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

Hello, and welcome to the alstria Results H1 conference call. [Operator Instructions] Please note this call is being recorded. Today, I am pleased to present Olivier Elamine. Please begin your meeting.

Thank you very much, and welcome from sunny and hot Hamburg this afternoon. My name is Olivier Elamine. I'm the CEO of alstria, and I'm here today with Ralf Dibbern, which you know well is heading our Investor Relations presentation. Jumping into the presentation itself, a very short disclaimer on the duty to update and the forward-looking statement. And without undue delay, moving into the presentation itself. The operating business has moved according to our plan so far with the revenue up 6.3% year-on-year. The FFO is down to EUR 41.5 million, 13% as expected, which is mainly reflected the increase in financing costs. And we have a reasonably busy year on the letting activity with substantial number of new leases around 32,000 square meters and 20,000 square meter of extension. There is obviously less extension than last year, which has more to do with the structure of the portfolio than anything happening in the market, but I'll come back to the letting market in a minute. On the balance sheet side, and again, we'll go into a bit more detail in a second. The EPRA NTA stand at EUR 9.45 per share, and our net LTV is slightly down at 57.6% versus 58.3% at year-end 2023. The portfolio itself, there is nothing much to report. Everything is very much stable. This year, there was no half year revaluation. As you know, we only do year-end revaluation of the portfolio size, volume and rent has remained pretty much flat, current vacancy rate, EPRA vacancy rate across the portfolio stands at 7.9%, with a valuation yield at 5%, and there was no transaction activity across the quarter. Letting overview, we've discussed that briefly. We're still increasing the average rent per square meter on the portfolio, which stands at EUR 14.87 right now. We have signed a substantial number of new leases, mainly long-term leases with an average WAULT of 7 years, which reflects around EUR 40.5 million of future income and have extended leases mainly on a short-term basis with an average lease length of 2.7 years, which represents around EUR 10.6 million of future income. Obviously, signing new leases is the most encouraging things we have on the market, and we do see still an active letting market for the right asset at the right life located in the right locations. If we move on to the balance sheet, the G-REIT equity ratio has improved slightly at 44%. It's still below the required 45%. The testing date, as you know, is once a year. Our net LTV, we've touched on that briefly is down to 57.6%. The investment property increased to EUR 4.32 billion is essentially reflecting the CapEx we have spent in the portfolio, and our net debt is virtually stable at EUR 2.3 billion old debt that we have taken over the quarter -- over the first half year has been used to refinance existing indebtedness. So the -- no movement in the net financial debt actually is hiding a lot of movement in the back with basically some bond buybacks has taken place and new mortgage financing being put in place as well. If we move on to the profit and loss statement, our gross rental income, we've discussed briefly is up 6.3%, reflecting both new leases that have started over the period as well as some indexation on existing leases, the funds from operation is down 13.5%, which is reflecting, again, here the increase in financing costs. So I'll go back to that in a second. And our SG&A are also down 10.5% to EUR 9.2 million for the first half year, which is reflecting a bit of savings that we've been doing on that front. If we look at the refinancing, we've stopped -- based on the amount of debt, which remain -- on the net debt, which remains reasonably stable, it is hiding a bit of activity in the background. We have taken onboard EUR 245 million of new debt with an average maturity of 6.5 years, which is secured mortgage debt and we've bought back EUR 97.3 million of bonds and refinanced one of our existing mortgage debt. And therefore, we've basically been reinvesting 100% of the proceeds of the new debt into refinancing existing liabilities, which we intend to continue doing in the future. You have on this slide, a summary of the different bond buybacks that we have been doing over the last few months. We're obviously still interested into buying back our bond whenever they are available. We are mainly reacting to in bond inquiry and not necessarily actively playing that on the market. We've also, during the quarter, extended the EUR 150 million RCF to 2027. If we look now in a bit more detail in the financial cost of the debt, our cost of debt is up 0.3% which is again 30 basis point, therefore, not a surprise, looking at our marginal cost of debt right now. And that's a trend that we will expect is going to continue in the near future as we refinance kind of legacy debt with new debt with -- and the new interest rate environment being what it is, I think we need to expect that our cost of debt is going to continue to help average debt maturity despite being 6 months later, it's still pretty much stable, which basically show our ability to still tap in the debt market and extend the average maturity of our debt. So the next refinancing that we have is for September 2025, end of August 2025, September 2025, we have no liability left between now and then. I also wanted to take the opportunity today to give you a bit of an update on the REIT status of the company. We are currently working on 2 different scenarios, one where the company would retain the REIT. As you know, we're currently in breach of the free float requirement, which need to be cured by the 30th of December 2024. We currently have a bit less than 5% free float, whereby is requiring to have 15%. And the REIT equity ratio, which is below 45%, but we would have a bit more time to solve this one as the deadline would be 31st December 2025. We are currently working on several work streams in parallel to restore the free float requirement by December '24. However, most of those process are basically out of our hands has involved one way or another, some of our shareholders. And therefore, there is currently some kind of an uncertainty on whether or not we're going to be able to maintain the REIT status at year-end. And as such, we're disclosing a contingent liability with respect to that potential loss in our financial statement. Basically main impact here would be that we would need to book deferred tax liability on our balance sheet, which is obviously a non-tax -- sorry, noncash item, but it would be reflected in our equity and in our kind of P&L for the year. And then there would be like a minority shareholder compensation, which is required by our bylaws, which would have actually a very minor cash impact if any, on the company, simply because it would reduce our dividend -- mandatory dividend by the same amount. So net-net, it should be pretty much neutral for the company on a cash basis. There is obviously the exact amount of the deferred tax liability mainly will only be determined at your end once we have the valuation of the company if we need to go into that situation, and we can't extend the regime for at least another year. Looking back into the market, I think the positive things still in Germany is that the letting market remains strong and active. And we're still seeing good tenant demand for quality space and most of the assets that we have currently on the market. The investment activity, I think, is not going to be a surprise to anybody that still remain very much subdued, and we don't expect any material change in the course of 2024, we think 2024 is going to remain lackluster transaction activity. And so we are on our end, continuing to focus our attention on refurbishing our assets and our pipelines, and we're making good progress on that front. And as I said, this has been very much supported by the letting activity and the tenant demand, which is generating all in all, still reasonably attractive financial returns on the refurbishment that we're doing. We're still seeing rent increasing on the assets which are currently in demand. So that will be it on my side for this half year presentation. In summary, I think the financial of the company have developed according to what we would expect with revenues slightly up and FFO down because of financial cost, the balance sheet is where it was supposed to do with no maturity before Q3 2025, which we are currently working on the refinancing. And from a market perspective, we're still operating into a positive leasing environment as the investment market itself remained completely subdued and no expectation of a quick recovery in 2024 on that front. So I think we can move to Q&A, if there are any.

[Operator Instructions] Your first question comes from the line of Michael Chakardjian from BNP Paribas.

I had a few questions. I see that your RCF was downsized from EUR 200 million to EUR 150 million. Can you explain why?

Yes, I can. Because one of the banks which was involved in the RCF decided not to extend.

Okay. The next question is, I know you no longer have been reporting your unencumbered assets. I don't see that in your report, but can you tell me how much of your pool is unencumbered?

Yes. If you give me one second, but I think the difference between what we reported in year-end and this year should be probably EUR 160 million, which is a new mortgage loan that we've put in place.

Okay. Then the next one is your -- you have a EUR 150 million RCF, and you have around just under EUR 100 million in unrestricted cash. Are you looking to -- how much are you looking to -- of that, would you be interested to buy back bonds? Like basically, how much cash would you want to keep on hand before excluding buying back bonds?

I think for the time being, yes, we're still interested in buying back bonds. If they come, as I said, we don't have a standing buyback program. We reacted to in bond inquiries. And for us, I mean, I would be prepared to use at least the entire RCF volume to a certain extent, to buy back bonds. It's still an attractive value proposition for us. So that's something we're still open to look into, but we haven't seen a material volume recently. So it's -- but this thing comes and goes. But [ the board has a special ] interested in buying.

That's interesting. And then the next question I have is your bond is maturing in 13 months from now. What's your refinancing plans? Have you -- Brookfield owns a lot of those bonds, have you had discussions with them on would they be willing to -- what they were willing to do in refinancing? I mean refinancings only 13 months away, you must have a plan. Is there anything which you can share there?

Yes. I think our plan has not changed from what it was over the last 24 months. We're still raising debt in the mortgage market and using that debt to basically refinance our bonds that have not changed from.

But your mortgage market debt is -- what is it, it's around 5%. These are going to be I mean, are you looking -- and your income on your properties is only 5% as well. Is that what you think you're all-in funding costs are, how do you spend vision, how your ICR going to be?

Our marginal cost of debt is 4.2%, 4.3%. And as the carry on the asset is something which is like kind of different, but it's higher than that. I mean, the yield on the assets is closer to 5%. But in principle, yes, we're planning with the actual cost of debt. And I mean, the interest rate environment is what it is, haven't changed over the last 24 months. We know where it's going, and we're planning with the higher interest cost of debt, and refinancing in the mortgage market with that.

And then I guess, and you must know how much of the [ TopCo ] loan about what's the balance and how much dividends or your owner needs. Is there anything you can share on that for us to be able to see how feasible this plan is?

Yes. I mean, so far, our dividend policy is we pay the minimum dividend required by law, and that policy has not changed. If it changed, we would need to basically like do an ad-hoc announcement and inform our shareholders. We haven't paid any dividend this year. I think we haven't paid last year, if you put aside the special dividend. And so we still -- as a REIT, we expect that the dividend on a yearly basis is around EUR 30 million, and that's the current plan is to stick with that dividend policy.

Then have you -- when Brookfield -- I assume Brookfield has refinanced the -- extended the shareholder loan. Is there anything which you can say on that?

I think you should ask Brookfield.

Okay. Unfortunately, they're not on this call. Then the next one is have you look to buy back -- have you looked to buy back bonds from Brookfield? Or if any of the bonds you bought have been the ones which have been owned by Brookfield?

No, we haven't bought any bond by Brookfield.

And then lastly, by year-end, if you're unable to bring back to secure your REIT status problems. How much extra tax liabilities would be added to your -- would be added to your balance sheet?

Well, it's all disclosed in our financial statement, the half year as a contingent liability. So far, if you assume a full -- like a full tax rate, which is around 30% in Germany, it will be around EUR 370 million, but this would be, again, need to be refined and reworked once we have the final value of the property at your end. And we are more in a position to determine the exact kind of tax rate that would apply to us going forward.

Our next question comes from the line of Pranava Boyidapu from Barclays.

Firstly, to start off, you disclosed you're rated by the holdings of Brookfield. It's shown as EUR 110 million in your H1 report, but it says as of December 2023, I assume that H1 '24, but that's considerably down from what you disclosed in December '23.

I think that's a typo, which we have corrected in the meantime. I think the first version of the report that went out had a typo. The number has not changed compared to December 2023. I think it's 243-something.

Okay. So Brookfield still owns all of them. They haven't actually sold anything over this....

To my knowledge, that's correct.

Okay. And all these holdings, I think you just clarified that you haven't bought anything from them. So these are completely independent bond holdings and they would not be canceled in any way, right? Is that correct?

Correct. The only bond that are -- could be canceled, are the ones which are owned by the company. I mean the -- I mean, Brookfield and us are 2 independent companies. This is why, I mean, they are a shareholder, they're 95% shareholder, which makes them a very important independent company to the company, but we're still operating independently for them. And they do whatever they need to do and want to do with the bonds, they could also sell them back in the market. But so far, we have no way to access them or to do anything with them. The only bonds that we control are the bonds which are owned by the company.

Sure. And in your presentation, you mentioned that you have raised new debt of EUR 245 million with 6.5 year secured. That's the refinancing of the -- of loan 1, which is EUR 150 million down to EUR 125 million . And the drawdown on the EUR 120 million that you signed, I think, towards the end of 2023, is that right?

Yes. And we -- basically, the kind of difference between those numbers, if you add up those numbers, the difference was the bond buyback.

Okay. Got it. And you mentioned just now that you're willing to buy back the bonds in the market, especially like using much of your RCF. If you look at your debt profile, which is in Q3 '25, you've got a EUR 107 million loan and the 2025 bonds that are coming due. If you end up using much of your RCF buying other bonds, then what would the liquidity be left for you at that point when you look at the 12-month liquidity?

I think, again, maybe I need to clarify that. So what we are doing right now is we're still raising mortgage debt. And we're still having very good traction in that market. So our intention is to refinance the bond of 2026 by raising the amount of debt necessarily in the mortgage market. What I was saying is between now and then there is the opportunity to buy back bonds, and we have not raised the mortgage debt in the meantime. We would be using the RCF for the purpose for which it is, which is to bridge cash for a certain period of time without hindering the overall operation of the company. But clearly, at the end of the day, the intention is to refinance those bonds, not with the RCF, but with mortgage debt. And so if you call me tomorrow morning and tell me I have a EUR 25 million of bond I want to sell to you. I'm probably going to consider that positively. But from a cash perspective, are we going to be using the RCF to bridge the moment between now and the moment where we're going to draw down on the next tranche of mortgage loans, which we're currently negotiating. Does that make sense?

Yes. And would you consider issuing in the unsecured bond market as well, if spreads have been tightening and the yield on your bonds has been quite low in the recent past as well.

So I think for us, at the end of the day, it's really an arbitrage between how much spread will be in charge in the mortgage market and what the spread we're going to be charged in the unsecured market. And over the last 24, 36 months, the mortgage market has been substantially cheaper than anything we can find in the bond market. So it's a very basic kind of I have 2 providers of capital. One of them is substantially cheaper than the other one, a bit more complex, but substantially cheaper. And so for us, it probably makes more sense to go into the secured market. If the situation was to change and the yield were to tighten dramatically than we would obviously reconsider.

Got it. And finally, would you consider buying the bonds from Brookfield? I know you mentioned you haven't so far, but if they come up to you and so is there anything that stops you from buying?

I think we wouldn't be buying any bond from Brookfield outside of a structured kind of -- like a structured auction essentially. So we'll be making the exact same offer to everybody, but we wouldn't clearly -- I mean, the answer is no.

Okay. Like if you do tender, it's okay. Like if you do tender...

If they were to call me tomorrow and say, look, we have EUR 25 million of bond, would you draw down on the RCF? I would say no.

At this time, there are no further questions, I will return the conference back to you.

Well, thank you very much for your interest in the company. We're obviously still available if you have any follow-up questions, either myself or Ralf, we'll be happy to address them as much as we can. And we're looking forward to speaking to you for the third quarter results, which is due sometime in November. Thank you very much for your attention, and have a great end of the day. Cheers.

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