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 full year results 2021. At our customers' 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 welcome, everybody, to the full year results presentation from alstria. I'm here in Hamburg on a sunny day with Alex Dexne, Ralf Dibbern and Julius, which is from IR team, to walk you through the financial results. Before we start, just a short look at the usual disclaimer on the forward-looking statement and the duty to update. And as it is our habit before the annual result presentation, we just wanted to kind of start with a bit of a business update and some thought what had happened in our markets over the last few years during the COVID pandemic. And one of the things, I think, which was kind of interesting and have, I think, answered a number of questions that we had about the office market prior to COVID, is this kind of dichotomy where on one hand, you can argue that no one actually really need an office. I think we went into that pandemic and when there was the first lockdown and everybody went back home. And then the office work did not collapse and we were able to work and produce reports and things were just working fine despite the fact that everybody was at home. But then on the other hand, we also figure out after a while that being at home, you could do a number of things, but then there was a number of elements that you were missing. And those are the elements, I think that everybody, which is keen in going back to the office today is looking for. And where this is interesting if you're an office owner is, from our perspective, what the pandemic has done and what this kind of very unfortunate social experiment we all went through, have done, it has highlighted basically why tenants are paying rent in an office. What is the added value that the office have? And why do -- why should tenants pay? And what should they expect? And the reality is that not paying for the 4 walls and the roof and the desks that you're going to put in there, but they're paying for something different, and you could call it creativity, you can call it teamwork, you can call culture building. There's a number of things that can be structured or color on that. But this added value of the office, I think, has been made very much apparent in the pandemic. And I assume that tenants, which are looking for office space today are trying to value whether or not the office they're going to rent is going to be able to deliver that. So we're moving away from the office, which is a commodity and getting into a place where you're trying to pay for something which is going to add value to your business. And this is really as alstria, something we've been working on for quite a while, and we intend to capitalize on that trend as much as we can going forward. It's also hard to speak about the 2 years of the pandemic and not touch on the ESG topic. As you know, this is a topic we, as a company, has been discussing quite a while, including in our annual call. And one of the points, which is actually has been, I think, the major innovation in the last few years has been the introduction of the EU taxonomy. Unfortunately, and this is really my point of view. So please disagree if you want to. The taxonomy might be a very good idea in terms of sector in and real estate, it is basing by a margin. So what the taxonomy does and what it's going to do, it's very likely that it's going to be pushing capital in a place with limited supply and where there's actually literal ESG benefits. And it's going to start capital in a place where there's actually a need for capital and where there's huge supply. If you look at how the different regulation are set up, if you look how the SFRD is set up so the reporting obligation of investors. You would realize that in actual fact, in order to be taxonomy-compliant and my understanding is like everybody wants to be taxonomy-compliant today. Basically, you need to own brand-new buildings, which are considered as compliant, but if you are actually intending to transition buildings, then you're very, very unlikely to be taxonomy-compliant. And this, we believe, is going to create a tremendous market opportunity. You -- for people who are going to be able to walk next to the taxonomy and bypass the needs of being compliant or the urge of being compliant, the market of building to be refurbished, which is vast with a lot of supply is going to be starved for capital, and therefore, there are going to be a lot of interest and opportunity to invest in that market. It's not yet the case, but it's coming. And the market where those buildings when they are refurbished, you would be able to sell them to, which is a market with very limited supply is going to be where there is all the capital flowing and little assets that actually ticks the box on offer. And we think is that the ability of a company like alstria to take this contrarian view while still sticking to its ESG targets, is going to be a unique market opportunity that we can take with us. And you know that we have been very much leading the way on the ESG and on the thought process around that. So we believe that we can still fulfill our purpose and transition buildings from the old world to the new world, take into consideration not only the ESG, but also the new work concept that we've discussed a bit before. And that, I think, is going to generate a substantial opportunity. This needs -- I mean, the reason why I'm kind of highlighting that is because it needs also to be put in the context of the transaction that we just executed with Brookfield. Our view and right or wrongly, and let me maybe start with the fact that we had an incredible time in the public equity market. And we have enjoyed continued support by our public shareholders since the company IPO-ed and none of us would be there, today, if it was not for that support. So we're very grateful for everything that happened. But we came to the conclusion that in the current market, the public equity would be relatively inefficient, because the change that are happening are too radical for the public equity to take a view and to take a strong conviction of what's going to happen. If you speak to individual investors they have, for a lot of them, strong conviction, but the market as a whole is not in a position to take conviction. And my belief is that public equities on the office side, I don't know for other part of real estate, but the office side, are going to be struggling to try to convince the concern about ESG and the concern around the future of office, are going to weigh heavily on the share price going forward. What we find in Brookfield is a partner that actually share our conviction about where the market is going. And in that sense is going to help the company to be able to make the best of the opportunity we've described before, we share the view of what the opportunity is, and we share the view about how to tap that opportunity going forward. And we believe that at least for the coming years also, the private market are going to be more efficient because they are able to take stronger conviction than what the public market will be able to do going forward. So what changed for us is not fundamentally the business we're doing. Our purpose doesn't change. For that matter, the fact that we changed shareholder doesn't change the market in which we operate. But what changed is our ability to allocate capital differently to be able to make use of the market opportunities that we're seeing. I think the best illustration of that is the fact that we're going to pay a minimum dividend or we're proposing to the AGM to pay a minimum dividend year of EUR 0.04 per share compared to EUR 0.52. And so there's going to be a retained earning here. And moving forward, the ability of the company to do more of -- and invest more in its portfolio, is going to allow us to tap into the refurbishment opportunity and try to benefit as much as we can of that change and transformation in the market, and we're really looking forward for the next chapter of the company in that respect. And finally, and just to spend a few words on that, we have published today, or yesterday actually, next to our annual results presentation, our carbon accounts. I would encourage you to look at them if you're interested. What the carbon account shows is that the balance sheet, our carbon balance sheet have doubled in size, and that's really related to the increase in price of carbon in the course of 2021, which increased by almost 150% in 2021. And from my perspective, the main lesson that we learned when we look at our carbon account is the very low impact of the price of the carbon that we emit from our direct operation compared to the change in value in the embedded carbon. And that highlight, if that's still necessary, but it highlights the fact that the challenge in real estate, at least in the office market, is not so much into the efficiency and the operations and the emission in operation, but It is in the embodied carbon discussion, which I'm glad is taking preeminent space today in the conversation about real estate ESG, but this has been our belief through the years, and now it's showing the right to be strongly in numbers. The challenge for real estate company is in managing the embedded carbon and not so much into -- or not anymore into the operational emission, which are pretty much under control. What's also interesting to look at is in the operational carbon at least when it comes to alstria the vast majority of the carbon savings that we have made related to change, which are unrelated to us. So this is basically the decarbonization of the grid, and that also highlights the need for interaction with different players across the value chain if we want to effectively manage our capital exposure over time. If we move back to the more standardized reporting and the operation, we had in 2021, a relatively strong year from a financial perspective, which is always at least looking retrospectively interesting, if you think about the fact that for most of the year, the vast majority of our buildings were barely occupied. I think the resilience of the company is something that is very welcome, and I think underlines the strength of the portfolio with our revenue up around 3.7% year-on-year, a strong growth in the FFO at around 7.2%, and also a nice leasing result, and I'm going to come back to those numbers in a bit in more detail. We ended up the year almost balanced from a sale and acquisition perspective. And we have invested EUR 121 million in the portfolio in terms of CapEx, which, again, is something we intend to accelerate in the future as part of the repositioning of the asset and trying to size the market opportunities that we're seeing. The NAV is at around about slightly sort of EUR 19, which compares to the EUR 19.50 of the offer that was made and actually accepted by the vast majority of our shareholders by Brookfield. The portfolio itself is still very much the same. The value is EUR 4.8 billion. We do like relatively small assets in terms of 500, 12,000, 13,000 square meter on average. Per assets capital value at EUR 3,400 per square meter, which ample opportunity to spend money on refurbishments and improve the rental income. And we have a contractual rent of EUR 205 million on the portfolio. Our rent collection rate in 2021 despite the pandemic was at 100%. Letting volume was relatively strong, again, considering that we were in the market which was pretty inefficient from a letting perspective. The market is doing better as we speak. There's clearly more momentum in the letting market. But the letting volume at 155,000 square meter is nothing, I think. We need to be shy of the average rent per square meter. On the portfolio, it has continued its trend upward, and we have secured EUR 120 million of future income through the different leasing that we have executed across the year. And all of this letting activities have led to a like-for-like rental growth of 2.8% in the course of 2021, bearing in mind that I mean, we had a bit of inflation in 2021, but nothing compared to what we're having right now and that inflation is really going to have a material impact on the way the revenue of the company are going to moving forward. On the transaction side, we have been continuously selling some of the assets that we had in the periphery and 2021 was the year where we basically finalized that process, the asset in Trier, which was one of the last nursing home that we had has been disposed and that basically terminate the sale of the noncore asset, which we acquired from Deutsche Office together with the company in 2015, and so we're done with that process. And on the acquisitions, we've been, again, here consistent with the view of acquiring buildings that require repositioning, acquiring 2 property was in Berlin in Mehringdamm and the other 1 in Frankfurt and Hanauer Landstr, which are 2 properties that we intend to reposition over the years and which offer a substantial value potential from our perspective once the repositioning will be done. Moving on to the financial and the numbers. I'm going to go very briefly through them. Investment property is up year-on-year by around 5%, and that's essentially reflecting the market, all the CapEx that we have spent on the property and the OMV gain. Our equity is up slightly. Again, here, we're going to go back to the NAV bridge in a minute. And our net financial debt have increased again, which is essentially the reflection of the investment that we have made during the year through the bond that we have issued back in 2019 at the very beginning of the pandemic. If we look at the EPRA NAV bridge, just to highlight, I don't think there's going to be a lot of surprises here. In essence, the dividend payment is nicely balanced by the operational profit and the change in NAV is being reflected or impacted by both the revaluation and the disposal gains both being -- disposal gains being realized gains and revaluation and realized gains. So what -- I mean if you were likely to look at the same bridge next year, well, the dividend will not be there anymore and the rest will -- I mean not giving any guidance on the revaluation. But the rest would be probably looking in a similar way. And so the -- retaining the dividend is just going to have a positive impact on NAV going forward. If we look at the debt, well, first of all, we are kind of very happy that S&P has confirmed our investment-grade rating at BBB-. We still were downgraded following the transaction, but we remain at the investment-grade level. The current debt structure, which is shown on this slide, is going to change in the coming weeks, our intention is to increase the overall leverage of the company, again, in order to be able to adjust the capital structure to the opportunities that we're seeing. But that you have on that slide, the structure with the net LTV slightly short of 30% at the end of 2021, with our intention to move that closer to the 50% level as we go through 2022 level. And then finally, if we look at the profit and loss position across the company, we've briefly touched based on that before. We have a strong increase in the FFO of 7.2% and the slight increase in the SG&A would essentially reflect the higher kind of cost in the employment market in Germany and some of the virtual shares and the noncash item linked to the employee participation program, which is reflected in those numbers. That's it from my perspective for the year-end presentation. I would now open for the questions.

[Operator Instructions] And the first question is from Kai Klose of Berenberg.

I've got 3 questions, if I may. The first one is on Page 31 of the company report. I just want to understand the amount of maintenance CapEx, which is deducted from the FFO to devise AFFO was materially lower compared to 2020. What was the reason for that?

Kai, well, the main reason is, I think we've discussed that in the Q3 numbers. And because of the pandemic, obviously, there was a slowdown in the amount of work we were doing in the buildings. And that's basically what you see reflecting in the number here. So we expect that there are going to be a catch-up of that in the course of the year 2022.

And the slowdown was so significant that it's more than half -- less than half compared to the 2020 numbers?

Yes. But that's exactly it.

Okay. And the second question would be on the refurbishment pipeline, which you show also in the report. Just to understand, the number, there are more properties included, but the, let's say, completion date is only relatively precise for a few numbers. Could you explain why?

Why we don't provide a more specific date for completion?

Yes. I think you have about 20 stocks -- 20 properties on Page 25 in that table, but only for about half of that, you mentioned the expected completion date. Just want to understand why.

Well. So I think what you would notice if you read through our report is that there is probably much less information that we used to put in the past. And I think that also reflects the fact that we're slowly moving to a place where we have a single shareholder. And therefore, we're not necessarily providing as much information as we used to do previously. So I mean, there's a number of things that you would not find in the report this year and I can highlight them, so you will not find the list of the properties with OMV, et cetera. And that really highlights I think the change that we had from a shareholder structure, which then have an impact on the way we're reporting and the way -- and the transparency of the company going forward. So I think you need to expect probably a bit less information from us going forward. I mean I appreciate it's a bit weird looking at it from today's perspective, but this is something that we will -- I mean you will continue to see going forward. There is less need for us to basically allow the market to have a better view of what we're doing and how we're doing it.

Okay. And then the last question, maybe as you mentioned, the downgrade to BBB-, what can we expect regarding financing costs regardless of the higher interest rate levels in general with alstria now being still investment-grade rated, but slightly lower. And how this could affect the targeted yield on costs, you mentioned of 5.5% for the development project?

So our yield on cost is not going to be impacted by that because it's an unlevered. As you know, we always underwrite our assets from an unlevered perspective. So our cost of financing doesn't have an impact on the way we're looking at life. I think if you look at the spreads on the where are bond currently trading, they are obviously trading wider than when we were BBB+, which is kind of an obvious statement to make. So the -- I would expect that the cost of financing -- I mean, our marginal cost of financing would be probably somewhere around 50 basis points wider from where we currently is. Having said that, the -- I mean there is also a bit of technicalities and where our bonds are currently trading, a number of investors have assumed that we would be downgraded beyond investment grade. And so one of the arbitrages that was possible was to buy the bonds and then put them back to the company for 101%, which didn't work. So there was a bit of downward pressure on our bonds in the few weeks after the announcement of S&P that we would remain investment grade. But I would expect overall -- and I think this is what you would see if you take the average of our -- of the curve of our -- where our bonds are trading to be around 50% higher than what we are. What we will clearly also do a bit more now than we were doing in the past is mortgage financing. And from that perspective, this would probably be pretty much in line with the cost of financing that we have.

[Operator Instructions] And the next question is from Manuel Martin from ODDO BHF.

Just 2 questions from my side. One is on the dividend policy. Is it fair to assume that alstria will keep the minimum dividend payment for the next, let's say, near-term future, given the financing needs that you have with your investment program?

So -- I mean, that's actually key what I think we've been -- I think what was in the offer documents and what we've been guiding the market towards the -- I mean in the communication around the Brookfield transaction, and that's also what's reflected in our proposal to the AGM this year. So I would assume that the operational profit that we will generate, we have to pay. We've been paying much more than the 90% required by the REIT legislation, but I think it's a fair assumption to assume that the operating profit is going to be distributed to the minimum extent legally required.

Okay. Okay. Understood. My second and final question is about future plan. I mean, if I understand that correctly, Brookfield holds more or less 95% in alstria. Is there any scenario of delisting possible of alstria given the situation?

Well, I think, again, if you look into what Brookfield has in the offer document, they have not ruled out the delisting, but they have also not mentioned that would be -- they would do delisting. I mean one thing maybe you want to -- because I mean given that they have now 95%, there might be some speculation about a potential squeeze out, which actually is not possible because the -- I mean, technically, it's a different entity, which owns the 95%. So if there is a conversation about the delisting, it's not going to be through a squeeze-out process. But at this stage, at least as far as I know, as far as I'm involved, there is no discussion about -- I mean, no decision made about the delisting and the -- but the option, I mean, clearly has been on the table at the time of the offer, and as far as I am concerned, it's probably still one of the possible options looking at the success of the takeover.

And there are currently no further questions. [Operator Instructions] And we haven't received any further questions. So I hand back to the speakers for closing remarks.

Well, thank you very much, everybody, for joining us today. And I'm looking forward to the next quarterly result presentation that we're going to make. Thank you very much for your interest in the company and, yes, looking forward for the next time. Cheers.

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