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

Hello. Good morning, good afternoon, ladies and gentlemen. First of all, I would like to mention that this call, this presentation is being recorded. Then I would like to thank you all for joining this presentation of half year 2024 financial results of EPH European Property Holdings. My name is Yulia Makhinova. I will do this presentation, but I'm accompanied here with my colleagues, and they may step in if necessary. So first of all, I would like to say a couple of words about the business of the company during the first half of year 2024. So during this period, the company continued to show a stable operating performance despite numerous challenges in the global market environment. And this is possible, first of all, due to the company's selective policy with respect to the asset acquisition as well as due to professional asset management of EPH with the help of our manager, Valartis Group. Currently, the group's portfolio consists of 10 prime assets in prestigious locations in Germany, Austria and Switzerland with a total value of approximately EUR 815 million. So the properties are almost fully occupied, and they meet high sustainability standards as evidenced by their relevant certifications. So in April of this year, EPH performed a further step to diversify and strengthen its portfolio by the acquisition of a historic 5-star hotel in Vevey on the shores of Lake Geneva. This landmark property, originally built in 1842, offers nearly 16,000 square meters of space, more than 70 luxury rooms, 2 restaurants and a spa. And operations of the hotel are carried out by approximately 70 employees, which are now part of EPH Group. EPH has plans to redevelop the hotel over the coming years, and now we're exploring different options for such a development. So this acquisition demonstrates our confidence in the Swiss hotel market and in the potential of this historic property. And now the group owns 3 hotels in Germany and in Switzerland. Despite the positive operating results, the development of real estate market in Europe during the reporting period led to further downward adjustment of fair values of our properties that overlapped operating earnings in the period and resulted in the overall loss. But despite such challenging market environment, EPH is still optimistic about the future development of the company and continues to see potential in its European target market. And this optimism is sorted by our many years of experience, where real estate markets experienced some decline and then recovered again with the growth. And the group continues to focus on major European cities and core properties in prime locations, both in the office sector and also in the hotel segment, as you may see. As for the financial results for the period. First of all, I would like to say that NAV slightly decreased as compared to the end of year 2023, and it is now EUR 33.39 per share. The group reported net assets, calculated as total equity, of almost EUR 489 million compared to EUR 501 million as of the end of the last year. And the net loss of the period amounts to almost EUR 14 million as compared to high loss of the comparable period of the last year of more than EUR 130 million. But in this, I would like to emphasize that net loss of the first half of 2023 comprised of the loss of continuing operations and also the loss from discontinued operations. And if you compare the loss from continuing operations only, it is decreased from almost EUR 29 million for the first half of year 2023 to EUR 14 million for the current reporting period. So the main factors influencing the financial result of the first half of year 2024. First of all, the increase of net rental income of the group by more than 11% as compared to the same period of the last year, from EUR 15.6 million to EUR 17.4 million. And this is primarily the result of the increase of net operating income or net rental income in the property Lassallestrasse 1 located in Vienna. So this net rental income of this property has substantially increased after the end of grace periods that were provided to the tenants of this property for most part of year 2023. And as for other properties, they also contributed to the growth due to the regular indexation of the rental rates in these properties. So for newly acquired hotel Trois Couronnes, we recognized the loss of -- in the amount of approximately EUR 1 million, so the operations of the hotel have been maintained on the preacquisition level. As I already mentioned, the management of the group is currently considering different scenarios or further investment into renovation of this hotel, which we expect to lead to its future profitability. In the reporting period, the group recognized a loss from revaluation of investment properties in the amount of EUR 20 million, and the decrease in values is caused primarily by a further increase in discount and capitalization rates applied in valuation models, but -- though this devaluation loss is slightly -- significantly lower as compared to the first half of year 2023. So in this slide, in the next slide, you may see the table with key performance indicators, which supports the factors I just mentioned. First of all, the increase of net rental income and increase of operating income. But as a result of increase in financial costs, earnings from operational activity of the first half of full year 2024 are slightly lower than for the same period of the last year. You may also see the changes in different items, noncash generating items such as revaluation of investment properties, change in impairment allowances, net foreign exchange movements and resulting in the overall loss of EUR 14 million. And also you may see that our properties now consist of 9 investment properties and 1 newly acquired hotel property, which is treated as fixed assets, and I will explain this in further slides, with the total value of approximately EUR 8 million -- or EUR 815 million. And you may see that loan-to-value ratio is more or less stable after the sale of the Russian portfolio and, for this period, is equal to 46%. So then I will say some words about particular lines in our balance sheet and income statement. And first of all, the most important line, which is like investment properties, as I already mentioned, the value further decreased by approximately EUR 20 million, which represents 2.5% of decrease. So you may see -- in the table below, you may see the exact breakdown by property and also may see that -- so this decrease mostly is a result of the increase of discount and capitalization rates for each property. So despite the fact that the markets have slightly stabilized compared to the last year, so the rates are still rising, resulting in the overall reduction of the property values. So you may see some increase in the values of the hotel properties located in Berlin and Dresden. This is because tourism and, therefore, hotel market shows a positive trend. So the office properties in Germany are valued with only slight increase in discount and capitalization rates. However, these properties still show a decrease in value. And this is also the result of slightly increased vacancy in these properties due to expiration or termination of some leases. So recovery of Austrian commercial real estate market is still behind Germany market, with capitalization and discount rates reaching the levels of Germany. So in the next slide, you may see the line property, plant and equipment, which includes the value of the newly acquired property in Switzerland. And actually -- so as I already mentioned, this property was acquired in January 2024, and the acquisition was treated as a business combination because it's clearly the acquisition of business rather than the acquisition of like a single property. And therefore, the assets and liabilities of the acquired entity were recognized at their fair value at the date of the acquisition, and the positive difference between the purchase consideration and fair value of net assets were recognized as goodwill on the balance sheet. And as usually, this goodwill in our balance sheet mainly relates to the recognition of deferred tax liabilities, which would realize upon potential sale of this property in the future. So purchase consideration consisted of, first of all, repayment of loans owed by the entity to its former owner in the amount of EUR 32 million. And now this represents the intercompany loan and also payment for shares of approximately EUR 20 million, of which EUR 0.5 million were deferred at the date of the acquisition and then paid in full in August of this year upon finalization of the accounts of the acquired entity. I would also like to mention that the entity's currency of operations is Swiss francs, and this is the only entity which has the functional currency different from the like currency and presentational currency of the group. And therefore, upon translation of balances and operations of this entity into presentation currency of the group, which is euro translation, difference will be recognized in equity in every reporting period. So in the next slide, you may see the current treatment of the acquired hotel. And as I mentioned, unlike all other properties of the group, it is classified as property, plant and equipment as a fixed asset, not as an investment property. And this is because -- so the hotel is being operated by the company itself but not just like leased out to third-party operator as it is the case with 2 other hotels of the group and all other properties. So the accounting standards provide for the choice for us to use the recognition model of this property. And taking into consideration that the property requires significant renovation, and its fair value will be hard to estimate reliably for the period of reconstruction. So the management opted for the cost model of its accounting, and the cost is determined based on the property valuation at acquisition, which is supported by third-party valuation with respective depreciation charge over the useful life of this property. So goodwill. As I already mentioned, so goodwill increased with the acquisition of the hotel Trois Couronnes in the reporting period and decreased for the effect of translation difference in the period also in relation to this property. But also the group recognized impairment of goodwill in relation to QBC 4 property. And this is a result of decrease in fair value of this property below its acquisition price. And the overall increase of goodwill line is slightly less than EUR 5 million. So the line -- so we have 2 lines for loans and accounts receivable. One line is a part of noncurrent assets of the balance sheet, and the second line is within the current assets. And for long-term assets, loans given and receivables from the former Russian segment are the main part of this like noncurrent loans and receivables. And these receivables from the former Russian segment are presented net of impairment provision. And I would like to mention that in the reported period, the group received slightly more than EUR 4 million as a repayment of these receivables. So the impairment represented the expected credit loss on these loans and receivables, and this expected credit loss was assessed in the amount of EUR 14 million. And as of the end of the year 2023, it was approximately EUR 12 million. And the additional impairment charge was recognized in the amount of EUR 2 million and is a result primarily of increasing difficulties on international transfers from Russia but still -- so it's possible to make these transfers. Also, I would like to mention that the current accounts receivable include bank deposits for the amount of EUR 6.3 million, with original maturity of 6 months and with fixed rates in the range of 3.11% to 3.25%. Yes, and receivables from the sellers of investment properties refer to settlement with the sellers of property Lassallestrasse 1. So in the next slide, you may see the breakdown of cash and cash equivalents. And so some part of cash deposits is included and still into the line of cash, not as accounts receivables, and this includes deposits with maturity of up to 3 months and with interest rates in the range of 2.85% to 3.5%. So the overall cash and cash equivalents decreased by almost EUR 40 million. And first of all, this decrease is due to the payment for the acquisition of the hotel in Switzerland. And also, the main outflows are, as always, interest payments on the bonds and loans and the placement of bank deposits, which are now -- for the period of more than 3 months, which are now presented in line accounts receivable in the statement of financial position. And the main inflows include net rental income from rental properties of the group and also transfers from Russian segments, the repayment of the loans and also proceeds from sale of treasury shares owned by the company. Borrowings, the overall amount of borrowings almost not changed, but some part of the borrowings were reclassified during reporting period from the current to noncurrent borrowings due to the extension of the bond terms, and the current part of the bonds issued for the amount of EUR 45.25 million has maturity in December of this year. And the management now is considering prolongation of the term of these bonds for another 5 years, and we are quite confident that the extension will be successful because of their experience with other bonds issues. So the bank loans include mainly a secured loan from UniCredit Bank provided to the entity SALZ 4. And this loan is matured in December of 2029. So we have the new line in our balance sheet, net defined benefit liability. And so this is -- this relates also to the acquisition of the hotel in Switzerland because with the purchase of this hotel, the group also acquired an obligation on defined benefit plan for the entity's employees. The company makes contributions to a pension plan that provides the benefits in the event of death, disability or retirement of the employees, and the benefits are generally based on the years of insurance, age and pensionable salary. And so the pension costs are determined by the independent recognized actuary. And the group recognized net liability in the amount of EUR 1 million. And this amount represents the difference between the benefit obligation at the end of the period and fair value of plan asset. And you may see that -- so this pension plan has impact not only to the company balance sheet but also to the income statement and -- because it has like different elements. And you may see in the further slides that the actual cost of this pension plan is recognized as a part of the income statement as the hotel expense. And the gains and losses from revaluation of the pension plan by the actuary are recognized as a part of the equity as other comprehensive income. So in the equity section, so the main changes are, first of all, the sale of the ordinary shares, treasury shares owned by the company for the amount of approximately EUR 2 million in the first half of this year. Also, there are some changes in other reserves. And so these reflect, first of all, fair value and impairment adjustment for euro bonds that were acquired by one of the group subsidiaries in year 2021 and also, as I mentioned, actuary gains and losses on defined benefit plan of equity Trois Couronnes. And the change in cumulative translation adjustment reflects a negative effect of fluctuation in the exchange rate between Swiss francs and euros and used for translation of the balances and operations of equity Trois Couronnes. So net rental income increased, as I mentioned. And in the right table, you may see the breakdown by equity, and also as mentioned, the major increase relates to the increase of rental income in equity Lassallestrasse 1, and increase in rental income of other properties is explained mainly by indexation of rental rates. And some shortfall in revenues of the German office properties Work Life Center and City Gate is caused by the temporary increase of vacancies after expiration or termination of some leases, and you may see the comparable between the vacancies -- between the current vacancies and vacancies as of the half year of 2023. So as I mentioned, we recognized a loss of EUR 1 million from operations of the acquired hotel. The operations of the hotel are consolidated starting from the 1st of January of this year despite the actual date of control, which is 16th of January, and this is agreed between the seller and EPH. So the 3 main sources of revenue of the hotel are accommodation fees, sales of the -- sales by the restaurant and services of the spa. And the main costs are, of course, the compensation to the staff, depreciation, materials and consumables and utilities by the hotel. And you may see that -- so the significant part of the hotel cost is depreciation. And if we are talking about the operational loss, it is less than EUR 1 million. It's only like EUR 300,000. And so this section includes all revenues and cost of the hotel with the exception of compensation to the General Manager of the hotel. And this compensation, we treat as administrative costs, and it is presented in the line of administrative expenses in the statement of profit and loss. So for revaluation of investment properties, I already described in like details. Just to mention once again that the most part of this loss from revaluation relates to Austrian properties, which is like EUR 19 million. And for German properties, we have like EUR 2 million of loss. And the fair value of the hotel properties was slightly appreciated due to recovery of the tourist market in Europe, appreciated by approximately EUR 1 million. Finance costs, so increased mainly due to increase of the interest on bonds as a result of the change of the interest rates for the bonds extended in October of 2023 and June 2024. The rates will increase to reflect the current market situation for one issue -- bond issue from 2% to 4% and for another bond issue from 2.25% to 3.5%. And the finance income includes interest income on loans given by the group as well as interest on bank cash deposits. Income tax, we have income tax benefit. And actually, so the income tax usually consists of 2 lines. First of all, current income tax expense, which is more or less in line with the previous period, and it includes primarily income taxes accrued by the company and its Cyprus subsidiaries. And deferred tax benefit resulted from negative property revaluation adjustment as the taxable difference between the fair values and tax values of the properties also decreased, and has decreased this half of the year, is less than in the same period for the last year. So the deferred income tax benefit of this year also is less than in the first half of year 2023. So this is mainly it. This is all what I wanted to present to you. And if you have any questions or need any clarifications, you are welcome to ask your questions right now. I see no questions by this moment. So if you have any further questions, you may always contact us through the contact details published on our website. And otherwise, I would like to thank you for participating in this presentation. And I wish you a good day and good weekend. Thank you very much.