PATRIZIA SE (PAT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Constantino, your Chorus Call operator. Welcome, and thank you for joining PATRIZIA's annual report 2020 conference call. [Operator Instructions] I would now like to turn the conference over to Karim Bohn. Please go ahead, sir.

Thank you, Constantino, and good afternoon, everyone, to our 2020 full year financials conference call. Before we go to Q&A, I'd like to walk you through a brief presentation on key achievements in 2020 and the financials. 2020 was a challenging year for all of us personally and professionally. However, financially, 2020 was a successful year for PATRIZIA. We have achieved -- what we have achieved beyond financials is displayed on Page 3 of the presentation. We have collected EUR 1.9 billion of equity for our global -- from our global clients during the worst economic environment globally. We now manage our assets under management for more than 450 national and international clients. And in 2020, over 30 new domestic and international institutional clients were welcomed to our platform, taking the -- our client base to over 450. We continue to focus on technology and innovation to make the management of real assets better, more efficient and simpler. Our goal is to further improve operational excellence to serve our clients. Just to name a few examples. We bought the digital global real assets platform called BrickVest and partnered with PiLabs in Europe, CamberCreek in North America and Taronga Ventures in Asia to secure early access to disruptive technologies of the future. And last, but by no means least, ESG has been part of our DNA for decades and is a key pillar of our growth initiatives. Building communities and sustainable future is the key word we use internally. PATRIZIA continued to develop the sustainability strategy to further integrate ESG in everything we do. And we made strategic hires in this area to future-proof the platform, products and assets under management. You can download the sustainability report from our website, which was launched at the end of the year. Now moving to Page 4. The 4 key messages to take away today are as follows: PATRIZIA continues to be a resilient business model and platform. EUR 6.9 billion of transactions closed for the global client base in 2020 despite the European lockdowns, and we continued to grow. We were able to grow both our assets under management and recurring management fees, and we continued to deliver on our midterm strategy in a structural growth market. And finally, our balance sheet is stronger than ever. Net equity ratio of 76% and a cash position of EUR 645 million, which gives us a lot of flexibility to further develop PATRIZIA's platform. Moving to Page 5 of the presentation. As I said, we closed EUR 6.9 billion of transactions for our client base compared to the historic average of EUR 5.9 billion, while the market was down 26.5% year-on-year. We also continued to collect transaction fees with EUR 48.1 million in 2020, which was down 26.4%. However, I see this actually as a positive. We have earned close to EUR 50 million of transaction fees in the most severe economic crisis in 70 years and have proven that the business model continues and remains resilient, even in these markets -- even in these market circumstances. Moving to Page 6 of the presentation. And coming to the second part, actually, of our 4 takeaways. We continue to grow. We increased our assets under management by 5.7% and increased our management fees by 1.3%. On a like-for-like basis, so basically taking out aperiodic items from the previous year, our management fees increased by 3.4%. The guidance for 2021 is to reach management fees of EUR 204 million to EUR 208 million, or in other words, a growth of 5.5% to 7.5% year-on-year, and we will continue to grow. And we reiterate our growth targets on Page 7 of the presentation. We intend to grow organically, on average, by 8% to 10%. And if you include M&A, that might as well add up to 15% per annum, including M&A, and that could lead to AUM over the midterm of EUR 60 billion to EUR 80 billion. Page 8 shows the strong balance sheet and significant cash position PATRIZIA has at the moment. Equity ratio of 63.1% and net equity ratio of 76.4%. And the cash -- available cash position of EUR 645 million. 2 things to bear in mind. In addition to the cash position, we also hold 2.7 million of treasury shares, which are currently worth approximately EUR 70 million. And we have a performance fee claim of EUR 380 million from Dawonia, which is currently at the balance sheet and will be collected over the next years at the end of the original investment period of Dawonia. Now let's go to the financials in a little more detail on Page 10, which starts with the highlights of our financial results. Operating income EUR 116.5 million in 2020 and a growth of assets under management by 5.7%. Of -- we achieved EUR 47 billion compared to the EUR 44.5 billion at year-end 2019 despite the market shrinking by 26.5%. As I said, the net equity ratio remains fairly stable or remained fairly stable at 76.4%, and our net cash increased by 37.7% to EUR 333 million. As a result, we proposed to the AGM to increase our dividend to EUR 0.30 per share or in another words a year-on-year increase of 3.4%, which is, by the way, the third consecutive dividend increase in a row. For 2021, we guide for an operating income in the range of EUR 100 million to EUR 145 million. It implies further organic growth of up to 24.5% at the upper end of the guidance. With an organic AUM growth of EUR 3 billion to EUR 6 billion or ultimately an AUM base of EUR 50 billion to EUR 53 billion by the end of 2021. So we are well on track to deliver our midterm growth strategy goals. Page 11 shows the result of 2020 compared to 2019. So let's look at the year-on-year performance by its components. Management fees up 1.3% to EUR 193.4 million, transaction fees were down 26.4% to EUR 48.1 million. However, we believe, given the market circumstances, this is still a remarkable result. Performance fees at a very high level of EUR 86.1 million, slightly down by 6.3%, and net sales revenues and co-investment income is down 14.8% to 20 -- to roughly EUR 20 million, as expected. As you know, we sold our principal investments over the last 10 years really and with that, the co-investment income or in other -- or the net sales revenues decreased from year-to-year. Given COVID, we remained cost-conscious, and we're able to reduce our net operating come -- our net operating expenses by 3.3% to EUR 219.7 million. Now if you take out D&A and net finance costs, you get to an operating income of EUR 116.5 million, which is down year-on-year by 13.4%, but as I said, the market is down almost 27% and our operating income is down only 13.4%. Now before we get to Q&A, I'd like to briefly walk you through the guidance for 2021 on Page 12 -- on Page 12 of the presentation. We remain and we are positive for 2021, which is reflected in the guidance and the outlook remains strong with the expectation that we see a recovery -- a material recovery of the economy and the real estate market in the second half of 2021. We expect our recurring management fees to grow between 5.5% and 7.5% in 2021, mainly driven by further organic AUM growth. We expect transaction fees based on a recovery of the transaction market of EUR 50 million to EUR 60 million, and performance fees of between EUR 60 million to EUR 90 million. Co-investment income is expected to come between EUR 5 million and EUR 20 million, and net operating expenses on the low end remain significantly below the level of 2020, but the range is EUR 209 million to EUR 223 million. So just on the upper end, slightly above the total operating expenses or the net operating expenses of 2020, considering a larger or a bigger growth in assets under management. If you take out again, D&A in the financial result, you get to an operating income of EUR 100 million to EUR 145 million. Now with that, I'd like to conclude the presentation and ask Constantino to open Q&A.

[Operator Instructions] The first question is from the line of Kai Klose with Berenberg.

I've got 2 questions, if I may. The first one is on the change, and relatively small decrease of the net operating expenses. Could you indicate if you have set yourself either a new or, let's say, if we find any kind of target regarding operational efficiency and operational margin, just assuming that maybe in 2021, at least in the first half, the transaction activities will remain relatively low and similar to the lockdown period in the last year. So maybe you could give a little bit more, maybe some thoughts how you're seeing the company's efficiency developing in that time environment? And secondly, communicate what was the like-for-like change of the AUMs in 2020 and maybe a bit more on asset by asset or sector by sector basis how the values have been trending there?

Kai, thanks for your questions. Let's start with the first question on cost. And we've been talking about this a lot, Kai. What you can see between 2020 and the guidance for 2021 is that on the upper end, you only see a small increase of net operating expenses, I think which reflects the efficiency in the business. We intend to grow AUM significantly and also our management fees of about 5.5%, but the operating expenses -- net operating expenses only grow marginally at the upper end. Now talking about efficiency, as you know, we have invested a lot and are investing a lot in digitalization and the harmonization of processes, which is going well. And we slowly see the results coming out of it. But I think it will probably take another year or 2 for the efficiencies to be more visible as those projects take usually between, I would say, 2 to 3 years, and we are now -- we just finished, I would say, the first real year of the digitalization initiative. So in 2021 and 2022, we will see more efficiencies coming out of it. And Kai, the way we measure efficiencies, on the one hand, obviously, as a CFO, I measure efficiencies in money or in cost ratios. And you could -- what you can see -- what you have seen in other presentations is that the total cost ratio came down significantly over the past years. The other effects we see coming out of the digitalization initiatives is a better client service. So the digitalization process or initiative really has 2 sides of the coin. One is a significant improvement of client services, and at the same time, we will be able to manage our growth targets with basically the cost bases we currently have. Now when you look at G&A in total, this -- it's also interesting that, that G&A is actually down 9.5%, but we have invested in people and increased our FTEs in 2020. So staff costs were up year-on-year, and G&A was down year-on-year. Now to your second question, can you -- the second question was AUM on a like-for-like basis. I guess, the question is probably relating to valuation effects, right?

Yes, correct, for the underlying property -- the values of the underlying properties like-for-like, how that have been developing? And maybe also some comments how that has been developing like-for-like on a segment basis, so how office, retail and residential have been developing which you have been managing for clients in 2020, like-for-like?

Yes. Now generally -- let's talk about the market a little bit. And where we saw valuation increases, valuation dips or where the portfolio developed relatively stable. Now I think it's not breaking news to you that obviously, retail and the hotel market is under severe pressure, has been under severe pressure. And those are the areas where the valuations were challenged the most. As you know, from the 15% of retail exposure we currently have, approximately half relates to high street and shopping centers and the rest is grocery stores which isn't challenged at all or wasn't challenged at all during COVID, the opposite was actually the case. So if you then add hotel, which is less than 2%, the overall exposure to sectors which are COVID induced is less than 10%. Resi continued to the increases in valuations. Logistics, which is the flip side of retail really, also saw valuations going up. And office remains fairly flat in 2020. So what we saw in 2020 was roughly EUR 300 million of uplift coming out of resi or Dawonia, and roughly EUR 850 million from other asset classes on a net basis.

Sorry, EUR 850 million from other residential assets or...

No, from other sectors. So it was roughly EUR 280 million from resi and Dawonia and EUR 850 million from other asset classes across the board. Now what it shows you or what you can see by the total valuation uplift is that our -- as you know, the majority of our assets under management or 3/3 -- 3/4 quarters of our assets under management are in core and core plus. And the valuation uplift show that, that we managed or our assets managed quite well during COVID, and it shows the stability and the resilience of the underlying asset base.

Understood. And the last question, the EUR 850 million is the net number, so which is already net of some write downs, I would say, lower value you saw for probably is managed for third parties from the retail and hotel segment?

Yes, that's correct. That is correct. Those are net numbers.

And maybe a very last one. What was the -- could give a number on the magnitude of lower values in retail and hotel?

I don't have that number on the top of my head. But given that the exposure is fairly insignificant for us, the impact on the overall portfolio wasn't material. But what I can tell you is that, in particular, in retail, Kai, we saw occasionally, valuation down -- valuation decrease of up to 30% in specific retail assets.

The next question is from the line of Manuel Martin with ODDO BHF.

One question from my side, please. On the guidance of EUR 100 million to EUR 145 million operating income, what would be your scenario for the lower end of the guidance of EUR 100 million. What must happen in Germany to reach that bottom.

That's a good question. And I'm sure you spotted the wide range of EUR 100 million to EUR 145 million. And that reflects, to a certain extent, the limited visibility we have as of today. I mean, as opposed to last year, we had a good quarter behind us when the lockdowns were initiated in Germany. This year, it's kind of the other -- or in Europe. This year, it's kind of the other way around. We started the year in a lockdown. Vaccinations have started, going slow, but have started, and we do expect a stronger second half. Now what would make -- what would be a base scenario with the majority of the year being in lockdown and only the fourth quarter recovering, that would be a year in which we produce around EUR 100 million. So that's really a -- I wouldn't say a downside scenario, I would say, a base case, assuming lockdowns continue to prevail longer than we currently anticipate. The EUR 145 million, as you could see in the guidance, assumes certain upside on co-investment income and performance fees. And what that actually reflects is that if the second half recovers, if we are going to be able to sell more assets which have a performance fee or that could unlock co-investments, that would translate into the upper end of the range in the range of EUR 145 million. So it really depends on the client behavior throughout the year. As you know, the majority of the performance fees come out of sales, and a large part of the performance range is based on the range of performance fees.

[Operator Instructions] The next question is from the left Philippe Kaiser with Warburg Research.

Just 2 short questions. And you touched it shortly during the presentation on the Dawonia topic. So is it fair to assume that we will not see a split of the performance fees over the next couple of years? My first question.

Well, as we keep saying, it really depends on whether we convert the current investment structure into an evergreen structure. We currently believe that Dawonia will be converted into an evergreen. That's our current expectation. But whether the conversion is happening this year or next year, is undecided at the moment, but we are not in a rush, given the visibility of the assets.

Okay. But there's still negotiation ongoing on this topic.

Yes, I wouldn't call it negotiation. I think it's a discussion -- a structural discussion we're having with investors on that fund, which is now in year 8 since initiation. But the value -- the important thing is, Philipp, that if you look at the balance sheet, the value is there. It's not realized, but it's already on the balance sheet.

And the second question regarding the staff -- the increase in the staff costs. So is it only related to the expansion of the workforce? Are there still some one-offs that you might not see in 2021? Or is that the base for the next years?

It's a combination of both, Philipp. I mean, on the one hand, we increased the workforce a little bit. But at the same time, we had one effect, which can be deemed a one-off effect. And that is in 2020, we paid higher bonuses for 2019, which weren't completely accrued for, but given the strong year in 2020 -- in 2019, in particular on the transaction side, we paid more bonuses for '19 than we accrued for, and that was reflected in the overall personnel expenses in 2020.

Ladies and gentlemen, there are no further questions at this time. I hand back to Mr. Karim Bohn for closing comments.

Thanks, Constantino. Thank you very much, everyone, for joining our year-end call. We're looking forward to talking to you at latest at the earnings call for the first quarter of 2021. In the meantime, you know where to get us with further questions and stay well and healthy. Talk to you soon. Thank you very much. Bye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.