Grand City Properties S.A. (GYC) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for Grand City's results call for the first half of 2026. You can view this presentation on Grand City's website, either on the Home section or under Financial Reports of the Investor Relations section. With me today will be Chairman and Director, Christian Windfuhr; CEO, Refael Zamir; CFO, Idan Hadad; and CMO, Michael Bar-Yosef. [Operator Instructions] The e-mail address is gcp-ir@grandcity.lu. With that, I would like to hand you over to Christian to start with the presentation.

Good morning, and welcome to our H1 2026 results presentation. We are pleased to present a solid set of results for the first half of 2026, reflecting another period of strong operational performance. The economic environment continues to be shaped by ongoing geopolitical developments, including the situation in the Middle East, which create ongoing volatility in financial markets. Our portfolio locations benefit from strong fundamentals, and we do not observe a material impact on our operations. We also continue to monitor capital markets and interest rates closely. While these have been impacted, our bond spreads have remained mostly stable and both capital and transaction markets have stayed open, giving us comfort that the current environment is not creating any significant disruption to our access to liquidity or to our business. We also continue to maintain a solid financial position, providing firepower for external growth as well as downside protection. On the operational side, we continue to see strong and supportive fundamentals across our portfolio locations with demand for housing remaining robust and supply structurally constrained. We recorded another period of solid rental growth, reaching 3.3% like-for-like, while also externally growing the portfolio. Looking at the financial profile following the perpetual notes transaction executed in the second quarter, we have now fully refinanced our perpetual note stack with next call dates only in 2031, providing increased clarity and limiting potential negative impacts from market volatility. Following our robust financial position and after approval at the Annual General Meeting, we paid a dividend of EUR 0.30 per share for 2025 in July. Going forward, we have updated the dividend policy to 50% of FFO I per share, which we view as a good balance between an attractive return and positioning the company well for long-term value creation, maintaining a prudent and strong balance sheet. The strong operational performance was further reflected in the slightly positive full portfolio revaluation recorded in the first half of the year, driven by operational growth. We will provide more details later in the presentation. On Slide 3, we present a summary of our key financial results for the first half of 2026. We saw a solid performance with net rental income up 3% and adjusted EBITDA up 3% year-over-year. This led to an FFO I of EUR 91 million, in line with our full year guidance. Our balance sheet remains strong. As of June, our LTV stood at 33% compared to 31% at the end of 2025. The LTV was impacted by acquisitions and investments in the period, partially offset by the operational results and positive property revaluations recorded in the period. The net debt-to-EBITDA and the interest cover ratio remained very strong at 8.7x and 4.7x, respectively, and we maintain a strong liquidity position. Turning to EPRA NTA, which stood at EUR 4.6 billion or EUR 25.8 per share, driven primarily by strong operational performance and positive property valuations, partially offset by the dividend allocation, which was paid in July after the reporting date. We continued to maintain a low vacancy rate of 3.7% and achieved solid like-for-like rental growth of 3.3% as of June, supported by continued increase in in-place rents. Our portfolio as of June 2026 stands at 61,000 units, up from 60,000 units in December following the closing of several acquisitions. We will discuss these items in more depth later in the presentation. Moving to Slide 5. We present key data on the German residential market. The German housing market continues to face a structural supply and demand imbalance. New construction remains restrained, particularly in metropolitan areas as land and construction costs stay elevated. This was reflected in the number of permits approved, which continues to sit well below the estimated number needed for demand. We are encouraged to see that policy changes are aimed at increasing the supply. The Bau-Turbo allows the municipalities to approve projects outside zoning plans. And in June, the government introduced the Aktionsplan Baukosten, a set of measures aimed at reducing construction costs, including digital permitting, faster planning and tax breaks. That said, completions are still expected to fall significantly short of government targets in 2026, and these measures are not expected to close the very significant gap. Accordingly, available supply remained low and asking rents continued their upward trajectory. The fundamentals continue to impact our portfolio positively, reinforcing its resilience and growth potential. On Slide 6, we address the topic that has been a recurring source of uncertainty for the German residential sector and where we have seen more clarity over the past months. For some years, the expropriation debate centered on Berlin has become a source of noise for the market. Our position on this topic has been consistent. We viewed this initiative with skepticism, saw much of the momentum as driven by electoral politics rather than by a workable housing solution and have always argued that the answer for affordability is more supply, not less private investment. Measures that simplify construction and conversion, such as the Bau-Turbo address the actual problem. Expropriation does not. And in our view, risks doing the opposite by discouraging the very investment the market needs. We can see that our view is now increasingly shared by the federal level. In March, Berlin passed a framework law, but one deliberately built with constitutional guardrails that only takes effect in 2028, leaving room for prior review. Recently, in early July, the federal coalition agreed to introduce a law that would ban the states from using socialization legislation to transfer private rental housing into public ownership. This was taken up at the request of the construction ministers on the reasoning that the threat of socialization endangers housing construction and undermines Germany as a place to invest, very much the argument we have made ourselves. The federal law is an agreed intention rather than an elected legislation. But we believe this is a meaningful signal the federal government is actively seeking to remove this source of uncertainty and to provide legal certainty for housing investments. Slide 7 highlights the strong fundamentals of the London residential market, whose regulatory environment also strengthens the diversification profile of our portfolio. The softer rent regulations compared to Germany allows rental prices to reflect underlying market conditions quickly, which market rents capture fast -- with market rents capture fast, sorry. London's rental market has continued to tighten in affordable and mid-income borrowers, which is the focus of our portfolio. Supply remains structurally short with delivery falling short of new homes needed and approvals continue a downward trend in recent years. On regulations, we have seen the Renters' Rights Act come into effect, introducing reforms to the eviction process and moving leases to rolling monthly terms with annual adjustments to the market level. While this is widely described as the largest change in U.K. rental regulation in decades, none of these changes had a significant impact on our operations or our portfolio, which is maintained at high quality and where we keep a healthy and positive relationship with our tenants. The U.K. government has indicated that they already see positive impact from the reform and both the Housing Secretary as well as the Prime Minister have ruled out the need for rent controls. All in all, fundamentals in London remain strong and continue to support asking rents and portfolio values going forward. Now please allow me to hand over to Refael.

Thank you, Christian, and welcome also from my side. Turning to Slide 8, we present an overview of our diversified portfolio. As of end of June, our investment property portfolio totaled EUR 9.2 billion, increasing from December 2025. Berlin remains our largest location, representing 23% of our portfolio, followed by London at 21%, NRW at 19% and Dresden/Leipzig/Halle at 15%, with the remainder spread across other strong metropolitan areas. Our external growth strategy remains focused on disciplined capital recycling and substantially selected acquisitions where we see clear value creation and FFO accretion, while preserving balance sheet strength. During the first half, we completed approximately EUR 75 million of acquisitions in Germany at a rent factor of around 14x. This came in addition to the over EUR 100 million new build turnkey portfolio in London signed previously and completed in 2 stages with the first half recently completed and the second half was completed after the reporting period at an expected factor of 13x once fully rented. This newly built portfolio is expected to be fully let within a few months contributing partially to operating results in 2026 and fully from 2027. On the disposal side, we completed EUR 31 million mostly properties in a non-core location and condominium. Regarding new potential acquisitions, we continue to be highly selective in Germany with FFO accretive as a key condition. We do expect the pipeline to improve gradually in the midterm as fund continue portfolio cleanups and assets come to market through mortgage banking system. In London, we view the landscape as potentially more attractive as shorter finance maturities of 3 to 5 years compared to more than 10 years in Germany, are creating refinance pressure, particularly among smaller developers opening entry points into high-quality, well-located assets at compelling pricing. As always, we do not set fixed disposal or acquisition volume target, so the strategy remains opportunistic and guided by pricing, return, asset quality and reinvestment potential. On Slide 9, we show the continued strong point of our operational performance, supported by positive market fundamentals, as we mentioned before. As of June 2026, our in-place rent increased to EUR 9.8 per square meter. On a like-for-like basis, total net rent growth was 3.3%, driven mainly by in-place rental growth, split between 2.1% from re-letting and 1.2% from indexation. Vacancy remained low at 3.7%. As always, we know that this growth comes at low CapEx and high accretion to cash flow, and it's not the product of significant modernization projects or new constructions. Rental growth in Germany was recorded across all our key locations with the highest rental growth increase recorded in Mannheim, Kaiserslautern, Frankfurt and Mainz, as well as in Dresden and Leipzig. We also continue to see strong growth in London with over 3% rental like-for-like with vacancy there at structurally low level just above 2%. Going forward, we expect London rental growth to align more closely with our German operations. Our annualized net rents reached to EUR 442 million compared with an estimated market rental value of EUR 530 million, indicating upside potential of 20%. We expect to unlock this mostly through revisions upon re-letting with additional upside as market rents continue to trend upwards. A supportive operating environment and this upside to market potential are expected to support like-for-like rental growth over 3% for the foreseeable future in line with our 2026 guidance. Continuing with Slide 10, we present an update on the valuation of our portfolio. A full portfolio valuation was conducted by external independent valuers as part of our H1 2026 report. We recorded a slight positive like-for-like value change of 0.2%, net of CapEx driven mostly by continued solid operational performance, supported by sufficient transaction activity. Including CapEx, the value like-for-like amount to 0.6%, this is reflected in the stable valuation parameters compared to December 2025. As of June 2026, the portfolio average rent factor stood at 20.4x compared to 20.5x at the end of 2025, with average discount and capitalization rates broadly stable. Average value per square meter was EUR 2,353, which remained conservative and well below replacement costs. Looking historically at the portfolio on a like-for-like basis, we have seen lower valuation volatility with moderate increase in times of growth and moderate decline in times of pressure as movement have been driven primarily by rental and operational growth rather than market-driven revaluations. Looking ahead, our base case is for yields to remain broadly stable with value development driven primarily by organic operating performance. Slide 11 illustrates how we constantly drive our in-house platform efficiently through innovations. Over more than a decade, we have progressively built out our digital and operational capabilities from digital tenant service and centralized in-house service center through standardized digital workforce and today, to AI-supported, human-led processes deployed across our operations. Looking ahead, we will continue scaling implementation and focus on emerging innovations to drive further efficiency gains. This is already reflected in our tenants metrics. The share of tenant requests handled through our property management app rose to over 17% in the second quarter of 2026, supported by strong app adoption. Around 95% of the handover protocols are now completed digitally, and we are seeing high rates of digital move-ins and moves-out. Constant investment in our digital and AI capabilities improves tenant experience, build up operational resilience and increase cost efficiency across the platform, keeping our operating costs low and supporting our high EBITDA margin of around 80%. Now please let me hand over to Idan to present the financial results.

Thanks, Refael. On Slide 13, we present our P&L results for the first half of 2026. Net rental income amounted to EUR 219 million, an increase of 3%, driven primarily by strong like-for-like rental growth of 3.3%, supported by acquisitions completed during the period and partially offset by the impact of disposals in 2026 and from previous periods. Adjusted EBITDA increased by 3% to EUR 174 million, in line with the rental growth and broadly stable net operating expenses. Finance expenses rose to EUR 37 million, reflecting the full period cost of debt raised in pervious periods, which have now full effect in this period. In the first half of 2026, we conducted a full revaluation of the portfolio, recording a positive like-for-like value change of 0.2%, this uplift was driven by our continued strong operational performance rather than by yield compression. This resulted in EUR 56 million of property revaluations and capital gains. We recorded a profit of EUR 129 million for the first half of 2026 compared to EUR 210 million in H1 2025, with a decrease primarily reflecting a lower revaluation result comparing to the previous period and higher finance expenses, partially offset by continued strong operational performance of the portfolio. Basic earnings per share for the period came in at EUR 0.49 compared to EUR 0.92 in H1 2025. Turning to Slide 14, our FFO I and II results. FFO I came in at EUR 91 million in the first half of 2026, down from EUR 95 million in the same period last year. The main drivers of the decline were higher perpetual notes attribution and higher finance expenses, along with higher contribution to minorities. Together, this more than offset the growth we saw in the adjusted EBITDA. FFO I per share stood at EUR 0.52 compared to EUR 0.54 in H1 2025. The higher perpetual note attribution comes from the refinancing we completed in May when we have issued EUR 600 million of new perpetual notes at a coupon of 5.25% and at the same time, redeemed EUR 603 million of notes that carried a coupon of 1.5%. FFO II amounted to EUR 99 million, lower compared to EUR 146 million a year ago as a result of a much lower level of disposal in H1 2026 than in H1 2025, along with a lower FFO I. Over the period, we disposed of EUR 31 million of assets against around EUR 131 million a year earlier. The sales during the period were completed well above book value at a premium of 13% and at a margin of 34% over total cost, including CapEx. On Slide 15, we present an update on our maintenance and CapEx activities. Our focus remains on enhancing the overall asset quality of the portfolio and supporting rental income growth. In H1 2026, total investment amounted to EUR 13.3 per square meter, stable compared to H1 last year despite inflation of around 3% over the period. Of this, EUR 10.3 per square meter relates to repositioning CapEx and EUR 3 per square meter to maintenance. Additionally, we invested EUR 15 million in pre-letting modification, which includes the creation of new rental space and other measures supporting additional rental income in upcoming periods. We also invested a targeted EUR 2 million in modernization projects. These are aimed at upgrades such as balconies, elevators and technical infrastructure to support higher rental levels. Investments in energy efficiency and CO2 reduction, such as window replacements and heating system upgrades are allocated based on the specific nature and scope of each project. AFFO for H1 2026 was EUR 52 million compared to EUR 54 million in H1 2025, lower mainly due to the lower FFO I. On Slide 16, we present a case study that shows how our sustainability CapEx is translating into measurable improvements in asset quality. This is a building in Berlin, where we replaced a gas-fired heating system with a hybrid air-source heat pump supported by a buffer tank and the gas backup for peak demand. The works were carried as part of a larger investment program and quality enhancement. And therefore, it made sense here to also increase the energy efficiency. The impact of this single measure was significant. The asset's energy performance certificate improved from an E rating to a C with the final energy demand reduced by around 45%, moving the buildings from below to above the German stock average. The renewable share now sits at over 65%, and the system is in line with the new GModG requirements. We are already working to improve the assets with the lowest energy scores irrespective of the regulatory time line. The European framework, the EPBD has now been transported into German law through the GModG and imposed no renovation obligation on residential assets. We see energy efficiency investments as a driver of asset quality, lower running costs for our tenants and reduce regulatory and CO2-related risk over the longer term. As the chart on the right shows, this continued work keeps our portfolio well ahead of the German average, both for multifamily and total residential stock. On Slide 17, we present the update on our EPRA NAV metrics. EPRA NRV per share increased by 1% to EUR 29.2. EPRA NTA per share increased by 1% to EUR 25.8. EPRA NDV per share increased by 1% to EUR 23.6. The increase across our NAV metrics was driven mainly by the strong operational performance and positive property revaluation recorded in the period and partially offset by the provision made for the dividend paid in Q3. On Slide 19, we turn to our professional -- financial profile. Our LTV ratio stood at 33% as of June 2026, up from 31% at year-end 2025. The increase was mainly the result of acquisitions and investments carried out during the period, partially offset by the positive revaluations and operational cash flows generated over the half year. The EPRA LTV ratio, which treats perpetual notes as debt stood at 45%. We remain committed to maintaining a conservative financial profile, which is a core pillar of our strategy and a key driver of long-term success. Our leverage remains low, giving us the flexibility to capture external growth, which we expect to continue unlocking primarily through accretive capital recycling. The interest coverage ratio stands at 4.7x. And in addition, EUR 6.6 billion or 71% of the portfolio remains unencumbered, ensuring strong access to bank financing. As of June 2026, cash and liquid assets totaled EUR 1.4 billion. Our cost of debt remained low at 2.1% with an average debt maturity of 3.8 years or 5.2 years, adjusting for debt already covered by our strong liquidity position. On Slide 20, we bring together the steps we have taken to solidify our financial position. Through proactive management and full refinancing of our perpetual notes, we are in a strong and conservative position that has allowed us to resume our dividend. On the perpetual notes, we have now refinanced the entire stack. In the second quarter, we issued EUR 600 million of new notes at a coupon of 5.25%, following the transaction we executed in the fourth quarter of last year and completed the tender offer on the notes with the first call date this year, which have been now bought back or redeemed. Our perpetual notes have equity content under S&P methodology. With this, the next call date across the stack is only in 2031, giving us greater clarity on this part of our capital structure and limiting our exposure to market volatility. Following approval at our Annual General Meeting on the 24th of June, we paid a dividend of EUR 0.30 per share for the 2025 financial year in July. Going forward, we have updated our dividend policy to 50% of FFO I per share, which we view as the balance between an attractive return for shareholders and returning the headroom to fund accretive growth while keeping our balance sheet conservative. And with this, allow me to hand over to Christian to conclude the presentation.

Thank you, Idan. Allow me to point out that in the appendix, you will find more detail on our strategy, portfolio distribution, ESG, financial policy, analyst coverage and more. On Slide 22, I would like to confirm our FFO guidance for 2026. Our results for the first half were in line with our expectations and put us in a good position to confirm our guidance. For the third quarter -- from the third quarter onwards, we will have the full impact of the new perpetual notes, which will have an offsetting effect on the FFO I growth. Accordingly, we continue to expect FFO I in the range of EUR 175 million to EUR 185 million, while internal and external growth is expected to support increasing EBITDA more than offsetting the impact of last year's disposals, FFO I is expected to be slightly lower in 2026 than in 2025. For 2026, our guidance is like-for-like rental growth of around 3.5%. FFO I in the range of EUR 175 million to EUR 185 million, translating to FFO I per share of EUR 0.99 to EUR 1.05, the dividend in the range of EUR 0.50 to EUR 0.53 following our updated dividend policy. And as always, we aim to maintain our strong balance sheet and keep LTV below our 45% internal limit. Thank you for your attention, and allow me now to move to Q&A.

Thank you. Before we invite your direct telephone questions, we would like to answer questions that we have received by e-mail prior to this call. For simplicity reasons, the team has taken liberty to group similar questions in order to answer as many questions as possible. Allow me now to read out these questions. What is your view on the geopolitical situation and its impact on GCP?

The geopolitical developments continue to create volatility in the markets. But overall, we see the potential impact of Grand City Properties as manageable. Our portfolio locations benefit from strong fundamentals, and we do not observe a material impact on our operations. We continue to monitor capital markets and interest rates closely. However, we are in a solid financial position as a result of the measures we have taken in recent years. We hold EUR 1.4 billion in cash and liquid assets alongside low leverage and a large share of unencumbered assets. In addition, following the refinancing completed in the second quarter, our perpetual notes stack is now fully refinanced with the next call date only in 2031, giving us further protection against market volatility. Despite the increased uncertainty, our bond spreads have remained mostly stable and both capital and transaction markets have stayed open with strong investor demand. This gives us comfort that the current environment is not creating any significant disruption to our access to liquidity or to our business.

Like-for-like rental growth stood at 3.3% in the first half. What is driving it? And how do you see your performance developing going forward?

The like-for-like rental growth is in line with the level we have seen in the recent period and in line with our guidance of approximately 3.5%. Small fluctuations from period to period are normal and it's impacted by several factors such as timing of the rent increases as well as minor fluctuations in occupancy, which are a normal part of our business. For the first half of 2026, we recorded total like-for-like rental growth of 3.3% with re-letting contributing 2.1% and indexation, 1.2%. Re-letting is a bigger driver as it allows us to capture the revisionary potential of the portfolio faster. We are seeing references rents continue to move in our favor with the 2026 Berlin Mietspiegel period set nearly 7% above the prior schedule, which increased the potential we captured on re-letting. In London, rental growth has coverage throughout our German level at just over 3%, consistent with what we guided as vacancy there settled at structural just above 2%. Going forward, we expect to continue unlocking the revisionary potential gradually through steady indexation and stronger re-letting supported by those fundamentals keeping us well positioned to deliver on our full year guidance.

How do you assess the valuation results for the period? And what is your outlook for the coming periods? How do you view the transaction market?

As part of our H1 report, we conducted a full external revaluation of the portfolio by independent valuers and the result was 0.2% positive like-for-like, net of CapEx and 0.6%, including CapEx. This was supported by the continued strong operational performance of the portfolio, and there were no large movements in yields. Accordingly, our valuation parameters remained broadly stable compared to December with the portfolio yield stable at 4.9% and the discount and capitalization rates broadly unchanged. We continue to hold the view that yields will remain broadly stable with gradual movement, and this is supported by market. Looking ahead, our base case is for organic value growth to be correlated with the operational performance of the portfolio with yields remaining broadly stable. And in case of yield expansion, we expect this to be more than offset by operational growth. At the same time, we do not rule out selective yield compression over the longer term, especially in the scenario where financing rates come down, supported by strong demand, low supply and high replacement costs. But with the recent moves in the capital markets, we see this more as a longer-term prospect than a driver for the coming period. The transaction market has slowed down in the past few months following the volatility in the market. However, transactions have not been fully muted, and we see transactions in the European market being closed, including several larger deals. We do note that the summer months are usually quiet, and we will hopefully see the transaction volumes increase after the summer and towards Q4, hopefully also supported by positive development on the geopolitical front.

How do you view your leverage position? And do you expect it to move materially?

Our leverage remains conservative with an LTV at 33% as of June, higher compared to December as a result of investments, which we see long-term supportive. EPRA LTV, which treats perpetual notes as debt remained stable at 45%. Our strong financial position allowed us to resume the distribution of dividend. We have best-in-class ICR and net to debt -- and net debt-to-EBITDA ratios, which is also a reflection of our conservative financial approach. Preserving a conservative financial profile remains a core pillar of our strategy. While our metrics give us ample headroom to support growth, we expect to fund that growth through capital recycling and our current liquidity. So we anticipate leverage staying low and below our Board limit.

How do you evaluate your strategy on acquisitions and disposals in the current market environment? Where is the deal pipeline more active?

Regarding acquisition and disposal, our approach is unchanged, and we stick to disciplined capital recycling and highly selective acquisitions with FFO accretion as the main principle. We do not set fixed volume target for the simple reason that we do not want to find ourselves transacting just for the sake of meeting the target and not for creating value. As presented in the first half of 2026, we completed around EUR 75 million of acquisition in Germany alongside the partial takeover of EUR 100 million in London, new build portfolio at attractive factor, while completing around EUR 30 million of disposal. The remainder of the London acquisition was closed recently after reporting period, and we expect the full impact from the new acquisition to be reflected from 2027 onwards.

Have you seen changes in your financing conditions in recent months?

On financing conditions, access to capital markets remains strong despite market volatility, with spreads on our bonds broadly stable at low levels, similar to where they were at the beginning of the year. Given our capital market access, combined with our large pool of unencumbered assets and established bank relationships, we view ourselves in a solid position to access funds at attractive pricing. We have no near-term refinancing pressure. Our liquidity comfortably covers bond maturities up until the end of 2027. We expect to come to the market opportunistically, for instance, as part of the liability management exercise if conditions support it.

How much are your perpetual coupon expenses this and next year?