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 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, sir.

Thank you very much, and welcome, everybody, from cold but sunny Hamburg this afternoon for the 2022 financial results presentation of alstria. Thank you for -- very much for your interest in the company. I'm here today with Ralf Dibbern, which is heading our Investor Relations Department, which you know well, and looking forward to walk you through the presentation. Before we go into the detail of the presentation, just a short reminder on the disclaimer and the duty to update and the caution regarding the forward-looking statements. And then without undue delay, just jumping into the presentation itself. If we want to summarize, I think 2022 has been a relatively busy year for us on multiple fronts. First of all, from an operation perspective, where the company has performed in line with our expectation from a revenue perspective, also from a letting activity perspective, with north of 100,000 square meter of leases signed, both in new leases and extension. But it also have been a very busy year on the capital structure perspective, where we have returned EUR 750 million of capital to our shareholders through a special dividend. And obviously, this increased financing cost had an impact on our FFO, with -- albeit in line with our targets for the year has slightly down year-on-year, but in line with the company guidance. As usual, we have funded for -- and substantially invested in our portfolio, and the EUR 130 million of CapEx that we have spent on the portfolio have been essentially funded through capital recycling. The EPRA NAV is -- or NTA now, I should know, is down, which reflect essentially the capital return to the shareholder. And our LTV is up for the same reason, as we funded this capital return, and I'll go back to that in a bit more detail in a minute, through the issuance of new debt. Looking back at the portfolio. Being a property company, I think we need to start with the assets. The profit itself have not materially changed. We have disposed 3 properties through the period for EUR 116 million at an average disposal yield of 4.1%, which is slightly south of the average valuation yield of the company itself. And we have sold those assets at a premium, around 2.5% premium, to where they were booked at the end of 2021. Contractual rent is at EUR 199 million -- almost at EUR 200 million, and the average value per square meter remain at a very reasonable EUR 3,329 per square meter with an average lease length of 5.5 years and then EPRA vacancy rate of 7.2%. Our focus on the 5 major cities in Germany have not changed, and this is something I'm still a bit confused, but we have to publish it. But since COVID, it seems to be the norm. We have collected, as you would expect, 100% of the rental income coming from our leases last year. If we looked at the valuation bridge, obviously, and I'll again go back to that in a minute, as much of the leasing activity and the leasing market has been supportive, and it's still supportive as we speak, the investment market has been a bit more shaky lately. And so the valuation result is probably a point of interest here. We basically -- the way our property portfolio have moved over the year has been through the disposal. The EUR 116 million was the sales price, our carrying value. So fair market value at the end of last year of those assets was EUR 116 million -- EUR 109 million. We had a mark-to-market of the assets through the valuation process of negative EUR 174 million and -- which was partially compensated by the EUR 113 million, which we have invested in the portfolio, which lead to a total portfolio value at the end of 2022 of EUR 4.6 billion. Letting market has remained extremely supportive, both in 2022, and I think the few months of 2023 remain equally supportive. We have been leasing up around 107,000 square meter, of which 43,000 square meters as new leases and 63,000 as renewal, which secured around EUR 106 million of future income for the company. Obviously, the new leases are more valuable than the renewal simply because we achieve usually substantially higher rent on the new leases than on simple renewal. The average rent per square of the company continue its road upwards and is currently at EUR 14.06 per square meter, coming from EUR 11.60 back in 2016, which represents around a 3.3% increase on an annual basis -- on a compound annual basis. Moving on now to last year like-for-like rental growth, which was around 1.3%, the bridge on this slide is basically showing you the impact from the transaction, which moved our contractual rent from EUR 205 million down to EUR 197 million. And then we had a EUR 3 million like-for-like rental growth, which is around 1.3% on the portfolio, which lead us to the EUR 200 million contractual rent at 31st of December. That in a year where, obviously, there was a lot of inflation, but we also had some large termination or largely expiring mainly in Daimler and Stuttgart. So the fact that we are able to increase the like-for-like rental income during that year is something which we were expecting -- which we were reflecting in our guidance, but it's also quite an achievement from the company. A number of that, as I said before, has also been driven by inflation, which has been supportive not only from a valuation perspective, but also from a revenue perspective. In the course of last year, we kept on recycling capital. I would expect that the pace of disposal is going to slow down in 2023. But at least in 2022, there were still some activities. Some of that was actually at the end of the year of 2023 -- actually, most of that was at the end of the year 2022, sorry, but we see a much lower market as we speak. So we've disposed of 3 properties, which were essentially properties that we have repositioned and refurbished through our ownership, 1 in Stuttgart, 1 in Hamburg and 1 in Düsseldorf, for a total disposal price of EUR 116 million. And the Amsinckstr. 34 assets is yet to close, so it's still hold on our balance sheet as an asset held for sale, but the SPA has been signed at the end of last year. Moving on to the financial part of the presentation. If we look at the balance sheet, obviously, we've discussed already the investment property, which have moved down slightly, reflecting the movement of the market itself. The equity is down from EUR 3.3 billion to EUR 2.5 billion, which is essentially a reflection of the capital that we have returned to the shareholder. And given that this capital return was funded through a new debt taking on board, the kind of logical impact of that has been an increase in the net financial debt of the company. We still have a very comfortable G-REIT equity ratio at 55.3%. And the EPRA NTA, as we discussed before, is down to 14.4%, reflecting the special dividend that was paid by the company in September. If we go into more detail about the movement of the equity and the earnings per share, so the dividend is obviously the lion's share of the movement. There was a bit less than the euro, the EUR 170 million devaluation, which impacted the NTA per share. FFO has a positive contribution as well as disposal gain and other effect on the balance sheet, leading to around EUR 0.70 of upward movement of the EPRA NTA to end up at the EUR 14.47 per share. If we look at the other part of the balance sheet on the liability side and the way our debt has been moving, we are providing with a debt maturity profile. We still have a balanced portfolio right now of bonds and bank debt, which is -- which we're running through. Our next bond maturity is in early April, which we intend to repay with cash at hand right now. And our net LTV is -- was at year-end at 43.7%, average debt maturity at 3.2 years, and we still have around EUR 0.5 billion -- north of EUR 0.5 billion of liquidity and undrawn credit line, which give us still a very comfortable cash position. We're also in the process of discussing with a number of banks a number of mortgage loans. It's a very active market right now, at least for us. It's a very active market, and we see a lot of interest in financing the company from that perspective. And we're very comfortable that we should be able to secure, at least, as much as a bond refinancing within the next few months. If we move on to the P&L. As we've discussed, the gross rental income came up in line with our guidance at a roundabout the same level than what it was before. Fund from operations is down, reflecting essentially the increase of the cost of debt linked essentially to the new borrowing. SG&A is materially up, but this is essentially reflecting a lot of costs, which are related to the transaction with Brookfield. So there's a lot of one-off in there. I would expect that in 2023, we will be back closer to the level where we were in 2021. So I don't think you can read in the SG&A increase today much more than the reflection of some of the costs implied by the transaction with Brookfield. Our FFO margins remain very comfortable at 58%. And EPRA cost ratio, again heavily impacted by the transaction, has moved up to 27%. But I would expect it to back -- to close to what it was in 2021 once the effect from the transaction are taking up. In terms of guidance, the -- we are guiding the market to revenue at around EUR 190 million, which is up around EUR 7 million from where they were last year, which is driven by both indexation and the start of new leases that we have signed in the past. We expect the FFO to reduce to EUR 79 million, which is, again, here, the full year impact of the financing that we have done last year, plus the refinancing of the bond, which is currently yielding at 2.2%, whereby our marginal cost of debt today is closer to 4.5%. And we will be also -- and this is more an information rather than a guidance, but we will be adapting our accounting policy to match more the one-off Brookfield, which would reduce the effort internally in terms of reporting. That will have an impact in terms of the way we classify items in the P&L, not necessarily on the end result at the end of the day, but it will create probably a bit of attention over the next quarters just to better explain the changes that have been taking place through the changes in accounting policies. That doesn't relate to our 2022 numbers. But from the Q1 onwards, we will be showing a reconciliation between the old policy and the new one on the accounting side. Just looking briefly at how the change in the FFO bridge is being impact, as we've discussed, the main impact is going to be coming through financing costs, which we expect to increase by around EUR 30 million, and that the combined effect of the full year impact of the debt we've taken last year, plus the refinancing of the maturities that we have in 2023, which are going to, by nature, become more expensive than what we used to have before. And finally, before we move into the Q&A, I just wanted to spend some time to walk you through our carbon accounts, which we have published this morning as well. As you know, I mean, this is not a proper accounting. We have defined an accounting standard, which help us to monitor the impact that carbon would have on alstria's portfolio. We use that both for internal reasons to manage our risk and also for communication reason. We found it relatively helpful to be able to quantify the impact that the whole conversation around carbon will have. And what's interesting this year is we start to have 3 years of history as we started publishing that just as COVID started, and we can see basically what are the main drivers behind the way our carbon accounting is working. Our current carbon balance sheet size is around EUR 91 million, which is still pretty large. It's as big as sort of our larger assets that we carry on the balance sheet. But on the other hand, it's still pretty manageable in light of the size of balance sheet, which is more close to EUR 5 billion. So it is a material part of the balance sheet, but it's also not a part, which is -- or could be, by any mean, life-threatening. What's interesting is the size of our carbon balance sheet was only around EUR 30 million 3 years ago, so it has almost tripled in size over the last 3 years, which is essentially reflecting of the increase in carbon price, which have moved from EUR 24 million in 2019 to almost EUR 88 million at the end of 2022. It is cruising right now slightly north of EUR 100 per tonne. And we do -- we currently have a carbon liability, that is what we call -- a total carbon liability equity, sorry, of minus EUR 18 million, which is a difference between the carbon asset that we have and the carbon liability that we have. If you're interested in to discussing that or looking to more detail, I would encourage you to look into the carbon accounts on our website, and we're always happy to pick up a call and have a conversation around that topic, if needed. From an operation perspective, last year, essentially, the company has emitted something around EUR 3.2 million worth of CO2, for which we obviously didn't have to pay anything. But if we were to apply the cost of carbon to those emissions, that's basically what it would have cost the company. And as we have been doing for the last few years, we are -- we will propose to the next General Meeting another green dividend, which is, in effect, supposed to compensate for those emissions that we haven't paid for of EUR 0.01 per share, which is going to be EUR 1.8 million, which we're going to propose to our shareholders for a vote at the next General Meeting of alstria. Again, the full carbon accounting is available on our website. If you feel that you want to discuss this further, we would be more than happy to engage on the topic. That's it on our end. We will be happy to take your questions, if any, and looking forward for the follow-up conversation.

[Operator Instructions] The first question comes from Kai Klose from Berenberg.

Kai Klose from Berenberg. Just 2 quick questions from my side. It's on Page 7 regarding the split of letting volumes. Should we read anything too much? Or should we read anything into the split of the [ wall ] for lease extensions and lease renewals? Or do you think that a shorter wall for lease extension was specific to the assets or the leases that are expiring? And second question on the recycling of capital on Page 9, could you give maybe a rough idea of what you are planning for '23 and also in which regions -- or in which locations you're targeting more or less disposals?

Yes. So Kai, thanks for the question. The lease extension and the lease -- and the new leases, the difference in lease length, I think you can definitely read into it, which is that most of the lease extensions that we have are tenants, which are still wondering how they want to organize themselves post COVID in the new work environment and, therefore, are not necessarily committing. For as long as tenants who are signing new leases, which are more tenants, which have kind of already made -- took a view on the way they want to organize themselves and, therefore, are prepared to commit on the longer term than on the lease extension. So I think you can definitely read into that. You would also -- I think if you run the number, you would realize that the average rent per square meter we're getting on the lease extension is lower than the one that we're getting on the new leases, which is also reflecting of the quality of the space that we deliver on the new leases versus the lease extension and reflection also that the lease extension space is not necessarily -- or have not yet been adapt to the new work environment. So you can definitely read I think that into the numbers. With respect to the capital recycling, the investment market -- and I didn't really expect on that, but the investment market right now, we feel, is still very -- there is little liquidity or little transaction happening. So we don't expect to have a material activity in terms of sales. We did sell EUR 25 million, I mean, end of last year, beginning of this year. We probably expect to sell another EUR 25 million in 2023. We don't think that there is going to be material activities on the transaction side before early 2024 at best. So we're still waiting to -- I think, like everybody else, is waiting for the first transaction to happen to see how and to what extent they would price and where they would price. And looking at the volatility that you have in the interest rate market and the interest rate environment, I mean, if you just look at swap rates this morning, which are up 10 basis points from where they were yesterday, it's very difficult for a lot of people to actually make educated decision on pricing assets. So our expectation for the transaction activity is going to be relatively low. When it comes to funding our CapEx program, as I mentioned on the call, we still have EUR 360 million of cash at hand, which is more than enough to get us through another 2 years of CapEx, and that's clearly what we intend to do.

That would have been my follow-up question regarding the CapEx program. You mentioned that you have sufficient liquidity for the time being, so to say, for refurbishments. But -- so are you planning to spend more, let's say, equity cash on refurbishments, rather than financing this capital recycling? So what I want to ask is when you see transactions not picking up soon, would you expect to postpone, delay the CapEx activities? Or is this -- are these 2 independent?

No. At this stage, we're not planning to postpone any of our CapEx activity. We still believe that there is a substantial opportunity out there to deliver space and a quality that tenants are looking for. And there are not enough outside space out there, which kind of drive rent on those specific spaces at higher pricing point. So I don't think we have any intention to reduce our activity on the -- it's not that I don't think, we don't have any intention to reduce the activity on the transaction side. And actually, the liquidity that we currently have is past capital recycling. So it's because we've been selling assets. And maybe not you and I, but I and a number of people which might be on the call had the conversation in the past about the fact that we were a net seller and we're not reinvesting so much. And we always argue that the best investment in our portfolio and really now is the time to be using that as much as we can. So we are clearly looking at deploying that capital within the portfolio of the company.

[Operator Instructions] There is no further questions.

If there is no further question, I need to thank you all for taking the time this afternoon, spending some time on our financial results. We would be coming back for the Q1 result presentation around May. In the meantime, we'll probably speak potentially at the next General Meeting of the company. And we're available if you have any follow-up questions that you want to take on a one-on-one basis. We're always happy to address them. Thank you very much for your interest in the company, and looking forward to speaking to you later. Bye-bye.

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