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 2023. At our customers' request, this conference will be recorded. [Operator Instructions] 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 half year results presentation. My name is Olivier Elamine, I'm the Chief Executive of alstria, and I'm here today with Ralf Dibbern, which is heading our Investor Relations. Welcome from cloudy Hamburg today. And before we start, usual heads-up on the disclaimer and the cautionary note regarding forward-looking statements and the duty to update. But without undue delays, let's go into the presentation. I think the first half of 2023 has been developing from an operational perspective, pretty much in accordance with our expectation, where we have had lower activity on the financing side with a bond and part of the Schuldschein that we had, which came due and we moved all that financing to the more secured side of life, and I'll come back and develop on that in a bit of a moment. Leasing activities has been in line with last year with more extension and a bit less new leases. I will develop on that in a few moments as well. But here, the main message is letting activity in our market is still pretty much strong and this is the kind of blue sky in the overall situation. The investment market itself remained completely subdued. We have sold one more property in Eschborn over the period. And we don't expect it actually to recover before, at the earliest in 2024. From a balance sheet perspective, our NTA is pretty much stable. If you consider the dividend payment and our net LTV is also pretty much where it used to be. The portfolio itself, I think I don't need to spend too much time on that. You're pretty familiar with it. If you have been following us for a while, the total value of the portfolio has been stable over the year at EUR 4.7 billion. There was some kind of write-down, which was partially compensated by some of the CapEx we've made in the portfolio. We still have an extremely reasonable capital value at 3,364 per square meter. Contractual rent is at EUR 198 million and a weighted average lease length of 5.5 years, a bit short of that. Letting, as I've discussed before, and as you know, letting market in Germany is still a dynamic market. We are discussing leases and we are signing leases, which is reflecting in the number. We're slightly ahead of where we were last year. Average rent per square meter has continued to go slightly up. Overall, I think what is happening on the letting market right now is that we're seeing the total number of leases and the total of volume we're discussing pretty much in line, which was they used to be through our leasing pipeline. It's just as big this year than it was last year. The main difference is that lease tend to be a bit smaller. So we're seeing companies looking at rather smaller space and bigger space. And we're also seeing some of the largest company not interacting so much in the leasing space. We believe this is due to partially the fact that some of the companies are still trying to figure out how to organize themselves on the office side and partly as well linked to the new work-from-home practices and new work practices, which is changing a bit the requirement for office space. As a company, we feel pretty comfortable. As you know, our assets are relatively small. So the fact that the average size of the leases is reducing is not really impacting us so much, and we're equipped to do so. What we're seeing as well is that most of the tenants are looking for space, which can deliver some kind of added value in terms of culture and communication, et cetera, which is what the company is striving to do within its refurbishment program. So we also feel very comfortable with the trend and our ability to benefit from it going forward. If we look briefly on the financials, the usual balance sheet position we're looking for. As you know, investment property pretty much stable. Equity, stable as well. The little change that you have here reflects the dividend payment that was made by the company. And our net financial position is stable as well. So we had a lot of activities on the financing, and I'll come back to that in a minute. But overall, the KPIs here from our balance sheet remain pretty much in line with what they were at the end of 2022. If we look at the P&L, we have a slight increase in revenue, which is reflecting the new leases that we signed in the course of last year, which are started to start now and picking up, reflecting as well some of the indexation that we are capturing and on the other hand, some of the lease termination and assets we're preparing for the next refurbishment cycle. Fund from operation, I'll develop that in a second, but it's essentially impacted by the higher leverage that the company has. If you remember, we did pay out last year, EUR 750 million of special dividend, which was funded with debt, which obviously increased the overall leverage, and that has the lion's share of the impact on the fund from operation. SG&A is substantially lower. We were expecting that, and we have discussed that in previous calls and on year-end presentation. The number in 2022 were impacted by a number of effects, which were related to the transaction of Brookfield. Those effects faring down, we are reverting back to a more normalized SG&A number. So the reduction here was expected, and we've been discussing that in the past. If we look into how the FFO have moved over the year on a year-on-year basis, as you can see, there is some effect from lease-up and from indexation. But the lion's share is coming from the financial results. We did have last year, in the other operating result, some positive impact on the FFO, which was linked to termination fees that some of the tenants have paid which were not renewing this year. But here, again, I think the lion's share is linked to the way the leverage of the company is going up. And in addition, the cost of debt per itself is going up, which lead me to, looking ahead, taking a deeper look at our financial structures. So our net financial debt is pretty much stable year-on-year. We did refinance all our maturity in 2023. We still have around EUR 200 million to refinance in 2024, which we are currently working on. Our average debt maturity is very much stable. What has changed is that since we refinanced the bond, we basically switched the last bond that matured in March -- in April, sorry, with mortgage debt. So we have moved closer to secure or increase our secured indebtedness versus capital market debt. We are currently still in discussion with lenders on more secured debt. And I must say that the price at which we are able to access secured lending today, which is somewhere between 120 to 170, 180 basis points, depending on the risk profile of the assets, is substantially lower than how bonds are trading, whether alstria's bond or other bonds on the public equity market. So from a company perspective, it's absolutely no-brainer right now that the mortgage secured market is substantially more attractive than anything we can find in the debt capital market. To wrap it up, just a bit of the outlook. As you know, letting market active and supportive with tenant demand still strong, but switching a bit and focusing whether on smaller area, but we're still very comfortable with the level of activity and the level of rent that we are achieving in the letting market, and that's clearly the bright spot in our business right now. Investment market activity is, I mean, low, kind of an understatement of what it is. It's extremely limited, and we don't expect it to recover before early 2024 at the earliest. 2023 for us is clearly a year where very little is going to happen on the investment market. As a company, we still have a substantial refurbishment pipeline we're working on, and we're still transitioning assets to meet our tenant needs, to meet the new ESG standards that are required by our tenants and the city in which we operate, and we're still looking to continue investing in that part of the business, which has been for us, bread-and-butter for the last 15 years. And hopefully, it will continue to be for the next 15 years. Having said that, I'd like now to hand over back to the operator and go through any question you may have.

[Operator Instructions] The first question is coming from Chris Roberts at BNP Paribas.

A couple of things from me, I suppose. First thing is, as I'm sure you're aware, S&P has highlighted that there is a loan at the holdco above alstria, which comes due early next year. Is there anything you can tell us about how that may be tackled? Or any conversations with your shareholders around that? That's the first question. Second question would be, how should we be thinking about your dividend ambitions given the environment we're in now. I think in the past, you would suggest that -- or the company has suggested rather that they would like to pay out about EUR 1 billion, and so far, I think it's EUR 750 million that's been completed. So is that plan still the plan? Or has that been put on ice? And very lastly, if you could just remind us of your rating ambitions, please, that would be super helpful.

Yes. So on the first question, I mean, I know there is a holdco loan and I know it needs to be refinanced. I'm also aware that the conversation I'm going right now between our shareholder and the lenders of them to actually implement the refinancing of the loan. From a company perspective, however, I think this loan -- I mean when we look at it, it's equity because there is no recourse to the company assets. There is no cross-characterization or anything which basically would impact us. So any negative impact on that loan would have a limited impact on the company per se. But we are not part of that conversation. So we are not part of the discussion with the lender. The best we do is organize some property tour here and there to basically explain the business of the company and show them some of the asset, but that's about it. With respect to the dividend payment, I think our position is still what we have discussed in the year-end presentation and I think last quarter. The plan is still to pay out around EUR 250 million of additional dividend to the shareholder to go back to this EUR 1 billion. And -- but the timing of that payment is still open. It basically depends on the ability of the company to generate liquidity, first of all, for its own business and then the extra liquidity that would be needed to disimburse those additional to EUR 250 million. If we were to actually change that plan, we would need to disclose it as an [ adopt ] because this is a material information. So I think my best guidance here is as long as you don't see anything coming out of us saying that we decided not to pay it out, I think it's reasonable to assume that this will come. It can come as a dividend or a share buyback or a mix of both. So for the time being, it's still part of the plan, still part of our budget. What I don't know is when this is going to happen, and that's clearly depending on the liquidity position of the company and our ability to generate the extra cash above and beyond what we need to actually run the business. And the last point, I think the last part of your question was about the rating. In principle, I mean, we have a good relationship with S&P. We're very happy to see them. We're also very happy to be investment grade and remain investment grade. Having said that, I think there are also a number of external factor that are not necessarily, I mean, linked to what the company is doing and how the company is doing, which are more some macroeconomic factors, some kind of also sentiment around office globally, which I don't think necessarily should reflect negatively on the business we have here, but still, which might impact the rating of the company and the way S&P is going to be looking at us. So we cannot kind of -- and we would not do crazy things just for the sake of retaining the investment-grade rating. So we've always run our business in a way we thought was appropriate. So as we discussed and as we highlight, our target is to have an LTV, which is going to be around 50%, which is where the dividend payment would get us essentially, which we believe is consistent with the BBB- investment grade. But from there on, if that doesn't work, then I think we could also live with that. So our target is not to be downgraded, but our target is also not to remain investment grade, no matter what the costs are. And again, here, if you look at this from a company perspective, as I've tried to explain during the call, the difference in price between where mortgage debt is and where corporate real estate debt is on a public market is so substantial that there is, to a certain extent, little benefit or little interest for a company like us in remaining invested in the public bond market, at least as long as the market have not kind of come back to its mind and adjusted pricing to be more in line with where the average corporate BBB or investment grade rating are. So what I'm trying to say here is there seem to be in the public debt market, a difference between real estate debt and the rest of the corporate market debt where real estate debt tend to trade at a substantial spread and that make it completely unattractive for us to be out there. So we still have time between now and when our bonds are going to come to maturity. I still feel that the public debt market has a lot of benefits in terms of flexibility and attractiveness, et cetera. But today, the cost disadvantage that it has is clearly -- make it a clearly no-go area. So let's see how things are going to develop between now and 2025. But if they stay where they are, we are very likely to switch to secure financing across the board.

[Operator Instructions] The next question is coming from Kai Klose at Berenberg.

Just one question, if I may, on the refurbishment pipeline. Could you indicate if any of the underlying parameter from your side have changed, either in terms of letting expectations as -- either/or in terms of completion of schedule as well as in terms of construction cost or the material costs. I got some indications how -- and if to this extent, there has been some adjustments.

Kai, yes -- well, thanks for the question and keeping on being interested in us. On the development side, what we're seeing right now is construction costs tend to stabilize at the level where they are. So we're not seeing them increasing anymore. If we look at our overall project, we have seen across the years cost increase somewhere between 10% and 15%, which was essentially cost increase in the year 2021 and 2022. So this year, this has clearly stopped. But we have been able to recoup most of that cost increase through higher rent that we are achieving on the lease-up of those assets. So overall, our economics on those have remained pretty much stable. We're not seeing a material delay, at least nothing which would be unexpected in a business like ours, which is usually you have 1 or 2, 3 months delay, like a quarter delay on delivery of a building, which is -- I don't think it's something very unexpected. But -- so we're not seeing a material delay on that front either. What is a bit more concerning, but this is more like from a global economy perspective, is we're seeing more bankruptcy of the supplier side and on the construction side. We're seeing also a bit more bankruptcy, which is not related to us, in some of the developer. I mean, again, this morning, there was some developer in Düsseldorf fighting for bankruptcy. But on the other thing, we think that this kind of distressed if it and when it happens in the market is going to create more opportunity for us to deploy capital. So we look at it rather positively. But overall, I think the metrics that we have on our construction pipeline and restoration pipeline has remained pretty stable.

The next question is coming from Silvia Duranti at Goldman.

A question from my side. I understand the portfolio remained quite stable on the market value from last year, but you haven't conducted a thorough valuation semiannually. May I ask why this was the case? And what are your expectations for the investment property values and the yield expansion?

Well, we haven't changed our policy in that respect. So we've never conducted half year valuation in the past. So there was no fundamental reason why we would change that right now. There is little evidence and market transaction evidence right now in the market. And the little transaction that we've seen seems to be very supportive of to the value of the portfolio. We have in Hamburg -- the City of Hamburg itself has acquired building which is very comparable to us at prices which are 15% to 20% higher than our carrying values. So we do have a number of market evidence here, which support the view that the value is relatively stable. Also, those are fairly limited. We would be running an external valuation at the end of the year. It's probably very, very early to be able to say how things are going to develop and whether or not there are going to be more transaction evidence that would, I mean, show where the market is settling. As we've discussed previously, we don't expect to see a lot of market activities. There is little being either put on the market or -- and even less, which actually trade. But we feel, when we look at those transaction, that the value -- our carrying value are still substantially below the asking price that we're seeing for markets. And so I'm pretty comfortable with where the valuation stand right now. We've never played in the past the game of massively increasing the value of the portfolio. And I think now is the time where we're benefiting from that compared to others.

Okay. Very, very clear answer. If I may follow up on this. So are you looking to dispose more assets? If, of course, the market opens up, mindful of your comments before to keep, let's say, offset the potential, the expansion that you might have? Or in terms of deleveraging plan? Or you're happy with the current leverage at company level?

So we are planning disposal, but actually not so much because we're worried about the leverage, but mainly because those are assets where the work is done. And one of the premises of the transaction with Brookfield was that it would increase our ability to recycle capital and increase the pace at which we go through refurbishment portfolio, which we have not done so far or at least only to a limited extent. Obvious subject -- I mean, obviously, linked to the market situation. So clearly, if there were opportunity to dispose some of the assets that we have repositioned, we would be pursuing them, and we would be pursuing them aggressively because we wanted to accelerate the pace at which we are recycling capital, which in the current market situation is almost, I mean, not feasible, essentially, there is no liquidity, which would allow us to do that. So we've been selling some assets here and there, but those are mainly on smaller volumes. Ideally, our plan would be to sell around EUR 150 million to EUR 200 million per year, which we have not been able to do so far.

There are no further questions at the moment. For closing remarks, I move back to the speaker.

Well, thank you very much for your interest in the company, and looking forward to speaking to you for the Q3 result presentation. If you have any follow-up questions, by all means, feel free to reach out, [email protected] or you can reach out directly to Ralf or myself. We'll be happy to take it from there. Thank you very much and enjoy the rest of the summer, and speak to you then in November. Bye-bye.

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