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

So welcome to the Q1 result from alstria. I apologize for the technical mess that we're having right now. And let me go through the presentation without waiting. First, a few moments on the disclaimer and the cautionary notes on forward-looking statements and duty to update. And without any delay, let's move into the highlights of the quarter. The operating business has developed pretty much in line with what we're expecting with revenue at around EUR 45.5 million and FFO down 7% year-on-year at EUR 25.4 million. I will comment a bit more on that, but this is basically linked to the increase in leverage that we have been implementing last year, which has built the increase [ year-over-year ] for the company and had an impact on the FFO, which was [Technical Difficulty]. We did have a busy quarter on the leasing side and I think on the leasing front, it's something which is still very positive in the overall German market with overall activity of around 34,000, 35,000 square meters of leases. A bit slowdown on the new leases but an increase in the lease extensions. And overall, relatively positive amount in terms of total amount of income secured, I'll come back to that in a bit, compared to the same period last year. The balance sheet, I don't think there's much to report. Our balance sheet is relatively stable compared to what it was at the end of the year, EPRA NTA at EUR 14.40 per share and an LTV stable compared to year-end at 43.7%. Moving on to the portfolio. Here again, it's extremely stable. There has been little portfolio activity in the first quarter. The investment market itself is pretty much dull right now with very little transactions taking place. We did sell, I'll come back to it as well, assets in the course of the quarter. But overall, the portfolio is very much what it was in the end of the year with an average value per square meter at EUR 3,300 per square meter, which we feel very comfortable with at this point in the cycle. An average weighted lease length of 5.6 years and EPRA vacancy rate stable at 7.4%, then contractual rent, slightly short of EUR 200 million at EUR 196 million. Going back into the letting, we'll discuss that briefly. As you can see on the slide, our average rent per square meter is going up nicely and reaching at the end of Q1 2023, EUR 14.19 per square meter. The -- all the leases that we have secured or extended during the first quarter will generate future income of around EUR 46.5 million. That's compared with EUR 30 million for the same volume that we have signed last year. And that links to the fact that we have been able to sign leases or extend leases usually at a higher rate or longer term than what we did a year ago. On the transaction side, really nothing exciting to report. We did sell a small asset that we own in Eschborn, which was a vacant asset. Eschborn is not really a market where we have either a lot of expertise or a lot of belief in the future. So we are just exiting it as part of the finalizing the strategy we started about buying the center and selling the periphery. So here, we are clearly selling the periphery. And we're still selling the asset to buy a small asset at the premium to year-end book value, which will also reflect the premium to year 2022 book value. If we move to the P&L and the balance sheet, starting with the balance sheet. The balance sheet has remained very stable in the course of the quarter with the investment properties slightly up, potentially reflecting 2 effects. One of them is the increase in transfer tax in Hamburg and the state of Hamburg would have a negative impact on the value property. And the second one was the investment that the company has made within the investment property portfolio, which led to the increase of the value. Equity is rather stable at EUR 2.5 billion. It's going slightly down, again reflecting the change in investment property as the devaluation linked to the increase in transfer tax. And our net financial debt, very much where it was at the end of the year at EUR 2.4 billion, and I'll come back on the financial debt, most of which happened after the close of the quarter. If we look at the P&L, I mean we did change and adjusted our accounting policy in the first quarter of 2023 to align with the accounting policy of our shareholders that helped us to simplify our internal processes, the reporting requirements. And in that process, we have -- and I encourage you to look into our Q1 results, if you want to do a bit more. We are now capitalizing part of the interest of the development project that we're doing. We're also capitalizing part of the G&A, which relate to the development project, and we have shifted part of the SG&A which are linked to real estate operations to the net operating income. So all those changes do not have an impact on the overall bottom line. It's more like a shift in position between one line and the others. If we put aside those accounting policy change, our gross rental income have remained relatively flat at EUR 45 million. Funds from operations as discussed before is down, which reflects the increase in interest rates on the debt. We have increased the LTV compared to where we were in Q1 2022 and that obviously have an impact on the overall FFO, which was clearly expected. Our SG&A are down, and that's also as expected. If you recall, at the end of the year, we have discussed the fact that 2022 was impacted by a lot of transaction-related SG&A costs, which were one-off and were not deemed to repeat in 2023, and this is what you're seeing right now in the numbers with the reduction in 25% in the SG&A cost. On the debt side that we're showing you on this slide, the level of LTV and the debt structure at the end of the quarter was, as we discussed, very little change compared to if we were at the end of the year. And most of the work that took place on the [indiscernible] happened after the close of the quarter, which is what we're showing on this next slide. We have been repaying EUR 325 million bond, which has matured early April. And we're in the process of repaying a EUR 37 million Schuldschein in the next few days. And we did that by entering into 3 new loans, 2 7-year loans for a total amount of EUR 278 million or mortgage loans, which includes -- the EUR 278 million include the EUR 48 million extension of an existing loan and so top up of an existing loan and EUR 188 million new loan and a new 5-year loan for EUR 100 million of notional. And we have a weighted average margin of 137 basis points on those loans. We are showing you also how this basically shifts debt maturity with no maturity left in 2023 and around EUR 220 million of maturities in 2024 million which we are currently working on pushing back. What is interesting, I think, is the ability of the company to tap the mortgage market, which, at least from what we can see is still relatively liquid at a price and a margin, which is clearly very, very competitive compared to anything you can find in the public debt markets. And we are actually very happy that we've been able to do that. I think it has to do also with the fact that we're starting with these small amounts, which do not actually require a lot authentication from a banking perspective and also offering our banking partners' portfolio with a number of assets they can diversify into, which allow us to basically open the line to the mortgage market. So this is a market where -- looking at how the public bond market is developing, as long as it's trading where it's currently trading, it's clearly, from a company perspective, much more interesting to remain into the mortgage market, both from liquidity and a pricing perspective. Following those refinancings, our debt has been slightly down, and that's essentially reflecting the fact that we've been borrowing a bit less and repaying. But our intention is to keep being healthy closer to 45%, 50% over time. Before I open the call to Q&A, just a few words on the outlook. As we discussed, the leasing market remains very, very active and strong despite the volatility we have in the financial market. One of the major change and shift that we have seen in the market, have been the fact that tenants are renting rather smaller space than bigger space. So we have less very large demand compared to 2 or 3 years ago. But the total volume of demand that we have is still pretty much stable. And within alstria's portfolio, we also have a way to accommodate all sorts of demand, so we are pretty comfortable that we're going to be able to tap in the existing liquidity in the lending market that we put, which is still very, very supportive. The investment market, on the other hand, remain with very low activities, and we don't expect it to recover materially in the course of 2023. I think we do expect transaction to restart actually in 2024. From a company perspective, we're still focusing on our alstria pipeline, which offer us a number of opportunities to upgrade and transition our assets to what the tenant needs, and we still have a number of projects to work on. And so we are pretty much occupied into improving and increasing the value of the portfolio. And our intent is to continue to do so. As you know, we are not dependent on the transaction market from -- across of this. We're more dependent on the active letting market, which we still have. And so we are pretty comfortable in our ability to deliver on the performance of the company. We are confirming our guidance, which is revenue of EUR 190 million for the full year and then FFO of around EUR 79 million. And we're pretty comfortable in the ability of the company to deliver that and continue to grow the value of the portfolio over the years through active management across the assets that we currently own. That's it on my side for the Q1 presentation summary. Really from an operation perspective, everything has moved in line with our expectation. From a market perspective, leasing market is still virtually dynamic considering the overall environment in transaction market that we expect is more subdued. The interesting part is that there is an active financing market with the mortgage bank at least for company like alstria, and we have been able to tap into that market pretty actively. We'll now hand back to the operator for Q&A, and I apologize again to the technical challenge at the beginning of the call. Thank you very much.

[Operator Instructions] Okay. Our first question comes from Kai Klose.

So the second presentation, which you put online with the additional information on the Q1 results regarding the refurbishment project, could you maybe give an indication if the expected construction cost or refurbishment costs are still valid? Or have your rental assumptions -- reletting assumptions changed in the light of the successful lettings in Q1? Just to get an impression of the yield on costs you're targeting of 6.1% of the construction phase might come out.

Well, thank you, Kai. The table you have in the additional information, the table we used to publish before at year end, we did not this year because we changed a bit our reporting. So there shouldn't be anything unexpected in that table. On the construction cost side, I did not mention that during the call, but we are currently seeing that there are -- at least they stop increasing and then to some extent, they start easing here and there. I think the construction industry is one of the industry, which has the weakest forecast in terms of confidence in the way the economic situation is going to evolve. So we are seeing a substantial easing in the construction cost. And the number that we have published are the number that we expect to achieve. On the leasing side, as we have also a targeted number that we expect to achieve. We are, in principle, moving ahead of those numbers because there is clearly strong demand for refurbish and reposition assets. So all in all, I think if you -- the yield on cost of the additional information that we have published, this is still our current expectation as we speak.

And a very quick follow-up on Page 6 of this second handout. Question on the renewals. I saw that the rental levels were either unchanged or slightly lower. Was this due to some specific reasons on the -- for the existing -- for the expected assets? Or is it a general trend you see in the market that tenants -- when it comes to renewals, that you, as a landlord, are not able to increase rents on renewals?

Yes. So on the renewal, essentially, you're talking about options, which are being exercised by tenant. I mean, there obviously was a question whether it's renewal an option, we will classify them as renewals. And in the options, as you know, in the German context, basically, the tenants just decide to continue the lease on its current [indiscernible] space. There might be a bit of conversation with the tenants here and there. But essentially, that's the reason why the terms remain unchanged. Whenever we have completed communication with the tenants including the leasing tenants, and this might involve usually a change of the amount of space or us doing more CapEx or improvement in the asset for the purpose of the tenants, in that case, we would classify that new lease and then show the increased rent most of the time or in some case, releases.

[Operator Instructions] Our next question comes from the line of Niraj.

I just had a quick question on your cash. I see the pro forma cash is EUR 351 million. Do you have any plans of sort of liability management exercise or how do you think about your cash position? And given the fact where your bonds are trading, do you have any plans further on that?

Yes. So the cash position that [indiscernible] at the 31st of March is essentially -- I mean, you need to bear in mind that we had refinanced EUR 325 million of bonds and EUR 37 million of Schuldschein adjusted today after the close of the quarter. So this kind of cash position was essentially here to us to cover for the refinancing yields which we have done. We use our cash -- I mean, our cash on the balance sheet essentially to invest in the portfolio, and we have around EUR 150 million of investment that we do on an annual basis, on the full year basis. Now that we have refinanced the bond essentially through the mortgage loan that we have put in place, we have basically been rebuilding our cash position. Obviously, there is a question internally about the usage of the cash, it's operating to keep such a high amount of cash from a capital management perspective. And so if you remember, we did mention that we intended to return capital to shareholders in an amount of around about EUR 1 billion. We did so far returned around EUR 750 million. So we have EUR 250 million to go. We do have, as I mentioned before, the investment we need to make in the portfolio, which is around EUR 150 million and there is also potentially the opportunity to look back at the bonds, which are trading at a special discount to their nominal value, which can offer also attractive opportunity to the company. So we don't lack investment opportunity for the cash and we probably don't intend to keep such a high amount of cash on a current basis beyond what we think for the portfolio investment on the balance sheet. And so this is something which we're still looking at what's the best and most efficient use of that cash going forward.

Got it. That's helpful. And my second question is on the S&P rating. Do you have any comments or thoughts on that to share?

Sorry, could you repeat the...

Yes. I'm just asking about the current S&P rating, which is BBB- on stable outlook. Do you feel any risk of downgrade in the current environment? Or do you have any thoughts to share on that side?

Did you understand the question?

I'm sorry, you're talking about [indiscernible] operate?

Yes, I'm just talking about your S&P rating and how you're thinking about it?

So look, I think we are an investment-grade rated company, and we're doing whatever we can to remain an investment-grade rated company. I think our intent is not to get ungraded by S&P. On the other hand, if I look at what's happening in the broader market, in the office side of life, there is -- are a number of changes, and I think most of the real estate rating entities or the rating agencies whether [indiscernible] or commercial real estate, you should be concerned about how the office market is evolving, whether office has a future or not, whether value are going to drop or not. As we discussed, we feel pretty comfortable with the future business of the company. We feel pretty comfortable with the fact that the value of our portfolio is very much protected on the downside because of the nature of the portfolio that we own and the fact that we have room to improve the value investing into it and we also have the platform to achieve that. So from our perspective, the credit risk of the company has not materially changed by itself. If anything has changed, it's the overall environment in which we have worked. And there is nothing much we can do on the exogenous changes around us. We can only work on [indiscernible] risks that we're managing ourselves. And so from that perspective, I feel pretty comfortable in the credit quality of the company. Whether or not S&P share my view is only for them to confirm. But we have a regular dealing of data as we did in the past. And I think that they have reflection more broadly around commercial real estate, where I feel pretty comfortable that the credit of the company is still just as strong as it was 6 months ago.

At this time, we have no further questions. Please continue.

Well, thank you very much for your interest. I will be looking forward to speaking to you for the next quarter results on the half year results. If you are a shareholder of alstria, I just wanted to remind you that we will be holding in 2 days, our general meeting, and I will be also looking forward to speaking to you then hopefully with better technicals than today. So again, I apologize for a bit of lapse on the technical side, but thank you very much for your interest in the company, and I'm looking forward to our conversation in the future. Thank you. Bye-bye.