Hamborner REIT AG (HABA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. A warm welcome to this year's H1 Earnings Call. Again, also on behalf of my colleagues, Hans Richard and Christoph, who is heading our IR activities. Yes, let's start the presentation with the quick glance at the highlights of the last 6 months. And after my introduction, I will, as you will hand over then to Hans Richard, who will provide you with further details here regarding our operational and financial results. Starting with the highlights. As to be expected, yes, our business again has been substantially influenced here by the pandemic during the first half year. Nevertheless, our business model has proven to be very robust throughout the ongoing global crisis here, and this has enabled us to generate very solid H1 results. On a year-on-year basis, total rents came down just slightly and even went up by approximately 5%. And despite an overall challenging market environment, we were able here to secure various and also substantial letting successes, including early follow-up leases for all our Real locations here in Germany. Since our strategy update mid last year, we have been substantially more active concerning turnover activities within the portfolio. As a result, we continue to reduce our High-Street exposure from originally approximately 12% last summer to meanwhile only 5% of our total portfolio. And in addition, during H1 here, capital recycling to the acquisition of 3 additional new properties, of which 2 fall into the new Manage-to-Core category. More details here regarding these transactions later on in the presentation. As you are used to, our financial profile remains solid, currently supported by a very strong cash position, which is mainly driven by the proceeds from our portfolio rotation, which I just mentioned. So all in all, a successful first half year which contributed to our updated guidance at the end of this presentation here. Now let's have a closer look at the development of our KPIs, and let's start, as usual, with a corporate perspective. Rental income year-on-year, as pointed out, slightly down. You should be taking into account our substantial sales activity here. Operating results substantially higher, driven by last year's impairment of probably the portfolio realization as of June 2020. So that's where the influence come from here. Profit or in comparison to last year. Profit reflecting the book value gains from our sales activities, FFO, influenced by lower maintenance costs as well as on payment here relating to the reletting of the Real space. The FFO per share has slightly increased. And please, also you take into account the year-on-year effect from 2 scrip dividends. LTV remains on the same level and NAV and NTA equal at EUR 11.02, slightly lower, but still fully in line with our guidance. Next page, looking at our portfolio KPIs coming from originally 80 properties by end of last year. Portfolio as of H1 comprises 69 assets, of which 2 further have been sold and will be transferred during the third quarter of this year. Like-for-like development on a year-on-year basis, rents -- retail rents within our portfolio went slightly down, a result of rent decreases in our remaining High-Street portfolio, which you can also see on the right-hand side, then whereas office rents went nicely up by 3%, and EPRA -- this is mainly due to reletting of the vacant space by the way. And EPRA vacancy remains unchanged, and again, very low level of 1.7%. Yes, same applies to WALT supporting here as we think the underlying strength of the portfolio. On the next page, providing you with some additional information on our investments. So some key data here regarding the assets, which we acquired since beginning of the year. Yes, meanwhile, the property in Mainz have been [ rated ] into our portfolio, and we will start a comprehensive prep work for our intended refurbishment as early as possible. The office development in Münster is underway and still expect it here to be transferred to our portfolio around the end of this year. The recently signed multi-tenant office property in Stuttgart, we will be here a very good addition to our Manage-to-Core part of the portfolio. From our point of view, it ticks a lot of relevant boxes here. It has a very good macro -- micro-location, including outstanding infrastructure access, shows low vacancy on -- and good office demand in the surrounding area. And in addition here, has a flexible space structure and already today a higher fit-out level. Yes. And compared to the property in mind, we should be able to start with our enhancement measures even earlier. Needless to say, that in both cases, we will evaluate our refurbishment and letting topics here under consideration of our sustainability strategy, for instance, with reference to facade and the technical building equipment. Yes. With this, moving on to our disposals during the first half of this year. Next page summarizes these disposals, the disposals which have been signed and/or closed here during the first 6 months and which, apart from all other arguments, enable us here to further focus on our operational capacity, and yes, on concerning assets for which we see a more attractive income and the [ early ] perspective. Yes. So on the next page, going on a little bit with the -- on the disposal side, providing you with some more information on our total disposal program here. Yes, it's a summary here of the sales activities within our strategic portfolio rotation. And considering the fact that we have started our program just one year ago, surrounded by a challenging pandemic situation. I think it's fair to say that we have been able to deliver quite satisfying results. And by the way, during this period HAMBORNER has rotated more of its portfolio then within the last 10 years probably. Yes. Next to the financial facts, some key takeaways, some additional takeaways here from our side. Based on age and overall condition of the sold assets here, the total quality of our remaining portfolio has further improved. And this also includes a better letting and maintenance profile in the short as well as in the longer run here. And in addition, the sale had a positive impact on our portfolio -- total portfolio KPIs awards and vacancy here concerning this portfolio. Furthermore, the Streamlined portfolio should additionally increase our operational efficiency. I just mentioned it here, especially concerning the successful sale of very small multi-tenant assets here. And last but not least, the continuous turnover here, the asset turnover underpins, we think, the ability of our team here to act successfully along a combination of ambitious targets, and at the same time, a challenging market environment. Yes, concerning the few remaining assets, we will continue our disciplined sales process as well as the recycling of capital into new properties. And for the asset in Lübeck, we currently evaluate different letting scenarios as well as a potential repositioning. And for that reason, this asset has been assigned to the management core -- Manage-to-Core part of the portfolio. With this short overview, let me hand over to Hans Richards, who will provide you with more details on financials as well as our operating business. Thanks for now.

Yes. Thank you very much, Niclas. Good morning, ladies and gentlemen. And also from me, a warm welcome. Let us now continue with the operating and financial figures for the first half year. First of all, let us have a closer look at our tenant base. Compared to the first quarter of this year, there are only minor changes in our tenant structure: EDEKA, Kaufland, REWE and Real are still leading our top 10 list. In total, food retailers currently account for 33.6% of the company's total rental income, an increase of 120 bps year-on-year. Further solid and reliable retail channels such as DIY stores, pharmacies and drug stores contribute around 30% of our retail -- of our rental income. As a result of the disposal of numerous nonstrategic, high strategic -- High-Street assets, the share of rents from the fashion sector was reduced significantly and currently accounts for 7.5%. Our office tenants, including medical care facilities, medical practices, educational institutions and public authorities generate around 39% of total rental income. Our solid and balanced tenant structure creates a sound basis for ongoing stable and predictable cash flows. Now a few remarks on the current letting situation. Thanks to successful letting activities, the weighted remaining term of our leases for the total portfolio is around 6.2 years. The average terms in the Retail and Office portfolio remained at consistently high levels at 7 and 5 years with 98.3% of the occupancy rates according to EPRA definition, is still very comfortable. The remaining leases outstanding for renewal in 2021 only correspond to 1.4% of our total annual rents. And currently, we are very confident to extend the expiries in the course of the year. For the following years, our lease expiry schedule still shows that the share of contracts expiring is well balanced. Larger letting tasks only need to be completed from 2023 onwards. Despite of the consistently difficult conditions on the German letting markets. We had a number of important successes in our letting operations and achieved a very strong letting result since the start of the year. We are able to conclude leases for around 96,000 square meters year-to-date. During the first quarter, we agreed on the long-term lease renewal with one of our biggest office tenants in our property in Cologne, which contributes to our letting results with around [ 16,000 ] square meters. The main tenant, NetCologne, a company run by the city and one of the biggest regional telecom service providers in Germany has made a commitment to the site until 2036. In June, we achieved further substantial letting successes and inside the long-term follow-on leases for space currently used by the food retailer Real at our retail locations in Mannheim, Celle and Giessen. In view of the ongoing restructuring of the hypermarket group Real, HAMBORNER was proactively exploring alternative uses for this space and started negotiations with potential new tenants at a very early stage. As a result, a mutually satisfactory cancellation agreement were reached with the existing tenant Real. At the same time, we were able to sign follow-on leases with new and attractive anchor tenants from the food retail sector. The total letting volume amounts to 33,000 square meters, while the weighted term of the new leases is around 18 years. At all 3 locations, remodeling and modernization work is intended and will be carried out in close coordination with the tenants. The lease contracts include corresponding agreements for tenant and lessor investments. In the Celle proper team, a substantial part of the former Real market will be taken over by the renowned food retailer, Kaufland. The space is expected to be transferred during Q3 2021. The new anchor tenant at the Giessen property will also be a leading provider in the food retail sector. The lease contract is still subject to the pending approval of the antitrust authority, the tenant cannot yet be named at this time. We expect the space to be transferred during the fourth quarter of this year. In connection with handover of all the spaces in Celle and Giessen, we currently expect investments in an amount of EUR 1.6 million to EUR 2.9 million. The exact amount of the costs as well as the potential effects of the 2021 earnings situation are dependent from the outstanding approvals of the antitrust authorities and in particular, of the local building authorities. During the modernization work at the Celle and Giessen locations, we intend to modify the layout and the technical facilities to create a basis for integrating additional stores. We are already negotiating with further potential tenants and are confident to successfully relet the remaining Real spaces of around 4,200 square meters during the next month. In this context, we expect potential effects on the 2022 results, which are dependent from the new tenant structures and thus cannot be reliable or estimated at the current time. In HAMBORNER's largest retail property in Mannheim, the Globus Group has leased the entire space currently used by Real and committed to the location for 20 years. The rental space is due to be handed over to Globus by mid next year and the associated modernization and refurbishment work will therefore also start in 2022, but with a very limited impact on HAMBORNER's results. In accordance with the lease termination agreement for the location in Mannheim, we already received a compensation payment of EUR 2.2 million with a corresponding positive effect on this year's earnings and FFO. In connection with all 3 follow-up leases, we granted building cost subsidized in an amount of EUR 7.8 million, which will be prorated over the total lease term, slightly dedicating our total future rental income. Despite the cost involved, the conclusion of these follow-on leases will further increase the quality of the retail locations and will secure our future cash inflows, which is already reflected in the fair value increases as of end of June 2021. After the view on our recent asset management activities, let me give a few remarks on the current impact of COVID-19. Despite the long lasting lockdown phase in the first half of this year and the associated impact on individual HAMBORNER tenants, incoming rent payments have seen surprisingly good performance in the last few months. Following the resumption of the lockdown at the end of 2020, the rent collection rates fell only slightly at the beginning of the year but continue to increase over the following months, resulting in an average of 96.7% in the lockdown month from January to June 2021. As a result of the gradual redemption of the far-reaching restrictions in May and June, the rent payment ratio rose immediately and almost back to precrisis levels and came in 98.5% in July. Regarding the outstanding rent payments, we are continuing our cooperative dialogue with tenants affected by the lockdown and are confident to find further mutual and fair agreements as we did in connection with the first lockdown in 2020. After the view on our recent asset management activities, let us now take a closer look at financial figures for the first half of this year. With a total of EUR 49.9 million, we saw a slight reduction in income from rents and leases compared to last year, which is mainly due to property disposals and pandemic-related risk provisioning. Reductions are partly offset by additional rental income from acquisitions. Total maintenance expenses were around 15% below the level of 2020 and around EUR 2.2 million. Net rental income amounted to EUR 38 million, a slight reduction of 1.5%. Administrative expenses increased by around EUR 0.3 million compared to the first half of 2020, mainly due to higher expenses for cash deposits. The significant rise in other operating income is a result of the already mentioned EUR 2.2 million compensation payment received from Real. Other operating expenses came in at previous year's level, but just slightly rose compared to our Q1 figures as pandemic-related impairments that [ deficit ] during Q2. As a result of income and expenses, the FFO came in at EUR 28.4 million in the reporting period, an increase of 5.1%. Now let me continue with a short look at our NAV and NTA development. The NAV calculation shows a slight decrease in long-term assets as a result of the portfolio disposals in the course of the first half of 2021. The increase in short-term assets related to liquidity enhancements, noncurrent liabilities and provisions increased due to additional loans taken out in connection with the newly acquired assets. Overall, NAV saw a slight increase of 0.3% as against the end of 2020. NAV per share at the end of June came to EUR 11.02. As in the past, the difference between NAV and NTA is very low as HAMBORNER's intangible assets only amount to EUR 0.5 million. Finally, a few comments on our financial situation, which is still very comfortable. The REIT equity ratio amounts to 57.5%, and is, therefore, still well in excess of the 45% ratio required. So the LTV as of end of June is nearly unchanged at 44.6%. Our interest coverage ratio rose once more to 9.5. The average financing costs are on a consistently low level at 1.7%, with an average remaining term of loans of 5.1 years. We have already concluded all follow-up financing for 2021 at favorable terms of 1.0%. And currently in negotiations on refinancing our liabilities expiring in 2020, which to a substantial part are due by the end of next year. So far from my side. Thank you for listening, and let me now hand back to Niclas for a short outlook.

Yes, Hans Richard, thanks so much. Yes, coming to the -- to our guidance and outlook for the remainder of the year. Yes. We see ourselves in a position to substantiate our full year guidance. Good reasons for this surely are our H1 results, which we just presented. But we are also able now to better see the outcome of certain operational tasks, including the effects from the ongoing asset rotation as well as the successful reletting of our Real sites. In this context, we narrow the range for the expected rental income to EUR 83 million to EUR 85 million and expect to achieve an FFO in the upper area of the former range, meaning now within the range of EUR 48 million to EUR 50 million. With reference to NAV per share, we are continuing to expect a number around the level of the end of 2020. For obvious reasons, this guidance also takes into account some remaining uncertainties concerning the continuing pandemic situation, despite the fact or despite this fact and considering the proven robustness of our business since the beginning of the COVID crisis, yes, we are looking pretty optimistically into the remainder of the year and are going to put a lot of effort in keeping up the dynamic concerning the enhancement of our platform. So with that, thanks so much for listening, and we are looking forward to receive additional questions from your side.

[Operator Instructions] We will now take our first question from Philipp Kaiser from Warburg Research.

Yes. Just a couple of follow-up questions from my side. First, regarding the divestment strategy of the High-Street portfolio. So very active on that side, only 6 assets left and okay, excluding Lübeck, maybe 5 assets. So could you shed some light on the disposal plan for those remaining 5 assets? I mean, there's one large asset in assortment and still in the portfolio. So could we expect the divestment also within 2021? Or you try to kind of dispose that in the beginning of 2022 regarding those strong cash inflow already received from those sales of the other High-Street assets. That would be my first question.

Yes. Happy to answer this. So I mean, apart from Lübeck, as pointed out, all these assets are for sale right now in the market. And we are in different point of transactions or conversations for these assets here within the transaction process. So therefore, it's a bit difficult for me at the moment provide you really with a reliable prediction of when we -- which assets will be sold. Nevertheless, I mean, coming from the experience we have made within the last 12 months, I'm pretty optimistic that we should be able to further reduce this number of assets by end of the year in which all of this will have make exactly, and at which point in time, I can't tell you. And just to make this clear, we want to continue, as pointed out in a disciplined way, meaning in the value-preserving way, finding the best solution here for the asset and for the company. And therefore, if it takes a bit longer, then that's the case, yes. I think we've seen a lot of speed here in the process. And yes, depending on the market situation. So therefore, we don't want to put ourselves under too much pressure to make sure that we always are able to keep the discipline here on the divestment side.

And could you shed some light on the acquisition side? I mean, you have -- you're sitting on a huge cash position due to the disposals, are kind of any indication when you are thinking to recycle a huge portion of that also within 2021? Or is it kind of hard to find suitable assets for the portfolio?

I can say that in the last couple of months, the acquisition pipeline has nicely increased. We see more interesting transaction coming to the market if you compare it, especially with beginning of -- end of last year and beginning of this year, meaning assets with a mesh [ characteristic ] as well as core assets. So I think we are -- at the moment, we have a lot to look at. And from this point of view, I'm -- yes, I'm hopeful that by end of the year, we -- until the end of the year, we should be able to do the underwriting here or to support the further underwriting here by another asset or 2, depending, obviously, on how the transaction goes. But at least if I look at the pipeline at the moment, it's looking substantially better than 2 quarters ago. And despite the way we like to -- sorry. This refers to office as well as to retail assets. I mean, we just want to underpin this because as we recently acquired 3 office assets, you might get the impression, meaning not you personally, but somebody who's observing that we are closing on office, that's not a -- we are opportunistic in the sense as pointed out in the past. And therefore, if I look at the pipeline at the moment, we see assets in both assets [ lot ].

But it's fair to see that the recycling of the cash flow this year and next year happen, at least?

Yes. Yes. I mean that's clearly our goal.

And the last question regarding those divestment strategy. Are there any new info for the early repayment charges that are in the room for at the beginning of the year? And regarding the financing, the underlying financing of the remaining High-Street assets. Are there any updates on that side regarding the size of the -- or repayment charges may occur?

Here, we are optimistic that we can avoid these payments. But nevertheless, we have here to sign the contracts in the next time.

Okay. And the last question regarding Real. So you pointed out the expected maintenance for Celle and Giessen this year. And in Mannheim, you mentioned there is a very limited effect on the earnings in 2020. Could you quantify that today or it's too difficult to quantify it now, which amount of capital and maintenance?

Yes. If you say that is a minor amount, then it's around EUR 100,000 in this level.

Okay.

This is positive.

We will now take the next question from Kai Klose from Berenberg.

I've got a quick question. First, on Page 11 of the interim report. There you mentioned that the fair value of the portfolio increased by EUR 6.6 million related to 5 assets. Could you give a bit of details on the -- or a bit more details on the uptake on this update and what were the main drivers, which resulted in the uplift in values. Second question would be on Page 9 of the report. We saw an increase in the other assets to EUR 7.7 million from EUR 300,000 by year-end 2020. May elaborate it a little bit more, what was the reason for that? And then the third question, is it fair to assume that also in the next quarters or at least for Q3, we are going to see, let's say, a difficult development between maintenance and CapEx? I'm asking because we saw now in H1, a decrease in CapEx -- sorry, decrease in maintenance but an increase in CapEx. So is it fair to assume that this will continue for the full year? And the very last question would be on the acquisitions. I think Mr. Karoff mentioned that you expect for Stuttgart, the refurbishment or let's say, the kind of refurbishment to start a little bit earlier. Just to ask why because the lease length of both properties compared to mines it's fairly similar? So maybe you could explain a little bit more why you think you can start -- why you think you can get your hands on that asset a bit earlier than in mind.

I may start with answering your last question, Kai. The content to get pretty easy. The answer because if you consider the fact that one property is a single-tenant property and the other one is a multi-tenant property. Apart from the WALT in Stuttgart, you have obviously a more flexible structure, meaning not all tenants are -- have ending contracts at the same time. So therefore, based on the structure, there on the lease structure, it's yes, it's a different time schedule for us when we have the chance to get access to the property in the different space. And then maybe another answer to your question concerning the value uplift. Please keep in mind that we have started the conversations pretty early. Obviously, last year already has pointed out, meaning our values and ourselves, obviously, we here for our accounting purposes, by end of last year already, we had a certain view on top, and there were some estimates concerning maintenance, CapEx spending, letting profile, rent levels, et cetera. and this obviously flew into the valuation already by end of this year. And now as we we are able to sign the contract, and we have an even better view on the whole financial environment here associated to it. This led to the fact that for the half year valuation, because of the expectations we had by -- compared to last -- end of last year, yes, we have a bit reduced on the -- if I'm correctly on the CapEx side, some reduction. So we have to invest less than we originally anticipated. And additionally, obviously, the market has moved on within the last 6 months. So it's a combination of different effects, but this all led to the fact that we have this certain increase here on the value side.

I answer the question for CapEx and maintenance first half. The relative high CapEx year with regard to one asset in the Darmstadt where we renewed the roof. This was EUR 1 million CapEx. And Darmstadt is one of the assets where we have changed the value coming from this CapEx, what was finalized now in the first half. The expectation that maintenance will last in the second half. You have heard, Kai, that we expect maintenance of EUR 1.6 million up to EUR 2.9 million in this year for the Real case. So I would expect that we will have a higher maintenance in the second half than in the first half, okay?

Okay. And may I can ask a last question on Page 5 of the presentation regarding the Mainz assets. You published a gross initial yield of 7%. Could you indicate where you see the annual rents after you have spent your modernization investments? And how much do you spend for modernizations once the tenants have moved out.

I think this will be a bit too early because it will depend on some conceptual questions concerning the refurbishment concerning Mainz because there obvious reasons, there are different options, how we can approach this property once we have full access to it. And therefore, it's a little bit too early because I want to avoid any disruption here. But once we have more light concerning our planning here, happy to provide more details in the next presentation.

But would you see the wins -- the currently contracted wins in currently the property being underrented?

Let's put it this way -- Yes, I mean, concerning looking forward, if we put more emphasis, and we put more measures here into the property and invest into the property, we see additional rent potential, however, I wouldn't say that it's massively under rented at the moment.

[Operator Instructions] As there are no further questions in the queue, I will hand the call back over to Mr. Karoff for closing remarks.

Yes, then. Thanks so much from our side, 40 minutes for this call. Thanks for having the patience and looking forward to talk to you in the future. Thanks.