Instone Real Estate Group SE (INS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Instone Real Estate Group SE Q2 2025 Results Conference Call. I'm Mattilde, the Chorus Call operator. The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Burkhard Sawazki, Head of IR and Capital Market Communications and Strategy. Please go ahead.

Thank you, Matt. Good morning, everyone. I would like to welcome you to our Q2 '25 earnings call. Our CEO, Kruno Crepulja; and our CFO, David Dreyfus, will walk you through our presentation and give you an update on our current business performance. As usual, this will be followed by a Q&A session. With this, I would like to hand over directly to Kruno.

Yes. Thank you, Burkhard. Good morning, everyone, and thank you for joining our Q2 earnings call. In an overall macro environment that continues to be affected by numerous uncertainties, we are pleased to have achieved a very solid set of half year results. We continue to see very robust demand in retail sales, which has exceeded our own expectations. While we had no retail starts in 2024, we decided to start the sales process of 4 new projects during the first 6 months of this year. All of them have been very well received by the market [with] strong momentum. These new projects are ideally tailored to the tax incentive scheme of the Growth Opportunities Act, which allows highly attractive post-tax returns for buy-to-let investors. Accordingly, the trend that private investors have become the most important buyer group was again confirmed in the second quarter. Moreover, we are also witnessing rising demand from owner-occupiers. All in all, we saw an accelerated sales growth in retail sales in the second quarter with a sales growth rate in the first 6 months of 58% compared to H1 2024. Sales starts are an important sales growth driver. Following the sales start of 4 projects in the first 6 months, we are planning 5 further sales starts focusing on retail sales by the end of this year. We clearly expect this to generate additional positive sales momentum in the coming months. It is still quite apparent that the institutional investment market remains more challenging. Our institutional sales for 2025 are geared towards the second half of the year and especially towards Q4 as planned. Against this backdrop, we are glad that we were able to sign our first institutional deal just after the reporting date in July. We sold a medium-sized subproject of a larger project in the top 7 German metropolitan region. The terms were fully in line with our expectations. I think this was really a good result. We also view this as an encouraging signal that the institutional market is continuing its gradual recovery. The interest from investors is rising, and we are in talks for several other deals. In our last call, we emphasized that the market environment for project acquisition is making a turn for the better. While we were still very selective last year, partly due to a lack of attractive opportunities, we are now seeing a significantly greater supply of attractive growth opportunities. Accordingly, and in line with our communicated strategy, we are now increasing our investments in our land bank. Currently, we have 5 deals either just signed or very close to signing with a total GDV of around EUR 350 million. We expect above-average margins and IRRs on our acquisitions. We are taking advantage of the current window of opportunity, and there's more to come. At this point, I think it's also worth mentioning that you can expect continuity and stability at Board level of Instone in the years ahead. The Supervisory Board has extended the contract of my colleague, Andreas Greve, until end of 2027, and I will also stay on the Board for the coming years, which I'm convinced will be a very promising phase for the company. My new contract will run until mid-2029. Let's now take a brief look at our financial KPIs for the first half of 2025. We reached adjusted revenues of EUR 231 million, fully in line with our expectations. We expect a stronger second half also due to the revenue contribution from the upcoming sales starts of additional projects focused on buy-to-let investors, the signing of institutional deals and a generally stronger sales seasonality. Our gross margin stayed at a high level of 25.3%. It is once again a strong indicator of our operational excellence. However, in line with our planning, we still expect a slightly lower margin in the second half of the year. Our adjusted earnings after tax amounted to EUR 17.2 million, which also shows that we are fully on track for our full year financial target. Including the seasonally weaker first quarter, our H1 sales reached EUR 96.3 million. The year-on-year comparison is distorted by an institutional deal in the first quarter of the previous year. As pointed out, the underlying demand indicators currently look clearly positive with dynamic growth in the retail business. With the contribution of the institutional deal just signed in July, we can expect to see a significant positive year-on-year sales growth in H2. On the basis of the very solid H1 results and the current demand indicators, we are also confirming our outlook for the full year 2025. We expect revenue in the range of EUR 500 million to EUR 600 million, a very healthy gross margin of around 23% and adjusted earnings after taxes in the ballpark of EUR 25 million to EUR 35 million. Our sales target also remains unchanged at more than EUR 500 million. Moving on to Slide 4 in our presentation. Our sales ratio on the upper chart illustrates our sound sales performance of our retail business. There are usually certain spikes at sales starts and subsequent temporary slowdowns, but the chart clearly demonstrates the underlying upward trajectory of our B2C sales. In the first 6 months, our retail sales climbed by 58% compared to the previous year, which reflects a further growth acceleration in the second quarter. Our sales ratio currently stands above the long-term mean. A key driver for this positive development was, as mentioned, our additional product we offer to the market with our sales starts. The projects were well received by the market. As mentioned, these projects are ideally tailored to the attractive tax incentive scheme for new builds, which represent a very powerful demand factor. There is a pipeline of 5 additional planned sales starts in the second half of the year to let investors, which promises additional growth acceleration in our private customer business. General investor sentiment has improved. The rising awareness that German residential prices have bottomed out and that we are entering a new upward cycle with support from dynamic rent growth, especially for new builds is also a very important reason for this. This top-down view is also shared by institutional investors even though this customer segment is still lagging behind in the recovery process. There is still a greater reluctance to buy among this group of buyers. Against this backdrop, we are, of course, very pleased that we were able to sign our first deal year-to-date already at the beginning of the second half of this year. I also believe that it provides a really encouraging signal regarding our full year sales targets. The institutional business is, as you know, always seasonally quite back-end loaded, but we can confirm that we are in concrete and promising discussions for several further institutional transactions. On the following Slide #5, we provide an overview of the sales starts year-to-date with the current status. As already highlighted in our last call, we have seen an especially strong sales performance of our project in Duisburg at an attractive micro location close to the border of Düsseldorf. We have already sold almost 60% of the first of 2 subprojects just within a couple of months. Our group [subsidiary new] with its innovative product that is based on digital and models planning is responsible for this project. With our new concept, we can offer apartments at a highly competitive price point of around EUR 5,000 per square meter, which contributes to the attractiveness of this innovative product. We have already started construction work and therefore, also generate revenues ahead of schedule. We are selling the Lahnwarte project Frankfurt, predominantly with our internal sales resources. With the current sales speed, we are well on track for the expected construction start in the fourth quarter. For the project in Gefilde Stuttgart, we started the sales process in June after receiving final building permits. We have already seen a very decent number of sales and significant backlog of notary appointments and reservations. Here, we are also confident that we can start construction this year. The fourth project in Hofheim Frankfurt has been contributing to our sales in July and also here, we are seeing good momentum. Due to a higher share of apartments, which are more tailored to the demand of owner occupiers, we anticipate a somewhat lower sales speed for this project. However, we have already collected a decent number of reservations, which makes us confident for this project as well. Again, all of these projects benefit from both the 5% degressive depreciation in combination with a 5% special depreciation over 4 years for energy-efficient buildings. On the following Slides 6 and 7, with an overview of relevant market indicators for our business. Despite the larger macro uncertainties, prices for new builds in the top 7 cities continued their upward trend, albeit at a still moderate pace. The rising scarcity of residential space in the metropolitan areas, which is also reflected in sustained dynamic rent growth is a key driver for this. This is especially true for highly energy-efficient, good quality new build. The rent development in top cities based on the data from Bulwiengesa is shown on the lower chart on this slide. Rising yields from rental growth were a crucial factor for stabilization of prices after the rate shock experienced during the past years. Rents for new builds are still outpacing price development and inflation. Therefore, rising yields are making the product even more attractive and thus demand for new builds should grow. Over to Slide 7, which illustrates construction price inflation over time. The most recent data from the Federal Statistic Office confirm a stable trend over the last few quarters with a rather moderate CPI growth. However, I would like to reiterate our statements from the last calls. Based on our on-the-ground experience, the cost price inflation for larger residential projects is lower due to the very favorable competitive situation we are experiencing at the moment. Construction activity for larger residential projects is clearly decreasing. We at Instone are clearly benefiting from this and not only from a cost perspective. Finally, all of our construction projects are well within budget. Moving on to Slide 8. Instone continues to report a very high presales ratio for its projects under construction. This is a key pillar for reducing the operational risk profile and increasing the cash flow visibility. This high presales ratio is an important differentiator compared to our peers. To give you a brief update on this, project worth EUR 2.5 billion are currently under construction, of which 92% have already been sold. This provides a stable source of future revenues of still some EUR 340 million as well as for secure future cash flows of some EUR 190 million. Over the past 2 years, we have already generated substantial cash flows from these presold projects under construction, which has led to further strengthening our balance sheet. This now puts us in a position to exploit investment opportunities in the buyer's market for land. As usual, David will elaborate on our balance sheet ratios later in the financial section. We have also done our homework on the approval side during the past years, and we have made good progress in further developing our pipeline despite the existing bureaucratic hurdles. As soon as the market reopens more broadly, we will be able to accelerate our sales significantly with an existing land bank consisting of projects that have already obtained zoning rights of around EUR 1.7 billion at the end of the second quarter. This does not yet include the progress we have just made on our project in Koln Bickendorf, which has a GDV of around EUR 650 million. We are ahead of schedule here. By the way, it can also be said that in general, that municipalities are now taking the issue of housing shortages more seriously and are more forthcoming in discussions with a stable partner as install. We discussed in the previous call that we are observing a rising supply of attractive buying opportunities in the market. The land market in Germany needed some time for its price adjustment process after the start of the crisis. In 2024, price expectations of sellers were, in general, not yet at a level which looked attractive to us, but this has changed. Sellers have become more realistic, although we have to negotiate the deals, which always takes some time. The low competitive pressure on the buyer side for larger projects is creating opportunities. With our strong balance sheet, we are capitalizing on this. We discussed our acquisition pipeline in the past, which is now starting to materialize. Currently, we have 5 land acquisitions very close to signing. Signing is expected either in the coming days or in the coming weeks. The projects are spread over several metropolitan areas across the country, such as Nuremberg, Stuttgart, Munich, and the GDV in total is around EUR 350 million. Furthermore, we have an extensive acquisition pipeline also with projects under exclusivity, and therefore, you can expect additional land transactions during the coming months. We are focusing on projects with a shorter duration, and therefore, such acquisitions should clearly help to strengthen our growth profile in the coming 2 to 3 years. I would now like to hand over to David for the financial section of the presentation.

Thank you, Kruno. Let me now walk you through our H1 '25 financials in a bit more detail, starting with our adjusted results of operations on Page 10. Our adjusted revenues are slightly below previous year's level as expected. This is mainly attributable to the slightly lower construction output and to the revenue contribution from an institutional deal in Q1 of the previous year. We expect higher revenues in H2 with a rising revenue contribution from new sales, including institutional deals. Also in the private customer business, the seasonality is typically stronger in the second half. Additionally, we can expect a rising impact from our various sales starts and the subsequent start of construction works, which is, as you know, the starting point for revenue recognition in our retail business. We have started construction of our new Duisburg project, and we are on schedule for the construction start of our Lahnwarte project in Frankfurt and Gefylde near Stuttgart. We have continued to produce a very healthy gross margin of 25.3%. Our margin definitely remains in the benchmark -- remains the benchmark in our industry. Our cost discipline and cost leadership with our own construction management and the quality of our projects are important structural drivers for this. It is also worth mentioning that we have evidently applied prudent cost assumptions for our projects in an inflationary environment. We do not have any cost overruns. The projects are well within budget. Nevertheless, we expect a somewhat lower margin in the remainder of the year, in line with our planning. Our platform costs were slightly below previous year's level despite ongoing cost inflation due to a lower number of FTEs and lower LTI provisions. Further down in the P&L, we saw a further decline in our net interest expenses. This was again largely attributable to the reduction in net debt of some EUR 55 million year-on-year. We expect a slightly higher tax rate in '25 lower earnings contribution from the Berlin-based equity joint venture project, which will be completed this year. Accordingly, we reported an adjusted earnings after tax of EUR 17.2 million, which, in our view, indicates that we are well on track to reach our full year earnings target of EUR 25 million to EUR 35 million. Over to Page 11. As a result of the significant cash generation from presold projects over the last years, our financial leverage dropped to a very low level, which gives us ample headroom for growth. Our leverage ratios remained largely unchanged over the quarter despite the cash out flow for dividends. Our loan-to-cost ratio remained at a very low level of 12% at the end of June despite the comparatively low earnings level at the current trough of the earnings cycle. Net debt to EBITDA is also only at 2.8x. In light of our planned growth investments, we expect our leverage ratios to increase over the next 18 months. However, you can rest assured that a strong balance sheet will remain a key cornerstone of our business model. Moving to the next slide. Over the past few years, we were able to demonstrate that our business model enables us to generate very attractive cash flows. While we still expect substantial cash contribution from our presold projects, we are now entering the investment phase. This does not only comprise land investments, but also the typical investments in working capital during the initial construction phase for projects catered to retail. As you know, we start construction after reaching a presales ratio of 30%. Accordingly, the cash flow rises over proportionately with sales progress. We expect that the cash requirements for the initial construction phase will largely offset the cash inflow from presold projects. The strong cash generation of Instone resulted in a liquidity position of more than EUR 270 million at the end of the second quarter, and the vast majority is available for land acquisitions. Due to the fact that the debt position contains mainly project-related debt, Instone has a significant net cash position on corporate level of some EUR 130 million. In addition, we have access to revolving credit facilities totaling around EUR 130 million, increasing our potential for land acquisitions. Chart 13 gives an overview of our financing structure at the end of Q2. There were no major changes during the second quarter worth highlighting. Finally, coming to our outlook on Page 14. In light of the very solid H1 results and the positive demand indications, we are also confirming our forecast for the full year 2025. We expect a sales volume of more than EUR 500 million, revenues in the ballpark of EUR 500 million to EUR 600 million, a sustained high margin of around 23% and a net result in the range of EUR 25 million to EUR 35 million. With this, I would like to conclude the presentation and move on to the Q&A session.

[Operator Instructions] The first question comes from the line of Andre Remke from Baader-Helvea.

A couple of questions, please. Starting with the first on the land plot acquisitions. Could you provide some more details on that? What is the potential cash outflow you have to pay on the mentioned EUR 350 million project volume. What is the status or the average duration to turn them into construction starts? And what could be a magnitude of planned gross margins?

Andre, so looking at the projects, we have 2 already signed. One is -- will be signed today. And we plan to sign the other 2 in a couple of weeks. In addition, we have a significant portion of exclusivities where we currently invest a lot of work and plan to finalize those this year. So when you look at one example, I think that's when I take one of the projects we have signed recently, which is, from my perspective, a good example for profitability, et cetera. So one moment, I have to go into the numbers. So roughly, you can say the land price is between 10% to 20%, depending on the location. So if you are in a top city, then it's more like 20%. If we are in a suburban area, it's like 10%. The gross margin we are looking at is above 25%. So we have projects where we are reaching quite 2, 3 percentage points more. And more important for us when we look at the current environment is what is the IRR we are targeting. And here, our initial target is becoming -- getting more than 20%. But here, the projects we are at a ballpark between 25% to 35% due to the fact that we are optimizing also when the land has to be paid, what is the work to be done. We have -- we are signing contracts partly where we are generating the building permit and then paying the land so very late. So here, we have the negotiation power to optimize the gross margin and the IRR. Is it sufficient as an answer for you?

Yes, absolutely, absolutely. And if you take an easy calculation for me as an analyst, 15% on average for the land on EUR 350 million means EUR 50 million you have to pay. But the question is, is it -- do you have to pay it right now or only, let's say, in 1 or 2 years from a cash flow perspective?

So absolutely, Andre, the payments vary. But typically, we have made favorable terms where we don't pay immediately. Some of them we pay beginning of next year, some of them we pay during Q4. So we are trying to push out the cash out from those land acquisitions as far as possible. But I would say within 1 or 2 quarters from the acquisition time. You also asked when those acquisitions, the EUR 350 million that we have mentioned when they will start the sales or construction period. All those projects are short-term we target to start the sales process during '26 and construction in '26 or '27.

Okay. Perfect. Second question is on the sale, you mentioned the EUR 55 million that you call it medium sized. Is this the kind of size you expect also for the potential deals under negotiations? Or in general, what are the deal volumes where the demand is higher from the institutional side? And who are the potential buyers if they are still the typical buyers or anything worth to mention here?

Yes. So we have, let's say, what we are targeting for the last quarter this year on sales, there are projects a bit smaller than the mentioned one. We have won a bigger deal we are planning. So I think the size between EUR 30 million to EUR 80 million is the ballpark, I would say. And the clients are more co-ops than maybe they have been in the past. So we have -- I think the institutional buyers classically from the past, like pension funds, for example, they are still on the sideline. So we have more interaction with co-ops who have the equity, who need to invest, who are familiar with the regional market. And here, we see a very positive traction currently.

Okay. The last question is on your guidance on the net income guidance. After the first half, you already achieved, let's say, almost 50% of the upper end of the range. And you are expecting an acceleration of institutional deals in the second half. It shouldn't be a consequence that such deals will contribute strongly also to earnings in the second half. So is it fair to assume that even the upper end of your guidance range seems to be conservative? Or where do you see the risk of this calculation?

So Andre, maybe just give you a couple of elements to this. Number one, we have provided a gross margin guidance of 23%. We are currently at 25%. So gross margin will come down in the second half of the year. Number two, we will have -- we do construction progress, which is a large part of the -- of our turnover of our revenues and sales have some impact, but a large part also comes from revenues that we generate through construction progress. And number three, I think sales volumes, as we just mentioned, when we will be able to complete them during the course of the second half is also difficult to say. It will most likely be in Q4. And depending on the timing, the amount of revenue recognition also will be different. So I think all those elements make us prudent to make any statement on where we will exactly land in terms of the CHF 25 million to CHF 35 million guidance we have provided.

Maybe one additional comment to that. Maybe you have seen the news flow. We have handed over a lot of projects, a lot of units in the last couple of months, projects which have generated a very high gross margin in the past. And then, of course, the mix currently is changing. We have the projects we are now selling are more like as you already mentioned, the remaining, let's say, portfolio is not at 25%. It's more like 20% to 22%. And this, in combination with the very strong margin projects, which have been finalized in the mixture, brings you to the 23% of gross margin. I think that's really important. Of course, the new projects gives us additional margin opportunities, but they are not really influencing the gross margin for this year.

And finally, Andre, one component to add is increasing interest rates, as we mentioned with the construction start buildup of working capital and the acquisitions, we will see that our net debt will increase, and therefore, interest rate in the second half will also go up.

Okay. If I may, a very last question, just for the record on your dividend policy. It was somewhat, let's say, disturbed by the last minute action of your -- some of your shareholders to pay more than originally planned. What should we expect going forward in terms of dividend policy? When will you have to do your mind whether you have to revise the existing dividend policy?

I think one -- maybe one point which is important to mention. Our big shareholders absolutely supporting our growth strategy. I think that's really important to say. And we have had the situation that in last year, we have generated significantly more operating cash flow than we have initially planned. So -- and then we have always had discussions with shareholders, the one who said, okay, you can pay out more dividends and you can stick to your growth plan. Others were saying, look, we want the company to invest all the money into growth and pay no dividend. So there are different, I would say, thinking about it. From -- as a management team, I would say that we want to further accelerate growth. We want to invest, but we also want to pay out dividends and dependent on how many, let's say, payouts do we have? What is the overall situation we are facing, then we will discuss this with our key shareholders. And then will we make a decision for the next AGM. Today, it's too early to discuss the dividend payment scheme for next year.

Yes, sure. I have no expectation that you will give me an answer today also in your press release. But in general, of course, this is kind of uncertainty what to expect from you as a company. So is it fair to assume that we only will -- that you will only provide further information on your general dividend policy at the beginning of next year. Is that right to assume?

Yes. I think when you look at -- and there, we have also to be very clear. So we have paid out EUR 10 million more, which is not really influencing our growth plan for the company. And also the shareholder -- the big shareholder has not asked for the maximum payout. So I think it's -- as I said, I think it's a discussion we have for years regarding what is the right dividend strategy. And we will take this and discuss it with our big shareholders when we have more clarity regarding our investments we have taken.

The next question comes from the line of Thomas Neuhold from Kepler Cheuvreux.

Actually, I have 2 follow-up questions. First, on the institutional business. Can you please provide more color on the total number, the total size of projects which are currently under negotiations? And can you maybe also provide some color on the institutional investors who are still not active in the market? What are the key concerns? What are the main topics you're discussing with them? And my second question would be on the potential project acquisitions, which you still plan to do this year. What is approximately the target for additional acquisition in terms of GDV this year?

Thomas, so we have currently 4 projects in institutional projects where we are discussing with potential buyers. And regards the, let's say, concerns of the, for example, pension funds, I think they have a portfolio. And this portfolio from the past is more dedicated to commercial investments. And we all know that office developments are not really easy. And the question for them is, of course, they have to refinance it. There's a discussion regarding valuation, et cetera. So I think there's a portfolio issue for them. When we talk to them, and I'm now saying cops who are still, let's say, part of our buying group, if I'm talking about institutional funds or pension funds, they are struggling with their portfolio. They are struggling, of course, a bit with the interest rates still. But from my perspective, if you talk to them, what attracts you in the real estate sector, they clearly say it's resi. They clearly say it's resi in the metropolitan areas. It's new build, but they have the issues to transform the investments they did in the last decade. And this is, from my perspective, one of the main reasons why they are current in the sideline. And the second is in a market where the transaction volume is very low. And when you look at the mass and things they did in the past, which was also not really successful, I think they have the problem to be the first mover in the market. So I think this situation will also change when we'll see the transactions going up, then we will see the classical core money coming back, but our expectation is that it will take some time. And the second question. The target GDV of acquisition, we have targeted EUR 2 billion for this and next year. with the EUR 350 million mentioned, we have made the first step. I think it wouldn't be too optimistic to get to the first EUR 1 billion this year. But I think it always depends project by project. It could be less, it could be more. I don't want to make an exact guidance for this year. But what I want to say is that we have a significant portion of exclusivities where we easily could cover the EUR 2 billion in total.

We now have a question from the line of Thomas Rothaeusler from Deutsche Bank.

A couple of questions. The first is actually on the institutional deal you've just signed. Just wondering if you could elaborate a bit on the terms.

So we have here -- but you have seen that we have not pointed out exactly where and what kind of projects. So we have here an NDA. What I can say is that the gross multiplier, so the gross yield is roughly at 4% starting gross yield is roughly 4%. And it's dedicated to -- and this is also important, it's not social housing. So it's really a free financed project, no social housing with a gross starting yield of 4%, which describes that we are satisfied with the result of it. I think the buyer can be satisfied, too. It's a very, very good project, very nice location. So it's always good when both sides are positive.

So that should be the level we should expect also for the next deals?

I think it's in the ballpark. So I think it's a good indicator, which is a realistic approach, always depending on what is the social housing portion, et cetera. But I think that's a realistic multiplier.