Investis Holding SA (IREN) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to this full year results 2022 presentation. I have today with me Rene Hasler, our CFO; and Laurence Bienz, our Investor Relations. Today, the agenda will be as follows. I will start with the highlights and then with the market trends. Then our CFO will present you the financial overview, and I will conclude with the outlook before the Q&A session. So 2022 has been a very active year for Investis. We had to adapt our strategy to the new -- of the economy. And the Property segment, we had to review our portfolio growth targets due to the continued inflation in the economy and especially on the salaries. So we decide in Q3, 2021 to review our strategy [Technical Difficulty] that, if inflation would continue, this will have an impact on rates and consequently on the value of our properties. So we decide to take advantage of, at that time, a strong real estate market to sell some of our properties [ for ] slightly less than CHF 380 million. These measures allowed us to have a profit of CHF 63.4 million on the sale to lower our LTV to 21%, and also quite a capital increase at the wrong time and also we have now the opportunity to benefit from the actual market. We have also restructured our real estate service over the past year to bring it under 1 entity with the leadership of Michael Stucki. This measure has enabled us to, first, improve the profitability with an excellent EBIT margin of 10.6% to boost our business through cross-selling measures, and also to simplify our organization and to continue our digitalization. At our Executive Board [ also ] Sophie Vartzbed, Head of Real Estate, joined us, and also Michael Stucki, Head of Real Estate Service. Mr. Walter Eberle left the group at the beginning of this year, and we thank him warmly of his contribution to the best of our service segment. We were also able to continue to refine our ESG strategy. And here too, we appointed a person to be responsible for its execution for the entire group. And as recently announced, we also have Mrs. Corine Blesi joining Board of Director. So highlights. 2022 was again an excellent year with an excellent profitability and continued cash flow generation. On group level, we could increase again our NAV per share before deferred tax to CHF 95.00 or plus 7.1%. We also improved our net profit, excluding revaluation effect at CHF 94 million compared to CHF 41 million last year. In the Property segment, we had a very successful sale of 11 investment properties with this gain of CHF 63 million. We had again, a like-for-like rental growth for the residential properties from 1.8%, and we could again reduce our vacancy rate to 1.3%. Regarding the Real Estate Service segment, we did the acquisition of Home Service and Aatest, and we could again improve our EBIT margin to an excellent 10.6%. So market trends. As you know, we follow the [Technical Difficulty] strategy. The first one is immigration and construction activity, the regulation and the capital market. Regarding the immigration and the demography, for Switzerland in 2022, we had again a very strong immigration with more than plus 80,000 new inhabitants in the country. For Geneva, the net immigration went up 1.1% to little bit less than 6,000 people. And going forward, we expect that the immigration will remain high. In 2022, the construction activity is on decline. As you know, also in Geneva, this is aCanton with much more -- with a high production of renting, 85% compared to ownership. And also there now, we've seen a strong decline of demand of construction [ belt ]. So after record years of construction, we see now a decline of this activity. Regarding the regulation, there is still this very attractive tax regime in the Lake Geneva, also boost the population in this area. Now maybe for this year, the most important metrics, the capital market. 2022 has seen a rise of the interest rates and the evolution of the interest rate with first, the development of inflation. And secondly, on the stability of the financial market, we've seen this last day what happened with these bank crises, and of course, if a recession is coming or not. This evolution will have an impact on the real estate market. So what happened in 2022 in the real estate transaction market. So Q1, Q2 were still very strong. End of Q2, rise of the interest rate. And then we had successive interest rates for 2022. And of course, the demand for real estate investment decreased. So actually in the market, we don't see a big fall of the prices or crash, but we see more consolidation of the market. And of course, the market is now much less liquid than 1 year ago, and we get now more opportunity than before. So on Investis side, as I said, we decided to reduce our LTV to take the opportunity to continue to invest now in better condition as the past year, in new properties. We expect also that interest rate would rise to maximum 2% from SNB. And then, due to the weakness of the European economy, we expect that the Swiss interest rate should decrease again and the demand for real estate will increase again. So, now if we look into some slides regarding the real estate market in Geneva, you can see that in all segment size, the vacancy rate is coming down. For the larger apartment, it's less than 0.4% and for the smaller apartment is a little bit up of 0.40%, but globally at 0.37% vacancy rate. And also, you have to imagine that, at the end of 2022, Geneva had only roughly 600 units available for a population of more than [ 0.5 ] million people. So demand is still very strong in all segment size, and the vacancy rate is good. We expect that we come at record low. On the next slide, this is just to compare the Swiss market to the Geneva market. Spread is more or less the same. What we can note also is that in both markets, the vacancy rate is coming down. Then we have a slide with the construction activities. The first thing is that housing project is slowing down. And if we look over the last more than past 10 years, we've seen that since 2010 to 2016, we had a stable production of units of more or less 4,000. And since 2016, it went up strongly to end of 2020 to 9,000 units. And since the middle of '21, we can see a strong decrease of this construction activity. And this is due, of course, to the regulation and construction costs were -- due to inflation. So we expect a continuing reduction also due to the rise of interest rates. On the next slide, you can see that when you have a change of tenant, in Geneva last year, the rents went up 7%. For our portfolio, we have the fluctuation of 11%, and this brings that for 2022 for our residential part, the like-for-like rental went up 1.8%. So investment volume. As I said before, we've seen Q3, Q4 '22 a strong decline in investment due to the rise of interest rates. 2021 was a record year with CHF 4.4 billion. 2022 it came down to CHF 3 billion, so minus 23%. For 2023, we expect again a strong decline to the interest rise. But for Investis, we see there an opportunity to invest at better yield. Now regarding the spread between the 10 years Swiss bond and the residential prime yield, we see a contraction since end of '21. This was due mainly negative interest rate environment and a huge appetite for institutional to have a positive yield. We expect going forward a slow normalization of this spread. So as I said before, the demand for apartment remained very strong. The construction is declining and we will face a shortage of apartments. On the graph of -- [ Luzern ] [ partner ], you can -- they expect for 2026, a shortage of 50,000 and mainly in the red area. And we are invested in 2 of this red area, Lausanne and Geneva. And of course, the rents in this location will continue to rise. And despite the rise, the fundamentals on the residential market have never been so good as now. So conclusion, the yield decompression has started in the second half year of 2022 as a result of rising interest rates of capital invested into real estate. The residential vacancy rate are among the lowest in the country. Obtaining building permit is getting more difficult. The construction costs are rising, and this will translate into a lower new construction activity. The demographic growth remained very solid. So this favorable market dynamics brings further rental growth. So the conclusion, we will have a price adjustment due to the rise of [Technical Difficulty], but it will be partly offset by the strong market fundamentals. So we own this property, Rue du Nant, and we show the evolution of the rent since the IPO, so since [Technical Difficulty]. Again, last year the rents went up from CHF 756 million to CHF 784 million or plus 3.7%, and in the meantime, the value went up 10%. And you can see that since [ 2015 ], the property has more than doubled. And as I just said, this continuing rent increase will offset part of the price adjustment that we will for sure see this year. So Investis market is unique. We have a low vacancy rate. We focus on middle segment of the market. We are invested in the region where is the highest demand with a higher rental growth. So fundamentals remain very strong. So I hand over to Rene for the financial review.

Thank you, Stephane. Good morning, ladies and gentlemen. Let me just explain some insights into our numbers. This first page we can skip. You have the highlights for the group, the Property segment and Real Estate Services. Stephane touched on that. If we turn then to the income statement. You see our top line growth, 5.3% to CHF 228 million. And very important is the line in the middle, is income from disposal of CHF 64 million, which is a gain on sale, which was materialized 20% over the previous book value, i.e., the previous valuation of our appraiser, CBRE. On the right, you see the fundamentals of our 2 segments. In blue, the Property segment, in brownish, the Real Estate Services. So Real Estate Services composed 75% of our revenues, 25% portfolio of the rental income. Invested capital, very important number, 4% is allocated to the Real Estate Service business and 96% in the bricks and walls. If we look at the EBIT contribution and there, [ I expect ] the property sale gains and revaluation gains, which contributed 70%. If you look at the rest, then you see that the 1/3 is coming from the service business and 2/3 is coming from the operation and the Property segment. And if we look at the cash flow generation, then Real Estate Services is even more strongly contributing, 37% to the group's cash flow. So Real Estate Services is marking its territory in our group. Nevertheless, the high cash flow generation remains from the Property segment. This Property segment, CHF 58 million in revenue down 3.7%. This is not a surprise since we announced in May the sale of 10 properties. We then added 1 more end of November. So this explains the decrease in the top line. These sold properties contributed CHF 10.6 million in revenue in 2022. So we will have to compensate somehow this revenue loss going forward. The like-for-like rental growth, 1% for the whole portfolio, and here, I would like to -- residential could increase its rents to 1.8%, while commercial was negative by 8%. So that gave the total number of plus 1%. In the 2 months of 2023, we see a development rental growth is up 1%, with residential contributing again strongly, and commercial is still slightly before -- below last year. The vacancy rate, 1.3%. Going to the details on the next slide, which is in total 1.3%. So, on this overview you have the highlights of our portfolio. We are residential, we are Geneva and we are in the middle covering the 1, 2 and 3-room apartments. And this portfolio sees a very low vacancy rate of 1.3%. Geneva, slightly up compared to previous figures because we have a couple of [ buildings ] in renovation. And as you know, we always use 1 or 2 rooms to -- especially in the winter time to accommodate tenants. Of course, we do the renovation by the tenants, still occupy their apartments. Canton of Vaud, 0.4% I don't think that this can be improved. I would rather expect this to be going back to the 1% vacancy level that we have in our portfolio any point in time. As you know, characteristic of our portfolio is residential, and our tenant contract, 74% of them are CPI-linked. So only 26% is linked to the rest which we -- probably we'll see an increase this year. But we saw already an increase in our CPI rates last year. That is why we had an increase in the rents, 1.8% in residential, and this will continue into -- since the inflation is not going down to the contrary, it's slightly increasing month-on-month. So I can confirm the target like-for-like rental growth will also in '23 be, the residential probably brought at the higher end of this range. If we turn then to the Real Estate Service business, as I said, more important profit contributor year-on-year. The year 2022, we could, I would say, boost the EBIT margin to 10.6%. You saw a 9.7% in the half year. And the second half we could achieve 11% margin, which is outstanding, and we had very good businesses in all our rents which contributed to that excellent result. So EBIT margin, 10.6% on CHF 174 million turnover. So last line on the bullets, EBITDA contribution, our KPI number for the group and this segment contributes in 40% to this key number. Little -- a little bit of history, you see the turnover after the sale of Regie du Rhone in 2019, and very solid, almost doubling, no, even more than doubling -- the EBIT margin between 2018 to now 2022 is 10.6%. As I said, with very good results to this outstanding performance. If we go back to the group level and look into the lines below EBIT, we see that our financial result due to the environment in the first, I would say, 9 months of the year and the proceeds that we could cash in during the year on the sales, our financial expense reduced to CHF 2.8 million, which was an average interest rate even below the years before. Tax normalized on 15%, as expected, which results then in an excellent net profit of CHF 152 million. Few words on the very strong balance sheet that you have on the next page. As usual, we highlight only the important lines of the balance sheet, and that is the portfolio on the one hand and the low financial liabilities, the deferred taxes of still CHF 143 million and a considerable number in our portfolio and a very strong equity of CHF 1.1 billion as we [ score ] 67%. Gross LTV stood at 21% at year-end and it is still as we speak. The next page you have a short introduction to our maturity profile. We are stably financing peak. As you know, we did not have to pay all the taxes on the portfolio -- sales gains. So in the annual report you will find that we still have CHF 22 million taxes to pay in 2023 on the sales of the last year. We'll increase our financial liability a little bit in the first quarter to roughly CHF 90 million. So average interest rate costs as we speak after the announcement this morning of the Swiss National Bank versus the year end figure that we published in the annual report, it was 0.39%, if you look -- we did look up the number. So that's from my side. Thank you very much, and I hand over.

Thank you, Rene. So outlook, I will start with the ESG. So we were able for the third consecutive year to analyze and monitor our energy consumption. We will focus on energetic renovation to improve our CO2 footprint on our portfolio. Since 2022 Investis is participating in the offsetting industry index. It's very important to note that over 90% of our portfolio is residential and mostly in central location. So we are in talk with the electricity heating supplier of Geneva and Lausanne because the more efficient solution will be the distance heating to improve the CO2 footprint. Also, we have -- a little bit less than 2% of our portfolio is rented to the Hospice General and also improving the comfort of the tenants through interiors innovation, mainly bathroom and kitchen. So outlook. We think that strong balance sheet now is capital in this real estate industry, dividend too, and Investis shows that we are able to deliver even in these actual turbulence both. We are very well positioned to capture opportunities in the market. And as I said before, the fundamentals in the residential market are excellent. Regarding the service, we will now focus on organic growth as the margin is already excellent. So why to invest in Investis? I think what we explained just now, that for the quality of the portfolio, we have the largest listed residential [indiscernible]. We have a very solid balance sheet. And the dividend is honored with the operating cash flow. So thank you for your attention. We are now ready for the Q&A session.

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

And the first few questions all around your like-for-like rental income growth. So here, if I take the 1%, then the like-for-like growth in the second half was flat. And if I take the 1.8% residential, even then we saw sort of a slowdown. If you could just briefly comment on this? And you have already mentioned that your high share of rental contracts linked to inflation. So how does this process sort of exactly work? And how confident are you that you can enforce it everywhere with your tenants? And if you have already initiated it, did you get any push back? And then the second question with this regard is, I mean, we saw the 2.8% inflation in Switzerland last year. Is this not really the benchmark for your residential portfolio for 2023?

Like-for-like, I just explain what we see in the first month. And this explains also the -- all the questions that you have raised. I mean, at the end of December, and for just 900 rental contracts according to the new CPI index that was valued at the end of the year. And no, we didn't have any push-backs on these rent increases because it's contractual and so, well aware of these contractual situation. And 2.8%, yes, if we could increase in all the rent contracts, then of course, it would be 2.8%. Also have -- sometimes we don't go to the maximum because rents are already on a high level and that will not equal to the full inflation adjustment on the portfolio, and as you know, only 74% of our rental agreement are CPI-linked. So the rest, we have to wait for the interest -- the reference interest rate to the adjustment.

And with regards to the slowdown in the second half of the year, you had [ CHF 2.5 million ] in H1?

On the like-for-like?

Yes.

I have to look that up and I'll come back to that.

And maybe just the last question on your balance sheet, which is now very strong following your property sale. Can you please give us sort of an indication where you feel comfortable on which levels? And but you need to take more actions or are you rather prepared to do some M&A transaction to take advantage of market opportunities? And is it maybe a chance that will even get access to full portfolio in the region?

So as I explained, in '21, we've seen that the interest rate, it goes up. Of course, this is a very -- this money goes up, the value comes down. So now we have to identify exactly what would be the level and till where the market will go before to invest. But we are in the market now. And as I said, it's much more holistic and you have much less buyer. So we try now to get -- [ we send ] offer at much higher yield than the market because we think that maybe we could capture [ 1 or 2 ] of this opportunity for some seller who has to sell. So we are very opportunistic. And of course, if we can buy, we will buy. Now as we always explained, we are comfortable when we are under 40%. But also, we have to identify clearly where the -- what will happen this year and next year with the interest rate, if we will have a recession or not. And all these points are not very clear. What we can see is that after successive interest increase in many countries, we see that the inflation is remaining very strong. So I think actually, you have to manage more your balance sheet than your P&L in certain industry. You've seen in some bank they have huge trouble now and the real estate, it's also an industry where the balance sheet is more important as the P&L [indiscernible].

Maybe I'll take up the open question on the like-for-like. Yes, it's correct. We had 2.5% in the first 6 months. This is first 6 months against the first 6 months in '21. And the split within this 2.5% were, 2.4% were residential and [ 3.9% ] were commercial, both on positive territory. And as I said in the full year, we were negative in the commercial with minus 8%, and that is due to one property that was literally closed. In the last quarter, you might have heard it in the press, it is our signature investment, [ Alaia Bay ] that had to be closed in Q4.

The next question comes from the line of Holger Frisch from Zurcher Kantonalbank.

Yes, I have couple of questions. First would be on the debt maturities of CHF 200 million for this year. And could you share your thoughts regarding the refinancing strategy with respect to instruments, duration and also interest rate level that you expect? And then could you maybe also elaborate a bit on the drivers of the reduction in the vacancy rate? What percentage is attributable to the sale of the properties and what is attributable to letting success? And maybe also you can share some light on the closure of the Alaia property. I was not aware of that. What is the reason for the close -- closing of the property in Q4? And the last one would be on ESG. So do you see a need for an increase in CapEx in order to meet the federal CO2 reduction targets? And then will you publish your own CO2 reduction path and when can we expect something there?

Maybe I'll start with the debt, which is a rather easy one. I mean the bond of CHF 140 million in October -- and I would say it's a little bit early to think deeply about refinancing this CHF 140 million. As you know, we have CHF 375 million bank credit lines that are already available, which were only used CHF 64 million at year-end, but we have enough headroom there. But I would rather postpone the final answer to the half year presentation when we have more light on, A, the markets, and B, on our financial -- or the refinancing strategy in that respect. And the other ones, you talked about CHF 200 million for the CHF 60 million are bank loans that we rollover on a monthly basis. On the vacancy, that is a rather easy answer. It's the result of our excellent asset management team that could let the vacant apartments rather easily. And ESG, yes, we have a plan to reduce dramatically our CO2 footprint. 2050 is a little bit far away, but I can confirm that our current renovation strategy of budget on a year-on-year basis will cover these additional renovation needs in our portfolio. So no big change to see in the -- let's say, in the next 10 years in that respect.

And maybe the last question regarding Alaia. So we had -- with the pool -- we had regarding the resolution of the pool technical issue with the company who did the general contract, and unfortunately, we had to close the pool 2 times in May, in June, and we did small repairs very fast, but we lost almost 50 days during these 2 closings. And we had to close now during more than 4 months to do a [ proper ] repair. We hope that General did a good job. And we opened it, it was 10 days ago. And of course, we claim the case with the insurance, et cetera. But of course, there was much less income for this property than last year because part of the income is a percentage of the turnover.

The next question comes from the line of Philippe Zuger from ZKB.

I do have 3 questions. So the first of them are bearing the tender of Geneva on board. Do you see potential for expanding the property portfolio and to which yields? And then the second one goes to the -- it's regarding the service business. So the EBIT margin stands at 10.6%. Are you able to maintain the margin in the future? And then the last one, I didn't get the point. How much is the share of the rents with reference is that at 1.25% in the portfolio?

Maybe Rene you can answer maybe to the last question?

Yes, 96%, as 74% are linked to CPI.

So -- and then I will jump into the first question regarding the potential. Of course, as I mentioned before, the market became much, much more liquid since end of February. As you know -- actually, when you have the interest rate going up for all the funds and very strong different institutional investors, I think they had to rebalance part of the portfolio -- the global portfolio because the loans market went down, so they have too high share of real estate. And since end of last year, many investors had to put for sale some properties. And since end of February, we are receiving much more opportunity than before. So yield depends of the quality of the property, commercial, residential. So we are focusing more on residential. And of course, then you have the thematic of ESG. You have maybe some institutional owner. They are not able or not ready or they don't want to refurbish, so they prefer to sell. So now what will be the yield. So we try to be very opportunistic. So we made offers between 5% to 6%, and let's see if we can get some opportunities, but for 1 property in Geneva, we are actually [ dot ] at that level. So the second question regarding the EBIT margin for Rene maybe?

Yes, thank you Stephane. Yes, we had 10.6%. We were positively surprised ourselves. We did not plan for this, and we plan rather to consolidate the segment. So I would not be surprised to a little bit under-achieved this number this year. But you can still expect a very, very, very high single-digit on this line for 2023.

There are no further questions.

So -- and thank you, ladies and gentlemen, for your attention. And if you have any question, Laurence Bienz is at your disposal. We wish you a good day. Thank you very much. See you soon. Bye-bye.