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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to our earnings call today for the presentation of our results for the first half of 2020. As usual, I'd like to direct your attention to the forward-looking statement and disclaimer wording on Page 2 of our presentation. The safe harbor language applies to the presentation and all comments we'll be making today. I would also like to repeat that everything is being recorded. After the call, a replay will be available on our website. Our CEO, Lars Schnidrig, and I will guide you through the presentation, followed by the usual Q&A session. The time frame for today's call is about 30 minutes. Now it's my pleasure to turn the call over to Lars. Lars, the floor is yours.
Many thanks, Kai. And also from my side, a very warm welcome to all of you. When we speak about the highlights of the first half 2020, of course, we need to speak about corona and its impact on the market we operate in. In general, the market was shaken by uncertainties, and this was mirrored by reduced real estate transactions during the shutdown in April and May. But since June, we realized that the market is showing signs of recovery, but of course, as usual, after a crisis, with a focus on lower risk return profiles than prior to the turmoil. This can be seen especially in the shift in investors' appetite away from value-add or opportunistic assets towards core and core+. Our assets under management went up organically by 3.4% in 2020 so far by around 1.2% in Q1 -- in Q2, sorry. This is a sign of steady growth even in difficult times. More also later on. Our assets and property management went up by around 13% since June 2019. And our private debt business, HFS, shows another very stable performance also compared with previous year's figures. The earnings from alignment capital suffered from negative valuation effects on asset levels, especially in retail and service apartments. Our youngest family member, STAM Europe, was hit hard by the COVID-19, driven comprehensive shutdown in Paris and other parts of France with corresponding delays in their transaction plans and budgets in 2020. Also due to COVID-19, our annual January meeting had to take place as a purely online event for the first time. During this, our Supervisory Board was extended and now consists of 5 experts who are explicitly independent from CORESTATE, offering various profiles of independents and fulfill the diversity criteria from the German corporate governance code. A bit later on, we will speak in more detail about our financial leverage and our plans to push down the debt position. Our clear ambition is to reduce our net debt significantly within the next 18 to 24 months to further improve our financial room for maneuver. Our Capital Markets Day was originally scheduled to 10th September, but due to the COVID-19 and the associated restrictions, we had to postpone it to 19th November. Currently, we plan to hold this event physically and online in parallel, but we will keep you posted on this. Now please flip to Page 4. Even prior to the crisis, we already started changing our product offerings and our setup, and we wanted to shift our focus steadily and deliberately away from value-add and opportunistic investments and towards core and core+. This strategic repositioning encompasses not only products, but also setup and people. Our clear aim is to become one of the leading ESG real estate investment manager in Europe. Accompanied by comprehensive rebranding of the entire group scheduled for 2021, we will also further strengthen our equity raising with a focus on institutional clients from Germany, Austria and Switzerland. As the markets we operate in have changed tremendously in the last couple of weeks, we, of course, had to react. And this -- and we accelerate the change process significantly. Clients currently only ask for lower risk return profiles, and therefore, we currently offer very successfully residential in A-locations of B-cities, logistics, student housing, the conversion of entire area in prospering metropolises into city quarters, with a mixed-use concept consisting of residential, near-field retail, offices and some level of spaces, affordable housings in B-locations of A-cities and commercial assets with A-tenants and long warrant. One very important, and to be honest, and parts painful aspect of our enhanced market approach is a group-wide efficiency program designed to further simplify our processes, improve our productivity and develop a more digitalized business approach. After several acquisitions in the past years and a quite constant growth path, we have to take a closer look into our processes and workflow to avoid double functions and reduce costs, but of course, with sound judgment. All these changes and novelties take place while the market, as said before, is shifting its focus massively from higher risk return profiles towards core and core+ segment. This is quite intuitive in times of and shortly after crisis. But I'm convinced that bit by bit and very slowly, but steadily, also value-add assets will come back into clients' eyes as soon as the market becomes more stable and predictable. Please turn to Page 5. You know this chart from our previous presentation. It shows the development of our assets under management since the end of 2019. In brief, we had another record-high at the end of June 2020 with a net organic growth of 3.4% in the first half year and a planned decrease in our nonreal estate assets under management of EUR 0.3 billion. At the end of the first half of this year, our assets under management totaled EUR 28.2 billion. Real estate assets went up to EUR 24.9 billion from EUR 22.8 billion. As you see in the lower part of the slide, we had only minor shifts within the segment. The proportion of residential and micro living went slightly down. Office went up a bit, and retail continues to decline as in the last quarters as well. Logistics is one of the core competencies of STAM, together with other, nearly doubled its share. A good sign in times of crisis remains our sourcing pipeline, which stood at around EUR 4.6 billion, with more than 1/3 in advanced contractual status at the end of June 2020. Please flip to Page 6. You also know this chart well. It shows the development of our real estate debt financing subsidiary, HFS. And in a few words, it did very well even in these times. The committed fund volume at the end of June 2020 stood at more than EUR 1.3 billion.In total, we financed 63 projects with, again, a vast majority in the big cities in Germany, Austria and Switzerland and with an unchanged high demand from developers. As you can see on the lower half of this slide, around 70%, this figure is kept also stable through quarters, of the lending goes to the top 7 cities in Germany with the exposure to Berlin steadily going down, probably following local political decisions on the housing market. Construction work in Germany, Austria and Switzerland have strongly gained momentum after being slowed down in April, so the basis of our business here is very stable. When you look at the upper right of this chart, you can see that, again, more than 70% of our mezzanine financing go to the residential projects, 15% to retail and 14% to office. So the developer's interest in this business is stable on a high level. And we, of course, continue our regular analysis of all projects and borrowers. But so far, only a low 1-digit percentage of projects show noteworthy delays. As a [ funds year ] end approaches, i.e., end of October, we see the usual churn of around 20% of precautionary cancellations every year. As common in this industry, these clients wait for the funds result, especially looking closely on potential risk-increasing events before they finally decide on prolonging their investments. In the last year, most of these clients tend to stay in the fund. And we are confident that our stable performance also in these bumpy times will have a positive influence on this decision. And any money that was withdrawn in the past was overcompensated by new inflows. But as a risk appetite from investors as well as their internal risk diversification requirements are adopted in the crisis, harvesting new money for our funds has become more difficult in the last weeks. Please turn now to Page 7, and let me hand over to our Chief Market Officer, Kai Klinger.
Thank you, Lars. Let me please speak a bit about our revenue stream in the first half of 2020. Also compared in brackets was previous year's figures. We earned EUR 12.1 million acquisition-related fees in the first 6 months of 2020, thus showing some decline, mirroring the slowdown of the transaction markets and its recovery mostly being in the core and core+ segments. As said before, we are currently shifting our product range towards this demand. But at the beginning of the crisis, we're very much more focused on the lucrative value-add and opportunistic segments. Our bread and butter business, assets and property management, once again showed very stable income with revenues of EUR 47.4 million, up from EUR 40.4 million in 2019. As said before, HFS delivered solidly with a slight increase in the coupon participation fee from EUR 23.6 million in 2019 to EUR 24.9 million this year. The markets for higher risk return profiles, or opco/propco structures, like for service apartments, remains very difficult. We did not harvest any promote in H1, and it's hard to predict if the market will be absorbed such assets in the remainder of 2020, again, with corresponding success-based fees income on our side. We believe that once the entire real estate transaction environment has returned to a more solidity environment, as for such assets will come back to investors' eyes, but there is currently still a way to go. The income from mezzanine loans was around EUR 4 million and supports the very efficient use of our mezz funds with capital deployment ratios of around 99%. We saw some revaluation on asset levels, especially in retail and serviced apartments, affecting our alignment capital due to the challenging performance since March 2020. Same on our warehousing income where we did not sign any new warehousing transactions in the light of our more strictly balance sheet approach. This led our revenues from warehousing going down significantly to EUR 2.3 million. We showed aggregated revenues and gains of EUR 95.6 million in the first half of 2020, a prudent recovery of the transaction market. Something we expect to happen in the next month will be the driver for further upside in the remainder of 2020. Please flip to Page 8 now. Let's turn now to our cost structure. As you can see on this slide, beyond typical seasonality in our business, our expenses have been burdened by the changing market conditions. The OpEx ratio of more than 50% shows this very clearly. Expenses from real estate investment management ended up at EUR 46 million. Alignment capital expenses at EUR 8.3 million and warehousing expenses at EUR 3.5 million, all in all, around -- representing around 60% of our revenues, which is driven predominantly from weaker revenue lines in warehousing and alignment capital. The latter was additionally burdened by extraordinary efforts in a complex operational environment. G&A expenses were at EUR 16.5 million, which is also higher-than-anticipated in the beginning of the year, but was affected by HR-related one-offs and first implications from our efficiency program, which will led to around EUR 5 million to EUR 10 million negative onetime effects until end of December of 2020. With this, our EBITDA were at EUR 25.9 million, reflecting an EBITDA margin of 27.1%, unusually low for CORESTATE. Depreciations and amortizations stood at EUR 16.3 million and were affected by IFRS 16 as well as by the first-time consolidation of STAM Europe. Our financial result was at minus EUR 9.2 million at the end of this year's first half, a good run rate for the next 6 months. Net profit stood at EUR 0.4 million, down from EUR 36.9 million 1 year ago. Adjusted by capitalized management contracts of EUR 12.6 million and deferred tax assets of minus EUR 1.7 million, our adjusted net profit was at EUR 11.4 million compared to EUR 47.8 million 1 year ago. In a nutshell, you see short term, massively reduced earnings from warehousing from alignment capital and from transaction-based fees. This all comes along with an invariably high cost base and led to an EBITDA setback of around 60% compared to our pre-crisis level. But we will take this now intensely but also deliberately. Please turn to Page 9. On this side, you can see our key balance sheet figure and debt structures end of June. Our total debt adjusted for nearly EUR 30 million of rental and leasing liabilities stood at EUR 585 million at the end of the first half of 2020. This includes EUR 190 million bank and other debt, of which, EUR 33 million warehousing debts are part of. As said before, we have used our balance sheet very disciplined and will continue to do so. Cash, restricted cash and cash equivalents amounted to EUR 55 million, slightly affected by seasonal and HR-driven contractual cash outflows in the second quarter. Net debt at the end of June was EUR 530 million, leading to a financial leverage after IFRS adjustments of 4x. Nevertheless, our midterm target range of between 2x and 3x remains unchanged. How do we want to reach this goal? We have several sources to reduce our net debt position. One, of course, is our cash flow from operations. But we will deliberately and step-by-step reduce our balance sheet exposure by placements out of our inventories, associates and JVs and from our financial instruments. We expect to push down our net debt by more than EUR 200 million in the next 18 to 24 months. But let me be very clear. We do not have substantial redemptions or refinancing needs until the end of '22. Please turn to Page 10. And with this, I would like to hand back to Lars again.
Thank you, Kai. So currently, we cannot give you today a quantitative guidance for the ongoing fiscal year as the imponderabilities resulting from the COVID-19 pandemic persist and especially a potential second wave of infections would cause further uncertainties in the market make it nearly impossible to anticipate a reliable budget on potential fees from transactions or income from alignment capital and warehousing. Nevertheless, let me please give you some qualitative views on what we expect to happen in the remainder of 2020. Obviously, the transaction market is still suffering from high uncertainties, but we realized prudent signals for recovery after the bottom of the crisis was reached in Q2. So we expect the first good signs during Q3 and quite steady improvements in the last 3 months of 2020. Of course, all under the caveat of no second long-lasting supra-national shutdown. Our asset and property management fees will remain our stable bread and butter business. This also applies for the coupon participation fees and the income from mezzanine loans of our real estate debt business. Due to the short-term changes in risk appetite of the market, we only expect minor earnings contribution from warehousing and alignment capital in 2020. Our cost base will remain broadly unchanged, anticipating between EUR 5 million to EUR 10 million as one-off cost for this year from the efficiency program we announced today. Let me state this once again. Clearly, we remain clearly profitable in our operations even in a quite difficult market environment. I would also like to give you some intel on what you can expect beyond 2020. We see, and clients mirror this in multiple talks, that investors feel an increasing pressure towards real estate investments as interest rates are expected to stay on a very low level. And such other asset classes often do not fulfill the yield criteria from institutional investors. Also unchanged megatrends like urbanization and demographic changes drives the markets in which we operate with an attractive product range. In 2021, we will sharpen our brand identity and unify our market presence, along with a further focus on ESG, especially on the ability to identify the ecological footprint of each individual assets by a fingertip. And last but not least, we will expand also by hiring high-profile people, our sales functions, targeting especially institutional clients in the DACH region. So all in all, the environment for us is far from easy. But the mid- to long-term drivers of our markets remain intact. And as we also expect to benefit from some catch-up effects in 2021, together with gains from our efficiency program, we are sure to be able to emerge stronger from the crisis. With this, I would like to hand back to the operator, and we are now happy to answer your questions.
[Operator Instructions] We'll take our first question from Thomas Neuhold from Kepler Cheuvreux.
Just couple of ones. I would like to start at the planned net debt reduction. You mentioned that you do have roughly more than EUR 200 million of inventories, investments in associates and the financial instruments. I was wondering what is currently the earnings contribution out of these assets and just basically how easily or how difficult do you think it's to get out of associates and joint venture structures where you co-invested with other investors? That's the first question.
Thomas, it's Kai. Maybe to give you some color here. Of course, this is an ongoing and already scheduled or planned placement process of these assets. And that's part of our normal doing before the crisis. And of course, there were, according to the risk return profile of these assets, a sudden halt there. And with this, we have seen delay of maybe 2 or 3 quarters of this placement process, and this will be part starting in 2021 onwards of regular placement processes where these assets will mature. So -- and of course, we are planning to compensate these assets also with minor new alignments but on a lower level. So the impact on our returns, of course, will be there. But bear in mind, currently, our alignment capital revenues are still -- all the income is on a very low level. So I hope this gives you a little bit color and right.
And I'd like to add something, Thomas. Obviously, this is also a game-changer because in the past, we have lowered the leverage via increased EBITDA, and now it's the first time that we really tackle the gross debt. And I can ensure you, by all means, we will work to reduce this. Part of this, by the way, is easier to realize and part of this will take, as stated, the terms between 12 and 18 months, because we are not aiming to do here any foolish things like fire sets or anything like this, but rather stringent on sales process or placement processes, which we have anyway planned. We just wanted to show you, our stakeholders, that we are absolutely committed to decrease the leverage by these measures.
Understood...
[indiscernible] so there, in our warehousing assets, we have close to EUR 60 million in a city shopping center located in the north region of Frankfurt in Giessen, which is generating rental income of around EUR 6 million. So the ratio between rental income, EUR 6 million versus 60 -- close to EUR 60 million book ratio is at least attractive to get placed. And there, of course, we see as a promising potential warehousing gains if we are, again, able after the refurbishment process of that asset to place this on the market.
Okay. The next question is on this repositioning strategy. Can you remind us which portion of your AUMs you would currently consider core/core+ and how quickly you expect this to increase going forward and what could be the share, let's say, in 3 to 5 years' time? And I was wondering also if you can give us more details on which costs you already incurred in the second quarter for the repositioning, refinancing and efficiency gain program. And maybe also you can talk a little bit about potential cost savings, which should result from these measures.
Maybe the easiest answer would be in the second quarter or in the first half actually, already booked one-off costs would be between EUR 2 million and EUR 3 million, closer to EUR 2 million. The split-up of our risk profile of standing assets in our current portfolio is maybe a little bit misleading. Maybe first of all, I will give you the number and then I can add some color. So in core, we are managing currently around EUR 6.1 billion in AUM; in core+, close to EUR 5 billion; in value add, EUR 3.5 billion; in opportunistic, EUR 1.6 billion. This led to around EUR 60 billion of standing assets. On top of that, if you close the gap to around EUR 24 billion, you have, of course, also our HFS AUM, which is, of course, from the risk return profile much more in the opportunistic value-add level if you take the underlying profitability into account. And the bulk of our core and core+ assets is coming from the legacy portfolio of an overleasing acquisition. So cost for itself was a typical core+ value-add specialist in their investment perspective. And of course, we changed exactly that. So the more new or the newer AUM in our portfolio which was raised over the last 3 to 4 years was part of the value-add and core+ game, which we've played.
Maybe to add, Thomas, it's not the one and only measure you take that you shift from or that you get higher gains shares in core or super core. This is a transition we have started actually 2.5 years roughly ago. To make a business like this more scalable in the core segment, you need certain ingredients. And these are reflected in our comprehensive ESG strategies that has a lot to do with technology, that has a lot to do with making, reporting, scalable that has to do with the governance that is reflected, obviously, in our ESG strategy. And there you saw, we have luckily -- capped the votes in -- at the AGM for our new Supervisory Board. We have a new CIO who comes from an institutional background. And all these puzzles come together and then increase your relative share of your core products. And I'm not saying that we turn around from opportunistic already, we will continue this. But going in a more stable P&L environment, of course, we want to increase, as we have done, where we have quite nice examples as with our big mandate, BVK or the churches and many others. But we want to have more of that. And therefore, we need further. And this we do by all means further to institutionalize the business, and this is technology, people and process. And this is the way we are continuing.
Okay. Understood. The last question I have is on the Mezzanine business you mentioned that the fundraising has become more difficult due to decrease in risk appetite. Do you seem to get a risk that the fund volume will decrease in the next couple of quarters or are you confident that you can replace existing ones with new ones?
Of course, there's always a risk. Life is risky, but we feel very comfortable according to the -- to today's performance of the fund. So the existing investor base is quite happy with their returns and why should they stop in a 0 interest environment to harvest a 11% or 12% from a higher risk business. And of course, you have always a technical impact, meaning a potential rebalancing of investors fund that he's not anymore allowed to touch this high-risk asset class, but I think we have good arguments to mitigate these potential pushbacks.
One disclaimer here in today's world. We all noticed we have a mega crisis out there. And therefore, I think it would be naive to predict how really investors' appetite for higher risk return profiles is. So therefore, we keep this very serious and also put further resources in as in the past to overcompensate potential cancellation. However, even if you should see a dip where I'm absolutely convinced the world outside there, the trends and the macroeconomics and the regulatory framework driven by the COVID crisis is in favor of the mezz business. Why? Because as in the financial crisis, the mortgage banks tend to decrease their mortgage funding for development, which is good for us because -- and that's also one of the reasons, obviously, that the fund is on record high-volume currently. Because if you have -- you need to build more homes. It hasn't stopped despite COVID. People need places where they can live. And somebody, as I'm always saying, needs to finance that. And luckily for us, on the one side is the mortgage banks now allocate or need to allocate higher equity, higher risk-weighted assets towards development loans. And we saw this exactly in the financial crisis. So what does it mean? They will recover over time. But currently, that may take 1 or 2 years. But currently, even if we would have a slight dip, I'm rather positive that we could make more. And I can ensure you, on the project side, we have quite a nice pipeline. And that is self-explanatory, because if a developer is in a development and he needs the funds, where should he go to? To who has such deep pockets as we currently have.
We'll now take the next question from Kai Klose from Berenberg.
I've got a question on Page 7. Could you indicate what was the underlying acquisition volume, which generated EUR 12.1 million acquisition-related fees?
No. We have had there roughly EUR 700 million of AUM plus, of course, some income from our HFS business.
And for this year between HFS and AUM projections?
Actually, around, I think EUR 4 million or EUR 5 million from HFS and the remaining -- remainder from our real estate equity business.
And the second question would be, could you indicate what was -- what is the net-to-EBITDA ratio according to S&P's definition? I'm asking because there was a difference between what you reported by year-end '19 and what S&P came out with.
Actually, we can't comment the S&P definition. But of course, they have some different methodology. For instance, we adjust according to what we have in our financial documentation, the IFRS 16 effect in our net debt allocation and maybe S&P has other adjustments in their methodology. But based on real financial liabilities, then you can do the back-of-the-envelope math based on our balance sheet position. And EBITDA is also quite obviously on an LTM basis from our reportings. So of course, you can adjust everything in the P&L and in balance sheet, but I can't comment what S&P is doing here.
[Operator Instructions] The next question comes from Manuel Martin from ODDO.
Two questions from my side. One question is a follow-up question on HFS business. If we have to look at the other side of the mezz on the money that you lend out, do you see any difficulties or turbulences coming when -- regarding to the refinancing of [ Consus' ] mezzanine loan. That would be the first question.
It's Lars. Sorry, but we are legally, unfortunately, not allowed to comment on individual loan agreements or individual clients, if they are clients. So that is unfortunately not possible.
And Lars already mentioned that we have a very strong pipeline of new projects and a very eager situation on the developer side to find proper mezz provider. So it's not -- the bottleneck is definitely not -- that we find interesting projects.
Okay. Okay. The second question regarding DACH region raising equity. There was a news recently that some club deal managers went away from CORESTATE in [ Zurich ]. The strengthening of the DACH region, does it mean that you're going to replace these guys or even build up more strongly the team? And also maybe you can elaborate on your global fund raising.
Sure. So I don't -- I can't comment on individual person in the company. However, as stated in the past, we have centralized the steering and the management of the fund raising. We will continue to invest in that. Why? Because currently, when you look at the -- how the company has developed, I think -- or not I think, I'm absolutely convinced we can do more in the DACH region. And we can, in particular, do more in the DACH region when it comes to institutional business. So that means we have currently more than 100 institutional investors. And of course, we want to increase their share by further generating long-term mandates from larger institutional business. And yes, so.
Ladies and gentlemen, that concludes our Q&A session. I'd now like to turn the call back to Dr. Kai Klinger for any additional or closing remarks.
Thank you so much for listening. We appreciate your interest and your questions. We'll be on the road, unfortunately, mainly online, but as far as possible, physically, in the upcoming weeks. But please don't hesitate to contact us for any further queries you may have. And as a please reminder that our Capital Markets Day will not take place in September. It was shifted on the 19th of November. Also online, and if feasible, by any means offline. So stay healthy and enjoy the rest of the summer. Goodbye.