUR 53 million in the previous year to EUR 51 million in Q1 '24. The reduction was mainly due to the recent portfolio sale such as the Waserstadt transaction completed in the second half of '23. Fortunately, the decrease in size was partly compensated by the before-mentioned like-for-like rental growth. FFO 1 from rental activity was negative at minus EUR 27 million compared to EUR 16 million positive in Q1 '23. This decline is mainly attributed to the increase in interest rate following the amended bond term in '23. FFO 1 includes EUR 47 million of noncash effective [ peak ] interest in the first quarter of 2024. Further, the EPRA NTA stood at EUR 448 million or EUR 2.96 per share at the end of March 2024. Compared to Q4 '23, EPRA LTV increased by 1.5 percentage points to 91.1% (sic) [ 99.1% ] , mainly due to the noncash interest expenses recording in our liability. The weighted average cost of debt remained at 6.3%. We have EUR 350 million cash on our balance sheet, excluding cash out at BCP. We will have a closer look at the development of our cash position later in this presentation. Regarding our disposal activity, we signed sales of several condominium units in Berlin for roughly EUR 6 million during the first quarter of 2024. Additionally, circa EUR 4 million sales of yielding multifamily assets were also signed in Q1. We received cash proceeds of EUR 17 million from the disposal of the development project, Waserstadt Tankstelle, in Berlin. We also received net proceeds of EUR 26 million by closing the sale of Leipzig FourLiving project to the city of Leipzig. This transaction was completed after the end of the first quarter. In addition to that, 2 project sales in Cologne and Düsseldorf are currently under exclusivity. Further, intended disposals are in advanced discussion. Therefore, we are optimistic to be able to complete additional transactions this year. Let's proceed to portfolio and operational performance on Page 8. As in previous presentation, assets owned by our subsidiary, BCP, are not included in our portfolio KPIs as we aim to sell our stake in BCP. For more detail of the BCP portfolio, please refer to BCP website where you find both the Q1 report and results presentation. Compared to the year-end '23, the value of our yielding portfolio has remained constant at EUR 4.2 billion given there were no major disposal and no valuation adjustment in the quarter. The value of our portfolio per square meters remained almost unchanged at EUR 2.47 per square meters. 86% of the GAV in our portfolio, EUR 3.6 billion in actual figure relate to our assets in Berlin. Let's move on to page -- or the next, Page 9. As already mentioned, there was no portfolio revaluation in Q1 2024. With the next scheduled portfolio revaluation for Q2 '23 (sic) [ '24 ], we could probably see a low single-digit percentage decrease in line with overall market expectation for the sector. If you look at our rental yield, you can see the increase compared to last year, mainly driven by the value adjustment down in the course of '23, for rental yields outside Berlin remain significantly higher than yields observed in Berlin. Please join me on Page 10 to discuss our rental growth in more detail. We continue to realize significant like-for-like rental growth of 5.1% as per March 2024 compared to 2% in March last year. This was primarily achieved through our high exposure to the Berlin market where we saw rental growth of plus 5.5% compared to 3.9% in the other cities. As you can see on the chart on the right, this was mainly driven by indexation of higher current rental contract and, to a lesser extent, by our reletting activity. As per euro basis, our average rent per square meters per month marginally increased to EUR 7.63 by the end of Q1 '24. As mentioned before, the last year figure includes Waserstadt portfolio, which was not subject to rent regulation. Our operational vacancy rate has remained on a very low level at 1.7% in March '24, just slightly higher than the 1.5% at the end of the last year. It can be seen that both our assets and the market we are operating in remain highly attractive for tenants. Now I would like to hand over to Thomas who will update you on our financial performance on Page 12.

Thank you, Thierry, and also extending a warm welcome from my side. We can be fairly quick on this slide, as you can see that there were no significant changes in our GAV compared to last quarter. We sold a few condominium units in Berlin as well as 2 multifamily buildings outside of Berlin. This reduced the GAV by roughly EUR 2 million in the first quarter. No additional disposals of development projects were signed in Q1 2024. As mentioned by Thierry, our development project in Leipzig was sold after the end of the quarter. The disposal of Waserstadt Tankstelle in Berlin was already deducted in the GAV bridge in Q4 2023 when we signed the sales contract with the investor. As stated by Thierry, there was no revaluation done in this quarter. This will be performed semiannual only as it is common practice in the real estate sector. Now let's have a look at EPRA LTV on the next page, 13. At the end of March 2024, our loan to value according to EPRA methodology increased to 99.1% from 97.6% in December 2023. As you can see in the P&L, the main driver for the increase were interest expenses. Please allow me to remind you that the EPRA LTV deviates from the covenant LTV definition in our bonds. This covenant has been temporarily listed and will be tested for the first time on 31st of December 2024. Also, please keep in mind that the capital structure of Adler Group will fundamentally change post implementation of the lockup agreement. With this, we will see a significantly lower LTV ratio, both according to EPRA and our bond covenant definition. With this, let us move to Page 14 for a financing update. In February this year, our subsidiary, BCP, issued a new series of secured bonds, the so-called Series D. The volume was approximately EUR 90 million and will be amortized between February 2027 and February 2029. Also, our real estate fully repaid the remaining amount of EUR 3 million of this 2017 to 2024 bond, the position that had not been tendered last year. Further maturities in 2024 consist almost entirely of asset-linked secured bank financing. We are confident to address these maturities by means of colocation. Discussions with the respective lending banks are currently in very advanced stages, and we expect to have agreements in place by the mid of June. Let's continue on Page 15 to discuss the debt KPIs. Our nominal interest-bearing debt position stood at EUR 6.5 billion at the end of March this year. This is a slight increase of approx EUR 80 million compared to December 2023, mainly resulting from before-mentioned bond series issued by BCP. Furthermore, the weighted average cost of debt remained stable at 6.3%. Our total debt has an average maturity of 2.5 years. This is without taking into account the intended prolongations as part of the comprehensive recapitalization that we have agreed upon with our bondholders. It goes without saying that following the implementation of the lockup agreement, our capital structure will fundamentally change. For this, we also refer to the investor update document that we published on our website on Friday. The detailed maturity schedule after March 2024 is shown on the next page. Looking at the 2024 maturity, the majority of the maturities consist of asset-linked secured bank debt and are envisaged to be prolonged. As stated, we are in very advanced negotiations with our lending banks regarding the prolongation of these loans. In short, we do not expect any major challenges in 2024. The volume of maturities in both 2025 and 2026 looks somewhat challenging, also taking into consideration that the transaction market for larger portfolio sales have not fully opened up again. This is one of the key reasons for the comprehensive recapitalization that we have negotiated with our bondholders. As explained before, we expect the maturity profile of our debt obligation to change fundamentally following the implementation of this transaction. Let's turn to cash on the next page, 17. At the end of Q1, our cash position stood at EUR 353 million, EUR 25 million less than at year-end 2023. The restricted cash position of EUR 105 million in December 2023 was only temporary, as highlighted in fiscal year 2023 investor call. A large proportion of it became available in January 2024. So the restricted cash position at the end of March 2024 was EUR 23 million. Please let me remind you that the EUR 353 million does not include EUR 142 million of cash held at BCP level, which is classified under assets and liabilities held for sale on our balance sheet. Let me point out some of the positions. First, a cash inflow of EUR 21 million from disposals of development projects and yielding assets. This includes the EUR 17 million proceeds from Waserstadt Tankstelle that came in, in Q1. Second, the positive inflow of EUR 15 million related to the operating income both from the rental and the project development activities. Third, EUR 16 million inflow from the release of trapped cash, a result of the forward sale project, Bundesallee, being completed and partly handed over to the buyer. Fourth, CapEx related to development project at Consus level decreased the cash position by EUR 34 million. Fifth, a cash outflow of EUR 23 million related to advisory fees partly relating to the restructuring plan update. And finally, EUR 16 million on cash, effective interest payments and amortization. Thierry, now back to you.

Thank you, Thomas. As always, we would like to end the presentation with some concluding remarks. We continue to make good progress step by step in various parts of our business, operation, asset disposal and corporate financing. On our rental activity, we delivered strong performance with 5.1% like-for-like rental growth compared to the previous year. The operational vacancy of the total portfolio remained at a structurally low level of 1.7%. We confirm our net rental guidance in the range of EUR 200 million to EUR 210 million for 2024. Until today, we generate net proceed of EUR 43 million from disposal of development projects in Berlin and Leipzig. By reaching a binding agreement with over 60% of our second lien bondholders for comprehensive recapitalization, we must stabilize the group for the years to come. While current market conditions are still somewhat adverse, we expect better conditions in our industry over the period of our re-profiled maturities. Furthermore, the prolongation talks for our 2024 bank activity are in advanced stage. At the upcoming AGM on June 25, Matthias Moser, an expert in real estate and finance with more than 30 years' experience, will be up for appointment for a Board member position. This follows the resignation of Prof. Kirsten, Dr. Arnoldi and Thomas Zinnöcker. With that, we would like to conclude the presentation and open the floor for any questions you may ask. Julian, over to you for the Q&A.

Thank you, Thierry. And with this, back to Sandra. Sandra, please start with the Q&A.