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

Dear ladies and gentlemen, welcome to the conference call of CORESTATE Capital Holding SA. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Dr. Kai Klinger, who will lead you through this conference. Please go ahead.

Hello, everyone, and thank you for joining us today on our earnings call for the presentation of our preliminary results for 2020. On the CORESTATE Investor Relations website, you can find our earnings presentation, the press release and the corresponding slide deck. 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. You can replay the call and view the transcript on our Investor Relations website very soon after the call. Together with me are our CEO, Rene Parmantier; and our CFO, Lars Schnidrig, who will guide you through the presentation, followed by the usual Q&A session. The time frame for today's call is about 30 to 40 minutes. Now it's my pleasure to turn the call over to Rene. Rene, the floor is yours.

Many thanks, Kai, and a warm welcome from my side. Speaking about the highlights of the full year 2020 means that we, of course, have to speak about COVID-19. The pandemic rapidly changed the risk approach from investors, and thus, the real estate transaction markets fundamentally. Clients are still eager to invest into real estate, but with a clear focus on reduced risk return profiles, so residential and commercial in very selected locations. In brief core and core+ is key. Of course, COVID-19 also has a massive impact on the valuation of assets. Especially in subsectors like retail, office and service departments or, to a lower importance for us, hotels. Subsequently, we saw a likely reversal of large micro living developments, and partially, fee refunds in some of our service department projects, with an impact on our P&L, and also, an impairment on the goodwill of our commercial asset management subsidiary, ATOS. In addition, we had several non-operational one-off effects in this very eventful year 2020. Our key risk parameter leverage ratio was at the end of last year way too high. This was driven, of course, by the decline in EBITDA, burdened by the crisis and extraordinary items, but also by the structure of our balance sheet. We prepared ourselves and our own books at the beginning of 2020 for another growth year. So we acquired assets with a higher risk return profile in order to place them into clients' funds soon later on. These conversions from assets into cash were rapidly stopped by the first lockdown. So some of them are still on our balance sheet. Let me be very, very clear. The last year was a very disappointing for us at CORESTATE, especially for us in the management board as we assume responsibility for this company. My colleagues and I had to take several very tough decisions, including the waiving of the dividend. I'm very well aware of how this hurts you as our shareholders. And I know that we have likely lost a lot of trust and confidence from the capital markets, and that it is our foremost task to regain this trust from you. We all know this takes time and needs a step-by-step approach. But what I can promise is that we all will be working very, very hard to earn your trust again. But it was not entirely a lost year for us. In mid Jan, we closed the acquisition of STAM Europe, and the integration of this French business with a strong foothold in logistics, and it's well on track. We also saw, as you all know, the fundamental realignment of our governance and management structure, including 5 new members of the Management Board and an entirely new Supervisory Board. I'm absolutely convinced that this setup offers a perfect mixture of competencies and experiences to guide the company back on a growth path. In January, we made an important step to broaden our client reach and to enlarge our product range in real estate financing by the acquisition of Aggregate Financial Services. Our aim here is nothing short of creating a unique powerhouse of real step debt solutions, and we are on a very good way here. Closing of the deal is expected Q2. With this, I would like to hand over to my colleague, Lars, our CFO.

Thank you, Rene. And also from my side, a very warm welcome to all of you. Before I give you the usual information in our AUM, the debt business and our figures, let me add some personal remarks on what Rene has just said. I'm also very disappointed about the development and results we saw in 2020. And I'm sure that mutual trust is the basis of everything we do, be it in the capital market, but also in our client relation and in our role as an employee, as we definitely have met not all the expectations you rightly put in us in the last month. But I cannot agree more on what Rene just said. We will pursue every avenue to do our best to restore the trust in our company and in us as a leadership. You know this slide from our previous presentation. This shows the development of our assets under management in 2020. In brief, in tough times, relatively stable. We showed 1.3% of net organic growth in our core business real estate AUM, and this includes negative valuation effect. Our non-real estate AUM, i.e., our rundown portfolio, was the significantly reduced from EUR 3.5 billion at the end of 2019 to EUR 3.2 billion at the end of last year. So all in all, we managed around EUR 24.6 billion of real estate assets, nearly plus 8%, and the entire AUMs amount to EUR 27.8 billion, up from EUR 26.3 billion at the end of the previous year. When you look into the distribution of our real estate AUM, you can see what drove the market last year: revaluations and a significant reduction of client demand in some pockets of micro living, especially served apartment. That is why you see these portions declining also in our asset. You will not be surprised to see a very stable development in residential and city quarters, the later becoming more and more the flavor of the season. Offices are requiring a differentiated view. This asset class currently triggers investors demand when you can offer a good location at a long-lasting contract with Class A tenants. That's what we provide for our clients, and that's why this asset class is still representing 1/3 of our AUM. At the end of 2020, our asset under management comprised of 52% asset management mandates and real estate equity, 22% of third-party mandates for property management and 26% of real estate debt. Let me give you on the upper right part of the slide a brief preview into the future. We have a booming tangible pipeline of around EUR 400 million of requested Mezzanine financing, representing a project development volume of more than EUR 2 billion. Our real estate sourcing pipeline stood at the end of 2020 at close to EUR 4 billion, with nearly 1/4 in advanced contractual status. These figures give me optimistic feeling of the upcoming business potentials in our various operation. Now please turn to Page 5. You all know this chart from our previous presentations. It shows the development of our real estate mezzanine business in 2020. In brief, relatively stable, even in a very challenging year. The total commitment fund volume at the end of December was around EUR 1.2 billion, so showing a seasonal decrease of 5% to 10% outflow from regular cancellations. But we have no doubt that we will be able to increase the volumes remarkably in the next month, supported with an attractive pipeline of requested financing, [ ACROSS ] proven fund performance to deliver further on a double-digit return in 2020 and a strong investor effort from AFS. At the end of last year, we financed 53 projects with an average size of around EUR 22.6 million. Again, as you can see on the lower part of this chart, with a clear focus on the top cities in Germany, around 65% of our lending money go out to these metropolis and another big chunk to Leipzig. One word to the margins of the fund. We saw revaluation effects at 2 projects, and driven by the pandemic, higher risk provisioning. This all led to a reduction of roughly minus 1 to 1.2 percentage point in the performance. Aggregate Financial Services bringing in not only many new clients on the investor and developer side, about 80% of AFS clients are new to us, but also a lot of personal contacts and experiences in products like whole loan or senior loan. This will help us broadening our product range and opens up a lot of synergies also in terms of clients. So all in all, we had in light of the crisis a stable 2020 at HFS and we are looking very optimistically into the year running for this highly commercial business. Please turn to Page 6 now. Here, you see our 3 KPIs on the chart. In brief, in line on top level, but a miss on EBITDA and profit. We showed according to the unaudited preliminary figures aggregate revenues and gains of EUR 191 million, down from EUR 303 million in 2019, but within our guidance of between EUR 185 million and EUR 210 million. To give you a bit more color. Our acquisition fees in our bread-and-butter business, asset and property management fees showed relatively stability. Our Mezzanine business also was relatively stable. But the coupon participation fee suffered a bit from the effects described above. The negative market surrounding, with massive impact on the valuation hit our alignment, capital and warehousing, especially at our co-investments in retail and service apartment, with a negative valuation effect of nearly EUR 16 million. For 2020, the preliminary report an EBITDA of EUR 17 million, down from EUR 175 million last year and clearly below our guidance. Our earnings were massively hampered by extraordinary items, like minus EUR 20 million of impairments from the reversal of 5 micro living developments and partial refunding's at 6 other micro living projects. In addition, we had minus EUR 2 million aperiodic success fee that had to be altered. We also had minus EUR 7 million as one-off for personnel expenses related to our efficiency enhancement program and to changes in our Management Board. And lastly, we showed minus EUR 2 million transaction costs for the acquisition of STAM Europe and corporate events like the capital increase in September or the change in our strategic investor base in November. This all comes on the backdrop of a quite inelastic cost base that was additionally burdened by expenses from the adoption of shifting clients focus. Below the EBITDA level, we have depreciated EUR 21.7 million of goodwill in an extraordinary impairment on art of capital, an asset manager specialized on commercial properties we have acquired in 2017. The impairment was, of course, driven by the harsh impact of COVID-19 on the market's valuation, especially in retail and opportunistic asset, which is the operational core competence of ATOS. In addition, a negative tax settlement effect predominantly from internal loss carried forward of around minus EUR 11 million had to be realized. This all led to a reported net result of minus EUR 69 million, mainly driven by nearly EUR 70 million of negative onetime item, mostly valuation driven and not cash effective. Adjusted by capitalized asset management contracts and DTAs, we show an adjusted net result of minus EUR 48 million, thus clearly missing our guidance. Now please turn to Page 7. Let me speak a bit about our key balance sheet figures at the end of 2020. Our total debt, including EUR 195 million of convertible bond, EUR 296 million of senior unsecured bond, and EUR 117 million of bank and other debt, stood at EUR 608 million. This also encompasses EUR 54 million of warehousing debt and is adjusted for rental and lease liabilities of around EUR 27 million according to IFRS 16. At the end of December 2019, we had EUR 91 million of cash or restricted cash on our balance sheet. On top of that, we had at year-end outstanding short-term Mezzanine bridge loans to HFS clients in the amount of EUR 104 million on very commercial term. All of them will obligatory redeemed or transferred into funds within the next weeks and months. Beyond of that, and let me be very clear on this. We will pursue every avenue to reduce our net debt in 2021. How do we want to do this? We will also place assets out of our balance sheet, especially from our inventories, associates, and joint venture structures as well as from our financial instruments of up to between EUR 80 million and EUR 120 million. And latest in 2022, we will convert more than EUR 60 million from co-investments into cash. At the end of 2020, our financial leverage based on a normalized operational EBITDA for the last 12 months stood at around 7.5x, unadjusted at more than 30x. This is, to make it very clear, unacceptable high. And we are working on full steam to reduce this figure into our target corridor of between 2x and 3x latest by the end of this year. So we are taking all endeavors to show a net debt of less than EUR 320 million by the end of this year. And to reiterate, our 2 large instruments, the convertible and the straight bond, are both not affected by higher leverage or any potential financial covenants. We are only limited in the issuing of new debt, and this is something we do not intend anyway. With this, I would like to hand back to you, Rene. Please turn to Page 8.

Many thanks, Lars. When I started at CORESTATE at the beginning of December last year, I knew the company and its market already very well from my previous jobs. But I was really impressed of how many talented and highly motivated colleagues we have. Nevertheless, my team and I took a very deep dive into the company's strategy and setup. And after 3 days and 10 sessions, we defined several action points to enable further growth and a return to pre-crisis levels of profitability. Firstly, we will adjust our product range across the entire real estate value chain without very complementary acquisition of AFS. The focus on core and core+ assets, and to give a precise and very recent example, our new city quarter funds we initiated just a few days ago. Just to mention one project. The Q in Nuremberg is the largest urban development project of its kind in Germany and already part of our product range. Or to give another example, we'll be very soon start the fundraising for our whole loan product, the natural next step in deepening our product range for our already broad client base. We have fostered our equity raising capabilities with a clear focus on the Dutch region, a new and very well-established Head of Equity Raising and a fully integrated group-wide sales structure. This team directly reports into me. So I personally will make sure we will meet our ambitious targets here. Thirdly, we will make the entire group more commercial and more profitable by raising synergies. This applies to better cross-selling between depth and equity products, but also to offer existing products to new clients and new products to existing clients. Thus, we have -- we offer a use of coverage of the entire life cycle of a real estate investments, including the enhancement of ancillary services like fund and property management. This all will be fostered by an agile business development and by very selected acquisitions, and where it makes sense for our shareholders, joint ventures. Our recently realigned senior management team, including new responsibilities at HFS, are personally responsible for making the best use of the above mentioned product range and client relations and the full enhancement of our real estate services. Very important for this is to reduce our complexity and to abandon redundancies in our organization. In order to operationally benefit from a strengthened operation, we have elaborated, improved and harmonized quality standards based on an industry-leading target operating model. Briefly, TOM. Lastly, but by far not least, authentic and comprehensive ESG orientation in everything we do and offer. Our clients are continuously asking for our ESG setup, and we are seen as a front-runner in this trend. We want to enlarge our pole position here. Just to give you 2 examples. We can measure the ecological footprint of our assets by one fingertip. And we have converted our entire German portfolio to green electricity. And we are probably, again, on an industry-wide leading position, ready to offer fully-fledged ESG team products to our clients. You can see on the chart that we have already done a lot of these steps. And we are under full steam to finish the very few points that are left over. So CORESTATE yet is in a very good shape for a promising 2021. So please turn to Page 9. Speaking about 2021, let me give you not only a financial outlook, but also some insights on market assumptions and revenue split for the year running. Of course, COVID-19 will still have a harsh impact on the markets, but we assume this to diminish gradually in the first 6 months, as we see the clients returning to the transaction markets, and the asset valuations gaining some stability. Latest in the third quarter, we are expecting to benefit from catch-up effects, driven by megatrends like urbanization and demographic changes, but also by investment pressure. This will lead to growth on an all revenue lines, as you can see on the chart. For the first time, we split up our transaction fees and assets and property management fees into debt and equity business to give you more transparency. Looking at the transaction fees, we expect in real estate between EUR 20 million and EUR 35 million and a transaction volume of between EUR 2 billion and EUR 3 billion, driven by a pickup in activities from clients. Our real estate debt transaction fees will end up between EUR 30 million and EUR 40 million, benefiting from our fostered financing business due to the AFS acquisition and a volume of new financings of between EUR 1 billion and EUR 2 billion. The growing assets under management base will have a positive impact on our asset and property management fees. Thus, we expect here between 90 and -- EUR 80 million and EUR 90 million on the equity side, on the same figure on the debt side, including the coupon participation fee. With this, we could surely speak of a really prospering mass business. As said many times, we want to reduce our balance sheet exposure for clients, and we will place assets out of our inventories. This will lead to revenues from warehousing and real estate operations in midpoint EUR 10 million. We are also very cautious on the development of our co-investments and are assuming earnings there of between EUR 0 and EUR 10 million. All in all, this will lead to aggregated revenues and gains of between EUR 235 million and EUR 260 million, thus showing CORESTATE being back on the growth track again. I ask you to turn to Page 10. As mentioned on the last page, we expect between EUR 235 million and EUR 260 million of aggregated revenues and gains. Our financial outlook for 2021 perceives an adjusted EBITDA of between EUR 90 million EUR 115 million and adjusted net profit of between EUR 50 million and EUR 75 million. Adjustments on EBITDA level comprised of between EUR 5 million and EUR 10 million transaction costs for the acquisition of AFS, and on net profit level, around EUR 15 million of capitalized asset management contracts. In this financial guidance, the recently acquired AFS is considered on a pro rata temporis base, including synergies, with circa EUR 16 million of revenues, EUR 10 million of EBITDA and EUR 7 million of net profits. As said before, we aim annual cost savings of EUR 10 million from our efficiency enhancement program, which is well on track, and we will definitely deliver here. Our tax rate is increasing slightly because of a gradual shift in our operations towards a higher portion on the German or French tax regime to between 15% and 17%. And let me also please stress this. De-leveraging is key for us in 2021. We aim a ratio of below 3 by the end of the year. All these figures are based on our budgeting process, taking into account all impacts of COVID-19 on our operations, valuations and transaction markets as we can to be the best of our abilities foresee them as of today. One last note, we will postpone our AGM. New date now June 28. Format will be again purely virtual. So all in all, the figures for 2020 are really not good. But the company is very well on track to deliver a quite decent 2021. You will see CORESTATE will be gaining momentum on profitability and de-risking in 2021. With this, I would like to hand back to the operator, and we are now happy to answer your questions. Thank you.

[Operator Instructions] Our first question comes from Kai Klose, Berenberg.

I've got a couple of questions. And I will ask them one by one, if this okay. The first one, what was the amount of coupon participation fee received in 2020 by HFS compared to 2019?

Kai, it's Lars. This year, preliminary, it will be EUR 43 million, EUR 44 million. Compared to last year, we were at EUR 55 million.

And on -- regarding Page 6, you mentioned a EUR 22 million write-down on ATOS. What was the goodwill write-down on HFS?

We have no write-down on HFS. We have there on current planning, quite decent buffer. So the impairment on goodwill is exclusively on ATOS.

So just to be clear. We had quite a remarkable drop in the coupon participation fee, but it could well remain unchanged?

Correct. I can fully agree.

And then on Page 7, you mentioned that EUR 104 million -- or about EUR 100 million were lent to HFS clients. How much was that by 9 months?

Around EUR 30 million. So why...

What was the increase from EUR 30 million to EUR 70 million in Q4?

Simply high demand on this product. And the fund is and was fully deployed. But as stated, we have around EUR 400 million pipeline. And given that we had the cash, in particular, from the capital increase on our balance sheet, we wanted to employ this economically and have lended the money.

And how many joint ventures or assets as held as inventory were placed in Q4, as you mentioned in the 6 -- the 9-month results that we were planning to that in Q4?

Well, as said, the main inventory is our warehouse asset, Gießen, and others we have not been placed in the fourth quarter.

To be clear. There were no placement, there's no sales from properties held as inventory with our joint ventures in Q4?

Correct, correct.

And what is the amount of the targeted repayment of gross debt you planned in Q4 -- sorry, in 2021?

Well, the target is EUR 320 million, as stated on Slide 7. So EUR 320 million net debt target in 2021.

No. I was asking about the repayment of gross debt and not the net debt target.

Gross debt, we will replay -- repay the EUR 30.5 million HFS loan end of the year and the EUR 10 million Lombard loan. And then latest in 2022, we will repay the convertible.

Our next question comes from Thomas Neuhold, Kepler Cheuvreux.

I also have several ones. So it's the best to take them one by one. First one is a follow-up on HFS. You mentioned that there was a seasonal decline in assets under management. It looks also like that the share of residential was down. So net-net, it looks like the residential projects decreased by almost 20% quarter-on-quarter. Can you elaborate on this? What was the main reason for that?

Thomas, it's Kai. Yes, of course, I can give you a little bit more color. And of course, we have a huge turnover ahead in the fund in the fourth quarter according to the slight backlog through the year. And thereof, there was a change of land plots in bigger cities, with a higher focus on mixed-use. And they are predominantly on the commercial side, meaning offers like you will have, for instance, in Frankfurt, Munich, where there's very expensive plots will go and now converted from whatever -- what it is before, retail now, so office and other things. And this is the background of this slight change. But this is not a signal that we want to change the general profile of the HFS fund, meaning leaving this safe harbor territory of residential linked and backed Mezzanine lending.

Yes. Understood. The next question is on your guidance and outlook. Can you tell us what the underlying assets under management growth assumptions are here?

5% to 10%.

Okay. Understood. And then regarding your EUR 320 million net debt target on Slide 7. If you look at the slide, it looks to me that they only incorporate this EUR 100 million Mezzanine loans repayment and the asset placements of EUR 80 million to EUR 120 million. What about the operational cash flow which you most likely will generate 2020 if you make an EBITDA of around EUR 100 million? Why is it not included here?

Thomas, it's Kai. This is now a little bit back on the -- the not mark because we don't provide any operational or free cash flow guidance, whatever. Take our EBITDA of, let's take, whatever, EUR 100 million as a ballpark, minus EUR 20 million on our financial results, interest expenses, minus tax. And tax, let's take another ballpark of EUR 50 million to EUR 20 million. And then you will end up of EUR 50 million plus of operational cash flow after these 2.

Okay. This is not included in this EUR 320 million net debt target?