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 Q3 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 to alstria's third quarter presentation. Welcome from cloudy Hamburg today. I'm here with a Ralf Dibbern, which is the Head of the Investor Relations and without undue delay, going through the disclaimer on the forward-looking statement and the duty to update and moving then into the presentation. I guess, I would like to start the highlight by making different points. First of all, on the operating side, where our business has developed over the last 9 months are pretty much in line with our expectation, both in terms of revenue and in terms of FFO. We think we're going to be in line with our own guidance that we have provided the market with. The leasing market has been doing relatively nicely over the year, with lease-up, up 22% year-on-year. Arguably, this is starting from a low base, given that last year was impacted by COVID. And arguably as well, a lot of the lease-up happened in the first half of the year. So there has been a bit of a slowdown, and we can go back into that in a minute. But the overall message is in the letting market so far is doing relatively well in the underlying markets, and clearly, not suffering as much as the investment market is. The other -- second item that is worth mentioning which took place in the first 9 months of the year is obviously the balancing of the capital structure of the company that we have started following the transaction with Brookfield. We did pay a special dividend as plan of EUR 750 million, which is EUR 4.21 per share, [indiscernible] of returning the capital to our shareholders. And we have funded that capital return through new mortgage loan of EUR 750 million. And I think it's worthwhile mentioning that the company was able to secure those loans over the first half of 2022 and the third quarter as well, which I believe is an interesting and remarkable achievement considering the market situation right now, which also speaks for the quality of the underlying assets and underlying cash flow. The rating of alstria was confirmed by S&P at investment-grade level, with stable outlook by S&P in September 2022, which basically again highlight the strength of our balance sheet and the underlying portfolio of assets that we own. Moving on briefly to the portfolio update. There is nothing much to report on that front. Transaction market are pretty much subdued right now in Germany. We have been doing a few transaction at the beginning of the year and have actually agreed on the sale of 1 asset in Stuttgart in the course of the last quarter at actually a premium to the year-end book value which also show that there is a bit of activity. But it's fair to say that the overall investment market has been stalling since the end of the first quarter and the start of the war in Ukraine and creates the change in interest rate environment is taking. Its still on the liquidity in the underlying market. So that basically had led us to slow down our transaction activities. And therefore, our portfolio has remained pretty much stable over the reporting period. If I go back, and I've been a bit too fast here, if I go back on the letting market, which itself has remained relatively strong. We have signed 32,700 square meters of new leases with an average lease length of almost 7 years, and an average rent of EUR 14 per square meter, slightly short of that. And we have extended 43,600 square meter of tenants who are remaining in the portfolio with an average lease length of 5 years, the total value of those leases, both the extension and the lease-up accrue for around EUR 77 million in total. The average rent on the portfolio -- the average rent per square meter, which is one of the KPIs that we're tracking have increased for EUR 13 -- EUR 13 to EUR 14, which is a combination of the lease-up that we're making, which really yield the higher rent than the average of the portfolio, but also an impact of the strong inflation, which is reflected in our leases through indexation of the rental income. I move now to the balance sheet to spend a little bit of time on that. The G-REIT equity ratio has gone down as a result of the dividend payment that we have made. Investment property are flat round about flat, which is to be expected, there was no revaluation in the Q3 and the actual market revaluation is going to take place for the Q4 number -- the full year number. Equity is down, again, similar to the [ debt ] equity ratio reflecting the dividend payment that the company has made. And the debt is up, which is the counterpart or the other side of the same metal given that we have funded the dividend through issuance of new debt, as you would expect, 0 volume debtedness gone up, which basically translates into a net LTV moving from 28.8%, up to 43%. The G-REIT equity ratio and the EPRA NTA have moved in the same direction, again, reflecting the capital repayment to our shareholders. If we look now to some of the P&L positions. As I've mentioned before, we expect our FFO to be in line with the guidance. So we are pretty much in line with plan, although the combination -- the construction of the FFO itself has changed slightly. Our rental income is pretty much in line with what it was last year, slightly up. And our SG&A is up year-on-year. So we spend more on SG&A, which is essentially linked to some of the impact from a Brookfield transaction. So a number of the costs that we have in the SG&A are transitory and are not necessarily going to be a recurring although there's clearly pressure right now on wages, which is something we are currently considering and looking at. But all in all, from a guidance perspective, both on revenue and FFO, we expect to come out in line with what we have guided the market for. It is really the tradition at alstria since 2010. So now for the 12th year in a row that we published our ESG report together with our third quarter numbers. And this year is no exceptions. We have put on our website the new [indiscernible] report of alstria. And I would like to spend a bit of time walking you through the main items that you can read in the report, it's a very extensive document that the team has put together and I would strongly encourage you if you have the time to go through it, and we will obviously be very happy to answer any question you might have. As you know, we have been focusing very early on, on the issue of embodied carbon emission in real estate, which is now, I think, at the forefront of any conversation you can have about ESG and real estate. It's a topic we've been looking into for a number of years. So we are, as you would expect, reporting that our processes and our refurbishment that we do tend to save around 69% of the carbon compared to a new construction, which we think is the right approach, and what you can also see on this slide is that both from GHG emissions from CO2 emission and from an energy consumption [ of alstria ] portfolio ranked pretty favorably compared to the rest of the market. And that's not necessarily linked to the fact that we have invested a lot in the portfolio, but has more to do with the fact that most of the assets that we have or low take therefore, the intend to use much less energy than equivalent building, which we use a lot of technology for limited real-life results. One item we have been focused on, and I think is one of the -- is going to be one of the main drivers for reporting on ESG and real estate in the future is the work that has been done by CRREM which is becoming the standard in terms of looking up at how a portfolio aligned with various equipment paths. We have been involved with CRREM since the beginning, and we have been reporting on CRREM and using CRREM as a tool to benchmark our portfolio since inception of the tool. We are publishing this time for the first time -- this year, for the first time, where the different assets are standing in relation to CRREM. And as you can see, there is obviously a substantial benefit into having non-fossil fuel heating and energy in the building, which lead to most of the assets that have those kind of non-fossil fuel heating to be substantially below where CRREM is today, whereby the assets which are using fossil fuel for some of them are of off-path. And we're working on bringing them back to the path. The other thing we've been very vocal about, and I'm glad actually that this is becoming more relevant topic, including for tenants is the difference between the new construction and refurbished buildings, I hope by now, everybody is aware of the tagline of our sustainability report, which is that the only sustainable building that we have is the one that was not built. And we're showing here and we spend a lot of time trying to put those numbers together. But we're showing here the consequence of working into refurbished buildings versus for every employee basically versus working into a new building. If you work in a new building and you want to achieve the savings that you hope to achieve compared to refurbished building, you probably need to forgo your car for 15 years or your flight for 30 years or you can potentially go on a diet for 30 years on a vegan diet for 30 years. There is a material negative impact on carbon emission from new construction, and I'm actually very happy that this debate is currently taking place. And I'm very hopeful that as we go forward, they're going to be more and more evident supporting the idea of refurbishing being superior to new build, which is something we've been arguing since the inception of the company. So that's it for today's presentation, and we are happy to take any questions if you have.

[Operator Instructions] Our first question comes from the line of Thomas Rothaeusler from Deutsche Bank.

It's Thomas from Deutsche Bank. Just wondering if you could give us a kind of update on German office in Western markets and also rental markets? Just a rough view from your side would be very helpful. .

Yes, of course. Thomas, thank you for the questions. As I mentioned in the presentation, the rental market itself is still relatively dynamic considering everything else, and we're still seeing activities on the -- in the leasing market. So this is -- I mean, rents are still going up. in the major city in which we're investing. There is still a tension. I think that's mainly driven by the fact that tenants are looking into moving into buildings with higher specs and higher quality, which is driving this demand. What I think is fair to say is a lot of the demand that we have seen was in the beginning of the year. So if I compare the first half of the year with today, there is a bit of a slowdown, which I think has to do with the with the overall economic situation. But still the letting market is doing relatively okay. The investment market itself is, I mean, for all practical purpose, frozen. There is little to no activity and there is a huge spread between the bid and ask. I also don't think that this is going to come as a surprise. It has to do a lot with the change in the interest rate environment and a lot of questions ask about pricing of real estate and how it needs to be approach? So I think there is a need for the market to kind of figure it out. So there's going to be a number of trial and error. But the consequence of that is the investment volume have went down quite dramatically. The little activity we see right now is on small-sized assets, so anything below EUR 30 million, EUR 40 million. The large assets, which are north of EUR 100 million, EUR 150 million are just barely trading. And the only asset we're seeing trading are things which were already agreed in the past and just to continue on the path for closing. So I don't expect that the investor market is going to restart between year-end. I would not expect anything material to take place before -- at the earliest early next year.

And what do you expect with regards to cap rates?

Well, look, I think it's billion euro question essentially. We are seeing 2 conflicting or 2 effects which are opposing each other. On the one hand, rent -- in-place rent on the asset is going up quite dramatically as an effect of indexation. We have leases that we are indexing twice this year. I mean simply because CPI has gone up so rapidly. So basically, rent is increasing. And then on the other hand, you have yield expanding. But so far, I think the view from the value and from the market has been that those 2 effects are kind of balancing out each other. I mean I was reading the number of research that came out this morning, which is hinting towards like a 30 to 50 basis point yield expansion. I think if you tap the field expansion, obviously, depending on your starting point, but if you tabled on 10% to 15% increase in rents, you would have value slightly down to kind of flattish. And I think this is a view the market is taking today from a valuation perspective. In the transaction world, we're not seeing a lot of trade happening. So it's also very hard for the value to be fair with them to come up with a view, I mean they are backward looking, but to come up with a view as long as you don't see trades happening. So we're not seeing trade that would demonstrate your shift in gap. We're just saying -- we're not seeing trade essentially. But then from a valuation perspective, I think the overall view is increase in income is going to lead to higher yield with property values slightly down 3%, 4%, but around about flat.

Maybe a last one on financing. Actually, what we hear is there's a lot of refocusing from unsecured to secured lending. I think you were also active in the secured lending space. What would you say -- what's the appetite currently for mortgage banks and maybe various products especially German office, and what are the terms?

Yes. So we've done EUR 750 million of financing on the -- in the mortgage market. Actually, the entire financing that we've done was in the mortgage market. And there is one thing which is pretty clear is that the terms are substantially more attractive than anything you can find in the unsecured market. So our bonds are currently trading somewhere around 7% to 8%. And we are financing ourselves in the mortgage market, all in, including hedging somewhere around 3.5% to 4%. So it's like substantially cheaper. I think the appetite is obviously depending on the nature of the asset that you offer and the quality of the assets that you offer are. Our experience is -- banks are looking to have debt yields, which is basically the relation between the amount of debt and the rent which is coming out of the portfolio, which is around 7% -- 6.5% to 7%, which is higher than what it used to be in the past, which show also a bit of caution. But if you have a portfolio that would fit those kind of yields. And with a good operator, I think you would find that available and you will profit it also next year. The challenge from my perspective is that every one of us, including alstria, we moved into the unsecured market when it was substantially cheaper. But I think it's going to be hard to refinance the entire unsecured market within the secure market. There isn't just not enough depth in the secured market to basically absorb like, I would say, per borrower more than EUR 2.5 billion or EUR 3 billion of debt in the secured market is going to be difficult simply because you will hit the limit within the banks with the limited exposure that every single bank can have to a single borrower. So I guess, the secured market is a good market, but the bigger you are the more likely you are to hit limits in terms of what you can do in that market. I don't know if it makes sense what I'm saying.

[Operator Instructions] And there are no more telephone questions registered, I hand back to our speaker.

Well, thank you very much, and thank you for your interest in alstria. Again, I encourage you to visit our website to take a look at the sustainability report. I think it's an interesting read. If you're interested in the topic, we will reconvene them for the full year report around the end of February. I'm looking forward to speaking to you there. And between now and then, please be well. Thank you very much. Bye-bye.

This now concludes our conference. Thank you all for attending. You may now disconnect. .