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Edited Transcript of ECT.AS earnings conference call or presentation 16-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Eurocastle Investment Ltd Earnings Call

St. Peter Port Mar 16, 2017 (Thomson StreetEvents) -- Edited Transcript of Eurocastle Investment Ltd earnings conference call or presentation Thursday, March 16, 2017 at 2:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* Olga Wilson

Eurocastle Investment Limited - IR

* Francesco Colasanti

Eurocastle Investment Limited - Managing Director, Fortress Investment Group

* Oliver Goodrich

Eurocastle Investment Limited - CFO


Conference Call Participants


* Tom Mills

Credit Suisse - Analyst

* Myrto Charamis

Liberum Capital Limited - Analyst




Operator [1]


Good morning. My name is Scott and I will be your conference operator today. At this time, I would like to welcome everyone to the Eurocastle fourth-quarter 2016 earnings call. (Operator Instructions)

Thank you. Olga Wilson, investor relations, you may begin your conference.


Olga Wilson, Eurocastle Investment Limited - IR [2]


Thank you, Scott, and good afternoon, everyone. I would like to welcome you to Eurocastle's fourth-quarter 2016 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 we posted on our website under the invest 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 as well. This call is also available on our website via webcast.

I would like to point out that statements, opinions, and beliefs communicated today which are not certainly historical fact may in fact be forward-looking statements. We encourage you to read the forward-looking statement and the risk factor disclaimer in front of our presentation.

With that, let me handoff to Francesco.


Francesco Colasanti, Eurocastle Investment Limited - Managing Director, Fortress Investment Group [3]


Thanks, Olga. And welcome, everyone, to Eurocastle fourth-quarter 2016 earnings call. For the discussion, we'll be referencing a presentation that we posted on our website.

So if you start with slide 2 of the presentation, Eurocastle aims to drive growth primarily through the investment just made in the Italian loan servicing business as well as through several investments in Italian NPL pools and real estate funds.

Since we announced our new strategy in 2013, Eurocastle have participated in the two largest NPL transactions that took place in Italy since the financial crisis. The first transaction was our acquisition of doBank together with a EUR3.3 billion NPL portfolio from UniCredit, of which Eurocastle owns 50%.

And the second one is our commitment to acquire, alongside with Fortress affiliates, a significant portion of the EUR17.7 billion gross book value NPL portfolio being sold by UniCredit, and which we will refer to as FINO.

Before we dig deeper into our year-end result, I'd like to note that in 2016, Eurocastle continued to deliver on its promise to generate superior investment performance and paid stable dividends. Since the implementation of our Italian strategy, Eurocastle has paid 14 consecutive quarters of dividends, and in Q4, our Board raised our quarterly dividend by 20% to EUR0.15 per share. In addition, we have announced a new policy to increase the distributions to investors going forward and I will give you more detail in a moment.

As you can see on slide 3, we outlined our main achievements for the year. 2016 was a very dynamic and productive year at Eurocastle, during which we generated meaningful earnings growth and deployed substantially all of our investable capital into the new investment strategy and cleaned out almost entirely our legacy business in Germany.

The main highlight is our commitment to the FINO transaction, which is the largest NPL deal ever made in Italy. And combined with the acquisition of doBank cements our position as a leading investor in the Italian NPL market. In addition to FINO, we committed or invested another EUR23 million in 3 NPL portfolios and 2 real estate funds.

On the capital management side, in June 2016, using surplus cash on our balance sheet from legacy realizations, we repurchased 12.3 million shares at EUR6.10 per share, returning EUR75 million to participating shareholders. The share buyback provided an additional liquidity option for our shareholders and enabled us to repurchase shares at a meaningful discount to net asset value for the benefit of our all remaining shareholders.

Our Italian investments continued to deliver strong results. The doBank Group recorded EUR61.6 million of combined EBITDA for 2016. And the Board approved doBank's first dividend of EUR52.3 million, of which Eurocastle shares 50% or EUR26.2 million and is expected to be paid in May 2017.

Subsequent to year-end, we sold our interest in real estate fund investment III for EUR20.9 million, which resulted in a 2.7 times multiple and 137% IRR on our original investment. I'd like to highlight that we have realized this investment two years ahead of our target exit date and we got higher amount than expected. This is an excellent result and exactly our goal for this type of investment.

As I mentioned briefly, we also succeeded in unwinding our legacy business in Germany. By the end of 2016, we fully disposed all of our assets with the last payment expected by June 2017. We generated total proceeds of EUR14 million versus EUR5 million to EUR15 million guidance. The cleanup of legacy business is an important milestone for the Company, which allows to focus solely on our Italian strategy.

2016, our dividend totaled EUR0.525 per share, of which EUR0.375 per share was paid for the first 3 quarters and EUR0.15 per share for the fourth quarter. In addition to raising our dividend by 20%, we announced a new policy with the aim of paying out substantially all of our normalized FFO realized in cash and accelerating the distribution of the uninvested capital. We believe the new policy balances Eurocastle's dual goals of taking advantage of compelling new investment opportunities and generating significant distribution to our investors.

Turning to slide 4, you can see the Eurocastle business is made up of three key segments. The first segment is doBank, the largest third-party servicing group in Italy, which has an NAV of EUR270 million or EUR4.49 per share and represents 49% of the total adjusted NAV. Post-acquisition of Italfondiario of doBank Group recorded full-year 2016 EBITDA of EUR61.6 million, in line with our target.

The second segment is Italian NPLs, which is comprised of 19 pools with a combined gross book value of EUR9.7 billion as well as EUR50 million to EUR70 million of commitments to acquire the FINO pool. The current NAV of this investment is EUR191 million or EUR3.19 per share, which represents 35% of the total adjusted NAV. We typically target 15% to 20% return in this segment.

The last key segment is represented by the Italian real estate funds, which is comprised of 5 funds with approximately EUR75 million of NAV or EUR1.24 per share. On these investments in aggregate we are targeting over 20% return. In addition to the 3 key segments, we have also EUR15 million of net corporate cash.

So turning to slide 5, let's talk about the financial performance in the fourth quarter. Eurocastle had a very strong fourth quarter, recording an adjusted NAV of EUR550 million or EUR9.16 per share. This represents an increase of EUR1.81 per share or 25% for the year, primarily driven by EUR1.62 per share increase from the valuation of our investment in doBank Group and EUR0.25 per share of accretion from the share repurchase.

In addition, Eurocastle continued to demonstrate strong earnings growth, recording normalized FFO of EUR12.5 million or EUR0.21 per share in Q4. The normalized FFO for the year was EUR46 million or EUR0.70 per share, which is an increase of EUR0.41 per share compared to 2015, equal to 141% increase and reflecting the full year's ownership of doBank.

I'd like to highlight that after raising our dividend by 20%, the dividend payout ratio of normalized FFO in Q4 was 72%, and we've increased up to 100% of cash in FFO following the recent policy change. Once again, this is a very strong quarter. I'm very happy with that.

On slide 6, you can see that our share price have responded positive to the FINO management and the other initiatives we put in place, closing the year at a 34% premium to the lowest price in March 2016 and further increasing in 2017.

So let's turn to slide 7, where we outline the performance of our investments to date. So far we have invested over EUR420 million of equity, primarily across our main business segment of doBank, the Italian NPLs, and the Italian real estate funds.

Given the realization to date and the current NAV of the investments, those investments have generated an unlevered IRR of 39% to date, well ahead of our target 15% to 20% IRR. And based on the current performance, we expect them to exceed our targeted range. They've also returned approximately 2 times multiple on the cash investment.

I'd like to highlight that these high returns are primarily achieved through very active asset management from both Eurocastle team and our Italian partners in close collaboration.

On slide 8, let's now talk through performance of each business segment in a little more detail, starting with an update on our largest investment, doBank. So 2016 was a transformational year for doBank that is owned 50% by Eurocastle and 50% by other Fortress affiliates.

DoBank is the largest independent servicing group in Italy with over EUR81 billion of gross book value under management, more than 6 times larger than the closest competitor. DoBank is led by the new CEO, Andrea Mangoni, and doBank has an ambitious agenda and an initial agenda for 2016 to strengthen the company's operations, increase loan collections, and develop new revenue sources.

In October 2016, doBank completed their strategic acquisition of Italfondiario. At the time of acquisition, Italfondiario was the second-largest independent NPL servicer in Italy. Today, the combined group, which we refer to as the doBank Group, is the highest rated third-party NPL servicer in Italy with a network of over 3,000 employees, lawyers, and external consultants across 24 offices.

The doBank Group has already seen benefits from the new initiatives. Loan collection for the year of EUR1.7 billion exceeded the budget, contributed to an EBITDA of EUR61.6 million for the full-year basis. Subsequently, in March 2017, the Board of doBank approved a EUR52.3 million dividend, which is expected, as I said before, to be paid in May.

DoBank is pursuing several projects to further integrate the two platforms and expect to realize additional cost savings through these initiatives and ongoing enhancement of the asset management process. The combination of the two servicing platforms along with the new management team and numerous initiatives to streamline the doBank Group operations contributed to a significant increase in the carrying value of the investments in 2016. DoBank will continue to focus on finalizing integration of Italfondiario and prepare for a potential IPO during the course of 2017.

On slide 9, we have outlined the performance of doBank's NPL pool, which will securitize in Q4 and which we will refer as Romeo NPL going forward. This portfolio is outperforming our original underwriting projections, generating EUR24.5 million of proceeds since closing in October 2015.

The actual pace of collection is 123% of underwriting and profitability of fully realized loans is 122% of underwriting. We expect that this initial performance will over time align to underwriting assumptions with potential upside on certain assets.

Our Italian NPL pools are also showing great performance, as is outlined on Slide 10. Including the Romeo NPL pool, we have acquired 18 pools of performing and nonperforming loans with a combined gross book value of EUR6.4 billion. The loans continue to outperform original underwriting projections with the actual pace of collection at 112% of our underwriting and the profitability of fully realized loans is up 235% of underwriting expectations.

Those pools have recorded cash flow to date of EUR36.2 million, which represents 83% of our original investment. We're very pleased with the results as well.

So if you turn to the next slide, let's now talk about the investments in Italian real estate fund units. So far we've invested or committed to invest EUR67 million in 5 Italian real estate funds, 1 public and 4 private, which will require a significant discount to their underlying asset values.

Our strategy is to cooperate with the fund managers to simplify the capital structure and enhance the property values. The goal is then to realize profits from the asset sales as the fund reach their upcoming termination dates. These investments are showing great performance, generating EUR22.5 million of proceeds to date and have significant upside potential. These investments require very active asset management by Eurocastle team, who have done a great job in extracting value for the Company from this asset class.

For example, as previously highlighted, we were able to sell our share in Fund III two years ahead of our underwriting, generated a 2.7 times multiple on the cash invested, and an IRR of 137%. I'd like to note that these investments are carried at an average discount of 22% of the underlying asset valuation.

And now let's look at slide 12, where we made an attempt to give you an update on the current banking situation in Italy. Despite a few notable transactions that took place in 2016, the Italian banking sector continues to be weighed down by nearly EUR360 billion of sub-performing and nonperforming exposures. Many banks struggle to recognize the losses associated with the large-scale NPL sales while complying with their Tier 1 capital requirements.

During the year, the Italian government implemented a series of measures to improve the current banking situation and how to resolve Italy's NPL problem. While the process has been slower than expected, we believe it sets up 2017 to be a more active year from a transaction perspective.

As banks look for feasible alternatives for addressing their NPL [fornack], the NPL market is likely to be further bifurcated between smaller, more competitive NPL transactions and larger, more complex structured transactions in which banks are seeking capital partner that can also provide both NPL underwriting capability and servicing expertise.

To date, Eurocastle have participated in the two largest structured NPL transactions in Italy completed over the past three years. And given our experience and Eurocastle ownership of doBank Group, we should be particularly well positioned to take on future transactions of this kind.

And with that, let now talk our near-term pipeline on slide 13. So we continue to view the market in four distinct models. First, the traditional model, where banks will dispose NPL portfolio which we already manage it or we'll take on management once acquired.

Second is the GACS model, where banks will securitize and sell NPLs using the GACS program, introduced by the government in early 2016. In this case, the senior tranche is guaranteed by the government with the first loss tranches to be acquired by specialized investors, which is several opportunities for us there.

Through our ownership of doBank Group, we will be able to provide underwriting due diligence services for the banks and ratings agencies. Also allows future loan servicing for the securitization vehicle. For the GACS, the rating of the service is that important and the doBank Group holds the highest servicing rating in Italy. Also, as investors, we see an opportunity to invest in the mezzanine and the equity tranches of those securitizations.

The third approach is what we call a partnership model, where banks partner up with an experienced coinvestment partner with servicing capability in a structured transaction. In this scenario, the bank retains a partial interest in the portfolio, and to its coinvestment partner improves the performance on the entire pool.

Once again, we think we're strongly positioned to take advantage of this situation as coinvestors, given our deep knowledge of the market and our experience. And to provide active servicing on the portfolio through the doBank Group.

The last approach is an outsourced servicing model, where banks retain 100% of the NPL pool and seek to improve performance and data quality by outsourcing servicing to a professional active manager. We believe that doBank Group, being market leader, is the best position to become NPL management partners of the Italian banks.

We are currently evaluating a pipeline of approximately EUR50 billion gross book value of potential NPL pools we acquired together with servicing contract, of which 3 deals account for EUR45 billion. Given that so far we participated in two largest deals in the market, we believe we should be in good position to secure at least one of these next large deals. But once again, we will only invest at the right price. We want to keep our discipline.

Another [shank] of our pipeline is related to EUR$2 billion servicing contracts only. We think all of the opportunities in our current pipeline will be beneficial to doBank and will grow its assets under management and a positive impact of the potential IPO.

Just to finish, I'd like to say that we are very pleased with the strong results of Eurocastle, what we delivered in 2016. And we look forward to updating you on the progress in 2017.

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


Oliver Goodrich, Eurocastle Investment Limited - CFO [4]


Thanks, Francesco, and welcome, everyone. Turning back to the financial highlights set out in slide 5, it's fair to say it's been one of our most notable quarters in terms of results. The adjusted NAV for the quarter increased to EUR551 million or EUR9.16 per share, a significant increase of EUR1.45 per share or 19% after having declared the recently increased dividend of EUR0.15 per share.

This was primarily driven by the increase in the valuation of our investment in the doBank Group, which now reflects the transformation activity that took place over the course of 2016 as doBank prepares itself for potential IPO in 2017. Outside of doBank, another notable increase included a EUR0.12 per-share or 61% increase of our investment in real estate fund III, following the highly accretive sale that took place in January 2017.

In terms of normalized FFO, it's amounted to EUR12.5 million or EUR0.21 per share compared to EUR11.9 million or EUR0.20 in the previous quarter, continuing the steady trend we have seen this year of quarter-on-quarter increases as we deploy our remaining available capital.

From a dividend perspective, the recent increased fourth-quarter dividend of EUR0.15 per share therefore equated to 72% of normalized FFO. Under our new policy, it's to increase to 100% of cash and FFO.

I look forward to updating you on this progress in future quarters. With that, I would like to hand over to the operator for the Q&A session.


Questions and Answers


Operator [1]


(Operator Instructions) Tom Mills, Credit Suisse.


Tom Mills, Credit Suisse - Analyst [2]


Thanks for taking my question. Yes, it's been a pretty good year. I guess you delivered as promised pretty much across the board. You can't argue with a 25% increase in NAV year on year.

I guess looking to 2017, there's quite a few potential positive catalysts there with the FINO transaction and the central IPO of doBank, which should be positive to the shares. I guess, do you think there's also within the pipeline, the near-term pipeline that you highlight, reasonable grounds for us to get excited about your ability to do one of those transactions in, say, the next six months or so?

Do you think these things could come near term, given what's going on in Italy at the moment? Or do you think less or more 6 to 12 months in duration? Just appreciate some color on that would be great. Thank you.


Francesco Colasanti, Eurocastle Investment Limited - Managing Director, Fortress Investment Group [3]


Thanks, Tom. Thanks for your question. So I will start with one thing is the credit market around the world is a very difficult market. I think we're looking for idiosyncratic investments where the perceived risk is higher than the actual risk. And in many parts of the world right now, it's actually the opposite. So it's very difficult to make good investments.

We think that in the Italian market for two reasons -- one is our position. So our ability to underwrite the deals we look at, and our experience in the market and what is happening on the Italian banks, I think we have a good chance to make these investments -- 1 or 2 significant investments in the next 6 to 9 months.

Those are large portfolios, so the underwriting of this portfolio is pretty long because it's a very detailed analysis. It's not a top-down analysis; this is a bottom up. You need to underwrite portfolios and be very detailed to come up with the right price to buy these assets.

So I think given the size of what we are looking at, I think it will take something like 6 to 9 months to really complete large transactions. I do think that, as I said before, we've done the two largest transactions that were closed in Italy in the past three years.

Now I think I'll be happy if we take one out of the next three transactions that close -- large transactions that will happen this year. I think they are very relevant and could be very good for Eurocastle, both from an investment standpoint in NPLs, but also because they will help to grow significantly doBank. And so they help evaluation of doBank to increase in a meaningful way.


Operator [4]


(Operator Instructions) Myrto Charamis, Liberum.


Myrto Charamis, Liberum Capital Limited - Analyst [5]


Great. Thank you, guys, for your results. I just wanted to ask if you could give us a little bit more color on what are your expectations for the IPO is -- the doBank IPO? And whether any NPLs will be included in that deal? Thank you.


Francesco Colasanti, Eurocastle Investment Limited - Managing Director, Fortress Investment Group [6]


So the IPO of doBank potentially is very much on the agenda for 2017. And the team at doBank is working very hard to prepare the company for the potential listing. It's clear that market conditions need to be right.

But the size of the Group, the marketing in which doBank operates, and the opportunities for growth, both organic and through acquisitions, represents a very interesting story for this company. We'll need to look at the valuation and the market conditions at the time when we'll be ready to understand our position and how much we want to sell.

Here is to the doBank Group, as we really believe in the company and the market opportunities. At the same time, we need to make sure primarily that there is sufficient liquidity to support the trading of the stock.

In terms of the NPL that doBank owns, doBank holds a 5% of the Romeo NPL portfolio, which will stay in the company also when it becomes public. It may also make strategic investment, coinvestments, in other NPL profiles, in particular in connection with its appointment as servicer for said portfolios. We don't anticipate transferring any of our portfolios into doBank at the time of the IPO.

In terms of valuation of doBank, I think it's pretty important. DoBank realized EUR61.6 million of EBITDA for the year and generated -- will pay EUR52 million of dividend. If you look at comparables -- comparable companies, they trade between 10 times and 12 times 2017 expected EBITDA.

So if you do the valuation of our Company at 10 times to 12 times and you add back all the other assets on balance sheet, the valuation is definitely north of EUR700 million. And our book is currently marketed at EUR540 million. So there is also potential upside from the IPO in case there's a good market and we will be able to do it.


Myrto Charamis, Liberum Capital Limited - Analyst [7]


Thank you. Can I also ask another question?


Francesco Colasanti, Eurocastle Investment Limited - Managing Director, Fortress Investment Group [8]




Myrto Charamis, Liberum Capital Limited - Analyst [9]


I didn't hear that. Can you say it again?


Francesco Colasanti, Eurocastle Investment Limited - Managing Director, Fortress Investment Group [10]


Sure. I said sure.


Myrto Charamis, Liberum Capital Limited - Analyst [11]


What is your expectation for growth for doBank, IPO or not. If you don't mind telling us? Thank you.


Francesco Colasanti, Eurocastle Investment Limited - Managing Director, Fortress Investment Group [12]


Organically, we think that doBank can grow in the numbers -- the EBITDA of doBank can grow for two different reasons. One is because there are the co-synergies that have already been implemented, but we'll see the results in stocking from 2017. And two, because it is every day in the market to get new mandates from banks to manage their nonperforming loans.

I will say knowing what are the synergies targeted by the bank and what the mandate that these guys are taking, without any extraordinary deal -- like what we said before, the large transactions -- without those large transactions, if they grow 10% in a year, I would be happy with that.


Myrto Charamis, Liberum Capital Limited - Analyst [13]


And you expect the same payout ratio that you had this time around?


Francesco Colasanti, Eurocastle Investment Limited - Managing Director, Fortress Investment Group [14]


DoBank doesn't have a formal dividend policy so far. So doBank expects to -- in conjunction with the IPO is expected to set a distribution policy for the future.


Myrto Charamis, Liberum Capital Limited - Analyst [15]


Thanks so much.


Operator [16]


There are no further questions in the queue at this time. I will turn the call back over to management.


Francesco Colasanti, Eurocastle Investment Limited - Managing Director, Fortress Investment Group [17]


Great. Thanks for your time. Thanks for your questions. And on behalf of everyone at Eurocastle, we thank you for your continued support and look forward to updating you again in May. Thanks a lot.


Operator [18]


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