EPH European Property Holdings PLC (EPH) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the conference call on the presentation of semiannual unaudited results of EPH European Property Holdings. The current call is being recorded. My name is Yulia Makhinova, and I will present the financial results to you. And I'm accompanied on this call by my colleague, Anna Bernhart and Liudmila Bugaeva, they will step in if your questions or comments required this. So first of all, I will focus on the business highlights of the company during half year 2021. In the first 6 months of this year, EPH continued the successful integration of new properties acquired in -- during the last year into its operations. I would like to remind that last year, the company acquired 2 hotel properties in Germany, in Berlin and Dresden as well as 2 properties in Austria. Hello? Hello, yes, so I was muted.

Yes, sorry.

Yes. So I will start from the beginning. So good afternoon, ladies and gentlemen, and welcome to the conference call on the presentation of seminal unaudited results of EPH European Property Holdings. The current call is being recorded. My name is Yulia Makhinova, and I'm accompanied here by my colleague, Anna Bernhart and Liudmila Bugaeva, and they will step in if your questions or comments required this. So first of all, I will say a couple of words about the company's business in the first half for this year. So EPH continued the successful integration of new properties acquired by the company in the last year into its operations. I would like to remind that during last year, the company acquired 2 hotel properties in Germany, in Berlin and Dresden as well as to Austrian properties, QBC 127, located in Quartier Belvedere in Vienna, with over 39,000 square meters of net leasable office space and approximately 680 parking lots. And currently, this property is close to 100% -- to be 100% leased to long-term tenants. And also in March of this year, the company successfully refinanced the development financing loans from Raiffeisenbank acquired with the properties QBC 1 and 2, replaced by 2 new secured loan facilities and the total amount of EUR 100 million from UniCredit Bank Austria, which are payable at the end of 2030. The second property in Austria acquired in 2020 is Lassallestrasse 1, an office building in Quartier Lassalle in Vienna, which is currently in the process of refurbishment and reconstruction. It has a total area of approximately 45 (sic) [ 45,000 ] square meters. And currently, the reconstruction of the project is on schedule and its finalization is expected in the middle of the next year 2022. And as of today, most of the leasable area in this property is already leased out and will be occupied once the construction is finished. So despite the coronavirus pandemic impact, which only -- which had only a minor impact on the company, so EPH rental properties continue operating well and generating sufficient cash to cover its operating expenses, service its debt and partially finance its investment program. So we have a moderate decrease in revenues of the Russian rental properties. And it is caused by different factors such as foreign exchange impact and also by the adjustment of lease rates during the process of renewal and replacement of like so-called old leases concluded before in 2014 when ruble significantly depreciated. But this moderate decrease is fully overlapped by income generated by newly acquired properties in Europe, as well as by moderate increase in revenues of the European properties acquired earlier. The main objective of the company remains to invest in high-quality real estate over the long term and to ensure that it generates stable revenues for shareholders. And the company continues to focus on office and mixed-use properties as well as hotel properties in Western Europe. And we are constantly monitoring the opportunities in all leading Western European markets. Then going forward and focusing on the financial results, I will say that, there, like a stable activity of the company. And overall stabilized situation in the markets led to a more or less stable results of the company as compared to the last year. The NAV per share slightly increased from the year-end 2020 and now is $37.89 per share. The net profit slightly increased as compared to the same period of the last year and now with $10.93 million reported for the first half of this year. And the main factors influencing in the company's NAV and the financial results are, first of all, we have increase of net operating -- or net rental income from $29 million in the first half of the last year to $32 million in the 6 months of this year. And the properties acquired in the last year contributed like $3 million more than it was in the first half for 2020. So the company continues to sell apartments in our Arbat properties and it's reported the net profit of $1.8 million in the first half of this year. Last year, the company reported a profit of $0.85 million on the sales of apartments, but also last year, in the first half of the last year, the company sold also the whole office space in the Arbat properties for the proceeds of $11.6 million. Also, the company reported a gain on the revaluation of investment properties in the amount of $16.5 million. And this gain consists of 2 elements, first of all, gain on fair value adjustment due to the market factors, which is, for this half of the year, $30.82 million, but it was partially reduced by the currency impact of $14.3 million. For the 6 months of the last year, the company also reported a gain of $21 million, but it was resulted from the opposite factors, loss on the fair value adjustment of properties, but it was overlapped by a positive currency effect. And for this half of the year, the major contributor to the gain in fair value adjustments of market value property QBC 127, it contributed around $27 million into this gain. So also, we have -- usually, we have impact of exchange rate fluctuations in the reporting period, overall negative effect of $15 million. And we have net foreign exchange loss recognized in the income statement, but it is partially overlapped by positive change in the currency translation adjustment reported directly in the equity section. So as I already mentioned, the COVID implications for the group performance are well managed by the company's management and have only a slight impact on half year financials of the company. So in the next slide and also in the Page 4 of the semiannual financial report, you may see key performance indicators, which shows stable operating income of the company and a slight increase especially as compared to the last year, with a slight decrease as compared to the 6 months of 2019, which was the period before pandemic impacts and all other factors which influenced this result. So you may see also some like analytic numbers that still we have [ 13 ] investment properties. And here, I would like to mention that so far, we treat property QBC 127 as one property, but probably later we will separate them. You may see also the division of our investment property values between Europe and Russia. Currently 37% are Russian properties and 63% are European properties. You may see also the increase of the company's market capitalization as well as the improvement of loan-to-value [ coefficient ] a little bit. So now I will focus a little bit more on the separate items of our financials in the asset section of our balance sheet. You may see that the value of our investment properties increased by more than $10 million. And you may see the breakdown of such increase by different properties. In Russia, you may see a slight decrease in values for Berlin House and Geneva House, and this decrease is mainly caused by the continuing replacement or renewal of old lease contracts concluded before 2014 upon the current expiration, with new leases with lower U.S. dollar rental rate, which actually reflects the current market and reflects the fact that ruble significantly depreciated since 2014. And also the expiration of such old leases led to temporary increased vacancy. And due to pandemic situation, now it takes a little bit longer to find suitable tenants for our exceptional properties. And in Geneva House, the process so far leases renewal is almost finished and the current vacancy is only 1.4%. But in Berlin house, the process is in progress, and we have currently active search of new tenants and [ active pace ] of negotiations with them. But also, I would like to mention that Berlin House and Geneva House remain almost the only properties in Moscow with U.S. dollar-denominated rates and we are trying to keep this situation. For Polar Lights, Hermitage Plaza and Magistral’naya properties, we have increased in U.S. dollar values, but this is mainly due to ruble appreciation against U.S. dollar as compared to the end of the last year, because the rental rates in these properties are denominated in rubles. And also, we agreed the terms of the new lease with a new tenant in Magistral’naya property, which also had a positive impact on the valuation of this property. For European properties, the fair values is these basically are appraised in euros, and the euro value of all properties increased. However, depreciation of euro against the U.S. dollar as of the end of June of this year by 3%, resulted in respect of deflation of translated U.S. dollar values of these European properties. For all properties, except for QBC 127 and Lassalle 1, the growth of euro value is moderate and is caused mainly by slight positive changes and assumptions by the value as a reflection of positive trend with COVID implications observed in the first half of this year. Lassalle 1 property is construction in progress. And currently, it is accounted at cost of acquisition plus subsequent capital expenditure until the end of construction, when fair value can be reliably measurable, yes, so until the end of construction or until the moment when the fair value can be reliably measured. And the current increase in value represents additional capital expenditure during the 6 months of this year. QBC 127, for this property, we have a significant increase in U.S. dollar value and even more increase in euro value. And it is caused by the fact that at the end of the last year, the property was accounted at cost of the acquisition because, actually, it was considered its value because the deal was closed very close to the year-end. It was at the arm's length and the price represented the fair value. But a smooth start of the operations of this property and higher-than-expected occupancy rates, and also lower yields applied by the value resulted -- resulting from elimination of uncertainty factor upon completion of construction and overall expectations in the Austrian market. These factors contributed to almost 10% increase in euro value of this property. But this significant euro impact also slightly eliminated by euro depreciation towards the U.S. dollar as compared to the year-end 2020. Inventory line in our balance sheet represents the value of Arbat apartments. And they are carried at cost and tested it at the end of each reporting period against price value for the impairment. And since the rate value is higher than cost, the apartments are treated that cost currently. And the decrease is -- the decrease in value by almost $10 million this quarter are caused by continuing sales of apartments and parking lots. And also -- but this is -- this decreased slightly overlapped by the currency effect due to the ruble appreciation against U.S. dollar as compared to the year-end 2020 because the costs are denominated in rubles. In cash and cash equivalents, we have a slight decrease in cash. And during the period, the main cash inflows were, first of all, net rental income from our rental properties and proceeds from the sale of Arbat apartments and parking lots. And the main outflows were investments into construction of Lassallestrasse 1 property, also the payment of regular interest on bonds and loans issued -- or [ attracted ] by the company. And also in the cost of refinancing of loans provided to QBC 1 and 2 properties, the company repaid EUR 7.5 million. Also, I would like to mention that our cash includes $15 million of cash retained on escrow accounts for potential future payments to the seller of some of our properties, which we acquired last year; and also $1.9 million of security deposits related to property QBC 1 and 2, which are kept on the restricted bank accounts. On the equity section, we have relocation of the amount between share capital and share premium. And it is caused by the fact that previously or from the beginning, the company's ordinary and preferred shares have been authorized and issued without par value. But at the Annual General Meeting held this year of 14th June, the company -- the shareholders decided to amend and restate its share capital by staining par value of $1 to each ordinary share and each preferred share. And accordingly, the share capital of the company is amended to reflect the par value of its shares, it's ordinary share, which is $14.4 million and the excess of this amount has been reclassified to share premium. And just to mention that noncontrolling interest reported in the equity section represents minority interest held by third parties in several European subsidiaries of the group. And the amount is like more or less stable as compared to the end of the last year. In the liability section, you also may see a reclassification of some amount between long-term and short-term liabilities, and this is caused mainly by the fact that construction and development financing loan from Raiffeisenbank acquired with the properties QBC 1 and 2, now -- what represented their current liability as of the end of the last year. But in March, it was refinanced by 2 new secured loan facilities for the total amount of EUR 100 million from UniCredit Bank Austria, with the final repayment on the 31st December for 2030. And that's why these new loans are now reflected as noncurrent liabilities of the company. Also, there is a slight impact of euro depreciation against the U.S. dollar as of the end of the period, which has some impact on euro-denominated loans and notes of the company. In the income statement, as I already mentioned, you may see the increase of net rental income from $29 million to $32 million for the 6 months of this year. And as I also mentioned, the major contributors to overall increase of the group's net rental income are duly acquired in 2020 property. But you may see the particular breakdown -- in the slide of the presentation, you may see the breakdown of net rental income by property. And I would like to mention that ruble to U.S. dollar average rate depreciation by 6% in the half year of this year compared to the half year of the last year resulted in compression of U.S. dollar values of Russian properties. But vice versa, the average euro-to-dollar rate appreciated by 9%, which has impacted positively the U.S. dollar equivalent of revenues of European properties. And in functional currency, almost all properties demonstrate stable revenues, with the exception for Geneva House and Magistral’naya in Russia. And the slight decrease in revenues of Geneva House is explained by renewal of expiring leases, which resulted in temporary increase of vacancy and decrease in U.S. dollar-denominated lease rate. And the decrease in Magistral’naya is also caused by the tenant replacement, which is currently almost finished. Also, the company reflected in its income statement, the result from the sale of Arbat apartments and parking lots, which is $1.8 million for this year. And as I mentioned, the last year is -- the results for the 6 months of the last year included also the result of -- from the sale of the whole office space in Arbat. And for the 6 months of this year, the company sold 9 apartments for the total area of more than 1,000 square meters and 4 parking lots. And some more other apartments or parking lots have been already prepaid as of the end of June of this year. But the process of registration of new ownership takes a little bit time actually, and it will be reflected in the second half of this year. But the sales continue. The revaluation of investment properties demonstrates the gain, the cumulative gain of $16.5 million. And as was mentioned, it is a result of 2 elements. First of all, gain from the fair value adjustment of investment properties, which is based on the increase of the appraised value based on the reports from the valuation companies, which are now [ Quartier ] Lassalle for the Russian properties and [ WLC ] for the European properties. And here also, we have the effect of currency translation resulted in the loss of $14 million for the reported period, and this is out by the fact that Russian properties have rubles their functional currency. Also, the company has reported a slight increase of the finance cost as compared to the 6 months of the last year. The interest on bonds did not change, but we have increased on the interest on notes payable. The interest -- the total interest during the period amounted to $5.5 million, of which $1.9 million are capitalized in the cost of Lassallestrasse 1 property under construction and $3.2 million are expensed. And the increase is caused by the fact that additional notes were issued at the end of March of the last year, and therefore, the interest on the new notes was only accounted for 3 months in the last year and for 6 months this year. And also, we have increased in interest on the bank loans due to the loans obtained with the acquisition of new properties in the second half of the last year, the UniCredit loan related to SALZ 4 property, and the Raiffeisenbank loan later refinanced by UniCredit loan in relation to QBC 1 and 2 properties. And also you may see that we have increase in income tax expense. The income tax expense consists of 2 elements also. First of all, the current income tax expense, which is more or less stable as compared to the same period of the last year. And it includes income taxes paid by rental properties in Russia as well as some minimum taxes paid by Cyprus subholding companies. And also, the second element is deferred tax, and it is recognized on the change in difference between the fair value of the properties and their tax values in the local books, and this is calculated on the values denominated in the functional currency of each entity. And in the first half of the last year, the group recognized deferred tax benefit as a result of restatement of deferred tax liabilities in 2 German companies at significantly lower rates. But this year, everything is like in the ordinary cost of calculation. This is mainly it about the main financial results of the company during first half of this year. And if you have any questions or comments, you are welcome to ask right now. If there are no questions, then I would like to thank you for your presence in this conference call. And I would like to mention that you may say your questions later on the official e-mail address published on the company's website. Then I wish you a nice day, and goodbye.