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

Hello, everyone. A warm welcome to our earnings call today for the presentation of our results for the first 9 months of 2020. As usual, I'd like to direct your attention to the forward-looking statement and disclaimer wording on Page 2 of our presentation. This safe harbor language applies to the presentation and all comments we'll be making today. I would also like to mention that everything is being recorded. After the call, 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's call is about 25 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. When we speak about the highlights of the third quarter of 2020, of course, we need to speak about corona and its impact on the market we operate in. Especially, the real estate transaction market was shaken by uncertainties and significantly less transaction during the shutdown in April and May. But we see very careful and very gradually a recovery of the transaction market, so far, with a clear focus on risk and reduced risk return profiles. This means that currently, most of the investors look into core and core+ fields, hardly into opportunistic or value add. We can also see this in our organic growth in real estate assets under management in Q3 by 1.2%, mainly backed by core and core+ transactions. This is also mirrored in our transaction activities. For example, we acquired for our largest client, the Bayerische Versorgungskamme, the so-called project Q in Nuremberg, being the biggest single deal we made yet and simultaneously, one of the biggest city quarter developments in Germany so far. I'm sure we will hear more from this, relatively new, but rapidly growing asset class of city quarters. And CORESTATE with its vast experience in several asset classes, like residential, office, retail, which are all combined and necessary in the city quarter developments is best positioned to benefit from this. We have not only signed several other transactions in Germany or in France in the third quarter, we have a number of deals on the finishing line, so our investment teams are working again under full steam. So more to come here in the upcoming weeks. Kai will speak about our figures in more details later, but let me highlight this. Our revenues from asset and property management, if you will, our bread and butter business and our mezzanine lending show remarkable resilience in the crisis, and all in all, we are very well on track to deliver on our financial guidance with a detailed roadmap for Q4. This takes also into account that the current second pandemic wave could also have, again, a short-term impact on deal appetite and execution in some European regions, but we also perceive that most market participants are used to deal with these obstacles in a much more normal way. As you all know, we have enlarged our management Board with effect of November 1, and we have appointed with my departure at end of the year an excellent successor. I will speak in a bit more detail about this later on. On September 11, we have issued in a very efficient process around 4.2 million new shares, which were placed without any discount at a market price of EUR 17.82, thus increasing our share capital by 19.5% and realizing gross proceeds of roughly EUR 75 million. We will use this money primarily to reduce our net financial debt in the short term, but it will also increase our entrepreneurial flexibility, especially helping us to divest assets from our balance sheet in a favorable environment. Please now turn to Page 4. As mentioned before, we have made several important steps to further enhance our corporate governance. So at the end of this process, our management Board will be enlarged to 4 members from 2 prior to this move. I will leave, and I cannot stress this enough on amicable terms and on my own at the end of this year. I'm sure that my team and I have done all to prepare CORESTATE for a strong comeback after the crisis, and I'm also absolutely convinced that Mr. Klaus Schmitt, the new CEO, starting on January 1, 2021, is the ideal successor. Mr. Schmitt brings not only fast experience in real estate industry and an impressive track record as 14 years of Board member at Patrizia. He also offers a broad network to important players in the real estate market. And more importantly, a strong background in core and core+, which is what our clients are currently asking for. Another very important step for our company is a decision to give legal, human resources, compliance, risk management and ESG a seat in the Management Board. And Daniel Loehken is the ideal position to fulfill this role. Daniel, currently Chief Legal Officer of CORESTATE, was not only a very successful lawyer with a strong international background but also responsible for establishing best-in-class compliance and risk management structure; something, especially institutional clients are asking for, before they invest in our assets. And maybe even more important as a servicer, our people, our most crucial success for us to distinguish in the market, to find support, incentivize and promote the right talent is one key endeavor and this will be now represented in our Management Board. Daniel has started as a Board member on November 1. With this, I would like to hand back to -- sorry, 1 second. And last but not least, the Supervisory Board initiated a structured search process to find a further Board member for finance and capital markets. Please turn now to Page 5. And with this, I would like to hand over to our Chief Markets Officer, Dr. Kai Klinger.

Thank you, Lars. You will know this chart from our previous presentation. It shows the development of our AUM since the end of 2019. In brief, we had another all-time high at the end of September 2020 with EUR 28.4 billion of AUMs, including a planned decrease in our rundown portfolio, the non-real estate AUMs of EUR 0.3 billion. In our core business, the real estate AUMs, we grew organically this year already with 4.1% despite of any negative impact from COVID. This also reflected in increasing acquisition-related fees, especially in the third quarter. Our real estate went up -- our real estate assets went up to EUR 25.2 billion from EUR 22.8 billion, so showing an increase of more than 10%, of course, driven by the initial consolidation of STAM Europe. As you see in the lower part of the slide, we had only minor shifts within the segments. The proportion of residential and micro-living went slightly down, office went up a bit, and retail continues to decline, reflecting also current investors demand. Logistics, as one of the core competencies of our STAM, nearly doubled its share. Our deal pipeline is obviously impacted by COVID-19. Nevertheless, we have more than EUR 4 billion of potential deals on our tables with more than EUR 1 billion in advanced contractual status. So our transaction teams are again very busy, and we expect several news here in the upcoming weeks. Please flip to Page 6. You also know this chart well. It shows the development of our real estate debt financing subsidiary, HFS. And in a few words, our mezzanine business showed strong performance in the crisis. The invested fund volume end of September of around EUR 1.3 billion is currently allocated in 57 projects. As in the past, the vast majority is invested in the metropolitan areas in Germany, Austria and Switzerland. [ Narrowly ] stable 70% of lending goes to the top 7 cities in Germany. And even more important for the performance of the funds, roughly 70% are residential-anchored projects, which went through the crisis without any negative impact according to the ongoing high demand. On the investor side, we just saw at the fund year's end on 31st of October only minor outflows based on a flawless performance of this high-return product in the crisis. We feel very comfortable to overcompensate this usual churn in the next weeks and can show again further organic growth until end of 2020, like in the years before. The proof is always in the pudding, and our excellent investment competence in choosing and managing the right projects and developers reveals now. This gets supported by a quality credit crunch on the banking side for higher-risk profiles in real estate. In addition, a couple of smaller but very active competitors in the mezzanine lending business were hit by the crisis. Based on less diversified portfolio and wrong type of underlying commercial projects, like, for instance, [ hotel ] or retail, they were forced to execute already debt-to-equity swaps with very unhappy investors and immediate cancellation of existing capital commitments. This all has strengthened our market position and boosted our pipeline of tangible mezzanine opportunities on a level of around EUR 0.5 billion. So we are absolutely convinced that the business will continue to contribute very stable and attractive earnings to our P&L in the next years. Please turn now to Page 7. Let me please speak a bit about our revenue stream in the first 9 months of 2020, also compared in brackets was the previous year's figures. We earned EUR 23.3 million acquisition-related fees in the first 9 months of 2020, just slightly less than between January and September 2019 and reflecting a gradual recovery of the transaction market since June. Our bread and butter business, asset and property management, showed revenues of more than EUR 70 million, up from EUR 64.7 million in 2019. So proving stability in the crisis and reflecting our strengthened recurring fee base from transformational journey over the past quarters and years. As said before, HFS delivered solidly, again, with just a minor decrease in the coupon participation fee from EUR 39 million in 2019 to EUR 35.5 million this year. The first step towards the new normality and cautious recovery in the transaction market can also be seen in our sales fee of EUR 3.2 million in Q3. Our income from mezz loans stood at EUR 6.8 million, reflecting a quickly revitalized market appetite, especially in new residential developments in A and B cities. The uncertainties in several pockets of the market, especially in retail and service departments, are reflected in the significant, mostly valuation-driven reduction of our earnings from alignment capital, down from nearly EUR 20 million last year to EUR 0.3 million this year. Another noticeable decline can be seen in our earnings from warehousing and real estate operations, standing at EUR 3.3 million in the first 9 months of this year and at roughly EUR 23 million in the comparable period of 2019. This is mainly down to our disciplined balance sheet approach in order to reduce our net financial debt and a dried-out market for value-added opportunistic investments. All in all, this led to aggregated revenues and gains of nearly EUR 143 million. And thus, we see us in a very good path to deliver on our guidance 2020. Please flip to Page 8. Let's turn now to the cost structure. Our expenses, especially the OpEx, have been short-term burdened by the changing market conditions. The OpEx ratio of more than 55% shows this significantly and is driven predominantly by weaker revenue lines in warehousing and alignment capital as well as extraordinary efforts in the underlying assets in the backdrop of a complex operational environment since the beginning of the crisis. Expenses from real estate investment management ended up at EUR 64.7 million, alignment capital expenses at EUR 9.2 million, and warehousing expenses at EUR 5.1 million. All in all, around representing 60% of our revenues. G&A expenses were also higher than planned at the beginning of 2020, standing at EUR 24.4 million. Until end of December, this will include around up to EUR 10 million negative onetime effects, mostly HR-related in the context of our efficiency enhancement program. With this, our EBITDA were at EUR 46.1 million, reflecting an EBITDA margin of 32%, unusually low for CORESTATE. Nevertheless, we are on a good run rate to reach out our new 2020 guidance of between EUR 55 million and EUR 80 million. D&A amounted to nearly EUR 25 million and were affected by IFRS 16 as well as by the first-time consolidation of STAM. Our financial result was at minus EUR 16.2 million at the end of this year's first 9 months. This results in a net profit of EUR 4.4 million and adjusted by capitalized asset management contracts of EUR 19 million and deferred tax assets of minus EUR 2.5 million and an adjusted net profit of nearly EUR 21 million. Again, a good run rate to reach out our guidance of between EUR 25 million and EUR 50 million. Please turn to Page 9. On this slide, you can see our key balance sheet and debt figures end of September. Our total debt adjusted for around EUR 29 million of rental and leasing liabilities stood at 59 -- EUR 597 million at the end of the first 9 months of 2020. This contains EUR 136 million bank and other debt, including EUR 33 million warehousing debts. As said before, we have used balance sheet since the beginning of the pandemic very disciplined and we'll continue to do so. Cash, restricted cash and cash equivalents amounted to nearly EUR 150 million, showing, of course, the effect of the capital increase but also positive operational cash generation. Net debt at the end of September was EUR 449 million, leading to a financial leverage after IFRS 16 adjustments of 3.7x. Nevertheless, our midterm target range between 2 to 3x remains unchanged. To reach this goal, we once again reiterate our plan to convert more than EUR 200 million of balance sheet assets into cash in the upcoming 18 to 24 months. But let me be very clear, we do not have substantial redemptions or refinancing needs until the end of 2020 -- our 2022 plan. And our main financial instruments are not affected by higher leverage ratios as the term and conditions only limit our ability to raise new debt. Something we do not intend to do so when our leverage ratio is worse than 3.5x. Please turn to Page 10. And with this, I would like to hand back to Lars again.

Thank you, Kai. What can you expect from us till the end of 2020? We have a very well-filled project pipeline of transactions and expect some advanced deals out of this to be materialized till the end of the year, as clients, especially pension fund, pension schemes and insurers feel increasing pressure to invest into sustainable and profitable real estate assets that we can offer. Our efficiency enhancement program will proceed as planned till the end of this year, so we can realize the gains and fruits, including around EUR 10 million of annual savings from the next year onwards. And we will, of course, continue to reduce our balance sheet exposure as described above, and we will see the first pickings, therefore, with positive impact on our net debt figure. Operationally, our focus is on asset and property management services for those assets that were most affected from the crisis, mainly, of course, retail and service apartment. As you can see from the figures, Kai explained to you just a minute ago, we are on a very good track to reach our guidance of between EUR 185 million and EUR 210 million of aggregate revenues and gains, between EUR 55 million and EUR 80 million of EBITDA and between EUR 25 million and EUR 50 million of adjusted net profit. So we confirm this guidance. Lastly, let me give you a sneak preview on 2021. We expect the real estate transaction market to pick up momentum as we anticipate higher visibility and post-corona scenarios and further increasing investment pressure on institutional investors like pension schemes or insurers. This will lead to a remarkable operational recovery of CORESTATE as we are very well positioned to benefit from a more positive operational surrounding. We expect that all our real estate equity business revenue line shows improved earnings in 2021 compared to this year, driven by the market gaining momentum and the current uncertainty to decline. Our mezzanine business will, based on the pipeline on record level, reflecting the strong demand from developers and the reduced risk appetite from banks, deliver once again on a stable level to our earnings. So also, although, we cannot give you a quantitative outlook as of today, we say that we expect all our KPIs to end of 2021 significantly improve compared to 2020. We will provide the financial outlook for 2021, as usual, on February 24 next year. With this, I would like to hand back to the operator, and we are now happy to answer your questions.

The first question we've received is from Thomas Neuhold of Kepler Cheuvreux.

Actually I've only 2. The first one is on Q2 -- Q3 results. Can you elaborate, please, in more details on asset impairment write-downs in Q3, which hits alignment capital and real estate operations? And what is the outlook here for Q4? Do you think more write-downs are still necessary? And the second question is, I was wondering if you can give us an update on your asset disposal plans. It seems to me that so far, nothing really happened here. What can we expect by the end of this year? Or if most of the disposals will happen next year?

Thomas, it's Kai. Maybe I will go for both questions. So the first about potential further revaluations or valuation adjustments in Q4, we see this today as not necessary and unlikely. So from today's picture, we will see a quite normal Q4 based on our budgets in every revenue stream. And your second question about asset disposals, so we have said with our H2 call -- H1 call, pardon, that we will already -- we feel comfortable to already convert around a low to mid-double-digit million amount in 2020 or in the second half, and we still feel -- and we feel still very comfortable to do so. So expect until end of the year, a lower net debt figure compared to what we see today in the third quarter.

The next question is from Kai Klose of Berenberg.

I've got 3 questions. One, could you indicate what was the transaction for the first 9-month split between equipment and disposal? Second question, you mentioned for 2020 as in full, you expect a transaction volume of about EUR 1.5 million. Maybe you could give a split here? What you expect in sales and acquisitions? So -- and the last question, I said 3 questions, is on -- is regarding Page 9. You mentioned there is bank and other debt of EUR 136 million. And you mentioned on discipline regarding the -- using the balance sheet [indiscernible] EUR 119 million, I think, by the end of June. So that went up to EUR 136 million. Is it reasonable to expect -- what was reason for that? And can we expect this to [indiscernible] in the fourth quarter?