Earnings call transcript: Adifica Q1 2023 highlights real estate growth

Adifica’s recent earnings call for Q1 2023 highlighted strong performance in its real estate portfolio, with significant growth in rental income and a strategic exit from the Swedish market. According to InvestingPro analysis, the company’s stock appears undervalued, with a "GREAT" overall financial health score of 3.67 out of 5. The company’s focus on elderly care and senior housing continues to drive its success in key European markets.

Key Takeaways

• Rental income increased by 8% year-over-year, reaching 338 million euros.
• The company maintains a 100% occupancy rate across its portfolio.
• Strategic divestment from the Swedish market is underway.
• Projected rental income for 2025 is 355 million euros, a 5.2% increase.
• Dividend guidance for 2025 is set at 4 euros per share with an 80% payout ratio.

Company Performance

Adifica continues to demonstrate robust performance in the healthcare real estate sector. The company’s portfolio, valued at 6.2 billion euros, is heavily weighted towards elderly care and senior housing, which comprise 86% of its assets. InvestingPro data shows impressive financial metrics, including a strong return on assets of 17.44% and revenue growth of 11.33% over the last twelve months. This focus has enabled Adifica to capitalize on demographic trends, particularly in Belgium, Germany, the UK, and Finland. The decision to exit the Swedish market reflects a strategic shift to streamline operations and focus on more promising regions.

Financial Highlights

• Total (EPA:TTEF) real estate portfolio value: 6.2 billion euros
• Rental income: 338 million euros (+8% YoY)
• EPRA earnings: 235 million euros
• EPRA EPS: 4.93 euros per share
• Proposed dividend: 3.90 euros per share
• Debt to asset ratio: 43%
• Net debt to EBITDA: 8.5x

Outlook & Guidance

Looking ahead, Adifica projects rental income to increase to 355 million euros in 2025, reflecting a 5.2% growth. The company also anticipates EPRA earnings to rise to 238 million euros, with a projected EPRA EPS of 5.01 euros. The development pipeline, valued at 160 million euros, is expected to yield over 6%. Adifica plans to invest 250 million euros in a mix of yielding assets and development projects.

Executive Commentary

CEO Stefan remarked, "We are absolutely ready for the second half of the 20s," expressing confidence in the company’s strategic direction. He also noted the changing market dynamics, stating, "The market really is changing... operators are thinking back about growing," highlighting the potential for expansion in the not-for-profit and public segments.

Risks and Challenges

• Market volatility in real estate transactions could impact future growth.
• The exit from the Swedish market requires careful management to avoid financial losses.
• Adifica’s high net debt to EBITDA ratio of 8.5x could pose financial risks if interest rates rise.
• The reliance on elderly care and senior housing may expose the company to demographic shifts.
• Potential regulatory changes in key markets could affect operations and profitability.

Q&A

During the earnings call, analysts inquired about the potential for UK market consolidation and financing strategies. The management addressed concerns about rent reversions and explained the rationale behind exiting the Swedish market. The possibility of contingent rent structures was also explored as a means to enhance financial flexibility.

Adifica’s strategic focus on healthcare real estate, coupled with its robust financial performance, positions it well for future growth. However, the company must navigate potential risks and market changes to maintain its competitive edge.

Full transcript - Aedes Societa di Investimento Immobiliare Quotata SpA (AED) Q4 2024:

Stefan, CEO, ADIFICA: Morning, everybody. Welcome to the annual results presentation of IDIFA for 2024. We will start immediately with the presentations, but we use this, opportunity to start the marketing of our Capital Markets Days that we will be organizing this year in Dublin, Ireland on the seventh and May. So if you are interested, feel free to reach out to our investor relation Delphine so that she can invite you. This being said, and I think by now we’re well, at 09:30, at the time that we should be starting.

Let’s dive into the annual results of ADIFICA. As always, Ingrid, our CFO, will be presenting the financial results. After her presentation, I will walk you through the portfolio and we will, of course, spend some time on the outlook of 2025. Not sure whether the slide is deck is actually, yes. Okay.

And maybe we can then go immediately to the yes, perfect. Sorry, we had a bit of a technical issue as usual when starting such presentations. So in a second, walking you through the highlights for 2024. I guess most of you have read by now the press release. So, we have today a portfolio, with real estate value of €6,200,000,000 We will be talking a little bit more about how value evolved throughout the year.

This portfolio has generated a rental income of $338,000,000 Euros, so which is 8% more than last year and is actually also showing a 3.3% like for like growth, resulting in $235,000,000 Euros of EPRA earnings, which is then leading to 4.93 Euros per share EPRA EPS allowing us to pay the dividend as announced of €3.9 per share. As you know, we are active in eight countries, but exiting one of these countries, we’ll talk about it. Looking at the pipeline and the portfolio, you will find as usual a healthy, nineteen years old, 100% occupancy rate, a pipeline that has made a turnaround that we’ll talk about it, and valuation that clearly has bottomed out and started growing again. On the balance sheet without any surprise, I think, showing a quite healthy debt to asset ratio towards the end of twenty twenty four with a strong credit rating. But these are topics that Ingrid will address and I’m switching over to her

Ingrid, CFO, ADIFICA: now. Okay. Thank you. Let me start by saying that we can present to you solid financial results. So we will start first with having a dive into the EPRA earnings.

EPRA earnings increased with 7% compared to previous year. First of all, there is the increase in the operating results, mainly coming out of the increase in rental income of 8%. You can also notice that the EBIT margin has improved. So last year, we reported an EBIT margin of 84.9%, which improved this year towards 85.9%. There is a slight increase in the financial charges compared to previous year.

This is related to the fact that the average amount of outstanding debt increased in the course of 2024 and there’s also a slight increase in the average cost of debt towards 2%. Thanks to the high hedging ratio of almost 90%, we can still keep the average cost of debt at a low level. Then we have the corporate taxes. So there you see an important difference with the previous year. It’s mainly related that difference to the impact of the FBE regime in The Netherlands.

So in 2023, there was a one off refund from the previous years of 9,000,000. And in 2024, we received a refund of 4,200,000.0 related to the taxes that were, booked and paid in 2022. So this leads then to the EPIR earnings of $234,000,000 or when we express it on a per share basis, it’s €4.93 per share. And you would exclude the non recurring FB refunds. We noticed that the EPRA EPS increased from 4.82 in 2023 towards 4.85 in 2024.

Then moving over towards the net result of $2.00 4,000,000 or €4.31 per share. The main variances that we see here are all non cash items. So first of all, the changes in fair value of the financial derivatives related to the fact that at the end of the year, the interest rates came down. So there is some negative change in the fair value of the hedging instruments. The big change this year is coming out of the change in fair value of the investment properties.

As already mentioned, portfolio valuation has not only stabilized in the course of 2024, but we see that it is also slightly increasing, mainly driven by a positive evaluation on our UK portfolio, thanks to the strong operator performance in The UK. Then there’s also some impact in the deferred taxes that are related to the changes of fiscal regime. So, this year we obtained The UK REIT status from the February 1 and that had an impact on the details that were booked in the past and that were reversed in the course of 2024. And the increase in rental income, plus 8% on a yearly basis, There is the positive contribution coming out of the the indexation of the rent agreements, the deliveries and the acquisitions to the portfolio. You can see there is a small negative rent perversion.

This is not related to the renewal of lease agreements that came to maturity that were at the end of the lease agreement. It’s part of some minor renegotiations that took place in the portfolio and limited to a couple of assets. Then there is the impact of the disposals. And you also see in this line, the contingent rent is only a small amount plus 0.4, €400,000 in the total amount of $338,000,000, the contingent trends they contribute for €1,400,000 Contingent trends is something that we see mainly in The UK portfolio. So, there we have clauses in place that if the operators have a strong performance that there is a possibility to have additional rental income.

This is something that we have started to show on a separate line item because it will have more impact in 2025. And I will come back to that topic later onwards in India. Rental income. So, when we look at this on a like for like basis, you can see the increase of 3.3%, which we can split in 3.1% related to the rent indexations. Then we have the minus 0.4% in the rent reversion.

This is also including the contingent trends and 0.6% coming out of the currency translation. When you look at the different countries, you can see that in Belgium and Germany, we are slightly below the number that you would expect based on the inflation that we have seen in those countries. In Belgium, it is impacted by the rent reversions. In Germany, it’s related to the fact that there are certain thresholds in place, so the indexation will only kick in once those thresholds are reached. It’s something that we expect for an important part of the portfolio to take place in 2025.

Netherlands, Finland and Sweden, there are most of the indexations take place in January. The number, the like for like number has not changed in the course of 2024. You can see that The UK, despite the fact that there are floors and caps in place, so the floors stand at 2% and the caps at 4%, that we can report a like for like that is slightly above the caps thanks to the contribution of the contingent rates. Our debt to asset ratio, as mentioned, 4.3%. We have a financial strategy where we say that we want to keep this debt to asset ratio below the 45% and we target or are comfortable with the situation around 43%.

So this means that there is headroom on our balance sheet to on top of the capital recycling that we are planning to take place in 2025 to add 300,000,000 to 400,000,000 of assets and still staying within the financial strategy that we have set for the company. Then our financial debt, we have a total debt portfolio of 2,500,000,000.0. Especially in the fourth quarter we were active on the refinancing side so most of the debt maturities have been handled for 2025. You can see that in the split of the financial resources that deals are diversified financial resources and we have access to debt capital markets as well as to bank facilities. We still benefit from a triple B, stable outlook rating from S and P and we are considered as being a strong triple B.

The interest cover ratio is at a comfortable level of 6.2 times, the covenant standing at minimum two times. Net debt to EBITDA stands at 8.5 times, average cost of debt 2% and most of the financing is done on an unsecured basis so we have very limited encumbered assets in the portfolio. As mentioned, so we have a well spread debt maturity profile and most of the refinances have been handled for 2025. Post closing, we have also signed an additional extension of a loan agreement. So, the mean and maturity days for 2025 are now covered.

The average debt maturity stands at three point eight years and we can cover our financing needs until January 2027. I’ve already mentioned the hedge ratio. So currently, we still have a high hedge ratio around 90% with an average hedge maturity of 4.4. Our financial policy is that we need to be hedged for at least 60% for the coming three years. But in practice, for the coming three years, we always have a much higher percentage.

So what we will do now is start working on refinancings, that are targeted for 2027 and 2028 to also make sure that there we can lock in some of the interest rates. So now I will hand over to Stephane to give some more light on our portfolio.

Stefan, CEO, ADIFICA: Thank you. I will quickly walk you through some of the main features of the portfolio for 2024 and perhaps already looking forward to 2025. Now, in terms of the segment breakdown of the portfolio, no surprises in ’24, so we remain, with a quite high focus of 86, percent on elderly care and senior housing with some 6% focus on childcare centers which is exclusively in The Nordics and mainly in Finland and 8% other care segments which we still consider to be our playground where we can explore other healthcare segments that might lead to future business lines. So in line with previous years, there might be some news about the geographical breakdown. Now when you look at the slide and the graph, you will find that the four major countries still are good for 80% of the portfolio.

And these are, as you know, Belgium, Germany, The UK and Finland with more or less equal weights around 20%. The runners up in the portfolio still are The Netherlands, but also and, even more, Ireland, which is now standing at 7% and which is a growing market for us. But I think the real news this time is coming from Sweden where we announced recently that we signed an agreement to sell our LSS portfolio in Sweden, which by the way completed, before the weekend on Friday. So we sold the 22 assets and we are in negotiations in talks to, sell the remaining six assets that we have, which are basically preschools and one school. So we are exiting the Swedish market.

To us, this is clearly a capital recycling strategy that we are following as we are convinced that the net proceeds of, this divestment once invested in today’s market will lead to a higher EPS contribution than is the case, compared to when we’re just sitting on this Swedish portfolio. So we are working on our cost of capital here. This being said, I think that the major news for us looking at 2025 is related to our tenants. What you see on the slide here is the tenant diversification. Once again, no major changes compared to the previous year.

Clarion remaining our main exposure, but I’m signaling once again that our Clarion exposure is almost 100% on the Dutch and the Belgian market, whereas we all know there is still a sales process ongoing, where Klaviyal might sell the Dutch and Belgian operations to a third party. So we are as is the whole market waiting for the result of that process. Otherwise, no major changes here, but and I think that this is the most important slide, perhaps, or at least one of the most important slides today. The operator health, the operator performance, keeps improving in Europe. What you see on the slide is the underlying resident occupancy for five of the countries for which we have sufficient data, made available by our tenants.

You clearly see that in countries like Belgium, UK, Ireland, the occupancy is now above 90%, which for The UK is a record, high. And in countries like Germany and The Netherlands, we keep in seeing improving occupancy now reaching 86% in our portfolio for the mature assets. So first of all, if you would combine these five countries and try to deduct an average occupancy over the five countries’ mature assets, you would reach at 90% right now. Couple of things to be said here. When we look at the ramp up assets which are not in these numbers, also there we do see an absolutely improved occupancy.

So it’s not just mature assets that are improving but we also see ramp up accelerating and getting to higher occupancy compared to the previous years. Light for light growth for the mature assets, you can see it on the slide. It remains, quite important. And then maybe one comment because there’s one for us rather important country, missing on this slide, which is Finland. The Nordics remain, part of Europe where operators really are not willing to be transparent today, although we are making some progress now in the Finnish market.

But what we can tell you about the Finnish market is that two of our main tenants, which are Meheilainen and Atendo have published themselves that their operating margins in Finland are improving in 2024. And that leads me then to the next slide because occupancy clearly improving. But also as far as we can tell, operator margins are improving. The only totally transparent country here is The UK and we are showing you, once again, the rent covers that we see for our UK portfolio, which once again are showing a sort of historic high, with 2.5% rent cover at the end of the third quarter twenty twenty four, but when we look back for twelve months, two point three percent rent cover. These are very high rent covers.

We are working, within ADIFICA, on the data collection from our operators so that we in the near future hopefully also can start mentioning rent covers for other countries. Today we have a 67% coverage of all of the assets in the portfolio in terms of, data coverage, data collection from operators. But this is a number that we are willing and looking to improve in the near future. This being said, The UK is showing record high operator performance. But what we keep hearing, throughout Europe from other operators and what we see in the numbers that they make public is clearly that margins are improving.

I already referred to the Finnish situation, tenants like Michelinen and Atendo that are good for 24% of our Finnish portfolio, clearly communicating improved margins. We’ve seen some of the major French players, announcing improved margins. And when we have conversations with some of the tenants that you have seen on previous slides, We keep hearing, from a lot of them that margins are improving. But even more importantly to us that they are now thinking back about growing. So the conversations that we have are turning once again more back to doing new business, adding new assets to their portfolios and our portfolio, or joining in project development.

So, the market really is changing in that respect. Quick look at who the tenants are and not specifically the names, but the profile. No surprises there. 90% of our tenants are, profit, driven operators, so the private market. We do, as I mentioned, see improved margins there.

6% of our tenants are social profit players, 4% are public players. I think that I’ve said this before in the future, but we’re starting to see more signs of it. We do see potential for growth in the not for profit and the public segment. Specifically in Finland, we keep doing business with, the Finnish municipalities and or care regions and it will probably also show in our future pipeline, but we now also see in some of the countries where we have quite important social profit markets, that lots of social profit players also start turning to investors like ADIFICA to finance their real estate infrastructure needs. So it is once again a market that is becoming more promising.

Quickly going through some of the other features of the portfolio, what you see on the slide I already mentioned. The portfolio is still showing a quite important nineteen years vault, and a 100% occupancy rate. Maybe also, drawing your attention to the fact that only 1% of our leases will come to an end in the next five years, so there is not a lot of lease renegotiations due to the end of leases in the next five years. Maybe going down to probably also another more important slide today is what happened with the valuation throughout 2024. Now starting with the fact that when you look at the situation end of the year, we are showing a fair value yield of 5.9%.

If you’re looking at the EPRA net initial yield, you will find that it’s standing at 5.3%. But I think you’re, on the right side of the slide, and there the message is quite clear. Throughout 2024, we have seen that first of all, at the beginning of the year, valuation was clearly bottoming out and stabilizing and that towards the end of the year, we did see some marginal uplift in valuation. When looking at the countries or maybe first of all, the whole of the portfolio, it means that for the, twelve months, we see we’ve seen the like for like increase in valuation of 0.7%, which is mainly coming from The UK and The Netherlands. Countries that are still lagging a bit behind are Belgium and Germany, but when we focus on the last quarter of the year, also for these countries, you clearly see that valuation is now bottoming out.

And in the German market, even slightly positive, very slightly positive. Then some, color adding to the development pipeline of the company. I think here the message is very clear. We’ve made the turnaround in terms of, in terms of projects that have been decided before ’twenty two or early ’twenty two based on the macroeconomic environment of that, period. So these projects have now been delivered and are contributing cash flow for group.

We mean that today we are focusing more at growing the portfolio again and refueling the development pipeline. Now what you see on the slide is that when I said the turnaround has been made, it’s now reflecting in the initial yield on cost of this development pipeline, we’re now above 6%, so this is a territory where we want to be and hopefully even increase it slightly towards 6.5%. So there, the turnaround has been made. The number of 160,000,000 Euros is relatively low number if you look at the recent history of ADIFICA, but there we are now at the point in time that we clearly are looking to refuel the pipeline and expecting to see new projects being added to this pipeline. Project that will be coming mainly also from Finland where we are developers, ourselves, but we’re also expecting to see some projects in Ireland and perhaps in other countries, in the portfolio.

Which is now leading us to the outlook. And then if we have a quick look at the numbers here, maybe let Ingrid do the presentation first and then I’ll pick up.

Ingrid, CFO, ADIFICA: Yeah. Okay. So this is our outlook for 2025. So first of all, we are expecting a rental income of $355,000,000, an increase of 5.2% compared with 2024. This is based on an organic growth of 2.7% coming out of the inflation, the indexation.

So, there in most countries, we are expecting that it will be around 2% or slightly above 2%. Like I already mentioned in the like for like, it will be somewhat higher this year, in 2025 for Germany. And we also expect contribution of contingent rents. So the contingent trends that we consider as recurring, the amount is estimated at 1,700,000.0 sterling is included in the organic growth of 2.7%. But we also expect in 2025 that there will be a catch up on some of these agreements from previous periods and that will have an impact of 3,200,000.0 sterling.

Then we have the increase in the ACRA earnings, $238,000,000, so an increase of 1.6%. So how to explain the difference between the increase in rental income and the ACRA earnings? In itself, you are expecting that the EBIT margin will stay around 86% and also in the financial charges, we only see a slight increase because the average cost of debt will remain at 2.1%. So, the delta is coming out of the taxes and it is related to the change of the fiscal regime in The Netherlands. For 2025, we are expecting that there will be an impact of current income taxes in the Dutch entities of 5,000,000.

And on top of that, we do not benefit from the refund. So there you will have a delta of more than 9,000,000 impacting the corporate taxes. Debt to asset ratio by the end of twenty twenty five based on the assumptions that you can see on this slide is expected to be around 42%. So which are the assumptions that we have included in our business plan? First of all, we have the deliveries from the pipeline, 110,000,000.

We have the asset rotation, so 190,000,000. This is also including the capital recycling exercise that we are currently doing, with the Swedish portfolio. So, the asset rotation is a little bit higher number than what we have done in previous year. We have also included an assumption on new hypothetical investments of $250,000,000 and this assumption will be split between yielding assets and projects that will be added to the pipeline. On the yielding assets, we assume that we will happen a little bit more later in the year, so more in the second year half.

The reason why we mentioned in the press release that the contribution of the new investments to the earnings is rather limited in our business plan because of the timing. If they would come in sooner in the year or for a more important amount, then we will adjust our ACRA earnings. Another assumption that we have included in this budget is related to the currency. You can see the 0.87, which is a little bit of a conservative assumption if you look where GBP is currently trading. If we would stay around the current level, the 0.83, that would mean that there would be an increase in the EPS of approximately 0.6 Euro cents.

We did not include in our business plan as in previous year an assumption on portfolio valuation changes. Based on those assumptions, we come to an APA EPS of €5.01 per share and we give guidance for the dividend of €4 per share which would mean a payout ratio of 80% of the consolidated APCA guidance.

Stefan, CEO, ADIFICA: Yes. And maybe zooming in into two building blocks that you see on the slide here, the first one being the asset rotation. So the number that you see is relatively high, meaning that we do expect ourselves to see on a yearly basis, recurring basis 0.5% to 1% of the total portfolio that is up for asset rotation. The number that you see is higher this year, but that has to do with capital recycling strategies. I’m referring to the Swedish, exit that we’re doing.

So basically, you could expect that up to 75% of the number that you see on the slide, are not older buildings that we’re trying to get rid of and that are high yielding but are basically capital recycling strategies where we are planning to reinvest the net proceeds of these divestments and have a positive impact on the EPS of the company. Another building block, the €250,000,000 of new investments, maybe just drawing your attention to the fact that it is the first time in two years now, that we are once again giving investment targets. So I think it’s a clear indication that our expectations about the healthcare real estate investment market are clearly changing, and becoming more and more positive. We are targeting both, refueling our development pipeline and acquiring yielding assets, on the back of an operator environment that is clearly improving and this is bringing me then to the medium term outlook. I think that the message here is, as far as we are concerned, it’s quite straightforward.

The company is absolutely ready for the second half of the 20s. Second half of the 20s that will be characterized by a growing demand for healthcare real estate on the back of demographic aging of Europe will accelerate as the baby boom generation is starting to turn 80 and is growing older, but also on the back of improving operator performance. And I repeat that we’re not just having conversations with operators about their margins, but we’re clearly having more and more conversations about potential new business with operators coming from the operators themselves that are being faced now with this growing demand. So in a nutshell, I think that the company is ready for a new cycle and that we’re looking towards it with a lot of optimism, not withstanding the present geopolitical and macroeconomic environment. I think that we can end the presentation at this point and switch to the Q and A.

And I’ll let Delphine handle it. So I guess that you are aware that you can either post questions into the Q and A chat box or raise your hand and we will unmute you. So, the floor is yours now.

Ingrid, CFO, ADIFICA: Yes. So, we have Mark.

Stefan, CEO, ADIFICA: Okay. Maybe in the chat box, quickly picking up one question. Other that we start exploring tax optimization strategies via smaller substitutes to benefit from earning stripping measures. Have you considered this approach? Ingrid, let you handle the question.

Ingrid, CFO, ADIFICA: We do already have in The Netherlands different entities. So what we are considering, because in the past to be applied with the FBE, there was a ratio between debt and equity that need to be respected. So what we would like to do is to increase the debt that we have in those entities and trying to optimize on that basis the interest deductibility that would lower the taxes. We are also having a look on the internal transfer pricing policy to see if there is also some headroom to have some fiscal optimization.

Stefan, CEO, ADIFICA: Thank you. I see that some people raised their hands.

Ingrid, CFO, ADIFICA: Yes. Mark raised his hand.

Stefan, CEO, ADIFICA: He needs to unmute himself. Can you unmute yourself and ask your question?

Mark, Analyst: Hi. Very good, very good morning. Can you hear me well?

Stefan, CEO, ADIFICA: Yes. We do.

Mark, Analyst: Thank you. How about your, your view on the, ongoing consolidation in The UK health care market because we just had KKR announcing a bid on Asura, we had launched Welltower (NYSE:WELL), the buying Care UK. What is currently your view on what’s happening here and what are you paying in terms of potentially increasing your size in The UK, which is a very strong market right now? Thank you.

Stefan, CEO, ADIFICA: Yeah. Okay. First part of the question about consolidation. The only thing I can say is that we are very well aware of the consolidation potential in the healthcare real estate space in Europe today. It’s something that we have been monitoring and keep monitoring, but there’s not nothing more I can tell you, about it or I’m willing to tell you about it right now.

But once again, we’re very much aware of what the potential is in the market. Secondly, The UK market, I fully agree that it remains for a difficult and attractive market to grow, based on the operator performance. So it is clearly one of the markets where we even today as we speak already see growth potential. UK, to combine with Finland because we have the development, team over there and then the Ireland and the Spanish market. So that basically gives you a little bit of an idea where today be the geographies where we do see growth potential.

Mark, Analyst: Thank you. And my second question is, around your, your financing structure. Your FOB is up roughly two percentage points this year. You’re aiming at investing as €250,000,000 which is another three percentage points with stable asset values for your LTV, so probably reaching 43%, forty four % or very close to your straight forward of 45%. And your debt maturities on only is less than four years, so you need to deposit a quarter of your of your debt every quarter every year.

What what should we expect on that front? That sounds a bit ambitious to aim at growing with the balance sheet, which seems to be rather stretched to me.

Ingrid, CFO, ADIFICA: So I think, first So I think first of all that the balance sheet is actually in a position when you look at the leverage to allow the increase to start investing. There is not only the DTA where it’s going to be sent and where we expect it to be at the end of twenty twenty five. But when you look at the interest cover ratio, that’s a very comfortable level. And also for the coming years, we are expecting that it will slightly come down, but it will remain above five. By saying that, I mean that the revenues that we are getting out of the lease agreements,

Pune, Analyst: they

Ingrid, CFO, ADIFICA: largely allowed to cover the financial charges. So there we have some headroom as well. On top of that, when you look at net debt to EBITDA because in itself it’s actually maybe the most important PPI which we should consider when you look at the leverage of a company because it’s not influenced by value changes. Net debt to EBITDA, we are expecting that in the coming years it will slightly decrease below the eight times. Also there, I see potential and headroom for adding new investments because the level of the aid might seem high from a US perspective, but in European market, it’s more like a KPI that is more common, I would say.

This is on the balance sheet itself. Then regarding the debt maturities, so indeed, the average debt maturity is three point eight years. It’s a little bit an exercise between finding the right balance between the cost of going longer and also the liquidity needs that you need to cover within the company. We do notice that each time we have bank financing that comes to maturity that we can refinance with the banks. Banks are also open a little bit to increase the exposure that they have towards the company.

Both markets are open again. When I look at the marginal cost of debt, so we pay a credit spread that is around 110 basis points on the bank loans towards the banks for bank financing. This is within maturity of five years. So if you add to that the mid swap, that means that the marginal cost of debt for us would be the bank financing around 3.4%. When I look at the bond market, it will be somewhat higher.

There, it will be closer to 4%. But that means that you can go longer. So there, you can have more than eight to ten years. So it’s a little bit finding the balance between adding some more longer term, debt and that is probably something that we will be doing in 2025 to extend a little bit the average debt maturity, but at the same point in time also making sure that the average cost of debt remains at an acceptable level.

Stefan, CEO, ADIFICA: Maybe adding to that, when you look at the balance sheet today and the debt to asset ratio, we’re combining this also with the fact that we’ve seen in ’24 valuation stabilizing, even slightly growing, and with our long standing policy that we want to see a debt to asset ratio of maximum 45%. On top of that, we apply now some capital, recycling strategies. Now if you add all of this up, I think that you can easily come to the conclusion that we have at least half a billion euros of firepower in terms of new investments. Okay. If we want to stretch it beyond that point, then we have to start thinking about raising equity, which after the stock prices we think doesn’t make a lot of sense.

But we do see the market evolving in a quite positive way. So what we need to show right now, first of all, is earnings growth to the market within the healthcare real estate space and then we’ll take it from there. But the potential clearly is available right now.

Mark, Analyst: Thank you very much. I appreciate it, Yvonne.

Stefan, CEO, ADIFICA: Yvonne?

Yvonne, Analyst: Hi, Stefan. Hi, Ingrid. I just have two questions about Sweden, if I may, please. What is the rationale for the exit from Sweden? Because it’s the only country you could actually generate some development profit on the development.

So does that mean that you’re also selling the land banks? That would be my first question. And also the yield on that Swedish portfolio is 6.4%. So do you see opportunities to invest above this yield currently? Thank you.

Stefan, CEO, ADIFICA: Yeah. Maybe I’m starting with the second question. It’s not a matter of the yield. It is a matter of to what extent was the Swedish portfolio contributing to the EPS of the group. And And when we compare within the whole of the portfolio, so when we benchmark our Swedish portfolio with the other countries, it was clearly underperforming in terms of contribution to the EPS to the point that recycling these assets and reinvesting this money in other markets in which today we are active, it will lead it will lead to a higher EPS for the company and the group.

So that is the whole rationale of it. Secondly, and that’s perhaps more linked to the first part of your question, yes, we were developers in the Swedish market, but this was a company that was set up by HoiVatilat Finland just before we took over HoiVatilat Finland. And we, to be quite honest, never were able to scale it up to the same levels as the Finnish development, activity. And it seems also to be even in today’s market quite difficult, to scale up this development activity. So when you combine the fact that we were not being successful in scaling up the development activity in Sweden and the fact that we can reinvest the proceeds of this divestment and have a higher EPS, that made it to us a no brainer.

So, it’s not so much the yield that you see which is important. It’s in the end the net contribution to the EPS while we can clearly improve.

Yvonne, Analyst: Understood. But regarding your investment target, do you still see opportunities above 6.4% currently?

Stefan, CEO, ADIFICA: But we do not need to be above 6.4% currently, so in the end, we do think that we want to be around 6% when talking about yielding assets and preferably high when talking about development activity. What we do see in the market today is that we are starting to get there, meaning that when looking at the real estate, well, the healthcare real estate market today, the bid ask gap has narrowed down a lot. So that means that there are more realistic

Philip, Analyst: buyers and sellers in the market. So we do expect to see

Stefan, CEO, ADIFICA: more deals kicking in in general. And that means that around six, there is, more and more potential in the markets. And then it depends on because we’re talking in the end what is the net contribution to the EPS, okay, then you have to differentiate between countries in terms of tax leakage, overhead costs in the countries, etcetera, etcetera. But there is a playing field now that is allowing us to start thinking about growing the portfolio through new investments.

Yvonne, Analyst: Thank you, Stefan.

Stefan, CEO, ADIFICA: Yes.

Philip, Analyst: Good morning, guys. Just two questions on my end I will ask, Sebastian. First, on the rent cover improving, what does it mean for you in terms of rental prospects over the long run? And aren’t you afraid that this margin expansion could lead to more regulation at some point from regulators in order to cap the private operators profit?

Stefan, CEO, ADIFICA: I didn’t quite understand the first part of your question. Could you quickly repeat it, Philip?

Philip, Analyst: Yes. What does the rent cover improving means for your rental prospect?

Stefan, CEO, ADIFICA: Okay. Yes. Okay. The rent cover improvement, well, basically that is what we need to see to get back into an external growth model with ADIFICA. When you look at the healthcare real estate market today, there’s one absolute certainty, there will be a lot of demand because of the aging of populations in Europe, which is already today starting to reflect in waiting lists in some regions in Europe.

So there will be a huge need to increase capacity, but we need to turn it into something which in the end is leading to accretive earnings growth for us. And that means when looking at reality today, we need to realign, as I explained before, our cost of capital with today’s cost of construction and the rent payment capacity of the operators. Now when the rent payment capacity is recovering, it means that basically also relating to what I just was, telling to Celine is that once their rent payment capacity starts increasing, the pool of potential deals will start growing because we will get, a reasonable return but also based on affordable rent, that can be paid by the operators. So that is the fact that this rent cover starting to improve is leading to a lot of future potential for us. The question about regulation, to be totally honest, I think this is a little bit influenced by some of the things we’ve seen happening in Belgium.

On the I’m not that much afraid, okay, there always might be exceptions, but on average, I’m not that much afraid of European countries starting to over regulate the sector, because I’m actually expecting that in lots of these countries in the very near future, these authorities will be confronted with huge needs in terms of building extra capacity. And I’m also pretty sure that they’re not going to finance it with public money, so they will have to turn to the private market one way or another to finance it for them. So they will have to make it possible. Otherwise, they will, be confronted with what I just mentioned, that is already happening in some of, the European regions that they might, have a system that is totally blocked and facing huge waiting lists. But waiting list, we’re talking people that have an acute reason to enter the care home.

So it’s not people that kind of forced to wait. So I’m in that respect more optimistic than pessimistic even taking into account regulation.

Philip, Analyst: Okay. That’s clear. Thank you. And the second one would be, just to remind on what you said. So you mentioned 6.5% or 6% to 6.5% as a target in terms of yield requirement.

And I guess part of the $250,000,000 you want to do is also new development. But I guess the question would be, is it possible to find operators today willing to commit to construction, to a building at two deals when your portfolio itself is valued at 5.3% on average? Don’t they have no incentive at all to do so?

Stefan, CEO, ADIFICA: Yes, this is on a country by country basis. But first of all, when we’re talking about building, and development, the first hurdle you have to take is the cost of construction. It is what it is today. It increased by 20%, thirty % over the past couple of years. And then you have the cost of capital of investors or whomever is willing to finance these projects.

So that leads to a certain rent requirement. So the reality in lots of the countries is not so much the availability of land or the availability or the willingness of developers and investors to proceed. It is more the rent payment capacity which is holding us back today. And operators are very much aware of the fact that they will have to pay a certain rent to get access to new buildings in the future. The question, however, is that you will you want to avoid over rent situations.

So but there we do see that, some of the countries already today, allowed to do new developments. The UK is one example where we still do see a lot of development potential. Also Ireland, we’re expecting, hopefully to add a couple of new projects, to the portfolio because operators can afford to pay the rent levels that we need today to be able to build. Other countries it remains more difficult, and the German market typically is a market where it still remains a relatively stretched situation. But then back to your previous question, as rent covers or rent payment capacity is improving on the back of improving occupancy, we are expecting to see more and more countries opening up also for new development schemes.

Philip, Analyst: Thank you very much. That’s clear.

Stefan, CEO, ADIFICA: And I could add the Spanish market where we also see development potential today. So, yeah. Vivien.

Vivien, Analyst: Sorry, double mute, double mute button. Sorry, my bad. Good morning. Thanks for the presentation. Couple of questions on my end.

Maybe first on the disposals. So I understand that outside of the Swedish portfolio already sold and the remaining to be sold. Could you maybe give some color on what kind of asset you expect to sold this year and what type of criteria did you use? Is it mainly low yielding assets or is it also to reduce maybe tenant exposure? And what country are you targeting most?

That might be interesting to know. Thanks.

Stefan, CEO, ADIFICA: Well, the country that we’re targeting most clearly is Sweden because, that will be the bulk of the asset rotation, in 2025. Referring back to what I said during the presentation, I think that you could consider that more or less 25% of the, target that we mentioned for asset rotation will be about, buildings that we picked, on the back of our building condition measurement program, meaning these are buildings where for whatever reason, IDificat does not see a long term future within our portfolio and why we think it makes sense to sell them today. To be totally transparent, this will probably be to a certain extent somewhat higher yielding buildings, but where you have clear reasons to get rid of them today to avoid future issues within our portfolio and also taking into account, the targets that we have, for instance, in terms of ESG. As I mentioned, 75% of, this target has more to do with what we call then capital recycling, and that means that in the end, that will be assets that we’re selling because we’re convinced that once we have the net proceeds, we can reinvest and get a better EPS out of it compared to the situation that we’re in today.

I already explained the Swedish situation, but that could also mean that we will be selling some very low yielding assets. And I’m talking really very low yielding assets where it’s clear that we can immediately reinvest and have a much better impact on EPS and still have similar quality assets. So we’re not sacrificing on quality there.

Vivien, Analyst: Great. Thanks. And then a question right on portfolio valuation. You mentioned that the EBITDAX is narrowing, meaning that we could see more transaction on the market. What do you believe that could impact?

Because I I think valuers have been quite cautious this year, especially with the lack of transaction. Do you believe that transaction evidence could put some pressure on your valuation? Or are you quite confident that the current valuation is really bottoming out based on market evidence?

Stefan, CEO, ADIFICA: Yes. I’m actually quite confident that, but you know that we’re both sellers and buyers in the market today. So in terms of what we’re selling today, we do see more and more deals where when we say that we are in line with fair value, it also means that we are slightly above fair value. So, I think that the market is or at least valuation is very well in line today with the market reality.

Vivien, Analyst: All right. Thanks.

Stefan, CEO, ADIFICA: That’s it. I could turn it the other way around. I do not see a lot of evidence in the market that would really challenge valuations today.

Stephen, Analyst: Thanks.

Pune, Analyst: Hi, good morning, everyone. The first one is also on the disposals. I see that in Spain you also don’t really have a large scale, but you just mentioned that you see development potential there. My question is, given that there is no yield given there, would you consider selling Spain as well because you don’t really have a larger scale there?

Stefan, CEO, ADIFICA: First of all, right now we do not consider selling any other geography. So the only exit that we have in mind is Sweden, so we don’t have any other exits out of countries in mind today. The Swedish market to us is basically very marginal because we’re just about to deliver two projects, but we are thinking about the future in the Spanish market. And today we’re much more inclined to grow our exposure to Spain, for the very simple reason and back to lots of things or answers already have been given to other questions. One of the attractive points about the Spanish market is the rent payment capacity of the operators and the Spanish operators have been capable also to, well, keep quite healthy margins, and that means that this is a country where probably you can start growing more easily than in certain other countries where, margins still are recovering.

Improving clearly, but still recovering. So Spain to us, we see it more as growth potential today.

Pune, Analyst: Okay. Perfect. That’s clear. And then my next question is on the Swedish divestments. You’re going to divest the schools.

And I remember at the Capital Markets Day, you mentioned that the yield of the schools was around 4.5%, in Finland. Is that the same in Sweden, those metrics?

Stefan, CEO, ADIFICA: Because we have actually one school in Sweden which has been recently delivered and we haven’t disclosed that. 4.5% in Finland is the yield that you get when the school is being operated by a municipality. And when you look at the Finnish portfolio, in terms we have top of mind around 10 schools in our, Finnish portfolio that we developed ourselves. And if I’m not mistaken, with the exception of one all being operated by municipalities. And so the city of Helsinki, the city of Oulu are tenants of Edifica Schools, in Finland.

So that is a very specific situation. Our Swedish school in Ninnisham is being operated by a private operator, which in the Swedish market is not uncommon by the way. So comparing these two doesn’t make a lot of sense to be quite honest.

Pune, Analyst: Okay, clear. And then the last one is on the in house UK redevelopments. At the last in the last quarter you had a redevelopment there at 7% yield on cost, which is I think a very good way of looking value. First question, do you expect to see more of those redevelopments? And then second one is regarding your credit spreads in The UK, is it the same?

Is it also 110 basis points or is it more?

Stefan, CEO, ADIFICA: I’ll let you first answer the question.

Ingrid, CFO, ADIFICA: Yes, no. The credit spread for GDP denominated debt is higher. So we have not done refinancing recently. So the way that we have financed a part of The UK portfolio, so partly one third is financed in GBP. Part of it was done through USPP where we have a fixed rate and part of it was done through bank loans, which where we also completely hedged fixed the interest rate.

But the

Stefan, CEO, ADIFICA: spread is higher. Yeah. Okay. Then maybe answering the first part of the question, yes, within the portfolio, we have identified more redevelopment potential. So the first one that we’ve shown was the amount in The UK, but there are others that we’re working on today.

And that will be part of the refueling of the development pipeline. Of course, we’re acting as developers ourselves in these cases which will take time to obtain building permits, etcetera, and renegotiate with operators, but we clearly have a list, of to be redeveloped assets in the portfolio.

Pune, Analyst: Okay. Perfect. Thank you for answering the questions, Pune.

Stefan, CEO, ADIFICA: Come. Stephen. Stephen.

Stephen, Analyst: Hi. Good morning. Thank you for taking my questions, of course. I have questions on Finland and Germany. So first, Finland, the staffing requirements have gone up again, even being less than initially feared.

What do you expect on the impact on profitability for tenants, and how do you look at those risks? So that’s the first.

Stefan, CEO, ADIFICA: Okay. First of all, I’m going to refer to what I mentioned during the presentation. Two of our main tenants in Finland, Atendu and Mihi Line, have been flagging to the market, not specifically about our portfolio, just their communication towards the market that they have seen their margins improving because their fees went up, more than the costs went up. So they’re basically catching off, for what happened in the past. So that was a quite positive mark, message.

And by the way, these two tenants without going into too many details are also tenants that we know are looking into building new capacity today. So it’s not just them talking about margins, they’re also looking at building new capacity today in Finland. And to be totally honest, I need to check on what you said about the increased staffing requirements because I know that there was a plan to increase staffing requirements in Finland, but that the government in the end decided to lower staffing requirements. But I will check with the Finnish team.

Stephen, Analyst: Yeah, I thought it went from point 55 to point 60 cash stock per resident. It’s in that tender press release. Yeah.

Stefan, CEO, ADIFICA: But it should have gone up to point six five or even point seven, and then I have to bring it back, and that should have happened, in April. I need to check, but basically, they abandoned, their plans to keep increasing. Yeah.

Stephen, Analyst: Okay. Clear. Second on Germany, could you comment on the quality and profitability of your German tenants? Because I also saw a survey, that shows that investors, and it’s a recent survey, still worry on German operators in general, and it’s there also given the weaker investment market there? And the second one, could you, quantify the expected life value for Germany in ’25?

Stefan, CEO, ADIFICA: Okay. First of all, commenting on on the German operators today. The picture is a bit mixed to be quite honest in Germany. But when we talk to the operators that we are working with today, we clearly see improved occupancy and what we hear from them because they’re not all of them are 100% transparent up to the level of their EBITDA margins. But we hear from them that they are in a much better place compared to the previous years.

We also see that in the fact that some of our German talents, or prospected tenants are also thinking about growing again. So there is once again a market opening up in Germany where operators are trying to take over their peers and competitors and where some operators are thinking about developing. Now developing in Germany right now seems difficult, but you do see operator market becoming more dynamic again. This being said and I know because I’ve seen the survey that you’re referring to, what also has been a reality is that in Germany, also in 2024, there have been lots of operators stepping out of the market, but then we’re talking about the small mom and pop shops. And this is a reality that we identified already, I think in 2023 in the German market, is that a German operator, needs to have a minimum level of administrative backbone to be able to increase its income because you need to negotiate with different authorities.

It’s a complex system. And if you don’t have the administrative backbone to do to be able to do that in a very successful way, and this very often was the case with these very small local players, then it becomes more difficult. So basically what we see in the German market is a lot of these smaller players stepping out of the market, and improved margins for the somewhat bigger, but it’s not so much a matter of just size, it’s more a matter of administrative backbone, how professional are you, as an operator in the German market. So that is clearly something that we have seen and in my view that is what is reflected in the survey that you’re talking about. But I could ask you to operators that are clearly trying to capitalize on the situation and are building up new portfolios by taking over the charities, within these smaller operators that are trying to get out of the market because they can’t cope with the administrative burden any longer.

Stephen, Analyst: Okay. Very clear. Thank you.

Stefan, CEO, ADIFICA: Hi,

Ingrid, CFO, ADIFICA: Akanksha. Akanksha?

Akanksha, Analyst, Citi: Hey. Good morning, Devon, Ingrid. Thank you for the presentation. Akanksha, I’m from Citi. I have two questions.

The first one is basically following up on Mark’s initial question on the evolution of the portfolio split. So the question so the question essentially is how do you view the evolution of UK and Finland as a percentage of the portfolio given they are both your really strong growth markets at the moment. Can we kind of expect the share of these two cumulatively to go north of 50%? They’re currently I think about 40%.

Stefan, CEO, ADIFICA: Very spontaneous answer. We don’t have a specific target. So it’s not like today we aim at growing The UK combined with Finland above 50%. It will be a little bit more opportunity driven. So in the end, it will also depend on what will be happening in lots of other countries.

So but do we see growth potential today in those two countries? Yes. The answer is clearly yes.

Akanksha, Analyst, Citi: Got you. And, my second question is slightly more longer term. So in the sense that given that, you know, the structural tailwinds in the sector are intensifying, There is improving operator health. It seems likely that at some point there would be a potential for increasing the like for like growth, above in the indexation. So basically the reversionary component in the portfolio.

Probably through evolution and you know, lease structures, so say like shorter leases, more frequent uplift, etcetera. Now, do you expect to have these conversations with operators or are you already having such conversations with operators? And the second part of the question would be, what do you see as the potential headwind to any such conversations occurring? And I appreciate it’s more, you know, geography specific because of different regulations, but any color of this would be helpful.

Stefan, CEO, ADIFICA: The first part of the question the answer actually is yes. But then we’re talking the future. This is not specific 2025, but when you’re thinking about what will be happening in the healthcare real estate space in Europe in the next three to five years, I do expect to see a more dynamic approach of the lease structure. Meaning, when we look at our portfolio today, already 3% of the leases that we have have one or other contingent rent, clause, mostly in The UK. And we’re building up experience with this and this experience today is quite positive because UK operators are outperforming.

So that means that, yes, we are expecting to, collect in The UK in 2025 extra rent on top of the fixed rent and inflation coming out of these contingent rent clauses, which in The UK very often are linked to, EBITDA margins or rent covers. So if they are above a certain threshold, we can collect extra rent for that specific year. So the first experience that we have in UK is relatively positive. On the back of that, we are trying to turn that into a strategic goal for ADIFICA and the teams within ADIFICA to explore what is possible in other countries in terms of trying to incorporate, incorporate such contingent rent clauses into new leases. So, and okay, we are working on some pilots.

Once again, 2025 is rather marginal if you’re thinking medium term perspectives in European healthcare real estate space, I think it will become more important. Perhaps also under the influence of what we see happening in The U. S. And the way The U. S.

Fleets are approaching the whole business. This being said, you also required about tailwinds. I think that the main tailwind today is that speaking really 2025, that too many of the operators are still traumatized about what happened, in 2223. The hit they took on their operating margin because of the cost increases and revenue that was not immediately following. So if you would try to push operators too much toward contingent rent clauses today, they probably are also going to try and, make sure that their downside risk is covered.

So they’ll probably be willing to push it to a floating rent and this is something where we are not willing to go yet today, a totally floating rent. So that might be the main tailwind in the, in the very near future. Did I ask you Yeah, sorry. Yeah.

Akanksha, Analyst, Citi: You just left the last part of the question. So what could be the potential headwind to such conversations? And in which geographies do you think you’ll face more of a pushback?

Stefan, CEO, ADIFICA: Yeah. The the potential headwind was what I said about the the the operator’s mindset today, which is still a little bit too much traumatized about what they’ve seen in ’22 and ’23. And they might turn these conversations then into what we contingent rent for us is a top of rent. It’s giving us some extra rent potential in case they are outperforming. They probably are willing then to turn it into sort of also protecting them against the downside risk and turning it into a totally floating rent.

And I’m not sure that that is a good plan already today. But okay, clearly I think the main message here is we believe that the market will evolve in the way, the market is approaching lease structures in healthcare real estate in Europe in the next, three to five years. So that’s the main message. The countries, well, clearly The UK is the obvious country to use these top up rents or contingent rents. Why?

Because it’s totally transparent. You need absolutely full transparency of your tenants, your operators at the asset level to be able, to agree upon such contingent trends, clauses. UK is a totally transparent country and they already have a little bit of the culture to do it. Okay, now it’s, now that’s clear. I think that Ireland might be following because we do see a lot of transparency in the Irish market also.

And as transparency is increasing in Europe, and I’m going to be okay, I’m not going to speculate about the countries, but we do expect to reach, very high transparency coverage in countries like Belgium in the near future, and perhaps some other countries. Now, if that will happen, that is creating for us a playing field to start talking about such contingent trends then.

Akanksha, Analyst, Citi: That’s very clear, Stefan. Thank you.

Stefan, CEO, ADIFICA: Welcome. I think that we’re out of questions. So maybe one last call. Elphine? Nothing?

Ingrid, CFO, ADIFICA: Yes, there are a few in the Q and A.

Stefan, CEO, ADIFICA: Oh, sorry. They’re not appearing on my screen. Sorry. I’m quickly checking. Yeah.

Oh, there’s a question about has the board considered buybacks as a means to close the NAV discount gap? Do you want to take a question, Eve?

Ingrid, CFO, ADIFICA: Yeah. But, there is actually very limited evidence that buybacks do have an impact on share price and that they are allowed to close this discount that is currently existing. On top of that, yeah, I think the message that we are giving today is that we believe that we are about to start a new cycle. So that also means that we want to keep some headroom, to start investing again in the markets.

Stefan, CEO, ADIFICA: Yeah. Maybe taking another question in the chat, rooms. What factors contributed to this minus 0.4% negative rent reverse? And do you anticipate similar trends in rent negotiations moving forward? And wait a minute.

The question continues. Are tenants actively discussing rent levels with you? Maybe first of all, the first part of the question is minus 0.4%. These were really very specific assets, so specific incidents within the Belgian portfolio that led to a negative rand reversion. And it’s really a couple of assets and I think the majority of them located in Brussels.

So it’s a very, very specific situation. It is not a trend. So we do not, perceive today within our portfolio throughout the whole of Europe a trend of operators trying to negotiate with us lower rent levels for trying to break in into existing lease contracts. That definitely is not happening, happening. I think that the risk is even remote or more remote today compared to the past because of the, occupancy and operating margins that are clearly improving in Europe.

So it really is not a trend today. So we’re not expecting to see this also popping up as a trend in the near future given the fact that the situation for operators is clearly improving. Could it still happen in the future? Negative rent reversion? Yes, of course.

There always can be one or other reason with a specific asset to, review rent levels, but it will remain in our view really incident based, not trend based. Hope that was helpful. And I think the other question we already took. So I think we are at the end of the session then. Elphine?

Okay. So, thank you all very much for attending this session. If you would have any further questions, well, you know where to find us. Feel free to reach out. And if you’re interested in the Capital Market Days, also feel free to reach out to Delfin.

Hopefully seeing all of you at NMW. Thank you. Bye.

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