PATRIZIA SE (PAT) Earnings Call Transcript & Summary

Good morning, and welcome to PATRIZIA. We published our financial results for the first 6 months of 2023 today, and I would like to share with you some of my personal takeaways. Probably not a surprise for you. In the second quarter of the year, the market environment for investing in real estate and infrastructure remained challenging for both our clients and for us, general market uncertainty, high inflation and rising financing costs were still an issue when deploying capital into real assets. This led to record low market activity in the second quarter of the year. Looking at our financial results, this had an impact on 2 of 3 revenue streams: transaction fees and performance fees, both showed year-over-year declines. There's a substantial decline in transaction fees, although at an already low absolute level. Contrary to that, and on a positive note, recurring management fees increased 4% year-over-year to around EUR 121 million. This was driven by organic growth as well as the positive impact from 2 M&A transactions closed in 2022, now fully contributing to our revenues in 2023. The increase in management fees was unfortunately not fully sufficient to offset the market-driven declines in other fees. So that total service fee income came in 6% lower compared to last year. Revenues from own account investing were down 61% year-over-year, which dovetails nicely with our strategy to operate an asset-light investment manager. That said, the profitable sale of one of the last owned balance sheet properties last year helped profitability in 2022 and subsequently led to a more pronounced decline in the first half of 2023. We have to consider a similar positive one-off effect in the comparable period last year when we look at the cost side. At first glance, net operating expenses increased 10% year-over-year to EUR 126 million. However, last year's level of EUR 115 million was positively impacted by the profitable deconsolidation of a project development in Hamburg, which was temporarily held on PATRIZIA's balance sheet with a relieving effect of around EUR 18 million alone. This helped other operating income and, hence, lowered the net operating expenses. So if we exclude all the consolidation effects and one-off restructuring expenses, then management kept operating expenses actually flat compared to last year. This includes the first fruits from the reorganization efforts end of last year, offset by inflation adjustments and staff costs and the full consolidation effects from 2 acquisitions. Putting it all together, we noticed a significant drop in EBITDA by 48% to EUR 28 million in the first half of 2023. But as I highlighted before, the year-over-year drop has to be put into perspective in light of 2 significant one-off effects in the first half of 2022. The absolute level of EBITDA after the first 6 months certainly is not an adequate level of profitability for a global and diversified platform like PATRIZIA. But EBITDA was actually in line with our internal planning due to the very subdued market environment. We, however, did expect a more pronounced recovery in client and market activity in the second half of the year. Based on the pipeline, we did build up for our clients at the beginning of the year. As preannounced on the 27th of July, we do not see a significant recovery in the second half anymore. We rather expect only modest clients and investment activity until year-end, which will continue to impact the level of transaction fees we will generate this year throughout the whole period, including 3Q '23 and even 4Q '23. This is why we have reduced the top end of our EBITDA guidance range by EUR 20 million, now to a range of EUR 50 million to EUR 70 million for 2023. We will certainly follow the market development closely, and we are well positioned to take advantage of market opportunities as they arise. This is backed by PATRIZIA's strong and resilient platform, the diversified product and client mix and the company's strong balance sheet and financial flexibility. Talking about resilience. The assets we manage for our clients showed resilience in this difficult market phase with AUM down only 2% to EUR 58 billion, primarily due to market-driven valuation effects. In addition to that, we were able to complete smaller transactions on behalf of our clients, resulting in net organic growth even in a subdued market environment. Moving to PATRIZIA's own balance sheet. What is unchanged is our strong balance sheet with over EUR 300 million of available liquidity and our net equity ratio of over 71%. This gives us flexibility on corporate level to seize market opportunities wherever and whenever they will arise. During the first half of 2023, we actually saw first opportunities to co-invest and used existing corporate liquidity to seed invest in certain assets, especially in the infrastructure business. Let me summarize. The market environment is still challenging, and we expect a more pronounced improvement in client investment activity and market activity, not before year-end 2023. We saw a significant drop in EBITDA year-over-year primarily driven by positive one-off effects last year. Overall revenues are under pressure due to the subdued market environment, which weighs on transaction and performance fee revenues, and we continue to closely manage our cost base. Our diversified AUM proved resilient, and we continue to have a strong platform and financial flexibility to take opportunities when they arise. If you would like to discuss further, our Investor Relations team very much looks forward to your calls and to continue discussing our equity story and outlook in the months to come. Thank you for your attention and speak soon.