PATRIZIA SE (PAT) Earnings Call Transcript & Summary

Good morning, and welcome to PATRIZIA. We published our financial results for the first 9 months of 2023 today, and I would like to share with you 5 key messages. First, the market environment remains challenging, but our platform and assets under management show good resilience as we continue to find attractive investments for our clients in the market. Second, we had a strong third quarter, driven by operating achievements and other income, both of which helped EBITDA after 9 months to already reach the lower end of our full year EBITDA guidance range of EUR 50 million. Third, we do not expect the fourth quarter to act as a trigger for higher business activity, which explains why we stick to our guidance range of between EUR 50 million to EUR 70 million EBITDA on an operating level. Fourth, we believe the challenging market environment will continue into 2024. So there is a potential for continued pressure on revenues compared to 2023. Fifth, we are taking actions to weatherproof PATRIZIA for an extended period of market uncertainty. This includes a strategic revision of our recurring cost base and platform structure to offset any market pressure, but also to significantly improve the relation between recurring costs and recurring management fees. Let's put some meat on to the bone. Our assets under management came in at EUR 58 billion, which is a more or less stable development over the last few quarters. We see continued valuation pressure on AUM, but at the same time, we are net buyers for our clients in the market, which offsets some of the pressure. After 9 months, we signed transactions in infrastructure and real estate totaling EUR 1.6 billion, of which the vast majority were acquisitions. We also more actively used our own PATRIZIA balance sheet to seed invest or warehouse assets, especially in infrastructure, where we invest along the mega trends we have identified, especially in the area of decarbonization. Looking at our EBITDA at slightly over EUR 50 million, we already reached the lower end of our full year guidance range. While overall revenues are down 8% compared to last year, recurring management fees actually increased by 2%. We had the strongest quarter for management fees so far this year, driven by debt structuring fees and real estate development service fees, both booked in the third quarter. Pressure continues to come from market-driven revenues like transaction and performance fees, which are both down over 30% compared to last year, which explains the overall 8% decline in total service fee income. Net operating expenses were up 3%, whereas this figure included several one-off items pretty much like last year. If we only look at the development of core costs like staff costs and G&A, then we talk about an unchanged level of cost compared to last year despite fully onboarding 2 acquisitions. Together with a significantly lower contribution from co-investments compared to last year, this explains the year-on-year drop in our EBITDA by 36%. As I said before, we expect market uncertainty to stay with us for a while, and that is why our strong balance sheet and financial flexibility are incredible assets to have in this market environment, and we will use them to take advantage of market opportunities for and with our clients if and when they arise. But it is also obvious that in a market environment where we expect temporary pressure on revenues to continue or intensify a flat cost base development is not the answer. Management is, therefore, taking action here. Firstly, to safeguard profitability levels in 2024, but more importantly, to improve the relation between recurring costs and recurring management fees sustainably to strengthen PATRIZIA's resilience against future market fluctuations in the business cycle. We today announce strategic measures to sustainably lower our recurring cost base and to refocus our platform structure. These measures will be implemented during the fourth quarter, and we expect the related reorganization expenses to be booked during the fourth quarter of the year. From 2024 onwards, these measures will significantly relieve our recurring cost base. This will help to offset further revenue pressure that we expect in 2024. But more importantly, it will strengthen the resilience of the platform, improve the quality of earnings going forward and offer additional profitability upside once markets start to gain traction again. The measures we are taking are significant, especially if you take into account that we still live in an environment of inflationary upward pressure on personnel expenses and G&A. Our target is to reduce personnel expenses in G&A to a level of our 2021 cost base, which was before we consolidated the cost base of 2 acquisitions and before inflationary pressure started, and the new cost base is not a midterm target. This is a cost base we want to achieve already next year. At the same time, we focus on the assets our clients have entrusted us with, preserving their value, preparing them for the future and making new investment opportunities one of our highest priorities. Because as always, every crisis offers good opportunities to create value for the future. 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 very much for your attention, and speak soon.