Preliminary 2013 Eurocastle Investments LTD Earnings Conference Call
Mar 13, 2014 AM EDT
ECT.AS - Eurocastle Investment Ltd
Preliminary 2013 Eurocastle Investments LTD Earnings Conference Call
Mar 13, 2014 / 02:00PM GMT
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Corporate Participants
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* Olga Kharchenko
Eurocastle Investments - Investor Relations
* Francesco Colasanti
Eurocastle Investments, LTD - Managing Director, Purchases
* Stephen Charlton
Eurocastle Investments, LTD - CFO
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Conference Call Participants
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* Navier Situ
Carlton Capital - Analyst
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Presentation
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Operator [1]
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Good morning my name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the Eurocastle fourth quarter earnings conference call.
(Operator's Instructions)
At this time I would like to turn the call over to Olga Kharchenko, Investor Relations. Please go ahead.
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Olga Kharchenko, Eurocastle Investments - Investor Relations [2]
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Thank you Stephanie and good afternoon everyone. I would like to welcome you to Eurocastle's fourth quarter 2013 earnings call. Joining us today are Francesco Colasanti, Managing Director Purchase covering purchases, European real estate, and leading investments, and Steve Charlton, Eurocastle's CFO.
This call is being recorded and the replay number is on our website. This call is also available via web cast at our website, which is www.eurocastleinv.com. I would also like to point that statements, opinions and beliefs communicated today which are not currently historical fact may, in fact, be forward-looking statements.
Our ability to present results or the actual outcomes of current actions and future plans is limited. Also, we believe that expectations reflected in any such statements are based on reasonable assumptions our actual performance or results may differ materially from those set forth in these estimates, projections, our expectations expressed in the statement released to inform any past performance or results. In addition references, past trends, or activities should not be taken as representations as such trends or activities --- in the future.
Eurocastle does not take any undertake any obligation to update any such statement which generally is only at the end of the fourth quarter of 2013.
With that I would like to turn it over the Francesco Colasanti.
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [3]
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Thank you Olga and welcome everyone to Eurocastle's fourth quarter 2013 earnings call. For the duration of this call we will be referencing a presentation that we posted on our website under the financial information section, which we hope you will find helpful.
So as I mentioned to you on the previous calls, 2013 was a very transformational and productive year for Eurocastle. We entered the year with ambitious agenda, simplified the company's capital structure to raise equity for new investments in Italy and to continue to realize the value of our legacy business.
Over the course of the year we made progress on all fronts. On page three of the presentation, we highlighted the key accomplishments we have had this year.
We successfully simplified the capital structure and restored dividends. In the first of 2013, we converted the convertible debt into ordinary shares at Euro 0.05 per share. We reset the management fee with an annual savings for Eurocastle of approximately Euro 18 million. In May we raised gross proceeds of Euro 109 million by issuing 15 million shares of Euro 7.25 per share. And starting from the third quarter 2013, we reinstated dividends and paid a total of Euro 0.25 per share for the third and the fourth quarter.
In parallel we shifted investment focus in the Italian market. We invested Euro 17 million to purchase five non-performing loan pools and one performing loan pool. This investment shows strong performance with Euro 9 million of distribution to date plus Euro 17 million of expected future cash.
The near term pipeline for future investment is better, significantly. And mainly focused on the NPL sector, but also considering direct and indirect real estate investments and other credit opportunities.
In addition to that we continue to optimize value for our commercial real estate and debt businesses. We generated Euro 271 million of proceeds through the sale of 33 commercial real estate assets and we repaid Euro 303 million of debt related to the commercial real estate portfolio.
In January 2014, we generated 23 million of net growth proceeds through the sale of CDO IV Securities, at the value in line with the NAV.
On page four of this presentation you can see that Eurocastle business is split into two core segments. Italian investments and the Legacy Business. The Italian Investments represent the new investment strategy for Eurocastle. The combined NAV for this segment is Euro 144 million at the end of 2013, but at the end of January 2014, following the sale of CDO IV Securities, it has increased to Euro 170 million or Euro 5.22 per share. This category includes investments made in the new strategy and the net corporate cash available for new investments.
The other side is our Legacy business which includes investments in German commercial real estate and European real estate related debt. We combine NAV of Euro 184 million or Euro 4.84 per share, taking into account the sale of CDO IV that happened in January 2014.
So the current market cap for Eurocastle is around Euro 228 million, and excluding the new Italian investment and the available cash that implies a Euro 58 million valuation for the Legacy Business, the approximately 63% discount Legacy Business NAV.
Before we started from 2013 a new investment program here at Eurocastle, which now focuses on Italian market buying NPL direct and indirect real estate assets and other credit opportunities. We continue to believe that the dynamic of the Italian economy created a truly unique investment opportunity for Eurocastle.
As we show on page six, despite the turmoil and the political uncertainty, Italy still remains the third largest European economy and the eighty largest economy in the world.
However, Italy was not immune from the European sovereign debt crisis and the double dip recession. Italy's unemployment rate rose to 12.9%in January. The CDS spread reached new highs in 2012 and 2013, but since then trended down in recent months showing higher confidence of investors in the Italian economy.
Following on page seven, the Italian banks continue to feel increasing pressure as The Bank of Italy and the European Central Bank enforce new capital provisions as a result of the ongoing asset quality review.
The inventory of the NPL stock continues to grow. And as I said in the previous call I expected the stock of NPLs in the Italian banking system at the end of 2013 to be between Euro 150 billion and Euro 160 billion from Euro 122 billion a year before.
As you can see from page eight, the total stock at the end of 2013 was Euro 156 billion. Stock NPLs in the Italian market is still growing. And at the end of January 2014, reached record high Euro 165 billion.
Total stock of NPLs in my opinion will grow as a consequence of the asset quality review currently carried on by the European Central Bank and by the third quarter of 2013, it could be close to Euro 180 billion to EURO 190 billion. When the Bank of Italy will be replaced as a regulator for the main Italian banks by the ECB.
I strongly believe that after several years of inactivity, the Italian banks are entering a third big wave of NPL sales. With the bank disposing, in my opinion, over Euro 50 billion of NPL between 2014 and 2016. Starting with significant transaction volumes from the second half of 2014.
In order to achieve the investment objectives we developed a strategy relationship with Italfondiario. As you can see from the following page, you can see that Italfondiario is Italy's largest independent non-bank special servicer and is an affiliate of Fortress Investment Group.
As we indicated in the past, we strongly believe that in order to succeed investing in Italy in the --- class it is crucial to have the home grown presence that our relationship with a stronger servicer that Italfondiario is, will be offered to Eurocastle.
Fortress have been active in Italy for 14 years and we expect to leverage its experienced management team as well as a long term relationship with senior management of top Italian banks.
We believe this factor gives Eurocastle a significant competitive advantage and provides access to a wide range of investment opportunities, as well as underwriting an acting servicing portfolio on the portfolios to be acquired.
So if you turn to page 10, as I mentioned earlier, we invested approximately Euro 17 million during the course of 2013 in one performing and five non-performing pools. The performance of our Italian investment made so far has been excellent. On the first deal we invested Euro 14 million in May, so far we collected Euro 8.1 million, versus the Euro 3.3 million estimate of underwriting for the same period, with a 145% increase. The investment of IRR compared to underwriting has increased from 17% to 37% of the performing loans and from approximately 19.9% to over 43% on the non-performing loans.
On the second deal we invested Euro 2.6 million in July and with the collection so far, the investment IRR has increased to 18.4% to 19.3%.
As you can see from page 11, we have a strong pipeline for growth. In Italian NPL sector, as I said earlier, we believe that over Euro 50 billion of assets are expected to trade between 2014 and 2016.
We are currently under discussion to invest Euro 30 million to Euro 40 million between the second and the third quarter to acquire interest in three NPL pools and we are analyzing over Euro 11 billion of gross book value that may require an estimate equity investment of Eurocastle between Euro 400 million and Euro 700 million.
In the real estate fund sector we feel there is a significant opportunity to purchase shares of listed funds near in liquidation, trading at significant discount to net asset value. We are actively working on one new investment which we announced in the beginning of January 2014. The investment represents a Euro 120 million partial tender offer for approximately 40% of an Italian real estate fund called UniCredito Immobiliare Uno. We made the offer jointly with an international partner.
The target fund has low leverage and the offer price of Euro 17.88 per unit represents a 36.5% discount to reported NAV. The offer will close on March 21, 2014 and based on the current level of acceptance, Eurocastle would invest around Euro 20 million.
Another attractive investment opportunity is represented by the target real estate investment through asset conversions. We are evaluating Euro 30 million of investments in two properties and we have a private pipeline of approximately Euro 200 million. This investment will generate 15% to 20% IRR.
In addition to that, we are considering other credit opportunities that could generate mid-teens to high-teens return. We are currently evaluating four deals with estimated equity investment of Euro 200 million.
With this lets turn to our Legacy Business. As we laid out on page 12, Eurocastle historical business model is being focused on two categories, German commercial real estate and European debt business. So from the Legacy Business we expect to generate between Euro 125 million to Euro 200 million that equates to between Euro 3.83 per share to Euro 6.13 per share. Specifically we are expecting to generate between Euro 100 million to Euro 150 million terms of real estate. And between Euro 25 million and Euro 50 million from the debt business.
And with this I will turn to Steve.
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Stephen Charlton, Eurocastle Investments, LTD - CFO [4]
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Thanks Francesco. And welcome everyone. I will spend a few minutes reviewing the financial highlights, set up on slide two of the presentation. More details are contained in the Appendix of the presentation, as well as in our 2013 audited financial statements released this morning.
The pro forma NAV at the end of 2012 was Euro 12.61 per share that is adjusting for last years convertible bond conversion and also the May capital rates. Mainly as a result of some asset specific valuation events within our Legacy German commercial real estate, and the Desk investment portfolio, Eurocastle's adjusted NAV at the end of 1013 was Euro 328.4 million or Euro 10.06 per share.
As in previous periods adjusted NAV adds back the negative net asset value in the MARS floating portfolio, but also excludes the book equity in the Bridge portfolio which was transferred to the lender after we were unable to reach agreements on extension when the loan matured in January this year.
Eurocastle recorded net losses of Euro 87 million for the year, last year's results of fair value movement in the German real estate portfolio and impairment charges in the debt ---.
Excluding these valuation changes and gains and losses on asset sales, normalized FFO for 2013 was Euro 15.8 million or Euro 0.60 per share, this compared to a normalized FFO lost of Euro 4.4 million for the full year 2012. In part reflecting the lower base management fees starting from the second quarter of last year.
Slide 16 shows the breakdown of FFO, a normalized FFO between the groups business segment as well as separating the German real estate business into non-recourse portfolios, that are cash flowing and most of the current cash trapped by the lenders.
The normalized FFO for the Italian business and for the cash flowing legacy portfolios was Euro 10.8 million for the year and that is after absorbing all corporate overheads.
From a pure cash flow perspective taking into account cash lease from asset sales, cash distribution to the top cove from the Legacy portfolios during the year was Euro 37 million. This is shown in more detail on slides 18 and 19 in the Appendix. Most of this cash was generated by our German real estate business which consistent with our realizing value from our Legacy portfolios, contributed Euro 35.5 million in 2013.
Distributions in 2013 from our debt investment portfolios amounted to Euro 1.5 million. As with our real estate business our goal is to liquidate debt investments in the short to medium term maximizing returns and generating cash for investment in our Italian strategies.
In January we succeeded in selling all the remaining securities within our CDO IV portfolio. Repaying all debts and realizing Euro 22.5 million of NAV which represented a gain of Euro 2.1 million over our third quarter 2013 carrying values.
On behalf of everyone at Eurocastle, we thank you for your continued support and look forward to updating you again in May. With that I would like to hand the call over to the moderator for the question and answer session. Thank you.
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Questions and Answers
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Operator [1]
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(Operator's Instructions) Your first question comes from the line of [Navier Situ with Carlton Capital].
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Navier Situ, Carlton Capital - Analyst [2]
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Hello there guys, I would just like to ask a question about the NPL pipeline. I think back in Q3, you highlighted about four pools of NPLs that you were considering. I think they totaled about Euro 2 billion. I was just wondering what happened to those opportunities and maybe some more discussion of the sort of portfolios you are looking at now in this quarter?
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [3]
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Thank you very much. Out of the four pools, we are negotiating SPA's on two out of the four pools, we are completing due diligence on the third pool, and on the fourth pool that we were analyzing the seller decided to sell the assets as after the asset quality review. The asset quality review started in the beginning of March and will be done with the analysis in June and the inspectors from ECB will have the report done by July and so we expect that that portfolio will trade after July.
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Navier Situ, Carlton Capital - Analyst [4]
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Got it, and so what is your expectation for timing then with the two pools that you have signed SPAs for?
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [5]
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For the two pools where we are negotiating SPAs, we think that they are going to close by Q2.
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Navier Situ, Carlton Capital - Analyst [6]
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Got it. And just in terms of competition for these pools, has the competition been greater than us expected or has it just been issues of just slowness of the banks to sell assets. Do you think that is going to be increased somewhat with the announcement from UniCredito the other day, about increasing its NPL significantly?
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [7]
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Well for sure the announcement of many banks for large deals that were up in the Italian market will increase the competition there. So that is what will happen in my opinion. We still have a strong competitive advantage because, even through the investors try to get into the market, there are a lot of barriers to entry and they don't have any collection curves and they don't have a servicer. So it will be pretty tough for servicers to get organized and be our real competitor at the beginning of this cycle. I think.
Specifically, on the portfolios that you mentioned before. It is not because the problem was not to close these two portfolios. It is not the competition, there, but it is just that the banks attention was drawn by the European Central Bank for the criteria and all the asset quality review. So it is their intention to sell these portfolios, we have been in discussion with them, the SPA and the due diligence is finalized. And so it is more a question of the time they have to dedicate to the inspectors of the European Central Bank and this time will be taken out to add to other activities. So that was the issue.
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Navier Situ, Carlton Capital - Analyst [8]
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OK, great, well thanks for the clarification.
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [9]
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No problem.
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Operator [10]
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(Operator's Instructions) Your next question comes from the line of [James Sheraton] a private investor.
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Unidentified Participant [11]
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Francesco and Steve thanks very much for taking the call, can you give us an update on the tender. I think in your statement you indicated in March 31 closing, I thought there had been an issue, a regulatory review that had to come first before the tender could proceed? Did I miss that?
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [12]
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Well on the tender, the tender was actually supposed to be completed by Friday, last week and on Thursday, last week we decided to give investors another two weeks to participate in the tender. And so basically the tender we had completed acquisition orders for representing approximately 30% of the original amount. So together with the bank that is working with us on this deal, we decided to give the investor two more weeks. So we expect to be done in ten days from now.
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Unidentified Participant [13]
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So four approvals have been granted, the tender is in process, and the response so far was underwhelming. You are saying that of the Euro 120 million only 30% or Euro 40 million was tendered.
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [14]
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Correct. As of Friday, last week.
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Unidentified Participant [15]
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You made no changes to the terms other than the duration, so it is not clear that you are going to get more. Would you take Euro 40 million?
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [16]
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Well we don't know if we get to 40%, what we think is that we decided together with the bank to do another advertisement campaign and that is what we are doing. The tender was in total for Euro 120 million, Euro 60 million for us and Euro 60 million for our partner, so far we got about Euro 40 million in total, that is Euro 20 million for us, for Eurocastle and Euro 20 million for our partner. And we hope to increase this amount. Maybe we don't know if we are going to get to the Euro 60 million, we need to wait for another 10 days. As soon as the period for the tender offer will be completed we will send...
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Stephen Charlton, Eurocastle Investments, LTD - CFO [17]
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We will issue a press release.
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [18]
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Yes a press release.
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Stephen Charlton, Eurocastle Investments, LTD - CFO [19]
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But the offer closes on the March 21, 2014. We settle it a week later on March 28, 2014.
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Unidentified Participant [20]
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If you got no more, would you take the Euro 40 million?
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [21]
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We have to consider that.
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Stephen Charlton, Eurocastle Investments, LTD - CFO [22]
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We certainly have the ability to do that but kit would not be our obligation to take it if we reach the 50% level which would mean us having acceptances for around 32,000 units and we currently stand at just over 21,000 units.
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Unidentified Participant [23]
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Can you talk broadly about what is happening in the AQR and the stress test, the timing of the two and what the implications are for the banks to sell? It is frustrating to have Euro 165 billion of NPLs and not be able to buy any of them. What is the reason for this not taking place more quickly and just run through what you think the sequence of events is for AQR and stress tests and what do folks wait for? When will it be ready to start selling?
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [24]
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So, what is the time line for the asset quality review? The asset quality review started in the beginning of March, with the inspectors inside the banks. The inspectors will complete the information gathering in June, 2013, they have the month of July to do the analysis on the date that they gather from the banks. And the asset quality review should be totally completed by October. Because in November the ECB will be the new regulator, so before the new regulator comes into play, the asset quality review has to be completed. So this is the time line that we expect.
In terms of deals, what we have seen is that we are trying to close these three deals now. What we have seen is that the size of the deals and the number of deals is increasing. Pretty much substantially in the market. We have been short listed together with another two investors on a Euro 3.9 billion deal. We are in the process of participating to a process to acquire Euro 5 billion of Italian non-performing loans together with a non-performing loan servicers. We are discussing with the liquidator appointed by the Bank of Italy, to acquire a Euro 1.1 billion distressed financial leasing business, assets basically. And we are in the process of signing confidentiality agreements to get a Euro 1.5 billion portfolio from a bank in financial distress.
So what we are seeing is that the size of the deal is increasing and the frequency where we see deals in increasing. This is actually the stage, this is why we said before, we expect the pressure on the banks to go up, while the asset quality review is in process with the most of the deals will be concentrated on the second half of 2014, when the results of the asset quality review will be known.
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Unidentified Participant [25]
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You need the AQR to be finished first before they feel any real pressure?
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [26]
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Well real pressure, yes, but the banks already feel the pressure because in the asset quality review they receive a questionnaire on each individual loan that will be expected. So the information that the ECB requested is very detailed and the Italian banks do not have this information, so their pressure is already increasing. And they create an internal task force inside the banks, just to answer these questions from the ECB.
So I think that a number of banks, the more solid banks will wait for the asset quality review to be completed in order to sell assets. Some of the banks are now trying to anticipate what is the end of the asset quality review because they think that when the asset quality review could be completed there will be an excess of supply of NPLs that will go to the market, so they would like to anticipate that.
And those are basically the banks that were are talking now, the large deals, I mentioned to you before, that if you look at the process letter in these deals, they would all like to be completed and done by June 30, 2014. I told you the second half because normally, June 30 is pretty aggressive, it is reasonable to expect that these banks will close the deals in the second half, even before the asset quality review, but in the second half and not by the date they have in mind.
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Unidentified Participant [27]
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What is the risk if there is a delay, Francesco, if the cast is too large, if they ask for more time and if all of this just gets pushed back?
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [28]
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Well we had a meeting with the Bank of Italy just last week and the Ministry of Finance on this topic, just to understand where they stand and what they want to do. I think that the Italian government will not be able to support the Italian Banks and it is not in a position to create a bad bank funded by the Italian government. So what I think is that the time for the new regulator to complete to play is set, that is November, so I don't think there will be many chances that this process can be delayed or stopped.
So I think especially the banks that are less solid and that have lower coverage ratio on the NPLs book, below 50%, they will be definitely forced to do something this year.
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Unidentified Participant [29]
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Thanks.
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [30]
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You are welcome.
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Operator [31]
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(Operator's Instructions) At this time there are no additional questions. I would like to turn it back over to management for closing remarks.
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Francesco Colasanti, Eurocastle Investments, LTD - Managing Director, Purchases [32]
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Thank you so much or your time and your attention and the attention you give to our company, Eurocastle. We will keep you updated for the progress and the next steps of and the growth of our business and we will be communicating to you in the next earnings call. Thank you very much.
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Stephen Charlton, Eurocastle Investments, LTD - CFO [33]
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Thank you.
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Operator [34]
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Thank you this concludes today's conference call you may now disconnect.
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