Phoenix Spree Deutschland Limited
(The "Company" or "PSDL")

Interim Results for the half year to 30 June 2017

STRONG OPERATING PERFORMANCE DRIVING PORTFOLIO VALUATION GAINS

Phoenix Spree Deutschland (LSE: PSDL.LN), the UK listed investment company specialising in German residential real estate, announces its Interim Results for the six months ended 30 June 2017.

Financial highlights

-       Gross rental income up 25% year-on-year to €9.5m, (H1 2016 €7.6m)

-       Profit before tax up 303% year-on-year to €63.1m, (H1 2016 €15.7m)

-       EPRA NAV per share up 22.3% in H1 2017 to €3.34 per share (31 December 2016: €2.73) EPRA NAV per share total return in H1 2017 of 23.7% (six months to 30 June 2016: 7.8%)

-       Net loan to value of 31.6% at 30 June 2017 (31 December 2016: 39.4%)

-       Increased first half dividend to €2.28cents (GBP 2.0p), up 25% year-on-year (H1 2016: €1.92cents (1.6p))

Operational highlights

-       Portfolio value increased by 22.6% in H1 2017 to €519.7 million. (31 December 2016: €423.8 million), and by 15.6% on a like-for-like basis.

-       Berlin posted largest like-for-like increase at 18.2%

-       Strong annual like-for-like rent per sqm growth of 5.0% (30 June 2016 5.7%)

-       Significant embedded value within the portfolio: Berlin new leases signed at a 44% premium to passing rents

-       First half condominium sales achieve an average value per sqm of €3,687, a 59.8% premium to portfolio average value per sqm at 30 June 2017

-       Five property acquisitions in Berlin completed for €27.7m in H1 2017, with a further two notarised in H1 and due to complete in H2 2017 with a value of €11.6m

-       Nuremberg and Fürth portfolio disposed for €35.2m on 1 July 2017, an 11% premium to its book value as at 31 December 2016

-       Berlin represented 78.2% of PSDL portfolio by value as at 30 June 2017, and 84.2%* on a pro-forma basis

*following completion of Nuremberg and Fürth disposal, and the completion of Berlin assets notorised in the first half of 2017, but not completed at30 June 2017

Outlook

-       Berlin property market outlook remains favourable, underpinned by strong demand for apartments, lack of supply and low interest rates

-       Significant further potential to create value through reversionary letting and condominium sales

-       Scope for further growth in property values, particularly in central Berlin

-       Strong balance sheet locking in long-term fixed rate debt at low interest rates

-       The Company is on track to deliver a strong financial performance for the full year 2017 

Robert Hingley, Chairman of Phoenix Spree Deutschland, commented:

"I am delighted to announce another strong set of results following an active start to the year in which the Company has delivered strong rental growth and enhanced its portfolio in Berlin where the outlook remains particularly positive. The Portfolio has seen another significant valuation uplift, driven by the positive market backdrop and our active asset management strategy, resulting in an EPRA NAV per share total return of 23.7% for the six months. Nothwithstanding the significant rises in property values to date, and corresponding rental yield compression, Management continues to see significant embedded value within the Portfolio, with further reversionary rental potential and opportunities to create value through the sale of apartment blocks as condominiums. The Company has also strengthened its balance sheet, bolstered by non-core disposals, leaving it well placed to continue to grow the Portfolio."

For further information please contact:

Phoenix Spree Deutschland Limited                                                                                                                  +44 (0)20 3937 8777

Stuart Young                                                                                                                                        

Liberum Capital Limited (Corporate Broker)                                                                                    +44 (0)20 3100 2222

Christopher Britton                                                             

Tulchan Communications (Financial PR)                                                                                         +44 (0)20 7353 4200

Tom Murray

Chairman's Statement

I am pleased to be able to report another strong set of interim results. Our active asset management strategy has continued to deliver rental growth at a premium to listed peers; we have made value enhancing acquisitions while successfully disposing of non-core assets; and have secured additional debt financing on highly competitive terms. 

Market dynamics are favourable with a continuation of positive growth trends in both rental and property values. During the first six months of 2017, the value of the Portfolio has increased by €95.9m, with like-for-like growth of 15.6%, while EPRA NAV per share grew by 22.3%. Notwithstanding these growth rates, the Board believes significant embedded value remains within the Portfolio, evidenced by first half new leases signed at an average 44% premium to in-place rents in Berlin, and condominium sales at a substantial premium to average Portfolio property valuations.

The market outlook remains positive, particularly in Berlin where, on a pro-forma basis, 84.2% of the Portfolio is located. Demographic trends are supportive as demand for housing stock from owner occupiers and investors continues to significantly outstrip supply. The funding environment is also positive, with rising property values and low interest rates combining to allow the Company to refinance maturing debt facilities on attractive terms.

The Board is confident that the Company is well positioned to take advantage of the favourable outlook to deliver future capital growth and income to its investors. The Board is pleased to declare a dividend of €2.28cents (2.0p) per share for the first half, which is expected to be paid on or around 13 October 2017.

Operational and Financial Review

Financial Highlights

Like-for-like portfolio value increase of 15.6%

As at 30 June 2017, the portfolio was valued at €519.7 million (31 December 2016: €423.8 million) by Jones Lang LaSalle GmbH, the Company's external property valuer. This represents an increase of 22.6% over the six-month period, equating to an average value per square metre of €2,308 (31 December 2016: €1,965) and a gross fully occupied yield of 4.1% (31 December 2016: 4.8%). Included within the portfolio are condominium properties with an aggregate value of €25.5m (31 December 2016: €24.2m). This increase in valuation reflects a combination of yield compression and growth in Portfolio rents.

On a like-for-like basis, after adjusting for the impact of acquisitions and disposals, the Portfolio valuation rose by 15.6% per cent in the six months ended 30 June 2017. This compares to an increase of 9.8% for the half year to 30 June 2016 and an increase of  19.4% for the full financial year ended 31 December 2016.  The appreciation in the Portfolio valuation reflects a combination of market growth, improved rents and the impact of rising condominium values on multi-family home pricing.

By geographic segment, Berlin posted the largest like-for-like increase at 18.2%. As at 30 June 2017, Berlin represented 78.2% of the portfolio by value, up from 75.2% as at 31 December 2016. On a pro-forma basis, including the impact of the sale of the Company's Nuremberg and Fürth portfolio and assets notarised, but not completed, in H1 2017, Berlin represents 84.2% of the portfolio by value.

EPRA NAV increase of 22.3% in H1 2017

EPRA NAV per share rose by 22.3% in the first half of 2017 to €3.34 (£2.94) (31 December 2016: €2.73 (£2.33)). After taking into account the 2016 final dividend of €4.3cents (GBP: 3.7p), which was paid in June 2017, the EPRA NAV total return in the first half of 2017 was 23.7% (H1 2016: 7.8%).

Accelerating rental growth

Against a backdrop characterised by undersupply of available rental property and population growth in Berlin, the Company's active asset management strategy has continued to deliver strong rental growth. Annualised rental income for the period to 30 June 2017 was €19.2m (30 June 2016: €15.1m). Adjusting for acquisitions and disposals, this represents a like-for-like increase of 8.5% compared with 30 June 2016 (30 June 2016: 3.3%).

Average in place rent was €7.7 per sqm as at 30 June 2017, an increase of 1.1% compared with 30 June 2016. On a like-for-like basis, the increase was 5.0% (year to 30 June 2016: 5.7%).

Reported vacancy at 30 June 2017 was 8.2% (30 June 2016: 11.1%). On an EPRA basis, which adjusts for units undergoing development and made available for sale, the vacancy rate was 3.7% (30 June 2016 3.2%).

Further increase in new lettings premium

During the period, 234 new leases were signed, representing an annualised letting rate of 14.4% of units. The average rent achieved on new lettings was €10.0 per sqm, a 6.4% increase on the same period in 2016.

Notwithstanding growth in rental prices, the Company continues to re-let units at a substantial premium to in-place rents. During the first six months of 2016, new leases were signed at an average premium of 30.6% to passing rents.  In Berlin, new leases were signed at an average rate of €11.2 per sqm, a 43.6% (30 June 2016: 37.4%) premium to passing rents.

The Company believes this reversionary uplift illustrates the significant embedded opportunity for continued future rental growth within the Portfolio, as lower paying tenants move out and prices on re-letting converge with current market levels.

Active portfolio management

The Company continues to source and acquire attractive assets in central Berlin. The Board considers this location offers the best medium-term potential for future rental and capital growth. In the six months to 30 June 2017, the Company completed on five Berlin property packages, consisting of 146 residential and 11 commercial units, for an aggregate purchase price of €27.7 million and representing an average price per square metre of €2,050. Two of these five properties were notarised in H1 2017, the others being notarised in the prior year. At 30 June 2017, Berlin represented 78.2% of the Portfolio by value.

Since 30 June 2017, the acquisitions of two further properties have been completed, comprising 75 residential and 3 commercial units, for an aggregate purchase price of €11.6 million and representing an average price per square metre of €2,045.

Overall, during the current year to September 2017, the Company has notarised a total of six new property packages, comprising 310 residential and 5 commercial units for an aggregate purchase price of €48.4 million, excluding purchase costs. Of this, €19.4 million of property was notarised in H1 2017.

In April 2017, the Company announced that it had exchanged contracts to sell a portfolio of 17 non-core properties in Nuremberg and Fürth for an aggregate cash consideration of €35.2m. These properties had been acquired in 2007 and 2008 for an aggregate purchase price of €13.9m and the sale proceeds represent an 11% premium to the 31 December 2016 Jones Lang LaSalle valuation. This disposal was completed on the 1 July 2017.

The disposal represents a complete exit from the Nuremberg & Fürth region, the proceeds of which will be used to reduce debt, fund further acquisitions in Berlin and invest in the existing Portfolio. Including the impact of this disposal on the 30 June 2017 figures, as well as Berlin acquisitons notarised in H1 but not yet completed, the Berlin proportion of the Portfolio increased to 84.2% by value on a pro-forma basis.

The Company has also notarised for disposal five other non-Berlin assets during the first half of 2017, with a total consideration of €10.5 million. A further non-Berlin asset was notarised for sale in August 2017 with a value of €2.1 million. Of these properties notarised for sale, €9.5 million has completed.

The Company continues to invest in its Portfolio through a carefully planned process of modernisation and renovation of apartments, upgrades to communal areas such as building facades and staircases, as well as investment in more efficient heating systems. The Company invested €3.0 million during the first half of 2017,  the majority of which related to vacant apartments, which are refurbished and subsequently re-let at higher rents. This process of targeted investment enables the Company to access the reversionary rental potential that exists within the Portfolio and it is expected that investment will continue at a similar rate during the second half of the year.

Condominium sales

The Company's condominium strategy is to divide and resell a small number of carefully selected apartment blocks as condominiums, in order to monetise the value difference that exists between the value of an apartment block and the value of the same property sold as single apartments.

During the first half of 2017, sixteen apartments were notarised for sale, with an aggregate value of €3.9 million. The average sales' value per sqm achieved was €3,687, a 59.8% premium to the Fund's 30 June 2017 average Portfolio valuation.

Since June, a further two apartments have been notarised for sale. As at 31 August 2017, all but one of the available units at the two Berlin Kreuzberg apartment blocks had been sold and over 20% of Boxhagenerstrasse units have been sold.  

Portfolio regional overview as at 30 June 2017

Berlin has continued its strong performance in the first half, with significant underlying growth in rents and property values. Reported average rent per sqm stood at €7.9 an increase of 0.4% compared with 30 June 2016, reflecting strong underlying like-for-like rental growth partially offset by the impact of recent acquisitons which typically exhibit lower rental values upon takeover.  On a like-for-like basis, (excluding the impact of acquisitions and disposals), the increase in rent per sqm was 6.1%. The Berlin EPRA vacancy rate stood at 4.0% in the first half of 2017 (H1 2016: 2.7%).

Nuremberg & Fürth, which was notarised for sale in the first half of 2017, reported rent per sqm of €7.5, a like-for-like increase of 4.9% (30 June 2016 2016 9.5%). First half 2017 EPRA vacancy stood at 5.9% (H1 2016: 1.4%).

Central & Northern Germany delivered a like-for-like increase in rent per sqm of 2.9% and an improved EPRA vacancy of 2.1% (H1 2016: 5.5%).

Rent and vacancy by region

Financial results

Reported revenue for the six-month period was € 9.5 million (30 June 2016: €7.6 million). This increase represents a combination of organic growth in rental income and the net impact of acquisitions and disposals.

The Company has reported a profit before taxation for the period to 30 June 2017 of €63.1 million (30 June 2016 : €15.7 million). This is after charging/crediting the following non-cash items totalling net €8.2  million, consisting of:

-       An accrual of €10.7million relating to the Property Advisor performance fee (30 June 2016: 2.8 million). The accrual reflects the potential fee payable to the Property Advisor at the year end, based on the increase in EPRA NAV, under the terms of the Property Advisor Agreement; and

-       mark-to-market interest rate swap gains of €2.5 million (30 June 2016: loss of €2.9m)

The results were positively impacted by a revaluation gain of €70.1 million (30 June 2016: €21.7 million). Excluding the revaluation gain, the performance fee accrual and the gain on the Swaps, the Company reported a profit before tax of €1.2 million (30 June 2016: loss before tax of €0.3 million).

Reported earnings per share for the period were €55 cents (June 2016: €14 cents).

The Board is pleased to declare an interim dividend €2.28 cents per share (GBP 2.0 pence per share), (30 June 2016: €1.92cents, GBP 1.6 pence) for the first half of the year. The dividend is expected to be paid on or around 13 October 2017 to shareholders on the register at close of business on 29 September 2017, with an ex-dividend date of 28 September 2017.

Debt and gearing

As at 30 June 2017, the Company had gross borrowings of €197.2 million (31 December 2016: €185.6m) and cash balances of €32.9 million (31 December 2016: €18.5 million), resulting in net debt of €164.3 million (31 Dec 2016 : €167.1m) and a net loan to value of 31.6% (31 Dec 2016: 39.4%). The increases in gross debt in the period reflects: i) the drawdown from new and existing loan facilities in an aggregate amount of €43.3 million, €11.3m of which was used to refinance existing Group debt and ii) the repayment of €18.3 million of debt in relation to the sale of the Nuremburg & Fürth portfolio. The increase in cash balances, and resulting fall in net loan to value, reflects the cash received in advance of the period end from the disposal of the Nurnberg & Fürth portfolio.

At 30 June 2017, the blended interest rate of the Company's loan book was 1.9% (30 June 2016: 2.0%). The average remaining duration of the loan book at 30 June 2017 was 6.3 years (30 June 2016: 4.7 years).

Since 30 June 2017, the Group has successfully refinanced €79.6 million of existing debt, while securing a further equity release of €14.8 million on the same pool of properties. The equity release will be used to fund new property acquisitions and also to invest in the existing portfolio.  Including the impact of this new financing, the average remaining duration of the loan book would be just under 9 years, providing the Group with stable, long term, low cost funding for many years to come.

Although currently well funded, the Group will continue to assess its funding options for growth, including further debt, equity and joint ventures.

Outlook

Market dynamics are favourable, particularly in Berlin, where demand for rental property is significantly outstripping supply. The demand for rental apartments is driven by inward migration, high job creation levels, and falling unemployment. By contrast, supply of housing stock is limited, constrained by lack of available land for development and new-build construction costs that exceed the value of existing housing stock in most locations.

The net effect of this supply-demand imbalance is upward pressure on new letting prices which, in turn, has created a significant reversionary rental opportunity for the future. The fact that new leases in our Berlin portfolio have been signed at an average 44% premium to in-place rents during the first half of this year suggests that significant potential remains to improve rental incomes even in the event that market rental values were to stabilise.

The rising trend within the Berlin market for private individuals buying apartments is also creating a reversionary opportunity within the Portfolio through selling individual units as condominiums at significant premiums to book carrying values. This potential was clearly demonstrated in our results during the first six months of 2017 and additional properties are in the process of being evaluated as future condominium projects.

Following the disposal of the Company's Nuremberg and Fürth portfolio, and a series of carefully targeted property acquisitions, the Board believes that the Portfolio, with its focus on Central Berlin, is well positioned to take advantage of these trends. Positive market tailwinds, combined with the Company's active asset management strategy, have the potential to generate further growth in rental incomes and property values during the second half of the year.

Identification of business risks

The Group's principal risks and uncertainties are consistent with those set out in the Annual Report for the year ended 31 December 2016 being compliance with financial covenants on bank borrowing, tenant default, liquidity, interest rate hedging instruments, insufficient investment opportunities and interest rate movements on bank borrowings. The Directors consider that the significant areas of judgement made by management that have significant effect on the Group's performance and estimates with a significant risk of material adjustment in the second half of the year are unchanged from those identified in the Annual Report for the year ended 31 December 2016.

Key Performance Indicators

The Company has chosen a number of Key Performance Indicators (KPI's), which the Board believes may help investors understand the performance of the Company and the underlying property portfolio.

In the six months to 30 June 2017:

·      the value of the property portfolio grew by 15.6% on a like-for-like for basis. This increase was driven by yield compression and an increase in like-for-like average rent per let sqm of 5.0% (H1 2016: 5.7%)

·      the EPRA vacancy of the Portfolio at 30 June 2017 stood at 3.7% (30 June 2016: 3.2%)

·      the Group continued with its targeted condominium programme, agreeing sales of €3.9 million in the half year to 30 June 2017 (H1 2016: €1.2 million)

·      EPRA NAV per share increased by 38% to €3.34 as at 30 June (30 June 2016 €2.42),

·      the declared dividend for the half year 2017 was €2.28 cents (2.0p) per share, an increase of 15% in Euro terms (H1 2016 €1.92 cents (1.60p) per share).