Investis Holding SA (IREN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Half Year Results 2020 of the Investis Group Conference Call and Live Webcast. I'm Alessandro, the Chorus Call operator. [Operator Instructions] And 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 Mr. Stéphane Bonvin, CEO of the Investis Group. Please go ahead, sir.

So ladies and gentlemen, good morning. Welcome to this presentation of our half year results, and thank you for your interest in our company. For this presentation, I have with me René Häsler, our CFO; Laurence Bienz, our Investor Relations. The agenda will be as follow. I will start with the highlights of the first half year. And then I will follow with a view on the market trend in this COVID-19 environment. And then I will hand over to our CFO for the financial overview. And before the Q&A session, I will go through the outlook. So maybe first, I want to start again with our strategy and to highlight the main elements that we focus on. As a real estate investor in the residential property market, you are looking for a stable, recurring and strong return. That's exactly what we want to provide and we focus our strategy on that element. On the top of this segment, we focus on residential real estate. Why? Because it's less risky. We also focus on low to mid segments because there, you have low vacancy rate. And also, we focus on Lake Geneva region because there, you have a strong demand with rental increase potential. And in the service, we are active in 2 different activities, the property management and facility services. There, we are a national provider because with 1 client, you have the chance to have mandates to all Switzerland. We also focus on long-term contracts, this brings the recurring income. We focus on margin. And this brings to the EBIT with much more capital deployed. And also very important for us, the innovation to avoid the disruption risk. This COVID-19 crisis shows that our strategy was the good one. We could, during the first 6 months, continue our business as usual and provide and achieve a very good performance. So now regarding the key figures for this half year. On the group level, the revenue went down to CHF 89 million. This is due to some disposal last year in the Real Estate Services segment. But in the meantime, we could increase our EBITDA before revaluation by 3.3%. And our group EBIT went up to -- went up by also 8.5%. In the Properties segment, the portfolio, we are now very close of CHF 1.5 billion. And we work on our vacancy rate. Despite this crisis, we could reduce it to 2.8%. And in the Real Estate Services, as I said before, we really focus on the EBIT margin, and we could increase this EBIT margin by 8.7%. We also bought a small company during this spring, ProLabo. This company provides analyze of construction material like assessors and air quality. And this company has actually 6 office across Switzerland, and we want to continue to develop this company. So now I want to give you a view on the real estate market in Geneva in this COVID environment. As you know, we follow some metrics which are important for us. The first one, of course, is the demography, then the construction activity, the regulations and, of course, the capital markets. So for us, demography is the most important element because this brings the demand for the apartment. And of course, if you have a strong demand, the prices of the rents, they increase. So despite this crisis, we had still a positive immigration in Switzerland. And Switzerland is one of the most dynamic countries in Europe in terms of population growth. We see that Lake Geneva region has the highest proportion of foreign population with 33% against The Swiss average of 25%. Canton of Geneva has 40% foreign population in the city, even higher with 48%. So this shows that even if the immigration is going lower, the region where we are invested will still be much higher than the rest of Switzerland. And also another element that shows why we have such foreign population rate in our region is that the share of rent of tenant is much higher than owner. So just remember, we have almost 85% of tenants in Geneva. So going forward, we continue to be positive despite this crisis on the demographic growth in Lake Geneva region. Also, this is due because in the past crisis, Switzerland has always managed to emerge from the crisis faster and better than our neighbors. And the Swiss economic could reset -- repeat this. And as a result, that immigration could again increase in the medium term. The Geneva residential market should in such a case benefit more of course than average. Now regarding the regulation, as you know, Geneva has a high regulatory market, not easy to enter in this market. And of course, this brings a limited availability of new residential properties, and we don't see any change in this area. Regarding the value creation, even with this crisis, we don't see a change. In general, rents are below market in the Lake Geneva region. And also, this is due to -- we had last year in Geneva a population growth of 1%. That was the highest growth since 2016. And this brings plus 5,000 new inhabitants. And in the meantime, during the last 12 months, it was only 2,127 new housing units created in Geneva. So if we go now on the Slide 8, this shows exactly the number. You see that in Geneva, you have a shortage of apartment of 2,000. This is the highest of Switzerland. And again, we don't see any change there. Vaud has -- maybe they produced. They don't have this shortage. But we are invested in Lausanne and Lausanne has also some shortage, but this graphic don't show it. Next slide is also very interesting. You can see that in our market, reletting is not a problem. It shows that in Geneva, you need more -- less than 25 days to relet an apartment. But in our case, it's -- normally, we don't have vacancy in between when we have a tenant who is moving, only when we have some refurbishment works to do in the apartment. Normally, it's the tenant that has reletted. Next slide, you can see that it shows the vacancy rates in 2019 for rented properties only. You can see that Switzerland has an average of 2.7%. And down on the left, you can see that Lausanne and Geneva are much lower, around 0.5%. And what is very interesting to see on this graph is that in the meantime, you see that even the rate is very low that the numbers of construction permits is decreasing in Geneva and Lausanne. So this means that this shortage will also again continue. The next slide, also, that's the first one that we provided. This slide shows that Geneva has the highest housing occupancy density. So you have the more inhabitant per home than the rest of Switzerland and this, you can see it for the last -- from 2000, 2012 and 2018, you see that it's still going up. So this means that this helps again to maintain the shortage of available apartment because, of course, when a new unit is available, you have people, then they maybe should move from existing apartment. But as you can see, since 2000, this density is still growing. So that means that shortage will continue. Next slide. This is the evolution of vacancy rates. It was very interesting to see that, but this is for rented and owned properties combined. You can see that when Switzerland is still going up, in Geneva, it has already start to go down even we are very low -- at a very low rate. So next slide, this is about the rent side. You can see that between May 2019 and May 2020, the rent from non-new apartments rose by 0.9%, especially for small apartments, and the increase in rent is more pronounced in Geneva city center, plus 1%, and that's exactly where we are invested. So the next slide shows the property that we own now since '98, that we show since the IPO is it shows, first, our business model. So it's buy and hold. We do some refurbishment, and thanks to the situation of our tenants, we can rent the increase. So since we bought it and since -- because we report the numbers since April 2015, the rents went up from CHF 620 to CHF 770. And in the meantime, the value of the property went up from CHF 12 million to CHF 19 million. So now a short look on the financial market. For Investis, we still see a very low interest rate environment. Maybe what we changed in our view is that now we see this very low interest rate environment now for a long term -- long time period to this -- due to the sanitary crisis, which will become -- it is already an economic crisis and maybe will be transformed in a financial crisis. So we see long term very low interest rates. But this graph shows that the gap between Geneva and Zurich in the property market on the yield is by 0.5% and the gap between the Geneva property market and the 10-year bond is 2.5%. So we still see there that there is a potential for yield compression. So to sum up, again, we can say that Lake Geneva region is Investis USP. We see still higher rental growth, still low vacancy rate. As I just said, I think we will continue to be in a very low interest rate environment. So we think that we are, with Investis, very well positioned going forward. So thank you. Now I will hand over to our CFO for the financial overview.

Thank you, Stéphane. Good morning also from my side, ladies and gentlemen. If you turn to Page 18, you have, in a nutshell, the excellent performance of the Investis Group, split up also for the Property and Real Estate Service business. If we go to our income statement, you'll see the details of our almost CHF 90 million revenue in the first half, which is split up 2/3 to service, 1/3 to the Property segment, but in reality, we could even go further and split the property -- the Real Estate Service also in 2, and then you would have 3 identical revenue contributor, which is Properties, which is the property management and is the facility services. Of course, for a property company, you see that the invested capital is predominantly in the portfolio, which is illustrative here with 99% of the invested capital. But also important to know where is the cash flow coming from, and you'll see that illustrated on the figure EBITDA before revaluation and disposal. And there, you can see that the Real Estate Service business contributes 25% to the operating cash flow while, of course, the portfolio generates 75% of the cash flows. In terms of EBIT, the split is more on the side of the Property due to the heavy revaluation gains that we could, again, account in half year 2020. If you look back to 2018, for instance, the share of the Real Estate Service business in cash flow was 80% versus 82% in properties. So we see here that this segment is developing very well, and we are glad that we have this segment in our portfolio at Investis. Let me now turn to Page 24 and talk, first of all, on the COVID crisis that hit also Switzerland, but also Investis partly. And you see here the figures and you are predominantly interested in the figures, what were the impacts on Investis. On the property side, we had a rather small rent reduction since we are predominantly residential. In the city, we have CHF 136,000 rents reduced. The tenants are still here, but we gave them either 0.5 month or full months or even 2 months of gratitude in the rental payments. We were also severely hit in our small business, which is the service apartments. There, we saw a really big vacancy coming immediately after the crisis. We had a vacancy even above 50% in the second quarter. The financial impact can be attributed to CHF 175,000. So overall, our like-for-like rent increase that stays net of these impacts at 0.9% was diluted by 1.1 percentage points. So you see, about half of our growth we had to suffer from the COVID crisis. But also, our Real Estate Service business suffered. First of all, I would like to thank the whole workforce in our service business that they were 100% up. We had no short-time working. To the contrary, in order to fulfill our services 100%, I would say, even above 100% since our staff had higher workloads during the crisis in contacting the tenants and, of course, also the owners of the buildings that we serve. We had also higher staff costs than normal in our Real Estate Service business. The revenue shortfalls were, on the one side, in property management when owners reduce the rent. And as you know, we are paid by the cash in rent for our owners. So we have there a small rent turnover reduction, but also in the facility services. In some of the services, we could not vendor as the customer ask that since we are not working in the office why aren't you coming and clean them up, so -- where we gave also some reductions to our contracts. So overall, we are, I would say, not hit by the crisis severely like other companies in Switzerland. But nevertheless, we had some impacts. And in order to not repeat these impacts all the time on all the slides, I advance with that slide for the financial performance. So I'm going back to Page 20 where we see the results of our Property segment, which is heavily concentrated in Geneva or the Lake Geneva region. And as you can see, we had CHF 29 million rent income, which is 3% -- 3.5% up against the 6 months in 2019, which is due, on the one side, our like-for-like rent increase, 0.9%. This is net of the COVID impacts that I just elaborated. And on the other side, due to acquisitions that we fulfilled in prior year. Revaluation gains, CHF 36 million, a very strong figure which reflects the quality of our portfolio. Our annualized full occupancy rent slightly reduced to CHF 60 million, and that is due to, on the one side, we had a sale of 1 property, but also, we saw rather quickly the impact on our service apartment business. And we swiftly reacted and decided that we are going to stop that business during the crisis and going forward because we don't think that in the next 2 to 3 years, that business will recover to levels that we saw before the crisis. In end of June, we already took out 22 service apartments out of 88. And as we speak today, we are down to below 20 apartments that we are still in the -- in our portfolio and all the others are rented out either without service or without furnitures inside. So we will see a further reduction in the full annualized occupancy rent. But on cash flow, that will not have an impact because with lower services and lower costs, we will have the same cash flow as before, luckily. But of course, the turnover will decrease on that. But since we are derisking that whole business, we are very confident going forward with our apartments. On Page 21, you have the characteristic of our portfolio, which is, I might repeat that, residential Geneva and small apartments, which means 1- to 3-room apartments. And below these graphs, you see our split-up of the very low vacancy rate, 2.8% as per end of June. In Geneva, we have 1.8%. Half of it is that 1 property that we talk about since a little while, which is Chalet Cuza, the vacancy contributes 0.9%. So in the rest of the portfolio, in the 100 -- over 100 buildings in Geneva, we are below 1% vacancy. Furnished apartments on these now at the end of June, 66 apartments, we still had a vacancy of 20%. So if we would not have reacted, we would see a figure above 50%, which is unpleasant. So as you can see, we managed our portfolio also during the crisis. Commercial property, 5.6%. That is a low turnover contribution, CHF 6 million in total. Again, this is literally 1 apartment that we purchased a year ago that we are also a little bit repositioning. We acquired it half empty and we are still on that level. So out of the 5.6%, 4.7% is that 1 property. So it's not an issue for us at the moment of the commercial part. But looking what is going on in the market, I would expect that also our commercial properties could suffer and that we cannot keep that low vacancy rate going forward. On the next page, you have the longer view of our development of the rent potential and important figure of the vacancy rate, which stays again at 0.9% for the first 6 months. Without the crisis, we would have been even hitting our higher range that we assume on a longer term between 1% and 2% ratings -- like-for-like growth, excuse me. On the right, you see our still heavy rent potential, which stays at 15% as per our appraiser, CBRE. And also, the number or the ratio of indexed rental contracts could be increased to 77%. Normally, when we purchase buildings, we take over rental contracts which are non -- not indexed. That is why the figures suffered in the last 2 years with our acquisitions, but we are steadily coming back to our target of 80%. That's all I wanted to highlight on the Property segment. If we go to the Real Estate Service segment, that is Page 23, we see our encouraging CHF 62 million revenues, which are down on last year's figure because we sold quite a few number of companies. So we are really focusing on property management and the facility services with the 2 brands, hauswartprofis in France, conciergepro in Privera on the other side. And we are very confident that we can continue. Also in the current environment with our high single-digit EBIT margin target, we could even improve the margin to 8.7%. If we look below the operating profit line, EBIT, we have the financial expenses on our financial debt, which are, as in the past, with a very low cost of 0.5%, including the P&L. Income taxes are normalizing of the big swing in the deferred taxes last year of CHF 61 million. And we split that up into 2 lines so that you can see the normal tax rate and the extraordinary contribution from the TRAF law change. Net profit, CHF 51 million, which is taking out the CHF 61 million up from the prior year figures, net profit, excluding revaluation effect, stays healthy CHF 20 million. So I'm confident that we will, again, finance our dividend by more than 100%. Maybe one last word on our very solid balance sheet. The numbers you could look up, I would rather look at the right part of that slide where you see our split-up of the financial debts. As we speak, we have CHF 382 million of credit lines available, which are used or were used end of June, CHF 60 million for financing the bonds that we repaid in June and we offset 1 guarantee that you remember still outstanding will be also at the year-end. Maybe it will be -- will go away, but the contract lasts until spring next year. Interest coverage, very solid, and the average maturity of our debts are 20 months. So we still go short on our maturity profile as the -- as Stéphane said already, we expect interest not to move north. That's from my side. Thank you very much and you will hear us again during Q&A.

Thank you, René. Now I will go quickly through the outlook. So as I said before, going forward, despite this COVID-19 crisis, we are very positive on our market. We still continue to look into the market to expand our portfolio through targeted acquisition, mainly in Geneva or Lausanne. And in the Real Estate Services, we continue -- we want to grow. But of course, we just -- we really want a profitable growth. And regarding the second half year, we expect a solid performance around our prior year level. So thank you for your attention. And now we are ready for the Q&A session.

[Operator Instructions] The first question comes from Pascal Furger from Vontobel.

I have three questions from my side. First question on the services business. So can you please explain how you boosted here your EBIT margin by 40 basis points? So the Régie du Rhône business you disposed last year was a high-margin business and also we had COVID-19. So I was just wondering where it was coming from and probably due to the contribution from ProLabo. And second question on the service apartments. So I understood you will discontinue the business. I assume rental income was obviously much higher for serviced apartments. So what will be the negative impact on rental income or how much was the rental income last year? And then last question, just on the transaction market in Geneva, do you see market opportunities arising in which you will be interested in?

Pascal, thank you for these questions. I'll take the first two and then hand over to Stéphane. The margin in the service business, I would say, in our original business, which is Privera on hauswartprofis, we were flattish, maybe slightly negative on the margin. As you rightly pointed out, with Régie du Rhône, they were just well above the 10%. We had a lot of dilutive effect there. ProLabo, that is trading at a very strong margin, which is well above double digit. So that is the explanation for the 40 basis points higher margin. So without ProLabo, I would say we would have been flattish. On the serviced apartments, we saw already a reduction in the total rent -- occupancy rent of CHF 400,000 due to that takeout of the 22 apartments. I assume that we will see until year-end another CHF 600,000 less rent. So in total, the add-on turnover was CHF 1 million from that serviced apartments business.

Okay. Now for your third question regarding the transaction market for residential property in Geneva. So actually, you have some transaction. But of course, when you have a big owner who wants to sell the property, of course, he will use CBRE or JLL, et cetera, to put their product on the market. And there, we see that the market is going down with a growth yield under 3%. And of course, for us, it's quite difficult to find deals. But we are always able to find, and that's what we do. We try to find deals off market. And also, as you know, we are really specialists, and we know how to manage buildings who needs refurbishment, repositioning, et cetera. And this gives us always the chance to find new assets for our portfolio. But of course, yes, the market is dry and quite tough to find new properties.

The next question comes from Ken Kagerer from ZKB.

Yes. I have also three. In fact, the first one is also on the margin in the service business. And there, I've seen that the direct expenses and the other operating expenses have been managed very well. Is this now the new run rate we can expect going forward, especially also as a percentage of sales? Or what do we -- or what should we assume there?

You can assume that the current numbers are very much represented this and you can whatever extrapolate from these numbers.

The second question is also referring to the transaction market. And I was just wondering if you had a look also at the portfolio that was acquired by ARRIS, the 18 residential or mixed buildings for roughly CHF 260 million because, I think, they would have suited also very well into your portfolio.

Yes. We looked into it. But as you know, we knew already that the price would not be the price that we are ready to pay for it. So this is -- we are always pushed out after the first round.

Okay. And the last one is also on Geneva and is more a general question. What is your take on Carouge versus the CPD development not only for office, but also for the residential segment going forward?

So you -- I just explained that. In Geneva, we have still this shortage of apartment. So I don't see that it will have a huge impact on the properties on the residential market. Maybe where I would have -- where we have really to look more deep into is more mega market. There, of course, they are building also a lot of property. And there, we can see and we feel that there is a pressure on price. But in the city, that's not the case. So -- and also, the shortage is so high that finally, you have this population growth, and we don't see any change going forward.

[Operator Instructions] We have no other questions at this time.

So then, thank you to all for your attention. And of course, if you have other question, we are always available of Laurence Bienz of -- our CFO and even me. So I wish you all a good day. Thank you.

Thank you very much. Have a nice day. Bye-bye. See you soon.

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