S IMMO AG (SPI) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the S IMMO AG conference call regarding the annual results 2022. [Operator Instructions] Let me now hand the floor over to Herwig Teufelsdorfer.

Good afternoon, everyone. Happy to have you here for our annual earnings call for the year 2022. With me is my colleague, Holger Schmidtmayr. Let me summarize, 2022 was a challenging year. due to different effects, let's say, starting with the Ukraine war on 24th of February, and being followed by the raise of interest rates throughout the year and also this year, interest in real estate was getting little. We did not see institutional investors anymore from, let's say, April last year on. But nevertheless, I think that we are able to present you very interesting and very positive figures of the year 2022. So I would like to start with key highlights and financials. If we look at the figures, we ended up with the total revenues of EUR 260 million compared to slightly below EUR 200 million in 2021. consisting of, let's say, rental income of EUR 155 million compared to EUR 131 million in the last year, slightly lower occupancy rate of 92.6% compared to 94% gross profit resulting out of this, at the level of EUR 140 million, almost EUR 31 million above last year and gross profit from letting meaning excluding our hotel GOP of the 2 myriads which we run on our own of EUR 126.8 million. Coming to the financial figures, we are happy that we have also been able to increase our funds from operations, EUR 1 per share, lifting it up to EUR 0.92 coming from EUR 0.86 last year. And plus of 50.6% on a year-on-year basis regarding the IFRS book value, including IFRS properties held for sale from EUR 2.8 billion, up to almost EUR 3.3 billion. Results from property valuations was EUR 200 million in 2021. Markets are still getting better and better yields. We are increasing, we have seen this differently, as I already mentioned in my first statement. So the yields we see yield decompression and this led to a new valuation of minus EUR 78.4 million in 2022. And due to our new acquisitions, LTV ratio raised from 40.4% in '21 up of 41.3%, but I think still a very good ratio, leading at the end into EPRA-NTA per share of EUR 26.09 compared to EUR 29.09 more or less driven as positive derivatives in the amount of around EUR 100 million and not included as well, as our core portfolio has changed, meaning that there is more or less no core portfolio within the IFRS statement so far, meaning that only 50% of the deferred taxes were in this. Coming to the annual results already mentioned at the beginning, EUR 250 million revenues. Revenues from rental income, EUR 155 million. Other operating income, EUR 2.2 million, property expenses at slightly below EUR 80 million, hotel operating expenses EUR 43 million. If we compare this with the corresponding parts of the revenues, we see that revenues have definitely risen more then the costs, meaning more business is bringing more gain at the end of the day, leading to the EUR 140.2 million gross profit. Results from property disposals 0, always 0 due to the fact that we are doing a revaluation in the moment that we are selling off the properties. And management expenses in total also have rosen from EUR 28.2 million to EUR 34 million, ending up in an earnings before interest taxe, depreciation, appreciation of EUR 106 million compared to EUR 81.3 million, meaning operational business did really run well. Coming to the financial part, depreciation and amortization slightly the same as in the year before. Results from property valuation already mentioned. We will see that in detail later on. So operating income, EBIT resulting summing up to EUR 18 million compared to EUR 270 million. This is coming from the difference in the valuation, meaning plus almost EUR 200 million the last year, this year, slightly below EUR 80 million of devaluation. Financial results, mostly driven by positive derivatives is EUR 16.9 million, ending in an EBIT of EUR 34.8 million compared to EUR 271 million. Taxes to be paid EUR 15.9 million, meaning 30% tax rate and leading to consolidated net income of EUR 18.9 million. Attributable to shareholders out of this EUR 27.2 million and attributable to noncontrolling interests, minus EUR 8.3 million. This is more or less driven by the capital increase that we had in one of our German holding companies, a capital increase. So we have a minority shareholder there at the level of 10.1% as a real estate tax broker. Moving over to the balance sheet structure as of 31st of December 2022. Looking on this, we are ending up in a sum of EUR 3.7 billion at the end of the day. were the major changes on the asset side, it was the acquisition of the 2 Puravest portfolios, summing up to more or less EUR 450 million. Also the acquisition that we have seen in Bucharest, the export with a bit below -- a bit above EUR 110 million. Also, requalification in Germany in regard of held for sales in our resi portfolio, IFRS 5, summing up to EUR 0.5 billion. Also other financial assets, revaluation of the derivatives summing up to almost EUR 92 million and also big difference in this is, the age of the IMMOFINANZ shares in 2022, slightly below EUR 400 million. If you look at the equity and liability side, what is the major changes looking at the shareholder equity, its hedge accounting on the one hand as well as net income, non-controlling interests the EUR 89 million capital increase just being mentioned before in regard of the German property invest company as well as capital increase of one smaller Hungarian SPV. Liabilities held for sale, we see that financial liabilities, also the liabilities held for sale in the amount of EUR 127 million, meaning this is the loans that we see in our resi portfolio to be sold. Coming to the next chart showing funds from operations, one, having the bridge from 31st of December 2021 to end of 2022. We start with an FFO in 2021, of slightly below EUR 61 million. In addition, rental income of EUR 24 million as well as the hotel GOPs of our 2 Marriots, the one in Vienna, one in Budapest of EUR 5.8 million. Then being -- having a deduction of EUR 1.2 million out of interest, insurances and something like that, then administrative expenses at the level of EUR 3.3 million more or less resulting out of the digitization project that we are running within and also modification of the stuff. And dividends from listed company is going down by EUR 17.55 million, so missing dividends of IMMOFINANZ and CA Immo. And others means banking fees, interest costs as well as pay taxes, summing up to FFO I of EUR 64.1 million. Going on with the valuation results in total, as already mentioned, valuation is down by EUR 78.4 million, more or less coming out of the German portfolio. German portfolio consisted in wide areas of residential. We all know that the yields have come down throughout the last 12, 15 years to, let's say, in Berlin, around 3% or even below 3%. Now that the -- that's the basis rents of the ECB has rose up to 3.5%. We see a yield the compression is. This is where the new valuation with EUR 73.3 million minus in Germany results of more or less similar to the Austrian portfolio. And we had an increase of the values in the CEE countries, especially in our Croatian operation portfolio. If we have a look, not by region, but by type of use, as already mentioned, residential was hit hardest by EUR 55 million, office bit less EUR 11 million, retail also by minus EUR 13 million and hotel by minus EUR 0.4 million. Land plots plus of EUR 2.2 million, whereas we see a slight devaluation within our plots in the sea countries, but having a plus of EUR 4.4 million in regard of our land bank in the commuting area of Berlin. That's so far from my side, and I'm happy to hand over to Holger. Holger, please.

Thank you, Herwig. I may lead you through the debt financing profile more I want to start out with the LTV ratio. So this stands at 41.3%. We have cash on hand as of December 31 of EUR 280 million. This is going to significantly increase by the sales in Berlin residential, which are already [indiscernible] . Indeed, it's unusual times because usually are happy to have cash on hand. But these days with this kind of inflation you're going to invest it quite quickly. And so that's the reason why you can expect further substantial investments mainly in Austria. So then let's move on to the maturity profile. So see, you see that here for the next 9 years. You see bumps in the repayment obligations when the respective bonds fall due. So in 2024, EUR 100 million; 2026, EUR 150 million; and 2028, another EUR 70 million. Otherwise, you have the regular bank repayments there and bank balloons. Regarding the bid structure in loans and bonds. So you can see roughly we have a -- we have 1/3 of our financing is done by bonds, 2/3 by banks. And then you have -- you see the spread out of bank loans, so we're fully hedged on the rate on the interest rate because it's a fixed rate of 8% and be it that the 92% floating rates are hedged on both interest rate cases have a remaining duration of 8.7 years. So we're quite happy with this. In detail, the bank loans currently cost us 2.46%. The bonds 2.05%. And if you add the effect of the derivatives now into that, that pay us currently, you arrive at current borrowing cost of 2.16% given the current rate of ECB, it's quite a good result. Regarding the share, we have quite an adventurous chart here. We performed completely contrary to the market in 2022. So a lot higher, as you can see compared to year [breaks and our peaks ], simply because there was a tender out there by CPI and that basically gave a put option to everybody by November -- until November 18, to put their shares at a price of EUR 23.5 . And that's where the share price rested and then collapsed more or less to and then got in line with the market. So [ lower ] the risks of the market, had anywhere. With a market cap of EUR 920 million currently, the share price was EUR 12.48 at December 31. And currently, it's EUR 13.10 as of yesterday. So you see not much movement there after this rather adventurous here. Shareholder structure, as everybody is aware of, I believe, so CPI holds now 88.37% and there is a free float of EUR 11.63%. Yes, you see your own targets here, some of yours spelled out here, price targets. So moving on to the shareholder structure. As I said, 88.37% for CPI as of November 18, 2022, that triggered a change of control clause in all our bonds. We have a bond outstanding for EUR 700 million. Amazingly, not only 22% made use of this class to put the bonds. So EUR 153.4 million were put so that -- and the rest remains outstanding and is already -- has comparatively high values currently at 80% to 90%. So given the interest rate development, so it shows a certain confidence in S IMMO. And as of the end of December, December 28, CPI sold an amount of shares to IMMOFINANZ, that IMMOFINANZ is now holding 50% and 1 share in S IMMO. Moving on to the development of the yield over the years, you have the chart for the next -- for the last 9 years. So S IMMO has paid a dividend yield of 3.325% during these 9 years. As to the dividend for the last year, no decision has yet been made, we have different signals in the market here. The Supervisory Board shall discuss this within the next few days. And at this time, we won't be able to say more about the subject. Moving on to the strategy and our business model. As you all know, S IMMO is active in the market for 35 years, for 22 years in CEE, for 16 years in Germany, that's what we call long-standing expertise what you see here. And this long-standing expertise we use in buying and selling existing property in letting such property and working it and to do project developments. Second most important point is monitoring market. So to do anticyclical investment and divestments. So Warren Buffet said, be greedy when others are fearful, be greedy when others are fearful. And so when others were fearful to buy in CEE, we bought when others were fearful to buy in Germany, we bought. And it's also the time to exit this. And so we have -- we make use to cash in on value enhancement and potentials for our shareholder currently. So moving on to Page 17, just focus on the second point. As Herwig already said, the sale of low-yielding residential investment and the swap into high-yielding, mainly office properties in CEE is the call of the day and that's what we are currently, mainly working on. So the selling of German residential, the buying of office in CEE in Austria. And by that, we continue to own a high-quality portfolio and a portfolio with a strong earning power in the residential, the earning power comes from an increase in value that we're not cashing in on and in the office, the earning power comes from the actual rents that we're earning. Moving on to the portfolio. The office currently is -- makes -- 55% of our EUR 3.3 billion property portfolio and the resi 25%. And what you will see over the next year is the office portfolio increasing from the 55% and the residential decreasing. We cannot say how fast this will go, depends on market good issues, but this is the general tendency that we can tell you. So hotel and retail, we don't expect many developments here. Moving on to the market and the respective yields. So in Germany, in 2022, we earned a yield of 4.6% in Austria, also 4.6% and in CEE 7.1%. And when you now calculate that we have a fairly even distribution between CEE and Germany and Austria. So 50% of the property totaling in Germany and Austria and 50% in CEE. It's quite logical to move that from the west to the east. And that's what we are doing. By property type, now in detail. So in these 25% residential, 92% are located in Germany and 8% in Austria. So this is the one we will reduce. Of the retail, which is 12%, 50% is located in Romania, 12% in Germany, 31% in Austria. In offices of the segment that we want to increase our investments due to cyclical opportunities and this is 55%. We have a hungry now with a fairly substantial amount. We have Slovakia, Romania, Croatia. What's missing is the Czech Republic, we are already invested in the Czech Republic. Actually, we have been investing in Czech Republic for 21 years with 2 hotels on the [indiscernible] square. What we're still missing various office, so we might be looking at something here to get this nice pie chart a little mixed up with added another country there. Yes. I mean, they are very small markets. You see that Croatia 5%, Slovakia 5%. So we might also consider if that's really a critical mass, which we which we want to pursue or add in them. So that ends the portfolio part, and I may hand over to Herwig again.

Thank you, Holger. Coming to acquisition and sales in 2022. Starting from the latest one, we've been quite successful in selling off low-yielding assets in Germany. So as of December 31, we had sales contracts for 92 objects with a volume of around EUR 219 million, already signed by March 24. There were sales contract 153 objects with volume summing up to EUR 570 million, this includes 41 properties in Berlin. It's the SPV [indiscernible] where we were able to sign some 10 days ago, closing will be as of tomorrow talking about a portfolio of 1,300 units adding up to 100,000 square meters. And in total, in Germany where we see the lowest yields, we have in total more than EUR 500 million currently under review for sale. This is also including commercial properties, meaning that our portfolio in Germany, as already mentioned by Holger will definitely shrink in total. What did we acquire as well. It was the acquisition of the so-called sales portfolio in Budapest, 6 office properties mostly located in VasiCorridor as well as Central and Pest. And all of these buildings are recertified, very good summing up to 124,000 square meters hence bringing additional rental income to S IMMO at the level of EUR 18.9 million on an annual basis. Also acquired the portfolio up parts, 8 high-quality buildings and 1 land plots summing up to 109,000 square meters of lettable space and rental income of around EUR 16 million. So with this acquisition of, let's say, in total for some EUR 450 million, we were able to acquire additional almost EUR 35 million of annual rental income. Acquired in May 2022 was the export business back in Bucharest with 42,000 square meters of lettable area and an annual rental income of EUR 7.9 million, occupancy rate at the level of EUR 96 million. What is the outlook in regard of the acquisitions. The thing is that we have been signing a letter of interest for an acquisition here in Vienna regarding [indiscernible] . And in the first step, we would acquire the so-called twin tower landmark building to the south of Vienna. What is the idea behind this, as this building is more or less 20, 25 years old. The idea is clearly in this regard that we want to manage this to ESG within the next 10 years. So it should be an autonomous building in regard of the energy supply in 10 years' time. And after having refurbished the building, managing it to ESG compliable at the end -- in the beginning of the '30s, there will be also tube, so meaning travel time into the city of Vienna of 10 minutes, having first-class object with brilliant connection to the city center will raise the value at the end of the day, very much. Holger also mentioned that we're having a look on Czech Republic maybe that we are acquiring over there as well. Moving over to the next topic, sustainability. We had in 2022, our ESG strategy launch, meaning that we have been defining 49 goals, including 15 co-goals distributed the growth areas of environment, social and government covering all ESG. First, implementations already done successfully, meaning that one of the targets was that we would like to 40% of the gross level area of commercial properties certified by 2025, due to the acquisition in Budapest, the 2 portfolios introduced before in Budapest, we were able to raise the level already now up to 46% of certified properties, commercial properties within our portfolio. What we've also done is the integration of ESG risks into the group-wide risk management and introducing science-based climate risk management into the company. And review of the entire portfolio for compliance with the used taxonomy criteria. 94.5% of the electricity within our portfolio was purchased from renewable sources. There are still some countries where you do not have the chance to acquire 100% clean energy support. What we've also been doing is by introducing new learning software that we do our mandatory trainings for code of conduct, compliance, human rights policies and these things now in a way of digital support of our employees. Green buildings, screen buildings and ESG reporting ratings already mentioned, almost 46% of portfolio is certified, meaning summing up to 500,000 square meters gross lettable area. We've been also awarded by the EPRA, SPPR Pros SPPR most improved. So SPPR for sustainability best practice report. So we've definitely improved, which was also proved throughout the ESG ratings that we are having, meaning improving in regard of the ISS ESG quality score from an average of 5.67 to an average of 2.33, meaning that we are within the past 25% of the industry. Same with the MSCI ESG rating, getting better from BBB A as well as Sustainalytics ESG risk rating where we ended up in 2021 at the level of 21 meaning medium risk and getting a rating of 15 by end of 2022, meaning low risk. Yes. That's it so far from our side. Thank you very much for your attention, and we would be happy to answer your questions. Thank you very much.

[Operator Instructions] And first up is Stefan Scharff from SRC Research.

My first question would be about the cost of funding. It was slightly up from 2.1% to 2.2%. What do you expect for '23 and '24? And my second question would be about your strategy. You mentioned that project developments are an option? And is this just for the Vienna properties where you just bring the corporate news or also smarter project developments also an option?

Thank you, Stefan. Answering your first question, we do not think that our cost of funding is going to increase, due to the fact that we've been able to ensure at least EUR 200 million of forward hedging by end of last year at a very low level. This is what we've already been using by refinancing the acquisition of part of the Budapest portfolios and due to the fact that we are still -- we are still selling off the German residential portfolio we have enough inflow to acquire new things, but definitely with new financing in total, the cost of funding will increase, but we think at a slightly low level. In terms of development, coming to your second question, we only have been working or have been proceeding with white collar works on the development. So there is no cut the bill or anything else on our plots, and this may definitely not change for 2022. We will not start development. This year, we have the plots. We are trying to establish building permits, whereas we do not have them so far. But we do not think that we are going to deliver new areas within the next 2 years.

Okay. One question to the resi portfolio. It's about EUR 800 million. And what could be the resi portfolio at the end of the year or end of '24 as you had some good trading success in March and already mentioned, the good trading success year.

Thank you very much. Where could we end up in terms of our residential portfolio. The thing is that we -- I think we will come down with our total portfolio to EUR 200 million, EUR 300 million within the next 12 to 18 months, I think, in Germany, part of this can be residential, but we are only keeping residential parts in a way if they show potential in terms of rezoning or things like that. If we do not see rezoning potential this, as an example, [indiscernible] where we have a Berlin office. We see that potential. We're working on these pieces, what we are keeping but everything else that is under breakage just income-producing residential portfolio with no additional potential in it, we will definitely try to sell off.

Okay. And the land reserves as you have some land reserves in Berlin or surrounding Berlin.