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 results H1 2022. 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 welcome, everybody, to sunny Hamburg this afternoon. I'm Olivier Elamine, Chief Executive of alstria. I'm here in the room with Alexander Dexne, which is alstria's CFO; and Ralf and Julius which you know well from the HR, to run you through the first half of 2022 financial results of alstria. Before we move on, just a short reminder on the disclaimer with respect to forward-looking statements and duty to update. And then without undue delay moving into the call. I mean obviously, there have been a lot of volatility in the underlying market over the first half of 2022. There have been improvement on the COVID front, I think, across the German market, but obviously, this was taken over by a number of other macro events, which have created substantial volatility. Having said that, as you would expect from a real estate company like alstria, short-term volatility had little impact on our short-term results. And therefore, we are showing revenues and FFO, which are pretty much in line with what we have targeted and also showing a substantial recovery in the leasing market compared to where we were last year at the same moment in time, obviously, linked to the improvement of the COVID situation. I'm not going to comment so much on the balance sheet at this stage. The number at the end of half year do not necessarily reflect where we're going to be at the end of the year. But I'll go into the detail of the balance sheet in a minute. If we look at the portfolio itself, there is nothing really material, no material change to the portfolio over the first half year of 2022. We still have a portfolio of around EUR 4.8 billion, which is represented by usually a midsized asset. The average size of asset is around 13,000 square meter with an average value of EUR 43 million, and we're still spread across 5 different geographies across Germany, where we operate local offices. Letting market has been gradually improving in the first half of the year, although the volatility I was mentioning make it a bit less visible and we have less visibility on how things are going to develop in the near future. Nevertheless, we did have a substantially improved letting result compared to the half year last year, where we secured around EUR 65.6 million of income for the future with a total leasing volume of 55,400 square meter that include both new leases and lease renewal. The average rent per square meter have increased to around EUR 13.90 per square meter on the overall portfolio. Most of the sales and the transactions that we have done happened in the first quarter. Since then, the investment market has been slowing down quite drastically. We are still working on a small number of transactions. However, given the volatility that we're seeing in the market today, both on the acquisition and the disposal side, I think most of the market is taking a breath and just holding up a bit to see how things will develop. The volatility in the financial market and interest rate is clearly having a toll, not necessarily so far on the value of the asset but on the volume of the transaction and the willingness of people to actually transact. If we go and move a bit to the balance sheet, we have a little movement on the balance sheet side, which essentially is reflecting the investment that we've made in the portfolio on the investment property side as well as the FFO or the net income generated by the company on the equity side. Our net financial debt has reduced slightly, but this is again not necessarily significant or reflecting the direction or the sense of direction we're moving into, but more as a preparation for the releveraging exercise we're doing. We did restructure a bit our loan portfolio in the first 6 months of the year, which resulted in slightly lower net financial debt for the first half. But again, that's not necessarily a driver for the future. Rental income is slightly up around 1.5%. That's driven by both indexation on leases. We have some of the higher CPI kicking in, in some of our leases, also triggered by some of the leases that we signed during COVID that have started as well as some acquisition we've done which are kicking in. Our fund from operation is in line with our guidance at around EUR 60 million for the first 6 months, which is pretty much in line with the -- as the increase is pretty much in line with the gross rental income. And the SG&A are up quite substantially, but this is, again, linked to the transaction book yield and a number of share-based compensation, which actually vested in that period that trigger a kind of a substantial increase, which is more a one-off than a repeating exercise. The -- again, not spending too much time on that slide, given that it is the thing we are working the most right now, which is on releveraging the balance sheet, but just providing a picture of where we're starting from with a net LTV of 27.6%, cost of debt on average of 1.4% and average debt maturity of 3.5 years -- 3.4 years. In total, the company currently carry EUR 1.6 billion of debt, and we have free cash of EUR 330 million At the end of the half year 2022. We are -- and we -- as we have announced in mid-April, we are in the process of levering up the balance sheet. Our target and our restated financial policy is to basically bring the LTV at the group level at around 50%, in line with a BBB- investment-grade requirement, at least our understanding of the investment-grade requirement. Our intention is to return capital to our shareholders in an amount of up to EUR 1 billion, which is funded through both debt proceeds and releveraging as well as some asset disposal. We are also considering the debt that sits at our main shareholder level on a look-through basis and trying to keep the net LTV below 55% on a consolidated basis, which you also consider look-through from a shareholder perspective. And we are funding the increase of debt, and I'll come back to that in a minute, with a reduced dividend, like recurring dividend beyond the special dividend that we intend to pay. We have reduced the recurring dividend. And for example, this year, we only paid around EUR 7 million of recurring dividend to the minimum required by the REIT law. We will be -- and clearly, as soon as the markets recover, we would be accelerating the rotation of the mature assets, and we intend to use the sale proceeds to defend the investment-grade rating profile, reinvest in the business as long as they are reinvestment opportunities and optimize the capital structure if both -- I mean the first 2 options have been already dealt with. We have been using already our access to secured market, essentially. We have raised around EUR 550 million of new debt -- EUR 537 million of new mortgage debt at an average rate of 3.2%, with an average maturity of 5.1 years in an extremely volatile environment, which I believe provide a good overview of the ability of the company to finance itself. By doing that, we are basically increasing the net LTV of the company to slightly short of 38% and increases slightly the debt -- the average debt maturity given that the new debt that we're taking on board have a 5.1-year maturity versus 3.8 on the overall portfolio. The intention is to use the proceeds of this new debt to pay a special dividend. We have called for a general meeting on the 31st of August. So -- and a bit shorter than a month, now 22 days from today. And we will propose at that shareholder meeting to distribute EUR 550 million, which is essentially the proceeds of that debt financing, which we're running up with some cash on balance, with the intention to repay up to EUR 1 billion to the shareholder of finance again through asset recycling and increase of leverage. From a cash flow perspective, I think it's important to note that we are financing the -- we're basically swapping the dividend for increased financial costs. So we are basically reducing the dividend and using the amount of cash available to us to fund for the increased interest burden that we're having from the new debt we're taking on board. So essentially, the way we're looking at it is, from a company perspective, we're just swapping debt capital for equity capital and making sure that from a cash flow perspective, it does not impact the operating cash flow of the company. So if you look into more number what that means, we used to pay around EUR 94 million of dividend with a minimum average -- so the average minimum G-REIT dividend we would have to pay over the years, and that number obviously change on a yearly basis. It depends on our German GAAP net income. But on average, over the last 10 years, was around EUR 40 million. So we have EUR 54 million that we could use to basically finance new debt or pay for the financial cost of new debt. We could use also to shield increased cost of existing debt and, if anything is left, we could then reinvest into the core business and accelerate the refurbishment process that we run on our assets. As I've mentioned before, there is, in the investment market right now, substantial volatility which is linked to all the uncertainty that we have from a macro perspective, which offer a little opportunity to deploy capital in a lucrative manner at this stage. The -- I think it's fair to say that there have been a substantial reduction in the overall transaction volume. I think quarter-on-quarter investment market have reduced by around 50% in Germany according to Jones Lang LaSalle. So this is like a substantial slowdown in the investment market. I think the main element of information that we're bringing today is the EUR 550 million dividend -- extraordinary dividend that we propose to our general meeting on the 31st of August. And we are in the process of having further conversation with both on the transaction side and on the funding side to basically fund the remaining with obviously no certainty that those discussions will lead to results, but this is clearly the aim we are working at. And that is going to conclude the presentation on my hand for today. I would be obviously looking forward to any questions you might have.

[Operator Instructions] And the first question is from [indiscernible], Barclays.

Can you please provide more guidance on how do you plan to raise additional EUR 300 million required for the dividend payment of EUR 1 billion? Is it going to be secured or unsecured?

Well, we are looking at different options today. We're looking at both the secured and unsecured market. It's still -- I think it's clear from the -- like the cost of debt, we are reaching in the secured market, where we're funding ourselves on a 3-year -- on a 5-year basis at 3.2%, that it's much more attractive market from a funding perspective -- from a funding cost perspective. Our bonds on similar maturity are probably trading at wider 200 basis points. So there seems to be like a material arbitrage that has to be done today between secured and unsecured. But the way we're doing it is essentially by releveraging existing assets that are in our secured pool. So we're not necessarily increasing the amount of assets which are secured, which are putting more debt on the existing assets which are secured. That's not true for the EUR 500 million I've mentioned before, but a substantial part of the deal we're working on right now is basically not necessarily increasing the number of secured assets, which are -- and -- not increasing the pool of secure assets, sorry, just increasing the leverage of the assets that are already in that pool.

Got it. And just a follow-up on that. So is it similar for the EUR 300 million debt maturing in 2023? Are you thinking on the same lines for that as well?

So I think -- I mean 2023 is still 9 months down the road. If I look back what happened over the last 9 months, you could be on a different planet as far as I'm concerned in 2023. But it's really something we're working on and we're working on different alternatives. We are currently covered for the 2023 financing with -- as I mentioned before, we have EUR 300 million of cash on our balance sheet. We have a EUR 200 million revolving credit facility, which we can draw down on. So basically, the financing in 2023 is covered. We would be looking at the most attractive kind of financing available at that moment in time. But it's a bit early now to make a judgment call on what will happen in April 2023.

Got it. And probably the last question from my side is, given you talked about the investment market, if the valuations were to start dropping, are you planning to take -- cut down your planned dividend to maintain the IG rating? So how are you thinking about that?

So as -- I mean as we mentioned before, the IG rating is something we're really trying to look after. At this stage, when we look at the EUR 500 million financing that we've done, part of the assets were actually refinanced were revalued, you have 2 competing effects, which are taking place right now in the market. One of them is yield is widening. I think that goes without saying. But on the other hand, you have CPI going through rents and increasing revenue. And so these 2 competing effects at this stage are still kind of compensating each other and values remain relatively stable. If values were to drop substantially, which I don't foresee at this stage -- I mean, again, I don't have a crystal ball, but as of today, we're not necessarily seeing that. Then the plan has always been to kind of reduce leverage through the sale of some of the mature assets we're keeping on the balance sheet as more like a public listed company, which we would then accelerate the recycling if we -- I mean now that we're more in private hands essentially. Does that make sense? Does that answer the question?

Yes, yes. I think it answers the question.

Your next question is from Kai Klose of Berenberg.

I've got 2 questions, if I may. The first one, could you indicate the increase in the rates by 100 bps in the first half? How much was that from the sale of properties? And second question, you indicated that the SG&A costs were impacted by some one-offs. Could you indicate what we can expect for the second half? In terms of normalized cost levels and maybe potential additional one-off.

Yes. Kai, sorry, I didn't get your first question about the tail you were mentioning. I'm sorry.

I was talking about the vacancy, which is now at 7.9% after -- after 6.9% by the end of 2021. How much was this increase coming from the sale of rental properties?

So I think none of -- I mean a bit is coming from the sales because you're obviously selling fully let asset and -- but most of that is simply because we are at the start of a new refurbishment pipeline. So we are actually vacating some of the assets that we intend to move into refurbishments in the next 6 months or a year or so. And that's basically triggered the increase in the vacancy rate that you're mentioning here. So there is a small effect from sales, but that's pretty minor. And on the recurring SG&A, and I'm looking at Ralf when I am speaking, on top of my head, I would think that it's probably around EUR 2.5 million to EUR 3 million in there, which is nonrecurring. You would have that in the appendix of the presentation. And so the recurring number -- sorry, it's EUR 3.9 million. So the recurring number would be around EUR 10.5 million to EUR 11 million.

The next question is from Manuel Martin, ODDO BHF.

I have 2 questions actually. The first one is on the FFO. For the time being, you have achieved something like almost EUR 60 million in the first half year. So actually, you seem to be on the runway to exceed your guidance. Is there anything which might come in, in the second quarter? -- sorry, in the second half of the year?

Yes. So we have all the financing cost of the new debt we're putting in place, which are going to kick in and that's basically is going to reduce our FFO for the -- I mean for the last part of the year. So the EUR 106 million we're guiding for is obviously also going to be lower next year simply because then we're going to have the cost of debt for the full year. So in the same way, I was mentioning we're swapping dividend for financial costs. Obviously, the dividend is not part of the FFO, the financial costs are part of the FFO. So you're going to see a reduction in FFO going forward, which is mainly reflecting the increase of leverage.

Okay. Understood. Second question, it's about heating costs, gas prices, et cetera. I mean, also your tenants, they might have heating in your building. How are you going to manage maybe tough winters? I mean the heating bills will probably go up. I mean have you discussed with your tenants scenarios or what could be expected there?

Well, I think we're in a commercial business. So I guess that heating costs and electricity costs are relevant, but they are clearly less relevant than they might be in a resi business, where you start to touch into the ability of tenants to close the month. So typically, Siemens, I think, is not going to die if their heating bills increased by 10%. They're just going to be fine. So in the commercial business, I think from our perspective, the issue is not so much about cost because we just pass it on to tenant and tenants are just going to pay them. The same is true with indexation for that matter. We just pass on indexation and tenant pay it on. And then what they do is they're going to increase the cost of their own product, which then is going to hit you as a consumer or as a resi owner -- of the resi tenant. So it's not so much about heating costs. What we're working on right now and there is clearly a conversation about reducing temperature within the building over the winter in order to basically reduce consumption, but this is not so much about cost than it is about availability. Within the portfolio, we have around 40 buildings, which are heated partially or totally with gas. Most of the others are heated with district heating or electricity. So it's only a fraction of the portfolio, which is concerned. But there is clearly a conversation and a discussion internally and with some of the tenants we're preparing about, you're probably going to be more cautious and reduce overall temperature in the offices comes the winter. And this is more to reduce overall consumption across Germany. I think the government is likely to ask that there is a limited temperature in the building. So it's not so much a cost question than it is an operating question and managing our operation properly to make sure that we don't spend more energy than we actually need.

So far, we have no further questions. [Operator Instructions] There are no further questions. I hand back to you, Olivier, for some closing remarks.

Thank you very much, and thank you, everybody, for your continued interest in the company. It is very much appreciated. We're obviously available if you have any follow-up questions. We would be more than happy to take them off-line. Otherwise, I wish you all a very good afternoon and looking forward to speaking with you the next time around. Thank you. Bye-bye.

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