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Edited Transcript of IIA.AT earnings conference call or presentation 29-Aug-19 1:00pm GMT

Half Year 2019 Immofinanz AG Earnings Call

Wien Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Immofinanz AG earnings conference call or presentation Thursday, August 29, 2019 at 1:00:00pm 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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* Christian Bader

Raiffeisen CENTROBANK AG, Research Division - Analyst

* Christine Reitsamer

Baader-Helvea Equity Research - 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 first half year results 2019.

(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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Thank you. Ladies and gentlemen, a very warm welcome to our conference call for the first half of 2019. Let's move straight to the highlights on Slide #2 of the presentation. Our occupancy rate remained stable at the very high level of around 95%, which also puts us among the market leaders internationally. Our standing investment portfolio grew by more than 10% to EUR 4.1 billion, bringing the value of our total property portfolio to over EUR 4.5 billion, and that's without the recent announced acquisitions.

With these, we are moving towards EUR 5 billion. Our rental income increased by almost 11% in total to nearly EUR 132 million. Adjusted for acquisition sales and completions, it rose by 3.3% in the second quarter. This is also a very encouraging increase, which was driven by higher rates. The overall gross return is 6.3%, which is a very solid level by international standards. The results of asset management, our most important operational earnings pillar, were up by more than 6% to EUR 101 million. And the net profit for the period more than doubled to approximately EUR 185 million. The financial results also benefited from the good performance of our S IMMO holding. We are pleased with this as it shows that we made the right investment.

Earnings per share were up by almost EUR 1 from EUR 0.79 per share to EUR 1.72. The development of our sustainable funds from operations is a key profitability indicator in our sector, also underlines our improved earnings power. FFO 1 from the standing investment business rose by more than 20% to EUR 59 million. Furthermore, we can continue to highlight a very solid financial profile. Our gearing is very robust at below 40% on the net loan-to-value basis. And at the end of June, we had around EUR 560 million in the bank, giving us ample scope to make attractive acquisitions. And now, I'll ask my colleague, Dietmar Reindl, to present the progress made in the portfolio to you in detail.

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

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My pleasure, thank you. Let's take a look at our 3 brands and our -- at our future plans in this respect. We're now generating more than 70% of our rental income from offices under the myhive brand and from our STOP SHOP and VIVO! retail properties.

The occupancy rate has been largely stable here since the end of the year and STOP SHOP is fully let at more than 98%. The returns are also very satisfactory. These are around 6% for the offices, and in the retail sector, we are at 8% or even slightly above that. But of course, we don't intend to sit back. For our myhive office brand, we have more buildings currently in progress and are also working with further developing the offer to our clients. Considering a lot the upcoming, as we think, megatrend of flexibility.

As you can see on Slide 4, in Vienna, we are converting an existing property in Ungargasse near the Rochusmarkt into a myhive office, including, for example, very nice terraces for the tenants. And next to the trivago Campus in Düsseldorf, we're constructing our first myhive property in Germany. This will have a total GLA of around 22,000 square meters. In both buildings, myhive Ungargasse and myhive Medienhafen, we will also offer our new myhive co:work concept. It is shown in detail on the next slide.

When we introduced the myhive brand at the end of 2016, we were entering new territory. The modern office environment with their comfortable atmospheres, similar to a hotel and the community aspects, were not widely known in Austria. We have developed design guidelines inspired by hotels to put a comfortable ambiance to the common areas. The second important element is the community. The events and office organized by our community managers are extremely well received by the tenants and their employees. And our international community now comprises already more than 32,000 employees.

And the next step now with myhive 2.0, we want to offer our tenants even more flexibility regarding the contract term and the scope of the services provided. This will happen in 2 stages. Initially, we will offer flexible standard layouts in all of our myhive buildings, which can be rented for periods from as short as 6 months. And the next step, we will then offer all-inclusive services. This means that if the tenants would like us to, we will take on, for example, the office planning, office furniture from our catalog, the cleaning and much more. The leasing of smaller rental units, so-called private offices, is also planned. And the selected locations, such as those already mentioned in Vienna and Düsseldorf, we will also offer myhive co:work starting from summer 2020. And there, we will provide furnished and serviced co-working desks or individual workspaces.

Our primary target growth continues to be the major tenants. However, at the same time, its concept provides space for smaller tenants, which will in return significantly enrich the variety of our community. With our STOP SHOP retail parks, we remain in the growth path. Exactly 1 week ago, we opened our 10th STOP SHOP in Serbia, in the city of Sremska Mitrovica. Even the Serbian Minister of Agriculture and the Austrian Ambassador in Serbia participated. The STOP SHOP is fully let from the first day of opening and the fact that the offer is very well received by our visitors can be seen that 12,000 people came to our STOP SHOP the first day.

In Poland, the third STOP SHOP is currently under construction in the city of Siedlce. This will comprise more than 14,000 square meters and its future open in spring 2020. Many well-known retailors have already signed their rental contracts. We will, as a result, reach our goal in the current year of growing the number of STOP SHOPS to around 90. In the next step, as you already know, we aim to bring the number of locations to above 100.

And the next slide provides an overview of our active development projects with a carrying amount of approximately EUR 163 million and an expected value on completion of almost EUR 280 million. In the first half of the year, we completed our Düsseldorf FLOAT office property and reclassified the current investment portfolio. The tenant Uniper has already moved in with around 2,500 employees. We have also completed the expansion of our STOP SHOP in the city of Trebíc in the Czech Republic. This retail park now has a rental space of almost 22,000 square meters, making this our largest STOP SHOP. And very important, the property is fully let.

This brings us to another work-intensive scope of the last month, our value-generating acquisitions. This year, we were often asked about our plans for a substantial liquidity. As announced, we have now invested part of this in the strengthening of our standing investment portfolio and sustainable earnings power and have taken some important steps in terms of growth. With the well-known Warsaw Spire, we now own the tallest office tower not only in Warsaw but in whole CE. This is an ideal combination of top quality with many distinguished tenants and optimal infrastructure. The property has a value of EUR 386 million and the expected rental income is EUR 19.6 million per year. This gives the rental return of 5.1%, which is a very good level for Warsaw and for this premium property.

In Prague, we've also strengthened our position as a provider of premium office property solutions. We acquired Palmovka Open Park, which has almost 26,000 square meters of GLA. This office location will contribute around EUR 4.4 million in annual rental income. Both properties, Palmovka and Warsaw Spire, are perfectly suited to our myhive office brand and will be marketed accordingly.

In line with our commitment, we have reinforced our position as leading retail park operator in Europe and acquired recently 6 fully let properties in Slovenia and Poland, as you can see on Slide 10. Including in the recently opened STOP SHOPS in the Serbian city of Sremska Mitrovica and 2 further projects in Poland, we have reached our goal of -- our goal for 2019 of expanding our STOP SHOP portfolio substantially to around 90 locations. The more recent acquisitions fit perfectly within our concept. Therefore, we let and generate a more-than-expected gross return of 8.6%.

I'll now hand over to my colleague, Stefan Schönauer, who will go through the financial slides in more detail.

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

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Thank you very much. Hello, ladies and gentlemen. Let me now take you to page 11 of the presentation and let me guide you through our profit and loss statement. Rental income increased by 10.8% to EUR 131.8 million. And if you adjust this for the adoption of IFRS 16 first time, the increase of rental income is still 4.2% or EUR 5.1 million.

Results of asset management also increased by 6.6% to EUR 101 million. The result of property sales was EUR 1.7 million, and result of property development, EUR 14.3 million, resulting from our successful finished development. Other operating expenses are down by almost 20% and came in at EUR 22.3 million.

We, early this year, also announced that we will expect substantial increase in the value of our portfolio. This is predominantly led by Austria and Germany and we see now this revaluation results with EUR 104.7 million in our profit and loss statement. EBIT operating profit was EUR 203.4 million compared to EUR 124.1 million in the previous year and the level increased by 64%. Net financing costs slightly decreased again on a very, very good level already were EUR 30.4 million. Other financial results, minus EUR 17.6 million, this is predominantly due to this market-to-market valuation of our derivatives that came in with the swaps, the hedging that we have in this very low interest rate environment.

From our equity-accounted investment, this is basically our investment in S IMMO, we accounted for EUR 43.4 million from the S IMMO. So financial results are minus EUR 4.6 million, while it was EUR 1.5 million positive in the previous year. Earnings before taxes, EUR 198.8 million, almost 60% increase compared to the previous year. Our net profit from continuing operations, there it was EUR 181.8 million and that was more than doubled compared to previous year. We also received a nice contribution from Russia. As you remember, we disposed our Russian assets in 2017, but now, still received some payments due to tax claims that we received here as reimbursement. So our final net profit for the period results to EUR 185.3 million compared to EUR 86.2 million. And this is more than doubled compared to the previous year.

Please follow me now to page 12, and let's have a look on our FFO and our FFO guidance. Our FFO 1 before taxes and before S IMMO increased by 22% to EUR 59 million. This substantial increase is even more and even higher. If you take into consideration also our dividends received from S IMMO, then we have FFO 1 of EUR 72.7 million. When we look into the year 2017 backwards, in April, we gave guidance to the market that, in finance, expects to achieve more than EUR 100 million of FFO 1 in 2019. Now, after half year results and also very successful investments, we are happy to tell you that we would like to lift up this guidance and we expect more than EUR 115 million FFO 1 in 2019, excluding S IMMO dividends. And if we take the already consumed S IMMO dividends here into account, we will increase this even more and will come to more than EUR 128 million FFO 1, including S IMMO dividends and before taxes.

Let's, on page 13, now have also a quick look on our financing and maturity profile. We have still very solid LTV of below 40%, precisely 38%. And we have, with end of June, a cash balance of more than EUR 600 million, money that we afterwards invested partially into the growth of our portfolio.

Our financing costs are including derivatives, 1.99%, so just below 2% and the average on a very good level, and with the issuance of our first benchmark-sized bonds earlier this year and also the investment-grade rating received by Standard & Poor's. We were able to increase also our hedging quota to almost 90%.

Finally, let's have a look on the picture of our maturity schedule. The next 2 years, I will call them relatively easy to have anything to refinance. And in the years 2022 and 2023, there are some balloon payments of bank financing in front of us. This, however, is already now addressed and we intensively work on rolling over these refinancings into the future so that we can further flatten out our maturity profile, and I can already now tell you that we are making very good progress with this exercise.

Thank you very much, and let me now hand over again to Oliver Schumy for the outlook

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

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Thank you, Stephen. Ladies and gentlemen, having repositioned our portfolio and improved its efficiency in the recent years, IMMOFINANZ is now successful again on course for growth. With the most recent acquisitions, we will not only significantly strengthen our sustainable earnings power but also moving towards a property portfolio of around EUR 5 billion. As we've outlined, we will integrate the office and retail properties acquired into our brand and further strengthen our position as leading operator of European retail parks, bringing the total number of locations to above 100.

With the further development of our office brand into myhive 2.0, we are also expanding our offering to include smart, flexible office solutions. With respect to our FFO, in April 2017, we are now repositioning, which has since been completed, we're still underway -- we made a commitment to our shareholders to generate FFO of over EUR 100 million (sic) [EUR 115 million] in 2019 financial year.

As you already heard, we will exceed this. Our new guidance for FFO 1 before tax for the current financial year now stands at over EUR 115 million. When the dividend already received from S IMMO is also taken into account, this brings us to a pretax FFO 1 of approximately EUR 128 million, as we plan to pay out 75% of this FFO to our shareholders in the form of dividends or the 2019 financial year.

Furthermore, we have meanwhile completed our extensive share buyback program ahead of schedule, which now holds 11.2 million treasury shares. That's equivalent to exactly 10% of all shares. The statutory maximum limit has, therefore, been fully utilized. We've spent around EUR 250 million in total on the buyback over the last 1.5 years. This is equivalent to an average price of EUR 22.34 per share, which is around 7% to 8% below our current share price.

Ladies and gentlemen, as you can see we are moving in a very good and very profitable direction. Thank you for the attention, and we would now be pleased to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Jakub Caithaml of Wood & Company.

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

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This is Jakub from Wood and Co. I have 3 questions. First, on the myhive program. The expanded CapEx aimed at modernizing the office portfolio seems to be gradually coming to an end. Of course, since you launched this initiative, the occupancy in the office portfolio has improved substantially, so it looks like a success. I was wondering could you share how much has been spent on this program to date and how much are you still looking to spend and over what time horizons.

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

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Thank you, Jakub. First question, we have spent until now the last 3 years around EUR 40 million, office properties, in one part the interior design, but also we improved technical solutions like air conditioner and stuff. The second part of the question we did not get. Could you maybe repeat once again, please?

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Jakub Caithaml, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [4]

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Sure. It's about the future. So what is the plan for the common or general office refurbishments, and how much there is still to be spent to modernize the rest of the office portfolio, perhaps for the myhive for a different standard?

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Dietmar Reindl, IMMOFINANZ AG - COO & Member of Executive Board [5]

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We are now coming into a more of a normal phase. It's actually grow office asset management where we are spending around 7% of the rental income on maintenance.

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Jakub Caithaml, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [6]

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Excellent. Second question, significant amount of funds, as Mr. Schumy has just elaborated on, has been dedicated to the share buyback over the last 12 months or so. Would you tell us what do you plan to do with the treasury shares accumulated?

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [7]

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Well thanks for this, Jakub. This is Stefan. For now, for the time being, these shares -- our treasury shares in our balance sheet, we were able to buy back these shares with a nice discount to average market price today. This is like 8% or even more. And you know that we have out there a convertible bond, for example. This convertible bond is keeping the money at the moment. So theoretically any day, we could get conversional, this is from bondholders. And these shares, and this is just one option, could be used to give then with such conversion. This is part of this 10% shares to bondholders. Other options, for sure, are also thinkable, but there is no decision taken in canceling these shares or doing something else with them.

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Jakub Caithaml, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [8]

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Understood. And lastly, just because I think somebody should ask this question, is there anything that you can share on the talks between the prospective combination of S IMMO and IMMOFINANZ at this stage?

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [9]

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Sure, there, we can look at it. It's pretty much the same as we answered this question already in the past. We are here in the situation that we have quite strict [law in the] guidance how we can talk or details that we can give to the market. We have here signed a nondisclosure agreement with S IMMO. And as soon as there is a result or there is something to tell, then we will immediately inform the market. There are many options, and this is still a very interesting opportunity. But for the time being, we are very, very happy with holding S IMMO in our portfolio. We received here a very nice dividend, just think of the fact that the dividend we received means 3.5% net return. So net return after taxes, this is an equivalent to roughly 5.5% gross return if you would take such an investment into real estate. So S IMMO is like second Warsaw Spire at the moment. We are very happy with this investment. And since we hold this investment, their net asset value improved from roughly EUR 18 to more than EUR 24 per share. This is also a very encouraging development, and we think we did the right decision. And after that, and besides that, there is still a lot of other possible options.

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Jakub Caithaml, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [10]

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Right. Sure. Sorry, could you -- because I didn't understand this 3.5% and 5.5% comparison because I thought that the return after taxes is on the equity investment, whereas if you were to invest, say, in Warsaw Spire, then you could leverage it up and then the return would be higher, of course.

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Stefan Schönauer Bakk, IMMOFINANZ AG - CFO & Member of Executive Board [11]

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No, happy to explain. This is just a comparison. What we have is we invested EUR 20 per share in S IMMO, and we received here a dividend of more than EUR 30 million or EUR 0.70 per share. This means we have a 3.5% net return. Why do I call it net return, because according to Austrian tax laws, such a return from a holding where you have more than 10% is free of taxes. And this is why we like this figure.

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Operator [12]

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The next question comes from the line of Christine Reitsamer of Baader Bank AG.

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Christine Reitsamer, Baader-Helvea Equity Research - Analyst [13]

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Christine speaking. Three quick questions. One is on the operating overhead cost decline, is that sustainable? The second one is the on the margin you have provided. Luckily, the adjusted margin for the IFRS effect, is that now the level that we can expect or do you see any improvement possibly for this year? And the third question regards -- you said you have room for acquisitions, but investment makes -- markets remain very hot. Any comments on that? How likely it is that you make another acquisition over the next few quarters? And that's all from my side.

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Dietmar Reindl, IMMOFINANZ AG - COO & Member of Executive Board [14]

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Thank you very much. This is Dietmar. I would just take the second question, but just because I did not get the first one. The second question was about the margin in result of asset management. Yes, as already said in our last call, we target here to get towards 85%. And the key here is that after some very intensive years of investing into our properties of bringing them into very good shape and to getting here the occupancy level up, we expect this -- Mr. Reindl had explained that our maintenance will flatten out, and this will further improve our margin into this direction.

The first one, could you please repeat? The overhead cost will probably take a -- operationally...

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Christine Reitsamer, Baader-Helvea Equity Research - Analyst [15]

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Yes, exactly. Overhead grew...

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

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I would say we have reached here a good level. For the future, it will be sustainable. And I see a potential to improve it in some content. The third question was about acquisitions. This year, I would say, we have done quite a nice volume of acquisitions. For this year, I don't see any bigger projects coming to road. But next year, we will again look at markets and projects fitting into our portfolio strategy. And this is a lot on STOP SHOP retail parks because, at the moment, they are still products which give an acceptable price and a very nice yield.

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Operator [17]

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(Operator Instructions) And the next question comes from the line of Christian Bader of RCB.

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Christian Bader, Raiffeisen CENTROBANK AG, Research Division - Analyst [18]

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I have 3 questions remaining. So while your overall occupancy across the group has improved a lot recently, there is 1 country on the retail area, in Romania, where the occupancy is below 90%. I can't remember whether it was on that level at the year-end but at least it looks a bit, let's say, suboptimal from this point. If you -- could you talk a little bit about that and which things are you proposing to improve the situation? Secondly, 2 questions on the financing. Now given this large amounts of money that has been spent for your acquisitions in the last 2 months, I was wondering if you could give us a figure for the, let's say, minimum cash balance that you wish to hold at any time? And second question, also related to that, I mean what other covenants that your rating agency require from you, please?

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Dietmar Reindl, IMMOFINANZ AG - COO & Member of Executive Board [19]

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Yes. Let me take the first question regarding occupancy in Romania, VIVO!. Thank you for the specific questions.

Yes, we have in Romania, one of our biggest shopping center actually is VIVO! Cluj, which has a GLA of 65,000 square meters. Right today, having started late winter, early spring, we have about 1/3 of this shopping center under refurbishment because we achieved to bring in all Inditex brands and as well we can -- we work into the shopping center. So we are refurbishing 1/3 of this quite big shopping center. And this we are showing in the occupancy because it's now sort of empty but we have signed 100% of all conflict with area. The opening will be the first part on October 16, the second part will open on November 7 and 14th. So we will, at the end of this year, see the occupancy back to 97%.

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

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Yes. And let me take the second question regarding financing and minimum cash level that we want to see in the company. We think that it's smart and wise to have something between EUR 200 million, EUR 250 million, let's say, minimum cash level. And we are still after these 3 large investments, as already shown today here in very good territory. And, sorry, yes, there was one more question regarding the covenants of bonds. You can have a look, half year report on Page 23. There is the covenants presented. We have here 3 main covenants, one is net debt-to-value ratio of maximum 60%, we have here 38%. Secured debt ratio of max 45%, we are here in a very good territory of 22.3%, and interest service coverage ratio of -- a minimum of 150%. We have here more than 345%, so well ahead of any covenant breaches or any danger.

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Operator [21]

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(Operator Instructions) And there are no further questions at this time. I would like to hand back to Oliver Schumy for closing comments.

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Oliver Schumy, IMMOFINANZ AG - CEO & Chairman of the Management Board [22]

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Ladies and gentlemen, thank you very much for the attention, and we hear each other again for our quarter 3 results in November. Thank you.

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Operator [23]

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