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Edited Transcript of IIA.AT earnings conference call or presentation 28-Nov-19 2:00pm GMT

Q3 2019 Immofinanz AG Earnings Call

Wien Jan 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Immofinanz AG earnings conference call or presentation Thursday, November 28, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dietmar Reindl

IMMOFINANZ AG - COO & Member of Executive Board

* Oliver Schumy

IMMOFINANZ AG - CEO & Chairman of the Management Board

* Stefan Schönauer Bakk

IMMOFINANZ AG - CFO & Member of Executive Board

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Conference Call Participants

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* Andre Remke

Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst

* Christian Bader

Raiffeisen CENTROBANK AG, Research Division - Analyst

* Christoph Schultes

Erste Group Bank AG, Research Division - Senior Analyst for CEE Equity Research

* Henri Quadrelli

Societe Generale Cross Asset Research - Equity Analyst

* Jakub Caithaml

Wood & Company Financial Services, a.s., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I am Haley, your Chorus Call operator. Welcome, and thank you for joining the IMMOFINANZ conference call on the Q3 earnings. (Operator Instructions)

I would now like to turn the conference over to Oliver Schumy, CEO of IMMOFINANZ. Please go ahead.

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Oliver Schumy, IMMOFINANZ AG - CEO & Chairman of the Management Board [2]

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Dear ladies and gentlemen, welcome to our conference call on the presentation of results for the first 3 months -- for the first 3 quarters of 2019. With these excellent figures, IMMOFINANZ is continuing the strong performance generated in the previous year.

Let's now take a closer look at the highlights on the second slide. At around 95%, our occupancy rate is stable at a very high level, which also makes us one of the best in international comparison. Our standing investment portfolio grew by a strong 25% to EUR 4.6 billion, and our entire real estate portfolio has reached the level of roughly EUR 5.1 billion. This reflects our latest acquisitions in the office and retail sectors as well as our major project completions in Germany.

Our rental income improved by nearly 16% to EUR 203.4 million. After an adjustment for acquisitions, sales and completions, we have a plus of 2.3%. At 6.3%, the gross return represents solid value in international comparisons. The results from asset management, our most important source of operating earnings, climbed by more than 14% to EUR 153.8 million, and our net profit improved by a good 50% to EUR 202.6 million. That represents earnings per share of EUR 1.9.

I would also like to highlight the development of our sustainable funds from operations. FFO 1 from the standing investment business rose by more than 47% to EUR 92.8 million. We are now well on track to meet our guidance, which we raised in connection with the announcement of results for the first half year, as you well know.

Our financial profile also remains fundamentally strong. Gearing based on the net loan-to-value ratio equals roughly 44% after the investment of surplus liquidity and reflects our target corridor. In other words, we are fully invested.

I would now like my colleague, Dietmar Reindl, to present the progress on our portfolio in detail.

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Dietmar Reindl, IMMOFINANZ AG - COO & Member of Executive Board [3]

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Thank you, Oliver. Let me start with our myhive brand. Today, we have 24 myhives in 6 countries. The occupancy rate is what's already used to, quite high, 94.2%, and it's the carrying amount of EUR 1.6 billion. The gross return is on 6.3%. And for the next year, we plan to add even more, meaning 4 further myhives. And regarding the concept of myhive, we are now, right in this month, adding a fourth pillar to the myhive brand pillars. And this is flexibility. We will offer a flexible leasing system, meaning shorter lease terms are possible, and we offer as well flexible areas, meaning that the tenants can, let's say, grow and diminish the areas much more flexible.

Second brand, STOP SHOP, we have now reached a number of 88 properties in 9 countries. Rental space is now above 600,000 square meter, and the occupancy rate is on almost 98%. The gross return is on 8.2%. For the next year, we plan to continue the quite successful growth of this brand up to 100 locations.

Our third brand is VIVO!, our shopping centers, where we have passed 300,000 square meter of rentable space and an occupancy rate of 92.4%. This occupancy rate is lower than we are used to, but this is because of 2 major refurbishments. And you can look at these refurbishments in a bit more detail.

The first one happened, I can say happened because we have already successfully opened this refurbishment in VIVO! Cluj in Romania. We refurbished about 1/3 of the shopping center, meaning around 20,000 square meters, and we added successful concepts like Massimo Dutti, Peek & Cloppenburg and Zara Home. The occupancy today is already back on the level of 99%, and in the first weeks we were able to increase the visitor frequency by 13%.

The second refurbishment in VIVO! was in Bratislava, VIVO! Bratislava, and is as well already finished and opened. We are offering here 20 new brands, and the occupancy rate by the end of this year will here be on the level of 98%. And because we added a very successful Lidl food store, we were able to report an increase in visitor frequency of 35% in September.

Let's now hand over to Stefan Schönauer to go in more detail with the numbers.

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [4]

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Dear ladies and gentlemen, let me please give you some more information on our profit and loss statement on Page 5 of our presentation. Our rental income increased by EUR 27.7 million to EUR 203.4 million, a substantial increase that is also linked with the very successful investment strategy that we executed in the second half of this year.

Our result of asset management, in line with rental income, increased by roughly 15%. Our result of property sales is positive with EUR 3.7 million, lagging a bit behind to the figure of the previous year. However, to be mentioned, the previous year's figure is led by foreign exchange translations from OCI through the P&L. Our result of property development is positive with EUR 9.1 million compared to EUR 23.7 million in the previous year.

Our operating expenses declined by more than 20% to EUR 32.2 million. And this, I think, is a very, very positive development in our expenses and development of cost-cutting. So herewith, result of operation was EUR 139.7 million. We had a very good revaluation result in the first half year with almost EUR 100 million, EUR 97.4 million to be precise. And we also expect a positive development in the second half of this year.

Operating profit herewith was EUR 237.1 million compared to EUR 150.1 million in the -- more than 50% up compared to the previous year. Our financing costs were pretty much stable. What we lack here is some financing income. This is because we acquired a property in Prague, Na Príkope, that was held in former times as a joint venture, and there is EUR 5 million less financing income. So financing costs were stable.

We had a negative effect from the revaluation of our derivatives, and this came in with minus EUR 21.2 million and is an effect from marking these derivatives to market.

Our investment in S IMMO paid off with more than EUR 47.1 million and is accounted in the line equity-accounted investments.

So financial results are minus EUR 24.5 million. While this was a positive figure in the previous year with EUR 32.3 million, here, there was also taken into account in the previous year the S IMMO contribution. Our earnings before taxes therefore are EUR 212.6 million compared to EUR 182.4 million in the previous year.

Finally and after taking into account some positive tax reimbursements that we received from Russia, our net profit of the period was EUR 202.6 million, and this is more than 50% increase compared to the previous year.

Let's now turn the page and have a quick look to our FFO. I also here can announce that our FFO is up by 50%. This means EUR 92.8 million in total for the first 3 quarters of 2019. We are on very good track to fulfill our guidance of EUR 115 million of FFO 1 excluding dividends from S IMMO. Taking S IMMO dividends into account, we are on very good track to achieve and overachieve EUR 128 million FFO 1.

Please take now a look on Page 7 of the presentation, a quick glance on our financing. We have a very solid position with our investment-grade rating achieved in January 2019. Our net LTV increased to 44.2%. This is because of 2 facts. On the one hand side, we executed and finished on our share buyback program. We are now having 10% of treasury shares. And secondly, we are fully invested again. We have acquired a couple of assets in the first 3 quarters of 2019, among those, a nice investment in Warsaw with Warsaw Spire. So the LTV is 44.2%. We have the high hedging quota of close to 90%. And our financing costs again decreased, including already cost of hedging, to 1.95%.

Let me now hand back to Oliver Schumy to give you some words about the outlook.

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Oliver Schumy, IMMOFINANZ AG - CEO & Chairman of the Management Board [5]

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Dear ladies and gentlemen, as you can see, with property assets of over EUR 5 billion, we have created a sustainable economic foundation and substantially strengthened our earning power. We are now working to integrate the office and retail properties acquired during the third quarter into our brands here. In addition, we want to reinforce our leading position as an operator of retail parks in Europe and grow to over 100 locations. Our plans also include the further development of our myhive office brand to include a flexible rental concept.

As I previously mentioned, we are well on track to meet the FFO target, which was raised at the half year. Our goal is to generate FFO 1 before tax of more than EUR 115 million in the current financial year. If we also include the dividends received from S IMMO, we count FFO 1 before tax of roughly EUR 128 million. And we want to distribute 75% of this FFO as a dividend to our shareholders for the 2019 financial year. As you can see, we are in a very good and very profitable course.

I would now like to make some brief comments on our investment in S IMMO. As announced on Tuesday, the executive boards of both companies decided to terminate discussions over the possible combination of IMMOFINANZ and S IMMO. In particular, no agreement on a possible conversion ratio could be reached. The decision followed a proposal by IMMOFINANZ to S IMMO proclaiming a merger based on the NAV for presentation to the shareholder meetings in 2020.

In our calls and on other occasions, we've always said that there are multiple options, and we are evaluating all alternatives. This is still true. Our 29% stake in S IMMO has in any rate proven to be a very profitable investment. We only need to compare the acquisition price of EUR 20 per share with the book value at the end of September. And the contribution to earnings in the first 3 quarters totaled an impressive EUR 47 million.

We will now be happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from the line of Jakub Caithaml of Woodward & Company (sic) [Wood & Company].

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Jakub Caithaml, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [2]

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It's Jakub from Wood. I will have 2 questions before -- regarding S IMMO. First, if you could walk us perhaps in a bit more detail through the options that you are currently evaluating with regards to your investment in S IMMO. And second, which is related, are you in touch or do you coordinate your S IMMO strategy with Mr. Pecik and Mr. Ketterer?

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Oliver Schumy, IMMOFINANZ AG - CEO & Chairman of the Management Board [3]

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To answer your question, there has been no contact, and we have not been contacted on this. And concerning options, as we said, there are several options. At the present time, however, we don't have any favorites. However, one thing is clear: our recommendation for a merger based on the NAV was rejected.

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Operator [4]

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The next question comes from the line of Christian Bader of Raiffeisen CENTROBANK.

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Christian Bader, Raiffeisen CENTROBANK AG, Research Division - Analyst [5]

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I have 3 questions and would like to do them one after the other. First of all, do we expect any positive effects for your rental income from the 2 refurbishments of VIVO! shopping centers?

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Dietmar Reindl, IMMOFINANZ AG - COO & Member of Executive Board [6]

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Yes, definitely. There is -- on the one hand, we managed to bring very strong brands, which by itself are working like a magnet and will drag additional visitors. I can tell you that in the second -- on the second weekend after the reopening in Cluj, we had from Friday to Sunday a visitor number of 156,000 people, and this is a tremendous number. The increase in rental income will be rebuilt from base rent and from turnover rent. The same is valid for Bratislava. They are even more because before, this was a old Carrefour store, Carrefour hypermarket. And now we put in very modern and new concept, while the rent level is much, much higher than before.

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Christian Bader, Raiffeisen CENTROBANK AG, Research Division - Analyst [7]

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Okay. But would you be willing to give us any number such as rent per square meter increase or something like that for those 2 shopping malls, please?

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Dietmar Reindl, IMMOFINANZ AG - COO & Member of Executive Board [8]

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I can give you the average square meter rent in Bratislava, which is now with some small STOP SHOPs still missing on the level of EUR 17.6 per square meter. And in Cluj, we are on a level of around EUR 15 to EUR 16 per square meter but not yet having the turnover reconciliation, which might, in both locations, in Bratislava I expect EUR 1 more per square meter addition, and in Cluj I expect EUR 2 more per square meter.

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Christian Bader, Raiffeisen CENTROBANK AG, Research Division - Analyst [9]

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Okay. And how does that compare to before the refurbishments? Roughly what is the increase?

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Dietmar Reindl, IMMOFINANZ AG - COO & Member of Executive Board [10]

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It's -- in total, because we haven't increased the area, it will be a high one-digit number.

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Christian Bader, Raiffeisen CENTROBANK AG, Research Division - Analyst [11]

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High one digit, I see, around...

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Dietmar Reindl, IMMOFINANZ AG - COO & Member of Executive Board [12]

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Yes.

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Christian Bader, Raiffeisen CENTROBANK AG, Research Division - Analyst [13]

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Good. Then my second question would be, is it possible to give any guidance for the fourth quarter and also maybe for next year already for your targeted maintenance, both through P&L and also through cash flow, so capitalized?

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [14]

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Well, I think what we can give is a longer-term guidance that we have already mentioned several times. However, we still see opportunities to improve the overall portfolio. These investments, we will not struggle to do so. Like we did now in Bratislava or in Cluj, take some investments and improve the overall earnings. In the long run, we expect roughly 7% -- 6% to 7% maintenance through P&L in the total portfolio. However, this will be something that can vary and fluctuate because of single investments in the one or the other period. We don't give here exact guidance. So I think when you take this into your model, in the long run, let's say, for 3, 4, 5 years, a 6% to 7% is fair assumption, but this may vary during the various years in P&L.

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Christian Bader, Raiffeisen CENTROBANK AG, Research Division - Analyst [15]

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Okay. And then I'd like to ask the -- my question differently. I mean are there any big shopping malls or office assets where you will or have to do some maintenance or some major refurbishments in the very short term now?

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Dietmar Reindl, IMMOFINANZ AG - COO & Member of Executive Board [16]

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We are planning for next year 2 refurbishments. One has started already. This is VIVO! in Bratislava -- sorry, VIVO! in Prague. Park Hostivar is their name. And -- but it's a minor refurbishment. And the second one is in VIVO! Baia Mare where we will manage to take out today's hypermarket, put it in a smaller area, and we can put in one or the other Inditex brands, and this will happen during next year.

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Christian Bader, Raiffeisen CENTROBANK AG, Research Division - Analyst [17]

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Okay. Very interesting. And my last question is on your other operating expenses. Now given the progress you've made, which is quite nice, shall we expect more cost-cutting benefits in the very short term? Or do we think you have now reached the, let's say, ideal level?

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [18]

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Stabilization is around, let's say, a figure of EUR 33 million, EUR 34 million because I think it's something that we reach a very stable ground. This already takes into account one or the other one-off projects that might be here and there every year.

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Christian Bader, Raiffeisen CENTROBANK AG, Research Division - Analyst [19]

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EUR 34 million is an annual?

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [20]

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Yes.

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Christian Bader, Raiffeisen CENTROBANK AG, Research Division - Analyst [21]

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Annually, okay. All right.

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Operator [22]

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(Operator Instructions) The next question comes from the line of Christoph Schultes of Erste Group.

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Christoph Schultes, Erste Group Bank AG, Research Division - Senior Analyst for CEE Equity Research [23]

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I have actually 2. One is a follow-up. Maybe we'll start with that. So to clarify, would you sell the S IMMO stake if you get a good offer? And maybe that's a little bit too much, but I want to ask you nevertheless what would be a kind of minimum price you would ask for. This would be the first one. Then the second one is regarding your own shares. It's obvious you don't need your own shares now for kind of share offer to S IMMO shareholders anymore. Are there any plans to withdraw your own shares? Or would you rather keep thinking about your convertible? This would be my second question.

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [24]

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So thank you very much. Regarding the first question, please understand that we will not comment on that, but as Oliver already said, all options from our point of view are open. We will not say any specific things about our S IMMO investment. The second question regarding our own stock, as you know, we have that convertible bond of EUR 300 million that is keeping the money. And we have now 10% treasury shares that could be used for, in case this convertible bond converts into equity, we could use for distributing the shares to the bondholders.

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Christoph Schultes, Erste Group Bank AG, Research Division - Senior Analyst for CEE Equity Research [25]

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Okay. So you don't think of maybe deploying the shares because it doesn't [help] for your convertible?

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [26]

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There is no resolution currently on the table regarding this.

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Operator [27]

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The next question is from Andre Remke of Baader Bank.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [28]

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Also from my side, some questions. On Page 5, you mentioned the development business, higher construction costs and delays, which turned to be negative in the third quarter. Could you remind me on the background here? So the first question, please.

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [29]

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Yes, for sure. We are planning to build our first myhive 2.0 building in Germany that will be called myhive Medienhafen. It's the second phase of our very successful trivago investment that we have done there. It's a 16-floors tower that is fully constructed now, and this was a building that trivago had an option to rent it. Trivago stepped back quite some time from these options. Now we are free to make here our first myhive 2.0 building in Germany. Changing this structure, changing this layout of this gearing cost time-wise some delay but will also create a very modern and very attractive new office building in Düsseldorf, and this caused some time-wise delay that is reflected with EUR 5 million in our P&L.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [30]

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Okay. Second question, you mentioned you expect valuation, also further devaluation in the second half. Not really in terms of numbers, but in which regions or asset targets do you most likely -- would most likely contribute? Do you have any clue at this point in time already?

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [31]

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Not really a clue to give there because our valuer, CBRE, is just about to start this valuation process about -- or end of this year. But as we saw broadly yield compression especially in Austria and Germany, we think that this will continue to improve our values also coming from these 2 countries.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [32]

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Once again, the last sentence, also in Eastern Europe?

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [33]

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Yes. All the Eastern Europe, but predominantly, I think it will be similar to what we saw in the half year results. Most of the positive revaluation results came from Austria and Germany. We also see positive trends in CE, not that strong yield compression although.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [34]

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Okay. That's helpful. Then the last question, you mentioned you are fully invested. So what will be the next step to finance any kind of acquisition opportunities? Or do you feel comfortable with your current development pipeline to focus on more internal growth?

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Dietmar Reindl, IMMOFINANZ AG - COO & Member of Executive Board [35]

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I think we can say that this year was a very good year in terms of acquisitions. We acquired one, I must say, really a symbol of -- for real estate in Europe, and this is the Warsaw Spire. It's also, say, contribute a lot to our successful numbers. And then we acquired as well Palmovka and one or the other STOP SHOP. We will finish with 1, 2 more acquisitions this year, which might be more in the STOP SHOP area. And for the next year, we will work with the existing portfolio. We will convert, as we mentioned before, the one or the other myhive. And we have these 2 refurbishments in the VIVO! sector, and this sort of says for us a good program, and this is how we plan the next year.

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [36]

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And let me add, our portfolio increased by EUR 1 billion, taking into account the reclassification of finished development and the acquisitions Dietmar had just mentioned, the Spire, our STOP SHOP portfolio in Palmovka and [partially] increase the portfolio size to EUR 5.1 billion, a very successful year for us.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [37]

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And therefore, you mentioned you are right now fully invested with all the smaller upcoming acquisitions or projects?

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [38]

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Yes.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [39]

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So in other words, you are not that ambitious at the moment to really have another, let's say, EUR 1 billion next year from today's perspective at least.

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [40]

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We are generally always ambitious, and we will take opportunities that may arise in the market. But we are fully invested. We have a very strong program that we're executing for 2019. We have now reached 45, close to 45% of LTV. We have invested our cash, and we will take opportunities to further grow if these options came around, but we are in a late stage in the cycle. So let's see what this next year will bring.

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Operator [41]

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The next question is from Henri Quadrelli of Societe Generale.

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Henri Quadrelli, Societe Generale Cross Asset Research - Equity Analyst [42]

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A simple -- very simple question on your presentation on Page 5 -- sorry, on Page 2. You gave a rental income like-for-like plus 2.3%, while on your report, you gave 3.6%. Why the difference?

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [43]

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Which report do you refer to?

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Henri Quadrelli, Societe Generale Cross Asset Research - Equity Analyst [44]

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The Q3 report, in fact. Page 15 where you -- there is a table with standing investment like-for-like by asset class and brand.

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [45]

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I think that's an easy one. It's just a confusion there, up EUR 3.6 million and 2.3%. So that's simply -- on Page 11 of the presentation, you have this in pretty much detail, it's EUR 3.6 million, up 2.3%. I think that clarifies it.

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Henri Quadrelli, Societe Generale Cross Asset Research - Equity Analyst [46]

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Exactly. Yes, you are right, sorry.

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Operator [47]

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And there are no more questions at the time. I hand back to Oliver Schumy for closing comments.

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Oliver Schumy, IMMOFINANZ AG - CEO & Chairman of the Management Board [48]

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Dear ladies and gentlemen, thank you for the call, and we will be happy to host you again with the full year financials next year. Thank you, and have a good Christmastime.

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Operator [49]

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Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for joining, and have a pleasant day. Goodbye.