UBM Development AG (UBS) Earnings Call Transcript & Summary

Thank you, and good morning, everyone. Thank you for joining UBM's conference call to discuss our results for the first 9 months. In summary, one could say that the first 3 quarters of 2024 could have been worse. While there are no unexpected updates regarding the headline liquidity over profitability, we do have some encouraging news to share. Let's take a look at the highlights on Slide 3. Q3 continued to deliver strong residential sales, which is good news given our 60% residential exposure. The office segment remains in a wait-and-see position, more on this in a moment. We continue to stay ahead of peers in ESG. While it might sound as not as relevant as it was before, I assure you it remains a vital component of our life. We successfully issued another green bond, which helps smooth our repayment profile, a positive development in these challenging times for the real estate market, I would say. Our Q3 financials were in line with our expectations. Cash management and cash generation remain at the top of our agenda, especially as the ECB presents additional headwinds. We anticipate halving last year's losses and returning to profitability in the second half of 2025. Let's dive into the details by turning to Slide 4. Our resi sales figures are remarkable, up by 186 apartments to nearly 300 sold within the first 9 months. This includes a forward sale of 124 apartments in Munich to the city of Munich or rather Munich and Wohnen”, marking the first forward sale in 4 years. We anticipate Q4 will add another 100-plus sales, quadrupling our residential sales from fewer than 100 in 2023 to over 400 in 2024. This points to a positive trajectory for the future and gives us optimism. Turning to Slide 5. Our optimism about the residential segment has led us to shift our EUR 1.9 billion pipeline significantly towards this asset class. Remember, it used to be in the lower 40s. UBM now stands for residential, timber and Germany. While Germany may raise some eyebrows, I'll explain shortly why it's not a concern in the context of residential development. We currently have over 900 apartments under construction or in development in Germany. Additionally, more than 3/4 of our pipeline consists of timber construction projects, underscoring our ability to execute our strategy and fulfill our promises. Please follow me on Slide 6. This chart shows a residential heat map of Germany on the left-hand side. Let me reassure you that temperature is rising faster than on our planet. Munich, Frankfurt and Berlin are evolving into heat islands, so to say, within Germany, and this is precisely where our developments are located. But it's not just Germany. In Austria, where we have over 1,200 apartments under construction or development, the situation is equally dramatic and politically highly explosive. Regardless of political efforts of financial investments, the shortage of supply cannot be reversed quickly. There are too few developers left and lead times cannot be significantly shortened. This is a key driver for our outlook beyond 2025. Now, let's have a look at the office market by turning to Slide 7. The office market remains, as already mentioned, in a wait-and-see mode, one could call it undecided, if you want. This applies to U.S. analysts, too, particularly regarding our Timber Pioneer project. Despite having rented 2/3 of the space quite some while ago, negotiations for the remaining 4,500 square meters are progressing very, very slowly. And believe me, it comes as a disappointment to us as well. The reasons are well known. Economic recession and uncertainty about the future of remote work are causing decision-makers to delay, often paired with flexibility offered by current landlords. For instance, tenants can now extend leases for an odd period of 15 months with options for additional months, or no problem. While some employers are beginning to force employees back to the office and tenants reporting on their carbon footprint face pressure to move to energy-efficient buildings, there is no clear timing for when these moves will effectively occur, but it will happen eventually. There's no avoiding it. Let us turn to the subject, which seems to have moved into the background at the moment, ESG. Please turn to Slide #8. There's been debate about whether the green decade in Europe is over. I believe this perspective misses the point whether the fund aligns green deals could be considered a peace agenda crafted when Europe wasn't preoccupied with war on the continent and the economy was thriving. Today's focus has shifted to self-defense and migration issues. However, ESG is far from disappearing. With increasing climate-related disasters, the importance of sustainability will only grow. Money has been irreversibly redirected towards sustainable projects driven more by risk management than return aspects. Our top-tier ESG rating in the DACH region reflects our continued leadership in this field. This ensures that we will not face higher coupons on our sustainability-linked bond 2026 until its maturity, a significant achievement and a perfect lead over to Patric. Patric, please.

Thank you, Thomas. First of all, let me take the opportunity to say thank you to the participating investors who placed their trust in us with UBM's second green bond. While this event occurred in the fourth quarter, I would still like to briefly highlight it on Slide #9 as the next conference call for the full year results is not scheduled until April 11, 2025. After engaging with investors before and during the summer, we decided to return to the capital market following the summer break with UBM's second green bond. The maximum volume was set at EUR 100 million, of which we effectively issued EUR 93 million, an achievement, especially considering this nearly double the volume of our 2023 green bond. While the coupon remained the same, the maturity was extended by 1 year to a total of 5 years. We also offered 2 bonds for exchange, aiming to smoothen our repayment profile over the coming years. As illustrated in the chart below, this strategy proved successful. EUR 73 million from the 2 bonds offered were extended. The next repayment scheduled for the fourth quarter of next year has been reduced to EUR 87 million. As in the past, we will continue to monitor the capital market closely for the next window of opportunity. We are proud that we have built a strong reputation as a reliable bond issuer over the past years, particularly since 2017 when Thomas and I have joined UBM. Aligned with our strategy, Green Smart & More, we have further advanced our green financing structure. Today, exactly 80% of our bonds are either green bonds governed by our green finance framework, or sustainability-linked bonds linked to our, as mentioned before, excellent ESG ratings. Let's move to Slide #10. In line with our guidance provided during our half year call in August, we had an unexciting Q3 and ended the first 9 months with a pretax loss of EUR 14.5 million. As Thomas mentioned, our primary focus during this transitional year remains on liquidity over profitability. That said, it's worth mentioning that we have been able to maintain our balance sheet ratios as of September 30 compared to the full year 2023. Through strategic noncore asset sales and project partnerships, we even reduced net debt to below EUR 600 million. Our equity ratio still stands at slightly above 30% and within our target range of 30% to 35%. Our loan-to-value ratio is 49.6%, well below the maximum of 60%. In summary, our balance sheet remains robust with all key metrics within our target ranges. Let's move to Slide #11. First, I would like to emphasize that we have successfully navigated through a challenging period of more than 2.5 years. This year, we have been delivering on our promise to focus on liquidity over profitability. I have already mentioned that in previous calls. Despite the strict cash focus, we have not compromised on our future like many others, just saving cash but not investing into the pipeline. Overall, we invested another EUR 134 million in our existing projects just in the last 9 months. In the last 24 months, that adds up to an impressive EUR 365 million or EUR 500,000 a day. Over this period, we have also made EUR 225 million in bond repayments from our cash position. Despite the fact that capital markets are still open for us, we have to acknowledge that the market is much weaker for real estate companies compared to pre-inflation times. We are proud to have successfully delivered our announced cash generation program within 6 months and by the end of the first half of the year. However, as you may recall, we mentioned that there might still be the one or the other transaction to follow. We are working hard to release cash from standings wherever possible. However, we will only be able to provide more news once the deal has been closed. As of the end of the third quarter, our cash position stood at EUR 143 million. It is important to note that this figure does not yet include the fresh money from the new green bond issue, which took place after September 30, 2024. I would like to take this opportunity to focus you on another topic. On one hand, we have corporate financing on the capital market side, which I have discussed in detail before. On the other hand, as a project developer, project financing is the other source. This year, we have been facing significant headwinds, keeping LTVs or LTCs up when it comes to project financing. As a result, we have injected an additional EUR 65 million into our projects in the last 12 months alone. This is not coming from investments. It is a consequence of lower LTV, LTC values on a project level. Banks are requiring significantly higher equity ratios in our projects. This is largely due to the ongoing ways of insolvencies in the real estate sector, and it has also impacted our cash position. Despite the fact that we will not sell the Timber Pioneer in 2024 and considering the increased requirements by banks, we would like to provide a cash guidance for the full year. We expect our cash position to be slightly above EUR 150 million by year-end, which would still be above the level recorded at the end of 2023. Back to Thomas.

Thank you, Patrick. When it comes to liquidity, we are reminded of Sisyphus, the figure from Greek Mythology who was condemned to push a massive rock uphill only for it to roll back down each time he nears the top. Similarly, we have been extremely successful in our cash management efforts. The reward has been the stabilization of our cash position rather than a significant increase. That said, the current level is highly satisfactory. We expect to close the year with half the loss recorded last year. There's no risk from rising interest rates, ensuring our safety on this front. However, transactions involving neighboring assets could always have an impact. So consider this as a kind of disclaimer. Looking ahead to next year, we anticipate tailwinds from delayed indexation effects. These will impact not only existing rents, but also those for projects currently under construction. You might have missed our press release announcing the rental of the top 3 floors of the LeopoldQuartier office at a monthly rent and net rent just below EUR 27 per square meter. This sets a new benchmark for office space outside the first district in Vienna. For those who survive '25, we foresee a bright future. As explained in detail during our half year conference call, we expect cost efficiencies and further rent increases to play a key role in this outlook. In summary, we choose to see the glass as half full rather than half empty. The worst, I believe, is behind us, but the road ahead remains long and stony. The good news is that enduring such difficult market conditions is strengthening our resilience. But rather than getting philosophical, let me open the floor for your questions, and thank you for your attention.

[Operator Instructions] And we have the first question coming from the line of Simon Stippig from Warburg Research.

My first one would be in regard to the equity injection you mentioned for the last 12 months. Is -- what's your expectation for the next year in 2025? And I'm not sure if it's better if I ask the question one by one or if I ask all the questions right now.

Why don't you ask all the questions right now and we take them then in the order of your questions.

Perfect. And another one would be, which is, I think, a change from your last guidance, and it's a positive change because you mentioned there's a return to profitability in the second half of 2025. So here, my question would be what's your underlying assumption for that or in the market? And/or do you see certain projects you're calculating with you potentially sell, et cetera? A third question would be, you mentioned and congratulations to the bond placement of the EUR 93 million. As I remember, there is a potential increase to EUR 150 million volume. So would that be an interest to make a tap in regard to that bond for the next year potentially? And then the last question would be your -- in the future for next year in regard to the sales in residential units, do you have particular projects right now that you do forward sale or you add to your unit volume you're selling? Is there any, I would say, soft guidance for next year as well?

Good. Maybe I tackle your first question and the bond-tapping question. So let me come to the equity injection in 2025 and maybe also elaborate a little bit in the last quarter of 2024. So it is a difficult one to tackle quite honestly, because it is an outcome of a negotiation with the bank we are talking about. But let me shift some light where we stand in this respect. First of all, we are losing this equity or we have to inject equity in the, let's call it, old LTV LTC. So it's normally occurring when we roll on the ball in a bank financing because either the project has been delayed due to the process where the regulation is not coming in how we have expected or we simply have to extend it because we are not able to sell it to the right price. So these kind of financing, most of them we have seen and we have rolled on. So the question there is, have we rolled on it far enough into the future or is it occurring again, but they are on the new LTV/LTC level, which is 5 to 10 percentage points below the old one we have seen? Most of the financing we are tackling next year, we expect that these projects will be sold to a certain extent as they are either residential or, for example, a project where we think an office could be sold. So we are currently not expecting to put too much equity injection into 2025. Bond issue tapping. Tapping is always an interesting one and the market is in the right condition. Currently, I would say the market isn't. So we are super happy that we have tackled the window and we're able to achieve the EUR 93 million. Currently, I would say the market is much more volatile as the window we have taken. If the right window is again appearing, we will ask ourselves the question, is it close enough to the old bond and we can use this one and tap it? Or is it a new exchange we are going to do? So also an answer where I can't give a clear one because we simply don't know.

Yes. As it is with everything, I said we have decided because we seem to be closest to the market at the moment of all market participants that the worst is behind us. So the glass is half full, the glass is half empty. The good news is we get financing still. The half empty aspect is that we had to inject equity. Now to your 2 remaining questions. What are our assumptions on turning profitable in 2025? Well, it's a combination of the market. because, as I said, the indexation that comes with the delay is helping rent levels, no doubt about it, and that is true across the board, and that helps in our efforts selling our assets. On the other hand, our assumption is that we can sell the LeopoldQuartier office project, which is currently ahead of schedule so that we can book a profit on the sale of this in the second half. Now the second half is from 1st of July to end of December. It's probably more the fourth quarter. But with the speed that we are progressing that construction side, then I invite everybody in Vienna to contact Chris and have a look at it. It's amazing. It's another step change to the Timber Pioneer. We never know, and we are in promising negotiations even though I've mentioned how kind of cumbersome and long-lasting these negotiations are for further tenants in the LeopoldQuartier. So it's a combination of the market is helping us. We also believe that on the interest rate side, we will not see any negative surprises. And we believe that we are able to sell projects with a profit in the second half of the year, particularly or predominantly the LeopoldQuartier office. Now the last question you had was do we expect any further forward sales? I believe you've asked more for 2025. But of course, you could ask yourself the question, well, guys, how do you want to manage to add another 120-odd apartments in the year -- in the Q4 2024? Now, in the year 4 -- in the quarter 4 of 2024, we do not expect any forward sales or packages that we sell. We are so confident because we have a significant number of apartments already signed where all that is missing is an authorization of these apartments, and we put maximum pressure on this to happen in the last 6 weeks of this year, if you want. Now for 2025, we expect that this trend is continuing. I mean I don't see analytically any good reason why the demand for apartments should shrink at least in the markets in which we are active. The contrary is the case, and we still have a plethora of apartments for sale going forward. And that means that I'm pretty optimistic regarding 2025. If you expect a number from me, that's too early to say. But the trend continues. And I think we've been early in promising you that this trend as an early indicator might kind of showed away. And we've been right in this one. So bear with us in our ability to project development.

The next question comes from the line of Stefan Scharff from SRC Research.

One question is about -- you already mentioned it, the more challenging financing conditions or the more need of the banks for an equity stake in the projects. You see here a competitive advantage for you and your firm compared to other competitors in this market?

We had troubles in the line. Would you just quickly repeat the question because we had to switch devices?

Okay. I see. The question was about the more challenging financing conditions and the needs of the banks for a higher equity stake in some projects. And you already mentioned that you are in a good position and might be a better positioned than most of your competitors. Perhaps you can say here more about what are your talks with the banks, how they're working and what it might have changed or improved after the successful issue of the second green bond.

Okay. First of all, one thing which has changed, and this is something we are seeing since, let's say, at least 9 to 12 months. In order to come to sound new credit facility, it takes much more time than we used to have in the past with these kind of negotiations. So first thing is you need to start earlier than before when you see that you might need to prolong something or even to have a new financing on something. In terms of conditions, as I was mentioning already, the LTCs and LTVs are coming down. But the advantage of UBM is that everybody is knowing that our cash position is quite good and that we are able to at least for a certain time frame can also accept if the financing is not working out like we have hoped to stand up from the table and try it again, let's say, a month or 2 later. So that helps us in the negotiations. And I think we are in a better position, as you were pointing out, compared to our competitors when it comes to this or in this respect. But nevertheless, it doesn't help us when banks are coming and saying we have pressure from the ECB on our valuations on the projects. We are not able to offer you the old LTC LTV levels we are used to. And it is an office and Basel IV is coming into play next year. These kind of things, they are hitting us as everybody in the market. But as I was pointing out, most of that we have already seen. And in most of our credit facilities where we had to prolong something, we have done so, and that was where we were losing the money. We just wanted to point out to everybody in the market that there is another source of -- or another drain of money, and that is coming from these individual project financings, which are still working well when it comes to are we able to finance something, that's still a business which is running quite well. But we are losing bits and pieces. And I mean, we also have to plan for that. But as I was pointing out, we are seeing not coming a lot of equity injections in the future. So we think we are more or less done with these ones.

Okay. I see. And I read some market reports about recovery step-by-step also in the hotel market. What's your perception here about your earnings and about the situation in the hotel market? I think the fourth quarter might be still quite good as always in hotels or mostly always in hotels, but it might be too early for good deals. What's your opinion here?

Well, I can definitely confirm that it's too early for good deals. We see a mixed bag in this respect. We see a difficult, challenging market situation, for example, in the Netherlands, whereas we see a very positive development in Germany, okay? And in Poland, it's like the one is doing better than expected. The other one is going not as well as expected. There's one thing for sure, the hotel transaction market is still lousy. I mean we have 4 hotels and we don't even put them on the market because the offers that you're getting are only to be called ridiculous, and that hasn't changed. So I think while room rates are recovering, the problem is, this is a very dangerous and misleading fact because you always have to compare them with the cost increases that you are also seeing in the hotels, and they are significant. And everyone is struggling to get personnel. I mean, you noticed this as a hotel guest yourself, and we're struggling to make the ends meet there. So don't expect a significant contribution to our profitability from the hotel side in 2025.

The next question comes from the line of Philipp Sennewald from NuWays AG.

A couple of questions from my side. I will also do them all on one. Maybe first on the Timber Pioneer, 2 questions. Can you elaborate on the letting process of the remaining floor space? And second, I remember in summer when you sent out the expos to potential buyers that you were quite happy with the feedback you got there. You just mentioned there won't be any news in 2024. I mean there's also not much time left. However, can we expect something there for H1? Is that fair to assume? And the next one on your pipeline, you always mentioned the pipeline is a 4-year pro rata logic. Is that still the case? And what developer margin? In your last call, you also elaborated on the developer margins on the developments there in the coming years. What margin do you expect on average there? And I don't know if I missed that. I was just getting out of the car regarding further nonstrategic sales. Is there something in planning?

Excellent questions. Let me take them in the order of you having asked them. Timber Pioneer, you are absolutely right in remembering that we were quite positive on the nondisclosure agreements that were signed and the info memos that were asked. But all of the interested parties want to see a 100% rent out of the Timber Pioneer before getting into the next stage of discussions, I call them discussions rather than negotiations with us. And once got to accept it. As I say -- as I said, it's a wait-and-see market. Everybody waits and wants to see it to be rented out. And as long as this is not happening, it's difficult to give a prognosis. The other thing is we are living from developing and selling our projects, but not at any price. I mean that's the kind of shiny side of the coin. We can afford to do so. So there will be no seen when it comes to the first Timber office building in Frankfurt. Let me say this loud and clear. And with having said this, it's difficult to give a guidance on H1. I know where you are pointing -- and it's no coincidence that I've mentioned the LeopoldQuartier sale as the contributor rather than the Timber Pioneer. So that's on the Timber Pioneer. The pipeline logic is still valid. It doesn't change. We don't change our reporting lightheartedly. So it's still the same. We are now from Q4 2024 to Q3 2028 when we give you pipeline numbers or other numbers. And that's important to note because we are also always cutting off one quarter, the last quarter, and we are adding a new quarter and still the pipeline that's pretty robust. And Patric has talked about the EUR 500,000 a day, like when we did the speaker notes, I was kind of hang on a second, we are spending EUR 0.5 million every day, that's quite bold. And obviously, it's bold without us feeling that it's bold. So then on the developer margins, that has also something to do. Don't expect them to change from one day to the other. They are improving. I can tell you, we had an executive committee on Thursday, okay? And we spent 4.5 hours out of a total of, I think, 6 or 6.5 if you deduct the brakes, only on discussing saving opportunities in not only future, but also existing project. There's a complete change in attitude with our employees, with our colleagues, okay? And that was a difficult one because if you kind of could afford cost overruns for more than a decade because the yield compression is compensating for everything to switch is not so easy. And admittedly, it took us a while, but I can report to you that now every UBM colleague has this on the top of his head, and that's going to help going forward. Now -- and I have nothing to add on the developer margins to what we have kind of shared with you in the half year report. And now on the nonstrategic asset sales, that's a very good one. As we've seen also some disappointments, we only want to report about it when the ink is dried and basically not even then, but when the money has arrived in our account. I could very well imagine, so keep your eyes open that this is going to be the case well before the Christmas break. But in German, one says, [Foreign Language] I don't want to make a translation for this, and I don't know the English word or saying for this. And this is what made us so cautious. We are living in difficult times and why we've been much braver in predicting what's going to happen. You're usually proven the contrary if you're leaning out too much. And this is why we say we continue our cash generation program and selling noncore assets, and that's basically our selling assets, but we only are more vocal about it once these deals have happened. But keep your eye open. There's another 3 weeks to go really to the Christmas break and maybe there is another good news on this one.

There are no more questions at this time. I would now like to turn the conference back over to Thomas Winkler, CEO, for any closing remarks.

Well, thank you, everybody. It's not so easy in times where recession and election results and new governments or no governments are on the top of your mind. And it might sound somewhat surprising to you that while we haven't been very optimistic over the last 2 years and why we've been actually one of the first to be pessimistic on what used to be a great run. We are in a different state of mind today than we have been at the beginning of the year, and that has something to do, as I said, that we are very close to the market and that we get encouraging signs. Now, do you see them already in the numbers? No. But I reserve the privilege of keeping my humor and being somewhat optimistic in the sense of the glass is half full rather than half empty. And with this, for those I don't talk to, I wish you a good break over Christmas and New Year and gather your strengths because you will need it for '25. Thank you very much for bearing with us and all the best.

Thank you.