PATRIZIA SE (PAT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Sarah, your Chorus Call operator. Welcome, and thank you for joining PATRIZIA's 3M 2021 Interim Statement Call. [Operator Instructions] I would now like to turn the conference over to Martin Praum. Please go ahead.

Welcome, everyone, to our first quarter analyst and investor call. This is Martin Praum, Head of Investor Relations, speaking. I'm happy to have our co-CEO, Thomas Wels; and our CFO, Karim Bohn, with us today to present to you an update on strategy, operations and financials. During today's call, we will refer to the 3-month 2021 results presentation, which we circulated yesterday and which you can find on our website in the section Shareholders under Most Recent Publications. As usual, this call will be recorded and be made available on our website. This quarter, we will also, for the first time, offer you a call transcript for further reference. With that, I'd like to hand over to Thomas to start the presentation.

Thank you, Martin. Hi, everyone. This is Thomas speaking. We thought it is a good idea for me to join the quarterly calls from time to time to give you an update on our strategy, market environment and on the operating business, so you get another impression on our progress beyond the financials, which Karim provides in his quarterly video and later in this call. With that, let's move to Page 3 of the results presentation. First message, we had a good start into the year. Despite continued lockdowns, we were quite active for our clients and signed transactions worth EUR 1 billion. This is an increase of 16% year-on-year and a great result if you look at the market average volumes, which actually declined over 30% in the same period. It is our well-diversified product offering, forward-thinking research and a combination of local experts and cutting-edge technology that allows us to offer attractive investment strategies to our clients even in this difficult environment. We currently see few large-ticket transactions but a number of smaller deals that add up to nice overall volumes. Compared to last year, we have also seen a higher number of deals, where PATRIZIA was approached directly and exclusive. This, again, confirms our excellent reputation as a trusted player in the market. Let's talk about pipeline. We have a multibillion pipeline at the moment. And from the signed transactions we have seen since the end of Q1, we can confirm an acceleration in transaction activity during Q2. Overall, acquisitions significantly outweighed disposals, which supports our assets under management growth targets for the year. Second important point, our strategy is unchanged, and the structural growth market case is fully intact. Growth in global pension money increased allocation to real assets and consolidation in the sector remain the major growth drivers for PATRIZIA. Our clients just recently confirmed this. Over 70% expect to increase their real estate allocation over the next 5 years, of which 16% actually plan to expand strongly. There was no investor who plans to reduce real estate exposure. Also interesting and fully in line with our strategy, every second investor plans to grow their infrastructure exposure. Our clients also care about an expected increase in regulatory requirements, which includes state-of-the-art reporting. This is why we continue to invest in technology and processes to further improve the client experience. We believe it will become an even more important and decisive factor for doing business in the future, and we are prepared. PATRIZIA has a strong international platform and the financial flexibility to deliver best-in-class solutions. This also includes the expected increase in ESG reporting, both at portfolio and individual property level. And that brings me to my third point, sustainability. The nature of our business model, the assets that we manage and the DNA of our people have one thing in common: We want to create something sustainable, something that lasts. That means that sustainability, which is on everyone's lips these days, is not a new thing to us. We create value for our clients to make pensions secure. We help people create and have a better future. And with the PATRIZIA Foundation, we have helped children worldwide for over 20 years to get access to education. But we, and here I mean the entire industry, have a lot of work ahead of us to further integrate ESG into the daily business decisions we are making. Also, we need to be able to support our clients with investment opportunities that meet their ESG requirements. And here is an important link between technology and ESG. Having the data in place to track ESG performance and build the basis for business decisions becomes a key success factor. Again, another reason for PATRIZIA to continue to invest in technology. We believe our responsibility as an investment manager of real assets is also to focus very much on the impact we have on the environment and communities. This is why we made strategic hires in this area. One example is Mathieu Elshout, who's joining us from PGGM in his new role as Head of Sustainability and Impact Investing. Together with the ESG committee, which I chair, and ESG teams we already have in place, we believe we can become a leading, sustainable investor and a leading impact investor in real assets in the next few years. With that, let me hand over to Karim to give you a brief update on our Q1 financials. Karim?

Thank you, Thomas. Let's move to Page 4 of the presentation. I can only confirm what Thomas just said, we had a good start into the year. Our balance sheet remains rock solid. We increased revenues and decreased costs. And we confirm our guidance for the full year 2021 as we see certain accelerating trends in transaction activity and client demand. Let's move to the next page for more details. Our balance sheet remains rock solid. And you might have seen the news today that we have decided to buy back shares in the market over the next few weeks and months. To make this clear, we have no plans to delete those shares. One of the options is actually to use these as M&A currency. So we are fully committed to find the right partners to strengthen the PATRIZIA platform and to make potential vendors shareholders of PATRIZIA for alignment of interest. We will also use the available liquidity to redeem EUR 66 million of bonded loans shortly and reduce our financial expenses. Let's move to Page 7 to look at our financial performance. In addition to our video presentation for the first quarter, the point I want to make here is that despite the overall market uncertainty in certain real asset subsectors, our assets under management continue to prove very resilient. This is a result of forward-thinking investment strategies for our clients and our focus on high-quality and well-balanced risk/reward strategies. We currently see good momentum in terms of market activity. And we will update and specify our guidance range for both AUM and operating income during the year. Let's move to Page 8 of the presentation. On Page 8, you will find the composition of operating income in the first quarter of this year. You, by now, may be used to some volatility in our transaction and performance fees if compared to the previous year's quarter. In case of transaction fees, this is due a very strong first quarter last year, which benefited from spillover effect from 2019, namely, major transactions where the transaction fee was triggered at closing and not at signing. Performance fees were up due to the Dawonia performance fee, from outperforming the annual cash flow targets and from profitable realizations for our clients. Management fees, however, grows steadily and in line with continued organic growth of AUM. Let's move directly to Page 11 for the guidance. As I said before, no surprises here. We stick to our guidance for the full year with continued growth in management fees. The big unknown to our operating income range remain the level of performance fees. And as you know, these fees, to a large extent, depend on client activity and client investment synergies. So the question is not will we generate performance fees. It's rather a question of when will they feed into our operating income. The performance fee claims we have generated over the last few years and which we will be able to harvest in the next few years give us confidence in a further strong balance sheet with lots of financial flexibility and the opportunity to take market opportunities when they arise, fully in line with our midterm strategy. Now with that, I'd like to hand back to Sarah to start the Q&A session.

[Operator Instructions] Our first question comes from Andre Remke with Baader Bank.

Basically 2 questions from my side, please. The first question is on your [ SBB ] program. How to phrase the question, what was the most decisive factor for launching it? To support the declining share price, or simply saying that you regard the current share price as undervalued? Or is it more to use the treasury shares in any kind of M&A transactions, i.e., is there already some on the horizon for usage this year? Your thoughts on that would be helpful. That's the first question.

Andre, this is Karim. Now the question is very simply, Andre. The answer is both is correct. First, we'd like to create further M&A currency for upcoming deals. And secondly, the stock was down -- or is down 15% since the beginning of the year. And comparing the current share price level to the average analyst targets, we think that the pricing is actually quite attractive at the moment to buy back shares and benefit from the weakness in the share price.

Yes. I fear that you'd answer it in that way. So there is no chance to get a closer view whether there is some M&A around the corner.

Yes. Andre, as you know, I mean, we've been talking about this for 2 years. And I understand that the market is waiting for an M&A. But remember, we've been very disciplined over the past 10 years really to find the right targets, be very diligent and make sure that the targets we're ultimately taking up or buying as a partner have the right cultural fit, are complementary to what we do and ultimately accretive.

Okay. Yes. I get it. And then the second question, could you remind me on the bonded loan? You mentioned this in your presentation. What amount is due and will be repaid? And will you launch new loans at presumably lower interest costs? Or do you need that large amount of available liquidity or not anymore?

Well, that's a good question, Andre. This year, nothing is due. But there is a tranche of EUR 66 million, which at the time was financed on a floating basis, rather than a fixed basis. And this is the portion we're paying back this year. We think that we have ample liquidity at the moment to do both, return a little bit of the debt and thereby save interest expense and negative interest, buy back shares. And given the strong balance sheet we have and the strong cash flow we are producing on an annual basis, we think that if our M&A activity exceeds the current cash balance, we can always go back to that market and borrow more money based on the very strong balance sheet and, as I said, strong cash flow production. So it's really an optimization of our balance sheet situation.

Okay. So there is no immediate change into another tranche?

No, none at all.

The next question comes from Klose Kai with Berenberg.

Yes. It's Kai Klose. I've got 3 questions, if I may. The first one, in your video presentation, you mentioned yesterday that you raised EUR 300 million equity from investors to be invested into European as well as global properties. Could you specify a little bit more on the second aspect, say, on global investments? Is this new, or is this kind of new fundraising? And in which regions you expect this equity to be invested on behalf of the clients? Second question is on the expense ratio, which came down a little bit. Could you indicate how much was because of the lockdown, meaning that travel expenses, et cetera, for the team was a little bit lower? And how much might have come from efficiency gains and your money you have invested into processes to improve? And the third question is a little bit on the operations. When you've arranged financing for the properties in the funds and lending banks, do you see banks asking for somewhat higher costs or, let's say, higher margins when it comes to different asset classes, particularly on the retail side?

Thomas speaking. Perhaps on the fundraising. We don't have global products except in the multi-manager space. In the multi-manager space, actually, we do allocate globally, which is small funds. But the allocation is 50% to the U.S. while the rest is Europe and very little in Asia. So the funds we are raising there are around EUR 250 million. So if half of it goes into the U.S., this is our international or global part. This said, generally, 95% of our business is still European. So if we talk international, it's international monies coming to global monies, which come to Europe, which is basically mostly Korean and Japanese monies.

To your second question, Kai, this is Karim speaking. Expense ratio, it's really a combination of both. A little bit of operational excellence, but the larger part really comes from cost containment during lockdown. It's travel -- mainly travel and advisory expenses, which we didn't spend because the transaction volume came down. It actually shows partly the variability of our total expenses. To your third question, the financing market, generally, credit spreads have risen to, I would say, depending a little bit on the asset class, 30% to 50%, remember, from a very, very low basis. So in the overall context, I would say, the interest expense or interest cost altogether haven't materially increased, but the credit spreads have 30% to 50%. When it comes to more difficult asset classes like hotel or retail, those are asset class at the moment which are very hard and difficult to finance at all. We do get financing done. But in the current markets, we hardly transact on retail or hotel deals. But -- liquidity is there. But for retail and hotel, the margins are significantly higher, probably more between 50% and 100% higher than before.

[Operator Instructions] Our next question comes from Manuel Martin with ODDO BHF.

One question from my side. The Dawonia fees were again, like last year, or similar to last year, quite strong in the first quarter. Could you give us some color on that? Which kind of targets were reached? So that we can understand a bit the mechanics behind that good performance.

Manuel, this is Karim. Yes, the Dawonia performance fee, as you all know, we do collect -- in the first quarter, we do collect the performance fees for the performance of the previous year, in this case, for 2020. 2020 has been a very good year for Dawonia. As you all know, resi had a pretty good year last year throughout COVID. And we, again, in 2020 overachieved our cash flow hurdles based on both very good performance on rent increases but also on the disposal and privatization side. So what it actually shows, Manuel, is that resi overall continues to perform very strongly throughout the crisis. And that's, by the way, not only true for Dawonia. There's also a small piece, a couple of million of performance fees, which come out of another resi fund. We've also outperformed our benchmark hurdles last year, and that also contributed to the strong performance fees in the first quarter. So resi remains very strong.

There are no further questions at this time. I hand back to Karim Bohn for closing remarks.

Thanks, Sarah, and thanks, everyone, for joining our call on the first quarter financials. We're looking forward to speaking to you at the latest in August, when we report on the second quarter numbers or, in the meantime, on the virtual road shows we're going to carry out over the next weeks and months. Thank you very much. Stay well and safe. Thank you.

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