Deutsche Wohnen AG.» 9M 2016 results. Conference Call, 15 November PDF

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Deutsche Wohnen AG» 9M 2016 results Conference Call, 15 November » Agenda 1 9M 2016 results 2 Investment update & Outlook 3 Q&A 2 » 9M 2016 results 3 » Financial highlights 9M 2016 Operational development

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Deutsche Wohnen AG» 9M 2016 results Conference Call, 15 November » Agenda 1 9M 2016 results 2 Investment update & Outlook 3 Q&A 2 » 9M 2016 results 3 » Financial highlights 9M 2016 Operational development In EUR m 9M 2016 YoY NOI letting % NOI margin 78.8% +2.6ppt Like-for-like rental growth 3.2% +0.1ppt Vacancy rate 1.8% -0.3ppt NOI nursing % FFO contribution % Occupancy rate 98.7% +2.2ppt Earnings from disposals % Gross margin privatization 40% -1ppt Gross margin inst. sales 12% +4ppt Free cash flow impact % ICR 5.7x +1.5x KPIs In EUR m 9M 2016 YoY FFO I (after minorities) % in EUR/ share 1) % FFO I margin 57.3% +9.0ppt FFO II (after minorities) % in EUR/ share 1) % Adj. EBITDA (excl. disposals) 2) % Adj. EBITDA margin 77.0% +4.8ppt Cost ratio 10.0% -1.6ppt Cost per unit 3) (in EUR) % In EUR m 9M 2016 YTD EPRA NAV per share (undiluted) 4) % LTV 41.7% +3.7ppt 1) Based on weighted average shares outstanding (9M 2016: m; 9M 2015: m); 2) Adjusted for one-off effects excluding disposals; 3) Corporate expenses annualized divided by avg. units in period; 4) based on 337.5m shares outstanding 4 » Portfolio update 9M 2016 attractive reversionary potential Strategic cluster Residential units % of total measured by fair value In-place rent 1) 30/09/2016 EUR/sqm/month Rent potential 2) 30/09/2016 in % Vacancy 30/09/2016 in % Fair value 30/09/2016 EUR/sqm Multiple in-place rent Multiple market rent Strategic core and growth regions 154, % % 1.7% 1, Core + 134, % % 1.7% 1, Core 19, % % 1.9% Non-core 3, % 5.21 n/a 5.1% Total 158, % % 1.8% 1, Thereof Greater Berlin 110, % % 1.7% 1, Further rent potential in Core + regions of unchanged ~25% Attractive spread between in-place and market rent multiples of c. 4x offer further potential for NAV growth Vacancy rate in Core + portfolio declined by 20bps over 12 months to c. 1.7% 1) Contractually owed rent from rented apartments divided by rented area; 2) Unrestricted residential units (letting portfolio); rent potential = new-letting rent compared to in-place rent (letting portfolio); 5 » Strong like-for-like development in Berlin Like-for-like 30/09/2016 Residential units number In-place rent 1) 30/09/2016 EUR/sqm/month In-place rent 1) 30/09/2015 EUR/sqm/month Change y-o-y Vacancy 30/09/2016 in % Vacancy 30/09/2015 in % Change y-o-y Core + 123, % 1.5% 1.6% -0.1pp Greater Berlin 102, % 1.5% 1.7% -0.2pp Rhine-Main 8, % 1.5% 1.3% +0.2pp Mannheim/Ludwigshafen 4, % 0.6% 1.1% -0.5pp Rhineland 4, % 1.0% 1.2% -0.2pp Dresden 2, % 2.6% 2.3% +0.3pp Core 13, % 1.9% 2.3% -0.4pp Hanover / Brunswick 8, % 1.8% 2.0% -0.2pp Core cities eastern Germany 4, % 2.0% 2.8% -0.8pp Kiel / Lübeck 1, % 2.0% 3.4% -1.4pp Total Letting portfolio 2) 137, % 1.5% 1.7% -0.2pp Total 142, % 1.8% 1.8% - Strong like-for-like rental growth in Core + (3.5%) and in particular in Berlin (3.8%) Like-for-like vacancy in Core + letting portfolio at 1.5% - portfolio fully rented out Strong like-for-like vacancy reduction by 40bps also in Core regions to 1.9% 1) Contractually owed rent from rented apartments divided by rented area; 2) Excluding non-core and properties held for sale/ privatization 6 » Strong earnings and cash contributions from letting in EUR m 9M M 2015 Rental income Non-recoverable expenses (6.2) (9.4) Rental loss (4.8) (4.6) Maintenance (64.4) (58.9) Others (6.0) (7.2) Earnings from Residential Property Management Personnel, general and administrative expenses (30.1) (32.7) Significant reduction of operational cost items (in % of rental income) Non-rec. exp.& rent loss Maintenance Other Personnel 23.8% 6.9% 1.5% -2.6pp 21.2% 5.7% 1.1% 12.4% 12.2% 3.0% 2.1% 9M M-2016 Net Operating Income (NOI) NOI margin 78.8% 76.2% NOI in EUR / sqm / month Significant improvement of NOI margin 78.8% in EUR m 9M M 2015 Net operating income (NOI) Cash interest expenses (76.0) (93.6) Cash flow from portfolio after cash interest expenses Cash flow margin 64.4% 56.4% 76.2% 9M M-2016 Improved NOI margin driven by rental growth combined with efficient management of operational costs 7 » Growing prices as demonstrated by disposal business Disposals Privatization Institutional sales Total with closing in 9M M M M M M 2015 No. of units 1,061 1,479 2,544 6,951 3,605 8,430 Proceeds (EUR m) Book value Price in EUR per sqm 1,538 1, n/a n/a Earnings (EUR m) Gross margin 40% 41% 12% 8% 22% 15% Cash flow impact (EUR m) Disposal business contributed cash flows of EUR 255m in 9M 2016 Privatization: Disposal of below-average quality at continued attractive margins; privatizations in Berlin moving towards EUR 2,000 per sqm Institutional sales: consisted predominantly of a Berlin city-border portfolio with 900 units and further ~900 units in Merseburg 8 » High profitability from nursing operations and assets Operations (in EUR m) 9M M 2015 Total income Total expenses (47.1) (45.9) EBITDA operations EBITDA margin 10.1% 8.0% Lease expenses 1) EBITDAR EBITDAR margin 28.6% 27.3% in EUR m 9M M 2015 Nursing Living Other in EUR m 9M M 2015 Staff (26.7) (25.2) Rent / lease (9.7) (9.6) Other (10.7) (11.1) Assets (in EUR m) 9M M 2015 Lease income 1) Total expenses (0.5) (0.3) EBITDA assets Operations & Assets (in EUR m) 9M M 2015 Total EBITDA Interest expenses 2) (3.3) (2.8) FFO I contribution Set out in the consolidated group financial statements as Earnings from nursing and assisted living Includes fee payable to operational partner of EUR 1.5m for 9M 2015 and EUR 2m for 9M 2016 EBITDAR margin of 28.6% or 1.5x lease revenues proof points for operational excellence 1) The delta between lease expenses (operations) and lease income assets derives from one nursing facility which is only operated but not owned by Deutsche Wohnen group 2) Including proportional interest cost due to minority stake in operations; 9 » Strong operating performance of the nursing business Strong revenue growth High occupancy rate is a good proof point for operational excellence Revenues (EURm) Occupancy rate ~ % 96.1% 97.2% German occupancy rate: 85% 98.7% M 2016 (annualized) 31/12/ /12/ /12/ /09/2016 Nursing is a staff-intense business Attractive EBITDAR margins Major expense items (9M 2016) in % of total revenue EBITDAR margin operating business 3) 3% 12% 9% 19% 27.8% 28.1% 27.0% 28.7% 51% Personal Rents Utilities & Maintenance 1) 2) Interest expense Other 1) Rents for internally operated facilities are consolidated on group accounting level; 2) Incl. housekeeping supplies, laundry, catering, other M ) EBITDAR = EBITDA before rents; 10 Other operators Katharinenhof» Nursing homes - portfolio overview Existing nursing business: Assets and operating business 1) Region Facilities # Nursing # # of places Assisted living # Total # Area (sqm) Occupancy rate Greater Berlin 12 1, ,442 84, % Saxony , % Lower Saxony , % Fair Value (30/06/2016) Total 20 1, , , % 161.4m Recent Pegasus acquisition: Assets only 2) Region Facilities # Nursing # # of places Assisted living # Total # Area (sqm) WALT Bavaria , North-Rhine Westphalia , Lower Saxony , Rhineland-Palatinate , Baden-Württemberg , Other , Purchase price Total 28 3, , , m Total 48 5, , ,099 n/a n/a 1) Katharinenhof manages 20 facilities, thereof Deutsche Wohnen owns 19 facilities; 2) Relates to recently acquired assets (Pegasus portfolio) 11 » Significant step up in EBITDA margin in EUR m 9M M 2015 Earnings from Residential Property Management Earnings from Disposals Development of cost ratio 11.6% 10.0% Earnings from Nursing and Assisted Living Segment contribution margin Corporate expenses (52.4) (54.8) Other operating expenses/income (1.0) (34.5) EBITDA M M 2016 Cost Ratio (corporate expenses divided by gross rental income) Development of adj. EBITDA margin 85.0% 85.8% One-offs adj. EBITDA (incl. disposals) % 77.0% Earnings from Disposals (46.4) (60.8) 9M M 2016 adj. EBITDA (excl. disposals) adj. EBITDA Margin (excl. disposals) adj. EBITDA Margin (incl. disposals) Adj. EBITDA margin up by 4.8pp (excl. disposals) driven by improvement of NOI and reduction of corporate expenses 12 » Operational improvements, acquisitions and lower interest expenses drive FFO growth in EUR m 9M M 2015 FFO per share development in EUR EBITDA (adjusted) Earnings from Disposals (46.4) (60.8) At equity valuation Interest expense/ income (78.6) (94.4) Income taxes (21.3) (14.0) % Minorities (5.2) (5.8) FFO I M M 2016 FFO I Earnings from disposals Earnings from Disposals FFO II FFO I per share in EUR 1) FFO II per share in EUR 1) Diluted FFO I of EUR 0.83 per share pro forma conversion of in-the money convertible bonds FFO I per share increased by 22% yoy Dividend expected to increase by 35% to EUR ~0.73 per share for ) 1) Based on weighted average shares outstanding (9M 2016: m; 9M 2015: m); 2) Based on FFO I guidance of at least EUR 380m and 337.5m shares outstanding 13 » Steady increase of EPRA NAV per share in EUR m 30/09/ /12/2015 EPRA NAV per share (undiluted) in EUR Equity (before non-controlling interests) 7, ,653.5 Fair values of derivative financial instruments % % Deferred taxes (net) 1, ,064.1 EPRA NAV (undiluted) 8, ,762.4 Shares outstanding (in m) EPRA NAV per share in EUR (undiluted) /12/ /12/ /09/2016 Effects of exercise of convertibles 1, ) Development of LTV EPRA NAV (diluted) 9, ,714.5 Shares diluted (in m) EPRA NAV per share in EUR (diluted) % 38.0% 41.7% Goodwill GSW (535.1) (535.1) Shares outstanding (in m) Adj. NAV per share (undiluted) /12/ /12/ /09/2016 1) Current strike price: EUR and EUR correspond to ~33.4m shares 14 » Conservative long term capital structure with 1.6% interest costs Rating A- / A3; stable outlook LTV 41.7% ICR 1) 5.7x Low leverage, long maturities and best in class rating Flexible financing approach to optimize financing costs Ø maturity 8.5 years No significant maturities until and including 2019 % secured bank debt 74% % unsecured debt 26% Convertible bonds accounted 100% as debt Ø interest cost Key financial principles 1.6% (~84% hedged) LTV: 35-40% fully flexible regarding secured or unsecured financing Base case LTV 2016 40% expected 2) Target LTV range: 35-40% Balanced maturity profile with no significant debt maturities in the next 4 years 3) Bank debt Convertible bonds Corporate bond ) adjusted EBITDA/ interest expenses, 2) Excluding changes in valuation of financial instruments, 3) based on notional amounts 15 » Investment update & outlook 16 » More than EUR 7bn value potential for Deutsche Wohnen with at least EUR 2.2bn value uplift expected for total year 2016 Value potential (EUR bn, incl. capex) 1) 13.5 Current FV (9M 2016) In-place rent multipliers (entire portfolio) 19.1x 23.5x 25.0x ~23.5x 3.0 1) Short-/mid-term yield compression 4.5 2) 21.0 Rent potential (incl. capex program) Potential FV Transactional evidence in Berlin for average quality assets points towards: 25-30x in place rent multipliers Prices per sqm EUR 2,000 Further significant yield compression in Deutsche Wohnen s Core + portfolio expected c. EUR 3bn fair value step-up of in the short to medium term expected At least EUR 1.5bn expected by year end 2016 Identified EUR 180m rent potential - including the contribution from the capex program - offers a further fair value potential of EUR c. 4.5bn Based on today s parameters DW s portfolio should be valued at c. EUR 21bn in the longer term Long-term capital value growth of c. EUR 6bn (excl. capitalized investments) expected to translate into c. 70% NAV growth or c. EUR 18 per share Driven by yield compression in particular in Berlin a further revaluation of the portfolio of at least EUR 2.2bn expected for 2016 (thereof EUR 0.7bn already realized at H1 2016) 1) Based on current annual rents of EUR 700m x 4.4 multiple spread 2) Based on annual Rent potential of EUR 180m x 25.0 multiple 17 » Long-term Berlin has huge catch up potential compared to other German and European metropolitan areas Residential price per sqm (existing stock) Top City ranking in real estate survey ,460 2,000 2,700 5,000 2,600 2,900 4,100 8,000 8,500 Rank City Rents Capital Values 1 Berlin 2 Hamburg 3 Frankfurt 4 Dublin 5 Munich 17 Paris 27 London Source: CBRE reports, empirica Source: Emerging Trends in Real Estate - Europe 2017 Price levels in Berlin - Deutsche Wohnen book values in particular - are significantly below German and other west European areas, offering huge catch-up potential Replacement cost including land are currently at around 3,000 EUR/ sqm (2 x book values) Berlins attractiveness as dynamic Top European investment place underlined by recent surveys 18 » Investments in best micro locations within Core + regions as accelerator for rental and value growth Quality 1) 1. Rent potential 2. Value potential Location cluster Units Targeted capex EUR m Pre capex Post capex Pre capex Post capex Pre capex EUR/sqm Targeted capex EUR/sqm Mid term market expectation EUR/sqm Hot Spot ~13,000 ~ Growth ~14,500 ~ Stable ~2,500 ~ Total 1) ~30,000 ~1, % 65% 1,580 ~640 3,500 23% 44% 1,410 ~640 3,000 24% 32% 1,000 ~490 2,400 26% 52% 1,440 ~630 3,200 Note: excluding new construction Focus on best micro locations, predominately in hot spot and growth areas within Core + regions - quality as precondition to drive rental and thereby value growth Based on detailed portfolio analysis significant step-up of existing capex program from EUR 400m (17,000 units) to EUR 1,000m (30,0000 units), scheduled to be executed by 2021 Investments of c. EUR 550m for pro-active refurbishments and c. EUR 450m for modernizations to upgrade the quality of the product underpin the comprehensive investment approach Value enhancing capex measures of EUR 450m can be directly charged to the tenant, translating into an attractive yield on cost of 7-8% Significant investment of EUR 630 per sqm leads to fully modernized investment stock post capex Rent potential will increase from EUR 120m to EUR180m post capex doubling of reversionary potential to c. 50% for the investment portfolio Significant fair value uplift on top of capitalized investments of c. EUR 1,100 per sqm expected ( 50% margin on fair value uplift) 1) Scale for technical building condition: 1=new construction, 2=fully modernised existing stock, 3=average quality, 4=short term investment need, 5=significant capex backlog 19 » New construction pipeline capitalizing on land bank New construction pipeline Location cluster Units Total investment (EUR m) Construction costs (per sqm) Market value (per sqm) Market rent (per sqm/month) Rent (EUR m) Rent multiple on cost Market value multiple New construction 1, ,500 4, x 28x Roof extensions/addition ,400 4, x 27x Total mid-term (by 2020) 2, ,500 4, x 28x Mid to long-term pipeline ~10,000 ~2,000 ~100 Value creation (EUR per sqm) New construction predominantly located in Berlin and Frankfurt am Main Expected NOI-yield of 5% (FFO yield ~8% overall 1) ) Significant value creation contribution of EUR ~1,500 per sqm translating into ROI of ~60% 2,500 1,500 4,000 ~10,000 units planned mid to long-term (mainly in the Berlin region and on existing land bank) Construction costs Value creation / step-up Expected FV Rent potential of c. EUR 25m mid-term and c. EUR 100m p.a. long-term from new construction 1) LTV of 50% on invest assumed 20 Nursing Residential» Bolt-on acquisitions: Focus on selected value enhancing acquisitions but at lower pace compared to past years No attractive acquisition opportunities in the listed segment Acquisition of quality portfolios with strong anchor in Core + markets, however more challenging as expected development largely reflected in price considerations of sellers Capital allocation decisions currently biased towards internal growth - targeted capex measures allow Deutsche Wohnen to capture value upside margin itself Attractive bolt-on acquisitions of c. 640 units in Core + regions for c. EUR 100m or EUR 2,000 per sqm High quality, fully refurbished portfolio with attractive rent levels EUR 40bn nursing market expected to grow significantly in coming years with estimated additional 300,000 beds required by 2030 Focus on acquisition of assets, preferably in combination with operations to enhance yields Adherence to strict acquisition criteria good location for nursing property good location for residential property Contribution of nursing business not expected to exceed c. 15% of group EBITDA in the medium term 1) Acquisition of Pegasus portfolio with c. 4,100 places for c. EUR 420m or gross yield of 6.5% High quality facilities in good locations predominantly in Western Germany Attractive pipeline of additional smaller bolt-on acquisitions in residential and nursing of c. EUR 200m 1) Current EBITDA contribution of nursing business, pro forma for the recently announced Pegasus acquisition, amounts to c. 7% 21 » Executive summary: Key strategic priorities to accelerate rental and value growth Focus Highlights 1 Investments existing stock Improve quality for top locations to crystallize rent and value growth Core +, in particular Berlin Capex program increased to EUR 1bn for 30,000 units by 2021 Reversionary potential post capex doubled from c. 25% to 50% 50% margin on fair value uplift 2 Investments new construction Redensification / addition of floors on top of existing buildings Monetization of existing land bank 2,200 units for close to EUR 0.5bn investment volume by 2020 ROI ~60% based on construction costs Another c. 10,000 units realizable in the long-term 3 Bolt-on acquisitions Nursing assets, ideally in combination with operations High-quality residential portfolios with strong anchor in Core + Successful acquisition of Pegasus portfolio with RoCE 6% 22 » NAV guidance increased for M 2016 Guidance ) Old New Comments EPRA NAV per share (undiluted) 26 ~30 Based on transactional evidence at least EUR 2.2bn expected to be realized for 2016 (EUR 0.7bn already realized with H1 2016) Excluding changes in goodwill impairment and valuation of financial instruments and convertible bonds FFO I (in EUR m) Dividend per share 380 n/a Excluding recently acquired nursing portfolio with transfer in Q4 2016/Q (Pegasus) Acquisition expected to contribute c. EUR 23m (annual run rate) Based on 65% pay-out ratio of FFO I and 337.5m shares outstanding LTV 43% 2) 41.7% 40% 40% LTV target range reduced from 35-45% to 35-40% Commitment to leverage discipline in light of asset appreciation 1) Without acquisitions and opportunistic portfolio disposal as well as excluding changes in goodwill impairment and valuation of financial instruments, based on current number of outstanding shares 2) Pro forma acquisitions 23 » Q&A 24 » Appendix 1 nursing segment presentation 25 » Overview of German nursing market Care dependent people by age groups 46.2% 21.0% 9.8% 4.1% 1% 1.2% 1.9% 3.3% 0- 55 55- 60 60- 65 65- 70 75- 80 80- 85 85 Total Source: Federal Statistical Office 2015, BBSR (2015), Georg Consulting (2016) Overview of market segments 2.6m care dependent people 1.86m (71%) outpatient care thereof 1.25m provided by relatives 0.62m by ambulant nursing services 0.76m (29%) inpatient care c.13,000 nursing facilities Source: Federal Statistical Office 2013 Germany is the biggest nursing market in Europe with c. EUR 40bn annual spend, of which c. EUR 28bn inpatient and EUR 12bn outpatient nursing care Presently c. 2.6m care dependent people in Germany, of which c. 764,000 or c. 30% permanently live in one of c. 13,000 nursing facilities with nearly 900,000 beds The likelihood of requiring professional care significantly increases above the age of 75 26 » Key demographic trends in Germany Increasing share of age groups 65+ and 80+ 5% 23% 15% % 8% 28% 2030E 20% 72% 13% 33% 2060E 20% 67% Age groups: Ageing population leads to increasing demand for nursing homes Nursing care market driven by (irreversible) demographic trends - increasing demand for social, medical and nursing services Main reasons for aging German population are: Decreasing birth rates Ageing of former baby boomer generations Increasing life expectancy
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