PATRIZIA SE (PAT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. This is Stuart, your Chorus Call operator. Welcome, and thank you for joining PATRIZIA's First Half 2021 Interim Statement Call. [Operator Instructions] I'd now like to turn the conference over to Martin Praum. Please go ahead.

Welcome, everyone, to our first half 2021 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 our operating business, on the market environment and on our financials. During today's call, we will refer to the first half 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, and we will also offer a call transcript for further reference. With that, I'd like to hand over to Thomas to start the presentation. Thomas?

Thank you, Martin. Hi, everybody. This is Thomas speaking. As I did last quarter, I would like to give you an update on our strategy, the market environment and on the operating business. So you would get another sense of our progress beyond the financials that Karim provided in his quarterly video and later in this conference call. So let's turn to Page 3 of the results presentation. First message, we started the year with the good first quarter and continued with a solid second quarter due to our resilient and well-diversified platform. Despite COVID, we were very active on behalf of our clients. During the first half of '21, we were able to sign EUR 2.1 billion of transactions and raised EUR 0.8 billion of equity for international investments. Both key performance indicators show strong growth compared to last year, with 30% growth for signed transactions and 20% growth for equity raise. The transaction volume growth we delivered is a great result considering the average European transaction volume was down 8%, compared to last year. Another interesting fact from European transaction markets and fully in line with our strategy. The number of net buyers of European real estate is almost 4x higher than those of net sellers. What else have we seen in the market? Demand for the living sectors, which include residential, but also health care is unbroken, besides additional continued growth interest -- strong interest for logistics. Office transactions are back, especially in the second quarter with focus on best quality assets that offer a modern working environment to attract talent back to the office. In terms of geographies, Germany, the U.K. and France remain the most liquid markets, with the U.K. showing increased appetite from international capital, having left the Brexit troughs behind it. Overall, we see markets opening up fast again and transaction volumes accelerating. We also have a well-filled multibillion pipeline under exclusivity, which really make us optimistic to deliver our ambitious transaction volume targets for our clients in the second half of the year. Second important point, our strategy is unchanged and the structural growth market case is fully intact. Growth in global pension money, increased allocations to real assets and consolidation in this sector remain the major growth drivers for PATRIZIA. Our clients also confirm this with a high level of interest in increasing their real estate allocation over the next years. With the appetite for real assets, we remain strong in Germany, our home market, but also grow faster outside of Germany. Our goal is to become at least as strong in our other key markets as we currently are in Germany. One example of PATRIZIA continuing to expand its international presence and offering attractive products to our clients, our expansion plans in Japan. We just recently strengthened our local leadership team in Tokyo with Katsumi Nakamoto as new President. He is a renowned real estate expert and former CEO of Diamond Realty Management, in short, DREAM. As you might have read our AUM targets for the Japanese markets, we believe the team around Katsumi will be able to contribute over EUR 2 billion of AUM to our platform in the next few years. Being able to cater different needs of domestic and global clients, but also different local regulatory requirements is just another element of being a successful international investment manager. Client expectations are without doubt, high and growing. To be a trusted partner to our clients, you need the right mindset, a forward-thinking approach, but also the platform and technology to deliver continued solid performance and services. This brings me to the third point. Technology and ESG. The nature of our business model. The assets that we manage and the DNA of our people have 1 thing in common. I'm not getting tired pointing this out. We want to create something sustainable, something that lasts. That means that sustainability, which becomes more and more urgent, is not a new thing to us. It has always been anchored within our business model. With the real estate and construction industry responsible for 40% of world's greenhouse gases, we have the opportunity and responsibility to have a real positive impact and to trade a better future. This is reflected by our 4 clear long-term sustainability goals. One, become a leading sustainable investor in real assets with consistent UNPRI A+ rating from 2025 onwards. Two, become a leading European impact investor in real assets with over 15% of our AUM dedicated to impact investing by 2035. Three, become carbon neutral by 2040 with over 70% of our AUM, client and our own internal AUM. And four, become an employer of choice. But not only the future will become more sustainable with PATRIZIA, already decades ago, we started giving back to society and engage for a brighter future. We create value for our clients to make pensions secure. We help people create a better future. And with the PATRIZIA Foundation, we have helped children worldwide for over 20 years to get access to education and health care. Let me give you another example that shows the PATRIZIA DNA. Just recently, our staff initiated the #patriziaride, together with the foundation, with a goal of cycling together with distance from Augsburg to Nepal and back, the distance of 17,500 kilometers. In the end, 3x the target distance could be reached by more than 230 participants internal and external, raising thousands of euros for the digital classroom project in Nepal. Compared to the global ESG task ahead of us, it might sound like a small project, but it shows what we can achieve if we work together. On another note, offering our clients investment opportunities that meet their ESG requirements is an urgent matter. That's why we just launched the first close-ended ESG strategy fund for private clients in Germany. No doubt, we are convinced this will become the market standard going forward. But there is even more we can do. The entire industry, including us, has a lot of work ahead to further integrate ESG and ESG reporting. Therefore, we continuously invest in technology and processes to further improve the client experience. We believe this will be even a more important and critical factor for doing business in the future, and we are prepared. PATRIZIA has a strong international platform, becomes more and more digitalized. It has the financial flexibility to invest and to offer first-class solutions, which includes the expected increase in ESG reporting, both at portfolio and individual property level. 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 us to continue to invest in technology. By investing in technology and innovation, we gain access to the most promising PropTech solutions across the world that enhanced our managed assets and services. You can be sure the largest part of the transformation of our industry through digitalization and technology still lies ahead of us. And we as PATRIZIA have the strength and the chance to drive the disruption and not being disrupted. With that, let me hand over to Karim to give you a brief update on our first half financials.

Thank you, Thomas. Thank you, Thomas. This is Karim speaking. Let's move to Page 4 right away. I can only confirm what Thomas just said, and we can see growth momentum also in our financial KPIs of the first half of the year. First, assets under management continued to grow to now over EUR 48 billion, and recurring management fees showed over 8% growth year-on-year. So we continue to improve the quality of our revenues. And I think it is worth reiterating how steady our assets under management have been growing over the past few years, even in times of market volatility and distress. It shows the strength of our platform, but also the high quality of the assets that we manage. Second, despite redeeming parts of our bonded loans during the second quarter, available liquidity remains strong and gives us great financial flexibility to grow and to invest. Thomas already mentioned the third point on business activity, and that leads us to the fourth point. We confirm our guidance for the full year of 2021, as we see certain accelerating trends in transaction activity and client demand. Let's move to Page 5 for details on our balance sheet and financial flexibility. Our strong balance sheet and liquidity position is nothing new to you, as we have built it up step by step over the past few years. What has changed? We have redeemed EUR 66 million out of the EUR 300 million bonded loans to optimize our financial expenses and we continue to buy back shares in the market. We now own around 3 million treasury shares worth EUR 66 million. This is M&A currency, which comes on top of the available liquidity of EUR 537 million you see in the table. As you may know, we have no plans to delete these shares. 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. Let's move to Page 7. We already talked about some of the highlights mentioned on this page. So let me focus on the key things. Operating income of EUR 57.4 million shows that we are well on track to reach our guidance range of EUR 100 million to EUR 145 million for the full year. Is the 22% decline in operating income year-on-year concern to us? Not at all. First of all, we had timing differences in the realization of performance fees between the first and the second half of the year. And remember, the majority of performance fees is generated once our clients realized returns, and there can be timing difference depending on assets or fund disposals. We also had around EUR 10 million higher contribution from co-investment income last year. This was offset by growth in management and transaction fees this year. So further quality increase of revenues. At the same time, we had some operating effects in the cost line. So overall, a solid set of results in our view. That is why we confirm our guidance for the full year in all KPIs, ranging from transaction volume, AUM growth to operating income. Page 8 provides further details. On Page 8, you will find the composition of operating income in the first half of this year. Management fees and transaction fees with solid growth year-on-year. Performance fees with timely differences compared to last year, but still an important contributor to total service fee income, simply reflecting the attractive performance we generate for our clients. Net sales revenues and co-investment income are down significantly year-on-year, which is fully in line with our strategy as an independent asset-light business model with full focus on third-party clients. On the cost side, we had some aperiodic effects that lowered the cost base last year and one-off costs this year for optimizing space -- office space, used by PATRIZIA. Overall, we will continue to expand the PATRIZIA platform and invest in the future for the benefit of the operating income of tomorrow. Let's move to Page 9, on management fees. Management fees stand out with a convincing growth rate. This year, positively impacted also by management fees we received for managing real estate developments for our clients. That explains the gap between growth in assets under management and management fees in the first half. The services we provide for our clients in this area already generate fees. Assets under management, however, will rise later step by step in line with the projects progressing in construction. Page 10 gives you a little more detail on transactions and transaction fees. Transaction fees also showed a solid 4% growth year-on-year. However, we believe there is more to come in the second half of the year, given the fees generated so far only reflects 38% of our full year guidance at midpoint. As expected, we see more acquisitions than disposals, confirming the continued demand for attractive products in real assets. Let's move to performance fees on Page 11. I talked about timing of performance fees before, and we also expect performance fees to contribute to the second half of the year. With the chart on the right-hand side of Slide 11 show, should reiterate there's more to come. Performance fees always have a certain element of volatility once they are realized, but these performance fees have been generated over several years through active asset management, smart investments and forward-looking strategies of PATRIZIA's experts. Performance fee claims mean future cash flows for PATRIZIA and its shareholders and provides continued financial flexibility to grow the PATRIZIA platform. Page 12. 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 remains the level of performance fees. And as you know, these fees to a large extent, depend on client activity and client investment strategies. So the question is not, will we generate performance fees? It is rather a question of when will they feed into operating income? We expect to have a better picture on timing and market activity with our next results release. With that, I'd like to hand back to Stuart to start the Q&A session. Thank you.

[Operator Instructions] First question is from the line of Kai Klose from Berenberg.

I've got a first question on Page 11 of the first half report, and could you elaborate a bit more why we have seen an increase in the other operating expenses by around 29% in the second quarter compared to the first -- compared to Q1?

Kai, I was a little confused because Page 11 actually shows performance fees. But your question is very clear why have operating costs increased a little bit? There are actually -- mainly there are 2 effects, Kai. One is, we merged offices in Frankfurt and I think we spoke about this, that we refurbished a new office to [ new work ] basically to go to have a full and modern office space. And therefore, we merged 2 offices. And with the merging of 2 offices, according to IFRS 16, the capitalized rent has been amortized immediately rather than paying the rent over the next few years. That was 1 major effect. And then as you know, we have a service investment platform where we manage a small amount of assets for other managers. And 1 item that goes through -- that went through the P&L on the cost side is actually costs for those funds, which were -- which are neutral to the balance sheet because they are also under the revenues. And those 2 effects led to an increase of the cost side. But from a fundamental perspective, costs haven't really increased.

Okay. Then I have a second question, again on the report, not on the presentation, but on the first half report. Could you elaborate a bit more on the volatility of the cash flow from operating activities? I was just a little bit surprised to see EUR 15.8 million for Q1 and now just EUR 800,000 for the first half, maybe a little bit more. Maybe could explain why that volatility on this number was so high in the second quarter.

Yes, that's a good question. And when you read the cash flow statement, that's an obvious question. But as you know, the operating cash flow includes aperiodic effects and items like payment of bonuses, for example, or tax payments. The operating -- if you compare to the operating EBT, there's also -- the operating cash flows after tax, operating income before tax. And what are the reasons why we have the operating EBT as the KPIs because that's actually a good proxy for the recurring cash flow before taxes. So in short, Kai, the operating cash flow statement or the cash flow is impacted by operating effects coming from bonuses and tax payments.

Understood. And 2 very quick questions. You mentioned that the target range for the transaction volume for this year stands between EUR 6 billion and EUR 9 billion. Could you give a bit more details about the split regarding segments and regions where your clients are currently particularly interested to invest?

Yes. Well, first of all, the transaction volume is really across the major areas of our Western European platform. I think it's fair to say that at the moment, there's high demand for, I would say, the living sector for logistics, there is less demand for retail. And we also see, as Thomas said, demand for office slowly coming back.

Understood. The last question, you mentioned that in a release recently that you want to change into an SE -- corporate structure into an SE . Maybe you could give a bit more details on what kind of advantage -- what advantages do you expect from that change?

There are actually a few things, Kai. Thanks for picking this up. First of all, the legal structure, and you are familiar with international structures. The legal structure of an SE really follows the internationalization of our business over the past years. And there are many European listed companies that convert it into an SE already. Also, when you think about the involvement of the management structure and the leadership of this firm, we're really adopting the management structure to international standards. So if you compare ourselves with the companies, we'd like to compare ourselves with, if you look at Brookfield or Blackstone, for example, or even Partners Group in Switzerland, they all have the same international legal structure.

Next question is from the line of Lars Vom-Cleff from Deutsche Bank.

I realized that you've recently become extremely vocal about screening potential M&A opportunities, either in present views and releases such as yesterday's or even on today's call. Is there any additional information you might be willing to share with us at this point in time? I guess Asia is still very -- is still on top of your wish list infrastructure assets and/or private or public debt. Correct?