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

Good morning, everyone. I hope you can hear me. We would like to welcome you to the EPH European Property Holdings presentation on the half year results 2022. Yulia will present to you the results of the first half year 2022. And if you would like, you can find the presentation we are holding also on our home page. She will present. And after that, we will have a Q&A session. [Operator Instructions] Please note that the call will also be recorded. And now I would like to hand over to Yulia to start the presentation of the results.

Thank you, Anna, and good afternoon, everybody. My name is Yulia Makhinova. And as Anna mentioned, I will present the results of the company for the first half of year 2022. So currently, like we are living in very like a challenging environment, and now this started 3 years ago with the coronavirus pandemic, and now we are facing the implications from ongoing conflict in the Ukraine. And of course -- so which has an impact on like almost all the world and on EPH itself because EPH started its business from Russia and even currently, after shifting the investment focus into Western Europe, still significant part of the group's assets. And the group's properties is located in Russia, in Moscow, in particular. Saying that, I would like to emphasize that until now, the business of EPH is only affected to a limited extent, first of all, due to the strong portfolio in Western Europe and also due to the fact that all properties of the group are operating independently from each other and also due to several proactive measures undertaken by EPH management in the beginning of this year. I will mention now this in details further. As of today, EPH has a portfolio of 15 core assets with the value of EUR 1.47 billion, with a total lettable area of approximately 250,000 square meters. So these include properties in 4 locations in Germany as well as properties in Vienna and in Moscow. And these properties represent office, multifunctional buildings as well as hotel properties. The properties in Western Europe represent value approximately 60% of the total property values of the group. And they continue performing very positively in the reporting period. Currently, all European assets are fully let, and net rental income and market value of the European properties were increased primarily due to the end of rent-free periods and the newly acquired properties in Vienna, QBC 1, 2 and 7, and also due to the strong tenants, long-term leases concluded with respect to these properties and very good locations. Also you know that we have refurbishment projects in Vienna, LASS 1. And despite the difficult market situation, this property added -- like a delivery of this property has only been slightly delayed and currently is very close to its completion. So this building offers its tenants modern workplaces on 9 floors, with a total area of almost 45,000 square meters. On the 1st of July of this year, the first tenant has already moved into the building, which is Vienna Healthcare Group. And we expect that 2 more like a large tenant will move to the property in October and December of this year already. Following the fact that most of the group sales are now in Western Europe and also to underline the current group strategic focus, in February of this year, the company was domiciled to Cyprus. So there were some like changes with respect to the different currency effects relating to the group. And first of all, the functional currency of the company itself and the presentation of currency of the group's financial statements have been changed from dollars into euro effective 1st of January of this year. In addition, the currency for EPH share capital has been also changed based on the decision taken in the Annual General Meeting of the shareholders. And now the company's shares are listed on the Swiss Stock Exchange in euros starting from the 10th of June of 2022. Also, the currency of the company's bonds has been changed from dollars to euros. And all bondholders agreed to this change as well as they agreed to the subsequent decrease of the interest rates on this bond. So all these amendments to the bond prospectus became effective from the 1st of April 2022. And the first trading day of the adjusted bonds was the 4th of April of this year. In addition, to improve liquidity, a total of EUR 103 million was raised by the company from 2 -- its shareholders in March and April of this year. It was done in the form of subordinated notes with a term of 3 years and an interest rate of 3.5%. And like these 2 measures, I mean, raising of this additional funds of more than EUR 100 million as well as like a decrease of the interest coupon under the bonds issued by the company, these 2 measures have improved the liquidity situation of the company and like give additional comfort to all our shareholders to EPH group. So all in all, despite the challenges -- challenging overall market situation, EPH is optimistic about its future development and continues to see good potential in the target markets, in particular in Germany and Austria. And the main strategic focus of EPH for potential additional acquisitions continues to be core European properties in the premium locations and especially in the office asset class as well as in the hospitality sector because these 2 sectors already proved their stability even during such a different -- difficult challenging circumstances in the market. From the financial side. So once again, I would like to say that currently, the group is presenting its results in euro. And accordingly, the comparative numbers also currently are being presented in euros. As of the end of the reported period as of 30th of June 2022, EPH reported total assets of EUR 1.83 billion, net assets calculated as total equity of EUR 598 million and net asset value per share of EUR 41.07 per share. So this represents a significant increase as compared to the numbers as of the end of 2021. And this increase, mainly caused by rubles strengthening against the euro as of the end of reported period. And that affected the euro equivalent of ruble-based assets. At the same time, the group reported net loss for the period of slightly more than EUR 37 million as compared to the profit of almost EUR 9 million reported for the same period of the last year. And the loss is mainly attributable to substantial decrease of fair values of properties in Russia and their functional currency in rubles. And this is caused mainly by ruble strengthening against U.S. dollar during the period because the values of like 2 significant properties in Russia, which are Berlin House and Geneva House are still determined in U.S. dollars. But also, this decrease in fair values is caused by a more conservative valuation assumptions, which is like understandable in the current situation used by the valuer to reflect the changes and uncertainty in the current market. So although these like 2 facts reported in different directions -- I mean, the increase in asset value and net asset value but simultaneously reporting the loss, I think that it will be like a more visible and representative for when we come to the investment property slide. And it will be more visible how these results have been received. Nevertheless, from operational perspective, the group demonstrates stable growth, and the property continued generating sufficient cash to cover its operating costs, including interest payments on bonds and notes issued by EPH. And the overall net rental income of EPH Group has increased from EUR 26.61 million to more than EUR 33 million for the first 6 months of this year compared to the same period of the last year. Exchange rate fluctuations as usually -- and in the reporting period especially has significantly affected the company's results. During the first half of the year -- although during the period, there were significant fluctuations of like between rubles and euro in both directions, but as of the end of the period, ruble gained approximately 34% against euro. And as a result, the overall positive effect is EUR 113 million. And this is -- this consists of, first of all, net foreign exchange loss reported in the income statement of EUR 48 million. And also, the positive change in the currency translation adjustment reported directly in the equity section of the balance sheet in the amount of EUR 161 million. If you have presentation in front of you, you may see this slide, and also, you may see this in the beginning of the financial report or half year report itself. You may see the table, these key performance indicators. And this exactly demonstrates the fact that, from the operational standpoint, the company, the group operates very well. You may see that like there are sufficient earnings from the operational activity of the group, and the loss is caused by like a nonoperating, nonincome generating factors such as revaluation of investment properties and net foreign exchange movements. So you may also -- okay, just a couple of words. I'm sorry. So you may see also the breakdown of investment properties. Now so 60% of investment properties by value is located in Europe and 40% in Russia. And you may also see that, so far, the loan-to-value ratio of the company is rather stable and even slightly decreased as of the end of reported period and is now 57%. So now we can discuss in a little bit more details some important items of the company's financials and, first of all, of course, the investment properties. The overall increase of investment property line is in the amount of approximately EUR 136 million, which is like a 10% to the value reported as of the end of 2021. The European part increased by 4%, and the Russian part increased by 21%. So -- and in the right side of this slide, you may see the breakdown of the valuations in the currency of valuation of these properties as well as in euros in the presentation currency. And you may see for the Russian part that in the currency of valuation, the values of the properties decreased mainly due to more conservative market assumptions used to reflect changes and uncertainty in the market. So the discount rate in the valuations of investment properties in Russia will increase by 1%, and utilization rates will increase by -- from 0.25% to 0.5% to reflect the current market. So this loss actually is the reason for the like valuation loss reflected in the income statement of the company. However, due to the ruble strengthening, the values of these properties in euro equivalent substantially increased. And that's why actually the total asset -- net asset value of the group increased value. For European -- for the European part of the group's portfolio, we have like a moderate increase, mainly due to increase of rental stream in these properties, as I mentioned, for QBC 1, 2 and 7. This is a result -- this reflects the fact that currently, these properties received full rent after expiration of rent-free periods. And for other properties, so this is mainly due to the rent indexation. LASS 1 property in our balance sheet, it's still accounted for at cost, and this is still construction in progress since its acquisition in 2020. So it is accounted at cost and is increasing for substantial capital expenditures, and this will be the case until the end of construction or when its fair value can be reliably measured, whichever is earlier, and we expect that construction will be finished by the end of this year. So it is expected that it will be valued at the fair value as of the end of 2022. So increase in value during the reporting period half year this year represents additional capital expenditures for the period. Inventory represents apartments in Arbat projects in Moscow. This property is carried at cost and tested against appraised value for the impairment at each balance sheet date. And as appraised value is higher than cost, apartments are currently treated at cost. And the change in value during the reported period is caused by the following. First of all, there was slight decrease in value due to the sale of several apartments. But simultaneously, the euro equivalent increased rather significantly due to ruble appreciation towards euro during the first half of this year. So you see there a substantial increase in the company's and the group's cash position. Mainly, this happened due to the proceeds received from issuing of the subordinated notes to the company's shareholders in March-April 2022, as I already mentioned. And otherwise, the group has like a stable and normal for our business inflows and outflows. Inflows include the net rental income from the group's rental properties as well as proceeds from the sale of Arbat properties. And the main outflows are further construction financing of our LASS 1 property as well as interest payments on the bonds, notes and loans of the group. On the liability side, there were some changes in the borrowings, both in the noncurrent liabilities section and in the current liabilities section. So first of all, as I already mentioned, based on the consent of the bondholders on the 1st of April of this year, the currency of the bonds was changed from dollars to euros and fixed in euros, as of the agreed exchange -- at the agreed exchange rate. So also, as I mentioned, in March and April of this year, the company issued registered subordinated euro-denominated notes to 2 of its shareholders in the total amount of EUR 103 million, which actually accordingly increased the total value of the borrowings. You may also see that there were some reallocation from the noncurrent liabilities to the current liabilities mainly due to the fact that subordinated notes for the total amount of EUR 285 million have a maturity of the end of this year and first half of the next year, so they are now classified as short-term borrowings. Saying that, I would like to say that also that the company received consent from the noteholders of this notes with short maturity where they confirmed that they are ready to extend the maturity of these notes, and the particular terms of this extension are now being negotiated between the company and the shareholders, the quotas of the notes. [Foreign Language] Thank you. For net rental income, so the company reported a rather substantial increase for like both segments for European properties as well for Russian properties. So net rental incomes of the European properties have been increased from EUR 8.5 million in the first half of year 2021 to EUR 11.5 million in the half year of 2022. And as I mentioned, the main contributors are QBC 1, 2 and 7 properties because they started to receive full income after the expiration of rent-free periods in their leases. So the Russian properties also demonstrated stable results, not only in euros but also in rubles. The income increased for the most of the properties, except for Berlin House. In Berlin House, there is slight a decrease in the ruble-denominated income due to the tenants' rotation. And income in euro for the Russian part of the portfolio increased significantly due to the ruble appreciation and because the average rate of ruble towards euro decreased by 13% in the reporting period as compared to the same period of the last year. So for Arbat apartments during the first half of this year, 3 additional apartments have been sold, but this happened till March of this year. And after that, and currently, the sales have been suspended because actually -- so negotiations are ongoing with the potential buyers, and even several deals have been agreed. But currently, due to like a reaction to the sanctions imposed against Russia, special permissions are required to sell these apartments because apartments are currently owned by Redhill, which is like a Cyprus legal entity, acting in Russia through its branch, and therefore, like as I said, in order to sell and in order to register that like a transfer of title and the sale of apartments, Redhill has to receive a special permission of their governmental commission. And management filed the respective request for obtaining such a permit. But so far, the approval has not been granted. Yes. So as mentioned, there are like a main factor resulting in the total loss reported by the group is like a loss from revaluation of investment properties. In total, this loss amounts to EUR 90 million. And this amount consists of 2 elements. First of all, a fair value -- loss from fair value adjustment of the values, which is a net result of EUR 7 million (sic) [ EUR 17.08 million ] gain in the appraised values of European properties but simultaneously more than EUR 37 million loss in the appraised values of Russian properties. But also, there is a currency translation effect that resulted from the translation of U.S. dollar values per appraisal reports of Berlin House [indiscernible] of the Russian entities like holding these assets. So you may see the extended breakdown in the right section -- right table in this slide if you have the -- if you see the presentation now. So you may see that finance costs of the group were a little bit decreased as compared to the comparative period of the last year. The overall decrease of finance costs is caused mainly by a decrease of interest rates on the bonds from the 1st of April 2022. This interest decreased from like 5.5% to 7.25%, down to 2% to 2.25%, which we have now starting from the 1st of April. And also, we have a slight increase of interest on the subordinated notes, which is caused by issuance of additional notes for EUR 103 million in March-April of this year. And also, I would like to mention that part of the interest expense on the notes in the amount of EUR 1.6 million was capitalized during this period in the value of investment property under construction, LASS 1, so it is not presented in the income statement, yes, during this period. Also, you may see that the overall result of the company is affected by income tax line, and this line consists of also 2 elements. First of all, current income tax expense, which includes income taxes paid by rental properties currently in Russia because European properties have losses carried forward and used to eliminate the current tax base and also some minimum taxes paid by Cyprus subholding companies of the group. And this part of the income tax line remains more or less stable as compared to the last -- the same period of the last -- of the previous year. But also, the second element of this line is deferred tax, and this deferred tax is recognized on the change in the difference between fair values of the properties and their tax values. And this value is like -- this difference dominated in the functional currency of the entities, meaning in rubles and in euro. And since in the first half of this year, fair values of the Russian properties and rubles substantially decreased. As a result, the group recognized deferred tax benefit as compared to deferred tax expense recognized in the same period of the last year. So these are the main items reported in the company's financials for the first half of this year. And as Anna informed, if you have any questions, you may ask them now, either directly or through the chat, or you may write to the official company's website like if you have these questions later.

There are no questions.

So if there are no questions for the time being, then I would like to thank you for the participation in this call, and so have a nice day. Yes.

Thank you, everyone.