Branicks Group AG (0QGG.IL) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the presentation of the full year figures 2022 of the DIC Asset AG. I now hand over to the host, Sonja Warntges, CEO of DIC Asset AG.

Good morning, ladies and gentlemen. A very warm welcome to DIC's 2022 Full Year Results Conference Call. Today, as usual, I'm joined by my colleagues from Accounting and Investor Relations. I will give you a short presentation of the highlights of our full year results then followed with a Q&A session. In 2022, we achieved the best FFO result in our 25-year history. Despite the difficult market environment on the transaction market, we are looking back on a very successful and transformative year for DIC. Our team showed a very high performance in a year that was marked by a war in the middle of Europe, global supply chain problems, the interest rate turnaround and considerable uncertainties regarding the economy, energy and inflation. Our business model, our strategy and the agility of our employees have proven more than ever to be decisive factors of our success. With a clear plan in our mind, we followed our overall strategy to become and stay the leading office and logistics experts in Germany. So we have achieved a lot of highlights as EUR 176 million rental income, 5.8% like-for-like rental growth leading to an FFO of EUR 114.2 million with 1.5% value increase in our commercial portfolio leading to an asset under management number of EUR 14.7 billion. In our Commercial Portfolio, we have now 31% green buildings. And this, ladies and gentlemen, is one of the most relevant numbers for the future attractiveness and value of our portfolio. The major transformation for DIC was driven by the strategic decision to significantly strengthen the logistic asset class on our platform through a majority takeover of VIB. With integration of VIB, we have expanded our logistics asset class into a second pillar alongside the already existing focus on office properties. With EUR 4.5 billion, our commercial portfolio is now more than twice as large as in the previous year. We acquired an attractive portfolio with around EUR 100 million of rental income per year and a low EPRA vacancy rate that will further strengthen our position in the market. We intend to use this newly gained size to further expand our platform in the medium term. At the same time, with this transformation, we have achieved a major step in changing our revenue stream. Ladies and gentlemen, let me now give you more details on our operational and financial performance last year. In total, we had EUR 3.3 billion of notarized transactions across all business segments. EUR 2.9 billion of acquisitions, including VIB, and EUR 0.4 billion of disposals. Year-over-year, our real estate platform grew by 28% to assets under management of EUR 14.7 billion. The maturity takeover of VIB of EUR 2.3 billion had a big impact on this growth. Also, the Institutional Business segment now crossed the level of EUR 10 billion after further acquisitions in Germany and for the first time in the Netherlands last year. Our share of the logistics asset class on the entire platform significantly increased year-on-year from 8% to a total of around 19%. Within the balance sheet portfolio, the share of logistics assets increased from 4% to 39%. This clearly underpins our transformation to the leading specialist for German office and logistics real estate. Our next -- on our next slide, you can see our strong letting performance of the DIC platform last year. Year-on-year, we saw another increase of the letting performance by 21% to a total of 374,900 square meters. The strategic expansion in the logistics sector was clearly noticeable in the takeup. The overall letting performance was mainly driven by the high level of renewals of 255,300 square meters. In total, new lettings and renewals represent EUR 48.9 million of annualized rental income, a year-on-year increase of 48%. The like-for-like rental income for the entire portfolio under management was up 5.8%. The increase was 80% driven on indexation. The value of new contractually agreed monthly rent per square meter rose year-on-year from EUR 15.56 to EUR 18.72 for office space and from EUR 4.24 to EUR 4.80 for logistics. Now looking at the profit and loss statement of the full year 2022, I want to highlight the following. Compared to 2021, the net rental income grew massively to EUR 152.5 million a plus of 67%, driven by the VIB consolidation and strong like-for-like growth. On the other side, the real estate management fees saw a decrease of 13% as a direct result of the lower transaction activities since the second quarter of 2022. Adding the net rental income, together with a recurring fee income of EUR 36.4 million from the Institutional Business segment, the share of these recurring income streams in comparison to all rents and fees increased to 79% coming from 66% last year. This can be seen as a clear improvement in cash flow quality. With EUR 114.2 million, the FFO are within our guidance range. and on a record level in the company's 25 years history. Looking into the drivers of our best FFO results. You clearly see, on the one hand, the positive effects from the additional net rental income from the VIB portfolio as well as the additional share of the profit of associates. These positive effects more than outweigh the effects from the decrease of management fees, higher OpEx and an increased net interest result. On a per share basis, the FFO increased from EUR 1.32 to EUR 1.38. This already takes a slight dilution from last year's scrip dividend into account. By the end of 2022, the net asset value remained almost unchanged compared to last year's results. The net asset value per share stood at EUR 18.29 mainly due to the slight dilution from the scrip dividend and the offsetting effect of higher investment properties and core investments on the one hand and, mainly higher financial liabilities and noncontrolling interest on the other hand. The adjusted NAV per share decreased to EUR 21.84 due to the changed market environment resulted in an updated value for the Institutional Business segment, driven by the increased WACC of EUR 522.3 million. As usual, I would like to give you also a quick update on our current financial structure. In the last years, we have worked on our growth in assets under management, in results and profits. We have now a very good portfolio based on different asset classes producing a very sustainable base cash flow. And now it's time to work on the financial structure to lower the LTV by reducing liabilities. And there are different ways to make this happen. As using our higher operational cash flow, reducing the warehousing portfolio, optimizing the portfolio by selling nonstrategic assets. And as mentioned in our last conference call, the refinancing of the bridge loan maturing in 2024 is one of our main priorities. Already roughly EUR 100 million were paid back in the third quarter of the last year. With regard to our maturities in 2023, we plan the repayment of EUR 150 million bond. It was the 2018/2023 bond. And in general, we are also assessing the market for refinancing options. End of last year, our average interest rate, excluding the bridge, only slightly increased to 1.9% year-over-year due to refinancing activities. The average maturity of loans and borrowings without a bridge loan remained stable at 3.8 years. Around 88%, excluding the bridge, is fixed interest or hedged. Looking at the covenants of the green bond, we can assure you that we have a sufficient headroom, especially the covenant ICR shows the ability to meet our interest payments. Ladies and gentlemen, let me now conclude my presentation with our guidance for 2023 and the main topics we are focusing on. As already published in January, we expect FFO in the range of EUR 90 million to EUR 97 million. The main reason for the lower FFO guidance versus previous years is the persistently challenging environment in the real estate investment market, mainly due to the change in the increase in the interest rate level in 2022 and a still unclear impact of a weaker economy on real estate demand in Germany. We expect delays in acquisitions and disposals to persist in the first half year of 2023. In this context, we expect to generate lower transaction-related management fees in our institutional business. Our focus in 2023 is, as mentioned, to further strengthen and optimize our portfolio operationally and strategically by letting reducing vacancy, delivering on our ESG strategy and sell if appropriate. This is key for the sustainability of DIC. While also improving our balance sheet and financial structure via increasing the recurring cash flow base from rent and ongoing management of real estate assets for third parties with reducing the LTV to below 50%. Regarding transactions for both segments, we do not plan any acquisitions for the commercial portfolio, but disposals in the range of EUR 300 million to EUR 500 million. For the Institutional Business, we intend to do transactions in a volume of EUR 400 million to EUR 1 billion, thereof EUR 100 million to EUR 200 million on the sales side. We expect the majority of transactions to happen in the second half of 2023. Ladies and gentlemen, we have been highly successful in the last years, and we will keep the pace to remain successful in the future. What has distinguished us to this, they will continue to give us the necessary tailwind for '23 and beyond. So thank you very much for listening to our presentation today. We are now ready to take your questions.

[Operator Instructions] And the first question comes from Stefan Scharff, SRC Research.

My first question is, perhaps, could you please give us some more details on the change parameters regarding the valuation of your institutional business unit regarding the NAV? And second question. As you know, your LTV and also the adjusted LTV both came up significantly in the last year, of course, mainly due to the VIB takeover. What are your steps on -- your optimization steps here in the current year and also for the next year? And perhaps you can give us a bit more road map how to make it with sales and how to organize the debt reduction?

Stefan, as mentioned, we have reevaluated our institutional business, as we do it every year-end. And as said, on the one hand, the WACC has increased to 7%. So this is a general thing to make here, so to say. This is because of the environmental challenges, so to say. This makes around about EUR 160 million. And on the other hand, as said in our guidance, we have reduced our business plan for the Institutional Business for this year. And so this reflects the value of the Institutional Business where we have taken in the business plan on the Institutional Business, this is of around EUR 60 million. And therefore, the value of the Institutional Business reduced to EUR 522 million. On the other hand, as I said, what we are doing is, after a lot of years to increase the cash flows, to increase our rental income as well as our base recurring fees of the Institutional Business, we're now working on the financial structure to reach our goal to reduce the LTV of around 50%, maybe a little bit lower. And therefore, as I said, we have a lot of things which we can make happen using the increased cash flow, get rid of our warehousing and also do selling, if appropriate. If you have might read, we have also began to sell. So we have sold our Kaufhof in Chemnitz on the last day of last year. This will be effective in 2023. So the first step is done here. And we do not need to do this. So we have also other possibilities. But if appropriate to optimize our portfolio, we will work also on the sales side.

Okay. On Slide 10, you talk about the internalization of the DIC real estate platform. Perhaps you can give us some more details here?

We have 3 vehicles, so to say, in place in the institutional business, which are -- for which we can buy internationally. So we are working on this. As I said, at the moment, the transaction markets are down. This is not only in Germany, but also in the rest of Europe. And therefore, we are optimizing our sales force and our transaction force to do this. And we are searching for possibilities not only in Germany but also in Netherlands, Belgium, Austria, as said. And if we get possibilities there, we will do this, and we have a commitment and money in place in this vehicle. So we are ready to shoot, so to say. But as said, I think that in the first 2 quarters of 2023, the transaction market will not be in that shape that it really makes sense to say the transaction market has come back. It's a point for 2 business partners, the seller and the buyer, if a transaction is happening and the real market, I think, will be back in the second half of the year.

The next question comes from Andre Remke, Baader Bank.

Couple of questions from my side. Starting in your disposal target of EUR 300 million to EUR 500 million this year from the Commercial Portfolio. Does this mainly relate to the VIB portfolio, i.e., logistics? Is this the right assumption? That's the first question, please.

Andre, no, this is not mainly driven by the logistics portfolio. It will be a mix, I think. So we have a plan, which shows a part of office and a part of logistics. And we are focusing on our logistics on the VIB platform, so to say. So we are also optimizing the portfolio in this way. We have built a vehicle for to bring in the retail assets in this fall, so that the platform will be optimized further in the next year. And I also think that for office, office will be good to transact in 2023. So as said, we have began with the Kaufhof in Chemnitz. And yes, we will optimize also our office portfolio in 2023 because we have a stable portfolio there, but we have some office assets where we say, these are not strategically relevant for us because the on-site has a long travel journey to get there and so on. And therefore, we think it makes sense also to optimize the office portfolio here.

So non strategically means mainly in terms of regions?

Yes. In terms of regions, but also in terms of size and in terms of what happens in the environment of this asset. So some of them, we prepare to get refurbished or to reuse them in another asset class and so on. And so we are working on the steps to talk with communities and so on that we get the bond plan changed in some of these things. And when we have done this, and we sell the asset because we are not doing the transformation, for example, to residential or something like this. So it's a mix of regional but also use conditions.

Then the next question refers to the bridge financing. Could you remind me on the current cost? And when are the next step-ups in the conditions? And what are your plans to maybe, if at all, more concrete time line when you intend to lower the amount during the year?

At the moment, we have around about 5.6% costs on the bridge loan, and the next step when I have it right in mind will be on first of April. I think it's the last or the one of the last steps, and I think the last step. Yes, as said, we -- it's our major goal to get rid of this bridge financing. But also, as said, we have different possibilities to get the cash flows in here to repay this. But we see also it takes some time, and sometimes more time as we wish to take it. But we have done some steps. And I think in the near future, we will finalize the first one, but I cannot talk about it today. And so we have a clear plan to refinance this, and we have to do now step-by-step the actions to make it happen. And maturity is end of January 2024. And so on one hand, the bridge, and on the other hand, our bonds are the major things we are working on with the different actions I've talked about.

And coming back to your dividend proposal presented already some weeks ago. This was not an option to suspend positive dividend to say EUR 60 million?

No. So on the one hand, we have prepared ourselves to also do the scrip dividend this year. So this will reduce the cash flow from -- when we take the 40% of scrip dividend into account of last year to EUR 45 million cash flow. And we see us as a dividend paying company. So this -- we also have said that this is our strategy, and we have said this very clearly. So if we are ready, and if we can, we want to pay a dividend also in the next years and that's what we are working on. And we have to optimize our cash flows and all the things we plan for 2023, but this is one of our major goals to pay a dividend.

Okay. And you mentioned the scrip dividend. This finally means a kind of dilution, given the deep discount to NAV.

Yes. This is 1% or something like this 1% to 1.2%. So I think this -- yes, it is, as you said. But on the other hand, I think it's a good way to do it. So it's advantageous and disadvantageous, but it's the way it is.

Then my last question is coming back to the target. What is the pro forma LTV including fee so far announced disposals? And the target of below 50%, is it really a target, which you're striving for already to achieve at year-end '23? So if you deliver on, let's say, EUR 500 million disposal from the Commercial Portfolio and assuming a stable portfolio valuation this year, I would assume this is still above 50% or did I miss something here?

I can clearly say, and as you know, I'm a controller from my heart. If I say it, I have calculated it and I really try it. We want to reach the 50% goal. But as also said, we have a very challenging environment. So we are taking the steps. We are taking the actions. But sometimes, we cannot decide on our own if we sell something or something like this. So the 50% goal is the goal, definitely. Whether we can reach the 50% on 31st of December 2023 or the 20th of January 2024, I cannot really say, but this is our goal. And on a calculation basis of our plan 2023, we reach this goal until the end of 2023. But we have 11 months to go, and so we will keep you updated where we stand, but this is definitely our goal.

The next question comes from Manuel Martin, ODDO BHF.

I think 2 or 3 questions from my side. One question is a follow-up question on your disposal guidance for 2023. The EUR 300 million to EUR 500 million disposal target for the Commercial Portfolio, is this something which you're going to sell entirely to the market? Or which are you going to sell into the funds of the DIC? Is there a plan behind that?

Martin, yes, we have a plan behind this. So we have, as every year, deeply dived in the portfolio, so to say, and have searched for things we want to make in 2023. And as said, some we want to refurbish, some we want to do on the letting side and so on. And some of them we want to sell and get rid of them. And it's definitely more than in the past, the thing we want to do on the market because we do not really know when the Institutional Business market will be back. So at the moment, the Institutional Business with the institutional investors is also a little bit low. So as said, we have all the commitments, but we have no commitment from investors that, as said, we want to sell something because with the indexation in commercial portfolios, the cash-on-cash growth and so the institutional investors are very satisfied with their portfolio. So this is the situation. So I don't think that they will sell a lot. And on the other hand, it's very calm at the moment on the buying side. So we have the 2 pillars on the sales side, the market and the Institutional Business, but we are focusing on the market at this time.

Okay. Talking about the market, can you give us some details about property valuations? How has the fair value evolved of your property? Maybe you can remind me on that figure, please?

The valuation of our own portfolio has a sharp increase of 1.5%. So it's stable, but with the trend to an increased number. And this comes mainly from the base that we have let a lot in the last year. But on the other hand, of the indexations as said, with a 5.8% like-for-like on the platform, 80% of this is indexation. So this also is reflected in the valuation of the evaluator. As always, because we do not have this in our balance sheet, we do not really fight with the evaluator, so this is the number we got from them, and we take it. And I think this shows that our granular and not in the main inner circles of the top 7 cities located portfolio is very interesting, on the one hand, for the tenants. And on the other hand, it's very stable. So we see it's different if you have landmark assets and if you have it in the top 7 cities in the inner circles and if you have factors with 30x or more. So the evaluators have, I think, a clear view on such factors. So 28 and more is at the moment, not really shown in the values. But we do not have such factors in our portfolio. And therefore, I think it's very stable. And as said, for me, the most interesting part and the most relevant part for the future of such portfolio is the possibility to make them green in whatever sense. And this is from my perspective for the LTV, one of the most important things that you can do. But the loan is the one part in the LTV, but the value is the other one. And if we talk with the evaluators and also with the tenants, this is the major point to create lettings to create -- to attractive tenants and to create more euros in letting and therefore, the value. And this is what we are working on.

My last question would be on indexation. As you said, that was one driver. As far as I could see in the presentation, the indexation in the Commercial Portfolio was something like 3.6% and in the Institutional Business 6.4%. This is quite a difference. Maybe you can give us some color on that, please?

Yes, I can give some further details for the commercial portfolio assets. So our own -- our proprietary portfolio indexations have been much higher, have been the main driver for indexation, the 3.6% like-for-like rental growth. And for the 6.4%, it was less driven by indexations, but they are more driven then by also new lettings we achieved in the Institutional Business segment.

So at the moment, there are no further questions. [Operator Instructions] And there's one question still coming in from Jochen Schmitt, Metzler.

I have one question on your like-for-like rental growth in the commercial portfolio, which you have just stated at 3.6% in '22. Do you expect a higher corresponding figure for '23? That's my question.

Jochen, a good question for 2023. Yes, we expect some further indexations also for 2023. We've been very conservative now what we expect. So from internal planning, we say 1.5%, but could also be higher. As you know, it's nothing we switch from today to tomorrow. But in the discussions we have with the tenants, we expect at least 1.5% for 2023, but could be higher.

So thank you very much. There are no further questions. So I would like to hand back to the speakers.

Thanks for joining us today for this conference call. As usual, if you have any further questions, please don't hesitate to reach out to Max and myself from the Investor Relations department. We will be also on the road in the next weeks. Happy to meet you again physically, talk about our vision for 2023 and the story. We have a lot of work to do, as you know, but we are convinced that we'll achieve our targets this year. And yes, happy to talk to you within the next weeks. Bye-bye.

Bye. Thank you.