Branicks Group AG

Good morning, ladies and gentlemen. A very warm welcome to DIC's Half Year Results Conference Call.

Today, as usual, I'm here with my colleague, Patrick Weiden, CMO of DIC Asset; Dirk Oehme, our Head of Accounting; and our Investor Relations team headed by Peer Schlinkmann. As usual, I will give you a quick presentation of our results for the first half year of 2021, followed by the Q&A session.

Before I guide you through the details of the first half year results and the performance of our real estate platform, ladies and gentlemen, let me start my presentation with a quick overview of the operational highlights. You will see what we have achieved in the first 6 months of 2021 in a still challenging environment.

Our unique business model has again shown its strength in a constant way with growing assets under management leading to a growing FFO. We have defined a new midterm target for assets under management with €15 billion-plus in the 2 segments: Commercial Portfolio and Institutional Business, driving the value of the 2 segments.

And last, but not least, our results. The reason for that is embedded in our 360-degree management approach.

We transformed the real estate value chain into a dynamic circular process. So we are able to deliver 360-degree value creations during the lifetime of the assets while taking advantage of strong synergy effects and it shows up in higher values and in higher results.

Our success is based on the 4 key elements of this 360-degree management approach: transact, operate, develop and match. Under the term transact, we see us as the local expert with keen in initiating and structuring transactions, including the financing for the growth of our platform, and always with a view to find attractive opportunities, which have further potential.

The day-to-day businesses and ongoing management of our properties is what we define under the term of operate. An active and sustainable management approach is key for today's and future success of our business model.

Another central part of our platform is our track record in developing. That means, on the one hand, developed assets, but it does also mean developed processes bring it continuously to the next level.

Another term, match, we summarize our goal to bring together the right properties with the right occupiers and the right investors. So to say the perfect match.

It means acquiring suitable properties while disposing unsuitable ones. Looking at the performance of our platform, we can state that our assets under management keep growing in the first 6 months with a volume of €897 million.

Compared to the transaction volume in the same period last year, they increased by 81%, also due to the acquisition of the so-called Uptown Tower in Munich, which is our biggest transaction so far. The uptown tower was bought for warehousing and will be placed into a new vehicle for institutional investors in the next month.

For our own balance sheet portfolio, we bought 2 assets for a total of €138 million, one in Cologne and one in Munich. On the disposal side, we successfully sold 2 properties for our clients in the Institutional Business.

The hotel in Frankfurt Villa Kennedy and the residential project Riverpark, also in Frankfurt, for around €173 million together. As of the balance sheet date, 3 properties are in the warehousing portfolio with 2 logistics properties in the meanwhile already transferred to the new logistics hubs and the Uptown Tower.

On Slide 4, you see what we mean with operate. Our letting teams signed just over 100,000 square meter in lease agreements with contractually accrete annualized rental income of around €12.5 million in the first half of 2021, with a majority share of 73% coming from office leases.

Compared to the same period last year, our new lettings saw a strong rebound. A significant part of new leases were actually put to the logistic asset class.

The development of the like-for-like rental income for the entire managed portfolio slightly increased by 0.2%. The like-for-like rental growth for the commercial portfolio stood at 0.5%.

Our average trend in the Institutional Business grew by 4.2% to €15.68, and in the Commercial Portfolio, 8.2% to €11.21 Including the logistic assets from RLI, the average trend in the Institutional Business stood at €11.90 per square meter. At the same time, the average trend in the Commercial Portfolio, including the warehouse properties, stood at nearly €12 per square meter.

Overall, the remaining lease expiries to the portfolio are on a very low level. Only 2% of the rents are due to expire until the end of the year.

Roughly 75% have a remaining term until 2025 or even longer. Now let's have -- let's take a quick view on our balance sheet portfolio on Slide 5.

As of today, and not including the properties in the warehousing, our Commercial Portfolio has reached a size of €2.1 billion. The office asset class is still dominating the composition of our portfolio.

Portfolio KPIs like the EPRA vacancy rate decreased to a very low level of 6.1%, which is a minus of 140 bps compared to last year's period. The remaining average lease term, our WALT, stood at 5.9 years.

In the first 6 months, we further strengthened our portfolio by 2 acquisitions with an annualized rent of €7.2 million. The fully occupied MBC in Cologne has led to the car manufacturer and blue chip company, Mercedes-Benz AG, and it provides a rental income of €4.9 million and has a very long-term WALT.

The total investment cost for the property amounted to €71 million. The gross rental yield related to the purchase price exceeds 7%.

Besides a strong generation of rental cash flows, the property promises further value potential. Our newest acquisition is the property Campus in Munich for a total of €66 million.

The fully occupied multi-tenant property provides a gross lettable area of 9,200 square meter. Maintenance of the property are a U.S.

software company, Adobe Systems, and 2 public sector tenants. General rental income approximates €2.4 million, while the secured remaining lease term is over 3 years.

We are witnessing a continuous inflow of companies and a steadily rising demand for modern and flexible office units in this area of Munich. Therefore, Campus C promises a steadily increasing value appreciation potential, as we expect that Munich will keep its position as a highly attractive office location.

Together with the acquisition of the Uptown Tower for our warehousing activities, we also significantly increased our overall footprint in the Munich area. Now we have even stronger presence on Munich's market and we expect to further increase our presence there.

As part of the key element transact, warehousing plays an important role in our 360 degrees management approach. During the first 6 months of 2021, we acquired the already mentioned Uptown Tower and one logistic property, ILP near Erfurt.

The logistics property has already transferred -- has been already transferred to our existing logistics fund after this balance sheet date, end of June. For the Uptown Tower the marketing was launched in July, and we expect to transfer to a new investment vehicle to take place in the second half of the year.

Until then, we will profit from the additional rental cash flow in our P&L. Bringing together the right investment ideas with the right investors is what we define under the term match, as I already mentioned at the beginning of our presentation.

As of today, the assets under management in the Institutional Business grew by roughly €2 billion within 1 year, which means an increase of 33% to €8.6 billion. After the acquisition of the logistics asset manager, RLI Investors, at the beginning of this year, we have successfully completed the integration into our real estate platform.

Just a couple of weeks after the acquisition, we quickly launched the first joint logistics fund, which targets investments in light industrial, urban logistics and logistics assets. And only another 4 months later, we completed the fundraising for this new logistics fund.

Therefore, we are now ready to fill the fund in accordance with the investment strategy. Including the fund raised for the new logistics fund, we still have more than €700 million of equity commitments available for new investments, and in total, an amount of roughly €1.3 billion.

Ladies and gentlemen, I wanted to shed some more light on our activities and measures, which shaped our growth plan to reach the target of more than €15 billion assets under management in the midterm. First of all, our target is based on our market view and expectations.

Yes, COVID-19 has changed the world and, to some extent, also the parameters in the real estate business. But we view this rather as an opportunity than a risk after the pandemic.

Germany as a real estate market will remain the most attractive in the European landscape and this is our home turf. Core/core plus investments in the top 7 locations for everybody style, and we can offer the product.

Given the market environment, we believe that an active management approach is key to our success, along with our entrepreneurial mindset and high deal speed. We are following an active management approach for many years now and cover a wide range of the real estate value chain.

And we are well prepared for ESG and we already set up an updated ESG strategy and road map. Our action plan towards the next growth target is built on the following specific milestones.

One simple formula to grow, we need to invest. We will invest our own money to increase the balance sheet portfolio, but also the equity that our investors have entrusted us to further increase the AUMs in the Institutional Business segment.

We will expand our product offerings for investments in the German real estate market but also especially for logistics outside Germany. We stick to the level of our vertical integration as we truly believe it is a competitive USP in the transaction and letting markets.

And it supports us to generate superior returns for our clients and we can create added value on our platform. We will also deliver on our ESG road map and further develop it.

Especially for Institutional Business, our goal is to tap the potential from a growing international investor base. We are happy that we can rely on our strong domestic investor base now and will continue to further match existing and new investment ideas with this expanded investor base.

Besides keeping the fees we generate from our transaction activities on a high level, we also target for a higher portion of our recurring fee base, driven by the increasing number of assets under management. For the Commercial Portfolio, we focus on the additional value creation through selective repositionings and refurbishments of existing properties, followed by a further strengthening of the portfolio quality by acquisitions on the one hand and disposals, if appropriate, on the other.

On top of that, we will use our balance sheet capacity to some extent from time to time for warehousing of attractive properties. This will generate significant and additional set-up fees as well as rental cash flows.

Through this action plan, we will achieve further values, FFO growth and attractive dividends. What we also have seen over the last month, overall success is defined more and more by a company's ESG strategy.

Therefore, let me reaffirm that the topic of ESG is seen as a long-term commitment for us. This means that it's not only driven by legal obligations and new laws like the European Green Deal or the [indiscernible] technology.

Incorporating ESG criteria into real estate promises additional returns for our clients and for our operations. That was why we started to put our emphasis years ago on implementing ESG into our daily business.

The ESG approach has become an essential and integral component of our corporate strategy, of our management approach and of our daily business activities. As part of our latest sustainability report, which we published end of June, we also presented our updated strategy for the next years.

It demonstrates how the success and dynamic nature of our business model is clearly and decisively linked to the assets under management. Let me highlight some of our recent milestones and give you also an outlook on some of our targets as part of our ESG road map.

In the first half year, we updated our ESG strategy, as I already mentioned, newly created the position of a Head of Sustainability and implemented an ESG Committee, which will be responsible to further establish and implement ESG in our DNA. We placed an ESG-linked promissory note with a volume of €250 million for the first time and set a green building target of 20% by the end of 2023 as part of the promissory note issuance and launched a new ESG website to give more regular updates on our milestones.

Digitalization, thereby, is an incremental part for the further ESG process, and it will guide us to a better understanding of the impact through faster analyzing the raw data of our properties. Looking at the half year figures, we were again able to benefit from several revenue streams.

A strong profit from disposals was achieved mainly from the transfer of the repositioned property in Darmstadt out of the Commercial Portfolio in the new office fund we have launched last year. Additional profits from disposals in the amount of €4.3 million were generated in Q2 coming from last year's disposals.

Our net rental income from the Commercial Portfolio is on a stable basis but shows temporarily a lower level compared to the previous year due to the disposals in the previous year. The latest acquisitions, as well as further ones, will more than compensate the rents from disposed assets until year-end.

Our management fees again significantly increased by roughly 20%. Thanks to restructuring of transactions and acquisitions, the transaction-related fees increased to €31.7 million.

The increased assets under management base in particular, improved the asset property management and development fees to €18.8 million. Overall, the profit for the period increased by 32% to €37.7 million in the first half of this year.

Looking at our valuation and adjusted NAV, which takes into account both the value of our balance sheet portfolio as well as the full value of our asset management business, the adjusted NAV amounted to €21.91 per share, which was just slightly below the year-end figure of 2020, mainly due to a €1.3 million higher amount of shares and the cash dividend paid in the first half of 2021. On the next slide, I just want to give a quick update on our financial structure.

We are now looking at a more ESG-driven financial structure. According to the attractive conditions of the ESG-linked promissory note, our average cost of debt decreased to 1.9% and the average maturity of loans and borrowings increased to 4.2 years.

With the funds from the promissory note, we already secured a refinancing of a major part of our maturities in the next year. Until then, we will use the funds to temporarily finance our warehousing activities.

Mainly due to the most recent acquisitions for the Commercial Portfolio and the cash dividend payment in April, our LTV adjusted for warehousing increased to 48.1%. Including the full value of our Institutional Business, our adjusted LTV stood at 43.2%.

With the €240 million cash on hand, we have sufficient ability to further finance our short-term growth. And now let's have a look on the FFO.

Compared to the previous period, the net rental income slightly decreased due to sales and transfer of warehouse assets. On the other hand, we saw a significant growth of the real estate management fees.

Our OpEx increased in line with the growth of the platform and the acquisition of RLI Investors. The other operating income and expenses mainly increased year-over-year due to the release of provisions in Q1 2021.

This €53 million, our FFO achieved the best half year result in DIC's history. Including sales profits, the FFO 2 reached €69.3 million, which marks a plus of 31%.

Ladies and gentlemen, despite the market challenges in the first half year, we demonstrated once again how effective our real estate platform is, what a strong earnings dynamic it develops and it has a tremendous potential going forward. And that is exactly what we mean with the term dynamic performance.

With our own momentum, we will reach our targets for 2021. Many thanks for your attention.

Now we are ready to take your questions.

I think it's my turn. Just a couple of follow-up questions from my side.

Just starting with the Institutional Business. So you mentioned that the real estate management fee increased by around 20% up to over €50 million.

Could you elaborate how much of that is linked to the RLI acquisition? And how much is kind of organic growth in the fee?

Thank you for the question. Yes.

So for the RLI, it's around about €3 million for the acquisition from -- coming from the run rate, so to say. Yes, and the rest of it is from organic growth.

Okay. Perfect.

Then the AUM increased by 30% on a year-on-year basis, only looking at the Institutional Business. But the asset management, property management and development fee only increased by around 4%.

Could you shed some light on this difference? And yes, between the 2 growth rates.

Yes. So if you look at the growing AUM, you have to keep in mind that it is, so to say, signing date, yes.

That means, for example, the warehousing of the Uptown Tower we have signed, but it's not in our P&L now only for a small number. So at the end of the day, we have -- we have bought nearly €1 billion beginning -- since beginning of this year.

And the result of this, you will see mainly in the second half of the year.

Okay. So the fee is only lagging behind the AUM growth.

So in the second half, there should be a sharp increase in AUM and PM fees according to the AUM increase in the first half?

Yes, definitely. So if the signing is -- has been finished, it will take, at the moment, at least 8 weeks normally or 12 weeks to complete the transaction because the government authorities are a little bit -- yes, not so fast at the moment because of corona mainly.

So it takes much longer until the P&L comes after signing. But to clarify it, the Uptown Tower, for example, which means over €500 million growth in AUM, you will see in the fee after we have transferred it to a new vehicle in the IB.

So for the next 3 to 6 months, I expect it to be in the Commercial Portfolio rental income, and afterwards, we will create fees out of this. So it will not show a very much increased number out of this in 2021, mainly then in 2022.

Okay. So for example, the Uptown Tower in the AUM increase of [indiscernible] but not in the fee income because it's still in the warehouse on the balance sheet?

Yes, yes. It's in the number for the warehouse AUM, but it will go into the IB AUM, I expect, in the fourth quarter mainly and then the fees out of this come in the P&L in the line fees, yes.

And then just a couple of questions to the ESG-linked promissory note, you mentioned in the presentation. So are you able to get on with the green building certifications of the Commercial Portfolio?

And could you might shed some light on the balance between costs for these particular certifications and the interest cost savings out of it due to the ESG-linked?

Yes. As mentioned, so it is part of our strategy for purchasing and transactions to buy also so-called green buildings.

Our transaction volume for -- mainly for the Commercial Portfolio split into 3 parts. One is [indiscernible], one is green buildings and the third part is logistics.

So we have the goal to increase our number of green buildings besides ESG-linked or anything like this for the promissory note. It's indeed difficult to find green buildings on the market because they are not so often sold because they are not existing so much.

On the other hand, I think it's -- yes, it's important that we also buy green buildings on the one hand and we create green buildings from our existing portfolios. These are our 2 major streams for getting the ESG road map done.

For the promissory note, we only have the link to new bought buildings. That means we have to buy green buildings over the next 3 to 5 years.

But it's -- we find them. We are the biggest investor, so to say, in the German market.

And if not, we find them, who should find them, yes?

First, congrats for a very decent FFO picture, I guess, FFO II, plus 30%, almost €70 million. That's not too bad and shows that you do the right things at the right time.

My question is about Slide 4. On Slide 4, you mentioned your high letting volume for the first half of the year with about more than 100,000 square meters, and you also managed to lift the average rent of the new contracts.

Are there any significant investments in the properties in connection with the new contracts or prolongations? That's my first question.

Yes, thank you for your words, and thank you for the question. So no, we don't see any additional incentives, which we have to give.

So what we see is that there is interest in new lettings coming back here. So if you compare it to last year, we have increased our letting volume mainly by renewals because last year, everybody said I want to stay at home, so to say.

What we now see is that the letting market is back. It is in a very special way.

So you have to work much more with potential tenants on how should the space look like, what will the future bring and so on. So what we saw in the past is that some of the, for example, or especially big tenants have their own consultants who prepared all these things.

now it's more on us to find ways and to discuss with potential tenants how the spaces have to look like, what the employees want, how will it look in 2 to 3 years. And this means more work for us.

We have to have more ideas and we have to work on it, but it does not mean more incentives.

Okay. and on Slide 9, you mentioned that there are some good market opportunities outside of Germany and you expect attractive opportunities also to arise in the value-add segment.

Perhaps you can say here a little bit more which countries and which value-add properties might be interesting.

Yes. So beginning with the countries, we have launched our logistics fund.

What says that we also will invest outside of Germany and this means, I think, especially the Netherlands. So because this is a very interesting market for us.

Belgium maybe, Austria. So the western parts of Europe, I would say, yes.

And this is especially for the first time for logistic, not offices. But we see good opportunities there with interesting yields.

And so we expect them to come over the next weeks or months to be seen. And the value-add asset class, yes, we always invested in value-add and a little bit opportunistic, but it was not possible over the last years because you were able to find -- well, you add properties or manage to core, how you call it, [indiscernible] but not for value-add prices, yes.

And therefore, we buy one. But now we see this coming back.

We have also increased our knowledge in repositioning and in creating potential from value-add assets. And so we are looking on this in another way.

And therefore, we have established a team here in our company, which found value add and which brings value at potential to the assets. And yes, therefore, we will drive this in the Institutional Business as well as in our Commercial Portfolio.

Okay. And one add-on the new logistics front, which you fully placed in July with the target volume of €400 million.

Can you give us here a time line for the investments to fill up this fund?

Yes, definitely. So we have got the equity in 4 months.

So it was a very, very fast process. And we have also to -- as a brought into this fund because we had it in the warehousing.

It was after the balance sheet date. So -- but it was closed yesterday.

So the 2 properties are in the funds now. And we still have a good pipeline for the logistic area, but you have to keep in mind that it's a special asset class.

What does it mean? It means that you have to calculate that you don't find normally assets with a volume of €100 million to €150 million but it's our smaller one, so €20 million to €40 million.

So we have to buy even more assets in this asset class. But at the end of the day, normally, we have a closing for investments of 12 to 18 months for our funds.

And I expect it to be within this time line.

Okay. So it means more or less first half of next year is realistic?

Yes.

I have a follow-up question on the management and development fees on Slide 12. Are the margins in your business, excluding RLI, virtually unchanged compared to the first half 2020?

That's my question.

Excuse me, I didn't get it. Could you please repeat it?

Yes, sure. It's a follow-up question on the management and development fees on Slide 12 because I actually had also expected a more pronounced increase in the first half '21 compared to the first half '20 just with regard to management and development fees.

And so my question here is, are the margins basically unchanged in your book? Or is there any pressure, excluding RLI acquisition?

That's my question.

No, I understood it. Thanks.

So the margin is still unchanged, so it's as usual. But we have still less development at the moment.

So we have still less development fees. So it's a little bit like waived, but the margin itself is unchanged.

Okay. So this also means that the increase in management fees is actually -- or was actually stronger than the figure of EU 18.8 million versus 18 -- of €18.8 million versus €18.1 million for the first half was just right?

Yes.

Sonja, I have two questions on the Institutional Business. So as far as I could understand, DIC plans a significant expansion also with international investors.

Could you give us maybe some more color on that, how you're going to do that? Are you going to open offices abroad?

Or are you going to do that from Frankfurt? Maybe you can shed some light on that and which regions you might maybe tackle first?

Yes, thanks for the question. It's a very interesting one where we worked on some months -- for some months now.

So as you know, our USP is that we have our own people and our own offices all over Germany. And so we -- when we start to invest in foreign countries as such for the first part only for logistics in Benelux, especially Netherlands and Austria maybe, we will do this from our German offices.

So we have Cologne, we have Düsseldorf in place, we have Munich and Stuttgart so we can do this with our own people from our own offices in Germany. And when we have more than 1 or 2 assets in a special region in, for example, the Netherlands, we will do this with our own persons there.

So we will open an office if it is appropriate. Until then, we will outsource the property management to some specialists in the country.

And as I said, when we have the right number of assets in place, we will create our own offices and our own people because we think it makes sense if we have our own personnel there who work on the same payroll as we do for the assets, and yes, bring the potential out of it as we do it in Germany.

Okay. And when it comes to clients, that means our clients to bring more equity to invest in the Institutional Business?

Are there any plans for an international expansion right now?

Yes, definitely. We have -- yes, we have put a new Managing Director in the GT who only cares about international investors.

He has a very long track record with international investors. And so we increased these investor bases.

We have started this, especially the big investments are very interesting for international investors, not only by us, but also on other big investments. And so we think about the Asian ones and we also think about the Nordics.

There is a lot of institutional money from the pension funds and so on. And they are interested in German investments, on the one hand, but also in German players who care about the assets so that they have all these real estate value increasing things in one hand.

And I think we can fit to this. And therefore, we will increase the investor bases.

It takes a little time because they cannot travel at the moment or most of them don't travel at the moment, you have to do a lot of things by our teams so soon, but traveling is coming back. And so we expect to increase the bases over the next 12 months dramatically.

Hi, it's Peer speaking. Thank you for joining us today.

If you have any follow-up questions, please reach us through the Investor Relations team. Max and I are available the whole day.

Thank you. Bye, bye.