PATRIZIA SE (PAT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Natalie, your Chorus Call operator. Welcome, and thank you for joining PATRIZIA's 2021 Preliminary Annual Results Call. [Operator Instructions] I would now like to turn the conference over to Martin Praum. Please go ahead.

Thanks, Natalie. Hi, it's Martin speaking, and welcome also from our side to this year's preliminary financial year 2021 analyst and investor call. I'm happy to have our co-CEO, Thomas; and our CFO, Karim, in the room with us, and they will present to you an update on our operating business, the market environment and our financials. During today's call, we will refer to the preliminary financial results presentation which we circulated yesterday and which you can find on our website in the section, Shareholder Most Recent Publications. The presentation includes details about the new KPI set, which we introduced beginning of 2022. In case of questions, the IR team is more than happy to guide you through these changes and to help updating your models. As usual, this call will be recorded and be made available on our website, and we will also offer a call transcript later for further reference. With that, I'd like to hand over to Thomas for an introductory statement and to start the presentation. Thomas?

Thank you, Martin. Hi, everybody. This is Thomas speaking. First of all, I want to do a very quick side remark. We are shocked as everyone this morning about the attack on the Ukraine. I personally never thought war in Europe would happen again. This shows how important a united, democratic and peaceful Europe is. Our solidarity clearly is for the people in the Ukraine. Of course, we will watch the situation carefully. I personally would have hoped never to see war again in Europe, having grown up directly at the border to the German Democratic Republic many years ago. Some people just didn't learn from history. With that, I go into the main topic of the call. I have 4 key areas I would like to discuss with you today. In my view, they are a good summary of our achievements in 2021. Please have a look at Page 2 of the presentation. First, despite COVID-19, we delivered very solid financial results, and we can confirm a clear recovery in business activity in 2021. We've added 50 institutional clients to our platform in 2021, and also continue to attract new clients in the private and semi-professional area. Over 50% of raised equity came from international investors, and our flagship funds continue to attract a larger share of raised equity. This is fully in line with our strategy. End of November 2019, we announced the launch of the Living Cities fund. Only 2 years later, we talk about a EUR 1.5 billion equity product. Second, our diversified platform helps to offer your clients the right product at the right time even in times of significant uncertainty and structural changes in the market environment. We are building on this successful strategy and will continue to expand into new markets and products. We have made good progress in building a new hub in Asia, where we expect continued growth in business going forward. Another good example is our first real estate debt product we structured for a Hong Kong client. Again, I would like to revisit November 2019 when we announced our midterm strategy to the market. Expansion in the product offering was one of the key elements of our story. And as you can see, we are delivering on it. Third, we expanded into global infrastructure and can meanwhile confirm the successful closing of the Whitehelm transaction on February 1, 2022. The Whitehelm teams in Sydney, Canberra and London are now part of PATRIZIA and form the new PATRIZIA Infrastructure unit. We are now on our way to offering the great infrastructure products Whitehelm brought to the table to our global client network. We believe infrastructure offers great growth opportunities for our clients and for PATRIZIA. Fourth, we made very good progress on our sustainability strategy and ESG. Those of you who have followed us through the year saw the formation of a new international and tech-savvy Supervisory Board. With new committees in the Supervisory Board, we are now 100% compliant with the latest corporate governance standards. Two things we are proud of, our first impact investing fund, which we structured during 2021 and launched early this year, which is called PATRIZIA Sustainable Communities, an Article 9 funds, with seed investments from 2 leading Danish pension funds. The other point is our new ED&I Council, which will further accelerate diversity and inclusion in PATRIZIA. Last but not least, reporting becomes ever more important in the area of ESG. We will soon publish your 2022 ESG report, which will show another step forward in ESG and in measuring our progress. After these strategic operational highlights, let's move to Page 3. I have selected 3 transactions out of the many we've done for our clients in 2021 just to give you some examples of our activities last year. No doubt logistics and residential were the most sought-after asset classes of 2021, and a large part of equity raise was invested in these sectors. The acquisition of a 210,000 square meter Rotterdam logistics center with excellent ESG credentials is exactly the product that fits to our investment strategy. And it is an excellent example of the potential we have in the logistics sector to use property roofs for solar energy. On the right-hand side, another acquisition, this time in Helsinki, this time residential, the product development to be finalized in 2023, with a Class A energy certificate and social infrastructure attached like a kindergarten, an important element of building communities and sustainable futures. Another reason for showing this, our clients increasingly look at project developments and are willing to invest in forward deals. They are okay to wait 1, 2, 3 years before cash flow generation starts, that they, in return, get high quality, ESG-certified and future-proof assets. Lastly, the disposal of the Astro Tower in Brussels, a major deal in the office sector in 2021. Performance realization is an elementary part of our business, and we make sure that the assets we manage for our clients are perfectly positioned and maintained until the exit. So what are the plans for 2022? Let's move to Page 4. We now have a truly unique platform and people that can offer perfect solutions for our clients, be it a real estate fund for a number of investors or a single mandate, our global partner solution, our fund of funds business with investments even across the globe. Based on these solutions, we invest in key themes that are identified by our cutting-edge data limit -- data analytics team, together with our local people on the ground in each of the markets we invest in. So what are the themes for 2022? We believe that living, which is much more than simply residential, will continue to play a major role. Also enabling supply chains via logistics will continue to be a major theme. Impact funds and ESG products are no doubt becoming the new market standard, so we will continue to offer our clients product in this area. Our new infrastructure expertise will no doubt accelerate our activities in this area in 2022. And lastly, sometimes forgotten in recent months, the office sector is back on the radar screen for many investors. Collaboration, direct exchange with colleagues, innovation culture and training young talent are all elements that lead to continued demand for high-quality office space in good locations. With that, let me hand over to Karim to give you an update on the financials for 2021 and outlook for 2022.

Thank you, Thomas. Let's move to Page 6 right away. I can only confirm what Thomas said, and we can see growth momentum also in our business activity of 2021. First, growth in equity raised by close to 39% and growth in signed transaction volume of 24% are a confirmation of a solid recovery from COVID-related business slowdown in 2020. Second, AUM continued to grow to now EUR 48.6 billion, and recurring management fees showed 8.1% growth year-on-year. So we continue to improve the quality of our revenues. If we look at the pro forma figures, which includes Whitehelm Capital's AUM, we reached an AUM of EUR 52 billion. AUM has 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 assets that we manage. Third, we continue to return cash to our shareholders and propose to distribute a dividend of EUR 0.32 per share at the upcoming AGM. This is the fourth consecutive increase in dividends and 6.7% higher compared to last year. In addition, for the direct participation in the positive business development, we also carried out a share buyback program in 2021. And this intended not only to support the share price, but also to create acquisition currency for future M&As. We are also currently running a share buyback program, which will continue until the end of this year. Fourth, despite redeeming part of our bonded loans during the first half of 2021, available liquidity remains strong and gives us great flexibility to grow and to invest. Fifth point, due to the successful transformation into a global investment manager, we will now adapt our key performance indicators to the existing business model. Therefore, from 2022 onwards, operating income will be replaced by EBITDA and the cost coverage ratio will be replaced by EBITDA margin as key financial performance indicators. This should make your life easier, and it will simplify financial reporting and significantly reduce the number of adjustments in our operating reporting, and it should also make our results better comparable to peers. Let's move to Page 7. On Page 7, you will find the composition of operating income of the financial year 2021. What you see is that management fees and transaction fees show solid growth year-on-year. Performance fees remained at almost the same level as in the previous year, but they are still an important contributor to total service fee income, simply reflecting the attractive performance we generate for our clients. Net sales revenues and core investment income are down more significantly year-on-year. The reduction is largely due to lower earnings from core investments. On the cost side, we are not surprised by 3.2% increase to the previous year. This is mainly due to one-off M&A-related costs and continued strategic investments. Excluding M&A costs, we would have seen a cost growth of only 1.4%. Overall, we will continue to expand the PATRIZIA platform and invest in the future for the benefit of the EBITDA tomorrow. Let's move to Page 8 on management fees. Management fees once again stand out with a convincing growth rate. 2021 was also positively impacted that management fees we received for managing real estate developments for our clients. As we see increased demand by our clients for attractive development profits and forward deals, this also explains the gap between growth AUM and management fees. The services we provide for our clients in this area already generate fees with assets under management rising later step-by-step, in line with projects progressing in construction. Our 2022 guidance for management fees is EUR 245 million to EUR 260 million. This is primarily driven by the consolidation of Whitehelm plus additional organic growth. At the same time, we expect AUM to rise -- to range between EUR 57 billion and EUR 60 billion. Let's flip over to Page 9. Page 9 gives you a little more detail on transactions and transaction fees. Transaction fees also showed a solid 6.9% growth while the transaction volume grew even faster with a 24% increase year-on-year. Bear in mind that not all funds we manage charge transaction fees. Some instead generate a higher management fee, explaining the possible disconnect between the 2 growth rates. Our guidance outlook for transaction fees in 2022 is EUR 50 million to EUR 55 million. Let's move to performance fees on Page 10. Performance fees remained stable at almost EUR 86 million. The new guidance range for performance fees is EUR 50 million to EUR 60 million for the financial year 2022. The chart on the right-hand side of Slide 10, however, reiterate there is more to come in the short term and in the midterm. The exit performance declined on Dawonia alone now stands at close to EUR 416.2 million pretax and EUR 339 million post tax. We are still in discussions with our investments in the fund about the future of the fund. But if there is one thing we can confirm, is that the value for PATRIZIA continued to increase in 2021. Do not forget, we also have a 5.1% core investment stake in that fund, which has increased in value to now over EUR 175 million after tax. Let's move to Page 11. As I said before, our guidance for the full year of 2022 will be partially based on new KPIs. This is the reporting side you are used to, which is why we have incorporated this graph for the 2022 guidance. To better explain the changes in reporting, please move to Page 12. You will see a familiar setup of management, transaction and performance fees, building total service fee income followed by net sales revenues and core investment income and net operating expenses. This is where EBITDA will come into play going forward. In addition, cost coverage ratio will be replaced by the EBITDA margin as a new financial performance indicator. AUM growth, a third key item, will continue to be a key financial indicator. So nothing will change here. If you look at the major changes applied, we will eliminate a number of adjustments. So the idea is to simplify the financial reporting and make it more comparable, as I said before. We also looked at how operating income and EBITDA compare over the last few years, and both figures actually were not far away from each other in the last 3 years. As an additional service, we have also included a guidance for EBIT and earnings before tax. You might remember that the M&A-related amortization of fund management contracts on a regular basis to lower the results below EBITDA. And these amortizations are noncash items, which is why we will continue to focus on EBITDA to show our economic progress. Now let's turn to Page 13. This table is unchanged to the previous slides. Thus, we do reiterate the major drivers of our expected performance in 2022, our AUM growth and the consolidation of Whitehelm to drive management fees, which we expect to increase from around EUR 209 million today to between EUR 245 million and EUR 260 million. This strong growth offset lower performance fees and lower core investment income compared to the previous year, at the same time, further improving the quality of our earnings. Cost growth is primarily driven by the Whitehelm consolidation so that we expect EBITDA in the range of EUR 120 million to EUR 145 million in 2022. Finally, let's us look at key balance sheet items on Page 14. Our strong balance sheet and liquidity position is nothing new to you as we have built this up step by step over the past few years. As you already know, we have redeemed EUR 66 million out of a EUR 300 million bonded loans to optimize financial expenses, and we continue to buy back shares in the market. The bank loans of around EUR 170 million are, as some of you might remember, only temporarily held on our balance sheet and relates to our business line with private and semi-professional investors. They will be redeemed as soon as the distribution of the related close and fund products start. By the end of 2021, we have 3.7 million treasury shares worth EUR 73 million. This is M&A currency which comes on top of the available liquidity of EUR 513 million. So in total, liquidity reserves close to EUR 586 million at year-end. The number of treasury shares has since been reduced to approximately 3.2 million shares as the Whitehelm Capital acquisition was successfully closed on February 1, 2022, and the first cut of the total consideration payment was partly settled with PATRIZIA shares. To sum it up, we see good momentum in business activity and despite COVID-19 also impacting in 2021, we showed solid financial results. Shareholders will benefit from another increase in dividends while we continue to buy back shares. Our outlook for 2022 implies further growth and further growth of recurring income. With that, I'd like to hand back to Natalie to start the Q&A session.

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

I've got two questions, if I may. The first one, when looking into the net transaction volume, it was -- you were a net buyer of EUR 1.1 billion, and the total AUMs went up net by 1.6%. So is it fair to say that the main driver for the AUM growth came from net acquisitions? Or could you also indicate what was the like-for-like change of the underlying AUMs?

Kai, this is Karim. One of the key drivers in 2021, given the balance between acquisitions or closed acquisitions and closed sales in 2021, one of the main drivers was also valuation uptick despite COVID-19. And the difference, as you know, Kai, between signed deals and closed deals is that now for signed deals, in particular, acquisitions, which we signed intentionally on, partly only closed in 2022. And when you look at AUM by year-end, we look at closed deals. That's why you always have deviation between signed and closed deals.

And what was the like-for-like uplift in the AUMs?

Like-for-like, you mean, without valuation?

Yes.

Well, it was -- the like-for-like uptick without valuation was just barely positive. So it was a few hundred million positive.

And which segment or which region contributed the most to that small uplift -- uptick?

Well, generally, what we bought was mainly residential and logistics. What we sold was mainly retail and office, really, across Europe with the majority of, I would say, 50% of both acquisitions and disposals was in the DACH, so in the German region, and the rest was across Nordics, U.K., Ireland and Benelux.

No, sorry, I was not precise. I was more interested in what contributed the most to the like-for-like uplift by segment or by regions and not what was the split in [ connection ].

Are you referring to the valuation, Kai? I'm not sure.

[indiscernible]

Okay. So the main contribution to valuation was really residential and logistics with office being flat and retail obviously contributing negative valuation results.

[Operator Instructions] The next question is from the line of Manuel Martin from ODDO BHF.

Just 1 or 2 question. My first question would be on your guidance for 2022. You're guiding for a strong increase in assets under management. However, if you have to look at the EBITDA guidance, it seems that you could have an EBITDA loss year-on-year compared to 2021 despite having actually good guidance in AUM. And in terms of fees, maybe you could elaborate a bit on that, please.

Manuel, this is Karim. Thanks for the question. It's well spotted and easily explained. Now you might have also noticed that the performance fee guidance is around EUR 30 million -- EUR 20 million to EUR 30 million lower than in 2021. And if you then look at the guidance of EUR 120 million to EUR 145 million, you see quite obviously that we fully make up for lower performance fees by a higher contribution from management fees. So we expect the quality of earnings to increase significantly. And one minor points but also important in this context is when you look at the EBITDA in 2021, EUR 128 million, that includes roughly EUR 6 million income from an amortization of an earn-out from an old acquisition, which positively impacts the EBITDA. So on a like-for-like basis, I would say the low end of the guidance is basically the starting point of EBITDA in 2020 -- in 2021. But as I said, the guidance actually assumes that we at least compensate or overcompensate the lower income from performance fees but higher management fees.

Okay. I see. My second question would be related to the performance fees again. The guidance that you're giving for 2022. Is this going to be the new normal? What we could expect for the next years? And maybe you could tell us also a bit on the background and why the performance guidance is at that level because it's, well, significantly lower than last year.

Yes, and it's a good question. We always said if you look at the performance fees, I would say, on the past 6, 7 years, the average was always, I would say, between EUR 50 million and EUR 60 million. It varies, as you know, between EUR 30 million and EUR 130 million depending on the year. And it's half the visibility on performance fees in a given year is also depending on the sales program we have in the pipeline and the vintages but -- the assets in the vintage -- in the various vintages of the funds that [ do run out of wind where we ] sell assets. So I would say it's a new normal. But I think it's fair to say that an average -- that we hold on to the average of EUR 50 million, EUR 60 million and the visibility we have for 2022 is based on the sales program we know as of today.

The next question is from the line of Philipp Kaiser from Warburg Research.

To start on the management fee guidance, so kind of on typically a wide range for your management fees. Is that driven by the acquisition of Whitehelm or also related to the kind of switch from transaction to management fee? Or how can we read that?

Philipp, there are mainly 2 reasons. One is closing of acquired assets because you know we start generating performance fees when we close the assets, not only [ try them ] -- management fees, sorry, management fees. And that's why there's a range. And there's also the wide range based on the Whitehelm acquisition, which, first of all, increases the lower end of the range. And then there's the third -- also the same certainty on closed and signed transactions. That explains the wide range in management fees.

Okay. Then my next question kind of on evergreen from my side regarding the Dawonia performance fees. So 2023 is now kind of only 1 year ahead and so any news on the negotiation or how we could expect that to be generated in cash flow out from this portfolio?

Yes. It's an evergreen question. The project also called evergreen. Now you're absolutely right. I mean, we're now at the beginning of 2022. So this is the year where we have to -- where investors have to make up their mind, how they want to -- whether they want to extend the Dawonia fund or not or if they partially want to extend and some other investors come in. I think the good news is, Philipp, that over the past years, even in 2021 or 2020, you recall that the value of our performance fee partly increased and also the value of our RED block at 5% stake, we also -- have also increased. And I know you're going to ask the same question in May and then again in December. I would expect -- I would be disappointed if you wouldn't. I expect more clarity, hopefully, when we announce Q2 in August, but surely, obviously with Q3 numbers. But this is now on top of the agenda for us and on top of the agenda for investors. But as you know, resi continues to be a highly sought-after asset class.

Yes. Yes, of course. Very clear. My last question connects the share buyback program with your, yes, significant liquidity. Or it might make sense to even increase the share buyback program regarding the current share price and the clear undervaluation to you kind of set an even clearer statement to the capital market as you regard the bought back shares as M&A currency in the future?

Philipp, as much as we would love to buy back more shares, given regulation, when you appoint or mandate a bank to buy back shares on a regular basis, they restrict to the amount of shares they can buy back on a daily basis. And that's why it's really not in our hands, for regulatory reasons, to increase the buyback volume on a daily basis.

The next question is from the line of Andre Remke from Baader Bank.

Just 2 questions left. First, starting with your calculation on idea on your calculation behind the asset under management growth target, EUR 57 billion to EUR 60 billion. So it's a huge increase. Could you run us a bit through your idea behind that? I guess it's included also with the EUR 3.5 billion Whitehelm. But then even though it seems to be that growth of EUR 6 billion to EUR 9 billion on a net basis, you have never reached such level. So does this include any other acquisition or how could we reach this?

Andre, it's Karim. Yes, that's a good question. And it's a fair one. The starting point, as you know, as I mentioned earlier, today, EUR 52 billion, including Whitehelm. So we look at a growth from EUR 52 billion to EUR 57 billion to EUR 60 billion. And this is really based on bottom-up planning we made based on a much broader footprint on a global basis. And the investments we made over the past years into the capital markets organization or the fund treasury organization as well as on the product side. And that's why we -- that makes us confident that with the new platform, including infrastructure, we will be able to deliver on that growth. It also includes, to a certain extent, deals we have signed in 2021, but will only close in 2022. So that's really the mix. But the main point to remember, Andre, is that we believe the investments we made over the past 2 to 3 years, plus the acquisition of the infrastructure business with the global and more importantly, with an APAC footprint, will allow us to achieve those growth rates. Now this comes with a bit of a caveat, Andre. And as Thomas said earlier on this call, this also assumes, I would say, a normal health in geopolitical environment. So when we went through the budget planning, we were obviously assuming that COVID's issues will slowly go away or will be lifted and would allow us to come back to grow -- to pre-COVID growth rates. Now we have to see how the geopolitical crisis, with which we were confronted overnight, will play out and will impact our business and our investors.

Yes. But again, a growth of EUR 5 billion to EUR 8 billion, is this, let's say, at least kind of feasible already from today's perspective? Or is it growth rates which you are planning if the business is running? So how comfortable you are on back of this? And maybe a follow-up on your, let's say, left over from signed deals last year. What is the magnitude of this?

Yes, the magnitude of a hangover from signed but not closed transactions is roughly EUR 1.5 billion. Not all of that will close in 2022, but a large part of that. And why do we feel comfortable with the growth? And that is, as I said, we have a much better platform. And if you look at the years pre-COVID, Andre, the growth rates, on a relative early basis, we achieved before. That wasn't that far away from the relative growth rates we'd like to achieve in 2022.

Yes, but a much lower starting point basis. But that's fine for me. Second question from my side is, could you elaborate again on the treasury shares? You mentioned 3.7 million shares. Is it after Whitehelm or was it as of year-end?

Yes. That's an easy one. We currently hold 3.2 million shares, and it is after Whitehelm.

So you spent 500 million shares -- 0.5 million shares.

Yes, exactly. Yes, that's about right.

There are no further questions at this time. And I would like to hand back to Karim Bohn for closing comments.

Yes. Thank you, everyone. Thanks for joining the call. Very well and safe, and I hope to see you soon, hopefully, in one of the live conferences. If you have any further questions, reach out to us, you know where to get us. [ After today's call ], we're also happy to see you in person again soon when other restrictions are lifted, and our hope for all of us that the geopolitical crisis we are confronted with right now will hopefully be eased away soon. So thanks a lot for listening, and talk to you soon. Bye.

Thank you.

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