Investis Holding SA (IREN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Half Year Results 2021 of Investis Group Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Stephane Bonvin, CEO of Investis Group. Please go ahead, sir.

Ladies and gentlemen, good morning, and welcome to our half year 2021 results presentation, and thank you for your interest in our company. I have today with me Rene Hasler, CFO; and Laurence Bienz, our Investor Relations. The agenda of this presentation will be as follows. I will start with the highlights of this half year, and I will continue with the market trends. Then Rene Hasler will present you the financial overview. And I will conclude with the outlook before the Q&A session. Highlights of this half year 2021. So we had really an excellent half year on both segments. The impact of COVID, as already mentioned earlier this year, was very small, and it doesn't impact our business. The continuing improvement of our operations next that we were able to deliver solid results and this year-after-year. Also, this result shows that our strategy is the good one in any circumstance. So now regarding the result on group level. The revenue went up 14% to CHF 102 million. The operating profit before revaluation up 6.1%, and we could achieve an impressive EBIT of CHF 155 million compared to CHF 62 million of last year. And this gives us now a substantial increase in our NAV per share to CHF 82.50 excluding the deferred tax. Now regarding Properties. So we had this revaluation gain of CHF 131 million. That shows the quality of our portfolio, the good locations of our properties, but also that we are able to transform the rent potential into real rent. And this like-for-like rent increase came up plus 1.6% for this 6 plus months. We could also reduce our vacancy rate to 2.7% compared to 3% last year. And here, again, I repeat that all our properties which are under refurbishment, they are counted in this vacancy rate. Now regarding the Real Estate Services. So we could grow the top line through acquisition but also organically. We bought during these first 6 months these 2 companies, Rohr AG and SEA lab. And they are now since the 1st of April consolidated. Regarding the EBIT margin, we could increase it to 8.8%, thanks to the improvement in our operation, the digitalization and also that we want to have only profitable contracts. And also, almost all subsidiaries improved the operating margin. So now the market trends. As you know, we follow different metrics to guide us for our investment strategy. It's the demography one of the most important, the construction activity, the regulation and, of course, the capital markets. Now regarding demography. Switzerland had for the first 6 months again a net migration of 26,000 people. And for the cantons of Geneva, for the last 12 months, we had 2,690 new inhabitants in Geneva, plus 0.5%. So also with this pandemic, we can see that the demography continues to grow. And of course, this is mainly due to the quality of Switzerland makes that, going forward, we see improvement in the demography. Now regarding the construction activity. We have higher construction activity at the moment, but that will not cover the pending demand in the free market. It's still a high entry hurdle for home ownership, and this will support the demand for rented apartment. Regarding regulation. Still, we think that the tax regime for corporations in the Lake Geneva region, which is one of the most attractive, will support the positive migration. Regarding capital market, I will come later on. Now if you look more in detail in the real estate market in Geneva. So we can say that despite the stronger construction activity, there is no significant change in demand in the residential market. Most of the apartments that will come to the market will have controlled rents by the canton and will not change the dynamics in the free market. The demand for apartment in the free market remains high, which is reflected also on the price trends. The rents for all non-new homes operate in the free market is up by 0.8% for the last 12 months. And if we look for the previous year, this was exactly also the same, 0.8% for the same 12-month period. The vacancy rate in the residential sector in Geneva is the lowest of Switzerland, 0.49% versus 1.72% for the national level. And also what I mentioned just before, the population of Geneva has the highest proportion of rented housing, 78%. So all these elements make that we continue to be very confident in this market, which is we told it already many times of the USP of Investis. Now regarding the real estate market of Switzerland. If we look into the residential market, you can see on the graph on the left that you have 4 areas with very low vacancy rate. This is Geneva, Zug, Zurich and Basel. But what's very important to note is that the number of construction application is weakening again, and the strongest decline was recorded in the canton of Geneva, Basel-Stadt and Zug, where you have the highest vacancy rate in Switzerland. So again, we can see that this situation going forward of low vacancy rate will not change. Geneva has not only the lowest vacancy rate but also the lowest stock of units for rents. And this is due to the high density of the canton because we can say that the canton of Geneva is a city canton, and it doesn't help to have units, I would say, around the center the center city -- the city center. Also on the next graph on Slide 10 -- on Page 10, that's also very important to note. We can see that the offered rent in the market for the free apartments that they are now for rent, they are 25 -- almost 25% higher than the current lease in Geneva and Lausanne. This means that we disclosed that we have this 13% potential -- rent potential on our portfolio. And if we look into the offer, you can see that this is 25% for the global market of Geneva and Lausanne. But what we see on our portfolio is that very often we are able to rent much higher than this 13%, what CBRE gave us as rent potential. On the next slide, here we can see that for the period from 2011 to 2020, the Lake Geneva region has a lower rental reduction than the rest of the region of Switzerland. And this is mainly due to the controlled rent. But it's also due that, we explained it, that we have a fluctuation of our tenants of approximately 10% per year. And we can see on this graph that for Lausanne and Geneva, the lease duration is higher than the rest of Switzerland, more than 10 years. The next slide shows again that the Geneva vacancy rate is declining again and well below the national trend, which is actually climbing again. So we are now a new graph, which was also very interesting to understand why in Geneva you have a low share of house owners. It shows that Geneva has the lowest disposable income of Switzerland. So that makes that the people are not able to save money to become owner, and so they have to stay tenant. And that makes why this market is very interesting. So now about the financial market. So on this graph that we show here now, we can still see that the residential net yield continue to decrease primarily with the 10-year Swiss bonds. We, by Investis, we still continue to see a very low environment of the interest rate for the next 5-year minimum, so negative. And we think also that next year, the Swiss francs will become stronger. This is due to the normalization after COVID situation in Europe. And we think that Switzerland is now in a much, much better situation than our neighbors. And Swiss National Bank will have to fight again to keep the Swiss francs low. This means that always you still see that the risk that the interest becomes more negative higher than they become positive. For the next slide, this is this property that we show in IPO. Again, we can see that during this last 6 months, we could increase the rent by 4.3%. We did the calculation for the last 7 years what was the average rental increase. It comes plus 3.2%. So this shows then that thanks these increase of the rent plus the yield compression, we have year-after-year a higher valuation. And again, for these first 6 months, we had CHF 2.2 million more valuation for this property. So to sum up. As I said before, Lake Geneva region is Investis USP. We have low vacancy rate. We are in a very low interest rate environment. We don't see any change there. The number of residential properties in city center does not grow. We have -- we are in a region where we have the highest demand. We have also one of the higher rental growth of Switzerland and also the highest potential for rent -- with a high rents per square meter. So to conclude, we think that the concentration of our portfolio in this market makes that Investis as one of the most valuable and resilient portfolio of Switzerland. So now Rene Hasler will present you the financial overview.

Thank you, Stephane. Good morning, ladies and gentlemen, also from my side. I turn directly to Page 19, where you see these 4 important graphs on the right-hand side, which characterizes our 2 segments very nicely. So starting maybe with the figures, we closed 6 months with just over CHF 100 million of revenue and once more a net profit which is slightly higher than turnover at CHF 132 million. Of course, that is due to the strong revaluation gains that we could accommodate in the first 6 months. When you look at the 2 segments, the blue ticks that we have in our organization, we have, on the one side, the portfolio, which is asset heavy. 98% of our balance sheet is covered from Properties. With steady cash flows, cash generation is 70% coming from Properties. But also service is constantly improving and marking the importance within our group, they post 72% of our revenues but also generate 30% of our cash flow. Both Real Estate Services, very important to us, strong cash -- strong performance on low invested capital. If we look into the portfolio a little bit more in details, revenue up 0.5%. This is lower than the like-for-like rental income of 1.6%. This is due to the 3 sales that we did in the second part of last year when we sold some commercial properties. But we are back with the revenues. When we look at the full property rent that we have in the portfolio, we are now at CHF 63 million with a vacancy of 2.7%. So that should lead to rental income of CHF 30 million going forward. On the right-hand side, important, our like-for-like rental growth, low vacancy rates. We still have some properties that we want to feel that we are repositioning and that will then also show even lower vacancy rates, I would say, in the years to come. The revaluation gains, again, are the result of both lower discount rates but also, already mentioned, higher cash flows in the portfolio. On the next slide, we see the characteristics of this portfolio still the same. As you know it, we are residential. We have over 3,000 apartments. 93% is residential, mainly in Geneva and Lausanne, 69% in Geneva, 25% in canton of Vaud. And the apartments are smaller apartments, 1 to 3 rooms, which is the characteristic of our portfolio, which also is what our tenants look for. Vacancy rates. Geneva, we are down to 1.2% since we filled in that one property that we repositioned in Geneva. And Vaud will follow the track in the future so that we will also have then vacancy rates below 2%, as expected. Commercial is rather less important, but also there, we have some vacancy. On the next page, Stephane mentioned it, our rent potential. So CBRE is always looking at our market trends and the rate that these rents could be 13% above our current levels, so still some room for high rents. That 13% is the same number as at year-end despite the 1.6% higher rent linked can be post like-for-like. Important to note that 75% of our contracts are linked to the CPI, Swiss Consumer Price Index, not to the interest rate that gives price protection and interest should even decrease further. We have the tenant turnover of 10%, which actually produce this like-for-like rental income. And the target remains the same, 1% to 2% on a yearly basis for this like-for-like rental income. That's for the portfolio. I would say no news compared to before. We are working on, I would say, improving the quality of the portfolio as before, and that was also a result in the valuation. Our service, getting more and more important, we have revenue of CHF 74 million compared to the CHF 62 million last year is, on the one side, the 2 acquisitions, Rohr AG, facility service company similar to hauswartprofis; and SEA lab, another company that is doing asbestos analysis as their core business, rather small company posted a turnover last year of CHF 2 million and is well integrated into our facility service business. EBIT margin in the service, 8.8%, a notch above last year despite that we purchased a considerable turnover in Rohr with margins that are still, I would say, below average. You might remember that in facility service in concierge segment, we expect margins of above 5%. So Rohr is not yet there. And here, I would like to mention that Rohr is consolidated since 1st of April and the first 3 months are not in our figures. But there Rohr is rather a black 0, if not a red 0, in the margin, so they are very seasonally impacted. The strong season is coming in the third quarter. And then the fourth quarter is then again a lower margin business again because, due to weather conditions, you cannot always perform the specialty services that they do or that they offer. Nevertheless, 8.8%, I would say, going forward, these margins should stay or even slightly increase when we then integrate all the companies together. For once, the COVID-19 effects that we had in our group were a little bit stronger in the service business than in the property part. But I hope with the vaccine getting distributed to everybody, we can get over that pandemic and go back to normal business as before. So the margin, we are very glad that we could again post this 8.8%. On the next slide, you simply see the past development of turnover and the EBIT margin. And we are now in this high single-digit bandwidth that we don't want to use and will continue. If you look on Page 25, below the operating profit, we see financial income and financial expenses, which I explained. And the tax normal at around 15% since most of the profits are coming from Geneva and Vaud, which have tax rate below 15%. EPS above CHF 10, which is also a result of the strong revaluation in the portfolio. Balance sheet is normally a rather boring slide since we have actually 3 positions in the balance sheet. It's the portfolio on the one side, financing on deferred tax on the other side, which results then in a strong equity of 51% or CHF 900 million as per the end of June. Financing, on the far right, you see that we have credit lines available, CHF 382 million. Part of it is used with bank credits. And we still have unused credit lines of CHF 267 million, so a comfortable situation for refinancing of the bond in November. We are not yet sure whether we do a bond or use the credit lines. I would also mention that in July, we issued our first private placement. All financing is done unsecured, so we are also available for private placements should there be extra cash in market. This financing leaves us with an LTV of below 40%, at 39%, despite the investments we did in the Real Estate Service business. And I'm sure you saw it in the half year report that we invested CHF 40 million into these acquisitions in the first 6 months. That's in -- a very short overview of the financials from my side, and I hand over to Stephane for the closing remarks.

Thank you, Rene. For the outlook 2021. So we remain very positive in the Swiss housing sector. Immigration into Switzerland and especially into Lake Geneva region will continue. We will continue to expand our portfolio through targeted acquisition raise in the Geneva Lake region. The demand for residential properties in prime Swiss location remain healthy. We will also continue to develop our Real Estate Service by focusing on acquisition and profitable revenue growth. As Rene mentioned it, we have a low debt strong balance sheet. And this gives us a low average borrowing cost, and we don't see any change there. And the operating profit for 2021 is expected to be much higher than previous year due to the continued solid performance of both segments. So thank you for your attention. We are now ready for the Q&A session.

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

I have 3 questions. The first one is on property valuation. Here, obviously very strong. So far, you were basically the leader in the Swiss universe, if I'm not mistaken, at least in relative terms. So also, in general, you reported quite meaningful revaluation gain since your IPO. My question is, is this story now over? Or what is your view on that? And what basically are the next triggers? Then the second question on the annualized rental income, it's up like 7% to CHF 63 million. Can you please provide us sort of a bridge where this is coming from or which properties you purchased, at what prices, just to get a bit of a feel there? And then the last question is on your noncore investments. You sold a stake in Flatfox for CHF 2.6 million. I saw there is many different platforms in the Swiss market. So why did you sell it? And maybe at some point in the future, you could give us sort of an overview on sort of all your other noncore investments. It appears this also captures some value that would be helpful.

So maybe first question for property valuation, so maybe if you look into the -- our competitors, you can see that the discount rate they use is much lower than ours. And I think that this morning, your colleague mentioned that we have -- or you mentioned it that we are still reasonable with our evaluation. So what we have to look is -- at the end is the market will stay the market today in the transaction. So actually, if we take the gross yield of our portfolio is around 3.7%, 3.6%. And if you look really the transaction market, you've seen the start of this year, you had this huge transaction of the portfolio from [indiscernible]. It was 2% gross yield. So in between 2% to 3.6%, I think we have still there a huge potential. So the answer is no. It's not at the end. And also what I mentioned regarding the interest rate and the capital market, Switzerland, finally, I said we are like [indiscernible] and we had to stop to run during 3 months. And now we start again to run, and we will be very soon fit again. But if you look around us, our neighbors, they were already all very fat. They become -- they became fatter for these last 3 months, and they are not able to run. So this is why if I do a calculation of the value of Swiss francs, I think that the Swiss National Bank will have these next months some stress, and so we will stay in this negative area for a long time. And of course, the market of residential property is very attractive. And you see a slow -- slide that people is going from the 10-years Swiss bond where it's negative to the residential market. So then I see -- I don't -- for us, I see it's still very positive, and we -- I think that we will have a higher revaluation. Now maybe regarding the second question -- I hope I answered to the first one. For the second one, maybe Rene will answer regarding the annualized rent income.

Yes. Sure, Pascal. It is correct. We are up, what is it, CHF 4.5 million. And if you look into the portfolio details on Page 30, you see the 3 properties that we bought. It's 3 properties in the canton of Vaud in the range of CHF 25 million. That is on the one side contributed CHF 900,000 to the full occupancy rent. Then we have that property development that we listed in the last -- over 3 years, which is the Alaia Bay down in Sion, very attractive new leisure location, which is not daily in the press but daily in the social media. And that contributed CHF 2.2 million to the gross rental income. And then with acquisition of Rohr, we also bought the property, which also generated CHF 700,000 of rental income. So these 3 elements will give you details for the CHF 63 million. If I take the last question, the sale of Flatfox, as you know, we were a very minority shareholder. And the founder and the other shareholders together decided to sell the company. And since we were bound by a shareholder agreement, we also had to sell with them, and that is the reason why we did sell the stake. We didn't want to sell, but economics sometimes force you to follow the majority, as simple as it is, since 100% of the company was sold to Mobiliar, the insurance company.

And maybe to add on this topic regarding the start-up, so we are invested in several startups in the prop tech environment. And of course, we have some investments that are really strategic and industrial for us. For example, one company is [indiscernible], which is developing a software for really institutional owner for property management. As you know, we have invested in [indiscernible]. We have a very small also in [indiscernible]. We have also in a very promising investment where we believe strongly in the blockchain. [ This is stories ]. So -- but some of them, they are strategic -- strategical, majority of them because, as you know, we provide services, and we think that it's very important to innovate. And our politics is always when we want to transform something in our business, we prefer to do it on the site in a start-up because it goes faster, it's cheaper, and we are able to bring a new mentality in the business. So that's really the way we follow. And of course, we had almost in all this participation that we have, like you read that [indiscernible], the new valuation was CHF 110 million. But net money is also much higher. [indiscernible] will be also very soon do another round at a much higher valuation. But of course, we are not disclosing a lot because it's not our main business. But as we are finally in Real Estate Service business, and we have to invest and we have to follow what's happening in the future, and that's really our way to go into the innovation. But it's quite difficult to give you numbers, to disclose a lot of things because also we don't have in all companies the control and we decide everything.

The next question comes from Philippe Zuger from ZKB.

I do have 2 questions. First one, after the integration of Rohr AG and SEA lab, how far are you able to increase the margin until the end of the year? And the other question is going to the Properties segment. Are you planning to buy or sell any other properties in the second half of the year? And if yes, where? That's the 2 questions.

Maybe I start with the margin one. I expect that the margin will not decrease and be stable at the level we are seeing it now. But since I don't have a crystal ball to look into it, it's a guess. And second one, Stephane, maybe you want to cover that.

Yes. For now, we don't have really -- I don't say that we have really in pipeline we do every week offer. I cannot say that we have actually a big, big bet that would change fundamentally the business of Investis in the pipeline in both sides, buying or selling, for now with -- it comes or it doesn't come. But as I told before, many properties that we are able to buy, our properties that are not in the market, and that is more with our network that -- and we can buy directly from the seller. And to sell, we don't -- for now, we have not seen that.

And you're still comfortable with the properties in the Valais region?

So in Valais, the main thing is Alaiana, where it's not -- we are in discussion to sell a small building, but it's nothing, is around CHF 5 million. But we are more going out of the Valais. And Alaia, I don't know if you've been there but you should go and you should try, and you will see them that every week, if you like the surf, you will come back. And that is an attractive investment. But of course, in the valuation, this makes the big part of this 4%.

And other commercial buildings in the region of Valais, are they connected with Alaia Bay.

You have Alaia Bay, Alaia Chalet. And you have also Alaia Lodge, which is the hotel.

And the commercial buildings other commercial buildings?

Yes. They are connected to Alaia.

[Operator Instructions] The next question comes from [ Mark Li from MerkiBaman. ]

I have only one detailed question regarding the FTEs in the Properties segment, which you decreased or halved from 10 to 5. So could you give us the reason for that? Is there a bit of change of the occupancy management? Or what's the reason?

So maybe that was always my goal. We had never had so much people in the Properties segment. But we own hauswartprofis, we own Privera, and we work with a refurbishment company, and the name is [ Minisal ]. So what we decided is that, finally, all our properties are managed by Privera. All our concierge, they are also managed by hauswartprofis. And finally, also, all the refurbishment we do, the technical team we had, we push it into [ Minisal ]. And why? Because if you have only 2 or 3 people on the technical side working in our office, they are less efficient to work in this [ Minisal ] team. And this company is almost doing maybe the half of the turnover with us. And it was a small company 25 years ago, and they grow, thanks to us and thanks to also all the other partners. And they know exactly our policy. If it was more efficient to have this technical team into Alaia -- sorry, into [ Minisal ] than buyers. This explain this change.

Maybe I can add another one about relating to ESG. Could you give out kind of an update to when can we expect ESG reporting initiative from your side?

So we are working on it. So as I said last year, we received already from [indiscernible] the complete bill or...

Overview.

Overview of our portfolio. Now we start to refurbish the worst property we have in the portfolio in Geneva. We also now are in this decision to enter in the SSS REA Index. We have -- we are adding now in 15 properties solar panel. Also, we spoke to all our partners where we have for white goods [Foreign Language]?

White goods, yes.

White goods for the lift, et cetera, that we want to have better energetic performance on all the new material we buy. We are also working on the project [indiscernible] for all the properties which are not in [indiscernible] is that in all the common part of the property, is a program that you do with [indiscernible] really to reduce the construction of -- any energy. And so we are quite doing a lot. And for the report, we are also working on it.

But we can expect something in the annual reporting then relating to the reporting side? I mean the initiatives are very, very good and welcome. But the investors also need some reports about it to compare, to get the numbers kind of and all that stuff. So can we expect that something at the end of the year? Or what do we have to expect or how much time we have to wait for that?

So maybe I'll take that. In the annual year-end report 2021, you will not have a detailed ESG report. That would anyhow be disclosed separately. And when we do publish it is when we are ready, and we are not yet ready to give you a report as to the other since a couple of years.

Ladies and gentlemen, that was the last question. I would like to turn the conference back over to Stephane Bonvin for any closing remarks.

I have one additional question that came in through the chat, which is -- which came in from Johan Scwartz [ SFP ]. Low housing development in Geneva, but what about the rezoning and the redevelopment of Geneva West industrial zone towards housing mix zone, higher competition looking forward in the Geneva housing market?

So in Geneva, when you have the industrial zoning, it's quite complicated because you have a foundation, who owns almost all the plots. And there is also a big discussion because, as you know, Geneva now they have with some big place, they are doing more and more residential. But you have also industry [indiscernible], et cetera, who needs space. So when I speak with [indiscernible] in Geneva, they want to expand. They want to have more space. So for now, it's like [ La Paie ], we speak about 55,000 new apartments. But finally, you have still people with a small company working there. And they're not -- if you take all the space to do residential, you have no more space for this company. It's not easy. So I don't see -- we will see some change during the time, but it will -- it's not that in 1 year, you will have 55 new -- 50,000 new apartments. So, Geneva is not so easy. We saw now, for example, [indiscernible]. It was possible because [indiscernible] bought during 10 years many properties, all the small garage, all the small entities. He has to -- to do [ Cartel Leton ], he had to invest and to buy not only the real estate, he bought the companies, the garage, car seller, et cetera, et cetera. I'm not sure that institutions are ready to do that. So we know it, it will come, but I think this will be the normal -- it will continue with the normal rate of construction in Geneva. So that was, I think, the last question.

Another one. I have another one. What size of acquisition or investments in million Swiss francs would be needed to launch a capital increase?

I mean we have a leverage of below 40%. And if suddenly we have a portfolio or possibilities to purchase CHF 200 million plus or even CHF 300 million, of course, then there would be time for a capital increase. I don't know whether...

Yes, my -- so CHF 250 million, so that was my idea. Okay. Then thank you again for your interest in Investis, and we wish you a good day. Thank you. Bye-bye.

Thank you very much. Bye-bye. See you soon.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.