CORESTATE Capital Holding S.A. (CCAP) Earnings Call Transcript & Summary

Dear, ladies and gentlemen, welcome to the publication of the preliminary results for full year 2019 of CORESTATE Capital Holding S.A. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Dr. Kai Gregor Klinger who will lead you through this conference? Please go ahead, sir.

Hello, everyone. A warm welcome to our earnings call today for the presentation of the preliminary results for fiscal year 2019. As usual, I'd like your attention to the forward-looking statement and disclaimer wording on Page 2 of our presentation and today, especially that all numbers are not audited and preliminary until our final figures will be published on the 24th of March. This safe harbor language applies to the presentation and, of course, all comments we'll be making from hereon. I would also like to mention that everything is being recorded, and after the call, as usual, a replay will be available on our website. Our CEO, Lars Schnidrig, and I will guide you through the presentation, followed by the usual Q&A session. The time frame for today will be about 30 minutes. Now it's my pleasure to turn the call over to Lars. Lars, the floor is yours.

Many thanks, Kai. And also from my side, a very warm welcome to all of you. . We can summarize 2019 in 6 words: A very successful year for CORESTATE. Our core business, real estate assets under management, went up year-over-year by more than 10% organically and reached around EUR 23 billion. We have made huge progress in institutionalizing our business and operations and thus accomplishing our corporate transformation. As in our past reporting periods, we once again have reached our guidance on all levels, supported also by another strong performance from our Mezzanine financing business, HFS. Let me give you some more details on our figures later on. As said, we have promoted our operations to a new level, and this already bears first fruits. We have onboarded several large international and prominent German institutional clients in the last couple of months who started business with us now and are willing to do more. And we are in a very promising talks to several new institutional clients, so you can expect more to come in the nearer future. During 2019, we have enlarged especially our Micro Living business into further European countries like Spain, Denmark or Poland, and we have broadened our footprint in the Benelux countries with several new investments for our clients but also a new office in Amsterdam, showing our commitment and local expertise, which is demanded by our clients. In January 2020, we have closed the acquisition of STAM Europe, which opens up the French market for us and gives us access not only to the very solid residential and office investments there but also to logistics, which enlarges our product portfolio for our trusted clients. Since closing of this deal on 15th of January, we focused on the integration of STAM on operational, personnel and product levels. STAM Europe's CEO, Edward Bates, joined our senior leadership team. And in the backdrop of the beforementioned process of institutionalization, we have enhanced our governance structure already in 2019 and will take some last steps by enlarging our Supervisory Board to at least 5 members, including a new Chairman of the Board, during the next AGM, and we will have an important change in our management team. Let me speak about this on the next page. Please turn to Page 4. I'm very happy to announce that Nils Huebener will become our new CIO on 1st of April, following Thomas Landschreiber, who has decided to step down from the Management Board but stay closely linked to the company, focusing on his vast experience in dealmaking and asset sourcing. I very much look forward to working together with Nils, who currently is Global CIO at BNP Paribas, bringing in more than 20 years experience in real estate investment management. Prior to his recent role, he headed the real estate investments at SEB Asset Management and was responsible for Real Estate Transactions Western and Southern Europe with Deutsche Bank Real Estate. You can hear from these few words that Nils is one of the most experienced real estate investment experts in Germany and Europe, and I'm sure that he will bring further momentum to our path of ongoing institutionalization and internationalization. Nils has an excellent track record and reputation with the institutional client work. He will be, inter alia, in charge of equity raising, research and investment management. With taking over responsibility for our well-running deal machine, I have no doubt he will put this onto a new level. As the next step in institutionalization of corporate governance, we plan to enlarge our Supervisory Board during the next AGM end of April to at least 5 members. I'm sure you have read our announcement yesterday. Dr. Georg Allendorf is proposed as a new chairman of the Supervisory Board, after Micha Blattmann will step down as her statutory term expires. I'm sure some of you know Dr. Allendorf as former Head of Real Estate Europe at DWS. He brings in vast experience in real estate investments and asset management. He was a Board member of BVI, the German investment funds association, and is a honorary Board member of INREV, the leading European association for investors in non-listed real estate. In these various roles, Dr. Allendorf took a very prominent role in establishing standards and best practices in real estate investments and asset management in Germany and in Europe during the last 2 decades. He also brings in a broad international network to important players in our industry in Europe. Now please turn to Page 5. You know this chart from our previous calls. It shows the development of our assets under management. And it's a very appropriate sum-up of our product offerings, the market's appetite and our future growth path. As I said before, our core business, real estate AUMs, have once again reached a new record high with an organic increase of more than 10% since the end of 2018. In the same period, our non-real estate portfolio went down as planned by around EUR 1.2 billion. As these figures represent the end of 2019, the EUR 2 billion AUMs from the STAM acquisition are separately highlighted as we closed this deal in January. Together with STAM Europe, we now have more than EUR 28 billion assets under management, and we are steadily approaching EUR 30 billion. When we did it -- when we dive a bit deeper into the segments, you will realize another increase in Micro Living by more than 10%, an increase in office and a slight reduction in retail. Our retail, as you all know, consists of well-run assets very well located in Germany's booming B-cities. One would expect our pipeline to go down a bit due to the typical seasonality. But the very solid market condition and 2 larger deals postponed from 2019 led to a steady sourcing pipeline of currently around EUR 6.1 billion with roughly 1 quarter in advanced contractual status and around 11% in the final stage of exclusivity gives us another strong tailwind for 2020. Now please turn to Page 6, and I will hand over to Kai again.

Many thanks, Lars. Let me speak a bit about our key figures for our fiscal year 2019. Our aggregated revenues exceeded EUR 300 million for the first time and ended up at EUR 303 million, by far outperforming our guidance of between EUR 285 million and EUR 295 million. We saw a lot of transactions, especially in the last weeks of 2019, plus some tailwind from our warehousing activities. The latter was quite visible already at the end of Q3. But also, our income stream from asset and property management as well as from alignment capital were finally higher than indicated during the second half of the year. You see the EBITDA line with its EUR 175 million, at the upper end of our guidance range of between EUR 165 million and EUR 175 million. As we have further institutionalized our platform and corporate structures, our expenses were influenced by related extraordinary costs as well as by one-off expenses from our M&A activities. On the flip side, we had in our account a strong, positive impact from release provisions based on expired M&A-related liabilities, which we've had already disclosed in greater detail in our half year reporting. On the bottom line, adjusted net profit, we achieved our guidance worth EUR 131 million. Adjustments on net profit level account for nearly EUR 22 million, mainly for capitalized asset management contracts and DTA. Our leverage ratio was, at the end of 2019, close to 2.7x. This slightly higher year-end level compared to financial year 2018 is mainly driven by a cash flow impact from the beforementioned postponed transactions to 2020, which includes also a significant component of alignment capital and promote fees. As soon as we have closed these client deals in course of the year, this will have another positive effect in our cash position and, of course, leverage. Please turn to Page 7. You know our story -- you all know our story. We are a very fast-growing company but also with a clear focus on shareholder participation. And this should be reflected in our distribution policy clearly stating our aim to carve out the half of our reported net profit to our shareholders. As you can see on the right side of the slide, we have increased our dividend per share constantly in the last 3 years and, subject to final approval from our AGM, to plan to do so for 2019 as well. We have started for 2016 with EUR 1, doubled this sum for 2017 and increased again for 2018. So we think we not only offer a solid, growing business model but also a very attractive shareholder return. Our reported net profit for 2019 was EUR 109 million with an EPS post minorities of EUR 5.12, leading to a dividend indication of EUR 2.60 per share and, once again, a payout ratio of around 50% of the earnings per share. Please turn to Page 8. Let me please give you an update on our Mezzanine business. We could sum it up as follows: stable margin and slightly growing fund volumes. At the end of 2019, the committed fund volume was around EUR 1.3 billion, thus showing a solid growth rate of 3% to 4%. And as in the past years, this money goes predominantly to German residential development, mainly to the top 7 cities. To give you an idea how robust our mezz business was in the last 12 months, we indicated between EUR 50 million and EUR 55 million coupon participation fee for 2019 and ended up even a touch higher, around EUR 56 million. The massive housing scarcity in these metropolitan areas is something we and many -- all market participants expect to stay for longer. In combination with very high and still further increasing regulation on the banking side, our leading market position in terms of size, quality and speed in this niche, we'll have full -- we have full confidence about the future performance of our private debt business. The average financing tranche end of 2019 was more than EUR 21 billion -- was more than EUR 21 million spread across 61 projects. Our key approach remains risk diversification in terms of number of projects, locations and developers. With this focus, we managed to achieve a close to 0 default rate for our investors in the past, and this is as a key -- and this is also our key ambition for the future. Please bear in mind, HFS is not only a very profitable business for us, it also opens the doors for our asset sourcing to new projects in a very early stage. Thus, it is a well-running cross-selling and sourcing engine as well. With this, I would like to hand back over to Lars, and please turn now to Page 9.

Thank you, Kai. Let me finally give you our financial outlook 2020, including some details on the revenue split. In brief, we expect growth on all KPIs. We are planning to see aggregated revenues and gains of between EUR 325 million and EUR 335 million, an EBITDA of between EUR 185 million and EUR 195 million (sic) [ EUR 180 million and EUR 190 million ] and an adjusted net profit of between EUR 145 million and EUR 155 million. Our main growth area is stemming from the institutional real estate equity business showing a bit lower margins than, for example, of our HFS operations. This slightly dilutes our EBITDA margin in 2020 and onwards but, of course, shows attractive growth rates in absolute terms. One main driver for the small jump in our bottom line between '19 and 2020 based on a significant lower level of interest expense from a more efficient use of our balance sheet for warehousing purposes. These figures are, of course, excluding any impact of potential M&A but include our latest acquisition, STAM Europe. We will focus on the integration of our new French colleagues, assets and operations in the upcoming months, but we will also remain the market consolidator if we see a valuable target at a reasonable price. On the lower side of this slide, you will find a deeper dive into our top line items. We will see our acquisition-related fees by year-end to between EUR 15 million, EUR 50 million and EUR 65 million. We expect our asset and property management fees to be between EUR 170 million and EUR 180 million. This figure includes our coupon participation fees. Our promote fees will increase in 2020 due to several very promising deals in our pipeline, including 2 larger ones in Micro Living. Thus, we will see EUR 20 million to EUR 30 million in this line item by year-end. Our warehousing business and our alignment capital also benefit from the very stable market conditions in our core areas. So we expect between EUR 30 million to EUR 40 million in each of these categories. So you see CORESTATE is in best shape to continue to benefit from a very healthy market and strong investment demand from existing and new clients. That is why we are sure to deliver in 2020 another strong operational performance. With this, I would like to hand back over to the operator for the Q&A session. We look forward to answering your questions.

Thank you. Ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] And the first question is from Thomas Neuhold, Kepler Cheuvreux.

Firstly, on your guidance. If you look at the midpoint of your guidance, EBITDA will increase EUR 10 million and net profit EUR 19 million. You mentioned that the lower financing costs will have a positive impact. Is there any other driver which leads to a strong increase in net profit than EBITDA?

Thomas, it's Kai. Yes, it will. The main lever will be our financial expenses. On top of that, we will have also what we had in -- compared to 2019, we will have a touch lower, relatively, depreciation. We are talking about EUR 2 million to EUR 3 million where we had an extraordinary write-down from past M&A.

Okay. And on the 2019 results, could you kindly provide us with a split of the aggregated revenues and elaborate also in more detail on the one-offs which impacted EBITDA? If I understand you correctly, the negatives and the positives more or less equal each other out. Is this correct?

Yes, roughly. Unfortunately, Thomas, I have you -- I have to ask for a little more patience until we will -- we provide our full range of financial setup end of March. We are today still in the preliminary mode.

Okay. Understood. Last question I have, can you give us an update on your current M&A pipeline? Is there anything in the cards which could lead to doing transaction soon?

Yes. I think priority will be on organic and on inorganic growth. So as in the past, we screen the market. We see that ongoing pressure on the smaller ones. You may have a look at our -- for instance, at our ESG strategy report, which is quite comprehensive and where we are definitely on the forefront. And you may keep in mind from 2021, the German government will price CO2 emissions also for real estate companies, although it's not fully clear how that's going to work in practice. But to be prepared for this, you need systems, processes and IT and teams that are able to measure your CO2 emissions in the portfolio that you are managing. What -- why I'm saying this, because, obviously, as a smaller asset manager, I can't imagine that this is possible on an economic base. So we share here economies of scale around all the asset managers we have taken onboard. So all I'm saying, we are looking at the market, but we will only execute if this is a perfect fit like the recent acquisitions we have done. So to answer your questions, as in the past, there's a huge variety of potential targets, but we will only do so if it fits into our strategy, if it fits to our financial targets, financial policy that we have communicated. And -- yes, that's it.

And the next question is from Kai Klose, Berenberg.

First question would be on the change of the senior management. Could you indicate in which function Mr. Landschreiber will continue to be close to the company? Second question would be regarding Page 9. Could you indicate, first of all, the split between asset and property management fees? Secondly, regarding the acquisition-related fees, could you indicate what kind of transaction or acquisition volume is the underlying for these funds fees? And I think lastly, on the warehousing, what kind of warehousing for HFS and for the [ old balance sheet ] you would expect here?

Yes. Maybe to give you some color, as I said, Thomas has stopped -- stepped down to the -- from the Management Board, but he will remain a valid source of business within the company. So he's doing that in all fans -- what he has most fun of it, and that's doing deals and supporting deals. And I'm very pleased that we have with Nils Huebener, a top manager found and, who will serve or support the institutionalization and the internationalization strategy we are adopting. And I worked now more than 20 years in management, and the ideal setup is if the former Board member remains adjunct to the company. So in which function he will be legally, of course that will be somewhere related to -- which we haven't closed yet because Nils has obviously not yet started and Thomas is still in the Management Board. So this will be in the form of -- mostly of a advisory agreement. So for me, we have the best solutions I can, so to say, yes, I can dream of, if you want to.