S IMMO AG (SPI) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the S IMMO conference call regarding the results of the first half year 2020. [Operator Instructions] Let me now turn the floor over to your host, Mr. Vejdovszky.

Good afternoon, ladies and gentlemen, and welcome to our conference call for Q2 of 2020. I think we can all agree that very challenging months lie behind us. Obviously, the COVID-19 pandemic had a major impact on the results we are presenting today. We will give you some more insight into this during our presentation, but for now let me tell you that we are optimistic that the worst is behind us and that the second half of 2020 will bring at least a moderate recovery. With our well-diversified portfolio, including a significant portion of residential properties, a strong cash and equity base and our close connection to markets and tenants, I'm more than convinced that S IMMO is very well prepared for the future, but let's go into some more detail on how our business model puts us in a good position to deal with the crisis and flip over to Slide 2. If you ask me who we are and how we do things, here are the general answers. In our portfolio management, we take the long-term view and apply a value-generating strategy in combination with a diversification across use types and geography. In difficult times, it helps a lot that we are an established player in the market and that we have great in-house experience and a strong asset management. We follow a very sustainable financing strategy with a well-spread maturity profile and has a land bank with quite some potential and [ do ] projects in an opportunistic way. All of that translates into a high-quality portfolio, balanced risk-reward ratio and dividend payments and a stable credit rating. I talked about diversification. On the next slide, you can see just how diversified our portfolio is. Our total book value of about EUR 2.4 billion is composed of 31% residential, 39% office, 20% retail, 8% hotel and 2% land plots. As you can see on Slide 4, geographically, about 69% of our portfolio is located in Germany and Austria and about 31% in CEE. The book value of properties that have a project development potential amounts to EUR 76.5 million in Germany and EUR 15.9 million in CEE. The book value of our land bank corresponds to a potential lettable area of 400,000 to 600,000 square meters, and I think it is pretty obvious just how much potential such a figure holds. In Germany, we are not only present in Berlin but have expanded also to cities like Leipzig or Erfurt over the last few years, where we identified significant potentials. But let's now go to the details of our results for the second quarter, where our diversification helped significantly to mitigate the effects of the corona crisis. On Slide 5, you can see that total revenues decreased from EUR 101 million to EUR 87.8 million. Hardly surprising, the majority of the impact comes from our hotel business where revenues declined from EUR 26.7 million to EUR 11.2 million, as we practically had no business in the second quarter. However, we could also reduce costs from EUR 18.3 million to EUR 11.1 million, meaning that our hotel GOP was not impacted as badly as the top line suggests. Leaving aside the managed hotel business, our rental income increased from EUR 58 million to EUR 60.6 million, and of course, this is not all cash. And we also had to face a negative impact on bad debt of about EUR 3.4 million on our property expense line. Even [ though ] bad debt increases, we cut back on other cost items so that property operating expenses only increased by EUR 1.1 million over prior year. As a result, our gross profit decreased from EUR 52.7 million to just EUR 45.7 million. This is nothing to be happy about, and we will continue our strong efforts to limit the impact of the crisis. However, things could be much worse and would have been much worse if we had not had the portfolio we have and if we had not done our best operationally to minimize the corona impact. In line with gross profit, EBITDA went from EUR 43.3 million to EUR 36.1 million. Flipping over to Slide 6, you can see that, despite the effects of the corona crisis and due to our diversified portfolio, valuations were positive and reached EUR 10.2 million. Of course, we couldn't make the record high of last year. And as we will see later, we will have ups and downs within this number, but to have a positive net figure from our appraisers is something we are quite happy with given the circumstances. Our financial result is impacted by one big thing, as IMMOFINANZ and CA Immo shifted their AGMs to the second half of the year and we are missing over of last year's dividend income of EUR 17 million in Q2. At least partially, we consider this to be a timing effect. On the tax line, you can see an improvement of about EUR 19 million, which is mainly due to the shortfall of property evaluations compared to prior year. Overall, therefore, our consolidated net income came to EUR 16.1 million. To summarize the main drivers behind this development is lower but still property -- but still positive property valuations, and the other 2 main effects are missing dividends and the reduced hotel GOP. Flipping over to Slide 7, you can see the composition of our property valuations and what I meant with our diversification paying off. First, with a total of EUR 32.9 million, Germany is responsible for the positive valuations, but also Austria with minus [ EUR 2.5 million ] and CEE with minus EUR 20.5 million did not far do badly in times like this. Looked at by use types, the picture is also quite diverse. And the upward valuations came from residential and to a smaller extent from office via primarily in Germany, while retail areas and hotels had to face devaluations. Let's now take a look at our financing on Slide 8. To start with, our cost of funding, including bonds, came to 2.28%. The average weighted final maturity of long-term loans amounts to 5.6 years. The average weighted maturity of our bonds is as much as 6.2 years. In addition, we can draw on unused credit lines of EUR 63.3 million as of June 30. Total LTV improved and stood at 44.6% at quarter end. Splitting up: The LTV for secured financing was 33.8%. What this means is that only 1/3 of our property investments is bank financed and that, if needed, we could get additional funds quite easily. The LTV for unsecured financing came to 10.8% as a result of the significantly bigger cash base. I've told you that the average maturity of our loans is quite long, but I am also quite happy in times like this that those maturities are spread out over relatively small, manageable packages. On Slide 9, this fact is shown in more detail. Our next somewhat bigger maturity is as far out as 2024, and even that is just EUR 100 million, with no other maturities in that year or the year before. In general, this is a profile I will not lose sleep over even in challenging times. Flipping over to Slide 10, we'd like to give you a bit more insights into our investments in CA Immo and IMMOFINANZ. Both companies are valued at their market price and had a book value of about EUR 396 million at quarter end. The valuation of both shares is booked through other comprehensive income and doesn't impact our P&A -- P&L via valuations. The cumulative purchase price for those investments was about EUR 435 million. And so far, we received EUR 36.4 million in dividends and expect some more dividend income in the second half of the year. On Slide 11, you can see some of our KPIs in a yearly comparison. To start with, EPRA NAV was impacted by the negative valuations of IMMOFINANZ and CA Immo and came to EUR 23.78 per share, as compared to EUR 24.27 as at Q2 2019. The book value per share increased over prior year and was EUR 18.98 per share, and our FFO I was EUR 17.4 million. If you back out the dividend income of prior year's FFO to improve comparability, we are talking about a decrease of about EUR 6 million. Given the record-high valuations of last year that we didn't have now, our earnings per share came down and to EUR 0.22 per share. On the other hand, our equity ratio increased from 41% to 44%. And last but not least, our LTV improved from 48.8% to 44.6%. Finally, our cash base increased significantly [ end to end from ] EUR 134 million to EUR 224 million. And let me now spend a few words on the development of our share price. On Slide 12, we plotted the share price development since the beginning of the year. Of course, like everybody else, our stock took quite a hit and devalued by about 28%. Still if you compare this to the development of the IATX and the ATX, you can see that we're still a bit less impacted than the market. And with that, let me now hand over to Friedrich, who will talk about the COVID situation and our project pipeline and land bank.

Yes. Thank you, Ernst. Good afternoon, ladies and gentlemen, and a warm welcome also from my side. Before I start to explain the impacts of the COVID-19 pandemic on our business, let me emphasize once more that S IMMO is very well equipped to handle the current challenges. We have a high-quality portfolio, an experienced and competent team in all markets; and are constantly in close contact with all of S IMMO's stakeholders. Obviously, the second quarter of 2020 was hit very hard by the pandemic. And a lot of restrictions were in place throughout our markets, and especially hotels and retailers had to close for a considerable amount of time. As for our rental income, we had to make valuation allowances of EUR 3.4 million in the first half of 2020. As for our hotels that are operated through management agreements, the GOP for the first 6 months of this year was down by EUR 8.3 million compared to the same period last year. Still it is positive to note that we almost could compensate a big part of the income loss by reducing expenses. Another impact is that, due to COVID, the annual general meetings of CA Immo and IMMOFINANZ had be -- had to be postponed, as Ernst mentioned. Therefore, the dividends were not paid out in the first half year as usual but are expected for the second half of this year, but for sure, our financing ability as well as our financing costs haven't been impacted by the pandemic terms of financing are still attractive and might encourage us to make further investments in the months and quarters to come. Still there are a lot of uncertainties; and we cannot really estimate the full impacts of the pandemic on our way of living, of working and socializing just yet. And over the last weeks, a few questions came up. Whenever I discuss this topic with various people, they are wondering in which extent traditional retail will be adversely impacted by an increase in online retail, if remote work and home office will lead to a decrease in office demand. And how long will it take the hotel segment to fully recover? And I'm afraid, Ernst and I, we do not have a crystal ball, but I would like to give you some insights from our experience and our expertise. Let's start with the retail segment. It's not a secret that there has been a trend towards online retail for some time right now. This trend actually started long before COVID-19 was an issue at all, so obviously that give us a lot between different types of retail and retail properties but, and I cannot stress this but enough, shopping centers and high streets offer a shopping experience that cannot be replaced by any online shop. And multichannel retailing will remain very attractive. It is therefore our conclusion that classic retail and online retail will continue to complement each other in a way that is beneficial for both, as we have seen this when also online went off-line, for example, in the past already. The same is well as for offices. Yes, the last few months have shown us that remote work can be useful to work in a -- plus to work in a physical office, but offices will remain essential for collaboration and representation. Working in the same place creates a sense of belonging and loyalty that cannot be reached via web conferences or virtual discussions. Apart from that, we need to distinguish between various industries and work requirements. Not every job can be done from home. Over the last years, also the square meters per workstation have increased throughout our portfolio, and it is safe to say that the concept of modern open-space offices might be worth reconsidering also in the future. So as a conclusion, I'm very convinced that offices will not see a significant decline in demand, especially if they are well located, efficiently planned and reasonably priced. As for hotels, it is clear that it will take this segment the longest to reach the pre-crisis level again, but we are sure that we will be a strong -- that there will be a strong recovery and a lot of catch-up effects as soon as there is a treatment or even a vaccine against COVID-19. At the same time, it is to be feared that not all hotels will outlive this crisis, so the number of competitors will decline. And the quality and location will be even more decisive. And for example, our Marriott hotels in Budapest and Vienna were the first gaining guests and getting back on track after prior crises like 9/11 or the financial crisis 10 years ago. Our conclusion is that a total recovery will take time. We will guess -- we guess that, 2 to 3 years, it will take from now on. On the next slide, let me give you some insights into our portfolio and how we are dealing with our current challenges. I strongly believe that, as a real estate investment company, it is crucial for us to be aware of trends as soon as possible and to adapt to them at very early stages. Always in close exchange with our tenants, we are working on creative concepts, always taking into account that flexibility is key. We also would like to refer to exemplary facts about some of our properties to give you a better feeling of how our portfolio performs at the moment: Good news come from the Arcade Meidling, the small shopping center here in Vienna, where revenues are almost back to pre-crisis level. In Sun Plaza, where shops were closed for almost the second quarter, we are expecting to reach roughly 85% of the pre-crisis revenues as of December this year. Also gastronomy came back strong after the reopening in May, for example. Coming back again to the office segment, I'd like to point out that changes in the office sector are nothing new at all. The pictures shown on this slide give you a quick overview of some of the trends within the last decade, and I am sure you yourself will remember different types of office spaces throughout your careers. Things change. Trends come and go. And it is our job to anticipate them and to adopt them -- adapt to them, but as I said before, offices will remain. As for our portfolio, we have a total of around 870 different office tenants and we are in close contact with all of them. We had a collection rate of office rent of more than 95%, which proves our strong asset management and our constructive communications we have with our tenants. The average office size in our portfolio is 450 square meters, so I'm sure you will agree that downsizing potential through home office is not really an issue on this case. Summing up. As all crises did before, this crisis will also be over at some point. We are convinced that the worst is behind us, and we are cautiously but still very optimistic for the future. Talking about the future, let me now give you an update on our project development and land bank, starting in Germany. Here we can see an overview of our current projects in Berlin and Potsdam. We have planned investments of roughly EUR 340 million for the next 5 years, with expected rents of up to EUR 18.2 million per year starting in '23, '24 at the earliest. In CEE, as you can see on the next slide, there are 3 projects adding up to a roughly EUR 120 million total investment within the next 4 years, with planned rental income of EUR 9 million per year starting in '23, 24 at the earliest again. One of them is an office development in Budapest, where I'd like to show you more details on the next slide. We purchased an area of roughly 9,000 square meters of land at the beginning of last year and are planning to develop a modern and sustainable office building with a total area of up to 38,000 square meters. This building is going to be located on Váci út, one of the main hubs for office space in Hungarian metropolis very close to the metro. We are heading for the building permission for next year, so 2021. Back to Germany on the next slide. I'm sure you are aware of we own a land bank of about 2.4 million square meters of undeveloped plots in the commuter belt of Berlin. Currently we have around 30 projects for medium- and long-term development. Mostly, we are striving for residential usage. The average acquisition costs amounted to roughly below EUR 14 per square meter. The purchases in Berlin's commuter belt are precisely in line with our strategy of buying on an anticyclical basis and securing earnings for the future. We see very attractive long-term opportunities and significant value enhancement potential in these developments. At the same time, the downside risk of this investment is quite limited according to the low purchase prices. Compared with the heatherland of other major European cities, Berlin's commuter belt still shows far below-average levels of property development. The demographic trends and rising prices in Berlin underline the potential of this region quite obviously. We look for exceptional locations. We develop projects with a strong sense of vision and to get people excited. It's also very decisive for the success of the project to take the interests of local stakeholders into consideration and keep the infrastructure and regional planning always in mind. On this slide, you can see a project with a working title "living on the waterfront." So more than 1,000 people are intended to live out there. The project on the next slide will combine the amenities of a charming village square with the pleasure of being surrounded by greenery. What we are striving for is to make most of -- out of a plot, not the most in terms of square meters but in terms of value. We are trying to create space that enriches the village and adds value to those who are going to live there, thus making it an attractive livable area for people who are looking for an alternative to the city of Berlin. We are constantly working on these projects. And all projects are in different, mainly early stages of planning, of zoning, discussions with authorities, elaborating the most possible value for our shareholders in the mid- and long run. Moving on to the next slide, let me summarize our investment strategy, and this is the last slide. S IMMO has been pursuing a sustainable and prudent business policy for more than 3 very successful decades with the aim of constantly creating future income. We apply a business model that is directed towards 3 dimensions of time, anticipating property cycles and benefiting from them. In the short term, we evaluate at what time it makes economic sense to buy standing properties that generate immediate revenues. Currently we are only investing -- investigating very selectively but in all of our markets. In the medium term, we search for properties that allow for quick planning and construction progress. This means that the project is ideally completed within 3 to 5 years. At the moment, we don't have projects under construction, but we focus mainly on zoning and planning activities in Bucharest, Budapest and Berlin, for example. Our local experts continuously monitor the markets where S IMMO operates and anticipate trends in the property sectors. And in the long run, we are going to work on our land bank in the outskirts of Berlin just mentioned a few minutes ago. With that, I would like to thank you for your attention, and we are looking forward to discussing your questions right now.

[Operator Instructions] And we have the first question arriving for today. We will begin with Andre Remke, who's calling from Baader Bank.

A couple of question from my side, please, and starting with your hotel operations. What could we expect here in terms of revenues for the, let's say, 1 or 2 next quarters? Is the trough really behind us? Do you already see increasing bookings or revenues? And is the cost base now stabilized at that level? So could we already expect, let's say, a break-even result in the next quarter? So this is the first question, please.

Yes. Hotels were hit the most, definitely, and this will still stay a bit of time, as we mentioned in the presentation. And we expect a full recovery within 2 to 3 years’ time from now on. The actual situation is quite challenging still, as there is no business travel at all at the moment. There is just the internal guests, I will say, so that all the tourism hotels are quite better off than the hotels in the cities. Nevertheless, we had quite, let's say, good bookings on occasions like the Formula One, that we had 3 Formula One teams in our hotel Marriott in Bucharest, for example, but due to the fact that we do not know if all these kind of congresses and trade fairs are going to be held this year, we -- it's not fair at all to give you any guidance on that. Definitely it will take more quarters to see what the situation is. And as we manage it, it will be the first thing. When we will have some kind of medications or some kind of vaccine, definitely then also the people are going to travel again. And we have made these experiences already in the past when we had the 9/11 occasion, when we had the financial crisis occasion, so we have seen these kinds of going down of a business, but the positive thing is that definitely in our portfolio we have very good locations within our hotels from the Wenceslas Square and here in Vienna and in Budapest, in Bucharest as well. And as we have seen in the past, as soon as business travels are coming back, our hotels are going to be the first ones who are performing quite promisingly in the future, but until we will not see this kind of, let's say, pre-COVID regular business congress and trade levels, we still have to wait until this kind of vaccine is going -- secure medication, that people have the safeness, I will say, to trouble again.

But at least, is it fair to assume that you are operating still at close to breakeven for the time being?

Yes. We have cut the costs dramatically, and I guess this is one positive outcome of that situation.

Okay. So then a second question, regarding your portfolio valuation. I know it's always a difficult point to discuss, but if things could or would be about to normalize, do you see any risks for further write-downs later in the year? So if you recovered, especially based on the residential plots in the first half. Do you see from your current view any certain risks that we come back to a negative result during the year?

So I don't see risks in the -- in our residential portfolio. I think we are on the safe side in this segment. I think in our retail portfolio the worst is behind. In terms of office portfolio, the question is more the general economic situation, if there is an impact or not, yes, but no. We don't -- we cannot give a guidance at the moment, but...

Yes, that's understood. Then a question on your investment plans. Could you provide us with some indications here? Do you -- are you focusing more on existing buildings? You mentioned "selectively." Or you are on full -- all eyes on your potential developments to go ahead with that. Is this the first priority?

No, no, no. We have experts on the ground in all of our markets. We are still looking on all the markets and where we invested in. So the main investment focus is definitely investing in more residential in Germany, in the cities where we already have some kind of critical mass and standing properties as well, not only land acquisitions. And also, in the CEE area there are quite interesting opportunities to acquire, to invest in standing properties. It's mainly office buildings we are looking at but no retail. And also land acquisitions in the CEE areas might be interesting, especially in the capital cities. So we will stick to our strategy and nothing has changed in -- on that topic.

Yes, okay. And the very last question, again on the dividend proposal for the AGM. Is there a risk that the [ envisaged ] EUR 0.70 will not be the proposal, at least from today's perspective?

[indiscernible]. The plan is that we discuss this issue in our Supervisory Board. It's a little bit too early to talk about this, but EUR 0.70 is the proposal at the moment. And we will discuss it if the situation has changed.

Yes.

The next questions for today come from Stefan Scharff, who's calling from SRC Research.

Stefan here. I have just 2 small questions after being very happy that your reval turned positive again. So the first question is your write-downs on your trade receivables. You mentioned in your quarterly report, on Page 10, EUR 3.4 million. Perhaps you can give us here more color which asset classes and which countries these EUR 3.4 million belong to.

Yes. It's -- definitely it's mainly the retail segment, I will say, the retail segment [ at Sun Plaza ].

Yes, it's mostly retail and it's spread out across Germany and Romania. Like Friedrich just said, Sun Plaza is the biggest chunk, but also in Germany we have a bit -- as an accountant, I couldn't say that we are overcautious, but I think you know us, and we probably took an approach that is sustainable, I will say. So the EUR 3.4 million, retail Germany and Romania, and let's see what the future brings.

Okay. Do you, do we have something like a collection rate for your rents, say, for July or also for August after we have the slump in the second quarter?

So regarding office, we always had quite a good collection rate of 95% and above. [ It was another action in second ] -- first and second quarter. Still it's not changing in the third quarter. In July or August, up to now, we do not -- we haven't heard anything on changes on that. And regarding retail, yes, it's not that nice, and that was also the reason for the write-downs. So depending on the regions and possibilities of making turnover. And if -- for example, in Romania, they were forced to close down almost the full second quarter, so they were even not allowed to make any turnovers. Well, it's quite difficult for the companies out there, but things are improving. And what we see right now, especially also in the Sun Plaza, is that we have a footfall of 70% compared to pre-corona situation, so this is quite positive. And you know, Stefan, that most of the turnover is done during the Christmas period, so this gives us hope that things are improving, always under the condition that there is not a second wave which is going to influence in one region or one country or one sector.

Okay. You talk a little bit -- in your quarterly you talked about Budapest, saying that there was not too much demand in the last months, and this could help for an increase in the yields. Can you say a little bit more? What do you think about Hungary and development there?

Yes. Hungary is quite stable. So it's, from the occupancy point of view, there is -- there are no big changes. I think it's a general trend in all countries that, the situation before, that was that all the companies were expanding and looking for more space. Now everything is stopped, so there are no expansions at the moment. And this is a good situation for the existing situations, as we are completely fully let in our office properties. And in Budapest, definitely we see, if the -- as Ernst mentioned, if there is no big downturn in the global economy, I do not see that this is going to make big problems in the office segment. And yes, the expansions are stopped, but I'm pretty sure that they are going to come back next year, as everybody sees that the GDP is growing again. What we also see from the Austrian point of view: So the GDP downturn is not that big, what was expected by the national bank of Austria. So things are -- it looks like that things are better than expected at -- for the time being.

Okay. And if you look at the acquisitions, you could do something to bring up the cash flow and the portfolio size, if you look for the second half of the year. You have a specific portfolio size in mind, what you could buy. Let's say EUR 40 million or EUR 50 million for the second half of the year, in particular Germany, I guess.

Yes, definitely, it's possible. If there is...

But let's hope, a little bit more.

A little bit more, okay.

[ Interesting ]. We have enough cash on the accounts, and if there are good opportunities, definitely we go for that.

Yes, yes, that would help also the cash flow picture, yes...

[indiscernible]. So we will have an eye on that as well.

The next question for today comes from Jakub Caithaml, who's calling from Wood & Company.

It's Jakub Caithaml here. A couple more questions from my side, please, focusing on the write-down of receivables that Stefan just touched on just to help me understand this better. With mostly coming from retail, does it mean that this is -- these are amounts that you have agreed with tenants that may be forgiven for the period as a part of some larger deal, which would include also some discounts for the early months after the opening which may be gradually scaled back, and perhaps in return you are getting some expansion on the lease durations? Or would the receivables be rather attributable to, I mean, some money which may have been owed and now the tenant is out of business and you simply see that it's not recoverable? And it wouldn't really be tied to any sort of agreements that maybe are being made with the tenants kind of as we speak.

Yes. Jakub, [ Willie ] here to answer the question. There's many partial truths in what you said, but the situation is a bit more diverse probably. So generally speaking, the bad debt we booked is not fully attributable to agreements we have. The approach we have to take is to make a fair judgment of all our open positions. And we also wrote -- we even wrote-down receivables that we have no agreement and where the tenant may pay because that kind of prudent approach is required by IFRS, in our opinion. So the clear answer is some part of the bad debt provisions relate to specific reductions being agreed upon already, but mostly it's a general approach of judging the collectibility of what we have in our books. And to give you a number: We have -- about 47% of our receivables have a provision. So that's quite a big number. What we had to do as well, and that's a different story, is if we have agreements already in place, we booked a -- lease incentives in our book. And we also did bad debt provisions on those. So that's a different story. So it's a mixture of everything you said, and in many areas we were able to actually get some return for the agreements. So sometimes we gave some concession, but the tenant has agreed on something as well, like for instance the prolongation of his original lease term and stuffs like that. So it's not always clear cut if discounts will be discounts in the end on a net basis.