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

Ladies and gentlemen, welcome to the Instone Real Estate Group SE Q3 2025 Results Conference Call. I am Hillie, the Chorus Call operator. [Operator Instructions] The conference is being recorded. 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. Good morning, everyone. I would like to welcome you to our Q3 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.

Hello, everyone, and thank you for joining our Q3 earnings call. We are pleased to report another very solid set of results for the third quarter in a macro environment that is still characterized by considerable uncertainty. We have witnessed a further pickup in demand with strong growth in sales to private investors, which has even exceeded our own expectations at the beginning of the year. Our retail sales surged by some 88% compared to the previous year. The third quarter was the strongest quarter in our private customer business since the emergence of the crisis in 2022. We expect continued very positive momentum also in the current final quarter with tailwind from seasonality and from further sales starts, which have become a major growth driver. On the other hand, it must be noted that the speed of recovery in the institutional transaction market has not quite met overall market expectations. Overall market uncertainty seems to be having an even greater impact on this segment. Nevertheless, we are making good progress in negotiations on various institutional transactions. Having closed our first institutional deal in Q3 with a volume of EUR 55 million, we are confident that we will be able to sign further transactions by the end of the year. Interest from institutional investors to invest in German residential new builds is definitely rising. We have already pointed out in our recent calls that we see an improved environment for acquiring land. I'm sure you have seen our latest press release on this that we have already secured projects with a GDV of more than EUR 1.1 billion year-to-date. This clearly demonstrates that we are currently very determined to take advantage of this window of opportunity and to capitalize on our strong balance sheet to further strengthen our growth profile. We are currently buying projects with above-average returns and mainly with the existing zoning or far advanced in the zoning process, two, allowing faster realization. As a result, we anticipate a short-term EPS accretion from these acquisitions. We continue to have a very extensive pipeline, so you can expect further attractive deals in the coming months. Our target is to purchase projects with a GDV of EUR 2 billion by the end of next year. Let's now take a brief look at our financial KPIs for the first 9 months of 2025. We reached adjusted revenues of EUR 347.5 million, fully in line with our expectations. We expect a stronger seasonality in the fourth quarter, also due to the revenue contribution sales starts, the signing of institutional deals and generally stronger sales seasonality in the fourth quarter. Our gross margin stayed at a very healthy level of 23.9%. We believe that this is still the benchmark in our industry and underscores our operational excellence. Our adjusted earnings after tax amounted to EUR 21.4 million, indicating that we are well on track for full year target. On the back of the strong retail business and the contribution from our institutional deal, the sales volume increased significantly and reached EUR 229 million. As mentioned, you can expect a strong year-end business and significant rise in the sales volume in the fourth quarter. On the basis of rock solid 9-month performance and the current demand indicators, we are confirming all of our financial and operating targets for the full year 2025. While we want to provide you with a bit more color on where we expect to end up in Q4. We expect revenue to be more likely in the lower half of the guidance range of EUR 500 million to EUR 600 million, and we expect adjusted earnings after taxes towards midpoint of our EUR 25 million to EUR 35 million guidance. Our sales target of EUR 500 million also remains unchanged. Moving on to Slide 4 in our presentation. Our sales ratio on the upper chart illustrates the sound sales performance of our retail business. There is usually a spike when we start sales and subsequent a temporary slowdown, but the chart clearly demonstrates that the underlying upward trajectory of our B2C sales. Our sales ratio of around 2% has reverted to its long-term mean as a sound foundation for our business. In the first 9 months, our retail sales jumped by around 88% compared to the previous year, which reflects a further growth acceleration during the third quarter. A key driver for this positive development was, as just mentioned, the acceleration in sales starts. The projects were well received by the market. Our new projects we are offering to the market are ideally tailored to the attractive tax incentive scheme for new builds for private buy-to-let investors. This customer segment has emerged as the most important buyers group. The tax incentives are a powerful driver of demand, and we expect this customer segment to deliver the strongest growth going forward. As a consequence, we have decided to focus even more strongly on this customer group in our strategy. This includes, for example, establishing our own sales activities and significantly strengthening our sales power, focusing on buy-to-let customers in order to be able to fully capture this attractive business potential. We expect further accelerating sales momentum in the first quarter -- in the fourth quarter with support from additional sales starts and general favorable seasonality for our business at year-end. For the full year 2025, we, therefore continue to expect 10 sales launches. As a reminder, we did not have any B2C sales starts at all in 2024. For 2026, we anticipate a further increase in the number of sales starts, which will pave the way for further significant rise in our sales volume. The general investor sentiment is improving. Also, all relevant investor surveys confirm that German residential remains on top of the investment agenda for institutional real estate investors. However, short-term investor appetite remains sluggish with many investors still preferring to stay on the sidelines for the time being. Nevertheless, after having signed our first institutional deal, a subproject of [indiscernible] to local cooperative with a volume of EUR 55 million, we are making good progress on a number of additional institutional deals. We currently have several institutional deals at an advanced stage of negotiation with a volume of around EUR 120 million. Accordingly, we have good reason to be optimistic that we can expect additional signings by year-end, though a deal is only signed when it's signed. Although our assessment at the beginning of the year, like that of most other market participants regarding the speed of the institutional investment market recovery has not been fulfilled, we nevertheless believe that we are on track to achieve our sales targets for the year as a whole. The stronger retail business can compensate for the weaker recovery in the institutional market. On the following Slide #5, we provide an overview of the sales starts year-to-date with their current status. We have seen very strong momentum for our project in [indiscernible], [indiscernible] Düsseldorf, [indiscernible] Stuttgart and our land water project in Frankfurt. The performance of our project in Duisburg, which is planned and executed by our subsidiary Nyoo is quite outstanding. We have sold more than 70% of the first sub project within just a few months. The price point of around EUR 5,000 per square meter, which can be achieved with our new product is considered as highly attractive. Also, the performance of our Frankfurt project is worth highlighting as we have to date already sold almost 40% just with our own internal sales force. Sales levels for the projects in Duisburg, Frankfurt and Stuttgart are ahead of our targets, and we thus were already able to start construction ahead of schedule for all these projects. The sales speed for our project in [indiscernible] near Frankfurt, as you can see, is lower. This is in line with our expectations as the apartments of this project be larger average living spaces and as they are more designed for owner-occupiers rather than buy-to-let investors. We have just recently started marketing of our 2 latest projects in Nuremberg and in the Hamburg region. [indiscernible] picture has been confirmed. In the first few weeks, we have already secured a substantial number of reservations and OTV contracts. The subproject of our Park Residence project in Leipzig is maybe a special situation. The building complex is a listed building. As you can see, we are seeing very strong demand for this product as well. On the following Slide 6 and 7, we provide you 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 moderate upward trend on a year-on-year basis with a stable development during the last quarter. The rising scarcity of residential space in the metropolitan areas, which is also reflected in sustained very dynamic rent growth remains the key factor for the positive underlying development. This is especially true for highly energy-efficient, good quality new builds. The rent development in the top cities based on the data from [indiscernible] is shown on the lower chart on this slide. Rent growth remains at elevated levels and property yields of existing properties are witnessing a further yield expansion, while interest costs have stabilized over the last month. Rents are also still outpacing general inflation, which has also stabilized. This provides the foundation for making investments in new build apartments increasingly attractive to a broader range of customer groups, thereby supporting the ongoing market recovery. Over to Slide 7, which illustrates construction price inflation over time. The most recent data point from the Federal Statistics Office confirm a stable trend over the last few quarters with a rather moderate CPI growth. We are also sticking to our own view based on our own on the ground experience that cost price inflation for larger residential projects is currently still considerably lower due to the weak order books of construction companies, which is giving us strong negotiation power. All of our projects are well within their cost budgets. Instone is currently leveraging its strong market position across multiple areas from securing attractively priced construction services and project opportunities to financing of its investments and also driving sales as a trusted partner for our customers. Moving on to Slide 8. Although several projects are progressing well and some have already been completed, our GDV continues to rise. This is driven by the addition of new projects to our portfolio, particularly in the presales phase, which is reflected in the growing share of this segment in the pie chart. Our operational risk profile remains at comparatively low level as we maintain a very high presales ratio of 91% of our projects under construction. This is also providing a high level of cash flow visibility and is clearly a key differentiator compared to our peers. Our presale projects provide a stable source of future revenues of around EUR 350 million as well as for secure future cash flows. Over the past 2 years, we have already generated substantial cash flows from these presold projects under construction, which has significantly strengthened our financial position. We are now leveraging this financial firepower by acquiring new projects with clearly above-average return potential. We have secured and acquired land plots for projects with a GDV of more than EUR 1.1 billion year-to-date. Approximately half of this volume is planned to be realized in cooperation with strong financial investors through joint ventures. These potential JV structures are particularly relevant for large-scale projects and offer significant benefits. They enable optimized risk diversification across our portfolio and enhanced return on equity by the generation of additional income streams from the project partners. We still have an extensive deal pipeline. And as we already mentioned, it seems pretty likely that you can expect further land acquisitions in the coming months. We have set ourselves the target of acquiring projects with a GDV of EUR 2 billion by the end of 2026. We currently see a window of opportunity for acquisitions, the property market having bottomed out with a rising supply of attractive buying opportunities with prices for land plot having undergone a significant price correction and with very low bidding competition. We are currently focusing on projects with a shorter duration, and therefore, our acquisitions should clearly help us to further strengthen our growth profile in the coming 2 to 3 years. With our existing portfolio, 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. As soon as the market reopens more broadly, we will be able to further accelerate our sales with our existing land bank, consisting of projects that have already obtained construction rights of around EUR 1.9 billion at the end of the third quarter. With this, 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 Q3 2025 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 anticipated. This is mainly attributable to a slight decline in construction output. However, with stronger seasonality expected in the fourth quarter and the expected timing of several institutional deals, we anticipate Q4 to be the strongest also in terms of revenue recognition. Thanks to better-than-expected sales performance and the earlier than planned start of construction of our projects in Duisburg, Frankfurt and Stuttgart, we will also see accelerated revenue contribution from these projects in the fourth quarter. Accordingly, we are confident and well on track to achieve our revenue guidance. We have continued to deliver a very healthy gross margin of 23.9%, which remains an industry-leading profitability at this stage of the cycle. The result shows us also to be well on track to achieve our full year margin target of around 23%. To put this into perspective, even at the trough of the cycle, we are generating higher margins than many of our competitors, including the other ones we were able to generate at the peak. This is a strong testament to our operational excellence. Moreover, the projects we are currently acquiring are expected to lay the foundation for further margin expansion in the future. Our platform costs were slightly below previous year's level despite ongoing cost inflation, mainly due to lower LTI provisions and also due to a lower number of FTEs. Further down in the P&L, our net interest expenses increased slightly during the third quarter. This was attributable to a slight increase in net debt, mainly due to our investments in working capital. As a result, we reported an adjusted earnings after tax of EUR 21.4 million, reflecting very solid profitability despite the current bottom of the cycle and fully in line with our expectations. Over to Page 11. Thanks to the significant cash generation from presold projects in recent years, our financial leverage dropped to a very low level, which gives us ample headroom for growth. While we have started to deploy our capital into new opportunities, as Kruno has just mentioned, our leverage ratios have increased only marginally and stayed at a very low level. A low loan-to-cost ratio of 13.6% and the low net debt-to-EBITDA of 3.1x clearly reflects our strong financial position. Although in light of our planned growth investments, you can expect our leverage ratios to increase steadily. However, I would like to reiterate our statement that the strong balance sheet will remain a cornerstone of our business model. Moving to the next slide. Over the past few years, we have been able to demonstrate that our business model has the capacity -- capability and capacity to produce very attractive cash flows. While we still expect substantial cash flows and cash contribution from our presold projects, we have now just entered a new growth and investment cycle. We are clearly committed to taking advantage of the current [indiscernible] opportunity for land purchases and acquiring projects with above-average return potential. We are going to acquire projects with a GDV of some EUR 2 billion by the end of 2026. This corresponds to expected total acquisition costs of around EUR 300 million. Part of this will be financed and part of it might be borne by project partners as Kruno mentioned, our potential JV partners. In addition to investments in land, there will also be a temporary increase in cash requirements for existing projects. This is mainly attributable to the typical cash flow profile of retail projects, where typically investments must be made in working capital during the early construction and sales phase with cash flows turning positive with increasing sales levels and construction progress. We have a chart on our cash flow of typical retail projects in the appendix of our investor presentation. The strong cash generation of Instone in the past resulted in a liquidity position of more than EUR 220 million at the end of the third quarter, with the vast majority being available for land acquisitions and some for the sales and construction ramp-up as just mentioned. 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 150 million. Just as a side note, our debt covenants relate primarily to our corporate net debt position and not to our total debt position, including project debt. Thus, our corresponding debt ratios in relation to our covenants are extremely comfortable. In addition to our cash on hand, we have access to revolving credit facilities totaling around EUR 140 million, increasing our financial firepower for land acquisitions. Chart 13 gives an overview of our current financing structure. There were again no major changes during the quarter worth highlighting. Thus, I would like to move on to our final page, Page 14. In light of our very solid 9-month results and our current business development, we are also confirming our forecast for the full year 2025, and we would like to provide a bit more color on where we expect to end up in Q4. We expect our sales volume to reach EUR 500 million. We expect adjusted revenues to be more likely in the lower half of our guidance range of EUR 500 million to EUR 600 million and a sustained high gross margin of around 23%. Bottom line, we expect an earnings after tax approximately towards the middle of our guidance 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 Thomas Rothaeusler from Deutsche Bank.

Yes. The first one is on the institutional business. Just wondering what it takes or what do you think it takes for a more meaningful recovery there?

Thomas, let's dive a bit deeper into the institutional market to give you here our, let's say, our experience we are currently making. So, what we are seeing generally is the rent price inflation remains high. And this gives the owners of properties, of course, the possibility to increase the property yields, which is positive. On the other hand, we are seeing falling completion rates, which are further tightening the rental market. And the rental growth is outpacing the CPI, which should support, of course, the sales volume going forward. And now the question is why don't we see the fast recovery here. So, in the first market phase, the investors were focused on -- more on newly built residential assets, which had been finished, but not sold yet. So, we've seen here a lot of traction in the market. Market segment is, I would say, sold out. So, this should help us going forward. And there is no real supply of such kind of product, which we expect in the next, let's say, next time period because it's already sold. So, this is, I think, positive. What we also see is that the investors are focusing on the top metropolitan areas, really the top cities. And this is also the reason why we focus in acquisition exactly to the same profile, acquiring projects which we can sell to B2B but also B2C clients. Now what do we expect going forward? And how are our current discussions we have with investors. So, the appetite of investors is there. The attractivity of resi is from our perspective there and increasing steadily. The problems which investors are currently having is, on one hand, refinancing pressure. So many investors are focused on refinancing existing office portfolios. They have, of course, discussions with the banks regarding valuation. And therefore, this is limiting clearly the capacity for new acquisitions. We see also slow recovery of capital inflows. This remains sluggish. And there is a cautious investment sentiment. So overall, we think that '26 will be better, massively better than '25, but by far not normalized as we have seen precrisis. And here, I think potential acceleration factors are, of course, the further interest rate development, potential subsidies of the government. But this is the current situation we are seeing in the market.

Okay. Another question on the retail business. I mean, you are significantly scaling up your activities there. Just maybe to get a bit more color on what could be the sales volumes there maybe for next year or if you're shy of guiding next year and maybe in general, just to get a better understanding of the ramp-up.

So, it's, of course, a bit too early to give a clear guidance on 2026. What we can say is that the number of sales starts we plan for next year will significantly be above what we have launched this year. So, I think we can nearly double the sales starts for the coming year. And this gives you, I would say, a good feeling for what is possible in the B2C buy-to-let investor market. So, we see a very strong appetite. We have designed all the, let's say, the sales start really mainly to the buy-to-let investor space. And we see very, very strong momentum here. And this momentum, we want to also additionally increase by our sales organization, which we are – which we already have started to build up. So, we have built up a company together with partners to improve and to increase the volume in sales additionally to the existing very good performing sales platforms we are partnering with. But here, we think that this could be a significant driver going forward to increase the sales volume in the buy-to-let investor space.

And how do you look at the competition for this tax incentive product? I mean, do you see more competitive products coming to the market?

So of course, we are not the only one who is offering the product. But there is still, I would say, a limiting factor is, on one hand, the developers, there's only a very limited number of developers who are able to start construction to get the construction financing. And when we look at acquisition and we are acquiring a significant number of projects which are perfectly -- which perfectly fit to buy-to-let investor space being top cities, metropolitan areas, here, we don't see really competition from -- or, let's say, we see competition, but it's, of course, let's say, very, very low -- on a very low level. So, there's only a very limited number of companies who are able to buy land and to start construction, getting the financing, and this is limiting the supply of this kind of product.

The next question comes from the line of Philipp Kaiser from Warburg Research.

Just a couple of follow-ups. I would start also with the institutional business. You mentioned during the presentation that you are in advanced negotiation with institutional investors and also a volume of roughly EUR 120 million. Could you elaborate a bit more on the deal size of any deal if it roughly in the ballpark of EUR 40 million to EUR 50 million each?

So, what we can say is that we have one project, which is roughly EUR 60 million to EUR 70 million, and then we have additionally 3 to 4 smaller deals with EUR 10 million to EUR 20 million.

Okay. Very helpful. And with regards to the retail segment, I'm looking back at the also printed down on the Page 4, the last quarter tends to be the most active one. Do you expect this also to be true for the last quarter of this year? Do you have already any visibility?

Yes, we have. So, as I already mentioned, we have further increased the volume of sales starts in the last quarter. And as it is like always that the first few weeks and few months with sales start, the momentum is quite huge. You're generating significant numbers of sales. And therefore, we believe that the last quarter will be by far the strongest quarter this year.

Perfect. So is it fair to assume that that will be the true you only need a couple of those deals to close to reach what you also stated the lower end. So, it's kind of a bit down [indiscernible] due to the strong last quarter of the retail segment.

Yes. What -- let's say, we are confident that we will achieve our sales target for this year. So, we made very good progress in the negotiation of the institutional deals and the sales activities in the retail business are going as planned due to the fact that we have here key indicators. Before we sign the notary deed, we have pre-reservations and [ net- ]reservations. And in this process, we clearly see that we will get to our numbers this year. And of course, for the institutional business, we have to sign these deals. We have not only one candidate in the process for each project. So therefore, we are confident, but of course, there's always a remaining risk, but we don't see here for us currently the situation that we get under the EUR 500 million.