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

Hello, and welcome to the alstria's Full Year Results 2024. [Operator Instructions] Today, I am pleased to present Olivier Elamine, CEO. Please begin your meeting.

Thank you very much, and welcome from a sunny Hamburg this afternoon to the financial result 2024 for alstria office REIT-AG. My name is Olivier Elamine, and I'm the CEO of the company. Before I walk you through the results, a short note with respect to the forward-looking statement and the duty to update. And then without undue delay moving into the presentation. Starting briefly with a summary of the year 2024. 2024 was essentially a reasonably good year for alstria from an operating perspective with our revenue and FFO ending up above the guidance that we had to the market with revenue at EUR 198.4 million and FFO at EUR 81.2 million, where we basically guided at EUR 195 million and EUR 71 million, respectively which leads to an overall FFO per share at EUR 0.45 per share. We had a good year in terms of leasing and 2025, I'll come back to that in a minute, is also starting on really relatively solid ground with our leasing result up almost 19% year-on-year with new leases of 52,000 square meters and lease extension of 106,000 square meters. As you can see in the new leases, we substantially outperformed the performance of the year before, and that's also speaking, I think, quite loudly to the dynamics of the letting market, at least in the market in which we are operating. The valuation results, we've seen a stabilization in property values across the German office space, which led to our valuation being up around 4% year-on-year, ending up at EUR 4.1 billion. And finally, all of that led to an EPRA NTA, which is pretty much unchanged compared to last year at EUR 9.15 per share, despite a lot of movement actually in the NTA itself. And the company LTV, which is down, and as you know, we're in the process of deleveraging the company and down at 56.5%, and I'll come back to that also in more detail in the follow-up slide in the presentation. But before we move into the operation, I just wanted to take a few minutes to go through the recent development with respect to the squeeze out process and the exit from the REIT regime, as you know, alstria exited from the REIT regime on December 31, 2024. This exit has triggered the compensation payment according to Article 20 of our Article of Association, and we paid a compensation to the minority shareholder of EUR 2.81 per share which was paid in early January. And then we had on February 11, the general meeting of the company, the Extraordinary General Meeting, who voted on the squeeze out request, which we received from Brookfield, our 95%-plus shareholder. The AGM voted in favor of the resolution of the squeeze out. And so we expect now that the AGM results will be registered in the commercial register and when that's done, the share would be transferred to Brookfield and alstria would become a private company. The process of registering the share in commercial register is a reasonably long process. It's subject to potential litigation by minority shareholders, and we expect that process to be -- or to take at least up to early summer, end of the summer before a registration can actually happen. But there is nothing unusual in that. This is like the standard time we would expect in such a process. If we move on to the operations, a slide that you are probably familiar with right now, looking at the portfolio of the company, we're still operating in the 5 cities in which we have been operating almost forever. The value of our portfolio, as you know, has increased slightly. It's now up to EUR 4.1 billion, which gives us an average asset value of slightly short of EUR 40 million. Capital value is still reasonably low in the context of the German real estate at slightly below EUR 3,000, EUR 2,970. What we looked at this year and this is new in our presentation, we also looked at the reinstatement value and reinstatement value is basically an estimate at how much it would cost to basically rebuild what we currently have including the purchase of the land. And that will be around EUR 6.5 billion. So you can see that the valuation of the portfolio is substantially lower than the reinstatement value, which gives us a lot of comfort in the downside protection that alstria's portfolio is currently offering. The weighted average lease terms on that portfolio is still at around 5.2 years. It has not moved over the years despite the fact that we're all getting a bit older, and that is basically a testimony to our ability to basically lease up the portfolio and maintain the cash flow and the visibility of the cash flow over the long term. EPRA vacancy rate is pretty much stable at 7.9%. Our contractual rent at EUR 203 million is substantially lower than the ERV of the portfolio, which is close to EUR 300 million. And we end up the year at a valuation yield of 4.9% and ERV yield at 7.5%, ERV yield looking at essentially the ERV in relation to the value of the portfolio. There was obviously a lot of movement in property values over the last few years. The -- what we are seeing in the market, and I think there's a reasonable consensus around that is that property values have stabilized. As you can see, we have been writing down the portfolio by around 18%, 19%, 18.7% since full year 2021. We've been reasonably early in writing down the portfolio in '22 and took a biggest write down in '23, but we think that we are now through this period. And as we said, property values are stabilized. Over that same period of time, we continue to invest in the portfolio and invested around EUR 353 million to basically improve the quality and the attractiveness of the asset as part of the overall business plan of the company. If we look now at the letting results. As we've discussed previously, 2024, was a reasonably good year from a letting perspective, we see still a lot of dynamic in the German letting market and a lot of liquidity. What has happened, and we had the opportunity to discuss that over the year is that average lease have reduced in size but what matters for us as a company is not so much that the lease are reducing in size, but there is liquidity in the market, and we can actually capture that liquidity. We have signed around 160,000 square meters of new leases and renewals, which basically secured future income of around EUR 136 million for the company. And our average rent per square meter on the portfolio have increased to around slightly short of EUR 15 and has been consistently increasing over the years. The letting market is really the positive element overall in the German market. We are still seeing tenants which are looking for improved quality space and are willing to pay more in order to get into refurbished assets, and that's really the market we're trying to address, and we're trying to capture over time. If we move now shortly to the financials and look at the balance sheet position of the company. Investment property, we have discussed that briefly already, have increased by slightly short of 4%. That's -- I'll come back to the detail of that, but that's essentially a mixture of capital expenditure and the increase in the value of the portfolio. The equity is down by almost 7%. This is essentially being impacted by the exit from the REIT regime, which trigger the recording on our balance sheet of deferred tax liability, which has had an impact of around EUR 200 million on our equity. And so the net impact between the deferred tax liability and the retained earnings from the year lead to the equity decrease of around EUR 100 million year-on-year. And our net financial debt is virtually stable in line with our financial policy, we're not taking additional debt on the balance sheet of the company and all the debt that we're raising is being used to repay existing debt or refinance existing debt. So the net LTV as a result of all of that at the company level have decreased from 58.3% to 56.5%. And obviously, our target is to bring that much closer and/or below the 50% over time. If we look at in more detail, and I'm really going to go very, very briefly over it, how the investment property has moved. Over the year, we have spent around EUR 92 million of CapEx and have around EUR 11 million of development cost, which are capitalized on the asset as well. And that participated into the increase in value or defending the value of the portfolio. There was a revaluation impact of EUR 53 million. A substantial part of that is also on the assets on which we're spending CapEx where we're capturing the added value, which lead to the overall investment property valuation of EUR 4.1 billion across the board. Moving on to the liability side of the balance sheet, our net financial debt is pretty much unchanged year-on-year at around EUR 2.3 billion. Our cost of debt is slightly higher, this is obviously what's going to impact our FFO mainly. We are replacing kind of historical debt which was extremely cheap with debt, which currently is more expensive. The average -- kind of we assume that our average cost of debt or -- sorry, our marginal cost of debt is currently on the mortgage side, somewhere around 3%, 3.20%, between 3.20% and 3.5%. And so our cost of debt year-on-year have increased to 2.8%. We discussed the net debt to EBITDA and our average debt maturity has decreased to around about 3 years. We clearly have the intention to increase that beyond the 3-year level with the refinancing of the debt maturity that we have in 2025 and addressing potentially some of the maturity in 2026. The debt to debt plus equity, if you look at that solely on the company level, would be around 61% across the board. We still have a mixture of bonds available and mortgage loans. So our unsecured debt is currently slightly above EUR 1 billion. If you look at the bond and the Schuldschein, whereby our mortgage debt is around EUR 1.4 billion. So we're around -- not exactly at 50-50, but very close to that level between the bond and the mortgage debt and ideally, we would intend to keep that mix at the level where it currently is. We did sign 2 new loans at the end of last year, which have not been drawn down on yet. But we intend to use those refinancing to address the maturity that we have in 2025, we -- the -- to give you a brief overview of the financial conditions of those new loans, the average margin of those loan's around 153 basis points with an average maturity of 6.1 years again here addressing and extending the average maturity of the portfolio with an average LTV of 52%. The total liquidity available to the company, if you take into consideration the RCF and the cash on the balance sheet is around EUR 437 million as of the 31st of December 2024. Moving on to what we -- usually would be the presentation of our carbon accounts. With the change in the regulation in the ESG reporting and the introduction of the CSRD, this year, we have decided to kind of reduce quite dramatically our non-mandatory reporting. We have published in November, all the ESG numbers the way we used to publish them before, but we have not published a sustainability report and have focused our attention on starting to produce the CSRD, which is a massive effort for the company -- even for a company like alstria, which is pretty advanced, in its ESG reporting. If -- to give you and for those of you who are not familiar with the CSRD framework, the CSRD directive have come into force in June 22. Germany have missed the deadline to implement that as a law. And therefore, we are a bit in kind of a legal uncertainty here. And to add to that uncertainty, we have the European Commission, which is now reviewing whether or not the CSRD is going to be implemented as it is. But having said that, in the current legal framework, at least as we know it, we should start reporting on that CSRD framework in 2026 for the full year of 2025 and -- but there is still a lot of uncertainty on whether or not it's going to be needed in the future. Nevertheless, we are planning with the existing legal requirements and not anticipating on any changes that might come or not next year. So we are slowly moving from nonmandatory reporting into mandatory reporting. And so this year, we are publishing together with our annual report, the sustainability statement, which is like the [ draft ] report or [ Straumann ] the report, which is going to form the basis for our reporting under the CSRD in 2025 onward. And therefore, we have basically addressed already a substantial amount of steps that need to be completed to be in position to publish the CSRD. Next year, we have finalized all the research and benchmarking, the description of the value change, the stakeholder engagement, the double materiality assessment and the first audit of the methodology so we -- you will find all of that in our annual report at the end of the annual report, there is a sustainability statement. And we will be hopefully in position next year to finalize what is still needed for the company to produce a full CSRD report, which is essentially populating the report with the data which is required by the current legislation, assuming it's going to still be in place next year. When it comes to the CSRD, we have identified the core activity of alstria as being a transition agent and being our activity of refurbishment, you are familiar I believe, with the business plan of the company where we basically acquire assets, which are usually underinvested and well located within the market. And then over our time of ownership, we would invest into them in order to upgrade them not only from the ESG perspective, also from the requirement of a modern corporate tenant. And then we would kind of rotate that capital once that's done by -- and recycle the capital by disposing the asset and starting the process again. So our CSRD, which is consistent with that analysis have identified our core activity as being the refurbishment process. And we have identified 5 major material topics for the company, which are listed on this slide, I will not go through them in more detail. But those are essentially the element on which we will be reporting in more details next year within our full CSRD report. So again, this year, from an ESG perspective, the full data is available on our website, has been published in November as always, without the usual sustainability report, and you will find in our annual report, at the end of the annual report, the starting CSRD statement, which doesn't have a lot of data, but is the preparation for the full CSRD report to be published next year. In the conclusion and going back to the underlying business, our guidance for next year is revenue of EUR 192 million, which is slightly short of what we have today. And the difference is mainly linked to the fact that we're in the process of emptying a number of assets in order to kickstart the next refurbishment cycle within the company's assets and FFO of EUR 52 million. And here, again, the decrease in FFO is essentially linked to the fact that we are refinancing existing debt with other debt, which is more expensive, I mean, to illustrate that a bit better, the 2025 bond that we intend to refinance in September or which comes due in September is yielding 0.5%, and that's compared with our marginal cost of debt which is substantially higher than that. We expect that the investment market are going to remain weak in 2025, but we believe they're going to gradually recover over the year. So we see 2025 as a year of recovery and we expect them to normalize in '26 and following, and we're basing our future business plan on this assumption. The leasing market, as we discussed before, is really the positive part of our business. It's still working reasonably well with strong tenant differentiation between the quality and amenity of the assets. So tenants are looking to modern office space in which they can expand the new work concept. And we're -- and that's also a bit new. We're slowly seeing increasingly some of the large corporates, which has been out for the market reverting back as they have clarified or in the process of finalizing the clarification of their real estate strategy going forward. So we do expect also and we are seeing in the beginning of this year, a number of activity from large corporates, which are seeking space. On the other hand, we think that the dynamic in the small lease market is going to continue and it's going to basically support the overall leasing market as a whole. And that's it from my perspective on the presentation. I'm looking forward to our discussion. Operator?

[Operator Instructions] And our first question comes from the line of Neeraj Kumar with Barclays.

I have 4 to 5 questions, so I'll go one by one. So firstly, are you looking to buyback bonds in the secondary market or through the tenders, given now you have like EUR 165 million additional loans signed from December. And the question was more broadly as well in terms of like how do you plan to refinance your unsecured bond maturities going forward?

You want to go through the 5 questions, and then I will answer them one by one?

Sure, sure, sure. And my second question is if there is any constraint on those new credit lines of EUR 200 million in terms of utilizing them for the refinancing purposes. My third question is in terms of the color around $160 million equity injection from Brookfield, which was noted by S&P in their note in December. Any color around if it's going to be in the cash format or if it can be any of the assets inclusion in the company? And lastly, in terms of the portfolio valuation, it is encouraging to see that the values are going up during the year. So is it fair to say that you can sell assets around book value to deleverage? And it's kind of a linked question on why do you think the investment market will normalize next year if you're already seeing the values going up this year?

Yes. So I think -- well, thank you very much, first of all, for the questions. A lot of them revolve around the plan for refinancing the coming maturities. I mean we're looking at different options right now. One of them would be to revert back to the public debt markets and not only to the mortgage market. Ideally, we would like to keep feet in both markets and be able to basically diversify our source of funding. And despite the fact that the bond market is still substantially more expensive than the mortgage market and the access that we currently have to the mortgage market, it is something we are looking into right now. So we are running in parallel a number of processes. One of them is, as I said, looking at the public debt market and the other one would be looking at the mortgage market, and we're having further conversations with mortgage banks on further refinancing to be able to address the 2025 maturity. And on top of that, we also have our revolving credit line, which is available to us. There is no restriction whatsoever into what we can do with the money we raised in the mortgage market. And -- but our intention, as I mentioned multiple times, is to use those funds to basically refinance existing debt and not increase the leverage of the company. Whether this would come through the buyback of the bond or whether it would come through us waiting for the bond to mature is still under consideration. If we were to issue a bond, we could clearly -- I mean, we would consider obviously, doing a liability management exercise together with it. And then we would need to look at this EUR 165 million could help us to address the 2025 maturity. Does that answer your first 2 questions?

Yes, they do. Yes.

Okay. I think then you had a question with the equity injections. So we have an equity commitment letter from our shareholders. And the way this works is so the intention here is to make sure that we don't breach the kind of S&P requirement for our debt-to-debt plus equity being lower than 65% or equal to 65%. And so the agreement that we have with Brookfield and the way this equity commitment letter works is that we're going to look at where the debt plus equity is at the end of the half year result and there's going to be an equity injection, which is going to be whatever is needed in order to bring down if necessary, the debt plus debt plus equity to the 65% and the reason why you have EUR 160 million in your mind is probably that if you make that calculation today, EUR 165 million would be the number, at least, if you were to make the calculation when S&P issued the report, which was, I think, in closer to year-end last year with the Q3 numbers, where this number would be EUR 160 million. All the equity that we're going to raise through that process is earmarked to reduce the leverage of the company. So that would also be the -- kind of usage of that equity is only going to be to pay down the like debt at the company level. But the exact amount we will only know in August once we can run the number on what is needed to keep the debt plus debt plus equity at 65%. And one of the reasons why we have kind of postponed that exercise to the end of the year, is because of the squeeze out process the company is currently running into, it would be rather complex to start to do like a capital increase and more capital transactions. So we have decided collectively and agreed with Brookfield that ideally, we would do that once all the squeeze out processes are over, which as we discussed at the beginning of this call, should also be around the end of the summer at the same moment in time when we publish our half year results. And then to your last point, which was whether or not we intend to sell assets and why we believe 2025 is a transition year despite the fact that value has stabilized, the -- as I said, there is a consensus right now in the marketplace that the value of our properties are where they are, but there is still a limited number of transaction evidence to support that. There is transaction evidence. But the transaction volume are still substantially lower to what they used to be, including if you compare that to the 10-year average. And the reason why I mentioned that I believe, is going to be a transition year is because I think 2025 is the year where you're going to start to see transaction coming up to the market and then confirming those values, but I don't expect that the value will return to the volume that we used to have at the earliest in 2026. And so from that perspective, and that's I think consistent with what we've seen in previous situations like this. If you look back in 2010, 2011, you had like this 1 or 2 years where the market was just confirming values, but with the level or volume of transaction, which was substantially lower than what it used to be before actually the market kick off again. And then I believe or at least my expectation is that 2025 is going to represent what 2010 was at the time. And so yes, we are having a limited number of conversations right now to dispose assets. And if we were to dispose assets, we would use the cash -- actually a priority one would be to fund for the CapEx within the portfolio, which will lead to deleveraging simply because when we invest in the asset, we tend to increase their values. And then if we have extra cash available, we reduce that to reduce debt with the target to bring the LTV down closer to the 50% leverage. Does that answer the question or...?

This is very helpful. If I may squeeze one like sort of additional question to it. You mentioned about the S&P debt to debt plus equity of 65%. One of the key metrics they also have is the weighted average debt maturity of 3 years, which you rightly mentioned is around 2.8 years. So it's kind of falling a bit short. As we go closer to H1, it will fall even shorter on that. So is it fair to say that you would be looking at a combined solution for 2025 and 2026 or there is a different way to think about it?

No. So as I mentioned also in the call, we are aware of the 3 years weighted average maturity. And as we -- if we go -- if you just look at the mortgage loan we just signed which have a kind of a 6, 6.5, 6.1-year maturity on average, we are increasing those maturity as we go. So the intention ideally would be to address first the 2025 and then the 2026. If we go to the public market and then we issue EUR 0.5 billion like a benchmark-sized bond, then we would try to address both at the same time. But yes, we are aware of that, and this is clearly something we are considering to bring back the average maturity above 3 years.

And your next question comes from the line of Robin Usson with Neuberger Berman.

Just 1 quick question actually on your valuations. When I look at your current average rent per square meter per month at current, it is EUR 15.23 million and then when I look at your fair value assumptions on Page 116 of your annual report, I see that it's anywhere between EUR 17.5 million to EUR 23.67 million for tenured leases. So it looks considerably higher than your current operating KPI of EUR 15.23 million. And when I look at previous years, the gap is more conspicuous in 2024 than in the past where the weighted average estimated rental value was generally in line or at least much closer to the actual current operating KPIs. So my question is, can you help me reconcile these 2 numbers?

So if I understand you correctly, you're referring to the difference between the ERV and the passing rent, right?

No, I'm referring on Page 116 of your annual report where you give the valuation assumptions within your DCF, you give us details on the weighted average estimated rental value depending on the year of leases. And I'm just trying to reconcile the current operating KPI, which is EUR 15.23 million and this weighted average estimated rental value that you used in the DCF, which looks considerably higher than the current operating KPI and in the past, it looked fairly in line with the current opening KPI. So I don't really understand the gap there.

Yes. So I think what you have on Page 116 is actually the estimated rental value, right? So this is basically what the independent valuer is assuming the rent at which you're going to be able to run the properties going forward. And that's basically -- and the reason why this has increased is, as we mentioned before, there is right now and we see that in our own leasing, the rents are still increasing in the underlying market, especially for assets which have been refurbished because there is really a scarcity of those available. And so we're seeing tenants which are actually reducing space compared to what they used to have before, but paying a higher rent on the space that they're renting. And so eventually, at the end of the day, they end up paying roundabout the same amount on an absolute number which is a higher rent per square meter, which is what we're looking for as a KPI, and they end up then also having a higher quality space. And that's a phenomenon we are seeing across the board. So the ERV in Germany, at least in the market in which we're operating is still going up and it's still going up substantially higher than where inflation is on the kind of assets that we produce. And I think this is what you're seeing as a weighted average on Page 116 which is the weighted average at which the valuer is looking at. And that's compared with our operating KPIs so basically, the level at which the -- if I understand you correctly, you're looking at the average which with our assets are currently rented, which is closer to EUR 1,490 which I think we published somewhere else in the slide. And that's because within the assets that we currently have, a substantial number of those are -- have not gone through that process yet of refurbishment. And that's exactly the kind of threat we're trying to capture and the value we're trying to add in the portfolio. Does that make sense, what I'm saying?

Yes, I think I'll have to think a little bit more about this, but I do appreciate the color. I think it's quite helpful.

And by no means, because this is maybe a more technical question, which is hard to answer over the phone, if you want to drop us a line and we can go in more details on that, if that helps.

Yes, will do.

And your next question comes from the line of Kai Klose with Berenberg.

I've got a quick question on Page 6 of the supplement regarding the refurbishment projects. Could you maybe indicate how the response of the space which you're bringing back to the market has been from potential tenants and if the -- or if we have already some response from tenants and if the potential rents are close to your rents which you were targeting or if there has been a bit of a wider gap?

Yes, Kai, it's good speaking to you again. We do have -- I mean, and that related back to the question of the previous speaker. We do see actually a relatively strong response from tenants on the newly refurbished space. And as mentioned before, the kind of amount of square meters that tenants tend to take is smaller than what we have initially thought. But they're looking at higher quality space and they're prepared to pay a higher rent for that. And so overall, we end up with -- we achieve rents, which are usually slightly ahead of what we have underwritten. And that partially compensates or actually fully compensates the cost increase that we have over the years. So if you compare our underwriting at the time where we looked at the assets initially, our costs went up with the general market and the general inflation in the market but we're more than capturing that in the increase of the rental level that we are achieving when we lease up the assets, which has been refurbished.

[Operator Instructions] And as there are no further questions at this time, I would like to turn the call back to Olivier Elamine for closing remarks.

Well, thank you very much for your interest in the company. Thank you very much for joining us today on that call. I'm looking forward to our next conversation, which is going to be for the publication of the first quarter result of the company. And if you have any follow-up questions by no means, you know where to find us. Thank you very much for your time. I appreciate you being here today. Have a nice end of the day.

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