Hamborner REIT AG (HABA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to our full year 2020 earnings call. Also, on behalf of, again, of my colleague, Hans Richard and Christoph from IR. Yes. Let me start the presentation with an overview on major points of last year. And following my short introduction, I will then hand over to Hans Richard, who will guide you, as usual, through other operational and financial results. Starting with the highlights of last year. Yes, I think certainly, 2020 in various ways here has been a unique year for all of us. The ongoing global pandemic had effect on almost anyone's personal and professional life. And as the COVID crisis is obviously far from being over, we are permanently confronted here with detailed update, statistics and predictions on this topic. With reference to HAMBORNER, I think it's fair to say that despite all challenges related to the pandemic, yes, we have been able to generate very satisfying full year results. Looking backward, a couple of drivers have been, yes, very supportive during this time. Yes, first, our very robust portfolio structure, yes, reflected by a reliable rent collection on a high level as well as strong letting results, yes, this even during the shutdown phases. Yes, second, the consequent and successful reshaping of the portfolio by selling various smaller nonstrategic assets and also adding, at the same time, new high-grade properties here in both asset classes. And third, our integrated business model with straight access to our tenants as well as having a team here with the necessary, yes, let's call, the hands-on experience in such an extreme market situation, which obviously is full of new daily challenges. So all in all, a successful 2020 also reflected in our dividend recommendation, which remains on the level of last year. Now looking forward, we are optimistic that we will be further able to show our strength and -- yes, to follow our communicated strategy. This shall include the acquisition of assets with core and Manage-to-Core characteristics. Yes, then proceeding the gradual exit from our nonstrategic properties and also ensuring a stable enhancement of the strategic portfolio. As recently published, the first acquisition for our Manage-to-Core portfolio has been signed. And we successfully sold 2 further nonstrategic assets. More details on this also with reference to our outlook later during the presentation. Yes, before we look deeper into individual topics, let me give you an overview regarding the development of our major KPIs here in 2020. Starting with the financial KPIs. Rental income, up close to 4% driven by recent additions to the portfolio. FFO, up by 2.4%, on one hand, negatively influenced by impairments from corona effects; and on the other hand, positive effects from the new assets and also, lower maintenance costs. Negative operating results driven by revaluation effect. LTV also slightly up. However, yes, still on a very comfortable level. The reduction in NAV per share, mainly influenced by the mentioned revaluation effect. So with that, let's go to the portfolio KPIs. Yes, for transparency reasons, we have separated the metrics for the -- for our high street assets here on the right-hand side. Please keep in mind that 8 of the remaining 18 assets have been sold through in Q4 last year and 2 further assets here just during the last couple of months. And the 10 outstanding transfers of possession have already been done or are expected for the upcoming days and weeks. Let me now turn directly to the major operating KPIs. Yes, less surprising, retail rents like-for-like came down by 1.4%, strongly influenced by a tenant exit in one former food retail asset. By the way, this is currently rented to the local community as a COVID-19 vaccination center. This could partly be compensated by a positive rent development on the office size. Despite the slight increase, vacancy remains on very low level, similarly split more or less between office and retail. WALT slightly down, however, remained at also very comfortable level of 6.3 years. Yes, all in all, taking into account the special market circumstances here, we think this to be a very good result. Going on with overview on investments and some additional comments here from my side. Yes, as mentioned before, we were able to add 4 high-grade properties to the portfolio. The 3 office buildings have been newly built, always secured cash flows here for an average period between 9 and 11 years. Only one with actual vacant space, however, for which we have a rent guarantee in place. At this point, I think, it's worth mentioning that actually more than 50% of the properties within our office portfolio have a maximum age of 10 years or less, just for your information. With reference to ESG, apart from the fact that the new office assets have been, obviously, developed on the basis of most modern energy standards, they cover various sustainability aspects like high-efficient heating, cooling systems, public transport connections, et cetera. The property in Neu-Isenburg has been certified by the German Sustainable Building Council here with the highest grade, Platinum. So obviously, also an important topic for us. Latest acquisition in 2020 has been an established neighborhood retail center with a, we think, great tenant mix of full line grocery, drug store and pharmacy and an excellent micro location here next to the railroad station with a direct connection to Frankfurt CBD. Going on with disposals. As announced in our -- if you remember, in our strategy update last year in July, and yes, and irrespective of the tense market environment, we have used the interim time to substantially reduce our high street exposure, yes, by selling more than half of the relevant properties. Apart from the positive effect on our operational KPI here and the more focused portfolio, we think the sale connect a couple of advantages here also for our operational business. On one hand, the exit of these assets with the combination of comparably small size, high number of rental units as well as building age allows for a more efficient use of our internal capacity. Yes, we think this one point worth mentioning here and obviously, also a reduction of increasing future maintenance and CapEx risks associated to these assets, which are relevant for the future or might be relevant for the future. Yes, looking forward, we intend to continue with our active portfolio approach. Yes, what does it mean? It means that on the disposal side, we will further focus on the remaining nonstrategic commercial buildings in city center locations, yes, added by selected other properties, which don't fit our respective investment strategy. With that, let me move on to the portfolio development. Yes, next page here provides you with the portfolio value bridge and also from now on for future presentations with the breakup of our expenditures for maintenance and CapEx. Some additional comments to this on the valuation topic, yes, mainly driven by the severe consequences of the pandemic situation here. Full year valuation came out at balance of approximately minus 3.1%. On a like-for-like basis, it has been 3.5%. Yes, as we're all aware, the blows retailers had and still have to take here include -- including full or partial closings for months, often delayed financial support from public health measures as well as, yes, obviously, reduced frequency rates and revenues here for many shops, even if those we're allowed to open, yes. As a consequence of these uncertainties, we observed for a number of assets the drop in market rents, yes, shorter rental periods and obviously, a different risk situation. With reference to our portfolio, the effects, especially applied to our high street properties and some larger retail outlets with broader tenant mix next to the, obviously, very stable food anchor. However, taking into account the recent acquisitions, the overall portfolio has remained stable, yes. Maintenance CapEx. Yes, with reference to maintenance CapEx and compared to 2019, both numbers came down. Main reason has been the COVID-19-related postponement of selected measures, yes. Consequently here, catch-up effects can be expected here for the current year, yes. So this is just as an additional information. Then with this, I will hand over to Hans Richard, who will go on with more details on operational figures. Thanks so much.

Yes. Thank you, Niclas. Good morning, ladies and gentlemen, and also warm welcome from me. Let us now take a closer look at the operating and financial figures for 2020 financial year. First of all, a few remarks on the letting situation. Despite the challenging conditions on the letting market, we achieved a very strong letting result in 2020. We are able to conclude leases for around 102,000 square meters in the course of the year primarily related to lease renewals with existing tenants. In terms of total lease space, the retention rate in 2020 was around 84%. Thanks to the successful letting activity, the vacancy rate, according to EPRA here, remained at a very low level at 1.9%. The rate of remaining term of our leases for the total portfolio is around 6.3 years. The average terms in retail and office remained at a consistently high level at 7.1 and 5 years. Considering the difficult economic conditions, a positive operating performance underlines the expertise of our internal asset management and the high-quality of our property portfolio. Our lease expiry schedule still shows that the share of contracts expiring remains well balanced throughout the next years. The share of expiring rental agreements for 2021 and 2022 account for a limited amount of around 5% of total leases, and we are optimistic to repeat last year's letting success. Let's have a look at the tenant structure. Compared to Q3 2020, there are no major changes in our top 10 tenant list. In total, food retailers currently still account for 1/3 of the company's total rents. Our office tenants generate around 37% of our total rents. Our solid tenant structure and in particular, the high share of tenants with strong financial profiles and operations that are mainly unaffected by the pandemic form the basis for our stable cash inflows even in these economically difficult times. Let's move on to the current operating business performance of HAMBORNER. Despite challenging market conditions, rent collection rates have still seen good performance in the last few months. Following a brief decline in rental income during the nationwide lockdown in spring, income rent ratios recovered quickly. And we're already almost back at pre-crisis levels in the second half of 2020 at an average of 98.8%. During the current hard lockdown imposed in mid-December, some tenants affected by closes are COVID-related restrictions curtailed or suspended the rent payments in the month of January to March. This led to an evident but moderate decline in rent collection rates. Across the total portfolio, the ratio of incoming rent payments, including ancillary costs and VAT, for this period average 94.6%. We are continuing our dialogue with affected tenants and are confident to find further mutual and fair agreements as we did in connection with the first lockdown in spring 2020. In 2020, limited rent deferrals of EUR 400,000 and temporary rent waivers of just roughly EUR 700,000 have been granted. This represents just 0.4% or -- and 0.8% of our annualized rental income. During last year's negotiations, numerous lease contracts were extended, weighted by rental income. The average term of the agreements was expected by around 17 months. The additional rental volume created by all lease renewals totaled more than EUR 12 million. These figures clearly illustrate that HAMBORNER has a very sound portfolio that has proven resilient even in times of crisis. The next chart includes a few details on our final figures for fiscal year 2020. As already mentioned by Niclas, we achieved further growth in revenue and generated income from rents and waivers of EUR 88.2 million. That means an increase of 3.6%, which was mainly due to the property transfers during the year. For the same reason, current operating expenses rose slightly compared to the previous year. Total maintenance expenses amounted to around EUR 4.6 million, and that's around 16% below the level of 2019 as already mentioned, mainly due to COVID-related postponement of different measures. Net rental income amounted to over EUR 79.1 million, a plus of 3.6% compared to 2019. Personnel expenses increased by 9% mainly due to the changes in the management team as well as the recruitment of additional employees. Other operating income amounted to EUR 1.7 million. The increase essentially relates to contractually agreed compensation payments due to delays in transferring ownership of the office property developments in Aachen and Bonn. Other operating expenses were approximately EUR 2.9 million in 2020. This item mainly includes corona-related write-downs and depreciations on trade receivables of EUR 1.6 million and is, therefore, significantly higher compared to the previous year. As a result of income and expenses, the FFO came in at EUR 55.6 million in the reporting period. The corresponding FFO per share amounts to EUR 0.69. All in all, a slight increase of 1.5% year-on-year. We will now move on to the next slide in order to give you further information on the NAV and NTA development. The NAV calculation shows an increase of long-term assets, which is mainly a result of the portfolio additions in the course of 2020. The position is also negatively affected by revaluation adjustments in like-for-like portfolio of EUR 55.1 million. The increase in short-term assets relates to liquidity enhancements and the reclassification of 8 high street properties held for sale. Noncurrent liabilities and provisions increased as a result of additional loans taken out in relation to the newly acquired assets. Overall, NAV saw a slight 3.6% decline as against the end of 2019. NAV per share at the end of December 2020 came to EUR 11.05. As you might already know, last year, EPRA introduced new performance indicators to provide stakeholders with the most relevant information on the fair value of the assets and liabilities of real estate investment companies. The new metrics include the EPRA net tangible assets, NTA, which focus on evaluating the value of a property company's tangible assets. The calculation assumes that property companies buy and sell properties and that taxes must be deferred as a result. Intangible assets and market values of financial instruments must be adjusted. The difference between the 2020 NAV and NTA only relate to HAMBORNER's tangible assets of around EUR 500,000. For this reason, the values for NAV and NTA per share are almost identical. HAMBORNER's financial situation also remains solid and comfortable. The REIT equity ratio amounts to 54.5% and is still well in excess of the 45% required under the German REIT Act. The LTV as of end of December is 45.5%, and interest coverage ratio rose to 5.1. We again managed to reduce average financing costs slightly to 1.83%, with the average remaining term of our loans of 5 years. We have already concluded all follow-up financing for 2021, are currently starting negotiations on refinancing our liabilities expiring in 2022, which, to a substantial extent, will become due in Q4 2020. Current average interest rates are considerably lower than the expiring financing agreements, and HAMBORNER will benefit from these lower rates. So far from my side, thank you for listening. And let me now hand over to Niclas for a short outlook.

Yes. Thanks, Hans Richard. So let me close up here with guidance and outlook. Yes, based on the very positive results in the overall corporate situation here, we decided to propose a dividend of EUR 0.47 per share, yes, at the same level as in the previous year. In addition, we will propose again to offer a scrip dividend to our shareholders. And yes, concerning our guidance, which we published, yes, in February here, meaning our forecast, and this builds up on our solid operating performance but also reflect a couple of uncertainties here, yes. Those include, yes, for obvious reasons, further encumbrances from COVID-19. As of today here, potential one-off payments or temporary effects here from our sales and acquisition activities as well as probable investments in connection with 3 larger retail assets, yes. These aspects here translate into a bit wider range for rental income of EUR 82 million to EUR 86 million; FFO, EUR 45 million to EUR 50 million. Yes, and with reference to NAV, by the end of 2021, we currently expect it to keep on previous year level. All in all, I see this year as a transitional phase, which enables us to drive forward some important parts and yes, at the same time, definitely lay the ground for further accretive long-term growth. And definitely, this will be supported by the quality and the resilience of our existing platform. Yes, and with that, also from my side, thank you very much for listening, and happy to take your questions.

[Operator Instructions] And we'll now take our first question. It comes from Dennis De Jong of Kempen.

I was wondering regarding the EPRA vacancy rate, it's 6.1% for the high street asset. Is this safe to say mainly residing in the 8 assets that have not yet been sold?

Yes, overall, we have a very low vacancy rate, and you can see this is included here.

Sorry, I think, I missed part of that. Might be on my end. But could you please repeat the answer? Sorry.

Sorry, you know that we have, in general, a very low vacancy rate. And the assets were going out at the end of the year.

Okay. And with the remainder of high street assets that still needs to be sold, I mean, you sold off a decent part of the high street assets already at a fairly good pace. Do you expect more difficulties with the remainder that you're intending to sell?

In general, we expect a little bit higher vacancy in this asset. It's very clear, yes, coming from the COVID-19 situation.

Then perhaps maybe could you perhaps give some color on the Manage-to-Core acquisition that you recently did in terms of plans and whatever you can provide?

Yes, maybe from my side, just additional information. As you have seen, we acquired some first property and an office property. We -- yes, we are very optimistic that this will be a great investment for us here, and we shortly onboard this asset. However, we have agreed with the seller at least for now that we can't provide further details on the asset itself. I think I'm hopeful that we can do so once we have closed the transaction and then provide you with more details on our individual strategy for the assets, yes.

Okay.

Yes. And apart from this, I mean, just to complete the picture, yes. Currently, we're getting the market. We are looking at other opportunities being on the core side, but also on the Manage-to-Core. And hopefully, we'll be able to add additional products to this first initial investment here, yes, be it on the office or on the retail side. Maybe a comment on the market here to our -- based on our observation in the second half of 2020, the market for these kinds of assets was rather small for, I can just assume, various reasons. But we see currently, since the beginning of the year, certainly the last couple of weeks, a pickup of product also on the market, which is of interest for us.

Okay. That's clear. And maybe my final question, it's a long shot, but I was wondering if you could disclose more on the rental levels regarding the O3 asset in Cologne.

Sorry. Which asset do you mean?

The leasing agreement that you recently signed in...

In Cologne?

Yes.

This come in place, I believe, in the year '24 with a higher -- with substantially higher rents, but we don't disclose this yet.

Okay. Now then that's clear.

It's an agreement with the tenant. But it will be come in effect in the year '24.

Our next question comes from Thomas Rothaeusler of Jefferies.