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

Good morning, everyone, and thank you for joining us for the Adler Group Q1 2025 Results Call. Speakers today are our CEO, Dr. Karl Reinitzhuber; and our CFO, Thorsten Arsan. Both will lead through today's presentation and then answer your questions. Please note that this call is being recorded and will be made available on our website where you can also find today's presentation. And with that, I'll hand over to Karl.

Thank you, Julian. Welcome to all of you and particularly to those who have joined us for our annual results just 4 weeks ago. I can already tell you there are no big surprises. We are very much in line with the strategy and the expected progress we shared with you in April. Let's have a quick look at the status of our recent disposals on Page 4. As communicated with the annual results, the BCP transaction was fully completed with the transfer of the remaining 10.1% stake in April '25. From the EUR 219 million of total cash proceeds, we used EUR 120 million for repayment of our first lien New Money facility, while the remainder was added to our disposal holdback basket. In our Q1 reporting, you see BCP no longer fully consolidated. No further update on the sale of the North Rhine-Westphalia portfolio, where we expect to transfer the remaining 10.1% minority stake in the course of this summer. The discussions with potential investors for our development projects are progressing well. But today, there is nothing to announce beyond what we said 4 weeks ago. In terms of smaller yielding asset sales, as usual, we have the commercial opportunity to dispose some units in Berlin, including a multifamily house with 15 units at book value. As of now, with EUR 245 million, our disposal holdback basket of up to EUR 250 million is almost fully filled. Moving on to Page 6. Now first into the financial highlights. Compared to the prior year period, net rental income in the first quarter decreased due to our disposals. We lacked the rental income generated by BCP, which was sold at the beginning of January '25. Also, the Q1 earnings include only 2 months of rental income from the North Rhine-Westphalia portfolio, which was sold as per end of February. Both transactions resulted in around EUR 15 million of lower rental income. This decrease was partly compensated by rent increases realized on the remaining assets. The adjusted EBITDA from rental activities amounted to EUR 21 million. The adjusted EBITDA total was negative as the Development segment did not contribute material earnings in this quarter. Let me mention in this context that we have launched a comprehensive cost-cutting program in the first quarter with a total cash effect of approximately EUR 30 million in '25. We have reduced our headcount by 150 in February with 60 thereof relating to our sale of the North Rhine-Westphalia portfolio. With these measures becoming effective over time, we expect our profitability to improve considerably in Q2 and beyond. Following the deconsolidation of BCP, the related noncontrolling interest position of EUR 166 million was deducted from the group's total equity position, now amounting to EUR 1.2 billion. On the contrary, the deconsolidation of BCP had a positive impact on our LTV, now ranging at 67.9%. Our cash position increased to EUR 293 million following the beforementioned transactions and after corresponding debt repayments. Thorsten will provide more color on financials later in the presentation. Let's skip the portfolio performance figures on the right and instead have a closer look at these KPIs on the following slides. Now as of March '25, our total number of rental units stands at 17,908, hardly unchanged to the prior quarter. More than 99% of our portfolio is centered in Berlin. The remaining 200 units outside Berlin are located in Eastern Germany. We work hard to sell these units within the coming quarters. Compared to December '24, the value of our yielding portfolio remained constant at EUR 3.5 billion, given there were no major disposals and no portfolio revaluation in the first quarter. The value per square meter, therefore, remains almost unchanged at EUR 2,821. Let's now move on to Page 9 to discuss our further operational KPIs. Our average rent increased from EUR 7.60 to EUR 8.31 per square meter per month by March '25. This increase is largely the result of the sale of the North Rhine-Westphalia portfolio with structurally lower rents compared to our Berlin portfolio. If we adjust for this, the comparable rent in the previous year's period would have been EUR 8.14 per square meter per month. Turning to vacancy. Our operational vacancy remained at a very low level of 1.5%, confirming the high demand of tenants for our offer of apartments for rent. It's not a secret that the continued population growth and the very limited new build supply keep increasing the market pressure in Berlin. Our like-for-like rental growth amounted to 1.9% over the last 12 months as in Q4 '24. The growth figure is significantly lower than 1 year before, which had been unusually high to a big part driven by inflation in the previous years. As explained in our last call, the largest driver of our rental growth comes from Mietspiegel regulated rents of existing contracts that make up around 2/3 of our leases. From that source of growth, we had a concentration of rent increases, particularly in the fourth quarter of '23. The time between 2 rent increases is 15 months by law, so this did not allow us to touch a large part of our rental contracts before early '25. We have sent out now close to 3,000 Mietspiegel rent increases in Q1 '25. This compares to less than 2,000 Mietspiegel rent increases for the full year '24. The sent increases from Q1 will become effective in Q2. I mentioned already last time that we target an annual rental growth of 3%. We are quite confident that we can report a like-for-like rental growth in that range for our portfolio with our Q2 results. Now I'd like to hand over to Thorsten, who will walk you through the financials, starting on Page 11.

Thank you, Karl, and also a warm welcome from my side. There's not much movement in our reported portfolio value in Q1. So just a couple of points to mention here. We sold a few condominium units and closed the sale of a multifamily property in Berlin. This reduced the GAV by just roughly EUR 4 million in the first quarter. The sale of the development project Eurohaus in Frankfurt was notarized in Q1 and reduced the GAV accordingly. At the end of '25, we had a portfolio of yielding assets with a GAV of around EUR 3.5 billion and development projects with a GAV of around EUR 1 billion. This adds up to a total GAV of EUR 4.5 billion according to the latest externally appraised values per year-end 2024. Now let's move to the next page, Page 12. We already reported with our annual results a few weeks ago, the successful refinancing of our first and 1.5 lien facilities in Q1 2025. With that, we expect to generate interest savings of approximately EUR 134 million over the remaining lifetime of both instruments according to our business plan. Also, the update on debt repayments and prolongations is the same as reported in our last call, with the exception that we have repaid another EUR 29 million of our first lien New Money facility in May 2025, including disposal proceeds from the second closing of BCP and smaller asset sales. This brings the total redemption of the first lien New Money facility to EUR 265 million in 2025. Looking ahead at our upcoming maturities in 2026, as announced last week, we have launched a cash tender offer to repurchase our EUR 300 million Adler Real Estate bond maturing in April '26. The bond will be refinanced with a tap under the first lien New Money facility. At the launch of the tender offer, we had obtained commitments in the amount of around EUR 240 million from the Adler Real Estate bondholders. We expect to complete the process in the course of June. Following that, we would carry no more unsecured debt maturing before December 2028 in our structure. Separately, we have initiated discussions with the lenders of our remaining 2026 bank maturity, which amounts to EUR 49 million. Here as well, we are confident to resolve these maturities in the coming months. Let's now move on Page 13 and take a look at our current debt KPIs. As per March 2025, our total nominal interest-bearing debt stood at EUR 3.8 billion, a net reduction of around EUR 340 million compared to December 2024, reflecting the refinancing of the first and 1.5 lien facilities and the debt repayments following our completed disposals. The LTV reduced to 67.9%, considering an extraordinary positive effect from the deconsolidation of BCP. The weighted average cost of debt stood at 6.4% at the end of March, which is 200 basis points below to what we reported for December 2024. Obviously, this is the result of the refinancing of the first and 1.5 lien facilities at better terms. And also our cost of bank debt reduced significantly after the repayment of the secured financings associated with the disposed NRW portfolio. The average maturity of our debt is approximately 4 years with most of our debt falling due in 2028. There have been no changes to our credit ratings as per end of March. Let's turn to debt maturity schedule on Page 14. As you can see, there is no debt maturing this year. Looking ahead to 2026, we have around EUR 349 million debt falling due. The majority of this, the EUR 300 million relates to the Adler real estate bond. As discussed, this is currently being addressed with our tender offer. The remaining EUR 49 million of 2026 maturities are under discussions with the respective lenders. We are confident that these will be resolved in the coming months as well. Let's turn to LTV on Page 15. As stated before, our LTV improved compared to the previous quarter. With the deconsolidation of BCP and the NRW portfolio holding entities, our balance sheet has reduced quite significantly, which typically has a positive impact on the LTV ratio. Important to notice that this reflects an extraordinary effect, which is not expected to recur in the coming quarters. Instead, we would expect the LTV to marginally increase quarter-by-quarter, particularly due to the interest expenses. As always, a reminder, kindly notice that our bond LTV with a threshold of 90% is calculated differently, leading to a lower figure than stated here. Let's continue with cash on the next page, Page 16. At the end of the first quarter, our cash position stood at EUR 293 million, almost EUR 50 million higher than per year-end. Our cash holdings are usually invested in money market funds and call money in order to generate interest income. You see the development of the cash position is in the usual format on the slide. The biggest drivers in Q1 were obviously the cash proceeds received from the first closing of the NRW portfolio transaction and the disposal of BCD. The proceeds from the Cosmopolitan transaction are presented on a net basis with the yielding asset disposal bucket, i.e., after repayment of associated secured debt. As stated at the beginning, from these proceeds received, we repaid EUR 236 million of our first lien New Money facility within the first quarter. Restructuring costs refer to the refinancing of the first lien and 1.5 lien facilities and are not expected to recur in the future quarters. And with that, back to you, Karl.

Thank you, Thorsten. Let me now conclude this presentation with some final remarks. We confirm our full year guidance for a net rental income between EUR 127 million and EUR 135 million. The rental business developed positively in the first quarter. We saw 1.9% like-for-like rental growth compared to the previous year. The rental growth, as stated, will pick up in the second quarter based on measures that we have initiated over the last couple of months. Our vacancy rate remains structurally low at just 1.5%. With that, we confirm our net rental income guidance for '25. Following the successful disposals of our 62.8% stake in BCP and the North Rhine-Westphalia-based Cosmopolitan portfolio, our focus is now fully on the residential rental portfolio, especially the 17,900 units concentrated in Berlin. This market remains highly attractive, offering strong fundamentals and significant embedded potential. To support this strategic focus, our key priority remains the disposal of all upfront sale development projects and the completion of a small number of remaining forward sale projects, all until the end of '26. In the current market, this obviously remains a challenge, but we are making good progress. We also now operate with a significantly improved capital structure, not least thanks to the successful refinancing of the first lien and the 1.5 lien facilities in early '25. Importantly, we now have no remaining debt maturities in '25 following the prolongations and repayments made earlier this year. Looking to '26, we are now in the process to refinance our EUR 300 million Adler Real Estate bond through a tap under the first lien New Money facility with the completion expected for June. And with that, I'd like to thank you for dialing in, and we are now looking forward to your questions. Julian, back to you for the Q&A.

Thank you, Karl and Thorsten, and I hand it over to operator yourself to start the Q&A.

[Operator Instructions] The first question comes from [indiscernible].

Just quickly on the Adler Real Estate box. Once you've completed the tender and so on and given the now significantly reduced asset value, is there any plan to collapse the structure and sort of have everything under the Adler Group entity? And if so, are there any meaningful costs associated with that?

Thank you, Peter, for your question. I mean you're fully right with -- I mean, after the disposal of BCP and NRW portfolio, which were both under the ADLER Real Estate subgroup, the group structure for ADLER Real Estate, let's say, simplified significantly. Once we refinance the ADLER Real Estate bond on Group S.A. level, yes, on an ongoing basis, we try to further -- or continue to further simplify the structure. But as of today, there is no plan to fully collapse the ADLER Real Estate subgroup. I mean there are still roughly EUR 500 million value of Berlin portfolio within the ADLER Real Estate Group. So the aim is, as we already did over the last year to further simplify the structure, but for the time being, not fully collapse it.

Okay. Understood. And just a quick follow-up on that. Is there from a cost perspective, a meaningful difference in having these 2 boxes run separately? Or does that in practice not really matter?

No. I mean there is no material impact on the cost structure.

The next question comes from Noor Sehur, Morgan Stanley.

A quick question from my side. On the Adler first lien prepayment, EUR 265 million, how much of that EUR 265 million was repaid before the refinancing versus after the refinancing?

I mean that's something we need to follow up. It's -- I can't give you the exact number right now, but it has partially been refinanced before the refinancing with the first disposal proceeds from BCP and partially after the refinancing, but that's something where we will follow up to you bilaterally.

[Operator Instructions] The next question comes from [indiscernible].

Also just one question for me. If you sort of fast forward towards the end of 2026, beginning of 2027, you'll have sold or hopefully, your development projects, maybe you'll have fully reduced your exposure to Berlin. The debt stack is at that point, very expensive. You've said it yourself, the LTV should be growing quarter-by-quarter. What would be your sort of ideal scenario then. What sort of ratios -- how do you see your future capital structure then? Is that the right time to look at it? I suppose it is. And how would you like to refi? I mean, obviously, if not sell the company, but yes, what would be your ideal structure there?

Well, as you might be aware, there are no maturities until the end of '28. So our structure will overall remain untouched for the time going forward. Let's say, we keep all our options open with regard to asset disposals and closely follow the opportunities in the market.

The next question comes from Niki Kouzmanov of Jefferies.

I just had a question on the developments. And obviously, you've put in the Holsten Quartier and The Wilhelm in the exclusivity stage. Is there any sort of timing that we can expect on how any of these negotiations and sales would proceed from sort of agreeing a deal to completion? And obviously, you've mentioned the [indiscernible] in June being completed now. And I guess that's what triggered the first lien pay down -- the partial paydown earlier this month. So I just wanted to kind of like understand that in the context as well of the holdback basket now being completely full -- well, almost completely full. So should we expect any sort of further development proceeds once deal is complete to enable further first lien partial paydowns?

Yes. Well, thanks. We don't disclose any information on individual sales process and disposals of assets. What I can say is that we have quite a number of assets in different stages of the sales process, and we definitely target some signings and closings over the coming months. Overall, we are not too worried about our basket as there is only EUR 5 million open at this point in time. So that's a very low priority.

Got it. Okay. So if we think about the sort of the only EUR 480 million left, which are not sales agreed on in exclusivity, that imply probably quite a significant amount across the other 8 projects of proceeds that could come in over the coming months. Would that effectively be used to pay down the first lien and going back to the earlier question around a different capital structure, even if you don't refinance anything, just naturally, the LTV is actually going to go down with the development proceeds and paying down some of that, I would say, expensive first lien debt?

Yes. Well, now it is, of course, our objective to repay the debt as quick as possible. So whenever we will have incoming funds from the disposal of our assets, we'll be very quick to then repay the first lien.

Okay, which kind of explains what happened early in May -- I think it was like 9 to 14th of May for that EUR 30 million first lien paydown?

Yes, that was the disposal proceeds from the [indiscernible] project.

[Operator Instructions] Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Dr. Karl Reinitzhuber for any closing remarks.

Thanks, everyone, for joining today. I may alert you to our upcoming AGM, the Annual General Meeting being held in Luxembourg on June 25. By the end of summer, we will publish our Q2 report on August 28, and the respective results presentation will take place on the same day. Thorsten and I look forward to speaking to you then. All the best for everyone. We close the call.