TAG Immobilien AG (TEG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the TAG Immobilien AG Conference Call on the Annual Report 2019. [Operator Instructions] Let me now turn the floor over to your host, Martin Thiel.

Yes. Many thanks, and good morning, all. Welcome to our full year 2019 conference call. Thanks for dialing in. As always, we will start with the presentation, which is available on our website. And perhaps some of you already see via the webcast that we present to you. And of course, afterwards, as always, we have enough time for questions. So looking at the highlight slide for the financial year 2019, first of all, I think it's fair to say that we had a really good and strong fourth quarter on the operational side. This is shown by the vacancy development, which was definitely positive, with the reduction in the vacancy of the residential units of 40 basis points in the fourth quarter, so from 4.9% to 4.5%, and to create a [indiscernible] total portfolio, the overall vacancy, that means including the commercial units that we have and including all the acquisitions that we made during the financial year 2019 vacancy was, for the first time, also below the 5% mark at 4.9%. Like-for-like rental growth at 1.9%, I would say, more or less in line with the previous quarter. The total like-for-like rental growth, including the effects of vacancy reduction was, of course, stronger, it was 2.4%. Good development in the full year for the FFO on an absolute amount and on a per share basis, a 10% increase year-on-year. Finally, we ended up at EUR 160.6 million, which was also above our guidance. Also, good developments regarding the EPRA NAV and the LTV, both numbers strongly driven to the positive way caused by a full year valuation by CBRE we had in the fourth quarter. EPRA NAV now stands at EUR 20.45 and LTV is down to below 45%. Looking at -- in a quick overview of acquisitions and disposals. On the acquisition side, we stated the 1,331 units that we, I think, already reported for the Q3, but after balance sheet date, we already signed in January in Germany in other portfolio of 431 units. I will come back to the acquisitions later as well as to the portfolios. We have basically 2 kind of disposals this year. First of all, something that you know also from the last year, 568 noncore units were disposed. The closing of this noncore units will be or was already in 2019, some of them in 2020. Basically, it's, let's say, half of noncore units is already done. So we will also in the future have some noncore units disposed, but that's more an ongoing process. So what we reported, I think, 1.5 or even 2 years back, a larger amount of noncore units of around 2,000 units, that's now basically done. Then secondly, this is something especially for this financial year, we were very happy that we signed in December 2019 a contract for disposal of 1 of 2 joint ventures we have in a commercial project in Munich. And perhaps some of you remember this, a project that basically started in 2013 where we have done with the help of our joint venture partner development projects, something that is quite unusual for TAG, but has historical background, and we were very happy that we signed now the first page -- the first 2 joint ventures in December 2019. We can't disclose the purchase price. So hopefully, you understand that it's confidential, but just looking at the net cash proceeds we expect from this commercial project, this will amount between to -- numbers between EUR 55 million and EUR 60 million. That includes our key shareholder loans, adjusted [indiscernible]. The amount of TAG shareholder loans are definitely the lower part of this total net cash proceeds. Closing will be expected at the end of financial year 2020. And the second stage or the second joint venture, which is basically Döbeln, right next to the first building. We expect here that the disposal will take place perhaps end of next year or beginning of 2022. So also for the second stage that should be a very positive effect. Then on the next page, a quick look at the portfolio valuation that was done by CBRE, again. I would say similar positive results like we had in the first year or the first half of 2019. So all in all, we ended up at 8.6% annual uplift, and valuation levels are now at EUR 1,000 per square meter. Or to be more precise, EUR 1,030 per square meter and a 6.1% gross yield. On the financing structure, at this time, just a quick comment or something to point out, which is, I think, important, there's a new LTV target. We have reduced the LTV now with [indiscernible] gain to 44.8%, and we think that definitely makes sense to adjust the LTV target accordingly. So the new LTV target stands now at 45%. This is down from 50% at [indiscernible] before. I already mentioned FFO was very positive in 2019. So EUR 5.6 million above our guidance, 10% increase year-on-year. And where, consequently, we also are adjusting, that means increasing the dividend for the financial year 2019, as we have overfulfilled our guidance. So the new dividend proposal to the AGM in May this year will be EUR 0.82 after the original EUR 0.80 for financial year 2019. On Poland, you know that we have acquired all shares in Vantage Development already at the end of last year. The signing took place in November. On the 13th of January, also the closing took place. So now we are a full owner of Vantage Development. The company has, at the moment, a secured pipeline of 5,400 residential units. When you remember the call that we had in November, at that time, we said, well, this is mainly concentrated or solely concentrated on Wroclaw. Now our second location, as planned, is already in the pipeline. And that's Poznan, where we have, in the meanwhile, approximately 1,000 units secured in transactions in the fourth quarter of 2019 or in the first weeks of 2020. Then looking at the P&L, the income statement. Some comments on the main development. The increase in net rent year-on-year was up by -- the rents were up 4.2%. That translates into an increase of EUR 12.8 million. Of this 4.2%, 2.4% was due to our like-for-like rental growth. The rest is coming from portfolio acquisitions. Not all of the acquisitions in 2019 have already closed in 2019, so we expect something to come in 2020 as well. The increase in net rental income is even stronger than the increase in net rent. We consider to be -- this a very good sign. Especially, it's remarkable that we have a little bit lower maintenance costs in 2019 compared to 2018, so that's nearly EUR 1 million lower maintenance cost that we have, so therefore the improved net rental income should be definitely a positive outcome. Also, the increase in net income from services was very positive, EUR 3.3 million up. That shows that our service business, which mainly refers to caretaker services, multimedia and energy service, is in a very good way. I think I have to explain the development in other operating income. Here, we have a reduction of EUR 4 million, but other operating income is, to a very large effect, driven by one-off effects. And perhaps remember that we had last year a larger reversal of a provision for real estate transfer tax risks. We made this provision originally in 2017. And now, the full risk is time [indiscernible] so that the courts reversed the provision in full, but the remaining amount in 2019 was lower than in 2018. So this is the main difference. So if you adjust this for one-off items, I think the other operating income level is on a stable level. Looking at the net financial results. The net financial result was reduced by more than EUR 20 million quarter-on-quarter, but this is definitely also the very largest part a noncash effect. At the end of the fourth quarter, we had, again, the fair value valuation of the equity option of our convertible bond and debt cost and noncash expense of EUR 29 million. Looking at the net financial results, which is relevant for the FFO, so really, the cash result, it was stable quarter-on-quarter. If you compare the years 2019 with 2018, we had an improvement in this net financial results by EUR 9 million. The income tax in financial year 2019 was higher than in the previous year, but this increase mainly refers to deferred taxes, looking at perhaps more interest in cash taxes. Yet, also, we had an increase by EUR 3 million, but looking at income tax rate, so based on the pretax FFO, it is still at a very moderate level at 4% after 3% in 2018. Now I'm on the next slide. Quick look on the development in EBITDA, FFO and AFFO in detail. So the EBITDA margin stayed basically on the same level. I already mentioned that the FFO development was very positive, a 10% increase year-on-year, driven by the EUR 8.3 million higher EBITDA and improved net financial results by EUR 9 million, and this had an opposing effect or we had an opposing effect with EUR 3.2 million cash taxes. But not only the FFO increased, also the AFFO improved by 6%. So an AFFO improvement year-on-year by EUR 5.5 million. And yes, we had higher CapEx in 2019 compared to 2018. But I think looking at the split of the CapEx, it's remarkable and positive that this higher CapEx is not driven by capitalized maintenance. It's really driven by modernization CapEx. I will come back to this a little bit later when looking at the different regions. So summarizing investments already at this stage, the maintenance was even a little bit lower than the prior year. Capital maintenance, also, a little bit lower than in the prior year. And what has driven the increased investment, not necessarily, but higher than the year before, is really the modernization CapEx. Then on the next slide, the balance sheet. I think there's nothing really special to mention here, except perhaps one position I want to explain shortly. You see in a separate line item, in the current assets, the prepayment on business combination, EUR 131 million that the total transaction price that we paid for Vantage Development. And splitting this total transaction price in the component leads to the picture that is as follows: We paid EUR 131 million to the sellers, and EUR 46 million were directly repaid to us for the disposal of the commercial segment of Vantage Development. So the net price for the acquisition was EUR 85 million. That's the number that you remember from the call in November last year. Then on the next slide, the development of EPRA NAV has shown a strong increase year-on-year by 18%. If you exclude the dividend payment of EUR 0.75 that we made during the year, the NAV growth was even 22%. And of course, this was mainly driven by the portfolio valuation. So the effect on a per share basis by the very positive valuation that was already EUR 3 per share. Then on the next slide, a quick look on the financing structure. I think it's still important to point out that we have ongoing refinancing potential. So we have already materially reduced our average cost of debt, which stands now at 1.7%, but there are still more than EUR 300 million of bank loans maturing in the next 3 years. So this year and in the years 2021 until 2022. And looking at the average coupons of this bank loan, there's still close to 3% per annum. So every bank loan we are today refinancing brings us further interest cost savings. On the next page, you see more detailed the development of cost of debt and the LTV. That's just something -- important thing to add to the development of cost of debt. This 1.7% cost of debt is based on the maturity of more than 7 years, so 7.4 years exactly, and is based on nearly 99% fixed rates. LTV, I already commented that now for the first time below 45%. And we said always in the past, while delevering on the -- with the high valuation gains is for us economically something different compared, for example, to really repaying debt. And you know that we look on the financial side much more from a cash flow perspective, from a perspective of maturities and of fixed rates. So therefore, for us, it was very natural to reduce the LTV target now to 45%, and it should ensure everyone that we will continue financial policy, which was, from our point of view, very reliable, very conservative as well also in the future. On the next slide, you see the development, and they're, for us, very important, strong -- very important financial metrics, like the ICR, like the net financial debt to EBITDA. And I think not so many companies are reporting this figure, but we think that makes sense to show it, the net financial debt in euro per square meter, which still stands at a very moderate EUR 460 per square meter. Then let's move on to the slide that shows rent growth and CapEx allocation. I already said, 1.9% was the like-for-like rental growth, without vacancy reduction. Including vacancy reduction, 2.4%. The split of this like-for-like rental growth was also very comparable to the developments we showed in the previous quarter. So still, the largest part is coming from rent increases for existing tenants and from tenant turnover and only a very small part, 10 basis points, and it's, I think, unchanged during the last quarters for modernization programs for existing tenants. Looking at the total investment behind is an increase year-on-year from formerly EUR 19.2 per square meter now to EUR 20.4, so that's not a massive increase, and it really includes basically everything, so total maintenance, total CapEx is included in that number. And perhaps to explain this EUR 20.4 per square meter number a little bit more, and if you look at the maintenance and CapEx split by region, you see the 20% of the total maintenance and CapEx went to the Chemnitz region, and you have in the appendix table where you see a detailed breakdown maintenance CapEx by region. So if you add up the number for Chemnitz, this was EUR 45 per square meter. So really, for our normal numbers, an exceptional high investment, but which paid off. In the Chemnitz region, we had a reduction in vacancy rates of nearly 200 basis points, with a 3% like-for-like rental growth in Chemnitz. So therefore, this modernization program that we started also to a larger extent already in the first half of 2019 really showed their success. And therefore, it's a high investment [indiscernible] more than justified. But still, to summarize that, we think that with a total investment of around EUR 20 per square meter, achieving 2.4% like-for-like rental growth, this is still a very good number. On the next slide, you see an overview of the vacancy reduction for the financial year 2019 and the year before, ending up with a 4.5% vacancy rate in the residential units. So that means on a like-for-like basis is something that, of course, was very positive for us. So therefore, you can see that, of course, the, let's say, reduction in basis point is not going to be more than 100, 150 basis points in the years before. That's clear because the vacancy rates are now on a low level, but still there's potential to improve that. Then looking at the portfolio valuation. We think that the numbers are definitely positive. They're absolutely in line with the first half of 2019 with the financial year 2018. So percentage-wise, yes, it's very clear, now the annual uplift with 8.6% is a little bit lower than last year, it was 10.1%. But if we look at the absolute numbers comparing the different years, EUR 413 million to EUR 414 million. So it's basically in line. And it shows that the trend is still there. The positive trend of valuation that we see in the market. Looking at the overall levels, and we are now at 6.1% gross yield, so that's the in-place yield based upon the current rent, that includes also the nearly 5% vacancy rate that we have on the portfolio that translates into EUR 1,030 per square meter. So that should be definitely also a level where further valuation gains are something that one should actually expect. Of course, for us, at that stage, it's not really possible to estimate any valuation gains for the financial year 2020. That's percentage-wise. As in 2019, you should expect a reduced number, but that the general trend in our portfolio is still very positive. That should be out of doubt. Then coming to the acquisitions of financial year 2019. I already mentioned that we acquired after the balance sheet date another 413 (sic) [ 431 ] units in Saxony-Anhalt. And for -- in the full financial year 2019, we acquired 1,300 units. We're very pleased with the multiples of the gross yields that were the basis for these acquisitions. So for 2019 acquisitions, all in all, the average gross yield was 8.3%, based on the current vacancy rate of, on average, 11%. So that was definitely positive outcome of our acquisitions in 2019, that we were still able to acquire at attractive yields. We cannot disclose the exact purchase price, the exact yield for new acquisition 2020, but I think a comment is fair that it should assume that it's similar to what we have acquired in 2019. But looking into acquisitions for 2020s or that look -- means looking into our pipeline, I think this 8.3% gross yield is something that you should not expect for the full year. So that should move more towards, let's say, 7% or 7.5%. Just to make this clear, in line basically with the positive trend that we have on the valuation side, of course, another effect is that we see a slightly increase in prices or increasing prices also in our markets, which has been a good news for the portfolio, but acquisitions then are a little bit more pricey, but still the 7% gross yield, if this would be the case for the full year financial -- full year 2020 would be definitely something which is very, very positive. On the next slide, you see the disposals, 568 noncore units that we disposed, and it's important to mention that these are really noncore units, so that means noncore in the sense of construction quality that is a little bit poorer or especially locations where we think, perhaps today, it's okay to operate that. But in the future, that means in the next 5 to 10 years, we have to have adopt whether this is really something very successful. So therefore, this explains the 8.3% gross yield, which was the basis for the purchase price -- for the selling price and the 19% vacancy rate. And in this case, from our point of view, this 19% is something which is not contrary to the acquisitions that we made last year, and that's our potential. And then coming towards the end of the presentation, some words on Poland. Just summarizing, again, the key transaction terms. We acquired all shares, so 100% in Vantage Development. Vantage Development, very successful developer based in Wroclaw. That's also the city where the main pipeline of the company currently is. I already mentioned that our net consideration amounts to EUR 85 million, so this was effectively, economically, the purchase price that we paid. And I can tell you that we also acquired the cash, which is in the balance sheet. If you deduct the cash position from the year-end balance sheet, which was around EUR 36 million, leaving out any cash from the commercial property segment, so that's kind of really [indiscernible] purchase price in an economic sense was more around EUR 50 million. So therefore, we consider this price as definitely very attractive. The transaction closed at the middle of January, so on the 13th of January. It was very much planned. We're very happy and very proud that the team is absolutely full in place and highly motivated. So Vantage has currently a platform of approximately 100 employees. All of them are still on board. All of them are very much looking forward from our point of view to work with us on a basically new business model because we wanted to change, at least, the largest part of the business of Vantage from a residential for sale models to residential for rent models. On the next slide, you see a quick overview over the -- regarding the pipeline of Vantage Development. So for now, it's 4,400 units based in Wroclaw. If you compare it with the 5,300 units that we communicated at the signing date, the difference of approximately 900 apartments is simply the number of apartments that Vantage now handed over in the fourth quarter to customers. So therefore, it's now 4,400 units in Wroclaw, and new -- an additional 1,000 units in Poznan secured for our renting business in the fourth quarter of 2019 or in the first quarter of 2020. As we already told in our conference call in November that Poland is really a mid-term project. So therefore, 2020 will be a year we will see earnings from disposals of Vantage and the first rents will be collected towards the end of 2021. And our mid-term target is still unchanged, and we're very optimistic and very positive that, that's going to be fulfilled, to have in the next 3 to 5 years between 8,000 and 10,000 units in Poland. As you see the numbers, what we think are quite attractive gross yield and quite attractive margins. We will provide you with more details on our plans in Poland with the Q1 figures. So now after the closing, we are really working with the management team of Vantage on a more detailed plan, especially on a split between residential for sale and residential for rent apartments upon the timing of rent. So therefore, our plan is, when we publish the Q1 figures on the 14th of May to provide you with a guidance for the year 2020 for Vantage, which is then basically disposal results, and perhaps that's even more relevant for the years 2021 onwards with our guidance, what kind of rent levels one could expect from the current pipeline and perhaps from projects under negotiations. So that is perhaps easier for you also to put it in the model. And finally, we have already announced that we are doing our Capital Markets Day in Wroclaw on the 26th of May, so then maybe 2 weeks or those 2 weeks after the publishment of the Q1 figures. So perhaps it's interesting for you to go there to have a better understanding of the business that we're doing there and to get more interest from the, what we think, very promising residential for rent market in Poland. Finally, some concluding remarks on our guidance for the financial year 2020, which for now stands is unchanged. So the FFO guidance is still at EUR 168 million to EUR 170 million, and the dividend guidance still stands at EUR 0.87 per share, but it's now -- I think it's clear after we had really a good fourth quarter as well, the guidance for 2020 should look very much doable. So therefore, we are very optimistic regarding our numbers for 2020. That's it from my side. Thank you so far for listening. And of course, now we're very much open to take your questions.

[Operator Instructions] And it looks like we have the first question here from Kai Klose, he's calling from Berenberg.

Yes. I've got 2 questions on the annual report. First of all, on Page 128 regarding the end contribution from services. We had a margin expansion of around 150 bps. Is this still a bit of -- kind of -- because [indiscernible] in a bit of a [indiscernible] or is this further efficiency gains to be expected from this segment also here in 2020? Second question would be on the personal expenses, the split here on Page 129. Of course, we had higher cost for caretakers and craftsmen, but also the employees in operations went up [indiscernible] segment by 16%. Also here the question, is this now a level which you expect to sustain? Or are they any -- or were there any one-offs or special items in the last year, which are the reasons for the persistence in cost? And the last question would be on the portfolio split. In the presentation on Page 29, you have the regional split of maintenance and CapEx. And could you indicate that after the high amount or the higher amount of CapEx spent in Chemnitz to say any new region in Germany where you intend to ramp up the portfolio investments to a similar level as it was in Chemnitz last year?

Okay. Thank you, Kai, for the questions. Perhaps I'll start with the last one. What's perhaps the main focus for 2020 regarding CapEx. Still, Chemnitz, of course, will be a region where we invest more. That's not that massively as we have done that last year. That was clear. And another region where we definitely invest more is the Berlin region. And you know that this region is at the moment very promising. If you look in our presentation, in the appendix, we showed like-for-like rental growth numbers of the Berlin region. And for example, in 2019, we achieved a total like-for-like rental growth of more than 4.1%, out of which 3.2% were also the like-for-like rental growth without vacancy reduction. So therefore, we're investing here more. But the idea of this more CapEx in the Berlin region is definitely also to reduce vacancy. And if you remember, our bank book and half the portfolio, there we still have high vacancy rates, and this is especially a place or a location where we will invest more. So you should, perhaps for 2020, expect lower CapEx in the Chemnitz region but more CapEx in the Berlin region. I would say, overall, perhaps, at similar level across the regions than we had in 2019. And looking at the development of personnel expenses. There are -- there's nothing that you should have in mind for 2020 regarding a strong increase. The increase in personnel expenses is then, as I said, on [indiscernible] driven by the extended service business because we showed the personnel cost for the service business not in the line item for the service expenses, but in the personnel expenses as long as it refers to salaries. You should also not expect stronger increase in the administrative costs. So what we expect, for example, for increases in salaries in total is perhaps something at around 3%, just to give you an indication. What we have planned for the financial year 2019 is perhaps some more bonus payments for some of our employees. So therefore, it's a little bit increased towards the year-end. But I think there's nothing really, trend-wise, looking at it, that should be taken into account when looking at future results. And then regarding the margins of the service business, yes, margin improvement is definitely there. But looking into the future, I think the next steps are here a little bit smaller. The big jump in income from services -- results from services was between 2017 and 2018. Now we're really continuously doing this, but you should assume perhaps a similar margin for 2020, like in 2019.

The next question comes from Sander Bunck, who's calling from Barclays.

Two questions from my side. The first one is on your values and how currently the discussion with the buyers are going. And I appreciate you don't want to necessarily comment on what you expect for potentially 2020, but more to get a bit of a flavor of how -- in your discussions, how are valuers currently looking at the general residential climate in the sense of potential regulation. Do you think they're getting more cautious, and as a result, are potentially more reluctant to push through yield compression? Or are they saying, and particularly in your case, like, well, given that your portfolio is still relatively conservatively valued and there has been less -- probably less regulation impact in your regions, it is not really an issue? So that's the first one. And the second one is on potential further acquisitions. Now obviously, you've shifted slightly your investment profile probably going forward into Poland. But is there opportunity to be a bit more aggressive in your acquisitions in Germany, especially where your LTV currently sits with share price rating? And are there potentially any opportunities there, particularly with units with higher vacancy, where you can basically increase vacancy through CapEx?

Yes. Thank you, Sander, for the questions. Starting with the valuation question, so the question was more or less what is perhaps the impact of potential regulations both in our region and the relation. My impression is that this whole topic is completely left out in the current valuation. So for example, I mean for us, this was nothing really material. The real burdened portfolio that we have, which is a little bit more than 300 units, there was not a write-down on this portfolio. This was simply valued, I don't know the exact increase, but I would say, more or less like in the previous quarters, simply augment from our valuers was here that what they observe in the market are still stable or even slightly growing transaction prices, of course, coming from smaller disposals they observed on the market. But they say, as long as we not really have evidence that, for example, any regulation will really reduce its prices, we continue like in the past. So therefore, especially in our regions, there was not any influence on regulation risk regarding valuation. And also now to the contrary because you can, of course, argue, whilst should not our regions, especially, for example, the Berlin commuter benefit from any increased risk in the city of Berlin. Also, this was not the case. So I know there's a big discussion around that. And for a good reason, a big discussion about regulation risk. But looking at results from valuers, our impression was that this had no impact on the valuation in 2019, once or more or less a really a formal valuation, but it's observable really in concrete prices on the market. And so far, we have seen no reaction. Whether this changes in 2020, that's difficult to predict. But I think for our regions, you can be completely sure that this would be, from our point of view, perhaps the least affected one, if regulation really would spread out of Berlin. Regarding your question, 2 acquisitions. Yes. Also, we are a little bit more aggressive. I tried to point you to that direction a little bit when I commented on the pipeline for 2020 that also gross yields of 7%, perhaps even a little bit lower, of course, depending on the individual acquisitions are for us something that could make sense with our lower cost of capital. That means lower cost of equity and lower cost of debt. So yes, it's clear it's something that we have to accept that we need to go in price levels that are a little bit higher than what we've paid in the past. But one thing should be made here at this stage very clear, we will not pay any price we see just to grow externally. So we will be disciplined, but disciplined today means that perhaps even a gross yield of 7% or lower is something that we would accept.

The next question we have comes from Georg Kanders, calling from Bankhaus Lampe.

[indiscernible] perfectly because I just want to -- is there anything more concrete. You have seen perhaps you're talking about these yields. And when you are suggesting that it's a little bit lower than the 8% last year, so I think you're thinking about further additions in the course of the year.