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Edited Transcript of ECT.AS earnings conference call or presentation 9-Aug-19 1:00pm GMT

Q2 2019 Eurocastle Investment Ltd Earnings Call

St. Peter Port Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Eurocastle Investment Ltd earnings conference call or presentation Friday, August 9, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Francesco Colasanti

Torre SGR SpA - CEO, MD, IR Manager and Director

* Olga Wilson

Eurocastle Investment Limited - IR Officer

* Oliver Goodrich

Eurocastle Investment Limited - CFO

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Presentation

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Operator [1]

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Good day. My name is Shelby, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Eurocastle Second Quarter 2019 Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to Ms. Olga Wilson, Investor Relations. Please go ahead, ma'am.

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Olga Wilson, Eurocastle Investment Limited - IR Officer [2]

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Thank you, Shelby, and good afternoon, everyone. I would like to welcome you to Eurocastle's Second Quarter 2019 Earnings Call. Joining us today are Francesco Colasanti, Managing Director at Fortress; and Eurocastle's CFO, Oliver Goodrich. For the duration of this call, we will be referencing a presentation that was posted on our website under the Investor Relations section, which we hope you will find helpful.

We would like to remind everyone that this call is being recorded and the replay number is on our website. This call is also available on our website via webcast. I would also like to point out that statements, opinions and beliefs communicated today, which are not [certainly] historical facts, may, in fact, be forward-looking statements. We encourage you to read the forward-looking statements in the Risk Factors disclaimer in front of our presentation.

With that, let me hand off to Francesco.

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Francesco Colasanti, Torre SGR SpA - CEO, MD, IR Manager and Director [3]

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Thank you, Olga, and welcome everyone to Eurocastle's Second Quarter 2019 Earnings Call.

So let's start in our usual Slide 2 with an overview of our business. Since 2013, Eurocastle has been one of the most active players in the Italian NPL market, which is considered to be the largest NPL market in Europe with approximately EUR 180 billion gross book value of nonperforming exposures on banks' balance sheets as of December 2018.

So over the past 7 years, we demonstrated strong capital deployment and strong discipline, given the results we've achieved, investing more than EUR 0.5 billion to acquire doValue, now the #1 independent pure servicer in Southern Europe and [a share of] 24 pools of Italian loans with a combined gross book value of about EUR 25 billion and a handful of strategic real estate investments.

For the second quarter, we continue to focus on building shareholder value through active asset management of our investment and buyback strategies we put in place last year to narrow the gap between Eurocastle share price and the net asset value. In total, since 2013, we have distributed EUR 484 million through a combination of distributions, accretive share buybacks and ongoing open-market buyback program. And just this morning, we've announced the tender offer to repurchase a further EUR 60 million of shares at the pro forma NAV following the doValue share sale.

So before I go into the detail on recent events, I would like to restate that we will continue to do the right thing for our shareholders and manage the assets we own with the goal of maximizing returns to investors and focus on closing the discount to NAV at which Eurocastle shares trade.

And with that let's turn to Slide 3 for the second quarter highlights and recent events. We should start with doValue. There has been a lot of exciting news in the second quarter. At the end of June, doBank announced that it has completed its restructuring and rebranded itself as doValue. Subsequently, doValue closed on the Altamira transaction and the result of the acquisition has created #1 independent pure servicer in Southern Europe.

During the first half of the year, doValue continued to deliver strong operational results reporting stand-alone EBITDA of EUR 39.1 million for the 6 months to June at 11% compared to the same period last year. If you look at the pro forma for 100% of Altamira, the combined H1 2019 EBITDA is EUR 86 million. I have to say that the management of doBank has done an excellent job because getting all of this done, it was complex and they've done an excellent job in doing that. In addition, Eurocastle received EUR 9.2 million from doValue annual dividend at the end of May.

Now on the most recent development. Yesterday, we announced that Eurocastle has sold 5 million shares or 25% of its interest in doValue at EUR 10.45 per share, generating estimated net proceeds of around EUR 50 million (sic) [EUR 45 million] or EUR 1.03 per Eurocastle share. This transaction allowed us to realize more than 10% of ECT's Q2 NAV in cash.

To give a bit more color on this placement, the Board took into account a number of factors in pursuing this transaction. As I noted in the beginning of the call, Eurocastle's Board of Directors is mindful of the discount at which company is trading compared to its NAV and has also been conscious that doValue represented over half of the company's NAV. After doValue published its H1 earnings, Eurocastle Board decided that it was an appropriate time to sell a portion of doValue shares in order to reduce the NAV concentration in doValue and realize a material portion of its NAV in cash. In addition to that, we believe that the increased free float of doValue shares can significantly help the liquidity of the stock and benefit the value of Eurocastle's remaining holding.

That being said, I'd like to note that we continue to believe that this investment has yet to see full appreciation from the market. DoValue will announce its new industrial plan in November and start reporting combined earnings with Altamira at year-end, which we believe will give the market an opportunity to understand the value being created in -- for the doValue group, including doValue -- the old doValue and the combination with Altamira.

The rest of our portfolio performance continues to be very strong. NPL collections are at unlevered pace of 118% and probability stands at 172% compared with the original underwriting.

In Q2, Real Estate Fund I, which is a listed fund, agreed the sale of all its assets resulting in EUR 6.7 million of proceeds to ECT being received already in August with an additional approximately EUR 3 million to come in the following quarter. This represents more than 10% premium to ECT's Q2 carrying value.

In addition, we closed on a number of sales in Real Estate Fund II, which resulted in approximately EUR 5 million of proceeds, which are also expected to be received in Q3.

With respect to our corporate activities, this morning, we announced our intention to distribute all the proceeds of the doValue share sale plus an additional available capital via a tender offer of up to EUR 60 million, worth of shares at EUR 8.45 per share. This figure represents the Q2 NAV pro forma for the price at which we sold the doValue shares, including the payment of the Q2 dividend, which will occur during the tender period.

Looking back. In June, we completed EUR 10 million tender offer, repurchasing approximately 3% of the shares at a 24% discount to Q2 2019 NAV. Since Q1, we have also repurchased EUR 700,000 worth of shares at 25% to Q2 NAV through our open market buyback program, which we will renew once the tender offer settles in September.

On the next slide, Slide 4, we provided some details of the doValue share sale. As I mentioned yesterday, we sold 5 million shares of doValue or 25% of our doValue stake realizing over 10% of the Q2 NAV in cash. The sale generated approximately EUR 50 million (sic) EUR 45 million net proceeds to Eurocastle. Post sale and prior to distributing the proceeds, our doValue holdings reduced to little over 40% of Eurocastle Q2 NAV from 55% as of June 30. We believe this is a more reasonable concentration.

As I noted, we intended to distribute all of proceeds via a tender offer announced today at Q2 NAV pro forma for the sale price and Q2 dividends. Taking a step back, this investment has been and continues to be extremely profitable for Eurocastle. Following the sale, we generated EUR 253 million of cash, EUR 95 million more than our investment and still own shares at the recent sale price are worth EUR 157 million, resulting in an implied multiple of cash invested of 2.6x.

On Slide 5, we show our usual breakout of our NAV as of Q2 2019. Eurocastle recorded a Q2 NAV of EUR 428 million or EUR 9.81 per share, the vast majority of this is split between doValue and Italian NPLs and the remaining is between real estate fund and cash. Oliver, our CFO, will provide you more detail on the NAV movement in a few minutes.

Next I'll talk about the Q2 financial performance on Slide 6. In Q2, there was a net asset value increase of EUR 0.10 per share. Normalized FFO was EUR 4.3 million for the period or EUR 0.10 per share. Excluding the impact of the sale, of all the assets of Real Estate Fund I, all of which were liquidated at a 10% premium to our book value, this would have been EUR 0.15 per share, in line with the second quarter dividend to be paid in August.

Let's move on Slide 7 where we outlined the performance of our investments to date. As highlighted in the beginning of the call, we've invested over EUR 0.5 billion across Italian investment since our new strategy was put in place in 2013. Realization to date have totaled approximately EUR 539 million or 104% of the total original amount invested, and the investments are carried at the remaining value of EUR 415 million. Based on the performance so far, this investment could potentially exceed our targeted range of returns over their lifetime.

Next, let me take you through the performance of each business segment in more detail, starting with doValue on Slide 8. As of June 30, Eurocastle owns 25% of doValue, #1 independent pure service in Southern Europe post its acquisition of Altamira, with approximately EUR 139 billion of combined assets under management.

As I said before, doValue continues to deliver strong operational results with revenues up 7% year-over-year driven by growth with (sic) [in] performance fees, indemnity fees and ancillary revenues. Stand-alone EBITDA for the first half of 2019 of EUR 39 million and net income of EUR 26.6 million are substantially up 11% and 27%, respectively, compared to the same period of last year.

The EBITDA margin is also up by 1.3% getting to 35%. Pro forma for 100% of Altamira combined EBITDA goes up to EUR 86 million with an EBITDA margin of 36%. Post acquisition of Altamira, doValue has net debt of EUR 320 million, which reflects financial leverage of 1.8x combined annual pro forma EBITDA.

Once again, as I said before, this is the result of a great job made by the management of doValue that, I think, has done really an excellent job, both in terms of operational results and also international expansion. And I think these guys will deliver even better results in the future. I have been lucky to work with them for since we put in place this new management team, and I am a big believer in them.

On Slide 9, we have summarized the NPL portfolios we own. Eurocastle owns interest in 24 pools of Italian loans with a combined gross book value of approximately EUR 25 billion. In aggregate, all of the loan pools we own are well balanced by region, security and default year. You can see from the graph in that page. Approximately 80% of the loans we own are located in the north and center of Italy and approximately 50% are secured by first and junior liens. The majority of the loan book we own are loans to SMEs.

Let's talk about the performance of these portfolios on the following Slide 10. Our Italian loan portfolios continue to deliver strong results, as I just said, returning approximately EUR 237 million, which is EUR 72.4 million above our original underwriting, including approximately EUR 41 million of net leverage proceeds. The actual pace of collections of the underlying claims on an unlevered basis is 118% of [estimated] underwriting and profitability of fully realized loans is at 172% of underwriting.

If you turn to Slide 11, we can briefly talk about our investment in Italian real estate funds. We invested EUR 67 million in 5 real estate funds, 1 public and 4 private, 2 of these funds have been fully resolved with Fund I now predominantly sold with the remaining assets under contract. Real Estate Fund II, which is a private fund with 2 luxury residential redevelopment projects in Rome, has been fully completed with the majority of the units sold and the remaining on the market.

Construction of the asset in Real Estate Fund V, which is also a private fund with a luxury residential redevelopment projects in Rome, is scheduled to be completed end of summer, by the end of this summer, by September, with approximately 40% of the units already presold.

In total, we have received approximately EUR 87 million of proceeds to date from the investment made in this asset class, returning all of our basis plus approximately EUR 20 million of additional cash. And we expect an additional EUR 15 million from agreed sales, of which EUR 12 million is expected in the next quarter.

And with that, let's look at Slide 12 for a quick market update. After a few quarters of volatility, government bonds recently have tightened but still wide. This contrasts with an Italian economy, which is characterized by solid industrial base and good fundamentals. Italy remains the third largest European economy with the second largest manufacturing output and a leader in world trade and tourism. Real GDP growth for 2019 is expected to be sluggish, 0.1% compared to 0.9% last year, while unemployment rates fell below 10% for the first time since 2012.

Italian commercial real estate investment volume declined since 2017 in light of the geopolitical events, but yields have moderately tightened and volume is going up. There is now political turmoil that could create additional short-term volatility. Our assets are pretty resilient to political uncertainty with a countercyclical component represented by the doValue investment.

Turning to Slide 13. Let's now talk about Italian NPL market. Italian banks have made significant progress in resolving bad loans. However, the NPL market remains the largest in Europe with EUR 180 billion of [troubled] loans on banks' balance sheets. We also see a significant investment opportunity in the unlikely-to-pay loans, an asset class which became more defined last year. There are approximately EUR 83 billion of UtP loans on the banks' balance sheets, of which approximately 80% is concentrated among the top 10 banks. In 2019, we expect to see higher volume of UtP transactions in the market.

We believe that Italian banks will remain under significant pressure by the regulators to reduce their nonperforming exposure, to improve the quality of their book and to grow profitability.

In addition, the GACS program was recently renewed by the government for 2 years, and we expect to see more banks dispose NPLs using the GACS structure. We are currently evaluating a pipeline of opportunities with combined GBV of approximately EUR 600 million.

And with that, I will turn to our CFO, Oliver Goodrich, that will walk you through our financials in more details. Oliver?

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Oliver Goodrich, Eurocastle Investment Limited - CFO [4]

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Thank you, Francesco. So then if we go back to the financial highlights page, Slide 5, the Q2 NAV stands at EUR 428 million, or EUR 9.81 per share. As Francesco highlighted earlier, it represents an increase of EUR 0.10 per share and is after paying the previous quarter's dividend of EUR 0.15 per share.

As you can see from the NAV bridge on the bottom right of the page, aside from the dividend, the movement reflects EUR 0.07 of accretion as a result of the share repurchases through our buyback program, EUR 0.09 per share increase from doValue, representing a movement in the share price over the quarter to EUR 11.68 per doValue share together with the dividend we received, and also a healthy increase of EUR 0.09 per share from valuation increase in all of the remaining investments net of all corporate expenses.

Taking into account the [additional] management incentive (inaudible)that would be payable (inaudible) since all investments are recognized at the current carrying value, which cannot be accounted for under IFRS, the Q2 NAV would be [EUR 9.81] per share.

In terms of NFFO for the quarter, this was EUR 0.10 per share. As Francesco mentioned earlier, it does include one-off impact as a result of the sale of RE Fund I. The impact is a result of the difference in the final proceeds of the sale compared to what was previously anticipated and partially recorded in our FFO. Regardless, the sale has been realized at over a 10% premium to our Q2 book value, and we expect the (inaudible) transaction to be approximately 6%. Excluding this impact, our NFFO is EUR 0.15 per share. And the Board has therefore discussed and declared the regular quarterly dividend of EUR 0.15, which is to be paid at the end of the month.

And finally as Francesco mentioned earlier, we continue to be focused on capital management and in light of the NAV discount at which the company shares are trading, so we've taken steps to further address this, while returning the proceeds from the doValue sale plus additional available capital at a price equivalent to the Q2 [NAV] net of the additional management incentive fees and pro forma for the doValue sale price and payment of the Q2 dividend. The Board and the company will continue to focus on initiatives to minimize the gap between NAV and the share price. So I look forward to updating you on our progress in future quarters.

And with that, I would like to hand over to the operator for the Q&A session. Operator?

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Operator [5]

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(Operator Instructions) There are no questions in queue. I'd like to turn the call back over to management for any closing remarks.

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Francesco Colasanti, Torre SGR SpA - CEO, MD, IR Manager and Director [6]

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So thanks, everyone, for dedicating the time to Eurocastle earnings call. And on behalf of everyone at Eurocastle, we thank you for the continued support and look forward to updating you again in November. Thanks a lot.

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Operator [7]

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This concludes today's conference call. You may now disconnect.