"Well-positioned for the crisis environment and the post-pandemic period"
An interview with the Executive Board of IMMOFINANZ, Ronny Pecik, Dietmar Reindl and Stefan Schönauer, on the year 2020, Covid-19 as a trend accelerator, crisis-resistant real estate solutions and plans for further growth.
IMMOFINANZ started 2020 with good operational performance, but the Covid-19-pandemic had Europe in a firm grip beginning in mid-March. What kind of corrective measures did you take in reaction to the changing environment?
Ronny Pecik: In a crisis, capital strength, liquidity and a focus on customers are particularly important. We have all that and were able to react quickly and flexibly and close the year from a position of strength. The pandemic and the related support for our tenants plus the crisis-related negative effects from the property valuation are reflected in our group result. Our occupancy rate remains unchanged on a very high level at 96% and our FFO 1, as the indicator for our operational earning power, even increased slightly. At the end of the year, we had more than a billion euros of liquid funds. That is a very strong foundation – to manage the ongoing crisis environment as well as the post-crisis recovery and growth phase.
Dietmar Reindl: Exactly these strengths have made us a leading provider of office and retail properties across our region in recent years, and they are now helping us to master this crisis: our focus on high-quality and innovative office solutions as well as cost-efficient and especially crisis-resistant retail concepts, our strong customer orientation, the commitment of our employees and our conservative financing policy. In other words: IMMOFINANZ is crisis-proof. Therefore we realise that fast and active communication with all stakeholders is one of the most important success factors. With our retail tenants, who were particularly hard hit by the temporary shutdowns for containment of the pandemic, we quickly developed individual solutions to help them handle the crisis. In exchange for temporary rent reductions and deferrals, we arranged contract extensions, among others, for roughly 440,000 sqm last year. That represents nearly 45% of our total retail space.
Stefan Schönauer: We were, and still are, in regular contact with our financing banks and investors. On the cost side, we introduced a number of measures at the start of the crisis to minimise the negative effects on the company as low as possible. Here are included the postponement of non-essential investments, cost reductions and tax deferrals. As seen over the year, that adds up to roughly EUR 24 million. To strengthen the Group’s liquidity, we concluded a revolving credit line of EUR 100 million at the end of March, which we still haven’t used to date. And on the capital side, we also acted quickly and proactively with various capital measures in July to strength our equity and the indicators relevant for our investment grade rating. The gross proceeds from the placement of shares and the issue of a mandatory convertible bond in July totalled EUR 356.0 million. In October, we issued a benchmark bond with a volume of EUR 500 million. With an equity ratio of roughly 45%, a net loan to value of 37.8% and nearly one billion euros of liquidity, the IMMOFINANZ Group has a sound foundation.
How did your individual brands perform? Did you need to make any adjustments?
Reindl: Our real estate brands are well positioned for both the current crisis environment and the post-pandemic period. Because the pandemic has definitely accelerated existing trends: In the office business, it is driving digitalisation because many employees were forced to change to home office more or less overnight. This practice will definitely not remain, we are increasingly hearing from tenants that their employees are lobbying for a return to the office. As we all realise, the importance of the social aspect and personal interaction, especially for innovation and productivity in companies, are crucial. Consequently, we will still see a demand for high-quality office space with added value – but with a greater weighting on flexibility. Our flexible myhive office products are the perfect answer: Tenants only pay for the space they need and can adjust their requirements over a short-term – and all that in a high-quality office environment with top service, infrastructure and friendly atmosphere.
In the retail business, nearly every branch was affected by the temporary shutdowns. But discounters scored significantly better because they benefit from the increasing price consciousness on the part of customers. We can also see this in our portfolio, which is focused on cost-efficient retail formats. Location is another factor: Our retail properties have been concentrated in medium-sized cities in Central and Eastern Europe in recent years, so-called second- and third-tier cities where there is available market capacity. This strategy has proven successful because our offering is indispensable for basic, everyday supplies. In particular, our STOP SHOPs have proven to be very crisis-resistant.
What about the visitor statistics in retail?
Reindl: In addition to implement wide-ranging hygiene and safety measures in our properties, we adjusted our marketing campaigns to support the fastest possible recovery in frequencies and retail turnover. In our STOP SHOPs, the number of visitors declined by 17% in 2020 – including shutdown days – but the retailers‘ turnover fell by only 7%. That means revenues per shopping trip were higher and, after an adjustment for the lockdown periods, turnover actually rose by 1%. In other words: When the shops are open, everything is just fine.
All in all, we continue to benefit from our traditionally close partnerships with our tenants. Based on the number of contracts, we are the largest landlord for a number of these retailers. We worked together with our tenants during the first lockdown phase to quickly find solutions, and that is now helping both sides to manage the additional lockdown phases.
Towards the end of the year, you reported further acquisitions for the retail park business. What are your plans for this portfolio?
Pecik: An essential objective for the many steps we took was to make sure IMMOFINANZ was able to act from a position of strength during the entire crisis and, in addition, to set the stage for the fastest possible return to a profitable growth course. Shortly before the end of the year, we added eight retail park locations to the portfolio and, held 110 locations at the end of December – including development projects – with a combined portfolio value of over one billion euros. That makes us the undisputed number one in Europe, and we want to grow to 140 locations over the coming years. One focal point in this programme will be the attractive Adriatic region. In the office business, we plan to expand in the capital cities of our core countries with myhive. Along with the refurbishment of several existing office buildings, for example in Budapest and Bucharest, we acquired a property in Bucharest during the first quarter of 2021. It previously served as the headquarters for the Erste Group subsidiary Banca Comercială Română (BCR) at a top location and will now be converted into a modern, “green“ property.
Our plans also include selective sales, and the pandemic has not slowed us here. In 2020 we sold real estate with a volume of roughly EUR 110 million. The largest deal was the Panta Rhei office building in Düsseldorf. Marketing started before the pandemic and was completed without any negative effects. We were very pleased with the realised price, which was also reflected in a significant improvement in our results from property sales. By the end of the year, we had also signed contracts totalling EUR 163 million for the sale of properties which are currently wating for the closings.
That brings us to the financial indicators: What were the main drivers?
Schönauer: The expansion of the portfolio in the second half of 2019 led to an increase in rental income during 2020. The consequences of the pandemic on the standing investment business are reflected, above all, in a substantial increase in the write-off of receivables from asset management to EUR 29.2 million. At the same time, these write-offs helped to support our tenants. Particularly encouraging is the fact that cost savings allowed us to hold the results of asset management at the prior year level. The pandemic also had a negative effect on the valuation of investment property. Revaluations totalled EUR -166.5 million, compared with clearly positive results in 2019. These write-downs represent roughly 3.2% of the total property portfolio. Another issue involved the steady decline in the price of the S IMMO share during 2020, which led to a write-down of EUR 88.6 million in the carrying amount of the investment to EUR 363.6 million. However, we will soon see a positive effect here due to the increase in the share price during the first quarter of 2021. Our results for 2020, in total, show a loss of EUR -165.9 million.
We are very pleased over the sound development of FFO 1 before tax, which excludes valuation effects and demonstrates our company’s inherent operating strength. This indicator increased slightly to EUR 126.1 million in 2020 despite the crisis.
Financing costs are normally the largest cost factor for a real estate company. How did these costs – and the maturity profile – develop in 2020?
Schönauer: We made excellent progress and concluded financing with a volume of roughly EUR 925 million in 2020. That represents 29% of the Group’s total financial liabilities at the end of December and involves extensions as well as new financing. Despite an increase of 12% in the financing volume, financing costs were slightly lower than the previous year at EUR 64.0 million. Average financing costs, including hedging, equalled 1.99% per year, and our maturity profile was further improved and extended. The average term of our financial liabilities rose to 4.3 years. And we have already started discussions with the banks for the preliminary extension of expiring financing, especially for 2022, to further improve our maturity profile.
Results for the year were negative, primarily due to crisis-related valuation effects, but IMMOFINANZ continues to enjoy a solid position – as is indicated by the development of FFO 1. What does this mean for the dividend?
Pecik: We will ask the annual general meeting for 2020 to approve a dividend of EUR 0.55 per share. IMMOFINANZ is positioned as a sustainable dividend payer. In the previous year, we recommended the waiver of the dividend for 2019 – to protect the company’s capital strength in view of the pandemic – and shareholders approved this proposal at the annual general meeting. However, we always said that this was not a reversal of our continuous dividend policy. And we now plan to keep this promise.
We have spoken a lot about financial indicators, but 2020 has shown that the non-financial area, in other words, so-called environmental, social and governance issues, are becoming more and more important – for all stakeholders. How are you managing this?
Reindl: We are well aware of our responsibility in this area and have integrated sustainability trends in our portfolio strategy for many years. Our flexible premium myhive office brand is an excellent example of how we anticipate trends. More flexibility, community and networking as well as more sustainable furnishings, for example through the use of standardised fit-outs – that is today’s business. During the past financial year, we also increased the share of our properties with sustainability certificates and started the certification process for our retail parks. The STOP SHOP in the Serbian city of Lazarevac has received BREEAM-In-Use sustainability certification – and further properties will follow. We also want to accelerate the installation of photovoltaic equipment at our STOP SHOPs and expand the mobility offering at our locations. For example: all our STOP SHOP locations in Hungary were equipped with e-car charging stations in 2020, and the roll-out to our retail parks in the Czech Republic started in December.
Of course, the real estate branch can contribute to climate protection in many different ways. We are therefore working on a strategy to make our portfolio climate-neutral over the long-term und to increase resource efficiency. The details of this strategy with exact and very ambitious targets will be announced by summer 2021. Preparations have also started for the implementation of the EU’s Taxonomy Regulation, which will generally increase the focus on properties and activities considered “sustainable” under this framework. We definitely see this as an opportunity, for example with a view towards tenant satisfaction, financing, positioning on the capital market and, naturally, also with regard to our contribution to climate protection.
IMMOFINANZ concentrated on strengthening the company during the pandemic in 2020, but you announced a takeover offer for S IMMO at the end of the first quarter of 2021. What are your thoughts behind this?
Schönauer: We have held a substantial investment in S IMMO since 2018, and this company, in turn, holds an investment in IMMOFINANZ. Our viewpoint has always been that the combination of the two companies would improve the market position and lead to the realisation of synergies. Our focus in 2020 was on mastering the crisis but – based on the increasing distribution of vaccines throughout Europe and expected control of the pandemic in the foreseeable future – we can now turn our attention to value-creating growth, and we are very well positioned to do this. The takeover offer is subject to a number of conditions, including the approval of S IMMO shareholders to cancel the restriction on voting rights and to merger control clearance. But all things considered, we will make a very attractive offer to the S IMMO shareholders.
This interview was published in our Financial Year Report 2020, which you can download here: https://immofinanz.com/en/investor-relations/financial-reports
