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

Good afternoon, ladies and gentlemen. And my name is Yulia Makhinova, and I'm glad to welcome you to our regular call this time to discuss the annual operational and financial results of EPH European Property Holdings for the year 2023. And I'm supported in this call by Michalis, who is tapped in case of detailed questions, so if otherwise needed. And please note that our call is being recorded. So from the business perspective, you well know that year 2023 continued to be a challenging year for the whole world and, in particular, for the real estate industry in Europe. Saying this, first of all, I would like to note that, of course, being influenced by various negative factors. Our company and its real estate portfolio remained quite stable and achieved further operational progress in 2023, primarily due to such factors as the high-quality class of our properties located in the prime locations in Europe as well as due to our professional asset management. And as a result, EPH once again achieved almost full occupancy through its European portfolio and increased its net rental income by approximately 26% as compared to the previous year. So as of the end of year 2023, the real estate portfolio consisted of each core assets and 1 parking garage with the total appraised value of close to EUR 800 million. And all of these properties are situated in outstanding locations in Germany and Vienna, all of which meet high sustainability standards. 7 out of 8 office and hotel buildings have already been awarded certificates in DGNB Platin, DGNB Gold and LEED Gold. One of the main milestones in the operating business in year 2023 was the completion of our Lassalle 1 refurbishment project in Vienna and start of generating income out of this property. So the property is located near the City Center of Vienna, in the up-and-coming Second District, and has a total area of almost 45,000 square meters. And as of now and as of the end of 2023, the property is almost 100% leased out. And in 2023, it generated the net rental income of approximately EUR 4 million and EUR 9 million, making significant input to the total company's result of the last year. So while the primarily investment focus of the group remains on prestigious office properties in grand locations in major European cities, the company also sees a directive for the potential in the hotel sector. And as you know, EPH already owns 2 hotels in Germany, in Dresden and Berlin, and also recently expanded its property portfolio with the acquisition of a 5-star luxury hotel in Vevey in the Lake Geneva in Switzerland. So with this acquisition, the agreement itself was signed in December 2023, but the deal was closed in January 2024. So this is a historic hotel which has approximately 16,000 square meters of space, 71 luxurious rooms, 2 restaurants and a spa facility. So EPH intends to redevelop the historic hotel, which was originally constructed in 1842, over the next few years. So by this acquisition, EPH acquired the full-scope hotel operations with 70 full-time employees, which is, like, quite new for the group itself. So another important step in ensuring the stability of our business was the successful restructuring of the company's debt in September 2023. So first, EPH secured an agreement with the bondholders holding approximately EUR 250 million for the company's debt to extend the maturity by another 5 years, until September 2028, with the interest rate of 4.5% per annum, which was, at that time, at the market level. And the second step in this area, the group earlier reported the loans provided by UniCredit Bank to the Austrian subsidiaries of the group in the total amount of approximately EUR 150 million. And simultaneously, the group realized positive interest rate swap values of approximately EUR 18 million. So turning to the financial results, so I would like to -- now to note the following main points. On one hand, the company reported to have a significant loss in its profit and loss statement of more than EUR 160 million. But on the other hand, the company's net assets decreased insignificantly because most of this loss is simply a reclassification within the equity section and relates to the disposal of the Russian segment of the business, the group's business. So all in all, the NAV per share as of the end of 2023 is EUR 34.44, decreased as compared to 2022. The net assets calculated as total equity amounted to EUR 2.5 billion as compared to EUR 527 million as of the end of 2022. And so as I already mentioned, despite a significant loss reported by the company, the decrease in net assets is only slightly more than EUR 25 million. So the total assets of the company as of the 31st of December of 2023 amounted to EUR 973 million as compared to the amount close to EUR 1.2 million as of the end of the previous year, excluding the assets held for sale, which was a part of our balance sheet as of the end of 2022. So the company reported net loss for the period in the amount of EUR 162 million. It also saw net profit of EUR 7 million reported for 2022. And this net loss includes EUR 59 million from continuing operations. And therefore, the previous year, the company reported profit of its operation of EUR 4 million. But once again, it's important to note that a significant portion of this loss is attributed to noncash accounting adjustments. So the main factors influencing the financial result from continuing operations in 2023 were, first of all, the net rental income, which increased from EUR 26 million in year 2022 to more than EUR 32 million in the year 2023. And this increase is mainly due to the fact that the properties that started operations in years 2021, 2022, after completion of construction works, I mean, properties QBC1, 2 and 7 and Lassallestrasse 1, expectedly increased their income, and they are main contributors of the growth of net rental income. And other properties also demonstrate stable rental streams and also growing, mainly due to the high inflation rates, which led to substantial rent indexation. At the same time, being influenced by the negative market factors, the company recognized a loss from negative adjustment of values of investment properties in Europe in the total amount of close to EUR 116 million. So as I said, this decrease in value is caused by the adverse change in the market assumptions, reflecting the current macroeconomic situation in Europe. Also, as a significant one-off gain, the company recognized a gain of EUR 18 million on the realization of the swap interest derivative embedded in loans from UniCredit Bank Austria that were [ paid ] in September of year 2023. And yes, okay, thanks. Also, part of the loss relates to discontinued operations. And the loss in the amount of EUR 103 million is caused mainly by reclassification from equity statement to profit and loss statement of the negative balance of the currency translation adjustment reserve in the amount of EUR 163 million. So this declassification resulted in a corresponding positive change in the [ CTA reserve ] balance. And so we have a 0 effect on the equity of the group. So also important to mention that, after the sale, the group recognized some loans and receivables from its former subsidiaries for the total amount of -- a total amount of EUR 75 million recognized in 2023. And this is in addition to the loans recognized in 2022 upon disposal of key subsidiaries. And in 2022, EUR 61 million of receivables was recognized. So the company is testing these receivables for impairment and, actually, so the impairment of -- like, an impairment reserve of EUR 23 million was recognized in 2022. And after the revision of this reserve and after amortization of interest-free receivables this year, the company recognized an income of slightly more than EUR 11 million. So just to mention that these adjustments are in relation to receivables from the former Russian segment, are reflected as a part of continuing operations in the profit or loss statement. But in the management presentation in the KPI table published as a part of our annual report, these adjustments presented together with discontinued operations because, in our management analysis, they are closely related to the disposed to discontinued operations. So on the next slide, you may see this, a key performance indicators table, which illustrates the main developments and main financial results which I just outlined. First of all, you may see the significant increase in operating income and earnings from operational activity increased almost twice as compared to 2022. So you will see that the main contributors to the loss, even from continuing operations, are noncash-generating items such as mainly a revaluation of investment properties for EUR 116 million as compared to the gain recognized in the year 2022. So also in the bottom of this table, we see the current loan-to-value ratio of the company, which improved, first of all, after the sale of -- disposal of the Russia-related segment of the business, together with some part of the company's debt, and further in 2023, due to the repayment of UniCredit Bank loans were provided to the Austrian subsidiaries of the group. So now I will describe in more details some items of the balance sheet and for the income statement of the company. So the most significant item, as always, is the value of investment properties. As already mentioned and as you see, so the value decreased approximately by -- from 10% to 11% for German properties and by 12% to 15% for Austrian properties. And you may see the detailed breakdown in the right side of this slide and also the changes in discount rates and capitalization rates as compared to the last year valuations. And actually, these changes in the discount and capitalization rates are the main reasons for the negative change in fair valuations of the company's portfolio. And you may see that these discount and capitalization rates were increased by more than 0.5% for German properties and even close to 1% for Austrian properties. A negative impact of increase of such [ adverse ] changes in such market factors was partially compensated by indexation of the rental rates, both with respect to the current rental stream of the properties as well as the estimated trend of value applied by the value after the expiration of the current leases. So the increase is approximately from 2% to 6% in the estimated rental rates. On the accounts receivables, we have 2 lines. The first line is part of noncurrent assets and second line, accounts receivables, is a part of the current assets. So the most part of this amount represents loans given and receivables from the former subsidiaries related to the Russian business of the group. And these loans and receivables were recognized as third-party loans and receivables in the consolidated accounts upon disposal of their respective subsidiaries in December 2022, partially then after disposal of Redhill subsidiary. And the main part in April 2023, with respect to the receivables from Lenbury and Capital Estate Group, it's a recognition, the value of interest-free receivables, which is a different part of the sales price for the Russian portfolio was discounted at market rate on similar instruments. And subsequently, the assets accounted for amortized costs less impairment allowance. And important to note that the loans from Redhill and Lenbury are partially repaid and the repayment in 2023 was for EUR 45 million. So the group assesses the expected credit loss on these loans and receivables. And as of the end of 2023, this allowance is approximately EUR 12 million, substantially decreased as compared to the end of 2022 when it was almost EUR 23 million. So -- and the face value of these loans and receivables before fair value adjustment and impairment loss as of the end of 2023 was close to EUR 88 million. So from the cash and cash equivalents side, you may see that -- so the cash balance decreased. And main outflows were, first of all, repayment of loans of UniCredit Bank Austria and also some regular payments on our bonds and loans. And from the income side, the main inflows were, as usual, net rental income from the rental properties. Also, as I already mentioned, some receivables from the former Russian segment was repaid during the reporting year. And also, the group received these proceeds from termination of interest rate swap with UniCredit Bank Austria for approximately EUR 18 million. On the equity section, so as already mentioned, you may see that -- there the disposal of the Russian segment of the group in the reporting period ending December 2022, the cumulative amount of exchange differences related to this segment in the amount of close to EUR 163 million was reclassified from equity to profit or loss statement, so no effect on equity from such reclassification. And the remaining [ minus ] CTA balance as of the end of 2023 represents a translation difference recognized on the change in the functional currency of the parent company from dollars to euros as of the 1st of January of 2022 and related to investment in European subsidiaries of the group, which initially were made in euros but accounted in dollars. And noncontrolling interest, which is approximately EUR 8 million as of the end of 2023, consists of the share of noncontrolling shareholders in German subsidiaries of City Gate, Work Life Center and SA3 Media in equity of these entities. On the liabilities section, it's always usually the significant amounts allocated to the borrowings line. And the current part of the borrowings represent mainly the bonds issued for the amount of EUR 167 million which has a maturity in May 2024 and December 2024. And when -- in April 2024, the company had suggested to the holders, so for the bonds to the maturity in May, 31st of May, because we are already in May, of this year to the extent their term for the next 5 years, until the end of May 2029 and to replace the current interest rate of 2.25% per annum with the interest rate of 3.5%, which is under the current market level. And the bondholders are requested to consent or reject the suggested mandates until next Monday, 13th of May. And we are quite positive that the bondholders will agree to the extension for another 5 years, subject to the market interest rate amendment. So other lines, other items, in this borrowings section represent, first of all, the bank loan. The remaining bank loan represents the UniCredit Bank loan provided to our Dresden-area hotel property, which has the maturity in December 2029. And the rest of the bank loans for the amount of approximately EUR 150 million were repaid in 2023. So -- and the other loans include borrowings from noncontrolling shareholders of our German properties and some minor liabilities towards the Russian segment of EUR 1 million for Russia. So in the income statement, you may see, first of all, a significant increase in net rental income from EUR 26 million to EUR 32.6 million. And you may see also the breakdown by properties for this rental income. And the major increase relates to QBC 1 and 2 properties. The increase is approximately EUR [ 2.3 ] million because these properties started their operations at full capacity only in the second half of 2022 when rent-free periods for most of the tenants expired. And Lassallestrasse 1 property started operations in the fourth quarter of 2022. And therefore, you may see that -- saw the significant increase of the rental income as compared to the last year. And some slight shortfall in revenue of Work Life Center is related to the remaining unlet areas after termination of some leases at the end of 2024. And actually, so our team is working actively on reletting of these areas. So a revaluation of investment properties we already discussed. And just you may see that this is a significant part of the company's loss. So for this year, and yes, so the amount is EUR 116 million and for the most part relates to Austrian properties of approximately EUR 77 million and more than EUR 38 million of this loss related to German properties. So also, it was mentioned that, after the disposal of the Russian segment of the business, the group has various loans and receivables from its former subsidiaries. And the company, the group, tests these receivables for impairment. And last year, the impairment for EUR 22.6 million was recognized. And in the reporting period, the group released a part of this impairment allowance, mainly because of reconsideration of impairment approach and also taking into account the current progress with the repayment. And last year, this impairment was recognized with respect to receivables from Redhill. And out of these receivables, more than EUR 22 million were repaid in the reporting period. And the estimated credit loss of -- on lenders' loans and receivables is new as of the end of 2023 because, there, this group generates sufficient cash to cover receivables and taking into account also that the remaining term of these loans is even now close to 9 years. So the finance income, this year, the company recognized significant finance income, mainly due to this one-off gain on the proceeds received from our early termination of interest rate swaps on the loans to UniCredit Bank Austria. Also, the group recognized interest income on loans provided to the former Russian segment and the amount, close EUR 2 million. And also, as mentioned, the interest-free receivables from its former subsidiary, Lenbury, was discounted at 3% at recognition and subsequently measured as amortized value, and the interest income is accrued each reporting date at 3% per annum and also recognized as a part of the finance income. So finance costs are more or less stable, slightly decreased, mainly due to the decrease of interest on bonds issued. So just to remind that, in April 2022, the interest on bonds was decreased initially from 5.5% to 7.5% to the range to 2.25%. And in October 2023, 2 bond issues for the total amount close to EUR 245 million were extended and repriced and at the then effective market level of 4.5%. But overall, these changes resulted in a decrease in the interest charge on bonds for approximately EUR 3 million. So interest on notes payable was incurred by the disposal group at the period when this disposal group was part of EPH portfolio and EPH balance sheet. And the interest on loans payable in the reporting period includes interest on the loans also of the disposal of in the amount for close to EUR 2 million incurred until the date of disposal of this segment, until 19th of April of 2023. On the income tax side, you see that, this year, the group has income tax benefit, but mainly related to -- no, not mainly, but related to default income tax, because this income taxes consists of 2 parts, first of all, current income tax net expense, which slightly increased as compared to the year 2022. And so this income tax, current income tax expense includes income taxes played by Cyprus-supporting companies, Austrian properties and a hotel property in Germany. And taxable income of the Austrian property is mainly caused by additional finance income from swap early termination. And this is a part remaining after the set off of -- after using of the losses carried forward from the previous periods. And the deferred tax liabilities arising on taxable temporary differences between the tax value and a book IFRS value of the properties were recalculated at the year end and tax benefit was recognized as a result of a decrease of the appraised value of these properties of the year end and respective decrease in the taxable differences. And deferred income tax also was impacted by the changes in the deferred tax assets recognized on losses carried forward because -- or mainly because of the fact that part of the losses were used by the company to offset the taxable income. So on the next 2 slides, you may see the shorter presentation of the disposal group, because disposal group was a part of the company's portfolio, part of the company's balance sheet until the disposal, until the date of disposal in April 2023. So as of the end of 2024 -- or 2022, these assets and liabilities of the Russian segment were already classified as held for sale. And as a part of consideration upon the sale, Lenbury, former subsidiary of EPH, replaced EPH as a borrower in the notes issued to the shareholders in the amount of EUR 426 million. And the remaining part of consideration amounts to EUR 46.5 million and payable over 10 years. And the remaining balances with the former subsidiaries' loans, receivables and borrowings, as discussed here earlier, were recognized as external in the consolidated balance sheet of the group upon disposal. So here, you may see the breakdown of the loss related to discontinued operations. And so first of all, the disposal group, as I mentioned, the operations of the disposal group were consolidated in the period until their sale, and their loss from operations was approximately EUR 2 million. And so the loss on the sale of disposal group represents a net result on gain on disposal. And this fair value adjustment of approximately EUR 163 million, the reclassification from currency translation adjustment to profit and loss statement. So these all factors resulted in the net loss from discontinued operations in the amount of EUR 103 million. So the group reported 2 subsequent events happened after the end of the reporting period, first of all, as I mentioned, the acquisition of the hotel property in Switzerland in January 2024. So the company, the group, treats this acquisition as a business combination because the acquired set of assets and liabilities constitutes a business. And currently, the management is finalizing the acquisition accounting. And the purchase price of this acquisition amounted to approximately EUR 51 million or EUR 52 million. So -- and this includes the deferred consideration of CHF 1 million because the price was -- is set in Swiss francs. And also the second thing is that, following the Cyprus legal requirements, in February 2024, the company offered its treasury shares for sale because, according to the Cyprus legislation, the company is not allowed to hold treasury shares for the period of more than 2 years. And the result of the offer, the company sold shares at the price of EUR 25.6 per share and in the total amount of slightly more than EUR 2 million in cash. And this sale was made to one of the company's major shareholders. So from my side, that's it. And if you have any questions, so if you need more detailed information, you're more than welcome to ask your questions. So I see that - no questions? So anyway, you can send all your questions to our official e-mail address published on the company's website. So any time, you may use these possibilities [indiscernible] otherwise, I would like to thank you all for participation in this call, and I wish you good day, good afternoon. Thank you.