UBM Development AG (UBS) Earnings Call Transcript & Summary

Welcome, everybody. It almost seems like yesterday that we had our last conference call, still a few things worth reporting. But let me try to keep the formal part of the presentation short because it is a continuation of what you've heard only recently from us. In summary, the good news we can report is Frankfurt's most successful rental activity in the first quarter and the demand for timber office space. We are unfortunately not able to report "white smoke" regarding the handover of F.A.Z. and the zoning permit for the timber factory at Baubergerstrasse and with 5 weeks left in Q2, it is getting very tight. So our prediction of a weak first half of the year becomes more and more of a reality, and I'm sorry for this. The situation on the transaction market remains unchanged. We still witnessed a complete standstill. Our financials remain strong, even with the repayment of the hybrid bond at the step up date -- step uptake. And as already mentioned, not too much to add regarding the outlook for the first half of what I name the year of the truth for the real estate market. Please turn to Slide #4 of the presentation and let's look at more details. With the rental success of the Timber Pioneer, we can provide first proof of our strategy. It has been the single largest rental activity in the first quarter throughout Frankfurt. Last week, we have concluded an LOI, a letter of intent for the remaining office space, which is encouraging. However, LOI is not the contract, and we have to see what the results of the contract negotiations is going to be. There's also interest by more potential tenants. So I'm not worried to live up to my promise that we conclude rental contract before the summer break. We have an extremely paradox situation on the office market at the moment. Vacancies are rising, and Frankfurt sees more than 1 million square meters of empty offices with the trend even going up. At the same time, we witnessed a rising demand for new work office space. It seems as if employers in a war for talent are prepared to do almost everything to lure their employees into returning back to the office. In other words, a number of companies, particularly larger ones, anticipate further reductions of their office footprint to trim unoccupied office space. At the same time, more than half of the companies according to CBRE survey plan to relocate to higher quality office space such as Timber construction offices. And to the rent level, particularly for this office space is rising with inflation or even beyond. The Baubergerstrasse is shortage of a high-quality supply. There's not only a significant difference between different industries, but also between Continental Europe and the U.S. Interestingly enough, in the U.S., sentiment grows towards either mostly in office or mostly remote works. In Europe, we see mostly hybrid, which might be a function of shorter commutes and less mobility during the pandemic. A lot of office workers in Manhattan are expense with other areas in the U.S. have moved the way to areas like Montana or other places in the country side. They will not return. This has not been the case with the vast majority of office employees in Europe. Bottom line, only the best offices will be successful, but they will be successful big times. Please follow me to Slide #5. The most amazing metamorphosis in our industry can be seen from the composition of our pipeline. While we had a geographic focus on Germany and Austria for a longer time, we now have a very strong focus on conventionally built resi and it can be financed more easily during difficult times with banks getting more conservative regarding pre-realization and equity ratios. What is even more amazing, more than 2/3 of our pipeline is now made up by Timber construction where we have a different situation, as I've explained. This is the future from an investor and a tenant's point of view. Within the Timber construction part, we have an almost equal waiting between offices and resi. Let me hand over to Patric now to present you with the latest finance before getting carried away too much with the longer-term future perspective.

Thank you, Thomas, and welcome also from my side. Please turn to Slide #6 and have a look on the left-hand chart. What we have witnessed in the first quarter was that the situation on the transaction market remains unchanged, a complete standstill. This is reflected in our net profit, which is lower than in previous years, but still acceptable considering the market environment and the business model of a project developer who lives from selling projects. By the end of the first quarter, equity amounted to EUR 445.9 million. The reduction in equity compared with December 31 comes from the fact that we repaid the 2018 hybrid bond prematurely in March. Since the hybrid bond is accounted for equity under IFRS, the equity ratio also decreased as a result. With an equity ratio of 31.6%, we are still within our target range of 30% to 35%. Our net debt increased to EUR 581.8 million and as a result, also the LTV. In summary, our balance sheet still proves relative strength and provides UBM with enough headroom and reserves for the uncertain times we are currently in. Let's now turn to our cash position and repayment profile on Slide #7. Crucial for our solid cash position in 2022, we have the 2 successful ESG-linked capital market transaction in 2021. By doing that, we not only successfully managed to steer our repayment profile towards green financing. On top of that, it gives us a digestible repayment profile for the next 1.5 years to come. Nevertheless, we are prepared to tap the bond market with the green bond whenever a window of opportunity occurs. In order to be best prepared, we published our green finance framework in the first quarter of this year. However, our cash position has decreased to EUR 250 million. Major driver for this was the already mentioned repayment of the hybrid loan in the first quarter. As you can see from the chart on the right-hand side, we have also illustrated our project financing for the full year 2023. EUR 15 million of the EUR 195 million project financing have already been cleared. Typical for a developer, our project financing is structured in 2 phases, the financing of the acquisition of the plot and after having received the necessary permits, the financing of the development phase itself. Out of the EUR 195 million, EUR 95 million are plot financing with the development to be started in the next 6 to 9 months. These EUR 95 million will be transferred to a typical project financing and the rest, EUR 85 million are plot or standing financing, which will be prolonged during the year. May I now hand back to Thomas for the outlook.

Yes. Thank you, Patric. Back to the future are some observations regarding the second half of this year. We have talked about a potential catalysts in the full year call. So let me underpin the scenario with a few facts. Regarding the market in general, there can be no doubt that we see a healthy demand for our products. After all, we do not produce injectors for diesel engines. What I mean is we produce something that the society really needs. And it is demand and supply, which ultimately decides the price of a product. Germany alone is short of more than 700,000 apartments already today, and this number is growing with rising pay negotiated by strong trade unions in Europe, the percentage of disposable household income remained fairly stable around 20% over the last 10 years. And we see construction costs falling in building construction for the first time in a very large period of time. With the cancellation of more and more projects, this should not come as a surprise. Besides, I'm getting not tired of reiterating that standardization and modularization has been bringing down costs in so many other industries. Why should this not be the case in real estate. If cars were still produced as in the early days of the automotive industry, a Volkswagen Golf would cost several hundred thousands of euros. Our total commitment to Timber construction is driven by exactly this idea. We have to move a significant part of the construction process away from the site to the factory. More specifically, regarding UBM, if not timber construction projects can be sold profitably to investors what projects can be sold profitably at all. This combined with money following European taxonomy and the sustainability guidelines gives us a competitive advantage. And this competitive advantage is further fostered by our relative financial strength compared to most of our peers. We are currently going through tough times, no doubt and nothing to smile away. But the stock market has a reputation to look through today and anticipate the future in 9 to 18 months. I have no doubt that the development industry or rather those who are left will strongly benefit from today's crisis within the next 1 to 1.5 years. Thank you for listening. And may I now open the lines for questions.

[Operator Instructions] And our first question is from the line of Stefan Scharff from SRC Research.

Yes. Stefan here from Frankfurt. I have 3 questions. The first question is, Thomas, you mentioned that just 5 weeks left in the first half of the year. And what you think about the closing F.A.Z. Tower and the permit for Baubergerstraße. Is it fair to say perhaps one will make it and the other one will come in the second half of the year, it's 50-50 or something or you think even this might be too optimistic. The second question is about the additional tenants for the Timber Pioneer. I think it's about 2 floors. And what do you expect for square meter prices, I guess, perhaps EUR 26 to EUR 30 or something? Or what is your expectation here? And my last question is for Patric. It's a P&L question. Other operating revenues were up from EUR 1.3 million to EUR 4.5 million. So -- and I think there is a reduction of provision in side, about EUR 1 million or EUR 1.4 million. Perhaps you can say a bit more here.

Okay, Stefan. First of all, thank you for joining us this early in the morning. Now that you're not an early bird, and you would much rather have a conference call at 10:00 o'clock in the evening, but we are having good reasons for this. So you've asked me if there's a 50-50 chance. Well, if you do likelihood, you might pretty much end up there. I'm a bit disappointed about the slow progress that we are making and we are preparing for none of the two events materializing in the second quarter so that we have rather a potential upside than a potential downside that we have to talk you through. We're making, as I said, slow progress, but good progress in both respects. And the reasons that I'm presented with are understandable for me. And you have noticed in other areas that there is a general slowdown in processes throughout Germany. So we are not alone, but that's no help for you. When it comes to the 4,500 square meters. Basically, it's not floors, it's more that a wing is open. You know that Universal has occupied the first floor and the interested party that we are having now a very concrete negotiations, which take the entire 4,500 square meters and they like them exactly as they are. And that would make it much easier than renting it out to several tenants. I think we really offer a unique proposal. And for anybody who has sustainability in their strategy, there is no way circumventing our office. As I said, it's not the only party but it's the one that we've signed an LOI with. And if this materializes, then the positive news flow is going to be reported also ahead of the summer break. So we have -- if you assume we continue, as we've developed in the past, 3 potential good news to be reported before the summer break, and that's quite something. This answered your question or...

Yes, it's okay. And the square meter price could be similar like...

Yes. Absolutely. And the square meter price is closer to EUR 30 than it is to EUR 25, and I can't go any further as well.

Okay. Stefan, to your question on the other operating income and the provision we released that has to do with the LeopoldQuartier and circles back to the time when we bought the LeopoldQuartier, and there was an open legal dispute. And we changed or we are quite sure now that the legal dispute will come into our direction and therefore, we were able to release the provision.

The next question is from the line of Christoph Schultes from Erste Group.

Yes. Also happy birthday from my side. Also, birthday questions to Patric. It's -- maybe if we can go back to Slide 7, and you talked about the maturity profile of the project financing. Can you maybe repeat what you mentioned what is already paid -- 2023 this year and the split up of what you mentioned, what is with regards to plots and other financing, that would be very helpful.

Yes, of course, I will do so. So I mean, on the bond side, the EUR 120 million, they are due in November. So they are not repaid yet, obviously, and we are watching the market and look at the market quite carefully. If there is a window of opportunity to have an exchange, how we did that in the past. But the market is probably better than myself. The volatility is still there on the bond market, and we have to see how we move forward on this one. The more interesting one and that is why we have put that now on the chart is the EUR 195 million of the project financing. Of this EUR 195 million, EUR 15 million are already kicked off, which is a small number compared to the EUR 195 million. So the predominant part to come. And out of this rest, which is EUR 180 million, EUR 95 million is a typical thing which is happening when a project is coming from its plot financing into a development financing. We are quite confident that for some of these projects, we will see a situation where we get the permits we need because that is a precondition to go to the bank and then put it over from the ordinary plot financing and the development financing. Currently, the situation in the market is that if it is a ready project that is quite fast to tick off because you can refinance them or you can finance them in the development phase quite easy still. If it is an office, it is more of a discussion, but I would say it is too early to say a tendency there how the financing is look like, but what we see already is that the LTVs go up on these projects when they do an office. For the rest, which I have not said yet is the EUR 85 million, that are plot financings, which run out and need to be prolonged. Also I think we are doing quite regularly. But in this time, it's probably worthwhile mentioning them. There, you have a bank where it's already financed and most of them have been prolonged in the past quite often. So we are quite positive on prolonging them also into the future and rolling them out. Did that answer your question?

Yes, that's great. This is exactly what I needed. So but you are confident that. So you have EUR 250 million cash, assuming that there will be also a positive cash flow this year. So you're positive, let's say, the next 2 years, what you have are more or less financed without -- even without tapping the market. Is this what I can assume?