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

Okay. Good afternoon, ladies and gentlemen. My name is Yulia Makhinova. I'm from Valartis Group, who is responsible for the preparation and presentation of the financial results for EPH European Property Holdings, and I will tell you about the results of the financial year of the company. I would like to note that this call will be recorded. So first of all, I would like to outline the main business highlights of the group for the last year 2021. Unlike the previous year 2020, which was a year when the group acquired quite significant numbers of new properties, and it was also the year of the quite extensive COVID impact all over the world. The last year, 2021 was rather calm but successful for the group. So during this year, the company made great strides forward with the integration of the properties acquired in 2020, which include the hotel properties STRAL 3 in Berlin leased to NH Group and SALZ 4 in Dresden located in the historic city center and leased to Melia Hotels International. Also, this includes the office property LASS 1 in Vienna, Lassallestrasse 1, which is currently under full refurbishment. And office properties QBC 1 and 2 accompanied with their parking garage QBC 7. So with these acquisitions of the first-class properties in premium locations in 2020, now the real estate portfolio of EPH consists of 15 properties with a total market value for over $1.5 billion, of which 63% relates to properties in Europe. All in all, the pandemic has had only a minor impact on the group and its operations. And despite the difficult market environment, it was managed to fully let all our new projects in Vienna. And we were able to secure leasing conditions for the new projects in the Austria as planned before the acquisition and we also found partnership solutions with the hotels for the past 2 years during this COVID situation. So from the operating standpoint, company’s income-generating properties continue to demonstrate stable profitability and they generate sufficient cash to cover the company’s operating expenses, including payment of interest on the bonds and notes issued by the company. So this is mainly due to the quality and diversification of the group's portfolio. With respect to refurbishment project Lassallestrasse 1, EPH made great progress during the last year. The construction is according to the plan and finishing of construction is expected in middle of this year 2022. The leasable area of this property is already fully let. And it is expected that tenant improvements will be done by the end of this year 2022. So the building will have modern workspaces, over 9 floors with a total area of approximately 45,000 square meters. So still, the group is like well managed by Valartis Group. And during year 2021, EPH has built up a powerful team in Germany and Austria with their longstanding teams in Russia. The excellent work of local property and asset managers form a basis for the operational success of the group and its further development. From the financial perspective, I would like to mention that NAV per share almost unchanged, just slightly increased up to $36.77 per share. As of the end of year 2021, EPH had total assets of $1.77 billion including more than $1.5 billion of investment properties. The group reported a net profit for the period of $11.2 million. And the main factors affecting the company's NAV and its financial results remain the same as in the previous years. First of all, net rental income, it has increased from $60.84 million for 2020, up to $67.17 million (sic) [ $66.17 million ] for the year 2021. And properties acquired in 2020 contributed more than $10 million to the net rental income of the group. Also, the group continues to sell apartments and parking lots in Moscow, like residential apartments. And it brought $8.5 million of profit in 2021 as compared to the profit of $0.9 million on the sale of apartments plus $10 million profit on the sale of commercial area in Arbat reported in the year 2020. The group reported gain on the revaluation of investment properties close to $25 million in year 2021. And this gain relates mostly to the market factors. In the last year -- last reporting year 2020, the company reported a gain on the revaluation of investment properties of $27 million. Also, the company in its income statement as usually has reported the impact of exchange rate fluctuations. In the reporting period, it was a negative effect of $37.9 million, which consists of, first of all, net foreign exchange loss reported in the income statement as well as a negative change in the currency translation adjustment reported in the equity section of the company's balance sheet. And this was caused mainly by depreciation of euro towards U.S. dollar by 8% as of the end of 2021 as compared to the year 2020. On the next slide as well as in the front pages of our annual report, you may find key performance indicators of the company, which demonstrates the growth of operating income from $57 million to $66 million as well as growth of the total earnings from operational activity up to $16.5 million. So this is the management presentation of the results as compared to standard IFRS income statement. So as I already mentioned, we have 15 investment properties. So a total value of more than $1.5 billion. 63% of this is located in Europe and remaining 37% is still located in Russia. So you may see also that loan-to-value ratio remains stable, around 60%. And also, we reported stable cash yield, which is calculated as the relation of the company's operating cash to the market capitalization value of the company, which is now at around 20%. If we may analyze the details of the balance sheet and income statement items. First of all, we have slight decrease in the dollar value of our investment properties as compared to the last reporting year. You may also see the breakdown of these values by property, both in the currency of presentation U.S. dollars and also in the currency of valuation of these properties. So for the Russian properties, we have some decrease for Berlin House and Geneva House properties located in Moscow, and this decrease mainly posed by the continuing replacement of -- or renewal of old lease contracts concluded before 2014 based on the like previous exchange rates, and now it is concluded still based on the rental rates dominated in U.S. dollars, but these rates are a bit like lower than it was before. Also, the expiration of old leases led to temporary increased vacancy. And due to pandemic situation and various like geopolitical factors, it takes now a little bit longer to find tenants with suitable profile. For Polar Lights and Hermitage Plaza, 2 office centers in Moscow, we had like a moderate increase of their market values. For the European properties, the fair values are appraised in euros and euro values of all properties increased during the reporting period. However, depreciation of euro against U.S. dollar as of the end of 2021 by 8% resulted in respect of deflation of translated U.S. dollar values of the European properties. For all properties, except for QBC 1, 2, 7 and Lassallestrasse 1, the growth of euro value is caused mainly by a slight positive change in the market assumptions is the reflection of positive market dynamics with COVID-19 implications observed in 2021 as well as by rent deflation. For Lassallestrasse 1 property, it is under construction and it is accounted for at cost of acquisition plus subsequent expenditures. And this will be until the end of the construction or when the fair value of this property can be reasonably measured, whichever is earlier. The increase in value of this property represents additional capital expenditures for the period as well as some part of capitalization of interest on financing attracted to finance this construction. Property QBC 1, 2 and 7. It consists of like respectively of 3 properties, 2 office building 1, 2 and packing garage QBC 7. As of the end of 2020, these properties were accounted at cost of acquisition, which was considered as like the fair value -- because the acquisition was made between the independent parties on the arm's length principle and -- so in our view and supported by the auditors, it represents the fair value of the properties at the time of acquisition. But further a smooth start of the operations higher-than-expected occupancy rates as well as lower yields resulting from elimination of uncertainty factor upon completion of construction and let in the premises. So these factors contributed approximately [ 80%, to 80% ] increase in euro value of these properties. But as I already mentioned, for all European properties, this impact is slightly eliminated by euro depreciation towards U.S. dollar as compared to the year-end 2020. Line inventory represents residential apartments and parking lots for Arbat properties in Moscow. It is carried at cost in rubles and tested against the priced value for impairment at each balance sheet date. If the priced value is higher than cost, then at the reported day, these apartments are rated at cost. And decrease in value during the reporting period, of course, first of all, by the sale of apartments and parking lots during the period as well as the U.S. dollar equivalent slightly, but opposite -- the U.S. dollar equivalent slightly increase due to ruble to what is U.S. dollar appreciation in 2021. So for the line loans and accounts receivable in the noncurrent part of the asset section and accounts receivable in the current part of the asset section of the balance sheet. I would like to note, first of all, that for noncurrent receivables, now we have Eurobonds, which were required by properties STRAL 3, for focus management purposes during the reporting period. And these Eurobonds are accounted for at market price at the year-end and rate of maturity from 2026 to 2028. That's why these are like noncurrent receivables. Some of our current receivables, I would like to mention that as of the end of 2020, we had quite a significant amount of receivables on the sale of residential properties and to the most part of this receivables was collected during the year 2021, and the remaining receivables are due for payment during this year 2022. So we have a slight decrease in cash and cash equivalents during the reporting period, mainly because of construction financing of the property Lassallestrasse 1. For the inflows, mainly we have rental income from our rental properties as well as income and proceeds from the sale of Arbat properties and receivables settled for the sale of Scandinavia land during 2021. Other cash outflows during the reporting period were, first of all, payment of interest on the bonds and notes and loans. Also EUR 7.5 million has been repaid by the group in the course of refinancing of bank close provided to properties QBC 1 and 2. Also, the group paid the most part of the remaining purchase price to the sellers of properties QBC 1, 2 and 7. And I would like to mention that our cash includes some part of the restricted cash, and it represents deposits received from the tenants of the properties QBC 1, 2 and 7, as well as the remaining liabilities towards the sellers, so for the properties acquired by the company in 2020. In the equity section, we have, as you may see, we have a reallocation of value between share capital and share premium. It was caused by the fact that before all of the company's ordinary and preferred shares have been authorized and issued without par value. But in the annual general meeting held in June 2021, it was decided that the company is entitled to amend and restate its share capital by [ change in ] par value of $1 to each ordinary and each preferred share. So accordingly, the share capital of the company is amended to the value or to the par value of this 14.4 million ordinary issued shares. And the remaining part has been reallocated reclassified to the share premium. So noncontrolling interest -- noncontrolling interest in the equity section of the balance sheet represents the minority interest held by third parties in several European properties of the group, and increase in euro value of this noncontrolling interest resulted from the profit received by these subsidiaries during the reported period. Also, as a part of the Eurobond likewise in 2021, there are Gazprom bonds and due to the current geopolitical situation based on the management judgment, it was decided to impair these bonds and create reserve for this impairment entities. This reserve is reported also in the equity section of the balance sheet. The company borrowings, although the total amount remains more or less stable, so there was some like reallocation or changes now the composition of these borrowings. First of all, the construction loan from Raiffeisenbank acquired with the properties QBC 1 and 2. It was presented as current liabilities on the end of year end 2020, and it was refinanced in March of 2021 by 2 new secured loan facilities in the total amount of EUR 100 million from UniCredit Bank Austria with the final repayment on December 2030. And that's why now it is now recognized as a part for noncurrent borrowings. Also some notes and loans with the maturity in December 2022 that have been reclassified from noncurrent to short-term borrowings as of the end -- at the end of 2021. Also some originated liabilities notes payable to the shareholders and loans of European subsidiaries deflated as a result of euro depreciation against U.S. dollar by 8% during the reporting period. So for accounts payable section, just I would like to mention that there is a significant decrease of current liabilities, mainly because of the payment of the most part for the remaining purchase price on the acquisition of properties in 2020. Mainly this relates to property SALZ 4 and QBC 1, 2 and 7. Also payables on construction of properties QBC 1, 2 and 7 that were required together with these properties have been repaid as loans their votes have been accepted. In the income statement, so I've already mentioned that we have an increase of net rental income up to $66.17 million. On the right part of this slide, you may see also the breakdown of this rental income by different properties. So you may see that net rental income of the properties acquired in the year 2020 are the major contributors to the overall increase to the group's rental income. As for the year 2020, the figures or like the rental income of these properties included not the full year, but only -- [ budget ] from the months of the acquisition. So all property demonstrated stable and didn't grow in revenues in the reporting period with the exception of Berlin House and Magistral’naya properties located in Moscow. Decrease in revenue for Berlin House is explained by renewal of expiring leases, which resulted in a temporary increase of vacancy and decrease in U.S. dollar-denominated rental rates. And so far in Magistral’naya, net rental income was also caused by tenants replacement. The average rate ruble towards dollar and euro towards dollar changed significantly during the reporting period in comparison to the last reporting year, and the corresponding effect is reflected also in the values reported in the income statement. Sales of properties. This year, it represents the income gain from the sales of apartments and parking lots of Arbat properties in Moscow. And last year, in 2020, it included also a gain from their sale of the commercial office area in Arbat 24 as well as sale of Scandinavia Land near St Petersburg. So you may see that the finance costs, the overall amount of finance costs increased as compared to year 2020. So first of all, some like additional notes were issued as of the end of March 2020 and June 2020. And this led to the increase of interest in 2021 as well as there were some like a bank loans acquired together with the acquisition of the European properties. In the second half of 2020, this UniCredit loan provided to SALZ 4 property and Raiffeisenbank loan later refinanced by UniCredit loan related to properties QBC 1 and 2. I would like also to mention that some -- so the interest on the notes payable amounted to $11.1 million, but we reported only $7.3 million in the income statement and the rest part of $3.8 million is capitalized in the cost of Lassallestrasse 1 property and the construction. So income tax consists of 2 parts. First of all, current income tax expense, which represent taxes paid by the rental properties in Russia and some minimum taxes paid by Cyprus sub-holding companies of the group. The European properties currently do not pay income taxes because they have tax losses carried forward from their previous periods and use them to offset the current taxable income. Deferred tax benefits or expense is recognized on the change in difference between the fair values and tax values of the properties denominated in the functional currencies of the entities. And last year, in 2020, we reported deferred tax benefit, and it is explained mainly by the calculation of deferred tax liabilities in the German properties [ likewise ] today significantly lower tax rate. So as a conclusion to my presentation, I would like to mention some like subsequent events happened after the closing of the reporting period. First of all, I would like to mention that the group or the holding company of the group EPH PLC relocated to Cyprus in February of this year 2022. And moving to a European country, like I was -- is a natural step in line with the strategy of EPH to further expand its European asset portfolio. And the focus in the first half of 2022 will be the operational and structural setup of the group at Cyprus. And as a first step we have already slightly changed the composition of the management committee to strengthen the operational environment in Cyprus. So some further steps are expected this year for them. Also in March 2022 following the re-domiciliation of the group to Cyprus, a country which uses the euro as its currency, the Board of Directors has decided to initiate the change of the denomination of the company's share capital, which will be further discussed, and it proved hopefully during the company's annual general meeting, which will be held in June this year. And also decided to change the denomination of the company's bonds to euro. And all the -- all bondholders have consented to amend the interest coupons and to change the denomination of the bonds and this took place starting from the 1st of April of this year 2022. Besides COVID-19, which might still affect the world and the business of EPH this year. The military conflict in Ukraine since February of 2022 and resulting sanctions against and by Russia have changed the operational environment in Russia, as well as business between Russia and other countries. As EPH owns subsidiaries and real estate assets in Russia, which is slightly more than 1/3 of the total assets of the group, it is of course affected by the imposed sanctions and ordinances. And we would like to confirm that in any case, all EPH’s assets are self-sustaining and -- but of course, the change in the geopolitical situation has had -- will have some impact on the operational environment of the group. Although as of the reporting period and until the publication for the annual report, there were almost no major financial impact on the EPH Western European portfolio as well as EPH Russian assets also continue to operate independently as they did before the Ukraine conflict started. So nevertheless, the nature and duration of this conflict is like rather uncertain and unpredictable. So the management will continue to monitor the situation and undertake all measures required to sustain and further develop the company's business. In March 2022, the Board of Directors of the group decided to improve the liquidity situation at the holding company and obtained additional liquidity in Western Europe by taking up EUR 103 million in form of subordinated loan notes with a maturity of 3 years with an interest of 3.5%. And these facts together with renegotiation of the terms of the company's issued bonds roll like first measures to improve the liquidity situation of the company and to give additional comfort to all stakeholders of EPH Group. So anyway, we hope that despite the difficult current situation mainly because of the Ukraine conflict and the ongoing corona pandemic, so maybe hope that the company will continue its further development. And the main strategic focus of EPH for potential additional acquisitions continues to be the office asset class as well as the assets in the hospitality sectors and high-quality properties in the premium locations. So this is mainly [indiscernible] with respect to the presentation of the financial results of EPH European Property Holdings for the year 2021. And if you have any questions or comments, you are very much welcome to ask. So if there are no questions so far, I would like to thank you for participation in this conference call, and I would like to mention that you're still welcome to send comments or questions to the general email address of the company published on its website, and I wish you a good day. Thank you and goodbye.