alstria S.à r.l. (AOX) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of alstria office REIT-AG regarding the half year results 2021. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Olivier Elamine, who will start today's conference. Please go ahead.

Thank you very much, and good afternoon, everybody. Welcome to the first half results presentation from alstria, from cloudy Hamburg today. I'm here in the room with Alexander Dexne, which is alstria's CFO; and Ralf and Julius from our team, which you know well. Before we run into the presentation, if I can just introduce briefly the disclaimer about forward-looking statements and the duty to update. And without undue delay, maybe I give you a brief overview about the performance of the company over the first half of 2021. All in all, I think it's fair to say that the business has fared extremely well. Considering the situation, our collection rate has been very close to 100% all across the pandemic, and the business has developed pretty much in accordance with what we were expecting, considering the overall economic situation out there. Our revenue are at EUR 90 million, slightly up compared -- I mean, 3.2% up compared to last year. Our FFO is also up at EUR 58.5 million, which bring you to an FFO per share of $0.33. We do confirm the current guidance that we have on terms of revenue and FFO, as you know. And as this is usually the case within alstria, our FFO rates tend to run a bit higher in the first 6 months of the year, and then there's a bit of catch-up, which is essentially linked to the underlying operation of the assets, where a lot of the work is actually finalized and invoiced during the end of the year. So we do believe that the company is pretty much in line to hit at current target. The leasing market, and I'll spend a bit more time on that in a minute, is improving and we're seeing a bit more momentum with new leases this year of around 13,000 square meter and lease extension and renewal of 24,000. I mean that's obviously substantially lower than what it was 2 years ago. But then again, the vacancy in the portfolio is a bit different than the underlying situation is different. And all in all, this is, again, developing in line with our expectation. The EPRA NTA at EUR 18.10 is essentially impacted by the dividend payment. And our net LTV, which is also impacted by the dividend payment is at 29.5%, so below 30%. If we move to the portfolio update, I'm not going to run through the number one by one. But I just wanted to highlight the fact that you might have noticed on the map we don't have the point which is called others, and that's because we have been using the opportunity of a strong market to clean up the portfolio as much as we can. And with the sale of the Trier properties that we had, we are almost done now with that. And from there on, the optimization of the portfolio is essentially from moving from periphery of the city and the market in which we are closer to the center. If we move to the letting market, we just discussed a bit the performance in terms of letting with slightly short of 40,000 square meter. We are seeing a bit more momentum building up in the letting market. We are having more discussion and activities, albeit the overall signing of leases is still a bit slow. The situation have not materially changed since last time we spoke. We have a lot of activity in the smaller lease area. Everything below 1,500 square meter is pretty liquid and functioning well. It is in the mid-market segment, everything between 1,510,000 square meter, where decisions are a bit slow. And here again, we don't expect that this is going to change materially before we have a clear exit from the health situation. The conversations that need to take place at the level of our clients in terms of human resources management, how company want to get organized, what the impact from work from home is going to be on the need of offices, all those conversations need to take place. The decision on the real estate side is just going to be an output from that. But we are seeing an increasing -- we are having increasing conversation and increased momentum as we speak. Obviously, the vaccination which is happening quite fast in Germany is helping to build up on that momentum. What we're also seeing is that there is a substantial backlog which is building up. So company need to make decision that just postponing that. And so we do expect that once we have clarity, we should see an extremely strong letting market, which in essence is going to reflect the kind of 18 months of backlog that we were running through as of today. All of that obviously is still subject to having clarity on the health front and making sure that the situation normalizes as much as possible going forward. I did hand to that a bit earlier. We have sold the nursing home that we had in Trier, which was coming from the Deutsche office portfolio. And we expect the deal to close in Q3 2021, which was one of the last assets we had outside of our core area right now, which are, as a reminder, in Hamburg, Berlin, this is old Frankfurt and Stuttgart. And we have also used the opportunity to reinvest in Berlin with this acquisition of an office property in the heart of Berlin-Kreuzberg with a relatively low in-place rent at EUR 9.60 on average. Part of that asset is linked to hospitality, which also presented some kind of opportunity for us. And the intention is to reposition this asset over time and benefit from the attractiveness of the location in the Berlin market and substantially higher end that could be achieved once the asset has been repositioned and refurbished. We're glad that we were able to secure that property with the acquisition of -- that we have announced earlier this year in Frankfurt, that would make us for a net buyer this year, which is -- was clearly not our expectation at the beginning of the year. But we are finding when we dig deep enough still opportunity to deploy capital in the German market. Moving up to the balance sheet briefly. The investment property have increased by 2.1%, which is essentially reflecting the amount of CapEx that we have been spending on the portfolio as well as the acquisition at 30th of June is only reflecting the Frankfurt acquisition. Equity is down 1.2%, which is essentially the net impact from the dividend payment and the profit for the half year. And the net financial debt is also up slightly, which is again the reflection of the dividend payment, which has taken place after our AGM of EUR 93 million. As we rebuilt as the dividend caution, we should be able to navigate and fluctuate on the net debt, depending on the dividend payment. If we move on to the profit and loss statement, gross rental income is up 3.2%, which is essentially a reflection of the lease that have started on our development pipeline and the full year effect on some of the leases that have started last year. Funds from operation are up. We've discussed that a bit briefly earlier, 7.5%. And again, bear in mind that we will have higher real estate operating cost going forward, and therefore, we would be more or less in line with our FFO guidance for the year. SG&A are relatively flat for the period at EUR 13.7 million. I think there is from my perspective, really 2 or 3 actually elements that I would like to highlight in the first half of the year. The first thing is the resilience that the company had, not only in the first half of 2021, but also in the whole of 2020, with -- I mean, our collection rate remaining extremely high. And despite the slowdown of the letting market, we've been able to perform relatively strongly on the operational perspective. Clearly, we were expecting that the letting market would be weak across the year in 2021. And we have not been disappointing with our expectations, but we are seeing more momentum building up, more inbound inquiries, albeit we're not seeing -- I mean they're not transforming yet into signatures, but we do believe that this momentum is building up and showing that the backlog is building up. And therefore as soon as we will see some kind of recovery and clarity on the health side, we should be seeing a relatively strong letting market, at least in the market in which we operate. The investment market itself is still very much supportive. The transaction that we're seeing in the marketplace do confirm the values at the end of 2020. There are also some of them which tend to show even higher valuation moving forward. As you know, we will update our valuation at year-end 2021. There was no formal external valuation from the portfolio at midyear. And again -- and I think this is -- as it has been the case for the last 14 years now, we do confirm our full year guidance, and we do expect to meet those guidance going forward for the full year. Having said that, that's going to be all on my side for this afternoon, and I'm looking forward to our conversation. Operator, if we can open the Q&A?

Of course. Ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] And the first question is from Ben Richard (sic) [Ben Richford ], Societe Generale.

Just quickly, just interested, you've obviously been looking at the Berlin market and a good acquisition in the first half. Do you expect to follow that up with more acquisitions, particularly in Berlin? And as you look further out, do you expect to remain as a net buyer, given your confidence in the market outlook and balance sheet?

Well, Ben, thank you for joining us this afternoon. We are constantly looking in the market for further acquisition. It has proven kind of challenging to fund assets that would meet our underwriting criteria. But as the 2 acquisitions we've made this year tend to show is we are still able to do that. So I'm always hopeful that we would be able to find more value and deep value in the market at which we're looking at. That's clearly something we continue to be looking into. On the disposal side, we are looking at it very much from an opportunistic perspective. So we did sell now most of the assets that we wanted to sell. And if we were to dispose more, it's really about optimizing the overall quality of the portfolio. So we're really trying to focus the portfolio in more central area of the market in which we are, which we believe would be more resilient and will outperform over the long term and probably exiting some of the more peripheral areas that we have and again, still in the portfolio we're working on. But what we have done and what I was trying to hint toward during the call is we have basically exited all the smaller market or most of the smaller markets, which were completely remote compared to where we are and which were more like the result of historical acquisitions that we have been doing in the past.

I've just got one follow-up question, which is, I guess there's a clear trend towards quality outperforming in office markets, including your own. And obviously, some of the properties you own are quite old. So I just wondered how we should think about that in terms of I guess the environmental credentials of your portfolio and what the future tenants' requirements on ESG mean for your refurbishment costs going forward?

So I mean, if you remember -- I mean, our underlying business model has always been the same is -- and we look at ourselves as a transition agent. So we basically buy old buildings. And through our ownership, we basically upgrade them to put them in line with the need of the current tenants. And that includes among other things as the environmental performance. So I mean, one of the reasons why we've been very, very cautious and some people would call us conservative on the acquisition side is because our underwriting criteria has always incorporated the view that we will need to upgrade the building from a sustainability perspective, which might have come on the radar of other investors like over the last 6 months, but has been on our radar for the last 10 years. So from a CapEx perspective, we already incorporate in our underwriting, and we have been doing so for years now, the need to upgrade the ESG credential of any building. So the changes and the conversation that are taking place right now are really not something which is kind of creating lot of trouble and headaches at alstria side, because that's something which has been embedded in the way we've been doing business. Where I do agree and I would concur with what you said, because this is how the portfolio was built. The assets are actually -- that we own are pretty old, but they are all very well-located, and they all have the potential to be attractive for future tenant. And from my perspective, this is really the attractiveness of what we have to offer here, because we have like 1.5 million square meter of assets that need to undergo that process, that can undergo that process and that can deliver substantial increase in upside into rental income when that has taken place. And the yield on costs with delivery on those is substantially higher than anything else we can find in the marketplace. So in essence, we are kind of sitting on EUR 1.5 million of potential work that we need to do in the future, which is going to like fuel the organic growth of the company going forward.

The next question is from Kai Klose of Berenberg.

May -- could share some thoughts about your current conversations with tenants, either existing or prospective ones, what they are looking for in terms of space or in terms of lease structure, the structure of lease lengths? Is it more shorter term, more flexible? Or are they looking for more, let's say, communal area rather than single offices? So maybe you have seen a bit of a change there. Or is it more kind of delayed process because of the COVID pandemic?

So I think -- I mean, there is no simple answer to your question, Kai. You are having basically as many conversation as you have tenants. We have seen and I have discussed yesterday, one conversation with a tenant, which is basically turning around his layout within his premises where he's moving from like 30% collaborative space and 70% offices to 70% collaborative space and 30% offices. We're also having conversation with tenants which are not changing anything to that space. So you basically have like all the extremes that you can think about, which are currently playing in the market. And that's from our perspective reflect the fact that giving what we've all been through over the last 18 months, different people are taking a different view. It seems also to be very much dependent on the business in which you are, so some business like advertising agency, et cetera, might be more inclined to increase collaborative space and less inclined to have some workspace, but that's also not -- I mean, you can't also generalize that because you have also examples within the same industry of people behaving differently. So we are going literally to all the shade of grays right now with our conversation with the tenant. Within -- in essence, it's not a problem per se, as long as you're able to accommodate those things, and you're prepared to have those conversation. But that's also what's taking a lot of time for people to make decision on leases, because it's not only that they are going to all shade of gray in the conversation with us, but they're also going through all shade of gray in their internal conversation. And then situation can change radically from one day to another because somebody else has been asked and is coming with a new answer to the same questions. When it comes to -- because I think one of your question was related to lease terms, at this stage, at least in Germany, we're not seeing a massive impact of what we're discussing in terms of the lease term. What we're seeing is people extending their current leases a bit longer, but that has more to do with the fact that they cannot make necessarily a decision on how they want to organize themselves and therefore, they'd rather stay where they are. But when we're discussing like new leases, we're still discussing 5, 10-year leases, and we have not seen like the kind of more flexibility conversation that you might have heard about in other markets.

The next question is from Manuel Martin, ODDO BHF.

Two questions from my side, maybe one by one. A follow-up question on Kai. Have you seen any trends in regards to rent prices during a conversation with tenants? Are prices rather stable? Or is there a slight pressure to the downwards or to the upwards? Maybe you can give us some flavor on that, please? That would be the first question.

I mean, at this stage, we -- I mean, the conversations are not about rent. So we don't have a major conversation about downward pressure on rent. If anything, pressure is slightly upward on rent. We are renewing leases at rent, which are slightly higher from what they were before. And the -- and there is maybe a bit more incentive that has built in over the pandemic, but nothing really material. What you need to bear in mind is we came into that situation with a market where -- which was extremely landlord-friendly. And so we gave a bit on that as a market, not necessarily as alstria specifically, but as a market, so there is a bit more incentive going into the leases, but the headline rents remain relatively strong. I mean, the vacancy rate in most of the market in which we operate are still relatively healthy. So it's not so much about the rent level, right now it's more about tenants trying to figure out what kind of space they need, how much space they need and how they want to get organized within that space. It's not so much a rent conversation.

Okay. I understand. My second question would be, well, a question about Brookfield, it's a simple question. Is there anything new what you've heard on would alstria feel good being together with Brookfield? I don't know whether there's something new on that topic.

I mean -- I mean, the last thing I read about Brookfield was written in a Bloomberg article, but I have no like further information about that. As we said in the article, we have and we have had, over the last 10 years, a number of conversation around like merger, acquisitions, being taking private, taking other company private. I think that's part of the life of a listed company. You're both a predator and the prey at any given moment in time and you need to be ready for all those things. We did have conversation with Brookfield, among others, around that, but we have not had, and we're not in negotiation right now with Brookfield. So I mean, I don't know whether I would feel good with them because at this stage I'm not sure they want to be with us in the first place. As soon as we have -- and this is what we've said about Brookfield, but it would be true about anybody else, if somebody submits an offer and is interested into buying alstria, we would obviously look at that offer on its own merit and then make up our mind and take a view at the moment where this will come. I mean, we're currently not in that situation.

[Operator Instructions] And the next question is from Monika Leykam, Immobilien Zeitung.

I was too late to pull back my question. I was asking -- I was intended to ask about Brookfield, and this had been answered.

You're welcome. I still hold you an article. I'm -- I have not forgotten that.

So then may something happen, although it would be a pity I think to see alstria disappear from the listed sector. That's it.

We're still alive and well.

Very fine to hear. So no more questions.

[Operator Instructions] And the next question is from [ Veronique Matten ], Kempen.

Two quick questions from my side. Can you maybe give some more color on the difference between the different cities that you're active in? Are some regions recovering faster in terms of leasing activity and maybe also in terms of transactional activity?

I mean in essence, the short answer is we're not seeing any major differences between the market in which we are. In terms of investment activity, so in terms of leasing, the momentum that we're seeing building up, it's true across all the markets in which we are. We're having increased competition right now in -- irrespective in the sector or the city in which we are. The investor market is a bit different, where you have some market like Dusseldorf, which are a bit less active, or Stuttgart, which is a bit less active than market like Hamburg, Berlin or Frankfurt, where you see a bit more activities. But I'm not sure you can read a lot into that, given that the investment volume are still relatively low compared to what they used to be before or at least a number of transactions because the volume in each and every transaction is going up, so the volume might be equal, but the number of transaction is lower. So in essence, the kind of experience that we had in the past, which is that the German office market within the 5, 6 large German market, it's pretty much moved pretty much in sync, still seems to be confirmed today with our experience on the ground.

Okay. And then maybe my second question. What essential -- maybe what amount of square meters of the leases that are expiring in 2021 will have to be renewed? And can we assume that they seem to increase over the third and the second half of the year? And does that maybe also give some opportunity to accelerate the refurbishment cycle?

So I think we have a pretty decent view of the amount of square meters that are going to expire at the end of this year. I mean, we have -- I mean, our larger expiry is going to be in the Stuttgart area, where you have part of the also [ Dalmer ] asset, which is going to expire, which we're currently discussing with a number of potential tenants, and we intend to refurbish. The pace at which we renovate our portfolio, which is currently around 3% per annum, is something we have already doubled over the last like 3 years, basically since we took over Deutsche office in essence. And we are investing right now somewhere around EUR 150 million on average over a 2-year period of time in the portfolio. I think there is no real intention on our end to accelerate that, neither there would be the possibility because that pace already kind of anticipate all the future vacancy that are coming through the portfolio. So the only way for us to do a bit more is what we did in the acquisition in Frankfurt, for instance, which is to buy assets with some vacancy or a lot of vacancies that need to be worked on right now. But within the current standing portfolio of alstria, I think the 3%, 3.5% renovation rate per annum is probably the run rate -- the natural run rate that we have, looking at the current letting structure within the portfolio.

[Operator Instructions] And we haven't received any further questions at this point. So I hand back to the speakers for closing remarks.

Well, thank you very much for joining us this afternoon for the half year results presentation. We will be meeting with investors and on the road between now and the Q3 numbers, so we might have the opportunity to speak then. If you have any follow-up question, we're all here, the team is available to answer any follow-up question you would have. Please do not hesitate to get in touch. Yes, thank you very much for joining us today and looking forward to meeting you virtually or in-person. Bye-bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.