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

Good morning, everyone, and thank you for joining us for the Adler Group H1 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 hand it over to Karl.

Thank you, Julian. Welcome to all of you. Before we start with the Q2 numbers, let's have a look at the status of our recent disposals on Page 4. As communicated before, the BCP transaction was fully completed in the second quarter. 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. We have also fully completed the disposal of our North Rhine-Westphalia portfolio holding entities. We recently exercised the put option in order to transfer the remaining 10.1% stake in the respective propcos to the buyers, Orange Capital Partners and One Investment Management. The closing occurred just a few days ago and proceeds will be fully returned to the investors of our first lien New Money facility. We also continue to make progress on the disposals of our development projects. Since the beginning of the second quarter, we have completed the transactions of our 2 Cologne-based projects, CologneApart and Cologneo III. Furthermore, we signed a contract to sell our Düsseldorf based project, UpperNord Tower, which will be transferred to the buyer, Nexus Investment, by year-end. As you may have read in the press, the real estate developer, Quantum, and the Hamburg-based housing provider, SAGA Group, have been granted exclusively to purchase the Holsten Quartier, one of our prime development projects. We are confident to be able to sign a sales contract in the coming weeks. We also expect progress on our development asset sales over the next couple of weeks and months, such as The Wilhelm, Benrather Gärten, VAI Campus and Schwabenlandtower, just to mention a few. Please let me also mention one significant milestone on our forward sale project, Ostforum in Leipzig. On this landmark building with a total rental area of 20,000 square meters for office, residential and retail, we signed a long-term lease contract with the big four audit company, Deloitte, 2 weeks ago. Deloitte will occupy around 8,000 square meters, more than 2/3 of the office space available in the building. This is the biggest commercial lease in Leipzig this year. We are convinced that this will allow us to negotiate further attractive lease contracts for the remaining space and ultimately enable us to successfully sell the project to a long-term investor around the completion at '26. In terms of smaller unit asset sales, we took the opportunity to dispose around 60 units in Berlin in 2 transactions at around book value. The larger of these 2 transactions in the volume of EUR 10 million will close by year-end. The other one is already done. We also continued the disposal of our noncore assets in Eastern Germany, thereby reducing the remaining units from 220 down to 162 million. Further disposals of these noncore assets are in the pipeline. As of now, with EUR 245 million, our disposal holdback basket of up to EUR 250 million is almost fully filled. Now we move to Page 6. First to the financial highlights. Compared to the prior year period, net rental income decreased in the first half of the year as a result of the disposals of BCP and the North Rhine-Westphalia portfolio. The decrease was partly compensated by rent increases realized on the remaining assets. We are well on track to reach our 2025 net rental income guidance in the range of EUR 127 million to EUR 135 million. The adjusted EBITDA from rental activities amounted to EUR 40 million with a slightly improved margin compared to last year. The adjusted EBITDA total was negative as the development segment did not contribute material earnings and was impacted by construction costs. Our group's total equity position amounts to EUR 1 billion. Our LTV increased slightly to 72.1% as expected. Our cash position amounts to EUR 285 million, largely unchanged compared to the last quarter. Thorsten will provide more color on financials later in the presentation. We are very happy with the performance of our rental portfolio in the recent quarter, particularly with the 3.4% like-for-like rental growth, and we'll have a closer look at all KPIs on the following slides. Let me quickly discuss our H1 revaluation results realized in this quarter. We continue to see a different dynamic for yielding assets and for development projects. Valuations for our yielding assets continue to stabilize with another slight increase in values reported for H1 '25. On the other side, values for development projects are still under pressure due to continuously rising construction costs as well as flat values for new build residential apartments in Germany. Almost half of the negative like-for-like revaluation of our development results, well, in the minus 15.5% attributable to the development project, The Wilhelm in Berlin, for which we booked the provision to account for the expected sales price, which we will generate at closing currently expected for September 2025. Now let's proceed to portfolio and operational performance on Page 8. As of June 2025, our total number of rental units stands at 17,772. It's a marginal decrease of 136 units compared to March 2025, driven by the mentioned disposals signed in Q2. Our portfolio is fully Berlin anchored with more than 99% Berlin assets. Only 162 units are located outside of Berlin, and we expect to sell these units within the coming quarters. In terms of value, the GAV of our yielding portfolio remained stable at EUR 3.5 billion. This reflects virtually no change from prior periods as there were no material revaluations and only limited disposals during the second quarter. The GAV per square meter increased slightly to EUR 2,843, up from 2,821 in Q1. Let's now move on to Page 9 to discuss yielding portfolio valuation. As in previous periods, our semiannual portfolio valuation was conducted by CBRE. After 3 consecutive years for -- of like-for-like value declines, the first half of 2025 confirms that the devaluation phase has come to an end. Our portfolio recorded a positive like-for-like fair value change of plus 1.4% in H1 2025, while rental yields continued to expand to 3.5% from 3.4%, the realized value uplift stems from our rental growth and is supported by the stabilized interest rate environment. The positive revaluation is also reflected in the results of our market peers. Please join me now on Page 10 to discuss our further operational KPIs. As projected in our Q1 results, we saw our like-for-like rental growth to pick up again more significantly in the second quarter. For the 12 months to June 2025, rental growth amounted to 3.4%, well in our target of around 3% per year. The main factor was that the contribution from the Mietspiegel related rents well -- delivered well. The rent increase for almost 4,000 rental units became effective in the second quarter. Over the last 12 months, we increased the rent of more than half of our residential units. For the 12-month period ending June 2024, we had reported a rental growth of 5.2% for our Berlin assets, which was mainly driven by the strong Mietspiegel related rent increases in H2 2023. Therefore, H2 2024 was rather flat as the time between the 2 rent increases is not less than 15 months by law. Also with inflation being higher at that time, we had an additional extraordinary contribution from the CPI-linked rental contracts in Berlin, which account for approximately 1/3 of our units. That said, we feel comfortable with the 3.4% reported now as this reflects a rather sustainable level in line with our midterm annual target. Our average rent increased from EUR 7.65 per square meter per month reported a year ago to EUR 8.45 in June 2025. This growth is largely driven by the disposal of the North Rhine-Westphalia Cosmopolitan portfolio, which had structurally lower rents compared to our Berlin assets. On a like-for-like basis, the average rent grew from EUR 8.16 to EUR 8.45 per square meter per month. Turning to vacancy. Our operational vacancy rate remains at a very low level of 1.6%, slightly down from 1.8% a year earlier. This confirms the continuous demand for rental apartments in Berlin driven by continued population growth and the structural limited new housing supply. Now I would like to hand it over to Thorsten, who will walk you through the financials, starting on Page 12.

Thank you, Karl. And also a warm welcome from my side. At the end of June 2025, our yielding portfolio was valued at approximately EUR 3.5 billion, and our development portfolio at around EUR 800 million based on externally appraised values. This brings our total GAV to about EUR 4.3 billion, slightly down from EUR 4.5 billion at the end of March '25. As mentioned before, the development projects saw a like-for-like valuations of minus 15.5% compared to the previous quarter. This lowered the GAV by around EUR 150 million in H1 2025. This was largely caused by continued increases in construction costs as well as the persisting challenges for residential new build in Germany, as explained by Karl before. Additionally, there was a marginal decrease due to the disposal of the UpperNord Tower and office project in Düsseldorf. In yielding assets, the decrease in value resulting from disposals was more or less compensated by the positive revaluation result of 0.4% during the first 6 months in 2025. Let's now move on to the financial update section on Page 13. One achievement that we realized in the second quarter was the successful refinancing of the Adler Real Estate 2026 bond. In May 2025, we had launched a cash tender offer to repurchase the outstanding EUR 300 million Adler Real Estate senior secured notes due April 2026. The offer closed with a strong participation rate of around 95% with EUR 285 million nominal tender at the purchase price of EUR 98.5 per EUR 100 principal plus accrued interest. To fund the repayment, we upsized our first lien New Money facility by EUR 281 million. The transaction settled on 27th June 2025, reducing the outstanding nominal of the Adler Real Estate 2026 bonds from EUR 300 million to EUR 15 million. With the successful refinancing, we have now no material capital market indebtedness maturing before the end of 2028. Turning to debt repayments and prolongation. We made further partial redemptions of the first lien New Money facility in Q2 and Q3 2025, thereby returning approximately EUR 50 million to the holders in their respective instruments between April and August this year. The proceeds resulted from the second tranche of the BCP transaction, smaller yielding assets and condo sales as well as the completed sale of the development project, Cologneo III. Proceeds in the amount of EUR 21 million received for transferring the remaining 10.1% stake in the Cosmopolitan portfolio are scheduled to return to the investors of the first lien New Money facility next Monday, September 1. Please let me also mention that we completed the prolongation of EUR 21 million secured loan originally due in Q1 '26 to Q4 2028. As for 2026 maturities, only the remaining EUR 15 million of the Adler Real Estate bond is due April '26, and discussions are ongoing with lenders regarding the prolongation of the remaining 2026 bank maturities. Let's now move on to Page 14 and take a look at our current debt KPIs. As of June 2025, our total nominal interest-bearing debt stood at approximately EUR 3.8 billion, broadly unchanged from March '25. This reflects the offsetting effects of the tender offer of the Adler Real Estate '26 bonds funded through an upsizing of the first lien New Money facility and ongoing partial debt repayments from disposal proceeds. Our LTV increased to 72.1%, with the revaluation of our development assets being the main driver. The weighted average cost of debt increased to 7.1% at the end of June, due to the refinancing of the Adler Real Estate bonds at terms of the existing first lien New Money facility. Our average debt maturity continues to stand at around 4 years with the majority of maturities concentrated in 2028. Following the settlement of the Adler Real Estate bond tender offer, S&P revised its ratings on the Adler Group and Adler Real Estate instruments on 30th June 2025. The issue rating on the first lien New Money facilities was downgraded from B+ to B due to the upsizing in volume. The ratings on the 1.5 lien secured loans and the remaining Adler Real Estate senior unsecured notes were successfully downgraded from CCC+ to CCC. The rating on the second 2L notes due 2030 remained unchanged at CCC. The issuer credit rating of Adler Group remains at B- with a stable outlook. Let's turn to the debt maturity schedule on Page 15. As told in Q1 results, there is no financial debt maturing this year. Looking ahead, our next maturities are in 2026 where we have a total of EUR 42 million due comprising EUR 15 million of the remaining Adler Real Estate bond maturing April '26, and EUR 27 million of bank debt maturing between March and December '26. Discussions with the lenders of the '26 bank maturities are ongoing, and we are confident that those will be addressed well ahead of maturity. As you can see on this slide, 97% of our financial debt matures in '28 or beyond. Let's turn to the LTV on the next page, Page 16. As projected last quarter, the LTV increased again this quarter mainly due to 3 drivers. First, the negative H1 revaluation result for our development projects including the provision booked for the onerous contract in regards to The Wilhelm project. Second, the usual impact from interest expenses, both paid and accrued. And third, CapEx expenses for our yielding and development asset portfolio. As always, as a reminder, kindly notice that our bond covenant 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 17. At the end of the second quarter, our cash position stood at EUR 285 million, which is no material change compared to the last quarter. As you might know, we invest our cash volumes usually in money market funds and call money in order to generate interest income. You see the development of the cash position in the usual format on the slide. On the cash inflow side, we realized proceeds from various disposals. Yielding asset disposals, including a multifamily house that we signed in December last year as well as several condo sales. Development asset disposals, including the completed sale of the CologneApart development project. And third, the remaining tranche of the BCP transaction. As projected in our last call, payments relating to our restructuring costs have been declined significantly. The EUR 29 million debt repayment in Q2 resulted from the second tranche of the BCP transaction and the sale of a Berlin yielding asset. Further redemptions were made post Q2 balance sheet date. Kindly note that the repayment of the tender Adler Real Estate 2026 bond is blended with the upsizing of the first lien New Money facility in the amount of EUR 281 million. And with that, back to you, Karl.

Thank you, Thorsten. Let me now conclude this presentation with some final remarks. Experts see a moderate improvement in the residential real estate market, more in standing assets than a new building activity. This is in line with our current experience at Adler. We have passed the valuation turning point and see a stabilization of yielding asset values, which is not yet true for development assets. Overall, it is the market expectation that yields will no longer expand. We are able to capture rental growth with our strong 3.4% like-for-like growth in line with our expectations, and we confirm our net rental income guidance for 2025. We have completed the BCP and North Rhine-Westphalia portfolio transactions and remain fully focused to dispose or complete all remaining development projects. In the current market for this particular asset class, this remains a challenge, but we are making good progress as a credible and trustable partner. For example, when it comes to the Holsten Quartier in Hamburg. On the capital structure side, we successfully refinanced the EUR 300 million Adler Real Estate bond and are now facing no material capital market indebtedness before end of 2028. Just as Thorsten said, 97% of our financial debt matures only in '28 or beyond. It goes without saying that we remain focused on our comprehensive cost-cutting programs and budget discipline to ultimately preserve our liquidity position. And with that, I would like to thank you for dialing in. We are now looking forward to your questions. Julian, back to you for the Q&A.

Thank you, Karl and Thorsten. And I'll hand it over to our operator for Q&A.

[Operator Instructions] The first question comes from the line of Wolfgang from Sarria.

I really only have one question, and that relates to your operating income, which is relatively low this year, if not largely flat. What's been weighing on that, please? And I'm afraid I might have missed it if you've said it.

So Wolfgang, it was quite difficult to understand. If I understood you correct, you basically refer to the development of the net rental income, where we basically have the effect that in the first 6 months of '24, we had a rental income for the Berlin portfolio, 6 months BCP and 6 months Cosmopolitan. Whereas if we look at our net rental income in the first 6 months of this year, it's only 6 months Berlin, 2 months Cosmopolitan and no contribution for BCP since we sold it at the 2nd January this year. So basically, what we can see is that remaining focused on executing our strategy, i.e., focusing on the Berlin portfolio also is now reflected in our numbers in the P&L and in the balance sheet.

But would you therefore say that your operating cash flow as per Slide 17, the first item, should that remain flat going forward? Or is there something in there that you can cover?

No, it basically means that we continue to have a cash balance of shy above EUR 300 million, most likely not because I mean we have certain costs from the development area, which are right now not being covered by the rental income. So basically, going forward, we expect that the cash balance, which was at EUR 285 million by the end of June, should go down by quarter-by-quarter, ideally with, let's say, reducing -- decrease. But at the end, going forward, we expect that the cash balance will be lower than as it is or as it was by the end of June.

The next question comes from the line of Armin Akhavan from Schonfeld.

The rental guidance that you've given, is that like-for-like versus the EUR 123 million of rent you should for as of Q2? Or does that include rent from disposed assets during Q1?

Yes. This includes 2 months of our North Rhine-Westphalia portfolio, January and February, and 12 months from our building portfolio.

Got it. How much is the 2 months of the Cosmo portfolio?

One second. It's EUR 6 million. You can find it on Page 24.

Perfect. The question -- a couple of questions on your projects. You show in the presentation a breakdown of the appraised values by city, which sums up to EUR 934 million. How does that compare? And then obviously, like earlier in the presentation, you show a total value of EUR 800 million. Can you just help me bridge the gap between those 2 numbers?

Okay. So the EUR 934 million on Page 23 includes 3 projects, Grand Central, Eurohaus and UpperNord Tower that are already sold where the SPA has been signed, but which have not closed to this day. Our GAV of EUR 830 million does not include these 3 projects. That's the bridge.

Okay. That's helpful. All right. Got it. When looking at your GAV for the forward sales, the EUR 137 million. Does that reflect any provisions you might have taken because of cost overruns or lower than initially expected rental income?

To what number, 137, what are you referring to?

The forward sales, you have 2 forward sales. I think the GAV for the 2 together is EUR 137 million, just a sum. And I think -- I just wanted to check, like in case you have taken any provisions because costs were just higher than initially expected or rental results are going to be lower than initially expected. Would that be reflected in that number? Or would that be gross of any provisions? Because I think in your annual report, you had some provisions for forward sales.

Yes. Well, let's say, the cost structure of the project would not be reflected in the GAV. But we have added, if you see the columns further right on Page 32, the CapEx for up to the date of June '25 and the remaining CapEx for the 6 months, July to December '25, which will give you an indication of the cost situation of the project. We can say that we have a slight cost overrun compared to last quarter in Quartier Hoym in Dresden, but well stable on the other assets.

Okay. Helpful. On your upfront sales. For some of the projects, it seems like you signed and you closed relatively quickly. For others, the time between signing and closing can be fairly long period of time. Can you just explain a little bit what that is driven by like why do some projects take much longer to close than others?

Yes. Well, we have, let's say, quite different starting points for the different projects, particularly with regard to the situation of planning permit and building permit. So in some cases where we take a longer time, most in these cases, some discussions with the authorities will have to take place to give the buyer comfort on the cornerstones of the planning permit going forward. So this is taking some time. And for this reason in some of the projects, we have quite significant time between signing and closing.

Understood. So for example, for the Holsten project, you mentioned that you expect to sign that in the near term. And I think if we believe the numbers in the press, it would be a meaningful disposal.

On Holsten, we have not signed yet, right? We expect signing in September, and we would then expect maybe 6 months to closing.

6 months. Okay. All right. Got it. And then last question for me. If we look at the 5 projects where you -- that you have under exclusivity but you haven't signed yet. Can you tell us what the aggregated appraised value for these assets is? So not by project, just like the aggregated for the 5.

Well, we do not report individual GAVs or individual also, let's say, numbers for subgroups of assets. So I'm sorry, no.

[Operator Instructions] We now have a question from the line of Antonio Casari from Northlight.

I actually had the same question as the previous person had. I can try to ask it in a different way. You provide the land plot and the area for the projects in Slide 31. And if I calculate the 5 projects in exclusivity represents roughly either 33% of the land plot or 45%, 46% of the area excluding the first 4 project. Is that percentage somehow reflective of how much value they represent of the EUR 130 million GAV that you disclosed?

Well, again, we are not reporting the individual GAVs of projects or subgroups. So I'm sorry.

But just in general, the land plot of the area, is it -- it's the only thing that you report, so.

Yes. This is true, yes. But well, I would say we have different status of maturity, if you like, on different projects, right? We have different levels of planning permit or building permit. And in some cases, like on The Wilhelm, for example, there is an excavation fit already in the ground, yes. So I think it's difficult. But let's say, as this is maybe the best proxy we have, I guess you have to do with it.

Okay. Perfect. And just confirming, once you signed the contract, do you receive any payment? Or is there any penalty for the buyer in case it does not...

Yes. Our standard in our SPAs is that there is a down payment of at least 10% to escrow with signing. And in case the buyer doesn't eventually close, that would work as a penalty. But we don't have -- we don't see really any cases where the buyer would not close.

No, it was in -- with reference to this, you mentioned 6 months of -- between signing and closing. So 6 months is a fairly long time and a lot of things can happen in this respect. So that's why I wanted to...

Yes. But this 6 months is, I would say, let's say, for Germany, if you buy a land plot or an asset, it would always take you up to 6 months with all the conditions precedent for the -- like the municipalities, right for first refusal and so on. So it takes quite some time for the conditions to be fulfilled.

The next question comes from the line of Niki Kouzmanov from Jefferies.

I have a couple, but maybe if you can start with a continuation of the net rental income. And kind of like the EUR 123 million shown on the portfolio overview table, which drives the implied rental yield of 3.5%. And then kind of like the annualized 2Q number, which would not include North Rhine-Westphalia, the Cosmopolitan portfolio anymore. What is driving that delta? And can we sort of see either further valuation upside going forward? Or based on this run rate 2Q '25 net rental income that you reported or effectively a widening of the implied yield, which sort of my understanding, was based on peers as well, you're not expecting? And then I have another follow-up question on the building portfolio.

Yes. Thank you for your questions. The first one with regards to the net rental income. So if we annualize the June rental income of the Berlin portfolio, i.e., you multiply it by 12, we will be at around EUR 123 million annualized. What you can see in our guidance is EUR 6 million contribution from the Cosmopolitan, i.e., so you can deduct EUR 6 million from the guidance. And if we then basically take the June rent where we already have some rent increases that we conducted within the first 6 months of the year, i.e., taking the June rent times 12 is EUR 123 million.

Okay. I was using the EUR 31.5 million from the income statement, which gives me EUR 126 million. It was kind of like the number that I was...

Which number do you have?

So EUR 31.5 million or EUR 31.484 million times 4. So is that the whole second quarter rather than just June monthly?

Maybe I think it's getting too technical. Maybe we can take this separately or bilaterally after the call.

And then on Berlin, there were some media reports earlier this quarter talking about potentially the company thinking about winding down that portfolio next year and preparing for that potential on hiring advisers. Is there a timing on when you think some Berlin sort of portfolio sales might happen, whether the whole 17-plus thousand apartments or subsets of that? Has there been any progress around that?

Well, we don't comment on these rumors. But what we can say is that we hired an adviser to assess the options on -- for our Berlin portfolio, but we are far from taking any decisions. So this is what we can say at this point.

Is there any timing on when you'd be in a position to comment?

No. There is not.

Good. And then my other question, just a final one. Third one, maybe sort of a little bit in relation to all these disposals. And obviously, you've been paying down from proceeds, the first lien. Once -- if you think about The Wilhelm, the Holsten Quartier, there will be a few more sort of sizable development sales, which hopefully should reduce the first lien further in the sort of the debt burden. Have there been any thoughts around a potential refi of the first lien and 1.5 lien after sort of the non-call on the 1.5 lien has lapsed?

No. I mean there are, as of today, no specific plans to, again, refinance the first lien and the 1.5. lien. I mean, as you just mentioned, our holdback is more or less fully filled, EUR 245 million to EUR 250 million. And so whenever we now generate disposal proceeds, they will be used to repay the first lien, respectively. But as said, there are currently no plans to do another refinancing as of today.

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

Yes. Thanks, everyone, for joining today. We will publish our Q3 report on November 27, 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.