One United Properties SA (ONE) Earnings Call Transcript & Summary

Good morning, once again, and welcome to One United Properties conference call for presenting the Q1 2023 results. My name is Zuzanna Kurek, and I am Investor Relations Officer at One United Properties. And I am joined in this call today by Victor Capitanu, Executive Board Member and Co-Founder of One United Properties; as well as Cosmin Samoila, the Chief Financial Officer at One United Properties. Together, we will present to you One United's Q1 2023 financial results, as well as answer to any of the questions you might have. Before we begin, I would like to mention that this call is being recorded, and the recording will be uploaded on our website later this week. As stated in the call invite, by joining this video conference, you automatically and implicitly consented to being recorded. If you do not consent to being recorded, please leave the call. In terms of the organizational aspects, let me present to you first the setup. Firstly, Victor Capitanu will deliver opening remarks. We will then move to the next part of the call, where together with Cosmin, we will deliver a brief presentation outlining the Q1 2023 results, as well as the key events that happened since our last call in February. During our presentation, feel free to type any of the questions you might have, and we'll answer them during Q&A. [Operator Instructions]. First, we'll answer the questions that we received via email prior to this call. Secondly, we'll answer the questions received via chat in chronological order. [Operator Instructions] As always, I would like to mention that we might be making forward-looking statements today during this call, and regarding the future performance of One United Properties and that the actual results may differ materially. We encourage you to review the disclaimer that you can see right now on the screen and which is included in all of our investor presentations, which you can find on our website. This disclaimer applies equally to all of the statements made in today's call. I would like to now start the call and invite Victor Capitanu to share some of the highlights regarding our performance in the first 3 months of 2023.

Good morning, everybody, and welcome to our quarterly call. I will start the remarks with some obvious fundamentals about our business. I know they are obvious for everybody, but I feel from time-to-time to -- it makes sense maybe to repeat it. So, for our business, it is critical to have great locations. Always location is a critical success to our business. Also on top of this, it's very important the acquisition cost to be reasonable. This allows you to lock your margin for a long period of time. And also critical is the low leverage. Companies with high leverage in periods like this when interest rates are increasing, are suffering. So somehow these 3 fundamentals are in our mind every day -- not only today, but every day since we started our business. The first quarter for this year was a very good quarter, probably the best quarter ever in terms of sales of residential. Also, we had enough product to sell, which last year we didn't. So we managed to sell EUR 90 million of new sales for residential in the first quarter of 2023. The demand in the market is very solid, and the deficit is structural. So this gives us a lot of opportunity ahead of us to create product for the market. What we see also in the first quarter is a [ flight ] to quality. So we see a lot of clients they don't want to buy cheaper quality. They prefer to buy higher quality, even if it's a bit more expensive product. We see clients that they don't want to buy periphery, they want to buy more central, even if it's a bit more expensive maybe. And we see people, they don't trust all the developers with their money the same. So they prefer to buy from us that we have by far the strongest balance sheet in the market, because they are much safer with their acquisitions. What we see also in the first quarter is that our brand is getting stronger and we are rewarded for this. Also, some competitors suffer, but we only see competitors suffering where they had too much leverage. So as it is normal, companies with too much leverage are penalized in this environment. Probably this will bring some opportunities for us. So probably for us is a good moment. What you want to do, how you want to behave as a company like us, you want -- when market is tighter, you want to be the one that is able to acquire new opportunities when they appear. On the rental side, the rents are increasing with inflation, so rents are now one of the highest levels in the last years, but still are the lowest for any European capital. So still we see -- that trend of European companies on-shoring their activities to Bucharest we see continuing and we see strong interest in this direction. Our overall position on the market is excellent, and prospects for development are great going forward. In terms of actual results, our turnover increased significantly in the first quarter, driven mainly from the revenue from residential sales, which increased 67%. And this led to a similar increase also in the operating profit, and the gross profit of the company. So gross profit of the company, we reached to RON 178 million for the first quarter. On the business highlights, on the first quarter, as I said, we sold the 220 apartments and the related parking and spaces for EUR 90.5 million. One High District was the best performing development. It's a new development that we launched around 6, 7 months ago. It's 3 towers with 20 floors on the Lake [ Day ], very close to the center of the city. Already in the first 2 quarters since we launched the sales, we sold around half of it. At the end of March, 67% of the units under development were sold out. We continue with our business plan and our strategy. Our strategy is that we develop only for the clients, we don't develop speculatively, and we do our best to sell everything during construction. We continue with this strategy and it's working pretty well. Also, in the first quarter on the residential front, we acquired a new location where we will develop, One Cotroceni Towers. It's a land close to One Cotroceni Park, where we already have building permit for 1,300 apartments, new apartments added to whatever we had up to now. Plus, a new office building of almost 50,000 square meter GLA. Of course, also the office building will not develop speculatively. We have interested tenants that want to sign long-term leases. So we will start construction only after we have tenants secured for long-term. On the office side, which I already started to discuss, the rental income increased 265%. But this is mainly due to rental agreements that we signed in the previous years. So basically, whatever we are signing this year, we only see in accounting in 1, 2, or even 3 years in some cases. So there is a significant lag from the moment you sign the lease contract, the moment you reflect the profit into accounting. We are also quite positive this year with the leasing activity and we see a significant demand for AAA high-quality space. Compared to other Western European markets, Bucharest doesn't have enough high-quality space, so there is still a significant deficit on this side. Maybe not as big as on the residential front, but there is still a significant deficit. On the retail side, we sold one of our buildings that is very central in the city near Athenaeum. It's called One Athenee. We sold it to a single buyer in a transaction of EUR 24 million. So instead of splitting and selling unit-by-unit, we decided to sell everything to a single buyer, especially that it's a small asset. It's only 2,400 square meters. This is now under construction, will be finalized by the end of next year. It is a listed monument. On the ground floor, we are discussing to bring some top international brands that are not present yet in the market. And on the upper floors, there will be a few apartments. Also -- in the first quarter we sold also One Herastrau Office, which was our first disposal of an office building, around EUR 21 million. We sold it more or less in a yield of 7%.

Thank you.

Thank you, and I will let my colleagues continue.

Thank you, Victor. I will now invite Cosmin to present the key financials for the first 3 months of 2023.

Good morning. Thank you for attending our call for the first quarter results of this year. We start with the main financial indicators. Consolidated turnover, basically here we have increase of 26% compared to first quarter of last year. And you will see all around the financial presentation, we emphasize the fact that last year in the first quarter we had an exceptional transaction -- one-off transaction, which was the acquisition of Bucur Obor, where we recognized a profit of RON 97 million. And all the presentation we are showing the figures and the changes including or excluding that specific transaction we had last year. So including the transaction, we had even 26% increase of the turnover. If we are excluding that transaction from last year, the increase was 75% in the turnover. The turnover mainly includes the revenue from sales of apartments. Most of the portion is [ from ] here [ RON 329 million ], but also rental and tenant service revenues and the gains from completed property investment. With this, the gross result reached RON 177.9 million, 14% decrease compared to Q1 of last year, but if we are excluding the one-off transaction I just mentioned, this will mean a 60% increase compared to the gross profit of last year. And the net profit RON 151.7 million, mostly the same as it was in Q1, only 9% decline. But if we are excluding that specific transaction, the net profit of this quarter was more than double compared to the net profit of last year. If we are going on the Residential segment, we see the revenues increase 67% and the net income from sale of residential property increasing 24% up to RON 101.5 million. As you can see, this is translated in a lower margin in terms of percentages, from 42% as it was first quarter last year to 31% this quarter. This change is strictly due to the fact that last year most of the revenue we recognized from developments that were close to completion or even completed, while this year we have a lot of income that we are recognizing from the development that are in the initial phase of construction. So naturally, all these developments in the beginning have a lower percentage margin in terms of net revenue. The best-selling -- as mentioned also earlier, best-selling development was One High District, 163 units sold from the 220 units in total sold [indiscernible]. If we are going to the Commercial segment, here the increase was even more higher up to RON 31.5 million. Rental income revenues from tenant services, this means more than triple compared to last year. And the effect was mainly generated from the office buildings, One Tower 100% leased, One Cotroceni Park 18% leased, and One Victoriei Plaza 100% leased. So from the retail asset, Bucur Obor we also generated rental revenue for the entire quarter. We will see in the next quarters, and the expectation is that this revenue will still increase. And as tenants move in also in the One Cotroceni Park Phase 2, that was exception in February and this period the tenants are moving in space and will soon start to generate rental income. On the other profit and loss position, we have the administrative expenses increasing 84% up to RON 18.5 million. This here is including non-cash allocation of the stock option plan of RON 6.3 million. This stock option plan allocation in Q1 last year was not recorded because we started the booking with quarter 2 of last year. So if we exclude this effect also this quarter, the increase was only 22%. And with this, the EBITDA reached RON 178.4 million, 16% decline compared to last year, but again, if we are excluding the one-off transaction, EBITDA would have increased 54% compared to quarter 1 of last year. On the Residential segment, the asset side, we have a 27% increase in residential properties, up to RON 842.3 million. And this -- by this also the current asset grow 100% -- 10%, sorry. The significant increase in the inventory represents the acquisition of One Cotroceni Towers, which was done in the first quarter of this year and from the developments that are already delivered and finalized, mainly, One Victoriei, the One Herastrau Towers and One Verdi Park. We have at the moment only 50 units available for sale. So we are going to the investment property segment of fixed retail and landbank. There was an increase of 5% in the investment properties up to RON 2.4 billion and this also generated an increase in the non-current assets mostly 5% which reached RON 2.5 billion. The increase here is mainly due to the acquisition of One Cotroceni Office Phase 3. That was done in the first quarter of this year, and also from the reclassification of commercial space of 2,000 square meter in the development One Verdi Park. This commercial space is rented to Lidl [ from ] a total of 18 years. On the liability side, we have an increase in non-current liabilities of 12%. This was mainly due to the increase in the long-term loans. These long-term loans increased mainly due to the new loan that we financed, the acquisition of One Athenee Plaza, and also the drawings that we did during the quarter for finalizing -- the finalization of One Cotroceni Park Office Phase [ 2 ]. Nevertheless, the average maturity of the loans as of 31 March is 8.1 years for the bank loans related to investment property, that are in total of EUR 140 million, and 1.2 years for the loans related to the development of residential of EUR 39 million. Also, the increase in current liabilities 41%. This is mainly due to the advances we received from customers and that we will recognize in the future revenue and deliver when we are progressing with the stage of construction or delivering in the apartments. On the cash position, it's a strong cash position. Nevertheless, 18% decrease compared to last year, due -- mainly due to the investments in the developments that started in the last part of last year and also in the first quarter and also due to the acquisition that we did that we mentioned earlier, One Cotroceni Park Office Phase 3 and also One Cotroceni Towers. Nevertheless, the loan-to-value ratio remains very strong. 28% is constant from the year end and if we are referring to the net debt, it is only RON 449.7 million, a little bit less than 10% from the total asset value. If we are referring to the cash inflow on the contracts from the residential sales signed as of the end of the quarter as of 31 March, we are to receive in the next period for the remaining 9 months of the year and 2024 and 2025, another EUR 260 million in cash. You can see on the right side graph, for the first quarter, we already received EUR 60 million for the -- from these contracts. In the remaining 9 months, we have to receive another EUR 171 million, and then for the next 2 years. Of course, as of the end of the quarter, in the residential development, we have sold or pre-sold 2,657 units and another portfolio of 1,357 residential units are available for sale and pre-sale. We are estimating to start new sales for new developments this year, mainly One Lake District and One Cotroceni Towers to start sales for another 2,334 units. So basically, the cash flow will increase even further as new sales will be signed and will add to the portfolio of sales. Thank you.

Thank you, Cosmin. Now a short business update related to the apartment sales. 220 apartments with a total surface of 18,500 square meters were sold in the first 3 months of 2022. As a comparison, same period of last year, we sold 120 apartments. So we saw an increase of 172% in terms of apartment value of the pre-sales and sales. And in terms of the total surface pre-sold, we saw an increase of 88%. Please note that this slide includes, apart from the value of the apartments sold also the parking spaces and other units, including commercial units, as well as early-stage apartments. In terms of the key residential trends, as it was in the previous quarter, the best-selling development of the first quarter of this year was One High District, where 163 units were sold in the first quarter alone. So far, 437 out of 786 units were sold, well over half of this development, which is estimated to be delivered at the end of 2025. The second development with significant sales was One Floreasca Towers, a high-end development located on Barbu Vacarescu in Bucharest. 16 units sold, a total of 87 since the sales started -- sales and pre-sales started at this development. And then we have One Lake Club, 15 units; One Cotroceni Park, 12 units. As you probably remember from our past calls, One Cotroceni Park is a majority already sold out. 11 units at One Mircea Eliade and other developments, 3 units. We have decided going forward the developments where there is -- less than 5 sales per quarter will not be included -- will not be highlighted and will be all put together under other developments. In terms of the apartment sales what is important to notice is that 50 out of 137 units that were pre-sold at One North Lofts as of the end of Q1 2023 are not included in the table and they were not yet recognized. These units will be only recognized following the obtaining of the building permit, which we estimate for this year. In terms of available stock, it is important to mention that 67% of apartments under development were sold out as of the end of Q1. We saw a significant increase in the number of units, thanks to the addition of One Lake Club as well as One High District and One Floreasca Towers between Q4 of last year as well as Q1 of this year. If we look at the type of the apartments sold, half of the -- approximately half of the units sold were 2-room apartments, 2-room means 1 bedroom followed by 3-room studios as well as 4-room apartments. It is important to mention we saw 3 high-value units, which are 5 rooms, meaning penthouses as well as villas in the first 3 months of this year. The significant demand for the 2 rooms was primarily seen at One High District, but also at One Cotroceni Park. In terms of highlights, here we have a mix of past accomplishments as well as some indication for the future. In terms of past, I would like to mention that we reported at the beginning of April that we sold our stake in One Herastrau Office, which was approximately 20%. We held indirectly a 20% stake in One Herastrau Office. It was a development that we acquired in 2020. Our stake was sold for EUR 4.2 million. Excluding the debt, the value was EUR 2 million. I would like to mention that we do not exclude sale of other smaller and non-core office buildings in the future as part of our strategy to consolidate the office portfolio around the large landmark locations. Now looking on to the future, I would like to mention that we have 2 significant developments where sales is estimated to be started this year. The first one of them is One Lake District, which [ hosts ] almost 2,100 residential units. We estimate to start the sale for the first phase and depending on the sale progress, we might decide -- we will decide when to kick off also the second phase. And in terms of One Cotroceni Towers, we -- this land that we -- the acquisition of the land that was announced in February, the land was acquired already with all of the necessary permits. Therefore, we estimate the construction to start and also the sales potentially to start already this year. This development will host approximately 1,300 residential units and we estimate it will continue the success of One Cotroceni Park. What is important to mention regarding the budget that the results from the first quarter are aligned with the expectations, meaning that the management maintains the budget for this year, which was approved in the shareholders meeting that we had last month. Therefore, we are targeting turnover of RON 1.43 billion and a net profit of RON 530 million with the net margin expected at 37%. The CapEx cost, including land acquisitions and development costs are estimated at RON 1.2 billion. In terms of the evolution of One's share on the Bucharest Stock Exchange, in Q1, One was the 10th most traded stock on the Bucharest Stock Exchange. We saw trades amounting to a total of RON 56 million. Around this amount includes also the POF trade of RON 24.5 million that was executed at the end of March. Our market capitalization as of the end of the quarter was RON 3.1 billion and we had 7,200 shareholders, 115% increase since the IPO. Out of the important developments, I would like to mention that our shares were included in the ROTX index of the Vienna Stock Exchange. It is a joint index of the Bucharest Stock Exchange and Wiener Borse that is made up of 15 Romanian blue chips traded at the Bucharest Stock Exchange. Now, this concludes our presentation of the financial results and the key trends from the first quarter of the year.

We have received several questions ahead of this call and I would like to start by reading them and addressing them. So the first question is, what is the strategy regarding the apartments for rent? Will this become an important business line in the future for One United Properties? And I would like to invite Victor to answer that question.

It's not from the chat box. It's from before the call?

Yes, exactly. We got them on the e-mail. So these are -- we have 3 questions that we received on e-mail.

So this is regarding the rent. So basically, the rented apartments are good business, but with low yield. The yield in the market is around 5%. So considering our high rate of return on equity on new deals, which is we are targeting 30% or more return on equity per year, then the return from rented apartments is quite low. But from case-to-case, when we finish some developments, we want to rent some of the last apartments units in order just to sell them more expensive down the road. So basically, we will always have some rental apartments. We'll sell from them -- from time-to-time. Maybe we replace with other apartments. So we will always have a stock of rented apartments, but not as a strategy of holding them. I hope this answers the question, I don't know.

The second question is, I saw on Friday an announcement about capital increase for the purpose of implementing the stock option plan. Can you please detail the purpose of this operation?

The stock option plan is related to our performance in 2021. It took a bit some time due to the paperwork to be done. So actually, it is implemented now, but this was also -- this was realized 1 year ago. So basically, there is no share payment for the performance in 2022. This is only related to the performance in 2021, as it was agreed with the shareholders in the beginning of the year 2021. And as it was disclosed in the prospectus for the IPO and the capital increase in August last year. So basically, this is more or less implementation of the result in the past.

We also got 3 questions on a direct chat that I would like to address first. How do you see the residential trends Q1 and Q2 2023 versus 2022 in terms of apartment prices and number of apartments sold for One and for the overall residential market? What is your forecast for unit prices and number of units sold for the next quarters?

So basically, what we've seen in the first -- in the beginning of the year, we have seen less interest in the market for the units in the periphery of the city and less quality developments. And obviously, as it shows in our results, we saw more interest for the well located developments with higher quality. So there is a divergence in the market between the quality properties in good locations and less quality properties in periphery or secondary locations. So basically, I think overall, the market as an average -- in residential sales is decreasing on the average. But if you analyze by category, you will see we are in the -- we are for sure in the growing category.

The second question is the margin net income from residential property. Revenues from sales of residential property decreased from 41% in Q1 2022 to 30% in Q1 2023. What are the reasons for this?

This I will ask Cosmin to explain, because it's not any decrease, it's just the way we do the accounting of ourselves. So I will ask Cosmin to explain a bit why it appears this temporary on the first quarter of this year.

Yes, I mentioned also in the slide where we presented the net income from sale of residential. Last year, in the first quarter, we recognized revenue and profits from developments that were very close to completion. This year, most of the revenue is generated from the developments that are in the initial stage of construction, and we started construction in the last part of last year or this year. And how the calculation is done that, always in the beginning, you have a lot of weight on the cost from the land, which is a fixed cost. And then you have the stage of completion, is low percent. And when you do the calculation, you recognize a smaller profit in the beginning of the development. But as you advance with the stage of completion, this profit starts to increase more and more and more. So this is how it's calculated, even if you have the same revenue. In the beginning, you have less margin on the sale. Also, the fact that something on top of this is that the more the construction progress, also there is a change in the pricing. In the developments that are finalized, the pricing is not the same from the moment that the construction is just started. So these are the 2 aspects why in the developments with very low stage of completion, the margin is lower.

It's very important to know that there is no decrease in the margin and we feel confident our gross margin on developments is safe and is not under pressure from any direction, selling price or cost. So we think we are very safe with our normal margin.

And another question from the same person. How do you compare the results for Q1 2023 revenues and net profit versus what you have budgeted for the quarter?

I think we perform better than we budgeted for the quarter, but still due to general uncertainties in the economy, I think we keep the budget for the year as we just approved it in the general meeting of the shareholders. But comparing to our target, of course, it's obvious to see that it's performed better than we predicted.

The next question. Is your impressive growth encouraging the local government to speed up the planning process? Is there any update since the fourth quarter on this issue?

So basically, there are 2 things here. One thing is that we don't have this issue anymore, because in the last 6, 8 months, we managed to get the building permit on most of our developments. Plus on -- in February, we bought a new development already permitted. So today we are in a quite unique position that we have around 5,700 units already permitted. So basically, this gives us enough activity for the next 4, 5 years. Even if 4, 5 years, we wouldn't get any new building permit. So if -- we even if in a theoretical possibility that everything is blocked 5 years, we have what to build and what to sell, which of course is improbable, because the administration works only that the times it -- only takes longer to get building permits. So every year we are getting closer and closer to Central and Western Europe timing. It used to be faster, but every year it gets more in line with European terms. But we are very happy with how many units we have permitted today. And although, there is no speeding up in the local government planning process, there is -- at the country government, there is now a new urbanistic law that is being implemented together with European Union and is part of a structural reform in the country in order to align with European Union norms. This urbanistic code will be very important and relevant for the development in Bucharest and in the country. And as we know, this should pass on this parliamentary terms. So by summer, the new urbanistic code should pass, which I think is the first change for many, many years. And I think this will stimulate the local development. But -- this is not done by our impressive growth, but this is done by, let's say, rules and regulation imposed by the European Union and the governments that our country has adhered to.

We now go to the question for Cosmin on the cost of financing. On the interest cost, is your 2% to 4% margin a premium over, for example, Euribor, or do you mean average interest cost of 2% to 4%? Either way, are you happy with these rates and what do you expect to happen to them over the next year?

So this is the margin over the Euribor. Usually, all our loans are linked to Euribor for 3 months. All the financing -- like 99% of the financing is in Euro. If we are happy with the rates -- don't think it's someone in the real estate industry which is happy with the rates nowadays. We see Euribor, it's like [ 3.3% ] these days. So, it's a real challenge in the entire industry with the loans. What do we expect? We expect in the next period to stabilize and maybe at the end of the year or next year to start decreasing the Euribor. In the same time, we are on the new financing, what we have and on the existing we are trying to lower the margin as much as we can.

And one more question. Where do you expect your loan-to-value be at the end of 2023 versus the current 28%?