Mobimo Holding AG (MOBN) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of Mobimo. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Daniel Ducrey, who will lead you through this conference? Please go ahead, sir.

Thank you, Ms. Moore. Dear, ladies and gentlemen, it gives me great pleasure to welcome you to the presentation of our 2020 financial results. [Operator Instructions] Here with me is Stefan Hilber, our new CFO. Stefan joined on November 2 and is now leading the finance department with enthusiasm and a lot of drive. He will present the key financial figures for you. Also with me is Marion Schihin, the Head of Corporate Communication, who will be happy to collect your questions in the webcast and bring them in at the appropriate time. Our agenda is, as usual, an overview of 2020; then the financials; the portfolio and the pipeline; and finally, a look ahead in the current year. 2020 was a great challenge for all of us, for all the real estate industry as well. The framework condition for almost all parts of our lives have changed. Of course, parts of our business have stood the test of time and remain constant, and others have suffered. What has proven itself is diversification as a basic concept at Mobimo, diversity is -- in the business model, which includes a strong investment portfolio as well as a strong development activity and which is enjoying fine successes right now when it really matters. So we were able to make important gains in this cyclical activity of development. The diversity of -- in the portfolio, which has proven to be crisis-resistant in its mix, has also proved its worth. Residential properties with additionally somewhat lower yield have both brought value stability to the entire portfolio this year and, at the same time, have also come through the various waves of COVID without any losses. The crisis hit us as a company. In special times, we had to find special solutions that would prove to be the best in the long term. We focused on dialogue and individual solutions in our portfolio management. We were able to come to an agreement with every single tenant, only for 2 it didn't work out. And we are convinced that this will prove to be the economically optimal solution. The resulting COVID-related shortfall in rental income amounts to CHF 6.5 million at the end of 2020. Even more than usual, the team plays a central role in difficult times. The new forces on the Board of Directors and in the Executive Board are already making a valuable contribution to the company. And the management team is now complete, and this is a big pleasure for me. Of course, a crisis like this is also an excellent test for various ideas we had when we already made -- we had already when we made the strategy together. For example, the agile business model, which has proven itself well in this situation. Diversification has also brought its fruits, as already mentioned. However, the fact that we were not able to reduce the vacancy rate for initial rentals in Mattenhof, as much as we had planned, is also a fact. The company, the team and the infrastructure have proven to be very adaptable. We have now successfully practiced going to home office and back in office without having to reduce services for customers, and we did it quite a few times already. And sustainability, not just written on a paper but lived day by day, especially when it matters, is something we also have done here. Deferrals, discounts, extension, progressive compensation, we pulled out all the tools at hand with our tenants to find solution. As a result of the fact that Mattenhof was completed and has now generated additional rental income, we have almost reached the previous year's level despite the losses. How does the situation look like today? The economy should still, we hope, partially recover this year. The bulk part of the economic performance will continue as it did. Catering and hotel will certainly still have a difficult year, and retail will continue its structural adjustment unabated. Switzerland will remain attractive by international standards. The low interest rates will probably remain with us for a while. And -- nevertheless, it remains a difficult year to assess in which politics can still provide surprises. But there are a few fundamentals on which we can build, most important, real estate will remain attractive and investment pressure will not diminish. This means that our E3 segment development for third parties will continue to find good sales. It also means that there will be -- continue to be excess in demand in the transaction market, and that for our condominium, there will be an unbroken demand. Residential has become the center of our life and will keep its status in the next couple of months definitively. And the changes in the market -- in the office market will be slow, but will progress steadily. Our business model will continue to hold its own successfully in this market environment. And now I would like to ask Stefan to present you the key financial figures.

Good afternoon, ladies and gentlemen. From my side also, a warm welcome to our annual conference call regarding the 2020 financial results. It's a pleasure and an honor for me to transcend to you the figures as new CFO of Mobimo for the first time. For the beginning, I'll just give you a short overview of our results. The net rental income has increased significantly since 2017 by around 12%. Despite some corona effects, the net rental income was almost on the same level in 2020 as in 2019. Mostly because of sales of 2 development properties around Zurich, the net profit on development projects and sale of trading properties increased in comparison to the prior year, up to almost CHF 37 million. The income figures of development for third parties and sale of trading properties are inherently more volatile than rental income, as you see in the table above. Therefore, we should also focus on the average profit over some years. The corresponding average 5 years' profit as of this business sector is about CHF 19 million. This illustrates the essential profit contribution from this business sector. The revaluation of investment properties and of investment properties under construction resulted in net income from revaluation of CHF 34 million. Although further yield compression can be observed in the market, the revaluation gain is lower than last year. But nevertheless, in the light of the corona crisis, a positive result, of which a CHF 31 million is attributable to operating performance. Mobimo sold 2 commercial properties of small size with a total rental income of CHF 400,000 million a year -- CHF 400,000 a year in the 2020 financial year. So they are really small, not CHF 400 million, you can believe me. The sales resulted in a profit of CHF 1.6 million. In the context of an asset swap, Mobimo also exchanged a property in Lausanne for another property also in Lausanne. Only the balance sheet was influenced by this deal. Due to a strict cost management, the personnel, operating and administrative expenses could be decreased, although Mobimo is on a growth path. This resulted in earnings before tax of CHF 146 million, a plus of 8.8%. Without revaluation gains, the EBIT resulted 35% higher than last year. This is mainly because of the profit on development for third parties and the sale of trading properties, as I already mentioned. After the financial results and taxes, which were significantly influenced by a positive one-off effect due to the tax refund last year, the profit in 2020 is 6.6% lower than last year, but mainly because of the just-mentioned one-off effect last year in the taxes. On the next slide, you see that the profit without the revaluation effects amounts to almost CHF 70 million, which is 13% above last year. The earnings per share are CHF 14.64 with revaluation effect and CHF 10.56 without revaluation effect. The next slide provides an overview of rental income. We consider development of rental income during the preceding years as good. It would have been even better without the effect of the coronavirus situation, which influenced the result by CHF 6.5 million less rental income, as Daniel in his introduction already mentioned. With 2/3 of all corresponding tenants, an agreement for support measures could be found. 1/3 is still open, but we are confident we will find a good solution for both parties soon. How corona will influence the 2021 results is very difficult to estimate right now, and therefore, we are not giving any guidance for 2021. As already mentioned, the rental income reached almost the same level as last year despite CHF 6.5 million negative corona effect. The Mattenhof district in Kriens, which was reclassified from investment properties under construction to investment properties, contributed now a whole year to the profit of Mobimo and, therefore, is the main reason for the compensation of the negative corona outcome. But the reclassification of the Mattenhof, it's about CHF 200 million in volume, is also the reason for the increase of the vacancy rate up to 5.5% at the end of 2020. Mainly first-time letting of commercial space in currently challenging -- is currently challenging, not only at the Mattenhof District but also in the Aeschbachquartier in Aarau. These 2 very new districts contribute 45% of the total vacancy rate of Mobimo. We see good but slow progress in the marketing of the mentioned free space, but fortunately, we see progress there. Nevertheless, this also shows that Mobimo does not have a structural vacancy problem in its portfolio. The like-for-like portfolio shows a steady rental income in comparison to last year without taking into account the corona effect. Mobimo achieved a slightly lower net yield of 3.5% with its investment properties in 2020. This was in line with market trends. Especially the yield compression in the residential segment in general was once again remarkable. The cost/income ratio of 14% is also in a normal range. On the following slide, you see that the revaluation of investment properties and of investment properties under construction resulted in net income from revaluation of CHF 34 million, of which CHF 31 million is attributable to operating performance due to good progress in the realization of investment properties under construction for our own portfolio. The value of the other investment properties increased by CHF 3.2 million. Mainly due to the hotels, the commercial properties had to face a revaluation loss, where, on the other hand, the residential part faced a gain because of further yield compression in the market. The applied capitalization and discount rates decreased once again in the reporting period in average. The next slide discloses the largest revaluation effects. As mentioned before, the largest revaluation losses had to be recognized for hotel properties as well as for one larger event location in the Aeschbachquartier in Aarau. The revaluation gain for our investment properties under construction are remarkable. These are the Manegg project in Zurich and one at the Avenue Edouard Dapples in Lausanne. These 2 gains can be considered as operative revaluation gains due to significant development progress, as mentioned already. The key balance sheet figures on the next slide show that the equity ratio with 43% is still in a comfortable range and allows further investment of more than CHF 300 million until we would reach our self-committed 40% equity ratio. The return on equity with 6.4% is lower than 2019, and this is mainly due to the one-off tax effect in the comparison year, as I already mentioned, to the EBIT. Without any revaluation effects, the return on equity amounts to 4.6%, higher than last year with 4.2%. The increase of interest-bearing liabilities reflects the growth path of Mobimo and the investment in its portfolio. The net loan-to-value with 47% is in line with the prior year figure. The average interest rate during 2020 decreased from 1.8% to 1.6% and is 1.5% at the end of the year 2020, with an average duration of the liabilities of 5 years. The interest coverage ratio and the net gearing are still in a comfortable range. On the next slide, you can see that the duration profile of our financial liability is well balanced. Upcoming May, a CHF 200 million bond matures with a coupon of 1.6% or 1.8% effective interest rate. In the current low interest rate environment, we can be optimistic to refinance the bond with a significant lower interest rate that will help us further decrease the average interest. Yes, this was a short summary of our 2020 figures. And now I would like to hand over to Daniel, please.

Thank you, Stefan. As already mentioned, our investment portfolio also grew strongly in 2020. Over the last 2 years now, it grew CHF 500 million. With slightly less people in the company, we consider it to be a clear improvement of efficiency in the company. Good building Relais in Aarau and the entire Mattenhof have been added to the investment property portfolio and are now bringing in additional rental income. The new addition to the portfolio, [indiscernible], in Zurich from the asset swap also strengthens it. We have been actively working with the whole portfolio this year. This has allowed us to undertake 2 asset swaps in 2020 where we swapped, meaning exchanged, properties with other owners, either to have future rental income in our income statement earlier or to add development potential into the portfolio. With the increased share of the investment portfolio, the potential for rental income has also increased while the development pipeline remained constant. The distribution of use in our portfolio is quite stable. With Relais in Aarau and the Mattenhof in Kriens, the relative share of office has slightly increased, which is also in line with our strategy. As a trend, residential and office will continue to slightly grow their part in the portfolio of investment in the near future. The next additions to our portfolio from development will be the Manegg and the Tiergarten project, both residential buildings in the city of Zurich. The balance between the regions remains stable as will our tenants. As far as the renewal of the leasing is concerned, we could -- we can precise that 98% of the contracts expiring in 2020 have been renewed and that for '21, 67% have already been signed and sealed. We are convinced that with the good properties we have in our portfolio, we'll also be able and to be in a good position to renew the expiring contracts this year. Our pipeline of projects for our own portfolio remains very attractive. A lot was completed in 2020. In the current year, Manegg is now certainly the main topic, together with Tiergarten in Zurich and Jumeaux in Lausanne, which are now starting too. Our investment portfolio still has a lot of potential, and it will still grow as of today by CHF 500 million from our own developments within the portfolio. How valuable the development work is for our own portfolio is sometimes not visible enough. This value creation, which is very material, is hidden in the number of profit from revaluation, which also includes market-related changes. Here are a few pearls from which the performance of one's own development can also be read in francs and cents. For example, Labitzke, which shows a difference between the investment made in 2018 to the value -- the fair value we have today of CHF 67 million. Same in the Petit Mont-Riond in Lausanne where the investment value and the fair value now has a difference from almost 50% value creation. And we are convinced that the current projects will continue to give similar returns. Let's move on to the third-party developments. This is a cyclical part in our business model. In a year with a lot of profit, which is the case this year, the pipeline also moves noticeably. With the scheduled sale of 2 projects, Regensdorf and Uster, and the reclassification of Manegg, this pipeline has decreased by CHF 280 million. At the same time, we have made acquisitions but increasingly in the segment of condominium projects, as the following slide with the pipeline will show. However, the quality in this segment remains really strong, and it is and remains an important pillar of our profitability. We will also ensure that the pipeline remains well filled. That's the overview of our condominium pipeline. And while CHF 150 million were in this pipeline 2 years ago, today, we have CHF 40 million under construction and CHF 550 million in planning. Housing in good location is extremely sought-after. And we have a development team with a lot of experience which prepares this project in line with the market demand and have the necessary foresights to place each individually at the right spot. In contrast, the 2 developments for third parties, condominium projects make a contribution to Mobimo's profitability over several years as they absorb profit spread over 2 to 3 years via the POC, percentage of completion. As can also be seen from the pipeline, the projects are well distributed over the years. But please keep in mind the receipt of the building permit, which is key to this, does not always follow and adhere to this ideal picture we have here. Whether a respective project is then finally sold in one piece or as a condominium to multiple owners is a question of better financial results for Mobimo and, of course, is reviewed time and again. Here are also a few highlights of developments in the past. These are projects with a significant contribution to the success of developments at Mobimo in the mentioned year. And with sales of projects, Mobimo benefits of the very high market prices currently in practice without selling rental income out of the investment property portfolio. Our portfolio is not only fit for -- to be profitable today, it's also well equipped for the challenges of tomorrow. This is also ensured by the metrics for sustainability. An overview of our ESG performance figures shows it. Energy intensity, the improvement is largely due to a clear allocation of electricity originated from renewable sources. This was a strong booster. The share of renewable electricity in the overall mix will be tracked from now on. The emission intensity, we measure it since 2011, and we started with 35 kgs per -- CO2 equivalent per square meter, has now been reduced by half. And we invest, in average over the last 3 years, CHF 40 million in refurbishments, which also largely helped to improve our performance, and this will continue for our case. Specifically, we also worked on these mentioned points in 2020. Energy efficiency target has been implemented. Biodiversity has been taken up in our discussion, and a study will be done this year on our portfolio on this matter. The energy network in Mattenhof is now operating. We have developed a strategy to operate the photovoltaic systems, since we own quite a few of them. And we promoted employees through further training, annual work hours have been installed and the internal carrier opportunities implemented and so on. So well, what's next? What are our focus areas in 2021? In the development, the start of the construction in Manegg is obviously very important, and we'll keep focusing on this. Then we want to make a big step towards completion in Meggen, which will be complete in '22, and the development should continue to make a noticeable contribution to the profitability of the company in this year also. In the marketing, the focus is on the Mattenhof pushing ahead with the first leases for the remaining commercial space, then to continue marketing condominium flats in Meggen and generally reducing our vacancy rate. For the real estate portfolio and the portfolio management, we must continue to seek solution with our tenants, and for those tenants which do not manage to survive, to find new ones. And continue to roll out the digital tenant portal. At corporate level, continue to develop our sustainability approach. We are using growth as -- in our portfolio as a driver for efficiencies, and we will continue to do this and further optimize our financing costs in this low interest rate environment. This is our intention for next year. Thank you for your attention. And now we are ready for your questions.

[Operator Instructions] And the first question is from John Vuong, Kempen.

I was wondering whether you could provide more color on your marketing process for -- or progress for Mattenhof and perhaps even Friesenbergstrasse. I was wondering whether the latter is already included in your vacancy rate for December.

Yes. John, thank you for this question. Friesenberg is completed. Friesenberg has seen new tenants entering. We have still some vacancy there, but in a minor. I think the vacancy rate of this freshly finished building must be around 10%. What we can observe in general is that, obviously, you need to make special efforts in marketing these days. We definitively are talking about shorter binding terms with our tenants, which we consider to be beneficial on both sides because with shorter lease terms, we are able to increase the price to come in shorter term as to -- back to higher rent income. That's one thing we are doing. On the second level is the -- finishing the equipment of the rooms. We are more open to discuss -- to finish -- to invest a little more in the surface so that we can rent it out. With these 2 measures and with the good-located buildings we have, we are, in a reasonably good speed, able to fill our buildings.

And maybe with regards to the investment in service, do you need to invest specifically more with new floor plans considering working from home?

I'm not sure I got your question absolutely right. But the question, if I'm getting it right, is the office spaces, will they be reduced because of home office? Is this your question, right?

No, no, no. But I meant more like do you need to restructure your floor plans to accommodate the new way of working? And does it cost any specific higher CapEx, or this is just part of the general process?

No, it's part of the general process because, obviously, the invested capital, which is not comparable to building investment but still is an investment, increases the value of your assets. So that's one thing. And the second thing is this, the home office doesn't interfere in this logic. It's more a question of how you live in your office. The office becoming more space of implementation of culture for the companies rather than to have separate spaces for your employees because this you can't have once you work at home. So we see a slight change in the nature of use of office in the future, a little change in the equipment we provide for the new tenants, but this is on the margin level of what we do.

Okay. And maybe on the matter of digitalization, should we expect more cost savings on that front going forward? Or have you squeezed every bit of it?

No, I think the company invests quite an amount to be on the forefront of digitalization for its own needs, reason why we are really -- we were not hampered one day by going to home office, coming back and so forth. As I explained, we play this quite a few times now. And for our relation with the tenants, the investments are in progress, are part of our budget. So we don't have to increase it. It's an ongoing process. And our cost level will rather go slowly down because the main investments have been made.

As we see actually in the figures of 2020?

Yes, you see a decrease in the number there.

Yes. That's clear. I was wondering whether that should go down even more. But understanding from this, I guess, there's more to squeeze in terms of the costs.

Your idea is not totally wrong, but it's difficult to tell you when exactly it will happen.

Okay. Fair enough. And maybe a last question on your long-term goal of acquiring properties with development potential. Seeing where interest rates are going, I understand that you're doing a lot of asset swaps, or have done at least 2 of them last year, should we see more action in this space in the short to medium-term?

I think the pace of change in the portfolio in 2020 was quite high when you see the list of properties we have added or we have changed. I think more than this will not happen in '21. We will try to keep doing good deals, and good deals in the current market are also possibly asset deal. What one needs to say is asset deals are very complex deals, much more than simple sell of -- disposal of a property, which can be done within a month. You have both parties needing to agree on the value of both assets. And then to make a smart exchange, it takes quite a time of the financial team and the legal team to get the right result in both books. We'd love to do this again. But as I said, we need to have the right partner. It's quite a complex operation.

And the next question is from Alessandro Taiana, UBS.

I have two quick questions. The first one regarding the vacancy at Mattenhof and the Aeschbachquartier, which, if I heard correctly, amount to 45% total vacancy. I was wondering if you can comment on how much of this vacancy at these 2 properties is commercial versus residential.

It's essentially commercial. Both plots have 100% rent out from the residential part, so it's only commercial.

Okay. And my second question is regarding your development income from third parties, and I understand this can be not as visible or more volatile. But with 3 properties under construction, I was wondering how big these are in relation to the pipeline and how advanced they are in the construction phase.