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Edited Transcript of P1Z.DE earnings conference call or presentation 14-May-20 1:00pm GMT

Q1 2020 Patrizia Immobilien AG Earnings Call

Augsburg May 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Patrizia AG earnings conference call or presentation Thursday, May 14, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Karim Bohn

Patrizia AG - CFO & Member of the Management 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

* Georg Kanders

Bankhaus Lampe KG, Research Division - Investment Analyst

* Manuel Martin

ODDO BHF Corporate & Markets, Research Division - Analyst

* Thomas Neuhold

Kepler Cheuvreux, Research Division - Head of Research of Austria

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I'm Andre, your Chorus Call operator. Welcome, and thank you for joining PATRIZIA's First Quarter 2020 Conference Call. (Operator Instruction] I would now like to turn the conference over to Karim Bohn. Please go ahead.

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Karim Bohn, Patrizia AG - CFO & Member of the Management Board [2]

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Thank you, André, and welcome, everyone, to our call on the first quarter 2020 financial results, and I hope that you are all well. When we spoke last time, end of March, we already felt that COVID-19 would impact our personal and business life, not really knowing how severe the impact might be. Since then, we were all faced with the situation probably no one from us had to deal with before. Especially the last few weeks, we faced significant restrictions in our private and business lives. I'm very happy and proud that our people, the PATRIZIA staff, reacted in an agile way to the crisis with the majority of us working now from home, at least at the moment.

But it is not only up to the question whether IT works. More importantly, we took care of our staff to ensure their well-being and ensure they have sufficient work/life flexibility to cope with the new situation. Many processes had to be adjusted quickly to ensure business continuity and client service. And if you count our recent press releases, you can see that PATRIZIA is still active in the market for our clients despite a significant slowdown in investment and transaction activity in the last few weeks. So let me start the presentation on Page 2 with a quick overview on where we stand today.

And there are mainly 3 messages to remember. We are a stable and reliable partner. We have a rock-solid financial position, and we operate in a market that continues to show structural growth, and the current situation will probably accelerate the current structural advantage we have. So we run a resilient business model with upside through structural growth opportunities.

Our stakeholders know that we are stable and reliable as a business partner that helps them to manage through this crisis. It is a challenging situation for our tenants, and we are carefully balancing their needs to maintain a stable and long-term client base, a tenant base in the communities we operate in, with our obligations to our institutional and private clients, as well, of course, our financing partners.

The crisis will continue to have an impact on the economy for quite a while. However, we do expect a U-shaped recovery towards the end of 2020, beginning of 2021, clearly at different speeds in the different European markets. Local expertise will become more than ever a decisive factor to generate performance for our clients but also to ensure that our clients' investments are safe. Local experience is and will be key. And we at PATRIZIA are best prepared for this environment. We are a pure service provider and run an asset-light business model that collects management fees rather than rents.

Our limited AUM exposure to sectors that are heavily affected by COVID-19 like fashion, retail, travel and hotels, helps our cash flows. We are in a strong balance sheet with a high equity ratio and ample liquidity. And our share buyback program will continue, and we clearly reaffirm the previously announced dividend payment for the financial year 2019. As I said, the structural growth market case is confirmed and will continue. Slides to quality will continue. The majority of our AUM is in the core and core-plus risk return area, exactly what clients are focusing on now. Interest rates might stay low for even longer.

So let's discuss these 3 pillars in a little more detail, starting on Page 3. On the macro side, the short-term outlook is still cloudy, and the visibility is fairly low with more and more easing of lockups, and economic recovery should be expected in the U-curve in the next few quarters, however, at different speeds within Europe.

Core properties, resi, and food-anchored retail clearly show resilience, and also, health care is on the radar screen of our clients at the moment. Visibility for nonfood retail and travel-related real estate is still fairly low, I think, for the obvious reasons. Our macro view clearly favors Northern European markets. On the transactional side, not surprisingly, activity has dropped significantly after the end of March, but we are selective for our clients. Everything takes much longer these days and a back to normal on the transaction market is not in sight, at least short term.

Banks are much more selective with regards to new business, but the long-term trusted relationship we at PATRIZIA have with numerous banks in Europe, that is helping a lot. We also think that the regulator has reacted very, very quickly to take some of the pressure from the banks. We would expect a considerable pickup in activity after the summer break so especially October/November will be the decisive months this year, in our view. As I said, we continue to be a reliable partner for all our stakeholders with 36 years of experience with our Pan-European local platform and our access to global money, we are well prepared to weather the crisis successfully. And every crisis offers opportunities. As a strong and reliable partner, we have the flexibility and the financial flexibility to take the challenges.

Let's move to Page 4 quickly on our financial position. We are best prepared for this environment. And we have literally been preparing the company for the impact of such a crisis over the last few years. And our diversified business model helps a lot to show convincing profitability even in times like this. If you had followed PATRIZIA over the past years, you might remember that we've been criticized for our high cash balance for quite a while. We always replied that this company has experienced a number of cycles in the market in crisis situations and that we want to be prepared for any external shock that might come. And this is exactly what happened now, and we feel confirmed in our long-term strategy to focus on a strong balance sheet with a high equity ratio and high available liquidity. This makes us very strong.

We clearly reaffirm the announced dividend payment for the financial year 2019, and our share buyback program will continue. We have bought back roughly 35% of our target volume of EUR 50 million so far.

The 3 drivers for our business model and growth remain fully intact. And our business model will benefit from prolonged, lower for longer interest rate environment. And we believe that the current crisis would ultimately lead to a stronger demand for our product. Now following market volatility and significant decline in economic sentiments, the lower for longer interest rate environment will prevail and continue to support our business.

This slide, by the way, it's also a good opportunity to welcome our new co-CEO, Thomas Wels, to the Management Board of PATRIZIA. He joined us on first of May from UBS, where he served several years as the Chief Operating Officer and Head of Global Real Estate, and he brings a wealth of knowledge to PATRIZIA, especially how to build and to run a EUR 100 billion AUM business with a diversified global product range, and we truly believe that Thomas will be essential to further develop PATRIZIA's successful business model.

Let me answer one of your questions right away. This does not mean that our CEO, Wolfgang Egger, is going to retire. It actually means exactly the opposite. We are preparing PATRIZIA for the next phase, where Wolfgang will focus on overall synergy and serving and broadening our global client base. And Thomas will focus on developing strategies to accelerate the industry consolidation, including our move into new real asset classes.

Now let's move to our 3 months of first quarter 2020 results on Page 7 of the presentation. Let's look at our major KPIs. We produced a solid bottom line result with operating income up 2.9% to EUR 24.7 million. Our AUM increased by 2% since the end of last year.

To reflect the uncertainties regarding the timing of the pickup in investment and transaction activity and, ultimately, the recovery of the global economy, we have broadened our guidance range for operating income from EUR 120 million to EUR 140 million to EUR 100 million to EUR 140 million. And with that, we have also changed the guidance for AUM with -- which is now EUR 46.5 billion to EUR 48 billion rather than EUR 48 billion to EUR 49 billion. I think it's important to note that we haven't demolished our guidance. We have simply broadened the lower ends of the guidance to fully reflect the uncertainty that might come over the next 3 quarters.

Let's move to Page 8 for more details on the composition of our results. Management fees showed growth of 3.6% to EUR 48.1 million, mainly as a result of the deals we signed and closed end of last year or beginning of this year. Transaction fees were significantly above last year's level driven by successful transactions signed and closed for our clients during the first quarter of 2020. That also includes some overlap business from the fourth quarter of 2019.

Performance fees came out according to plan, slightly below last year's level and continue to be a major contributor to the results this year. Overall total service fee income is up 13.1%, higher than last year.

Costs were up higher than usual, primarily Q2 in aperiodic effects or effects that will normalize throughout the next few quarters. Some costs that typically occur throughout the year were booked already in the first quarter of this year. So bottom line is operating income with solid year-on-year increase, and that shows that we had a solid start into 2020.

Page 9 shows a little more detail on our AUM by sector and management fees. Our well-diversified AUM mix forms the basis for solid management fees that were up 3.6% year-on-year. And the stickiness of our assets under management remain unchanged, and our clients will continue to look for yields that match their pension liabilities. We have slightly lowered our outlook and guidance to reflect lower expected transaction activity with a pickup end of Q3, beginning of Q4 2020 at the earliest.

And due to timing differences, as always, between signing and closing, the impacts of transaction activity on assets under management shifted rather towards 2021. Now the new guidance for management fees is EUR 190 million to EUR 200 million.

Let's talk a little bit about our transactions on Page 10. Now as you all know, the market activity has slowed down significantly. However, we have prudently -- very prudently continued with both sales and very selective acquisitions with definitive characteristics, generally core assets in RETT and health care. And in March and April, so during COVID times, we have signed EUR 1.1 billion in transactions, of which EUR 700 million relate to sales and EUR 400 million relate to selective acquisitions in the space I just mentioned.

So how does this translate into numbers on Page 11? On transactions, we actually had a pretty good start into the year. The market was up 7%, and we closed EUR 2 billion of transactions compared to EUR 1.1 billion in the previous year's period. We produced EUR 15 million of transaction fees compared to EUR 6 million in the previous year's period. So transaction fees are up 150%.

However, given the uncertainty of COVID, we have lowered our guidance for both transaction volume and fees for the full year 2020. We now expect a transaction volume of between EUR 3.5 billion and EUR 5.5 billion with transaction fees to come in between EUR 30 million and EUR 40 million.

Let's talk about performance fees on Page 12. Performance fees came in according to plan and were generated mainly from our RETT holding in Southern Germany, as usual, for the first quarter of the year, EUR 17.4 million compared to EUR 18.7 million last year, down 7%. But as I said, it's really according to plan. And there are more performance fees from other funds to come in Q2 and the next quarters, over which we have good visibility already.

We have, therefore, only slightly adjusted the range for performance fees to EUR 80 million to EUR 110 million for the full year of 2020. So here, we have actually lowered the guidance on the lower end but also increased the guidance on the upper end. And as you know, we have already full visibility over at least EUR 350 million of performance fees coming out of one of our major resi holdings in the future.

Now before we come to Q&A, I'd like to spend a few words on the guidance for 2020. To reflect the uncertainties regarding the timing of the recovery, generally in the global economy but also in the investment and transaction activities, we have broadened our guidance range for operating income from EUR 120 million to EUR 140 million to now EUR 100 million to EUR 140 million, so hence, lowers only the lower ends of the range. However, the quality of this guidance range is much higher than our guidance beginning of the year, which we gave out in February/March this year. Despite the crisis, we already have good visibility on the second quarter of 2020.

An important side note is that we have not lowered the guidance range altogether for operating income as we still see a certain likelihood that, depending on market activity in the last quarter, that the upper end of EUR 140 million can be reached. And you do remember that, last year 2019, was a year at a pretty slow start, we recouped the majority of the transaction volume and transaction fees in the last quarter of the year. And operationally, we are set up to do this.

So in summary, we show good profitability for this year, even in a significant crisis with management, transaction and performance fees as well as core investment income all contributing to the bottom line. And this is proof of our resilient business model. Now with that, I'd like to give back to André to moderate the Q&A. Thank you.

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Questions and Answers

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Operator [1]

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[Operator Instruction] This first question comes from the line of Andre Remke from Baader Bank.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [2]

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A couple of questions, starting with what you mentioned in terms of your guidance, you mentioned a good visibility in the first half already, i.e., also on the second quarter. What is contributing here? Are these already fixed performance fees, for example, from Dawonia or certain transaction fees? Probably you can give us some more light on that.

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Karim Bohn, Patrizia AG - CFO & Member of the Management Board [3]

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Now as I said, we transacted on EUR 1.1 billion of both sales and acquisitions in March and April. And what we already have good visibility on is a little more transaction fees but also performance fees from disposals. The markets -- as I said, the market is very selective at the moment, but there is still a market for super core of our core assets. And a recent sale, we did think was a week or 2 weeks ago in Hamburg showed that very good assets with high-quality tenant base are still sold at almost no COVID-19 discount. And those type of transactions are the type of transactions which continue to produce performance fees in these kind of markets.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [4]

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Okay. And if you're talking about transaction fees based on the EUR 50 million already earned and your target of EUR 30 million, is it fair to assume that you not really included a strong pickup in the fourth quarter, i.e., most of the EUR 30 million to EUR 40 million will already be captured in the first half? Is that right to assume?

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Karim Bohn, Patrizia AG - CFO & Member of the Management Board [5]

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Yes, most is, I think, the right term. The majority of the lower ends, half of the lower end is already earned, and so the majority of the lower end will be earned in the second quarter or the first half of 2020. Now as you rightly said, it ultimately all comes down to how active the second half of the year is going to be. We're currently not assuming that the market continues in complete shutdown even in the second half. So to a certain extent, we do -- we do assume that some deals will trade -- continue to trade selectively. And we're still assuming that, after the summer break, in effect, late Q3, early Q4, the market will start to recover -- the economy will start to recover, and that will translate into a recovery of the transaction market.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [6]

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So overall, your guidance on transaction fees is rather conservative.

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Karim Bohn, Patrizia AG - CFO & Member of the Management Board [7]

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Well, we feel pretty comfortable with the ranges we gave out based on the assumptions we mentioned.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [8]

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Okay. Second question. In your operating income, you adjusted by EUR 1.7 million, I think, by investment into the future. We discussed this already in the full year call. Could we see this as a quarterly run rate?

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Karim Bohn, Patrizia AG - CFO & Member of the Management Board [9]

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Well, the guidance we gave for the full year was approximately EUR 11 million of investments in digitalization and technology.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [10]

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That's why I'm asking.

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Karim Bohn, Patrizia AG - CFO & Member of the Management Board [11]

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Yes. And I wouldn't see this as a run rate. We obviously -- this is the time -- a situation where we all have to be very cost-conscious and have to focus on cost containment to the extent possible. With regard to digitalization, I think it would be the wrong time to hit the break. This is actually the time, in particular, when the market slowed down a little bit to really focus on these type of work to continue to make the operations more efficiently. And we still hold on to the initial guidance we gave out of approximately EUR 11 million to be spent this year.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [12]

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Okay. Perfect. And then the last question, you mentioned that your new core CEO is preparing, let's say, move into new asset classes. Could you indicate the direction here as well as potential timing? We talking about next couple of quarters or next couple of years or decades? Any light on that would be helpful.

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Karim Bohn, Patrizia AG - CFO & Member of the Management Board [13]

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Yes. Good question, Andre. Now first of all, I think it's the 2 asset classes we're going to look at are pretty much in line with what we communicated on the Capital Markets Day in November last year. In particular, infrastructure, that will be the first stop, and within infrastructure, we'll probably focus on energy and renewable. That will probably be the largest priority or focus within new asset classes. When it's going to happen? Yes, Thomas -- today is the 15th, So Thomas literally started 2 weeks ago, actually, includes the weekends in between. But it's a high priority, and it's a focus. And I think Thomas' CV tells you that the Thomas is a Manager that is very focused and has a reputation for swift execution.

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Operator [14]

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The next question comes from the line of Thomas Neuhold from Kepler Cheuvreux.

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Thomas Neuhold, Kepler Cheuvreux, Research Division - Head of Research of Austria [15]

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I have two questions only. The first one is on this 18% retail exposure in your assets under management. Which portion of this assets related to segments, which were hit hard by the COVID-19 crisis? And can you provide us an overview what is going on the ground and also what your investors think about this segment? Do they want to continue to invest there? Do you see already people who want to get out? What is the status here?

And the second question is on your updated guidance. I saw that the net operating expense is hardly changed, only down 2%. I understand that your view is that a recovery will take place in the second half of this year, but I was just wondering if you're also reviewing cost saving or cost-cutting measurements going forward?

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Karim Bohn, Patrizia AG - CFO & Member of the Management Board [16]

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Thank you for your questions. Great questions. Now let's start with the first question on the retail exposure. As you rightly pointed out, 18% of our AUM are in retail. Now approximately half of that, 50% is in food-anchored retail, which is pretty safe. And as you know, in particular, food retail saw a tripling of their revenues at the beginning of the COVID crisis. So that's actually going pretty well. The other half, approximately EUR 4 billion in shopping centers and high street retail, I think is obvious. Those tenants have difficulties. Shops were basically closed across Europe with hardly any revenues generated.

With regard to the investor sentiment, that really hasn't changed. I think what we see in the current crisis is an acceleration of trends we saw before. High street retail and shopping centers was on top of the [pops] before the crisis. And on a net basis, we always said last year that we are a net seller of retail, in particular, in high street and in shopping centers. And what we -- based on the discussions we're having, what you see is that there will continue to be demand for food or food at retail, but it's not a lot of appetite, if at all, for traditional retail exposure in fashion retail, what have you. The same is obviously the -- what is a little different is hotels. We have less than 2% exposure to hotels. On hotel sector, we think this will recover over time. And it's just a matter of speed of recovery until this market is going to come back.

Now with regard to costs, which obviously is an obvious question in these times. And so far, our focus is on slowing down the expense rate and contain expenses and be very conscious, at the same time, assuming that the markets will come back, we think that we will actually need our resources to be able to cope with a short-term recovery and potentially with a large business volume in a very short period of time. What we're currently doing is reallocates -- or trying to reallocate people that are less busy to areas where the activities are higher. Just a simple example, obviously, not some of the transaction team colleagues are less busy if at all in that market, and they're heading out on the asset management side to deal with the numerous tenant requests we're facing at the moment. So the answer is, of course we focus on slowing down the expense rate. Of course we're trying to contain expenses, but we assume that the crisis will be over at some point, and we need at least the personnel then to run the business. If things change, if the crisis prevails much longer, I think this probably would have to be revisited. But our current assumption is that, end of the year, earliest end of Q3, beginning of Q4, the market will recover. The margins will come back.

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Operator [17]

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The next question comes from the line of Manuel Martin from ODDO BHF.

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Manuel Martin, ODDO BHF Corporate & Markets, Research Division - Analyst [18]

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Two questions from my side. So I hope it's not repetition. I had some interferences in the conference call. The first question is about your new guidance, your new widened guidance. The lower end of your guidance, EUR 100 million operating income, how robust is that EUR 100 million? And is it still valid if the lockdown measures continue like this for, I don't know, 3, 4 months? Or is it based on a U-shaped recovery with Q4 being very strong, something on that?

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Karim Bohn, Patrizia AG - CFO & Member of the Management Board [19]

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Manuel, thanks for the question. We kind of talked about it before, but I think -- but I can more precisely answer this question, give a little bit of flavor on the assumptions we've put down. Now generally, the guidance is based on a U-shaped recovery, assuming the market is going to come back towards the end of the year. However, even though we do expect a U-shaped recovery, we didn't have a hockey-stick assumption where we assume that a large part of the profits or of the earnings would be collected in the last quarter. This is not the base assumption. And if a lockdown continues for a few weeks or -- let's say for a few weeks, I think we should be okay. If there's going to be a second or third wave of severe lockdowns, then I think it would be difficult to reach the lower end. However, I think even in that case, we would not expect a materialness of the low end. In other words, the EUR 100 million is, in our view, a pretty solid lower end of the guidance. But I think it's fair that, in the current environment, where no one really knows what's happening or has limited visibility, if there's going to be a more severe or an even longer lockdown than what we saw, we probably have to revisit a lot of things. But again, if that would happen and the recovery wouldn't be as quick as we are hoping for the end of the year, it wouldn't be a significant miss. That's our base. That's our current assumption. That's based on the visibility we have over the first half of the year.

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Manuel Martin, ODDO BHF Corporate & Markets, Research Division - Analyst [20]

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Okay. I understand. My second and last question is I understand that you have done transactions in Core, Core Plus properties, selective ones. And you will continue to do so even if we are in a lockdown situation still. For curiosity, how can I imagine these kind of transactions? Is this all done virtually? Or are these transactions already signed and you just have to close? Or how can -- could you give us a flavor on, let's say, the daily life right now?

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Karim Bohn, Patrizia AG - CFO & Member of the Management Board [21]

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Well, I mean, as I said, we signed deals in March and April, so we've connected. But as I said, it's very selective because, you rightly, as pointed out, it's difficult to do side with it. In some countries, it's almost impossible to get a notary appointment. But what we currently see is a slow easement of a lockdown in Northern Europe, in Germany, in Denmark. In Northern Europe, we do see a slow lifting of a lockdown that allows us to do deals on both sides. But as I said, we do it very prudently in a slow market, and the market will only fully come back when we see a more significant easing of the lockdowns. I think it all depends on how the lockdowns -- how successful the lockdowns in Germany and in Northern Europe overall are over the next weeks.

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Operator [22]

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The next question comes from the line of [Michael Roma] from [J Zappa Sarasin].

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Unidentified Analyst, [23]

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Just a question and a follow-up on the costs. I mean, are you able to lower your total cost ratio from the current level you reported despite the lower AUM expectation? And if then, how this will be achieved?

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Karim Bohn, Patrizia AG - CFO & Member of the Management Board [24]

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Well, if there's going to be [adjustments] of the guidance, I think the largest part of the variable portion of the cost is really variable payments, bonuses, right, as the majority of personnel expenses are fixed, except for the bonuses. There are a few items on G&A which obviously are variable like traveling expenses, which simply don't happen at the moment, advisory expenses, which you don't have when you don't do any deals. If mid-term, we see a different perspective of the overall business, of course, we would have to go for different measures, but we can't see this at the moment. I would say, generally, if the guidance would be missed or significantly changed, we probably have, I would say, approximately 10% to 15% of flexibility on the cost base.

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Operator [25]

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The next question comes from the line of Georg Kanders from Bankhaus Lampe.

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Georg Kanders, Bankhaus Lampe KG, Research Division - Investment Analyst [26]

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I have one question regarding here is a reduction in the assets under management assumption. Is this purely a delay in transactions? Or are you really seeing that some clients are abandoning investment decisions?

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Karim Bohn, Patrizia AG - CFO & Member of the Management Board [27]

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Thank you. That's actually -- that's a very good question but also lost me. You talk a little bit on how we see the business model developing literally over the next years. Now first of all, Georg, it is really a delay of transactions which are currently not happening because the market has simply slowed down significantly. And that's why we took down the transaction volume. We took down the AUM target because the markets will only come back towards the end of the year. This is not because we see clients changing their investment focus or investment behavior. I actually believe mid-term exactly the opposite is going to be the case. If you look at the drivers of our business model I talked about earlier, all the drivers actually are in favor of our business model. We expect an even lower for longer interest rate environment. The current market shows that the only long-term cash flow that can be produced is in high-quality assets in the real asset space. And this is all good news for our business model. So clients -- global clients generally will continue to invest in real assets. And I think they will probably have to continue to increase their allocations to the assets. At the very moment, obviously, clients have different issues to be solved. And at the moment, the clients are really focused on the performance of existing funds rather than new investments. But when the COVID situation -- when the dust really settles and everyone, including our clients, have more visibility, there will be a major driver of the market coming back.

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Operator [28]

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There are no further questions at this time. I hand back to Karim Bohn for closing comments.

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Karim Bohn, Patrizia AG - CFO & Member of the Management Board [29]

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Yes. Thank you, everyone, for joining this call. I hope that you and your families are all safe. And I hope that, at some point, hopefully sooner after the summer break, we're all going to see each other in person again. If there are any questions in between, please reach out to us to IR or to me. We're here for you. And yes, stay safe, and stay well. Talk to you soon. Thank you. Bye.

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Operator [30]

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