PATRIZIA SE (PAT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call Operator. Welcome, and thank you for joining Patrizia's H1 2022 Financial Report with Investor and Analyst Conference Call. [Operator Instructions] I would now like to turn the conference over to Martin Praum. Please go ahead.

Welcome, everyone, to our First Half '22 Analyst and Investor Call. This is Martin Praum, Head of Investor Relations and Group Reporting speaking. I'm happy to have our CFO, Christoph Glaser, with us today to present to you an update on our operating business on the market environment and on our financials. Durxing today's call, we will refer to the first half '22 results presentation, which you can find on our website in the section shareholders under most recent publications. The presentation includes the first half 2022 figures and details about our guidance for '22, which we confirmed with results. In case of questions, the CR team is more than happy to help as usual. This call will be recorded and will be made available on our website, and we'll also offer a call transcript for further reference. With that, I'd like to hand over to Christoph to start the presentation. Christoph?

Well, thank you very much, Martin. Good afternoon, everybody, and welcome also from my side. I'm more than happy to present to you Patrizia financial results for the first half of 2022 and then subsequently answer your questions you may have on forwards. That said, let's start on Page 4 of the presentation with a couple of words about the current market situation. Now I'd like to discuss with you first what we're seeing today and also then what we see in the mid-term. Obviously, in the recent months, the real estate and infrastructure business has been impacted by a change of several macroeconomic factors. There's been elevated inflation and interest rates, for risk increasing supply chain disruptions and also recession risks, although the series all out, whether that will be one and it's so how severe it will be -- what is probably more interesting at this stage is the overall speed of change in the environment and market uncertainty has led to what we probably would best call a temporary drop in investment activity, again, the question being for how long that will be. And you just need to look at the volatility of the ten-year German bond in the last couple of months to get a feeling for the challenges that our clients are facing. Now that said, our research house view sees the chance for some normalization in the second half of the year, given that occupational markets appear to remain robust, and there is significant dry powder ready to be deployed and it will have to re-deploy it until year-end. We, however, only expect to have clarity on that at the end of the third quarter or maybe the beginning of the fourth quarter, depending on market pickup or the degree to which market extend will pick up for light some of grade. Now in this uncertain environment, it's probably equally important to emphasize once again, one thing that remains unchanged, which is the fact that certain structural trends support demand for real assets in the medium-term perspective. There is every week [indiscernible] as to health pension funds, insurance company, state funds and so on. Our dealing is the current situation, how they're going to reallocate capital. For us, it's most relevant that we can cater to all their needs and that we can offer a broad range of products to cover any possibly the allocation of funds. Now Patrizia does have the platform and the products to offer, both on the global real estate side and the infrastructure side. So investors can rely on solutions that our alignment is for continuing megatrends: decarbonization, number one, number 2, demographics; number 3, digitalization and number 4, urbanization. Very importantly, it's also important to know what our clients are saying today, and I'm happy to inform you that the recent survey that we have conducted confirms the continued demand for real asset investments to put it simply 64% of our institutional investors expect an increase in the proportion of infrastructure relative to other asset classes over the next 5 years. Equally, it is important to note that this growing appetite for infrastructure is not coming at the expense of real estate investments because we also hear that 60% of those who we observed say that the intent to increase the real estate share of the investment portfolios over the next 5 years. So that's maybe just a scene a little bit here. And with that, I would like to go to Page 5. You may ask yourself the question why we have included the slide in the presentation because it shows a rather long-term perspective going back to showcase the trends that have unfolded over the last 7 years. You obviously know that Patrizia has a long track record. Company started mainly the residential property in Germany for some time ago and has gone through several market cycles, which, by the way, also speaks to our resilience. But what's probably more important is that over these years, we have strategically grown and diversified our AUM base, which now offers a fairly resilient and well-balanced mix of real estate and infrastructure across multiple geographies, whereas 47% of all of that are not sitting outside of Germany, so almost half and mostly in established European markets. Our AUM base is allocated to infrastructure and it's growing rapidly. We, in fact, expect infrastructure AUM growth to outperform in the short-term and medium-term. But as it means, well, simply speaking, we're not dependent on only one geography or one sector. And as I mentioned before, depending on how our clients want to allocate, and we do have the expertise in the product for the range of investment strategies. Yes. Globally diversified market share. We are running an asset-light business model in comparison also to some of our German or European peers. And this model is, at this very time, much less impacted than the business models of some of our other market participants by asset valuation discussions, and it does remain resilient because of its unique platform career. Lastly, the balance sheet is quite strong, and we keep enjoying high levels of liquidity. We feel well prepared to emerge even stronger from the current market conditions because we do have the dry powder or the strategic flexibility to harvest opportunities. But we will do that only with and when they arise, and we don't follow the philosophy of doing deals at any cost of water in the case of to do them, but there will be opportunities, I'm sure. So with that, let's move to Page 6, which gives you a bit of a short-term reflection of the past focus on the first half of the year. And there's kind of 4 key messages here, which really reflects on how we have progress with regard to our sustainability strategy and a couple of other strategic items. So number one, we just invested EUR 75 million in Cambio-LNG produced biomass, who does not only create natural gas from waste processing, but it's also liquidate, which is quite nice to see renewable energy production also on security point of view, is actually the first investment for infrastructure post our acquisition of Open Capital, and we feel pretty good about this. It's really a prime example of what we will keep doing in the future. What's equally important is that we maintain our focus on technology and digital fence formation. You might notice that we have launched a sustainable future ventures fund, where we want to promote technologies within the property, property technology industry, but do that together with our investors and to contribute and co-invest at the same time. So we continue to follow our strategic technology targets, but compared to the past, and it's important to know, we do not necessarily do this anymore on Patrizia's own balance sheet, but we rather do it together with our clients with a good amount of leverage and it's a team that is really active expertise and have closed the first round and we quite successful. Then the third thing that we've done which is somewhat more internal in nature, but I think it's important, and it's a reflection of our continuation of becoming a more international, more global player. We have converted from a German [indiscernible] Stock Corporation to an international SE or [indiscernible]. And that took place on the 15th of July when the transformation was registered in Augsburg and it goes along with our strategy towards a more international setup broadly speaking. It's also been accompanied by a change in our organizational structure, which I'm going to allude to in a moment. The Supervisory Board has been replaced by a high-caliber monistic Board of Directors and you may have noticed already, but if not, then just once again, we also have recently welcomed Saban Azar, who as a newly elected an independent member will not only contribute specialist banking expertise to put it SE but also structuring our international expertise in diversity. Last but not least, point number 4, our net zero coverage strategy has been launched to permanently remove greenhouse gas emissions from our assets, which, by the way, also includes implementing renewable energy generation and not only consumption on our sites in order to decarbonize Patrizia operations. I think all of these examples highlight really quite in a quite tangible way how we progress. Now with that, let's go to Page 7 and talk a little bit more about how we're doing with regard to transactions because there's a lot of talk in the market about no transactions happening. But the reality is that despite market uncertainties, we have been quite active in the first half of '22. Now the overall European transaction markets, as far as we know, experienced a slowdown and was basically flat or maybe declined by 1%, a little bit less year-over-year. But our pipeline was quite well filled as we exited '21. And so in a way, not surprisingly, we outperformed the market with the transaction volume growth of 32% based on signed transactions and 33% based on closed transactions. But as we told you before, some of this was thanks to a pipeline that's reached beyond '21 into '22, which we have successfully engaged. Maybe further example transaction through the acquisition of the project development of micro apartments in Minister, which is a sizable German town on behalf of private clients. And maybe a second example would be, that is more specific in nature would be strategic investment into a residential turnkey portfolio in Stockholm in Sweden, which is comprising of 4 multi-family houses. Just to give you an example that is a bit more tangible. Now that said, there's no doubt that the transaction pipeline has been temporarily reduced in terms of size, and that's quite visible. But we do still work on transactions to our clients, and we do have the capital commitments to act quickly once the dust settles and opportunities arise. And we will see how we fare in that respect in the later part of the third quarter and the first 2 months of the fourth quarter and then going into '23. So after there's a few words about the transaction environment. Let me briefly talk again on the internal topic of our conversion in SE. If we could go to Slide 8 for that, I would like to come back to the point I mentioned before, went together with a change to an international [indiscernible] adapted the organizational structure. Number one, the previous dualistic management structure consisting of the Management Board and the Supervisory Board so sort of a classic German setup was adapted to an international and monistic management structure with a single Board of Directors, which you can see in appear of the page. Now the Board of Directors has appointed 3 executive directors, which are also members of a broader and very operations-focused [indiscernible] due to its deep involvement in our operational business and client agency executive committee drive high operational standards across the company. Not surprisingly, the company's center and majority shareholder of Wolfgang Egger is one of those 3 executive directors as well as a member of the Board of Directors already sits together with 6 external and independent Directors. It is probably fair to say that the new Board is the most international and those drivers for this company has ever had, and it builds the basis to deliver on our strategic goals. I've had the pleasure to interact the ladies and gentlemen shown we have the half of the page for a few months now already, and it's been the privillage I have to say. Maybe 2 comments related to housekeeping, the [indiscernible] and nomination and remuneration committees remain unchanged. And with that, let's talk a little bit about the first half financials and also the outlook on the following page, which I guess would be page ten, if I'm not mistaken. Okay. Assets under management growth. Now the good news is that assets under management continued to increase by almost 17% year-over-year, despite adverse market conditions. Of course, the increase is largely impacted by the completion of the Vicom Capital acquisition, no surprise there. There has also been organic growth and positive valuation effects and higher [indiscernible] acquisitions for the group global client base. So that said, we are quite well on track to reach our guidance range for the full year when it comes to assets under management. With that, I suggest we turn to Page 11, where it's probably worth to once again look at the structure of our AUM in a little bit more detail because we have become quite broadly diversified in terms of geography, especially covering said European markets. I already mentioned that. But also in terms of sectors, covering growth, real estate and infrastructure portfolio. And the one point that has not been made yet as we said, we have also been quite successful with our risk investment strategies, which offer further downside protection in an uncertain market environment because we will have very manageable risk is to deal with. So all of this makes us rather robust, and it does also give us the confidence that we will remain resilient despite the current situation, which, as we mentioned before, we expect to improve potentially as we go through the rest of the year. With that, let's briefly go through the composition of EBITDA on Page twellve. EBITDA came in at almost EUR 55 million, which does represent a decline of almost 10% compared to the 6.3% we made in the first half of '21. Now this is slightly weaker year-on-year. But when you look at it in absolute terms, it remains rather robust under the circumstances and total service fee income was stable at almost EUR 162 million of income and our revenue mix has further improved towards recurring management fees. The net sales revenue and co-investment income reached EUR 7.5 million. That's already above our guidance for the fiscal year '22, judging by the first 6 months of the year. So we feel good about that. The non-operating expenses showed a slight increase driven by the initial consolidation of [indiscernible] Capital and a couple of one-off effects, which I will explain later on. Now all that said, I think this result reflects a resilient business model and a very dynamic and challenging environment. And it's probably fair to highlight that once again, the revenue mix has gained in terms of stability, but probably at a lower pace than we would have liked to, again, given the circumstances. So we remain on track to reaching our current guidance range of EUR 100 million to EUR 120 million of EBITDA for the fiscal year. We feel pretty good about that. We will obviously -- and that's important, we'll continue to monitor the AUM dynamics and the revenue growth dynamics and the revenue mix dynamics as we go through the remaining 4 and a half-5 months of the year. And what's very important for you to know is that we are agile enough to quickly adapt if there will be further adverse market changes different when they arise. So let me make sure that we continue on our path of sustainable and profitable growth, and that includes those revenue perspective and the cost perspective. I will focus on the total service fee income on the next few slides and then afterwards, net operating expenses. So with that, I guess, we can go to slide 13 now. So there's a visible increase in management fees, which is largely compensated for a decrease in performance fees and the specialty transaction fee income. We have talked about this already quite bit during our last call. Performance fees came in lower compared to last year, which was in line with expectations, which is based on -- was in the pipeline. At the same time, the decline in transaction fees can be attributed to a sustained shift in favor of recurring management fees. So that's one aspect. The other aspect is [indiscernible] alone increasingly cautious investor sentiment, which we believe is a temporary phenomenon. But again, let's see how the season will go in the type of private transactions will happen in the next 4 and a half months. So we do expect market players to return to the table gradually, price finding will settle at the moment, it's not settled yet, and market activity will pick up. There's a few players who have already indicated that they will become quite active in the market, and we will see what price points that creates, and we are quite optimistic that they will positively differ from what you see in that create markets right now. So we will continue to monitor that transaction market situation, in particular, between September and November, early December, what's the peak time of the year. Now looking at all these 3 revenue streams together, maybe the last and the quite important point you made is that full service income was in essence stable. Not a great result when you look at it compared to the past, but I think it's a decent result given the environment. So we feel relatively good about this, but I wouldn't use or great in this context. So with that, let's move to Page 14, where we look at the net operating expenses. So looking at the cost base, the net operating expenses increased somewhat from $109.7 million to a level of $114.6 million in the current period. If you break it down by [indiscernible] obviously, we need to talk about personal expenses staff costs and other operating expenses or SG&A and then other expenses [indiscernible] to the total. The increase in staff cost is driven by basically 2 factors: the consolidation of Whitton capital, but also the addition of a couple of adorns buisness in the context of strategic investments in the operations area of the back office operations for Q2. Now the other operating expenses or non-personnel expense related expenses were driven by 3 items. Organic cost growth, no surprise there, relatively moderate and a number of one-off items in total, about EUR 5 million and the first time consolidation of Bison Capital, once again, which has added non-personnel expense costs to our cost base. As already briefly mentioned, the one-off items in the other operating expenses category had a negative impact of roughly EUR 5 million in the first half. There was, for instance, transaction costs linked to the Whitehall acquisition, and there were a couple of other periodic payments. Now in addition to that, -- there was also some restructuring expenses that we incurred, which one could consider one, but they're sitting in the other column, which is the second one from the right. The last important thing to mention here, and I'm sure that some of you are interested in understanding is better. We also had some positive one-off effects. So normally, the other cost column, which in this walk represents a positive impact of EUR 9.8 million, i.e., deducing cost. Normally, this item would be somewhere between EUR 5 million and EUR 10 million of real cost. So it is positive right now, i.e., cost reducing because we've seen probative one-off effects here and not really one-off in terms of the underlying business of what we do because we do the type of activities that trigger these positive one-offs quite regularly, although not very often, but the magnitude of this positive impact this time is it a bit extraordinary because it is around EUR 18 million, but it was in line with our financial plan for the year. So the question that may arise or will get rise to is what was the background for this. So in simple terms, we deconsolidated the project development in the city of Hamburg in Germany, which we had temporarily held on our own balance sheet for around about the last probably almost 2 years and maybe one year and 3 quarters. So since the end of 2020 and it has a significant releasing effect on net operating expenses because our experts on the ground delivered substantial value to the benefit of our shareholders. And you do know that from time to time [indiscernible] has been taken a market view on certain assets and projects, and we will continue to do so and occasionally bring them on the balance sheet temporarily. So you will primarily see this in the form of continued co-investments going forward, and we can focus about that a little bit more in the Q&A session, if you wish. So that's it in a nutshell on net operating expenses. With that, let's turn to Page 15, where time to talk a little bit about the balance sheet. Now picture here is very good. Net equity ratio of 72% and it will liquidity of slightly north of EUR 400 million are probably a testament to our strength instability. We were able to redeem a significant portion of our corporate debt. So we deleverage, it is current cash reserves effectively, we're holding a net cash position of EUR 264 million as of the end of June. So we have plenty of flexibility and the liquidity profile that enables a very active capital deployment, which is part of our new capital allocation strategy. And our share buyback program shows progress. We're now holding 4.1 million treasury shares that can be used as M&A currency going forward. Let's see what opportunities come. And therefore, as I said before, I guess, not I guess, I do know that we are fairly well prepared to emerge stronger from the current market conditions and that we have the ability to [indiscernible] opportunities. That said, I guess we are nearing the last page of the presentation, if I'm not mistaken, and I would like to come to our guidance for the full year on that page. So -- which up , and I want to point out the current market sentiment that it's even more difficult to see our market development will develop, but we are quite positive that investment activity will pick up again off of the summer breaks. Our financial guidance for the fiscal year, therefore, remains solid based on that scenario. And as I mentioned, we will use our financial flexibility for capital allocation that is focused on accelerating closing infrastructure, number one, expanding our geographic footprint, number 2 and number 3, taking advantage of opportunities if and when they arise. On top of that, point number 4, we will continue to buy back shares. And so all of these measures and strategic focus is that the capital allocation should hopefully significantly benefit our clients and shareholders going forward. So with that, I guess, Martin and Operator, I would like to hand back to you to give our audience today an opportunity to ask questions and get answers.

[Operator Instructions] First question is from the line of Lars Vom- Cleff from Deutsche Bank Germany.

Four, if I may, and I would ask them one by one. I guess that's the easiest way to do it. With regard to your growing assets under management, you also speak about continued positive valuation effects. Do you already see any signs that this trend slows down or even reverses in the current market environment?

Hey Lars, It's Martin speaking. We obviously lost the line of Christoph temporarily. So we'll be back in a second. Let me take that question, if that's okay. In terms of valuation, you already said, we've seen not only with other players in the market, but also in our AUM, a positive valuation impact at the first half of -- and you might remember, we always highlighted in the past that the valuation of our asset management was based on conservative assumptions and long-term DCF and earnings models that has a kind of coding effect through the cycle. So on the way up, our valuation impact was somewhat limited on the positive side. So if the market should turn and we really see price evidence on the way down, then also our AUM would most likely react with a time delay. The second point is, and that's the point that Christoph also mentioned is that the quality of our AUM is above market average with the high focus on core and core plus assets. So short answer is we don't see any pressure on an valuation overall at this stage yet. And if we would mostly expect that with the time you may say, in the private market of 12 to 18 months.

Perfect. And then in your comments to net operating expenses, you say that the deconsolidation of Service One had a relieving effect rather it was a positive one-off. And then there were also negative one-offs, I guess, around about EUR 5 million, if I understood you correctly. Are there any other extraordinary effects we should already include in our model for the second half of this year when we're thinking about net operating expenses.

Perhaps coming to -- back to the first -- you're right that the one-off effects were around EUR 5 million in the first half. In addition, we had EUR 2.3 million restructuring costs that we booked in the first half. And below the EBITDA line, we had around EUR 10 million of one-off write-downs for the tech investments that we communicated to you in the first quarter of this year. So for the second half, the only one-off we could see at this stage would be the remaining EUR 2 million of reorg expenses related to the tech investments wind down and no further one-offs we would expect at this stage.

Okay. That's crystal clear. And then the tax rate in relation to EBT was 43% in the reporting period and it was 33 before. And you say in your report that the reason for the increase mainly resulted from additional tax expenses for previous years. Was that it now? Or shall we assume that H2 will also be hit by that?

No, exactly. We believe that this finalizes a tax assessment for previous years. a little detail about that. We had a total tax spend in the first half of EUR 11.4 million, as you can see in our P&L. Of that, around EUR 6 million were tax expenses related to previous periods. So the look-through tax rate was actually around 23% in the first half. For the total year and as the general guidance for recurring tax rate, we would still guide for 28% to 30%.

Also clear. And then one last question, if I may. You have not upgraded your guidance for net sales revenues and co-investment income, although you have already exceeded the upper end of the range after 6 months already. Is this because you're expecting a loss in the second half?

No, we don't... I don't see technical reason really because this position includes temporarily held assets for our private client business. As you might remember, we have to consolidate certain assets before we place them with retail investors. And the rental income that's booked into this line in the first half will probably be going away in the second half by the deconsolidation. So that's why we still believe we will be in the guidance range, probably at the upper end, given the profitable sale of one of the last assets on our balance sheet, so called Focal House this year. Okay. Thank you very much.

Lars, my apologies for not handling the questions directly. But just when you started to ask the first one, I lost connectivity for whatever reason, so I apologize for that, but I can confirm that all the answers given by Martin are correct.