UBM Development AG (UBS) Earnings Call Transcript & Summary

Thank you, Haley, and good morning, everyone. Thank you for your interest in UBM and the results of the first 9 months. Q3 has again been a quarter which came in above expectations. Remember, we were guiding you to expect a flat third quarter, and we generated an additional EUR 7 million EBT in the last 3 months. Before Patric is presenting the numbers, let me give you an overview where we stand with UBM in the context of the second lockdown. If you go to Slide #3. The transformation of UBM is in full swing. While we are back at EUR 2.2 billion regarding the pipeline, this pipeline now consists of 50% residential and 30% office. Only 15%, 1-5 percent, are made up by hotel still. We are witnessing a residential boom and provide you with evidence that there is a strong demand for new type offices. We also believe that real asset inflation is going to continue. Our strategy changed to sustainability, technological and emotional intelligence, is additionally supported by this megatrend also governing the fund management industry. I have already mentioned a better-than-anticipated operational results, and we are going to share our outlook for the full year, next year and 2022, of course, based on various assumptions. Let me, however, start with a recap of this year to put it all into context. Slide #4. We started the year 2020 in the old world, a sellers market for real estate developers and a share price of around EUR 50 with an upside trend. And then came corona, the black swan, the first lockdown. We have decided that COVID came to stay and reacted fast and decisive. We stopped all hotel projects, which were not under construction already. We were shrinking the pipeline to EUR 1.25 billion and took write-downs on our hotel operations. The to-be expected reaction of the share price was that it more than halved to EUR 23.60. Since the beginning of summer, we have worked on a new setup, green, smart, and more. Hindsight proves we were right. Amidst a second lockdown, which is not going to be the last one, we have changed almost all hotel projects into other asset classes and reestablished a EUR 2.2 billion heavy pipeline. To the extent the market is looking at small caps at all, the market has been giving us little credit so far, reflected in the share price, which is telling us that an almost 50% discount to book value is equally justified as no credit, no credit to the EBT potential of the pipeline, which could be anything between EUR 200 million and EUR 300 million based on a 10% to 15% developer margin. Fair enough, that's the capital market, seeing is believing. Where do we stand? Please follow me to Chart #5. Here are the facts. EUR 1.1 billion of our project pipeline is in residential. Remember, the most favored asset class by real estate investors at the moment. More than EUR 600 million worth of new type office projects need some more explanation and, admittedly, some conviction. 80% of our projects are in Germany and Austria, the 2 countries where the majority of economists expect the fastest recovery and the strongest macroeconomic reserves. And our largest project in Germany is only partially included as we present you with a 4-year rolling pipeline only. This is the Baubergerstrasse project, of course. Looking at Chart 6, you can see where the optimism for resi is coming from. The last 10 years of real estate inflation pointed a way into the future. Looking at the 3 markets in which we developed more than 3,000 apartments going forward, you can see real estate inflation has been 4x, 4x higher than consumer price inflation. And we even believe that this picture might accelerate as people start losing trust in money. Actually, it's something that the ECB yesterday said is also on their mind. With 1,000 apartments sold in 10 months, we have never sold more in such a short period of time. Interestingly enough, the vast majority has been sold to institutional investors, particularly the market leader, Vonovia. If anything, we see a sales price upside from the experience that we make with individual sales activities. So what about office? Please turn to Chart #7. We see an entirely new market situation with entirely new demand drivers. Demand driver number one is a significantly shrinking appetite for risk on the buyer side. This results in institutional demand focusing on A locations, top credit tenants and developers with a strong balance sheet. The perfect match of these requirements is our F.A.Z. Tower, the Tower for Frankfurter Allgemeine Zeitung. This is why we were able to sell it a few days ago to HanseMerkur Insurance Group. The purchase price of EUR 196 million represents a multiple of more than 30x annual rent, a price at which we have never sold an office building in Germany in the past. However, I must admit, it's been a while that we have sold an office building in Germany. Demand driver number two is our conviction that you can only bring your employees back to office if you're credibly telling them that their office is going to feel as good and as safe as working from home. This means the office is meeting the demand of a post-corona world, which will be governed by the fear of future pandemics or further outbreaks. It can only be achieved by an office which is a lot smarter. This means a lot more of sensors, a much stronger IP backbone and a very different look and feel or emotion intelligence, if you want. It is unthinkable, absolutely unthinkable that you will achieve this by asking your employees to come back to exactly the same office, which they left before COVID. This is why we believe the new world is a nightmare for traditional-type officeholders but heaven for new type office developers. Demand driver number three is riding the megatrend sustainability by developing truly green buildings with alternative building materials and ventilation systems, as an example. As a welcome side effect, we are going to bring down operating costs of such buildings significantly. Does it sound to visionary for you? Let's turn to Chart 8. Within 6 months, we have not only changed a 350 rooms hotel to an office building, we have changed the building right next to F.A.Z. Tower to Frankfurt's first hybrid timber construction office of size, with 17,500 square meters of gross floor area above ground. Don't get me wrong, we are not there yet. However, Frankfurt city authorities, all involved parties on our side and, last but definitely not least, potential investors have shown very strong interest to make it happen. We have tendered the timber construction. And not only have there been more than a handful of suppliers, but we are pretty confident that at the end of the day, this timber hybrid structure comes at comparable cost to conventional construction. That's an important one. And as I say, we base it on the current status of the tender. Finally, let me answer the question, what is this green, smart and more all about. Please turn to Chart 9. First of all, it gives us at UBM a clear new direction as a group. No doubt, sustainability, intelligence in building and a much higher expectation for aesthetics has been in the air for a while. It has been there before corona. But it was more of a side aspect or a byproduct. Now we have put it to the center of what we do in the future. Besides, it is something we find our employees easily embark on. 1/3, 1/3 of our workforce is actively engaged in one of our 7 virtual workshops to define what subjects are going to be put in the focus of our activities, like timber construction under the headline design and construction. Situation for all developers is a bit comparable to entering a gourmet restaurant. All starters sound interesting to the extent you know what is behind some of the very exotic names. But you can not choose 5 starters and 6 main courses and 5 desserts without overeating. You have to choose and compose the perfect menu. This is on which we are working right now. We are going to select a couple of signature dishes and are curious with what ideas our own people come up. We do this for commercial reasons, by the way. With the European Union's Green Deal and the Taxonomy guidelines, the fund management industry is going to go through a rapid change from Q2 of next year onwards. We are producing an independent GRI report for 2020 and strive to provide a consistent ESG documentation, which is ticking the boxes of our investors. Before going into 2021, I would now like to hand over to Patric for the financials. Patric?

Thank you, Thomas, and good morning, everybody, also from my side from the home office. And as Tommy -- as Thomas already mentioned in his introduction, from a financial point of view, we look back at very good 9 months in 2020. And this holds true in all financial dimensions: our profitability, our balance sheet and our cash position. But let me explain one by one. Please turn to Slide #10 for our earnings development in the first 3 quarters. Despite the challenges we all face in our markets and working environment, we have reported a positive result in every quarter in 2020, although we had to compensate for a material negative corona earnings effect, be it our hotel operational business or negative effects from FX fluctuations. In the first 9 months of 2020, pretax profit rose to EUR 51 million, which corresponds to an increase of 10.4% year-on-year. Also, in terms of net profit, we delivered a strong result of more than EUR 33 million. Composition of the result was very different, with more income coming from fully consolidated entities in Germany, and therefore, we had a much higher tax rate in the first 9 months 2020 in comparison to last year. The strong result is coming from our core business, real estate development, which is up and running. The construction sites of our forward-sold projects were making progress and residential sales are doing well, which led to corresponding PoC contributions. The biggest PoC contribution in the reporting period came from our QBC 1&2 office project, which will be completed by the end of this year. The QBC 1&2 is the last part of our major urban development project next to Vienna's main railway station, with an overall sales volume of more than EUR 450 million. Besides that, we were successful in the residential asset class, as Thomas already mentioned. The result includes material negative effects from the current corona crisis. We have been able to absorb some of the negative effects because we took fast and decisive actions. Negative corona effects include the hotel operations' write-downs and also FX effects. Already in Q2, the value of the hotel operating company was written down to 0. This included the book value, shareholder loans and accumulated operational losses. Overall, the effect from the hotel business amounted to minus EUR 15 million. Of course, this figure needs to be reevaluated by the end of the year when we are more clever on the impact of the second wave of the lockdowns. In addition, the earnings include negative effects from FX valuations of EUR 22 million. We had negative currency effects mainly from the Polish zloty. They are reflected in our P&L in the other operating expenses as well as in the at-equity result. All in all, we are pleased with the earnings development in 2020 so far, which is stronger than we had expected right after the corona outbreak. But we are also aware of the fact that the second corona wave has reached Europe at full speed and a challenging Q4 lies in front of us. Please turn now to Slide #11. The balance sheet has so far proven its resilience. Our cleanup work of the last years paid off. Equity increased by EUR 135 million since 2016. This EUR 476 million, we had the highest equity ever at this time of the year. With a balance sheet total of EUR 1.4 billion, this translates into a strong equity ratio of 34.3%. Due to further investments in the course of the next year, the ratio should -- could come down a bit, but we are strongly committed to our target range of 30% to 35%. Net debt was reduced by EUR 180 million in only 4 years. Net debt increased a bit since end of the year and now stands at around EUR 500 million. But if you put it in relation to our balance sheet total, our LTV is still quite favorable for a developer. It amounts to 37% by the end of September and gives us enough room to maneuver when investment opportunities arise. But we have not only prepared ourselves for upcoming project opportunities with a solid balance sheet, we also have built up a reasonable cash cushion. Please follow me to the next chart, Chart #12. On this chart, you can see that we have even more cash at our disposal than before the corona crisis. Let me remind you of our Q1 presentation in May when the effect of the crisis were not yet clear. We prepared ourselves for a hibernation scenario with the real estate transaction market at standstill for up to or even more than 1 year. On top of that, we assumed that the debt market remains closed, not only for bonds but also for project financings. We were hoping that this would turn out to be too pessimistic, but we were preparing for the worst. Now 6 months down the road, our process scenario looks brighter, and we worked hard over the summer to be able to release cash to a certain extent, and therefore, to have more financial headroom when it comes to acquisitions. What does this mean? Sales markets are open. After a short lockdown of the real estate market, also when it comes to residential or office, we were upon the first to be able to sell again on a pre-corona price level or even better. Project financing is possible when quality parameters are met and for high credit worthiness candidates. It is possible to finance projects, again, but banks are much more risk averse than pre-corona. This is true for the project risks stand-alone, but also for the risks, financial fitness of the parental company. Group refinancing, the bond and Schuldschein market were closed and are only opening very slowly. Despite our flat repayment profile, we have started over the summer to evaluate our options when it comes to early refinancing exchange offers. The market is still not where it used to be. But we are confident to successfully tap the market with EUR 50 million to EUR 70 million ticket until the end of the year. So not only cash as an absolute number has changed over the last quarters, but also the risk cushion we need to sustain. Also, in this difficult market environment, we succeed in optimizing our financial structure. We are definitely ready and able to take advantage of opportunities whenever they arise. Now back to Thomas for the outlook.

Thank you, Patric. A great set of numbers. This brings us to the last slide of the presentation, the outlook. It is fair to say that 2020 is going to come in stronger than anybody was anticipating at the end of March, including ourselves. It is going to bring very solid results, less top line and more profits. Needless to say that 2020 is, however, going to come in significantly below record 2019. 2021 is going to see a corona "dent" and a corona delay. The extent is still open in the light of the ongoing uncertainties and nobody is able to say how long this lockdown is going to last or if we are seeing further lockdowns before a vaccine is approved and successfully rolled out so that it makes a difference. It cannot come as a surprise after no project acquisitions in 2020, that in the likely absence of forward transactions in 2021, we still have to rely on percentage of completion contributions to a major extent. The mentioned uncertainties help, however, for 2022, as they increase the likelihood of projects, particularly of nonlisted developers facing increasing difficulties. With extension of bank financings, lack of trading opportunities, combined with lack of capacity to execute construction and mezzanine investors who see the opportunity to turn the money quickly in other projects or other areas of business, we will see opportunities, promised. All of this put together leaves UBM in an increasingly privileged position. We meet the requirements of the banks, investors and tenants. In other words, the likelihood of market opportunities bringing us back to pre-corona earnings levels increases exponentially with the duration of the lockdown, as sad as it sounds. Let me now open the line for your questions, and thank you for your attention.

[Operator Instructions] And the first question is from the line of Julius Stinauer of Hauck & Aufhäuser.

I have a couple of questions, actually. Let me start one by one. I think that's the easiest way. So first, what do you think is the effect of the current lockdowns on your business? Can you already outline the impact from it on Q4? And also given the fact that we are quite -- have moved into Q4 already. And do you expect more hotel write-downs in the last quarter?

Look, the lockdown started after 30th of September. Let's not forget it. It already feels like a lot longer. Most of our hotels are again in hibernation mode. This is true for the German hotels, for most hotels in Poland, but not for all yet. And it is unclear what the subsidies that we are receiving for them are going to be. As you know, there is an ongoing discussion. You can only apply for November since yesterday, I think, or the day before yesterday. So it's a bit difficult to arrive at precise numbers. The key, however, is what are the negotiations, the discussions that are ongoing with our owners going to bring. Because that's the question where we are at the moment completely at the loose end. They have kind of gestundet. They have waived our payment obligation, so we don't have to pay the monthly rents. But it doesn't mean that we don't have to pay them in the future. And it's easy to figure out. We now have 9 months this year, okay, where we had very little business that we could do. Our average occupancy rate, of course, excluding December, but extrapolated December is going to be just above 23%. And then the big question is, what does this mean going forward? And to what extent can we recover the remaining losses as described going forward? If we were able to give a better assessment, of course, it would have been included in the 9-month figures.

Okay. So that -- so you -- but the subsidies for the closed hotels in Germany, I think they will be paid as far as I know, and probably there will also be subsidies for December. So this should put -- like, get some pressure off -- probably off the operators, I assume, but you don't really know the full effect yet, I guess.

Exactly. And it's a number which will not suffice to pay the rental obligations that we have incurred.

And then on the -- another question, actually on the pipeline, your development pipeline. You said that it grew to EUR 2.2 billion. Are there any new projects? Or are there only reactivated projects for the time being? And how do you see acquisition opportunities in the markets developing? So is there anything new coming to the markets? You're saying -- you already said in the last call, you expect that it's coming to the market, but can you actually already see new offers in the market?

It's all reactivated projects. We had -- we didn't do any project acquisitions in 2020, and we didn't do them on purpose. In the first 6 to 8 months, we didn't do them for cautionary reasons. And ever since, it is a little bit like the situation in which soldiers are that are defending the people in the Wild West from the Indians. We are sitting in our round and waiting for the Indians to come. And the big question is when do you start to shoot? If you shoot too early, you will miss a lot. If you shoot too late, they will break through your lines. And that is pretty much the situation as we have it right now. They are our first projects or real estate coming to the market, okay? You hear about the most prominent hotel bankruptcies but -- and potential conversions into other usages, asset classes. But all we see at the moment is all you saw before the tsunami. It's not the tsunami yet. So the question really is what is the best timing and when -- have you kind of kept your powder dry for too long and when is it too early to shoot?

But you still expect that to happen in '21 and maybe in the half -- first half year or rather to the second half or...

Julius, your common sense, what does your common sense tell you? I mean you have friends that are working in less privileged areas than you do. I see people getting now really depressed, okay? I see friends who have never worried about the future since I know them, and I've known them for 30 years. All of this, okay, is not going to be resolved overnight. And the longer you wait, the longer it lasts, and that's the point that I wanted to make at the end of my presentation, the more likely it is, okay, that it makes sense. And if it's only for risk-sharing reasons, to share upside of projects by securing the full financing of these projects, that in many cases, not if they are under construction, but before this point have been delayed significantly. I mean we are talking 9 months minimum. So it is going to come. And as I said, nobody knows. You only know it then in hindsight if you waited too long to shoot or if you shot too early. I'm afraid I can't give you a better answer on this one.

Okay. Understood. Two more rather probably shorter questions. So you sold the F.A.Z. Tower? And what do you think is the impact on the EBT in 2020 already? Do you expect a significant uplift in the fourth quarter, given that disposal compared to the third quarter, for example?

Yes. That is a question I would take. Yes, of course. So selling the F.A.Z. Tower is giving us some tailwind when it comes to our PoC in the fourth quarter. What I would see from today's point of view is roughly that we are talking about EUR 7 million to maybe EUR 8 million. This is coming from the fact that we are facing here at equity and that we get the numbers only in after we have already taxed them. And in Germany, the tax rate is quite high. I made that point also in my presentation when it came to why is the EUR 51 million only translating into EUR 33 million net income. And when you have a net equity, you see that already far, far above the tax line. So that is the reason. The answer is yes, some tailwind from this one, but let's see what headwind we are getting from the quarter from the corona effect.

Okay. So you say EUR 7 million to EUR 8 million EBT, was it, right?

Yes.

Okay. And my final question is really, are there any potential upside trigger for '21? Because you said like in '21, it will be rather maybe a flat year compared to 2020 or no, nothing really exciting. So do you expect -- or are there any potential upside triggers for next year that could probably turn this '21 into a better year maybe?

Well, we have a couple of projects where we have to make the tough choice, are we selling them, okay, or are we executing them? Of course, if you execute them, the absolute contribution -- earnings contribution might be higher, but it comes in later. Or do we actually sell them with the additional value that we have created for them, which could be right to a building permit. And that is what we are currently contemplating to make the year 2021 a dent, okay, a delay. But it's too early to really report about it.

Okay. So I understand you have some options possibly, but you're still thinking about it. That's...

Yes. And options always depend on -- we are not alone, we need to find somebody who's prepared then to come up with the price that we are expecting.

The next question is from Simon Stippig of Warburg Research.

Can you hear me?

Loud and clear.

Perfect. So my first question, I would also ask them one by one, is regarding the timber tower in Frankfurt. And I would ask if you could please give a little bit more of an insight into the construction time and also the cost per square meter and maybe the CO2 advantages versus conventional construction.

Yes. We don't have a building permit. And before you have a building permit, it's almost impossible to give you then a completion date. All I can say is that the Frankfurt authorities are very, very comforting because they also want to have timber construction office in Frankfurt. So that's encouraging. We don't give cost per square meter prices, but we gave you a hint in our presentation that we believe based on the current tender that we have been running and more than expected participants, i.e., more than 5, more a number of 10, that we get very competitive prices. And at the end of the day, it could be that we come out with a price that is comparable to conventional construction. And last but not least, it is very attractive for investors based on early-stage discussions that we had with them to invest in green because as from 1st of April, okay, they will have to prove that a certain percentage of their investment is in green investment. And so they are all keen to look at this investment opportunity even if it's somewhat smaller than the F.A.Z. Tower.

Okay. Great. And just in total volume, what do you expect in rough, either construction costs or selling price?

Well, the sales price should be close to a 3-digit million price.

Okay. Great. And then second question would be in regard to the Frankfurter Allgemeine Zeitung Tower sale in Frankfurt. First of all, congratulations. And my question would be your forward sale contract to HanseMerkur, what exact performance metrics on rental level and vacancy are included there, if any?

Well, thank you for the congratulations. Obviously, the tower is rented out for 15 years to F.A.Z. So it's 100% occupancy rate. No performance level on this one. And we have to hand it over by end of Q3 2022 with the standard quality parameters that we have, okay?

Okay. Great. So there's -- I mean, logically, there should be no issue in actually finishing the tower and also providing it in the standard quality parameters to HanseMerkur at that time.

Looking at the last 147 years, no.

Okay. Great. That's a good -- very comforting answer. And then maybe 1 or 2 questions to Mr. Patric. So in regard to the balance sheet, we saw the financial liabilities increase to around EUR 0.25 billion from EUR 200 million in Q2 '20. Could you just explain that a little bit what that was and for -- maybe even for what project, that would be great.

Yes, of course. So one project, which kicked into this one -- or let me say, what we did at the beginning of the year and also with a short break after the corona crisis had made it able to again finance projects. So we had this in Baubergerstrasse. That is one of the big projects here which started. We have acquired that last year, first of all, with equity. And when we started it, we financed it and then we got a good part of the equity back because that was -- that is a standing and refurbishment of the standing. So you have a big block you paid at front, and you got some of that back, so you have a jump in the credit. Then there were the hotels in Poland with Mlynska and Mogilska. They were presold before the crisis, but they had to be financed in the crisis, which worked out. And a smaller part of the, what you call, jump is also coming that for the one or the other project, an unencumbered one we started to have a financing on them. So these are the major items. But most of the so-called jump or increase is just coming from projects which are started to go into the construction phase and being tapped from the bank financing loan.

Okay. Great. And then one question maybe to the cash flow statement. Also, there was an increase in the investments in PP&E. And to -- maybe that will also be great just if you could give me a little bit of more detail to where the capital was allocated to? Is it again in Baubergerstrasse or is it...

No. That is not in Baubergerstrasse. That is more -- most of it, I think you referred to the roughly EUR 20 million, going into this number. This is predominantly coming from Kneuterdijk. That's a project in Netherlands, a hotel we have already started before the corona crisis and which we built until the end, of course. And then there is a smaller part going to the Polish projects because they needed a bit more equity. We have financed them meanwhile. But nevertheless, you need -- we needed to bring up the equity at the start, and that's basically it. So the biggest part of that is coming from Kneuterdijk.

Okay. Great. And one last one to -- in regard to your standing assets. The Poleczki in Poland, that just sort of decreased a little bit in value, not by much, but still 3%, a bit more than 3%. Could you explain that from last -- I think it was from Q2 onwards.

Yes. That is the currency fluctuation. We have not revalued it. Because your question is probably hinting into this direction, have we revalued anything there? No, the answer is no.

Okay. Great. And maybe just one last one. Roughly of your EUR 2.2 billion, roughly, how much of that is already forward sold in your volume?

Thomas, question for you or should I...