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

Good afternoon, ladies and gentlemen, or good morning depending on the time you have in your calendar. Welcome to the regular presentation held by EPH European Property Holdings, now to discuss the 6 months -- the results for 6 months of 2023. Please note that this call is being recorded. So first of all, I will -- I describe the main factors reflected in our half year financials as well as the business highlights for the half year and the subsequent event happened. And then if you have any questions, then you will be welcome to ask them after the end of my presentation. So the most meaningful event for the first half of 2023 is the fact that the group completed the sale of its Russian portfolio. So the decision was taken already in November 2022 when -- in the Extraordinary General Meeting, the shareholders authorized the Board of Directors to sell the entire group's Russian portfolio by way of management buyout. And the first steps in this direction were done already in the end of -- at the end of 2022. And in April of this year, the deal was finalized. So after the sale, the group's real estate portfolio now consists of 9 core assets with the total appraised value of approximately EUR 852 million. So they are situated in the prime locations in Austria in Vienna and in 4 major markets in Germany, Berlin, Hamburg, Stuttgart and Dresden. So when the portfolio consists of 2 hotels and the remaining buildings are office like mixed [indiscernible] properties and [ parking ]. So all properties now let on long-term leases to the tenants with strong credit ratings. Due to quality -- high quality for our portfolio and the effective professional asset management, the group's portfolio performed above expectations during the reporting period despite the ongoing market environment changes, as you know. First of all, I would like to mention from the business perspective that from the asset management perspective, that the group was able to quickly re-let its -- in its majority space that had become vacant in our office property Work Life Center in Hamburg. And so still, there is some vacancy in this building, but we are convinced that also the remaining vacant space can be let at suitable terms in the near future and full occupancy of this building of more than 12,000 square meters will be achieved again. So another milestone in the operation business in the reporting period was full completion of LASS 1 refurbishment project in Vienna. And this property already started to generate rental income. So the main construction was finished as -- at the end of 2022 and the outdoor facilities were also completed in the first half of 2023. So this is the property located in the -- near the city center for Vienna in the promising district and has a total area of almost 45,000 square meters. Also, I would like to mention that -- so the company published its first sustainability report last year even ahead of -- for the official legal requirements and some factors that our high-quality properties satisfy high standards in terms of sustainability. And this is confirmed by the numerous Green Building Certifications and low-carbon footprints. And we are convinced that demand for modern and sustainable space will continue to increase in the future and sustainability will continue to play an important role in value preservation for our portfolio. Also, I would like to mention that following the end of the reporting period, another significant step of the group was restructuring of its debt financing in September of this year. On one hand, we have agreed with the bondholders holding approximately of EUR 250 million of the company's debt to extend the terms of these bonds by another 5 years until September 2028 at the interest rate of 4.5% per annum. And on the other hand, we have taken the decision to repay bank financing in the total amount of approximately EUR 150 million at the level of subsidiaries in Austria. And simultaneously, we -- the group realized positive swap values of approximately EUR 18.2 million. So we believe that this step will improve the -- also sustainability of the Group's portfolio and so will have positive impact for future development of the group. So from the financial side, the NAV of the group slightly increased for -- as of the 30th of June of this year. So now the NAV per share is EUR 36.49 per share as compared to EUR 36.08 as of the end of 2022. So the total assets of the group amounted now EUR 1.162 billion as compared to EUR 1.7 billion as of the end of the previous year. However, I need to mention that as of the end of the previous year, so the total assets of the group still included the Russian portfolio with the value of approximately EUR 550 million. So the company reported a net loss for the period and the amount of EUR 132 million versus a net loss of EUR 37 million reported for half year 2022. And this improves EUR 35 million of loss related to continuing operations of the group. So the total loss incurred is mainly attributable to reclassification of the Currency Translation Adjustment reserve related to the Russian segment. And this reclassification amounts to almost EUR 163 million. So it was reclassified from the currency translation reserve line of the equity to the Profit or Loss statement and the reclassification was made on the sale of the Russian segment in April 2023. The gain on the sale before such reclassification amounted to more than EUR 67 million, and this gain is mainly caused by the fact that the price was already in November of last year, while the value of the portfolio sold was decreased because devaluation of the Russian properties were mainly done in rubles and due to the ruble depreciation, the currency value decreased, and this result at the beginning realized by EPH Group. So after the sale, the group recognizes remaining 10-year loans and receivables from the former subsidiaries for approximately EUR 90 million and this amount is already net of impairment allowance reflected also in the accounts, and I will give you the details in further slides. In the reporting period, the group also recognized a loss on revaluation of investment properties in Europe in the amount of almost EUR 46 million and decrease in values was expected and is caused mainly by a negative change in the market assumptions reflecting the current macroeconomic situation in Europe. But despite the decrease in values, once again, I would like to mention that the operating performance of the continuing operations is encouraging and the properties that started operations in 2021, 2022 after construction works, I mean in the properties, QBC 1, 2 and 7 and property LASS 1 expectedly increase their income, and they are main contributors to the growth of the net rental of the group. But other properties also demonstrate stable rent flows and also growing for most of their properties due to the high inflation rates, which led to sustain -- substantial rent indexation of the rental income. So in the next slide, we see the key performance indicators, and this table is also a part of the semiannual report, so this is actually the management presentation of the company's performance. So first of all, here, there is a division between the -- like operational activity and some like nonoperational noncash generating items. And also, there is a division between continuing operations and discontinued operations. So from the continuing operations side, you may see that the net rental income increased rather significantly as well as the total earnings from operational activity increased up to almost EUR 8 million is compared to a slight net income for the comparative period of the last year. So as for noncash generating items, you may see the profits and losses from revaluation of investment properties, current exchange losses and so on. But nevertheless, the total result for the half of 2023 is a negative amounted to EUR 33.5 million. So for the discontinued operations, you may also see the result, which includes the result of the Russian portfolio until the date of the sale as well as of the result of the sale itself. And also, as I already mentioned, the result of the -- reclassification from Currency Translation Reserve from the separate line in the equity section to [indiscernible] statement. So you may see that there is like a slight -- maybe inconsistency between the presentation of these results in this table and in the financial statement because, as I mentioned, this is the management presentation and the form which reflects the results from the management perspective, while, for example, for the -- like official income statement, we have to follow the requirements of international financial reporting standards, so that's why. But nevertheless, the total result is the same, of course, yes. So also, you may see that, as I already mentioned, the number of investment properties in Europe remaining in the group's portfolio is 9 with the total value of EUR 852 million. And also, we see the loan-to-value ratio, which is based on the asset -- value of the assets and borrowings of the group. And we see that after the sale of the Russian portfolio or the loan-to-value ratio improved from 60% to 51%. So then we can discuss the particular lines of the balance sheet and income statement of the company. First of all, investment properties. Now it includes only the European portfolio. And as I mentioned, the value of the -- fair value of the investment properties decreased as compared to the end of 2022. So the decrease is from 5% to 7% for German properties and by 3% to 4% for Austrian properties. In the right table, you may see the exact breakdown by properties. So from one hand, we have the positive impact of indexation of actual rental rates, but this positive impact was overlapped by increasing capitalization and discount rates made to reflect the changes in the market environment. And such change in the rates is slightly different for German properties and for Austrian properties. But the estimate rental values, which means there are like market rental rates, basically remained on the same level as compared to the year-end because the indexation is -- rent indexation is done once a year. And the recent rent indexation was already included into the valuation of the properties as of the end of 2022. So also, I would like to mention that in the reporting period, the additions in LASS 1 final works, our refurbishment amounted to EUR 2.3 million also included into the value of this property. Accounts receivable. So the accounts receivable and loans receivable are included in both in noncurrent asset section and current assets section of the balance sheet and the -- of the total value of EUR 97 million. So you may see that the biggest part relates to loans given to and receivables from the former Russian segment. So these are loans given and receivables from the subsidiaries sold in December of the last year and April for this year. And these loans and receivables were recognized as third-party loans and receivables in consolidated accounts upon disposal of the subsidiaries because previously they were eliminated during consolidation. At recognition, the value of interest-free receivables because some of the receivables are interest-free, and the value was discounted at market rate on similar instruments. And the assets are subsequently accounted for at amortized cost less impairment allowance. So the group assesses the expected credit loss on these loans and receivables for the total amount of approximately EUR 18 million. So the current value of -- the reflected value of EUR 90 million is already net of this expected credit loss allowance. And the nominal amount of the loans and receivables from the Russian segment is slightly more than EUR 114 million. This value was as of 30th of June, but -- of which EUR 15 million has been already repaid subsequently. On cash and cash equivalents, you may see that the total amount remains almost at the same level as it was at the end of 2022. And the main inflows include, first of all, is always net rental income from rental properties, but also the repayment of loans -- provided to the former Russian subsidiary Redhill. And the main outflows are repayment of notes payable. Some notes were repaid in the beginning of the year before the sale of the Russian portfolio, and also for the construction expenses related to finalization of LASS 1 refurbishment as well as the interest payments on bonds and notes on a quarterly basis. So in the equity section, so the main event -- fact is that, as I mentioned, the significant amount of translation reserves of EUR 163 million was reclassified from this line like a Cumulative Translation Adjustment to the line accumulated deficit, and it was included into the loss of the current period. And this amount relates to the Russian portfolio and before the reclassification was made upon the sale. So the remaining amount, like a minor amount of [ EUR 650,000 ] related to the European operations of the group and also to EPH itself before it changed its functional currency from those [ into ] euros. And also some other resources reflect the fair value in the payment adjustment for the Eurobonds that we acquired by one of the group's subsidiary in 2021. In the income statement, as I already mentioned, we have increase -- substantial increase in the net rental income. And you may see also the breakdown by properties on the right side of the slide. So the major increase relates to properties, QBC 1 and 2. So in total, the increase in net rental income of this properties amounts to almost EUR 2 million. And this caused by the fact that these properties started operating at their full capacity only in the second half of 2022 when rent-free period for the tenants expired. And also, LASS 1 started operations in the fourth quarter of 2022. And in the first half of this year, this property already generated income of EUR 1.7 million. So the increase in rental income of other properties are explained by indexation of rental rates due to the inflation in Europe. And slight shortfall in revenue for Work Life Center property relates to the remaining unlet areas after termination of some leases at the end of 2022. The vacancy rate as of the end of June for this property was close to 14%. But as I mentioned, we hope that it will be -- so the new tenants will be found soon. So as a separate line, we have -- in relation to continuous operations in our income statement. We have the line called release of impairment allowance for loan and receivables. So at the beginning of 2022, the group recognized this impairment allowance with respect to the loan receivables from the former subsidiary, Redhill. So the receivables were recognized upon the sale of this subsidiary at the end of 2022. But now the group released the part of such impairment allowance in the amount of EUR 7.8 million. And the release is mainly caused by reconsideration of the impairment approach and also taking into account the current progress with the repayment of this loan because -- so out of EUR 62 million recognized as of the end of 2022, more than EUR 20 million have been already repaid by the end of June of 2023. But simultaneously -- sorry -- but simultaneously, the group recognized impairment allowance on the loan and receivables from the former Russian segment sold in April of this year in the amount of EUR 3.18 million. So the total release of -- net release of impairment reflected in the income statement is EUR 4.6 million. So -- and the impairment allowance was recognized for the amount of expected credit losses determined in accordance with IFRS 9. So we created some specific model to calculate this expected credit losses based on the probability of various potential scenarios, this repayment. So yes, as I already mentioned, we have a decrease and the [indiscernible] values of the European rental properties. And so the loss from this revaluation of almost EUR 46 million is reflected in the income statement, and this is the main reason for the total loss from the continuing operations. As we have also reflected fair value adjustments on financial instruments in the amount of EUR 6.3 million. And this amount represents the effect of time value of money for the interest-free receivable recognized on disposal of the Russian segment. So this is the deferred consideration which is payable within 10 years without particular schedule, and this is the interest-free part of the total amount of receivables. So the receivable is initially recognized at present value using market interest rate for similar instruments. And as I already mentioned, it will be subsequently amortized over the term of this repayment with the interest income to be recognized using effective interest method. So all in all, during the life of this receivable, the total effect will be 0, yes. Finance was -- so we have a decrease in finance cost as compared to the 6 months of the last year from EUR 9.4 million to EUR 6 million. And the main reason is that the interest on bonds decreased as a result of a decrease in the interest rates starting from the 1st April for 2022. And also these finance costs include interest on notes payable which is incurred by the disposal group on the notes issued to EPH shareholders and refinanced by the third parties just before the sale of the Russian portfolio. And also, interest on loans payable in the reporting period includes interest on loans of the disposal group of approximately EUR 1.8 million incurred until the date of disposal of the segment. Income tax, as always, include 2 elements: first of all, current income tax expense, which now includes some like [indiscernible] income taxes paid now not only by group Cyprus sub-holding companies, but now also EPH, following the relocation from [indiscernible] Cyprus, but also based some income tax in Cyprus. And deferred tax income tax benefit or expense. So in this period, we have income tax benefit, and this is a result from the negative property revaluation adjustment because the tax is calculated on the difference between the fair values and tax values of the properties. And as the fair values decrease, the difference also decreased. So you may find also some information about the disposal group. So as I mentioned, the Russian segment was sold on the 19th of April 2023, except for Redhill subsidiary that was sold in December of the last year. And as a part of consideration, so the company of Russian portfolio replaced EPH plc as a borrower in the notes issued to the shareholders and the amount of EUR 426 million. And the remaining consideration amounts to $46.5 million payable over 10 years. So -- and the remaining balances with the former subsidiaries, loans, receivables and also some like liabilities were recognized as externally in the consolidated balance sheet of the group upon disposal of the Russian portfolio. And in the reporting period, the operations of the disposal group were consolidated for the period until the sale, but nevertheless, it is reflected in the income statement in 1 line, which is called like net loss profit after income tax of discontinued operations resulting in breakdown. So -- and as I mentioned, the gain on the sale of the disposal group represents a gain on disposal of net liabilities of their subsidiaries in the amount of the total gain on the sale is -- amounts to approximately EUR 68 million. But this result decreased by the negative translation difference reclassified from Currency Translation Adjustment in the amount of EUR 163 million. So the total result from discontinued operations is a loss of almost EUR 97 million. So also as a subsequent event, we included in the -- in our semiannual report. First of all, the extension of their bonds, which in accordance with the previous terms expired in September 2023 with the nominal value of than EUR 240 million, and so it was agreed now with the bondholders to amend -- to extend the term of these bonds until September 2028 and also to increase the interest rate from 2.2% to 4.5% to reflect the current market conditions. And the amendments not real, but also became effective -- already became effective on the 1st of October of this year. So -- and also subsequently to the period end, the group received EUR 15 million as a partial repayment of loan granted to the former subsidiary Lenbury and this decreased the overall receivables from the former Russian portfolio -- yes, from the Russian portfolio of the group, yes. And also, I already mentioned that on the 21st of December of this year, the group repaid the loans provided UniCredit Bank to the Austrian subsidiaries of the group holding properties QBC 1, 2 and 4. And on the repayment of the group paid business distance fee for EUR 0.81 million and also received compensation for the termination of interest SWAP attached to these loans at the fair value of the SWAP for the amount of approximately EUR 18 million. So this is mainly about the results of the group for the first half of the year and for subsequent period. And if you have any questions or comments, you're welcome to ask. I see that there are no questions for the time being. But if you have any further questions, you're always welcome to send them through to the official email address of EPH published on our website and also [indiscernible], which we regularly publish on our website. And then I would like to thank you for the attendance to this conference call and wish you a nice day. Bye-bye.