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Edited Transcript of MOBN.S earnings conference call or presentation 7-Feb-20 1:00pm GMT

Full Year 2019 Mobimo Holding AG Earnings Call

Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Mobimo Holding AG earnings conference call or presentation Friday, February 7, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Ducrey

Mobimo Holding AG - CEO & Member of the Executive Board

* Manuel Itten

Mobimo Holding AG - CFO & Member of the Executive Board

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Conference Call Participants

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* John Vuong

Kempen & Co. N.V., Research Division - Analyst

* Pierre Paren

BMO Capital Markets Equity Research - Analyst

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Presentation

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Daniel Ducrey, Mobimo Holding AG - CEO & Member of the Executive Board [1]

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Thank you, Cecilia. Dear ladies and gentlemen, I am delighted to welcome you to the presentation of the 2019 annual report. I'm glad that you're taking time

to check the latest news from Mobimo here which is (inaudible) over the phone to get the comments on the annual results.

With me is Manuel Itten, our CFO. And as you know, last Friday, Manuel informed that he will be leaving Mobimo this summer. In the meantime, and also today, he stays fully involved, and I would like to thank him for this.

How are we going to proceed? As usual, we start with a few highlights, then the hard facts and figures, followed by a close look on the heart of Mobimo, namely our portfolio. And finally, we have a look ahead on what's coming next.

Let's start the overview of 2019 with a few highlights. I have selected 5 special points to be mentioned. First, we were able to significantly increase the rental income, as planned. We have exceeded the CHF 60 million mark for the first time in the half year and CHF 125 million for the full year. This reflects a clear strategic intent to further increase the rental income. Then we integrated 2 new districts with mixed-use buildings, Aqua and Mattenhof. This has increased our rental income and still has potential for more. Both sides are our own developments and which will now contribute massively to the positive development of our income.

As a third point, the strong performance in first letting was essential to achieve this goal. The performance, which was largely achieved by the in-house team in this highly competitive tenant market, was important element of success.

And the purchase -- then fourth point, the purchase of 3 new land plots for development of condominium apartments in the mid-price segment also brought some acceleration to the development pipeline.

Smaller but faster and no less profitable, these 3 projects also contribute to the development performance. And finally, the handover to the new leadership in the Board of Directors and the executive board took place and is now fully operational.

The overview of the key figures gives a first impression, which is overall satisfactory. At the first land, the figures show a good level of results, but they are partially due to a special effect in the taxes and the strong revaluation success. If we have a closer look, we are, of course, particularly pleased with the increase of -- in profits from the rental income, also because this is a key point of our development strategy. The cash flow from rental income is of utmost importance and we evaluate highly. The properties newly added to the portfolio were the Seehallen and Aeschbachquartier, they naturally have a negative influence on the vacancy rate. This, however, remained lower than expected, thanks to the good performance of the initial letting and the reletting of offices and apartments. The Mattenhof will be shifted into the investment portfolio during 2020, and this will then certainly drive up again the vacancy rates somewhat.

An operational profit of CHF 16 million from our own development is included in the net income from revaluation of CHF 51 million. But at the same time, we are, of course, not satisfied with the financial results from development for third parties and promotion.

This is a cyclical business, and we are depending on third parties. However, unfortunately, in 2019, we were not able to achieve the milestones we have aimed for. Nevertheless, only 2 properties were sold. On one hand, the property in St. Moritz, which has been a divestment property for some time already, and the second property was (inaudible) in Zurich, which was not suiting our portfolio requirements anymore and which has led us to divest.

Finally, we were able to absorb the increase in the portfolio value under management with the same high headcount. The total number of employees rose slightly from 157 to 161, but this is exclusively due to the expansion of FM activities in French-speaking Switzerland. The headcount of Mobimo management, our core business, decreased from 124 to 122.

How do we see the market and what are we going to do with it? The current political discussions are clearly moving towards more sustainability, more green and probably even more civil right for citizens. This applies also to the public debate about urban planning. We, the real estate business community, we will have to face this fact and deal with it. Now the low interest rates, which we also expect to remain for a certain time, will continue to increase the value of real estate. And in view of the transaction prices on the market, this low interest rate also increases, of course, the value of all real estate development potentials, also of our portfolio -- development portfolio.

The economic outlook looks robust. The demand for office spaces has clearly improved and is pulling through, and this is especially true for A-class location. For condominium properties, we are observing a strong demand for the mid-priced properties and residential housing is a solid segment as long as you are well placed in a good location and well connected.

In view of all this, we expect the coming year to continue with unchanged stability at good level. I would like now to hand over to Manuel for -- to walk us through the financial figures.

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Manuel Itten, Mobimo Holding AG - CFO & Member of the Executive Board [2]

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Thank you. I would like to turn your attention to the major result we achieved in 2019. Let's start with the income from rental properties where we are very happy to see the further increase, remarkable increase of the rental income of around 10% in 2019 due to the fact that were already described by Daniel. Adding new properties out of the pipeline on the construction for the own portfolio during the year 2019 was leading to this very interesting increase of rental income out of our core business. The second point, profit from development projects and sale of trading properties. There we achieved a low result of CHF 3.0 million in 2019, as we have announced in the second half of 2019. There we have, due to some time delays during the development, not achieved the goal of profit as we expected initially for 2019.

Here, I would like to turn your attention a little bit later on the explanation of the pipeline of condos for sale to private owners. We could, so to say, extend during 2019, that acquisition of different other investment opportunities.

The net income from revaluation, as you see on the line of the development over the last 4 years, we had 2016, '18 and at last 2019, achieved a remarkable valuation gain on the investment portfolio. And what is important here to outline is always that the remarkable portion of this revaluation gain was created by the development work, which was done for Mobimo for our own portfolio.

The profit on sale of investment properties was much lower, as expected, due to the lower number of transaction we proceeded in 2019, as already mentioned by Daniel.

And this was leading to a result comparable on the earnings before interest and taxes on the level slightly above the previous year. And we are really happy to achieve earnings before interest and taxes, excluding revaluation, which was based in the maturity. Now on the income from rental properties, it's around a result of an EBIT of CHF 82.5 million.

Then we had, as next point, a remarkable low tax expense in 2019 due to the fact that we had a onetime impact out of change in the tax rules in Switzerland in different [tenants], which have positively impacted the tax expense in 2019 as a onetime impact.

I would like to turn your attention now to the profit attributable to the shareholders of MOH, of Mobimo, which were nicely above the last year results although that means we have increased it, at the end of the day, 14% against 2018 on the level of CHF 103 million.

What is also additionally outlining the positive result of the core business created by the earnings of out of the rental income are the EPRA earnings per share achieved with CHF 9.12. Here, we follow the line and we already declined in the past to come much closer by further growing the portfolio and the income out of this portfolio much closer to this CHF 10 dividend yield, which we distribute out of the earnings to our shareholders. This CHF 9.12 at the end of the year is not including impact out of these changes of the tax rules in Switzerland.

So it's really the result of the core business. The vacancy rate on a level of 3.8% was still on a very low level. When you split the vacancy rate in commercial buildings, with 3.8%, we are very happy to achieve newly low result with very low vacancy rates on the commercial property portfolio and also on the resi properties, we achieved a vacancy rate of 3.9%. There you can see that by adding new properties at pipeline to the portfolio, [they're allowed] first letting work is to be done to really achieve the final goal of letting quota in these new buildings we have added to the portfolio.

When we look at the development on the next slide of the rental and net rental income, you will see over the last years, 2015 till 2018, we have achieved, on one side, the more or less same level of rental income. And now, as already announced in the past, in 2019, we put a remarkably increased rental income. And when we return to the outlook, you will see that our development activities for the own portfolio will also create a further increase in 2020 of the rental business income.

But this was additionally very positive with a direct cost income ratio that we could also lower from 18% last year, now to a level back on a -- you can see on a normalized level, which is represented by a direct cost income ratio of around 15%.

On the next slide, we would like to split and turn your attention then revaluation gain and what is a remarkable year out of the CHF 51.5 million total revaluation gain, CHF 16 million were created by the production of properties for the own portfolio. This will also be, in the future, an interesting point. For the time, we have still this portfolio -- this pipeline on the construction for the own portfolio where we typically create, on a very interesting level, a yield at cost at the end of the construction period which is much higher than the market yield, which will be paid for that rental income created by this property.

On the next slide, I will turn your attention to the finance capacity of the company. We have still, at the end of 2019, an equity ratio left of 44.4%, which gives us enough room also for further developments to be proceed -- to proceed out of the pipeline next years.

Then all the other financial figures as gross LTV, net LT,V, interest rate coverage ratio and net gearing shows that enough room is left for further investment in the development pipeline.

On the next slide, I would look at -- like to turn to another point of the financing structure. First, the finance positions are splitted around 50-50 in bonds issued on the capital market and another 50% financed traditionally by bank financing and other finance partners. And what is very interesting, the first point to ask that we further -- could further decrease the on-average paid interest rate and as a reporting date, we have achieved by duration of 5.3 years and on average bank interest rate, a level of 1.68% for the financial debt. And then I would like to turn your attention as last point to the upper graph that you will see in the first and the second year, around CHF 440 million were coming due of the financial liabilities. We used to finance the portfolio. And as -- when we face, we will face in the future also such very interesting interest rate levels for financing in Switzerland.

As you know already today, we have a remarkable opportunity to further remarkably decrease finance costs on average on the portfolio, especially for this CHF 440 million, which will be due over the next 2 years.

I would like to turn the attention back to the portfolio and Daniel.

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Daniel Ducrey, Mobimo Holding AG - CEO & Member of the Executive Board [3]

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Thank you, Manuel, and thank you for these figures. We -- I would like to walk you through now some details of the portfolio, and first, to see how beautifully the portfolio grew. The growth of the portfolio happened through investments in new land lots, the finishing of investment properties under construction and the revaluation result. And overall, CHF 220 million is a nice value addition in the portfolio. We are very happy with it, and we did it out of our own development and strengths we have in the company.

The residential part grew by CHF 126 million, the commercial part by CHF 156 million, almost the same proportion as we have already in the existing portfolio, a little overweight in the residential, however.

The growth in rental income and investment properties has not changed much the proportions in the portfolio, both the distribution and use and the geographical distribution has not changed significantly. However, among the major tenants, both the [SV] group with the Moxy Hotel in Lausanne in the Flon, and Swisscom with its new area rented in the Mattenhof, grew their share of spaces they rent from us and strengthen even further the solid partnership we have with them.

As already mentioned in the introduction, rental income is a very important asset. The permanent decrease in the value of real estate in the market has not been driven by the increase of rental income far away. The rent remains at the same level and however the buildings gained in value, and so the rent itself. As it's well known, we are in the fortunate position to -- of having our own development pipeline. And out of this, the performance of our asset management, we will have potential to grow in residential income.

In this slide, we show our intent to increase the residential income -- the rental income, sorry, fairly above the market of CHF 130 million. Last year, we showed you the same slide, the expectation was CHF 136 million out of the selling of this 1 property and the slightly higher vacancy rate we had to correct the expectation for the current year, CHF 232 million.

This development of the rental income is naturally based on our portfolio, our premium properties and you see here a few of them are, to a large extent, own developments, which Mobimo has in some cases, in very lengthy processes and very painfully over many years, completed -- developed, completed and brought in its portfolio.

The 5 properties shown here are representatives of many others coming over the years patiently as value creation into our portfolio. These buildings have been -- have completed the portfolio with an excellent yield to cost performance. It is our intention to continue to develop real estate to the great benefit of our portfolio.

Development is also a possibility and gives us the opportunity to improve the average and the environmental performance of our portfolio. The example of Mattenhof is surely well-known to you. At portfolio level, we monitor the development of our ESG performance and measure it accordingly to our international standards. For example, the Green Star label we got the award for from the GRESB for our portfolio is an important -- is very important to us because it represents an internationally comparable benchmark useful for you in your work.

We have also set a climate target for us for 2015 -- '50. We want our portfolio to reduce its CO2 emission per square meter greatly. We started 2011 with 35 kg of CO2 equivalent per square meter. We have reached already today 22 kg of CO2 equivalent per square meter. And our goal is to strongly reduce further and in 2050 have a very low emission. Our pipeline for our own portfolio shows 3 lower-hanging fruits, which are the busy Moxy Hotel in the Flon, the Mattenhof in Kriens and the Relais 102.

These 3 are, so far, actually finished and been shifting to the investment portfolio this year. The 2 still running projects, Ave. Edouard Dapples and Friesenberg, will be completed during this year, and there will be no problem to fill the apartments in Edouard Dapples in Lausanne, is very easy to rent apartments. The Friesenberg has already a good start of tenants, which came along through the refurbishment part and the challenge will be to -- will be the initial letting of the new spaces we create. This year, we will also start the construction phase for 3 new projects, Les Jumeaux, Tiergarten and the Zürichstrasse in Dübendorf, if we get the approvals for the permit, obviously.

Here are 2 examples of this very nice projects, 2 buildings located next to each other. We have the office building, the Friesenberg, as I said, we will complete it, the refurbishment by summer this year, and we have submitted the building permit, the application for it in December last year for the Tiergarten, that's a residential project, which will be on the higher segment of residential. Two examples from Lausanne, Les Jumeaux in Flon, where we create additional rental space by a very creative architectural solution, and for which we want to start the construction in spring. And the second example is bigger, obviously, but it's also taking much longer, is the Rasude, which is located just next to the main railway station of Lausanne, and for which we have submitted the application for the zone plan together with our partner, SBB. A development with plenty of potential located a bit further in the future.

As regards to third-party development, the pipeline remains stable at high level. Like already mentioned at the beginning, we depend for some of the decisions on third parties and -- such as authorities for comments. However, overall, the secured earnings -- earning potential is unchanged and is considerable. We now have a solid pipeline also in the condominium segment, which will allow us to earn attractive profits in this niche market without a high sales risk.

Wonderful projects, such as the residential development in Manegg in the city of Zurich or the project in Regensdorf located directly at the train station are very much in demand on the market and brings a lot of value as a sale or in our own portfolio. In Meggen, we have started with the demolition work and the renovation for the condominiums has started mid of December, and we were very pleased to see how much demand was there by the end of the year already.

Other condominium developments, you can see on this slide are in prime locations and allow us to continue to work in this segment with very great confidence with regard to execution time and project margin. As landlords and developers, to develop former industrial areas and operate them afterwards, is our specialty. This is where we can show our skills specifically. We have done this in the past, already in the Flon and acquiring Mattenhof, and now we continue with Rasude, as mentioned in the approval phase for the zone plan. With Agglolac, for which the voters of Nidau and Biel will have to decide this year about the selling the land and with RAD, where Rheinmetall, today's user, must decide on its schedule to move out. With these 3 areas, we have secured great potential for future developments for Mobimo throughout Switzerland.

Well, what's next? What are we going to -- and to take now, we continue to work on growing our rental income. We finished the projects under construction, include them in our investment portfolio, and we start new projects in their construction phase. Our marketing will be at full speed to highlight the qualities of our model to professional and to private tenants, thus enabling to future increase the letting success. The tenant for -- app and the support provided by our own facility management provide the customer with digital added value. Cost management and larger portfolio volume managed with the same headcount remains on our top priority. We are continuing to work on our development and ensure that we make the best possible arbitrage between profitability and portfolio growth, and we start from a good client. Therefore, we are looking forward to the current year with confidence.

Now we are ready for your questions. Thank you.

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Questions and Answers

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Operator [1]

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We will now take our first question from John Vuong from Kempen.

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John Vuong, Kempen & Co. N.V., Research Division - Analyst [2]

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This is John Vuong from Kempen. Regarding your vacancy, it's slightly up. As you mentioned, it's partly due to the -- let's call it, the development project delivery. To what extent is it caused by like-for-like vacancy increasing, also considering your slightly negative like-for-like rental growth?

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Daniel Ducrey, Mobimo Holding AG - CEO & Member of the Executive Board [3]

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No. The increase in vacancy rate is mostly and only driven by taking in the project Aarau, Aqua and the Seehallen, which has been taken in the portfolio. [These 2] have given a boost. We knew it before, and we know that for the current year, the same will happen with Mattenhof and the Relais 102.

These 2 objects coming into the portfolio will have a similar effect. Like-for-like, we are in a very stable position. We are able to re-rent the finishing contracts. And therefore, it's not much change to be expected from this side.

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John Vuong, Kempen & Co. N.V., Research Division - Analyst [4]

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Okay. That's clear. You also mentioned there's some change in the headcount for the French-speaking part of your portfolio as well as in the head office. To what extent is this headcount enough to run the entire portfolio, including the finished pipeline?

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Daniel Ducrey, Mobimo Holding AG - CEO & Member of the Executive Board [5]

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We -- I need to correct here something. The only increase in the headcount is in the facility management, the FMAG. It's not about the headquarter in the French-speaking part. It's the facility management rollout we have decided to have in the French part. So it's only this.

And our intent is really to continue with the same team to operate and manage our growing portfolio because we are not at the end of all the benefits of our digitalization efforts we made the last couple of years.

Investments -- significant investments have been made there, and now we want to see a return. The return is to be able to manage bigger portfolios with the same people.

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John Vuong, Kempen & Co. N.V., Research Division - Analyst [6]

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Okay. That's clear. And one last question on the balance sheet capacity. I noticed that the net LTV is slightly higher compared to last year. Was gross LTVs lower? To what extent do you have the capacity to finance the pipeline? Should we expect some capital recycling?

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Manuel Itten, Mobimo Holding AG - CFO & Member of the Executive Board [7]

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We have the capacity, actually, to further finance the pipeline, for sure, next 1, 2 years, easily by the given finance capacity on the actual figures we have. And then it's a question about further activities around or further investments, we can proceed in 3, 4, 5 years' time, and then we have to see what to decide, what the line will be.

But actually, we have enough room left to further develop and further grow on the existing capital base and the existing finance that you see.

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Operator [8]

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(Operator Instructions) We will now take our next question from Pierre Paren from Bank of Montreal.

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Pierre Paren, BMO Capital Markets Equity Research - Analyst [9]

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Just as a follow-up from John on the LTV. So if I look at it right way, maybe wrong way, but your LTV, assuming the CHF 250 million development should go above 50%, assuming stable values. How do you look at it? Do you have an internal LTV target or limit? That's my first question.

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Manuel Itten, Mobimo Holding AG - CFO & Member of the Executive Board [10]

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The intention is always to keep the LTV on a level not durable on a longer perspective, higher than 50%. It should be, on average, below 50%. That's our LTV goal we follow.

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Pierre Paren, BMO Capital Markets Equity Research - Analyst [11]

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Okay. And just on your revaluation result of CHF 42 million , how much was driven by the value creation on your pipeline?

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Daniel Ducrey, Mobimo Holding AG - CEO & Member of the Executive Board [12]

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Out of the CHF 51 million, CHF 16 million were operational profits out of own developments. With the finishing -- with the taking in the portfolio of finished construction, you have this value creation from own development, CHF 16 million that are there.

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Pierre Paren, BMO Capital Markets Equity Research - Analyst [13]

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Okay. And they relate to what -- how much development in the volume, investment volume?

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Daniel Ducrey, Mobimo Holding AG - CEO & Member of the Executive Board [14]

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I didn't get your question, sorry.

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Pierre Paren, BMO Capital Markets Equity Research - Analyst [15]

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So the CHF 16 million, to which development they refer to?

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Daniel Ducrey, Mobimo Holding AG - CEO & Member of the Executive Board [16]

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It is the 2 developments we took in, the Seehallen and the Aqua project in Aarau.

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Operator [17]

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(Operator Instructions) As there are no further questions at this time, I'd like to turn the call back to your speakers today for any additional or closing remarks.

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Daniel Ducrey, Mobimo Holding AG - CEO & Member of the Executive Board [18]

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Thank you for time taking to walk us -- with us through the year 2019, and wish you a very nice weekend. Thank you.

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Manuel Itten, Mobimo Holding AG - CFO & Member of the Executive Board [19]

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Thank you very much.

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Operator [20]

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Thank you. That will conclude today's conference call, thank you for your participation.