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Edited Transcript of TLG.DE earnings conference call or presentation 6-Nov-19 10:00am GMT

Q3 2019 TLG Immobilien AG Earnings Call

Berlin Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of TLG Immobilien AG earnings conference call or presentation Wednesday, November 6, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Barak Bar-Hen

TLG Immobilien AG - Chairman of the Management Board & CEO

* Herrn Gerald Klinck

TLG Immobilien AG - CFO & Member of the Management Board

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Conference Call Participants

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* Kai Malte Klose

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the TLG Immobilien AG Q3 Financial Report 2019 Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Barak Bar-Hen, CEO. Please go ahead, sir.

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Barak Bar-Hen, TLG Immobilien AG - Chairman of the Management Board & CEO [2]

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Thank you very much. Good morning, everyone. My name is Barak. I'm sitting here with Gerald Klinck, our Chief Financial Officer and my colleague to the Management Board. And we are here to discuss mainly the Q3 results, but of course, I assume you might have some questions regarding the envisioned transaction that we are working on these days. But I suggest we first start with the results, and we'll take it from there.

So as you can see, our rental income was growing to EUR 173 million in 9 months, which is a year-on-year 4% increase. We have additional 3.1% like-for-like growth on the in-place rents across our portfolio with -- which is 6.2% in office, that's the main increase. Our vacancy rate is reduced to 3.1% as of September -- 30th of September. We're more or less at the same level of total portfolio value of EUR 4.5 billion.

We didn't hold any valuation this quarter. We do it every 6 months. We had some interesting financial instrument going on and raising. We raised EUR 1.2 billion, in which half of it were in perpetual notes and bonds. The second half was in bonds. We got a very good feedback on the transaction from Moody's and S&P Ratings. Both confirmed BBB rating with positive outlook because of the merger, and we can -- are going to discuss it later on.

EPRA NAV now is EUR 30.25. If we look backwards, we see a 15.2%, which is very nice compared to the previous year. Very, let's say, conservative capital structure. We have a net LTV of 35.6%.

And then on the growth side, this is something that we discussed, if people are remembering the previous call on the half 1. So we were looking for a way to grow, and I think we managed to do it.

We purchased 15% stake in Aroundtown, which brought us a very nice FFO increase. Gerald is going to explain later on. And currently, we're holding discussions with Aroundtown regarding creating the biggest office player in Europe. I'm going to give some more input on these issues later on in the presentation.

Basically, we go now to the next slide. Basically, we're talking about the transaction structure. As you remember, we basically went out when we announced the transactions that we're going to be the offeror or any other way that will be a benefit for the company and its shareholders. After reviewing the envisioned structure with both of the companies from economical, financial, operational, tax, legal with our advisers, we got into the conclusion that the best way for the envisioned merger will be that Aroundtown will give a voluntary offer to our shareholder. At the end of the day, this is a friendly merger based on friendly discussions and agreements.

We went out recently with a nonbinding term sheet where the main terms were, let's say, agreed, and we are currently working on due diligence process and completing the business combination agreement. So this is where we stand at this point.

The exchange ratio that was back then agreed is going to be fair to anyone -- for everyone. It's NAV for NAV, both for Aroundtown and for TLG. And the combined company will get a new name. The headquarter will still be in Luxembourg, but of course, the operational headquarters is going to stay in Berlin.

What we have in this term sheet is additional governance clauses. So we spoke a lot -- we listen to our investors, we speak with our investors. For them, governance was an important issue. What we're going to have in the new company, if, of course, the potential merger is going to be executed, is a 2-body governance. We're going to have a Board of Directors with 6 to 7 members. The Chairman with the casting vote in case of a tie is going to be appointed by us. In the Management Board, we call it management body, there's going to be 5 members. TLG is going to appoint the CFO, an additional member that will hold the title co-CEO.

The next step, as I said, which we are now holding the due diligence process, we are working on the synergy analysis. I know that the market is expecting us to come up with numbers, and that's why we're working on it -- both parties are working on it very hard. We already see now a lot of -- I wouldn't say a lot, I would say very nice numbers of synergies and value creation, which, of course, both parties will go out to the market once we have an agreement, and we are going to publish this as well.

The publication of the offer document, hopefully, will be until the end of the year after BaFin's approval. And then we hope to be in a position to close -- closing of the offer, beginning of, let's say, first quarter -- half of next year. This is still in discussion, but this is more or less our expectation.

I think, Gerald, maybe you can take it from here.

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [3]

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Yes. Thanks also from my side. A very good morning from all of us to all of you.

So the next page should be Page 6. We saw -- we showed here the, more or less, sources and uses of the 15% acquisition of Aroundtown and also what the impact on the FFO on the right-hand side. So on the left-hand side, you see roughly EUR 1.5 billion for the more than 15% stake. We also put the dividend in place here -- or the dividend guidance which Aroundtown announced to the market, EUR 0.27 per share. And then the refinancing. And for a pro forma base, we split the hybrid and senior bonds and allocate the necessary amount here on the stake and have then also the total debt here in place. And obviously, we also use the equity from the June raise here also in these sources and uses.

So this is on the left-hand side. And then you can see what is an impact on the right-hand side. So I think the main takeaway first is that we take the dividend as a pro forma. And we all know that the dividend is paid in 2020. But it is -- let's say, it is -- it occurs in 2019. So we put that here in our pro forma, take the -- our FFO and put the expected dividend of Aroundtown in our FFO. That was, I think, one of the main assumptions which you have to take care about. And as you know, we do not put in the FFO for the 15%. We only take in here the cash dividend which we expect, also in line when we're paying our dividends.

This is one of the major assumptions which we put in here. And then you can see that it is FFO accretive for us and accretive in both scenarios. You know that we made an ABB in end of June, so where we put another 8.5 million of shares on top of our existing ones. And there you can see, however you calculate it, before or after that, let's say, dilution of our shares. There is a quite positive accretion to the 15% Aroundtown share for also 2019 with an impact on our FFO and also on a run rate level.

I'll come to the guidance a little bit later on. So you have to take here in place that the not allocated debt for the stake also brings us in the situation to pay here for some interest, which is not covered by the dividend of Aroundtown. So FFO guidance will be in the ballpark of EUR 147, but I'll come to that later on.

So on the next page, I'm flipping now to Page #9, there you see our, let's say, housekeeping which we do every quarter to show you the details of our portfolio. Nothing really changed over the last quarter or for the half year results. Barak mentioned that we only value our portfolio 2 times a year, and therefore, we do not have really big changes here. And obviously, sales and acquisitions in Q3 was not really significant.

On the next page, Page 10, the property value reconciliation. This is what you also saw in H1, and I mentioned that in my other slide. In terms of CapEx, you also see that the ordinary CapEx compared to last year numbers has a little bit here increase. That's the reason why we catch up with our programs in WCM, which is totally now integrated in our company. So in the integration here, CapEx was a little bit of spend in that time frame. So that's the reason why we can't get back to normal levels.

The next page gives you an overview of the annualized in-place rents. This is, and I mentioned that, the 3.1% like-for-like rental growth. So putting disposals and acquisitions away, we were able to increase it by 3.1%. Based on a like-for-like growth on the strategic portfolio, this is slightly higher, so 3.8%. And given that we, let's say, also release something from the nonstrategic, obviously, we have here, let's say, a decrease of rent levels on the strategic -- the nonstrategic portfolio.

Main part, obviously, is coming from office, as we all know. And also, the main part is coming from Berlin, which is very good. And also the Rhine-Main area, with more or less 1/4 of it, is also a very strong market for us.

On the next page, this is Page #12. That is showing the EPRA vacancy rate that is coming down on a very low level now, I would say, 3.1%, more or less. We are fully let with our portfolio. Main driver also from the office and also in the investment cluster of our portfolio, where we also have office and retail in it and comes from also Berlin.

Next page is -- this is Page 13. In terms of WALT, we have more or less stabilized situation in our lease contracts. Office is slight increase, and hotels by definition is decreasing every year because these are 6 contracts in the 7 hotels. And so every quarter, you will see that we will decrease here unless we haven't -- let's say, have a new contract here in place, but this was very long. So you can expect every, let's say, quarter or every year on the hotels that we will lose here, but we catch up here also on the other side.

Coming to the financials, FFO driver. And this is what I mentioned also in the other slide. I think the main takeaway here is that we put in here the change in net financials. And I think we are all aware that we have now the bonds in place, which is compared to the FFO for the last 12 months not the case. So the new bonds and perpetuals bring us to the situation that the change in net financial result is decreasing, and it's a catch-up with others.

And in others, we see the 1 month -- more or less 1 month allocated dividend of Aroundtown, which brings us here then to an FFO increase by roughly 7% based on -- in absolute terms. In terms of FFO per share, it's slightly less because we have the ABB in place compared to the 9-month 2018 numbers. So that is a dilution coming from the ABB, which is more or less half of the growth of 6.9%.

The next page, Page 16, EPRA NAV. So there's -- the main driver, if I jump from the last full year result, came from the dividend, which we paid out and the revaluation of the H1 result. And here, you can also see the ABB of EUR 220 million roughly. We were able to launch this ABB based on an NAV per share on that day of EUR 26.13. So that was not really a dilution on that effect, really that's timing. So we have an increase of 15% over the whole year. If you add to this 15% the dividend which is paid out, which is roughly 3.5% dividend yield on NAV, you end up with a total shareholder return of more than 18%, which I think is a very good number this year. And this is before revaluation at the end of year 2019.

Next page is Page 17. We have some changes here on the debt structure. On the left-hand side, you see our maturity profile. The bright green ones are our bonds and the gray ones is the hybrid. So I would say it is, let's say, not really a smooth maturity profile because we have also some, let's say, minor prolongation in year 2023 and 2025. But I think there is not a risk in our structure so that we have here also some possibilities to smooth that in the future as well. For the next 3 years, no material prolongation in front of us, so we have here really, let's say, low-risk structure from the maturity profile.

Also, everything is really fixed on the coupon.

In terms of transparency, we bring here 2 things: one, numbers with the hybrid; and the other without the hybrid. We know that hybrids in the market will be viewed differently or we treat it differently. From a bond perspective, perception is the hybrid's equity. From an equity point of view, it is debt. So at the end, it's a hybrid. It's in between, and therefore, we want to solve out this problem to bring you here transparency and give you these numbers.

I think excluding hybrids, it was 1.5% overall cost structure. I think it's a good number. It's -- there is headroom to improve in the combination of Aroundtown. If we can go here for an A- for our bonds, then we see here really potential upside to decrease it further on over the next years. Including hybrids, it's also a pretty good number, which is more or less in the same ballpark as before, with around 1.7%. So nothing really changed on the overall cost with or without the hybrids.

So maybe one last comment to that on this page. We were able to launch another rating from S&P in context to the hybrid. It is -- so S&P is also like Moody's with an investment grade of BBB. Both agency gave us a positive outlook in respect of the potential merger.

So outlook, next page and also the last page. And then I'm happy -- we are happy then to get your questions and hopefully also find good answers to that. So on the outlook 2019, the main takeaway is really we are able to cover the dilution of the ABB with the investment of Aroundtown stake. So in terms of FFO per share, we have stick to our guidance, which you know before. So at the moment, we see EUR 1.36 FFO per share. We stick to our dividend policy of around 70% of our FFO. So you can assume that the shareholders before ABB has an expectation in terms of dividend and after ABB, we also can, I think, deliver that expectation in terms of our dividend per share for 2019.

So with that, I will close here my statement. So overall, we are in line with expectation on our ordinary business. And the main driver in Q3 was obviously the Aroundtown stake, which brings us to the level as I mentioned before.

And with that, I'm very happy to hear your questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take the first question from Kai Klose from Berenberg.

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [2]

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I've got a question on operations and particularly regarding the letting volumes in the -- within the first 9 months. Could you indicate what was the total volume and what was the split between new lettings and lease extensions?

Second question would be on the like-for-like rental growth. You mentioned on page -- mentioned that we had a 6.1% rental growth in office. And in total, I think it was 3.1%. Could you indicate what's the reason for the somewhat significantly lower like-for-like rental growth in the other segment, possibly retail? And the last question would be, could you give us an update on the development projects, particularly on the Alexanderplatz project?

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [3]

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Kai, it's Gerald. So I expect your question. That's the reason why I didn't point it out in my presentation. So you can assume that we are -- and you had raised that question, I think, twice now. So now we are ready to answer that. So on the like-for-like rental growth of EUR 6.9 million, more or less, let's say, EUR 3.5 million out of it is really that people or tenants moved out. So the -- let's say, the letting activities is then in the ballpark of EUR 6.8 million so that was covered more or less 2x. And then the other, let's say, 3.5 -- EUR 3.4 million to come together to EUR 6.9 million in total is indexation and also, let's say, our, let's say, step-ups in terms of fixed step-ups. So the fixed step-ups covers at the end the rent, which we are losing if tenants are moving out so that you can say the EUR 6.9 million is also really our letting activities or performance over that last 12 months. And I think this is really, let's say, something which gives us a normal volume every quarter. So indexation more or less will cover the tenants who are moving out. And then the remaining piece is then our letting activity for the quarter and also, in this case, for the last 12 months.

I hope that it, let's say, brings you exactly the answer which you expect to get with us.

The second one is, obviously, in office, there's -- I think the main driver in office there, we have our active asset management in place. We are able to manage our offers better than in retail. Reason for that is that, as you know, our supermarket boxes have very long WALT, which are more or less fixed over a long period of time. So this is not really so dynamic as the office segment, where we have more and more tenant structures and so on, where we have a little bit more work to do. And in that case, we are able to increase rents in the office segment, let's say, better than in the retail ones. I think this is a general answer, but I think that is, at the end, exactly what we are seeing here. So in office, you have more potential upside than on the retail side. The retail side is more or less a very stabilized business profile.

Last but not least, on the development, I would hand over here to Barak to give us here a little bit more detail on that.

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Barak Bar-Hen, TLG Immobilien AG - Chairman of the Management Board & CEO [4]

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Kai, so just on the development update, so as you know, we already started our project in Großenhainer. In Dresden, the work has started already. Wriezener Karree, we are in the planning stages, permit stages. And regarding Alexanderplatz, we are still in discussion with the authorities regarding what's the best way to take it forward. As you know, this is a very, let's say, central location and it's important also for the administration and the authorities to be, let's say, in line with us regarding the project. So it's ongoing. We don't see, at this point, any delay in our projection

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Operator [5]

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(Operator Instructions) It appears there are no further questions signaled at this time.

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Barak Bar-Hen, TLG Immobilien AG - Chairman of the Management Board & CEO [6]

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So thank you very much for your time to listen to our statements and hope to see you again on next conferences or roadshows. So have a good day. Thanks.

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Operator [7]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.