An interview with the Executive Board – Dietmar Reindl and Stefan Schönauer – on the 2019 financial year: the occupancy rate set a new record, net profit reached the highest level in many years and the guidance for FFO 1 was definitely more than met.
If you were asked to briefly describe and rank the 2019 financial year – where would you start?
Dietmar Reindl: It was a very good year and marked a milestone in our company’s history! The occupancy rate in our properties continued to improve – from an already high level – and set a new record at 96.8%. This is a direct result of our clear brand policy with innovative office and retail solutions as well as the commitment of our customer-oriented staffs. Our net profit rose by more than 60 per cent and, at roughly EUR 352 million, reached the highest level recorded in many years. Through profitable property acquisitions and the completion of construction projects, our portfolio grew by nearly EUR 1 billion to EUR 5.1 billion in 2019 – which confirms that IMOFINANZ has now reached a relevant size as a player in the European real estate sector.
Stefan Schönauer: The development of our funds from operations, which is an important profitability indicator in the real estate branch, underscores this success. FFO 1 improved by more than 30 per cent to EUR 137.4 million in 2019. That means we clearly exceeded our guidance and demonstrates the success of the measures implemented in recent years to strengthen earnings. In other words, we delivered what we promised. As a reminder: In April 2017, during our repositioning, we announced a goal to generate FFO 1 of more than EUR 100 million in the 2019 financial year. This guidance was raised to more than EUR 128 million with the publication of our 2019 half-year results. In the end, FFO 1 totalled EUR 137.4 million – or more than one-third above our original forecast. We also set a number of financing milestones during the past year: At the beginning of 2019, we received an investment grade rating from S&P and issued a benchmark bond for over EUR 500 million.
Dietmar Reindl: We used the last few years to create a solid foundation for IMMOFINANZ and position the company as an innovative provider of high-quality property solutions. Our customer orientation, investments in the quality of the standing investments and the continuous improvement of our service offering have made us very successful. And this goes hand in hand with top performance in the financial area. IMMOFINANZ is very well prepared to deal with the current challenging environment and the related slowdown in global growth caused by the corona crisis: We took the necessary steps during the first days and weeks and implemented numerous measures to minimise the potential negative impact on our Group.
Stefan Schönauer: The sale of our investment in CA Immo during 2018 was an important part of our efforts to strengthen IMMOFINANZ in view of a possible economic slowdown. Our objectives here included the protection of liquidity, the further optimisation of financing costs and the diversification of our financing structure. And we made a great deal of progress in all key areas. Cash and cash equivalents totalled EUR 345 million at yearend 2019. Additionally, we concluded a revolving credit facility of EUR 100 million at the end of March 2020 to further improve the liquidity position. Draw-downs are possible at our discretion at any time during the two-year time frame, which give IMMOFINANZ added financial flexibility. Gearing, based on net LTV, currently equals 43 per cent which is clearly below our target of roughly 45 per cent, and our financing costs declined further to 1.91 per cent. As I mentioned, we also accessed another important financing source in 2019 with the first-time receipt of an investment grade rating and the issue of a benchmark bond. This security represents the first benchmark bond with an investment grade rating issued by an Austrian real estate company.
You mentioned the growth of the portfolio to more than EUR 5.1 billion. Was part of your liquidity used for this purpose in 2019?
Stefan Schönauer: Yes, due to the very profitable sale of our CA Immo investment in 2018 and the related cash inflows of over EUR 500 million, we had a well-filled bank account. We invested part of this surplus liquidity in office properties and the further expansion of our retail park platform to strengthen our earning power. Last year we also completed a share buyback programme and now hold 10 per cent of our own shares, which we purchased substantially below the net asset value.
Dietmar Reindl: One of the most spectacular deals in 2019 involved the Warsaw Spire in Poland, which we acquired from Ghelamco and Madison International Realty. It is the highest office tower in the entire CEE region with 49 floors. Together with the spire, meaning the attached tip, it measures 220 meters in total. The tower is fully rented to well-known firms like Goldman Sachs, Samsung, JLL and Mastercard. We are now integrating the Warsaw Spire into our myhive office concept, with its focus on service, a comfortable atmosphere and community building. Our other office acquisition in the second half of 2019, the Palmovka Open Park in Prague, will also be operated as a myhive. This location, in the heart of the rapidly growing administrative center and directly adjoining an underground station, is absolutely top, with a wide range of services and the Vltava River as well as several public parks nearby. These acquisitions have strengthened both our standing on the market and the recognition of our myhive brand. We also invested in our retail business during the past year, namely through the acquisition of six fully rented retail parks in Slovenia and Poland with roughly 54,000 sqm of rentable space in total. These properties will become part of our STOP SHOP brand. The acquisition yield on this package was over 8.5 per cent. Our STOP SHOP portfolio now covers 90 locations in nine countries and has a book value of nearly one billion euro.
Stefan Schönauer: Another acquisition at the beginning of 2019 covered the second half of the Na Příkopě 14, a building in the inner city of Prague, where we are now the sole owner. This revitalised prime street property on Prague‘s well-known shopping promenade, which is comparable to the Graben in Vienna, has an excellent inner-city location. In addition, this transaction marked the end of our last major joint venture in the real estate sector.
You repeatedly emphasise that the brand policy is a major success factor for your business. The myhive office brand was introduced at the end of 2016. What is your assessment so far? Are you satisfied?
Dietmar Reindl: More than that. Our expectations were clearly exceeded. When we launched the brand and the myhive concept more than three years ago, we were entering relatively new territory. Modern office worlds with a comfortable, hotel-like atmosphere and community elements were not widely known in our markets. The introduction was, consequently, a courageous decision. We also invested a great deal to renovate the lobbies and create tenant lounges. And a design guideline was developed – inspired by hotels – to bring a friendly, comfortable atmosphere into the public areas. myhive’s second important feature is the community. The events and offerings organised by our community managers are extremely popular with our tenants and their staffs, and our international community has grown to include more than 40,000 employees.
Stefan Schönauer: The occupancy rate in our myhive office buildings has reached 95%, a top level in international comparison. That not only gives us higher rental income, but has substantially reduced our vacancy costs. We are now able to generate higher effective rents. All in all, the myhive concept has had a very positive effect on our sustainable cash flow. We also examined this factor in detail: An analysis of the myhive portfolio – excluding acquisitions, completions and sales – shows an improvement of 16.4 percentage points on average in the occupancy rate since the roll-out. This higher occupancy rate combined with lower vacancy costs and the increase in net rents, in total, generate a positive cash flow effect of more than EUR 4 million per year.
Dietmar Reindl: Our agenda for 2019 included an upgrade for myhive – in the future, it will give our tenants even more flexibility with regard to the contract term, space and location. Today’s office tenants want greater flexibility – that’s a very important trend in our branch. With our expanded offering, we can provide solutions that optimally meet tenants‘ needs. This is another pioneering role for IMMOFINANZ, but naturally a role that also adds up for us. A further plus: Our offering will be expanded to include all-inclusive space – which means the tenant doesn’t need to worry about planning the offices, watering the plants or cleaning. We can take care of everything when this is what is needed. These new, flexible offerings with shorter contract commitments also meet tenants‘ needs in an uncertain market environment, just like we are currently experiencing in connection with the corona crisis. Our tenants can concentrate fully on their core business, and their office costs remain flexible.
And how was the performance in the retail sector with your STOP SHOP and VIVO! brands?
Dietmar Reindl: Very good! We have increased our retail platform to 100 locations, expanded our position as the leading retail park operator, completed major modernisation projects at our VIVO! shopping centers in Bratislava and in the Romanian city of Cluj and – what is particularly rewarding – we are fully rented. The occupancy rate in the retail portfolio is now at 98.3%, and at an even higher 98.8% in the STOP SHOPs. More is really not possible because you always need to have a certain level of technical vacancies for tenant turnover. And another point, the gross rental return is top at 8.1%. Visitor frequency has also increased significantly: Over 156 million customers visited our retail properties in 2019, which means a plus of 14 million or roughly 10 per cent. By way of comparison: That represents roughly the entire population of Austria, Germany, Poland, Slovakia and Romania combined.
What are the main factors for the success of this concept?
Dietmar Reindl: The focus of our STOP SHOP retail parks and VIVO! shopping centers is not on the national capitals, but on medium-sized and smaller cities primarily in Eastern and Southeastern Europe where there is still free market capacity. Our positioning in the convenience segment and the high degree of standardisation in our properties make it possible for us to offer very attractive rents and operating costs. That, in turn, helps retailers to develop additional market capacity with high space productivity. Our tenant-friendly, cost-efficient VIVO! and STOP SHOP retail concepts and the strong focus on low-cost, everyday products create a good basis in today’s challenging situation and will also prove successful in an environment that will most likely be influenced by a temporary, but substantial slowdown in economic growth.
Development projects as a share of the total portfolio fell from over 9% in the previous year to almost 4% in 2019. Were there no new projects in sight?
Dietmar Reindl: No, that’s not the reason. The economic cycle had already been positive for a longer time in 2019 – and we didn’t want to take any excessive development risks. We also completed several larger projects during the past two years, for example our FLOAT office building in the Düsseldorfer Medienhafen, where our tenant Uniper has relocated with roughly 2,500 employees. In Vienna, we completed the renovation of a hotel and office tower on the Wienerberg, and in the Czech city of Třebíč we opened the extension to our STOP SHOP. This retail park now has nearly 22,000 square meters of rental space, which make it the largest STOP SHOP in our portfolio. Our general objective is to maintain a healthy balance between standing investments and development projects, which we want to hold at or below 10 per cent of the total portfolio. Our largest project at the present time is our first myhive office building in Germany: the myhive Medienhafen in Düsseldorf, which is scheduled for completion in 2021. And at the end of March 2020, we opened our STOP SHOP in the Polish city of Siedlce as planned. The share of shops which sell basic supplies is high in branch comparison, which has allowed a number of tenants to open despite the corona crisis.
Let’s take a look at the financial indicators: What were the main drivers for the substantial improvement in net profit during 2019?
Stefan Schönauer: On the one hand, the profitable growth of the portfolio and the improvement in the occupancy rate were responsible for a sound increase of more than 18% in rental income to EUR 279.9 million and more than 19% in the results of asset management to EUR 207.3 million. The latter increase was also supported by a reduction in property expenses. IMMOFINANZ AG Annual Report 2019 18 Our financial results were positively influenced, among others, by a decrease in financing costs – which were 5.6% lower than the previous year at EUR -64.6 million – and that based on a substantially higher financing volume. And we also benefited from strong positive valuation results, which totalled EUR 195.7 million and resulted, above all, from solid development in all our core markets in 2019. Below the line, net profit rose by more than 61% to EUR 352.1 million, and we saw a sound improvement in diluted earnings per share from EUR 1.80 to EUR 3.03.
What does that mean for the dividend?
Stefan Schönauer: Our stated goal is to distribute 75 per cent of FFO 1 to shareholders. This year’s annual general meeting was rescheduled to 1 October 2020 due to the Covid-19 crisis – here, the protection, safety and health of our shareholders and staff are our top priority. We therefore decided to postpone our recommendation for the distribution of profit for the 2019 financial year and will present this information together with the publication of our half-year results for 2020. Until then, we will continuously monitor the effects of the Covid-19 crisis on our business.
Dietmar Reindl: Today’s rapidly changing developments make it impossible to fully assess the effects of the pandemic at the present time. However, we are taking all possible steps to minimise the potential negative effects on the company. Included here, for example, are cost reductions and the rescheduling of non-critical investments to later years. And we are maintaining close contact with our tenants in order to master these challenges together. In recent years, we have successfully placed the company on a solid foundation with regard to earnings as well as costs. The results of these efforts are clearly visible in our 2019 indicators. Covid-19 represents a genuine headwind for the global economy and for our markets, but we are also well positioned to manage this phase. Consequently, we have already directed our attention to the future, so we can support our tenants’ businesses with our property solutions when the economy restarts.