CA Immobilien Anlagen AG (CAI) Earnings Call Transcript & Summary

Hello, ladies and gentlemen, and welcome to today's analyst and investor update of CA Immo. [Operator Instructions] Let me now turn the floor over to the company. Please go ahead.

So thank you for joining. This is Keegan Viscius. Today, I'm joined by my colleague and CFO, Andreas Schillhofer. We continue to operate in a challenging market environment, characterized by lower occupational demand, illiquid transaction markets, longer decision-making lead times, shifting preference across occupiers, investors and lenders. On top, we face macro headwinds from slower growth expectations, sticky inflation, fall in confidence, lower hiring expectations and tighter monetary policy. Against this difficult backdrop and the negative valuation result, we're pleased to deliver stable operational performance and a positive net result. Operationally, across the portfolio, we've achieved higher GRI, 12% increase year-on-year with annualized in-place GRI up 6% year-to-date. We've had a positive sales result from disposals sold at a premium to book value. In the first 6 months, we closed 6 disposals totaling EUR 381 million in proceeds at 31% premium to book. In Q3, we've already closed 3 disposals totaling EUR 162 million in proceeds at 56% premium to book, and we have 2 more disposal signed that are expected to close later in H2. On the occupancy front, we remained flat at 90%. And of the current vacancy around 30% has already been signed with future lease start dates. The general tone of the leasing market can be characterized by thinner demand, a higher focus on quality locations and quality products, slower decision-making, but still tolerance for higher rents, and we see the ability to push rents up in the best buildings. We've signed 50,000 square meters of new leases in the first 6 months of the year, with rents up around 10% with incentive packages across the board stable, averaging around 22% across all of our markets. On the development side, our pipeline remains on track, on time and on budget. We have 2 projects under construction, and we expect to hand over to the main tenant occupying 100% of the building at Hochhaus in Berlin in early October, where we're 6 months ahead of schedule and under budget. The second project that we have under construction in Berlin Upbeat is on track with the groundbreaking ceremony expected to be held in September. We're 100% leased and already 50% of costs are tendered giving us good visibility and cost certainty for the rest of the development pipeline. Stopping here, I'll hand over to Andreas, and thank you for joining us.

Thanks, Keegan. Also welcome from my side. I hope you all well. Very happy to present to you our half year numbers. Despite challenging markets, we were again able to deliver a solid performance and in particular, strong EBITDA, thanks to the highly profitable sales activity. So let's move to Page 4 to look into a few numbers in more detail. So rental income was up 12% period-to-period. It reached EUR 118.2 million, mainly due to project completions and rent indexations. We continued our active capital rotation and closed the sale of 6 strategic buildings and land plot leadings to a sales result of EUR 112 million, which is substantially above the prior year level and mainly related to the sale of land plot in Munich called Langes Land. As a result, EBITDA stood at EUR 184.6 million, significantly up by over 100% again due to the exceptionally high sales result in the first half. Result for the period was positive with EUR 28.5 million, but obviously down by around 94%, mainly due to a very negative revaluation loss this time compared to a gain in the first half of 2022, which I will explain in more detail later. Let's now go through some details and bridges. Let's move to Page 5. This shows the rent bridge and clearly underpins why the top line is growing year-over-year. Due to strong letting activity as well as rent indexations coming through, our continuing income-producing assets delivered another EUR 8.5 million of additional rental income in the first half compared to the prior year period. EUR 8.1 million was added in H1 compared to the previous year due to completed development project, mainly the 1 Tower in Frankfurt and Grasblau in Berlin. Rental income was reduced by EUR 3.9 million due to low sales as a result of our ongoing capital rotation. So clearly, sales activities were compensated by development completions and higher rental income from standing assets. Overall, income increased to EUR 118.2 million, 12% up to prior year period. Also worth mentioning, our NRI margin is at around 81%, which is down 6 percentage points compared to the same period last year. The lower NOI contribution is mainly related to Tower 1 in Frankfurt, which is still being leased up and hence, any related costs. So for example, agency costs or vacancy costs reduce the NRI margin. This is a temporary effect. It should fall away once the tower is leased and tenants have moved in. Let's now move to our results from revaluation. As in previous years, on Page 6, you can see a full external valuation was carried out on the key day in June 30, '23. This year, we changed appraiser as part of our standard rotation. The entire portfolio was valued by Jones Lang. Total revaluation gain amounted to EUR 53.7 million and the revaluation loss to negative EUR 243 million. This resulted in a net revaluation loss of minus EUR 146.6 million, which applies a circa 2.5% markdown of our portfolio compared to end of year book value '22. This result obviously reflects the significant downturn in the market environment for office properties compared with the previous years. In particular, related to long-term economic consequences of the COVID-19 pandemic, i.e., work from home trends, the effects of the war in Ukraine, sharp rise in inflation and thus consequently higher interest rates as well as lower economic growth. This has had and still has an impact on the real estate market, mainly in the form of declining transaction volumes and obviously higher cap rates across all real estate asset class. As you can see also on Page 6, the largest and by far the largest contribution to the valuation result was attributable to investment properties at negative EUR 141.6 million, followed by active developments. Over 80% Germany accounted for the larger share of the valuation result in the first half of the year, followed by CEE 11% and Austria 7%. This is intuitive and Germany also benefited most from the yield compression in the last cycle. The main driver of the negative valuation result was yield decompression, which was, to some extent, counterbalanced by higher rental assumptions, but obviously could not compensate for this. Overall, like-for-like GRI yield across our portfolio increased from 4.3% in Q2 2022 to Q3 -- Q2 2023 to 4.9%. So you can also refer to Page 17 of the deck for these numbers. Let's now move to the FFO bridge, Page 7. At the bridge, you can see that overall FFO I decreased by EUR 21 million or 28% in the first half of 2023. This decline is mainly attributable to the missing FFO I from our sale of Romanian platform as well as to lower recurring distributions from our joint venture in Mainz, Rheinwiesen, which is being wound down over time. We still have 2 joint ventures in Mainz, which we expect to sell the remaining land plots in the next 12 to 18 months. Unlike in the P&L, where the remaining activities are shown as discontinued operations, the FFO I statement still includes the contribution from Romania for last year. On the positive side, EUR 3.9 million of FFO I was added, which is, in this case, on Page 7, a net figure and includes obviously higher FFO coming through from newly completed developments, but also various effects, such as occupancy and rent indexation but also lower FFO coming through as a result of sales. On the indirect expense side, we are EUR 2.2 million higher than last year period. This increase of EUR 2.2 million has to be seen in the context of strong inflation-driven salary indexations at the beginning of the year. Such effect was counterbalanced by further organization streamlining, resulting in an FTE decline from around 368 FTEs at the end of last year to now as of June, 339 FTEs. Let's move to Page 8, and let me give you some guidance and expectations for the remainder of the year. We expect FFO I for the financial year 2023 to exceed EUR 100 million. The decline compared to last year reflects, in particular, the sale of our Romanian platform and other nonstrategic assets which, however, improve the portfolio and earnings quality of CA Immo going forward. We raised our EBITDA expectation from EUR 200 million to over EUR 250 million on the basis of further secured profitable sales activity for the remainder of the year. Let's move lastly to the balance sheet on Page 9. So you can see here, IP income producing decreased by 3.5%, reaching EUR 4.8 billion. Again, mainly as a result of the revaluation loss, sale of assets and also some transfers of assets to the held-for-sale category. IP under development also slightly decreased to EUR 590 million, again due to the transfer of assets internally, but also counterbalanced by continuous investments mainly into our outstanding construction sites in Berlin, Hochhaus am Europaplatz and Upbeat. Cash increased to EUR 953 million, which is around EUR 130 million higher compared to Q4 2022, mainly due to early payment of the Berlin deal where the closing occurred in Q3. IFRS NAV per share stood EUR 32.95, which implies less than 10% discount of current share price to IFRS book value, so substantially smaller compared to earlier this year and also to most of our peers. Equity ratio was at 46.3%, similar to Q4 and our net LTV stood at 29.6%, slightly down compared to Q1, mainly driven by sales proceeds coming in. All '23 remaining maturities are either already contractually agreed or in final negotiations with the respective lenders. If you move to the financing section, you can see the details on Page 11. With respect to 2024 maturities, we intend to pay back the 2024 bond of EUR 175 million with cash at hand. The remainder of the 2024 maturity mainly related to project financing in Germany in particular Hochhaus am Europaplatz where follow-up financing and switch into a long-term asset financing has already been contractually agreed. From my side, this concludes our presentation, and let's move over to Q&A.

[Operator Instructions] The first question comes from Stefan Scharff.

I have one question about the letting performance. That was good in the first half of the year. And you mentioned that you could even let out your properties 9% over the expected rental value. Perhaps you can say a bit more here, how you calculate or how you judge the expected rental value.

The market rent also as indicated by our valuers and what we think is the rent achievable in the property. So I think overall, when looking at our budgeting and our planning for the year, we plan a headline office rent or use paid rents together with an incentive package as well as incentives and assumption on void and leasing and other costs. And this is based upon our market view triangulated against external data from our valuers and other advisers, that is the benchmark, and this is where ultimately the premium or discount comes from.

Okay. I see. So in Germany we have the news flow now in recent weeks or last days that some developers went past. What could that mean for your business and also for the relationship with banks for financing some developments. What is your impression here?

I think this will ultimately create an interesting opportunity for us. We have been very disciplined over the last years in terms of external investment. We didn't do any. Now in hindsight, it's easy to say, but we didn't do any top of the market M&A whether that was public or large private platforms, and we selectively acquired only small assets in our core markets where we have strong conviction. So we went into this period of uncertainty with a strong balance sheet and a high-quality portfolio. And we've transacted almost EUR 3 billion and really focused the business over the last number of years, exiting multiple markets and increasing the underlying fundamentals. So I think we're entering this challenging environment from a position of strength and also a very liquid balance sheet. We've leaned and streamlined our development pipeline, which now in Q4, we will be handing over 1 of the 2 remaining office developments that's 100% leased, as I mentioned. It's already 100% occupied for 6 months ahead of schedule and timing, and we're under budget. And we'll be left with only one development that's left in our pipeline where we're again 100% occupied. We have secured financing in place for the duration of the construction period, which will then roll over into an investment loan. We have a high-quality credit tenant and 50% of the works are already tendered. So we have really high cost certainty as to the future expenses and we have no leasing risk. So we have a really streamlined portfolio, strong balance sheet, unlike some of the project developers, who typically tend to operate with a lot more secured as well as subordinated higher leverage financing. And we see it also an opportunity to potentially be acquisitive against the future years at attractive prices and to be able to rebuild our pipeline and selectively expand our footprint.

I see. How do you see the progress in selling noncore assets in the second half of the year?

We've closed almost EUR 0.5 billion worth of real estate year-to-date. We have 2 additional assets that are signed already and will close during the course of September and October. We have 2 more deals that are -- one deal that's in exclusivity, a second deal that will be entering exclusively soon. I would say, in some of our markets, we have accounted for roughly 50% of transaction volume year-to-date. So for instance, in Vienna, which is highly accretive sale of our headquarter building at a material premium to book value. I think there is a -- it has been a very calm summer, so a very quiet summer. The market is liquid in certain areas. We see more activity in the smaller lot sizes. So that's also why you see the properties in our pipeline being typically less than 10,000 square meters. So we're trying to match the product that we want to divest to where we do see liquidity and special buyers. But it's a challenging market. We had an ad hoc announcement about the attention to strategically divest our Hungarian exposure unlike the Romanian platform, which had a bit of a different profile. This is something that is going to be harder and most likely be asset by asset sales over the next number of years. But we still see the ability to get stuff done. So earlier this year, we closed the sale of one of the Serbian assets, that's a transaction that we have been working on since pre-COVID. We're in exclusivity multiple times, but eventually managed to get it over the line. So definitely, the tone at the moment is a slower transaction market for the second half of the year. But we're focusing still on selling what we can out of the list at this moment, and we still attract what I feel are interesting prices.

And the next question comes from Jakub Caithaml.