Investis Holding SA (IREN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Half Year Results 2023 on Investis Group Conference Call and Live Webcast. I am Sandra, 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. Stephane Bonvin, CEO of Investis Group. Please go ahead, sir.

Ladies and gentlemen, good morning and welcome to this half year results 2023 presentation and thank you for your interest in Investis. I have today with me Rene Hasler, our CFO; and Laurence Bienz, our Investor Relation. The agenda will be as follows: I will start with the highlights and I will continue with the market trends and Rene Hasler will present you the financial overview and I will conclude with the outlook before the Q&A session. As introduction, I want to come back to 2022. In '21 we saw inflation coming and we decided to disinvest a part of our portfolio with the goal to take advantage first of the excellent market condition to reduce our debt and our LTV and also to be able to invest again in our portfolio at a higher yield. This decision was the good one as we saw during these first 6 months. First, a contraction in the volume of transaction, but also a decrease of the price for residential properties in Romandie. Our view now is that the increase of interest rate had an impact of the global economy, which is slowing down. We do not longer expect rate to rise sharply and if the Swiss National Bank decide to raise them in September, we believe it will be the last rate hike. We then believe that now is the right time to reinvest in our portfolio on better terms and we are actively looking for opportunities. During these first 6 months, we were also very active in the Service segment. We were focusing primarily on operational performance and now we're very well positioned to continue growing this segment profitably. So for the highlights, we had an excellent operating performance and a continued cash flow generation. But due to the market condition, we had also a lower valuation of the portfolio, which leads to a reported loss. On a group level, the EBITDA before revaluation and disposal reached CHF 24.6 million; the net profit CHF 17.4 million; but our balance sheet is very solid with a gross LTV little under 25% with a strong equity ratio of almost 65%. On Properties segment; we had an excellent like-for-like rental growth of 3.1% for residential properties, our vacancy rate went down to a very low 1% and as mentioned, we had this negative revaluation of CHF 48.8 million. Regarding the Real Estate Services, the top line growth 8.6% and we could again improve our EBIT margin to an excellent 9.9%. Now I will continue with the market outlook. To fine-tune our investment strategy, we monitor the following metrics. The first one is the migration and the demography. The net immigration in Switzerland for 2022 was plus 81,000 people, canton of Geneva almost plus 6,000 people and Vaud plus 7,000 people. And for 2023, the immigration should be again very high. We already saw in the canton of Geneva for Q1 plus 2,004 new habitants. Regarding the construction activity, the demand for small apartment increased. The construction activity remained low and we see also continuing declining numbers of construction permit. In Geneva, for Q1 the delivery of new apartment was plus 373 apartments compared to Q1 plus 1,017 apartments. So a strong decline and of course this means that the rental price continued to increase in Geneva. Regulation: the tax regime for corporation among one of the most attractive in Switzerland continued to attract many companies in the Lake Geneva region. Capital Market: financial market, they are strongly impacted by the interest rate. '22 and '23 central banks raised interest rate sharply to reduce this inflation. This had an impact on the Swiss real estate market. The first one was a contraction in investment volume. Many funds, foundation, investor had no longer the capacity to make new capital increase. The sales volume fell sharply. The property prices contracted and the investors still active now expect higher return. Also during the last earnings season, in Switzerland we also noted that construction equipment manufacture experienced a sharp drop in volume like Geberit for example. The watch export fell by 17% in July and some industry are starting to see a drop in the order books. This weakening of the economy will have an impact on rates and we believe that rates have peaked and that due to the strong resilience of Swiss economy, our currency will become stronger and we will be the first to lower rates again. So we, therefore, believe that the bulk of the rate hike has passed and that the decline in the value of our properties should no longer be significant over the next few months. And the attractiveness of investing in real estate in Switzerland should rapidly return as a result of this forthcoming rate cut. Now I will show you some graphs. The first one is the vacancy rate. As I mentioned, we could reduce our vacancy rate to a record low of 1%. We were never since the last years so low. If we look into the graph, we can see that the vacancy rate has fallen below 1% in June 2020 for canton Vaud. In canton of Geneva, it stay around 0.4%, very low. And overall, we saw that the vacancy rate is coming down for Switzerland to 1.3% and this means that the price of the rents continue to increase. On the next slide, parallelly we see that for the residential rental offers in Geneva and Lausanne, there is less advertisement on the market for a shorter period of availability. '21-'22 compared to '22-'23, we see that the number of adverts went down from 25,000 to 20,000 and the numbers of days online went down from 25,000 to 20,000. On the right you can see that the availability numbers of days dropped almost in all Switzerland so you have 15% fewer online residential adverts in Switzerland over 1 year and the stronger demand is reflected by the shorter period of marketing, for Lausanne and Geneva for example is minus 6 days. On the next slide for the annual rental growth for rented apartment in Geneva, we can see that for the first time since 2010 the rents with tenant in-place are growing again. And primarily, we see also with the green line that when you have change of tenant, the lease continued to grow around 7% for the 6 first months of this year. As I mentioned on the next slide in introduction, we had a significant slowdown in residential properties sales during this first half year. It went down from almost CHF 1.4 billion to CHF 0.5 billion. The next slide, we show you the slides since years now. As you know, the margin between the residential prime yields in Geneva and the 10-year Swiss bonds was almost always around 2% to 2.5%. At the end of last year, we saw that this margin was very low around 1% and now we see that the direction is changing. We saw first that residential prime yields in Geneva they are going slowly up, a bit up of 2.5%. But in the meantime we see that the Swiss 10-year bonds have been trending down significantly over the past 2 quarters. So we expect a normalization of this, but we see more that the interest rate with the 10-year Swiss bond would come down. So next slide. On this slide, we see that [indiscernible] is expecting that in 2026 there will be a shortage of 50,000 apartments in Switzerland. This should continue first, due to the long approval procedure for new project and also to the lack actually of interest from investor to invest in a new project. And we see that Geneva and Lausanne are in these red cities where the shortage is the highest. So market outlook. We can see that globally we have strong market fundamental with strong demand and low supply. The demand for rental apartment in Lake Geneva region is fueled by ongoing strong migration. The vacancy rates are further decreasing in 2023 and there are no signs of reversing this trend. The rents are expected to grow substantially going forward and parallelly the combination of inflation and rising reference rates also push rents upward for in-place tenant at least plus 3% for 2023. Yields and markets liquidity have moved more significantly in Romandie than in German speaking Switzerland. The SNB interest rate hike is expected to end soon. Property yields might reach a peak soon. So also residential portfolio have proven more resilient than commercial. Investis is now very, very well positioned to take advantage of this actual market condition. On the next slide, this is the property we show you also since years now. The main change compared to last year is this drop of valuation 4% from CHF 25.1 million to CHF 24 million. As mentioned earlier, of course this is due to the market condition. We had for the 6 first months only plus 0.7% of rental increase, but should improve during the rest of the year. So the position of Investis in the real estate market in Switzerland is unique as we are active in market where there is a constant situation of undersupply. We have low vacancy rate. We focus on middle segment. The number of residential properties in city center does not grow. We have the higher rental growth and, as I mentioned before, the fundamentals remain strong. So now I hand over to Rene. He will present you the financial overview.

Thank you, Stephane. Good morning, ladies and gentlemen, also from my side. Yes, another set of excellent results and figures for Investis. On Page 17 on the lower part, you see the highlights for the Properties. Like-for-like rental growth in residential of above 3% is really an excellent achievement and the further decrease of that vacancy rate to 1% I think this is the bottom that one can get in our business. And as usual I remind you that in this 1%, everything is included. All the renovations that are ongoing are counted as vacancy in that statistic. Real Estate Services is continuing its improved EBIT margin. We can post now a 9.9% EBIT margin for the first 6 months 2023. Overall, group revenue rose to CHF 115 million and I don't dig into the numbers because it's more important to see the segments than on a group level; but important, no change on the fundamentals. Continuous very strong cash flows from the investments into the portfolio with some 60% of the cash flows coming from that segment, Real Estate Services. Very high return on low invested capital as usual, but the Service is the main revenue contributor with almost 80% of the turnover. If we go to the first segment, Properties, you see revenue small decline compared to last year. That is not a surprise since we have 11 properties less than a year ago. We sold 10 in the first half and another 1 in the second half last year. I'll go into more details of the effect of the sales in the next page. CHF 26 million rent revenue, on track. And as I said, very strong like-for-like growth 2.5% overall and 3.1% for residential only. EBIT is those after the revaluation losses of CHF 49 million negative. But if you exclude that, we are still on track in improving the quality of the P&L of our Property portfolio. Page 20, you see effectively these impacts of the sold properties. It's very important to understand the mechanics. With these 11 properties, we sold turnover of rent income of CHF 10.4 million on a yearly basis. In the half year 2022, we still had CHF 4.8 million rental income as part of the buildings were sold in May, others end of September and then the last 1 end of November. And also in the second half, we still had CHF 1.2 million rental income from these properties. These are all gone now that's why we have CHF 26.2 million rental income this year. And as a reminding information, we sold these properties CHF 63 million above the previous valuation by CBRE, which is roughly 20% above the book value. Cash flow from these properties in the last half year were CHF 3.5 million. That is an important information if you compare then the EBIT numbers in that segment. Now on the next page, let's talk about these revaluation losses. Yes, CHF 49 million, it's a considerable amount, in line with our expectation because I always told you that 10 basis points will amount to around CHF 50 million. It's now CHF 49 million and we had actually 3 effects in that number. One is discount rate, the other one is the rent increases that we posted above the expectation in the valuation 10-year business plan and the third one is slightly stronger CapEx for energetic renovations. At the end, the number came to CHF 49 million. If you compare that to the last couple of years, then the CHF 49 million is in line with the hike in the last years that was also driven by lower discount rates. The characteristic of the portfolio is still the same: we are residential, we are Geneva and Lausanne. Vaud is predominantly Lausanne. And we are in the small apartments, 1 to 3 room apartments is 86% of the portfolio. Still the same as before. Not a surprise since we did not have any change in the portfolio in the first 6 months 2023. Let's talk about our vacancy rate, which still goes south; 1% as I said, record low. It's 0.9% in Geneva; it's 0.6%, it's little higher than end of December, 0.6% for residential in the canton of Vaud. And also commercial, we could rent some of the vacancies and are down to 1.4% for commercial, which is not large in quantity but still it contributes. On the right, you see we still have rents 10% below market as CBRE is guiding in our revaluation exercise. As a reminder, 72% of our contracts are CPI linked. That's why we could already increase the rents the last quarter '22, but also in the 6 months of this year. Unlike if the rents would have been to the reference rate of the official reference rate, then rent decreases start only as of September this year. We still have a decent turnover in our tenants 10%. And even so we had 3.1% like-for-like rent increase this year, we stick to the long-time target of 1% to 2% on a yearly basis like-for-like rental increase. A lot of information for the portfolio. Now it's our Service business, I would say continuing our paths of the last years. We could again increase the margin to 9.9%. As I told you in March, we are more in the camp of consolidating this margin. But for the first 6 months, we could increase it again by 20 basis points. Last year in the second half, we had a margin of 11.4%. I would not expect that all these positive impacts that we had last year would repeat. It depends also a little bit on the weather that we can of course not influence. But I would say we have decent progress in our strategy and the Service business is performing very well. 2/3 of our revenues are coming from facility services as we invested in acquisitions these couple of years. That's why property management is down to 34% within that segment. On the next page, you see the strong margin improvement over the last years. As I said, it goes along with the increasing turnover partly by acquisitions, but also organically and the margin as you see decent 9.9%, which is in line with our expectation. If we look below the operating profit EBIT, then we have the financials. We could probably for the last time decrease the financial expenses just below last year. This is on the one hand we had also to pay like everybody higher interest rates on our debts, but the debts were considerably lower as we used the proceeds from the property sales last year to reduce our debt, which is now at just below 25% of the portfolio. So average interest in the 6 months was 0.55%. At the 30th of June, our cost on the outstanding debt was 0.77%. This will increase once we have repaid our bond, as you know, it's 0.05% interest cost and maturity is the 9th of October and we cannot refinance this CHF 140 million the same interest rates of course. Tax is positive due to the pretax loss, which is a result of the revaluation losses. So all noncash not a problem, but this gives a little tax credit of CHF 2.2 million. Net profit excluding revaluation effects, CHF 17 million so we are on track to earn and overearn our dividend with operating profits. Balance sheet, Page 27. No big changes to December or the previous year. We have the portfolio in the invested part in assets. We have financial liabilities at CHF 364 million. As you know, besides the dividend that we paid CHF 32 million, we also had to pay federal income taxes on the property sales last year. This is only due in March after the year. That's why the CHF 22 million were paid only in spring 2023. Deferred taxes, as expected, down as a result of the revaluations and the strong equity at CHF 1 billion or 65% is one of the best in the market I would say. Maybe an information on the right, credit lines. As you know, we have to repay the bond of CHF 140 million. Our unused credit lines as we speak are above CHF 300 million. So I don't expect any difficulties in financing that bond. I close with the growth on our debt. You see the development and the hit between end of 2021 and full year '22. This is, as I mentioned, decrease as a result of the sales and this year that small increase resulted of the dividend and, as I said, the federal tax that we paid. Operating cash flow CHF 9 million in the first half year reduced accordingly. I will close on the ESG topic. Sustainability is also one of our priorities in the management discussions. We have a clear focus on improving the E and the S. In the E, we have now a dedicated 10-year plan in place to improve our footprint with energy efficient renovation or energetic renovation, to be more precise, to improve our numbers and this is not a secret that will not be best-in-class for a property company. We will publish all the figures in the annual report that we will print in March and we are full speed in preparing all this information for you. As is also important not only for our employee staff, but also for our tenants and we do everything that our tenants receive best quality apartments. And that's why in our renovation program, we have every year still also a focus on improving the quality in there. With that, I hand over to Stephane for the outlook. Thank you very much.

Thank you, Rene. So regarding the outlook. So mainly the residential properties market in Switzerland has solid fundamentals as I mentioned earlier despite the rising interest rate. So the demand for residential properties in prime Swiss locations remain healthy and strong. The net migration into Switzerland and especially into the Lake Geneva region remains an important driver and is expected to further grow. As I mentioned before, the residential market is expected to be short 50,000 apartment especially in central location. The construction activity continued to decline due to rising interest and also long approval procedure. So for our Property segment, we want to continue to grow our portfolio through targeted acquisition. As I mentioned after the result of the full year 2022, our goal is to buy the same EBIT that we sold for the half of what we sold. Regarding the Real Estate Services, we want to continue to develop it profitably with the margin that, as Rene mentioned, is already high, but now we will focus on growth. And regarding our balance sheet, we want to continue our politic with low debt and strong balance sheet. So thank you for your attention and now we are ready for the Q&A session.

[Operator Instructions] Our first question comes from Holger Frisch from Zurcher Kantonalbank.

I have a couple of questions. Maybe I'll take them one by one. First one would be, can you share your thoughts on the refinancing of the bond maturing this October? What are your plans or preferred options here?

Yes. I mean at the moment, we are less interested in the bond market itself as the spreads especially for Investis or I would say not representing the quality of our rating on the one hand and strong balance sheet and cash flow generation on the other side. That's why we would probably wait for the markets to normalize and use our bank facilities to refinance CHF 140 million.

And maybe can you give more details on the negative valuations? Where did you see the largest individual devaluations in your portfolio? Was it more or less broad-based?

As you could see, all the residential properties had an increase in the discount rate by 10 basis points and that contributed to the revaluation loss and it's all over. Every property was hit by this discount rate increase.

Okay. And then you said that there were higher estimates for future investments in energetic renovations that were partially a reason for the devaluations. How will this affect your investment plans in the portfolio going forward? And maybe you can explain why you had much lower investments in your properties in H1 this year compared to last year.

Can you repeat the last part of the questions because I'm not sure that I correctly understood?

Can you maybe explain why you had much lower investments in your properties in H1 this year compared to last year?

I don't know where you get this information from. Our investments were higher than in the last year. In the last year we also had purchase of a property. That's why you saw in the respective table in the external report a decrease to roughly CHF 4 million or CHF 5 million. But in fact we invested more in the renovation in the first 6 months. On the one hand, the normal quality improvements in the apartments; which is kitchen, bathroom and water pipes; but also energetic improvements that we started and/or concluded this year. When we talk about the valuation exercise by CBRE, then I can confirm that they increased their expectation of our future renovations in the planning. I mean we stick to our previous information, we will slightly come to an end with the kitchen, bathroom renovations and use that freed-up renovation potential to do energetic improvements. But we will also do the next 10 years slightly more to improve our footprint from the portfolio and this energetic renovation. You need to do them even normally you would not do that just because it is expected or is expected by law. I mean we have a roof in all our buildings, but these roofs are maybe not best practice anymore and that's why we will do the refurbishing earlier than we would have planned before. That's why the impact.

Okay. And then maybe last one, a clarification question. The rental growth like-for-like for H1 was 2.5%, right, for the overall portfolio?

Yes. The 2.5% all-in and 3.1% is residential and commercial was slightly negative.

The next question comes from Philippe Zuger from ZKB.

I do have a couple of questions. First one is do you see already opportunities on the current yields in Geneva to enlarge the portfolio?

Yes, we are. So the market is much, much, much more liquid than the first half year of '22. I think we send minimum 2 to 5 offer per week. You have a lot of foundation, institutional owner that are selling residential property around the Lake Geneva region. I think there is 2 motivations. First ESG, they are not able to refurbish in Romandie, little bit complicated for them. And the second motivation is maybe some of them, they have to reduce the leverage so they have to sell properties. We are actually in discussion and I think we should before the end of the year minimum 2 transaction at a very good price at a good year.

And are you in competition with private or with institutional investors?

I had the discussion yesterday morning, a long discussion with the Head of Transaction of UBS in Romandie. They said that mainly you have private investor now in the market. Institutional, they are out of now -- they are now on the opposite side. They want more to sell than to buy. I would say what we noted and also the decline of volume CHF 1.4 billion to CHF 0.5 billion. If you take away the transaction of [indiscernible], then you imagine that the transaction is very low. The transaction level is very low. So what we are seeing now is more that there are a lot of process going on, but you have no closing because the seller they have to accept the new market condition. That's the reality today.

Okay. The second one is do you think you can enforce reference rate adjustments on our tenants so also a second one next year without any political issues?

The reference rate is not really a benchmark for our portfolio and our tenants as our contracts are CPI linked. And yes, should the CPI increase, then we can adjust our rents. All our rent increases are to tenants.

I know they are like 26% I guess, but do you think there is no political headwind against the second one?

So far we had no headwind in that respect, no.

You cannot say that during 10 years, we have to decrease the rent due to the interest rate decreasing and then 1 shot, 2 times we maybe have to increase it. But maybe you read it this morning, they said that we will have to wait December for the next adaptation of the rate. So at the end sometimes you cannot always decrease and when you have to for the investor, they cannot increase. So at the end mainly is the population money invested in real estate.

And maybe additional thoughts on that. We are in a market where there is high, high demand for our apartments and no real vacancies available. So as a tenant maybe think twice before you challenge a market-related increase and, as I said, we are still 10% below market in average with our rent prices.

Good. And then may you give us the guidance for the EBIT margin for the second half year or for the full year? What do you expect in the Service segment?

In the Service segment, of course very, very low double digit and to stay I would say flat on the development for the full year.

[Operator Instructions] Gentlemen, so far there are no more questions from the phone.

I have additional questions from the webcast. The first one was from Bank Raiffeisen. Which properties have experienced the highest evaluation only due to discount rates or were there other reasons? I believe that this question has already been answered. And I flip to the second question from [indiscernible]. Can we expect a similar like-for-like growth in H2 2023? What kind of properties transactions should we expect regarding size yields, new or existing packages or one by one where do you stand in this process? So twofold that question, can we expect the same like-for-like growth and where do we stand in terms of transactions? I think that has already been answered with the first part of the question maybe.

Like-for-like, I mean we had the highest hike in the CPI in second part last year and beginning of this year and this is mostly priced in our rent increase. So I would not expect a similar like-for-like growth in the second half. But I don't know. I mean I don't know where the CPI will be at the end of the year. But if there is, then we can adjust, but I don't think at the moment that we can repeat this 3% in the residential.

And regarding maybe the second part of the question, maybe an additional information. Where do we stand in process and regarding the size, et cetera. So our goal is really -- so we sold almost CHF 7 million EBIT and the goal is really to buy back the CHF 7 million EBIT as soon as possible at much better condition as I mentioned. And where do we stand? So we are in 2 transaction very advanced and we hope to close it very soon. But also, as I mentioned, we are sending a lot of offer actually.

That's it from my side. No more questions from the webcast.

[Operator Instructions] Gentlemen, so far there are no more questions from the phone.

Okay. So then thank you again for your interest in Investis. We remain at your disposal for any bilateral question you may have. And we wish you an excellent day.

Thank you very much also from my side. Bye-bye.

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