Hypoport SE (HYPOF) Q4 2023 Earnings Call Transcript

Hypoport SE (OTCPK:HYPOF) Q4 2023 Earnings Conference March 11, 2024 12:00 PM ET

Company Participants

Ronald Slabke – CEO

Conference Call Participants

Operator

Ladies and gentlemen welcome to the Webcast Earning Q4 2023 of Hypoport SE. At our customers’ request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

May I now hand you over to Ronald Slabke who will lead you through today’s conference. Please go ahead.

Ronald Slabke

Yes, welcome from my side as well to the Q4 reporting and as you are aware of the current market environment makes it helpful to focus on the short-term development. In some moment, I will as well comment a little bit on the total numbers for 2023. So how to sum up this year in the end, you can say. Okay, first time we report in three segments. We use the year 2023 to restructure Hypoport, keep more focus on the value chains and therefore industry that we are digitalizing and the result are three segments. There’s management structures in them, real estate and mortgages with everything which is linked to private home ownership. The financing platform which sums up all activities in the credit industry beside the personal mortgage business and the insurance platform is, as you know it already, our digitalization strategy for the insurance industry.

So Q4 was a pretty good end of a challenging year 2023 for Hypoport. All segments had a positive trend, financing and insurance with growth in revenue, real estate with real estate and mortgage had a nice dynamic pre-Christmas in lead generation and interest of consumers regarding mortgage business. So we end this challenging year with pretty good and solid numbers in the fourth quarter and we are able to look forward in a positive way. When I say this, my mood is especially inflicted by this what’s going on in our larger segment. You’re aware of this 60% of our revenue and in the history, most of our profit were generated along the value chain of consumer mortgages. This is the core of the new segment, real estate and mortgages as well in as the real estate agent platform FIO, especially used by agents of banks and the valuation business of Value AG. So when you look on this segment, the underlying market is the German consumer housing market, and the general trends in this market is — are all in a positive development from what we see recently.

So first of all, the interest in home ownership, the desire to acquire your first home is growing in Germany. Why? I will come to this later. Latest, you do this here in Germany, or typically you do this in Germany when there is a trigger event when you plan to have children, or when you are splitting up these are the moments when a first home or an additional apartment is acquired. This life event just happening and keeps happening. And with this, the demand for home ownership is just steadily there. And now for already six quarters not fully executed by the triggered people. So there’s something piling up here.

In the history, we had a solid renting market and parts of the triggered families ended up staying in a renting market, parts is when you look on everyone here in Germany, 58% is renting market, 42% is home ownership. So there was a significant part of families staying in the renting market. What we see here as well in Q4 and in the previous quarters is an limited amount of new constructions started. We talk about roughly 25% of historical numbers of new renting units. So it’s really a distressed market environment. Nobody is interested in starting to build new renting space. Reason is it just doesn’t pay back. The rent you are able to achieve compared with the cost of construction and the regulation of constructions and give you a yield which is far below in normal market interest, so nobody is — nobody that — it’s a limited amount of market participants still doing it.

On the other side, the existing renting stock is heavily regulated. Over the last decade, you can say, on a steady basis, the government increased renting loss and applied new renting laws, which makes it even unattractive for existing landlords to keep renting and drives a certain number of them to the decision to trying to sell to homeowners and not rent again. And it reduces the fluctuation in the renting market. So if you have a rented apartment, you stay in it, because your rent is regulated in the metropolitan areas to roughly 50% of what is the current new rent value or price. So you save 50% when you stay where you are, or you can rent double the space that you need actually for the same price instead of renting new.

So this is as well taking a lot of renting space out of the market, you can say, blocks it and creates a distressed environment for families looking for a solution. So the need for home ownership is increasing, and that’s why as well, the desire is increasing because everyone feels in a moment when you need to move, how difficult it is to find something new. And if you find something new, you pay now more than you pay for a mortgage finance home ownership.

Good news for the fourth quarter the affordability gap started to shrink, especially to the end of the quarter. We saw a massive decline in interest rate for long-term interest rate mortgages, which is a standard here in Germany, you can say roughly from 4%, we went down to 3% in 6 weeks. So this was a sharp change in interest rates and something that made it already significant less expensive to acquire home ownership. You can say roughly 25%. On the other side, prices trickled down during the year. In the last quarter, they fell by roughly 1.5% on average, ending up the year with roughly 5% in price decline after a good 10% in 2022.

So in total, since the sharp change in interest rate, we are 15% down in the ownership prices. And last but not least, inflation and high demand for skilled workforce drives incomes up. You can say over a period of 1.5 a year, incomes here in Germany increased by more than 10%. So especially for this target group, which we have and what they are able to afford and what an apartment costs and how the mortgage rate looks like, it got significant better in the fourth quarter, where we didn’t get any support, is regulation. Politics doesn’t understand that it would be helpful to increase construction speed, deregulate construction, add some tax benefits, or reduce taxes on the acquisition of real estates. They talk about a lot, but they don’t decide or don’t execute anything which slows down the process of normalization of the market, actually.

But in general, you can say our underlying market home ownership here in Germany is something which is on the rise, even when it was not effective in numbers or in first quarter. But this just switched in over Christmas, we see this as well in our new reality, you can say. So looking on the indicators in the core KPIs that are defining our market in just charts, you see the decline in interest rate, you see where we came from and that it’s still higher than it was two years ago, but the lowest level we have seen now for more than a year, which triggered interest in the same moment properties are available, something we were not used to for a long time we had a really distressed environment, if you wanted to buy something, to get something was difficult. And if you could get something, you were in a competition with people who just bought it for renting and had a quite positive yield on this. So it was challenging for families to acquire the home.

Now there’s space available and less, or actually no competition from people who buy to let. So property prices trickled down to the end of last year. But we see in the first two months this year, already a turning point, that in more and more region, prices trickle up again. So even the average has turned on existing homes and flats. What still goes up is new constructions. And you will see this in our details of what we finance. It gets still more expensive what people are building, and we have here a record high construction costs right now in Germany. And, I mentioned this already and it’s relevant for the, let’s say, relief side supply side of the market. There is no renting supply. We have the lowest publicly available renting spaces offered ever. And this limits the alternative options, simply where you can go to.

Okay. So much about the environment in the housing market. The mortgage market itself closed the year still on the bottom, thanks to the Christmas season, and so only 2.5 months in the fourth quarter we saw the lowest quarterly numbers in history for a long, long time minus 6% compared quarter-over-quarter to the end of 2022, while we during the year already felt that market is more trickling up and down. But the short fourth quarter lead to this graph. So as I said already, with the massive change in interest rate, we saw an improvement in lead generation and in the number of applications under consultancy, under advice on the platform, and actually already in the last days before Christmas, a significant uplift in transactions. Just our monetization is a couple of weeks, roughly up to two months later. So, the revenue you will see in Q1 for this.

So, looking on the segment, we are serving the whole value chain, but the most important entities for the results is Europace with their special solutions for the cooperative and savings bank sector and our franchise system, Dr. Klein, which is very strong in monetization. When we look on this four, you see that we are growing even with an underlying market decline of minus 6% so total Europace plus 8, I will comment this in a moment. Dr. Klein plus 10. So the interest of consumers for independent advice is high and with this current interest environment even more attractive than it was when interest rates were artificially low two years ago.

Finmas and Genopace plus 40%. You see here that both sectors are enjoying the solid solution that we offer them and see us as the upcoming future as well for their — let’s say for their own mortgage solution, and we keep gaining market share in both sectors compared to the traditional software supplier there. I wanted to comment on the 8% of Europace. We have one strong large bank here in Germany, which for a long time is using Europace already. They migrated their mortgage business to a new joint platform in the second quarter of last year and failed with this huge IT project behind it. They still struggle. They are still not back on pace. And with this, especially in comparison to the last quarter of 2022, we miss here a strong partner.

So without this strong, let’s say with this strong partner, the total Europace number would have been something between this, what our own ventures network and the cooperative banking industry and the savings banks industry would supply. So the total number is slightly reduced by a missing strong partner here right now. Okay. Other perspective on the current transaction volume is what are we financing? And with this, actually, how are the underlying consumer behaviors right now? What you see is with the red columns that already in Q4 so not seeing the uplift in the beginning of 2024, the level of home purchases, we refinance is already, let’s say, normalized compared to this, what we saw end of 2022.

So it’s trickling up, you can say, and when you take into account that real estate prices are roughly 15% lower and average mortgage volume is roughly 20% lower than at the end of 2021, the beginning of 2022 you see that we are from the number of transactional perspective, not so far away anymore from a normal market environment. Just remember, normal market environment in 2021 means no supply and competition with landlords. So the future, we expect higher transaction numbers than in 2021 and previously. And yeah, we took market share as well since 2021. So total market may be still down for purchase somewhere between 20% and 30% in the third quarter, but it’s not far away from where we have been. What really reduces our sort of transaction volume right now, are the three other areas. So first of all, new constructions. We are on a historically low level, and this with inflated construction costs so between 2019 and now, construction costs rise by 50%. So with the current volume of new construction financed from a number of units we built, we are roughly at 25% of the historical level.

And this creates a distressed market environment, because with this low number of new constructions, you can imagine with more and more demand coming with migration and trigger events, this all needs to go to the purchase side because it’s not enough build. Developers still didn’t start new projects because of lack of funding for them and still the necessary workout in the oil project. So the recovery process of this part of the market will easily take another year or two. So next, which is still distressed, you can say is the area of refinancing, something which is historically very stable here in Germany, because we are used to finance 10 years plus fixed interest rate, and every 10 year we had to refinance.

Now, thanks to good advice done to people in 2012 and later, people closed — 50% of the people closed 15 years mortgages or longer even. They are going to come back in 2027. They don’t need a refinancing after 10 years. They can wait 15 years now, and only if the interest rates are low enough earlier they have an option to refinance earlier. And even the change in interest rate by a full percent, which we saw now at the end of the quarter, didn’t change the number of refinancing for now in a significant way. So people still wait for lower interest rates and they have the time until 2027 to do this.

So at last area energy efficiency investments. And the current home ownership stock declined even when there is a massive political agenda here in Germany to improve it and from European level and the German level, there is even a law for maturity of the home ownership stock until 2045. Sorry. So in the next 20 years, we need to fully renew or improve the energy efficiency for the whole household stock. And we are for now having an [indiscernible] volume of investments happening in reality. So this is going to change because they have to.

Okay. For now, you get a feeling where we are heeding to. And as mentioned already in next quarter, we see a certain level of uplift here on the transaction volume in Europace. Okay. Back to the perspective on in which parts of the industry we are especially growing. Cooperative banks and savings banks plus 40%. You remember they both represents a good quarter of the market each and with a huge space to still grow in the mortgage broker environment we got the confirmation because of a press release of the largest competitor of Dr. Klein, Interhyp market leader as well, that Dr. Klein outperformed the market leader by a couple of percent. So we took market share from them and as well as the platform in general. We increased our market share in the broker segment to roughly 60% and outperformed the only one who’s operating its own system still.

In the commercial banking side, still roughly 40% market share even when we gained the branch network of Deutsche Bank. But we lost, as I mentioned, a struggling partner with its IT problems. When this is back to normal, then I see an improvement as well in our market here in the private commercial bank sector. Okay. Now come to — after all these positive perspectives on the current change in market development, especially in the beginning of 2024, one challenging part here in the real estate and mortgage platform business with our valuation business, we were hit double in the last 1.5 year by regulation and market environment, and are still in a struggle to rebalance our resources, our IT developments to the current market needs and get a fit between this is what we offer and this is what the market needs and what the regulator wants get this all together.

We had significant one-offs here, close to EUR5 million in the last quarter. Another small restructuring bringing our losses down for the near term future. And let’s say we worked out a new plan, how to get to probability with our business here, using our strong position in the value chain and just delivering an excellent service under the current regulatory regime which doesn’t like digital as much as we. Looking forward, it’s going to get better and the one-offs are going to be hopefully effective and will bring us here to a path to profitability within the next two years.

For the segment in total, it was a profitable last quarter. When we take out this, what happened around valuation EUR3.5 million in profit in the last quarter. As I mentioned, everything what we saw in additional lead generation and additional activities on the platform will start to monetize in the first quarter 2024. This, what you see here is still a small uplift in the mortgage growth and some slowdowns in valuation, which sums up to a neutral revenue development, even a decline in gross profits. For the next year, or let’s say for this ongoing year 2024 we expect a double-digit growth in top line in this segment and then strong outperformance on the EBIT side, thanks to the scalability of our business models and the progress in restructuring of Value AG.

So next — the new segment Financing platform. So everything what we do in, let’s say credit business in the housing sector, corporate finance growth of the German Mittelstand and personal loan business for consumers. Here we start with the housing sector. Something which is pretty linked to the home ownership world. So this is the housing industry, which is serving the lowest third of the market. So social housing, where we are historically strong in financing it, but started to develop it as well software as a service platform for them to operate their whole business on it. So to manage their portfolios, the household stock, the leasing process as well as the financing process, as you can imagine, because this is something we are especially interested in.

So let’s start with the brokered volume of loans, slightly up from last year, which is not an interesting news. The interesting news is that after two devastating quarters, we are back to normal here in the last quarter. So we saw in 2023 a good first and a good last quarter. The reason for the good last quarter is that this industry reacts on interest rate changes immediately. So they used this 1% lower interest rates before Christmas to refinance what they had in open projects. So to buy some apartment, existing apartment blocks, some small new apartments they plan to build, and some energy efficiency, renewed finance as well.

Still, this is all far below this what would be normal for the sector, especially taking into consideration that a couple of hundred thousand of units for social housing are missing here in German metropolitan areas and that there is a couple of hundred billions to be invested in renewing the energy efficiency of their current apartment blocks. So that a peaceful end of 2023 on the financing side in the housing industry.

So where we are progressing well is the digitalization of this industry and the underlying platform. We reached 300,000 units under contract for our ERP solution and EUR1.1 billion in deposits for rented apartments on our accounting platform. So we serve them in three ways, and especially the Digitalization part we see as a strong way to connect in a digital way with this industry to enable even better and more smoother financing processes in the future than we do this right now by an integration of DAP system with our portfolio management system, where you can do all your future planning and financing activities within one solution.

As well as solid last quarter for REM Capital in the German Mittelstand. So corporate loan business, we let’s say REM Capital is dependent on the need for capital of these industries and the ability of banks and the willingness and ability of banks to fund them, plus a certain level of state subsidies to improve the probability of projects. And the need for capital is huge in the industry because of all the transitions that are requested by them. The subsidies are not well structured for now and the availability is limited even when this is the way how Europe is subsidizing the transition, it’s — especially in Germany thanks for certain issues around government spending and blockages there something which was a struggling environment in 2023 and as well at the end of 2023 and the beginning of 2024. We see this as a market opportunity for the near term future because all transitions that should take place needs to be financed and in general this capital is available in the banking industry here just the — this industry expects as well that the government is living up to its promises regarding compensation of the partly extraordinary cost the regulation triggers here.

So a good end for the year, but still a challenging market environment as it was for the whole year 2023. Well, last credit segment, personal loan business, something where we outgrew the market for a long time because since 2020 the market is more or less flat, actually even slightly declining because first Corona and now recession, fear and restrictions on the lender side, how much loans they are actually willing to provide to the clients.

So double-digit growth in the last quarter for the platform in total and as well a positive development in our white label business where we provide banks with solution in case that their own credit product is not feasible from risk profile or from a pricing structure that they are able to use our platform to broker third party personal loans and both are growing. The second one is more profitable as you can imagine than adjusted transaction, but in total and outperformance of the market and a good development. And looking forward, something where we expect as well double-digit growth in 2024, even when the market is going to be more or less flat.

We see more and more cooperation with banks, especially in the cooperative banking industry where we teamed up with the central personal loan offering in this industry and provide more wider solution for all credit and pricing interests of consumers. The segment had a strong last quarter thanks to the strong performance of housing industry and corporate loan business in the last quarter. So double-digit growth even in an overall challenging market environment and a strong profitability increase thanks as well to the good cost management here.

Last segment, insurance platform. This is as you know it and as you are aware of this, this is an industry which doesn’t struggle at all. Everything is every year as it was, plus 1%, minus 1% in total premium received by insurance companies. All three parts of this insurance market are more or less stable and the bigger challenge in this industry is to digitalize them when everything is stable, then the need for — the pressure for digitalization is consumer demand and cost pressure, but still, it’s an industry where you have a cultural understanding of nothing needs to go fast, everything will has its time and let’s say we would like to go double digit and keep still struggling with it.

As you aware of this we restructured our activities end of 2022, reduced our investment here and changed our cost structure and we are profitable now in the last quarters and without spoiling it, we keep going forward like this. So, we cover the whole value chain with different entities, well connected to each other. Right now we invest especially in integrating them, reducing technical depths, shutting off systems that we don’t need anymore. So streamlining our platform and keep waiting for our partners to migrate their on-premise solutions to our software as a service solution to our platform. This happens in all the segments with a different speed of progress to be fair.

So low speed only plus 9% faster than the industry, but still below our expectation in Smart InsurTech. So the personal insurance products, standardized insurance products here yeah, let’s say on track, I would say and with the expectation for 2024 and the near term future to incrementally improve the speed here, where we are already faster because the pressure for efficiency is higher is the occupational insurance world where the employer is another complexity driver and the information exchange between consumer insurance broker, insurance company and employer needs to be digitalized.

There are only two reasonable offerings here in the market, two platforms which grew to a certain size ePension on one of them and was able to improve the premiums under management to 42% last year. And we can be certain that 2024 and 2025 will see as well a significant double-digit growth thanks to new signed contracts in the second half of 2023, for instance by the largest German intermediary organization, DVAG, and additional insurance brokers which are specialized in the industry world which starts to use e-Pension as well.

So this is, you can say in a scalable bill phase already this part of our platform and our business. So delivering growth well. So new early stage, you can say Corify, we developed it in the last two years, something where we still spent a significant small amount of money and loss in 2023, got their first clients. First insurance contracts were created using Corify. So first small revenues here. Corify is a platform for industrial non-standardized insurances. So where an industry partner is securing a certain specific risk with a specific contract against an insurance company using an insurance broker. And we are with a huge part of the industry in the development process here for a long time now. And now we saw the first signatures and we see the first transactions. So good start I would say, but still something that needs to prove that it’s able to be scaled. So we hope to see in the next two years that similar to e-Pension, we see dynamically as well on the Corify side and e-Pension and Corify distributing the necessary speed of growth for this segment.

So in general, the segment is still single-digit in top-line growth, outperforming market but so taking market share but on a slow pace. What’s more important for us is we are not having to invest in this segment anymore. It had a strong last quarter. It turned profitable in the whole year 2023 now. So we are out of the investment phase now we are consolidating the technical infrastructure. Certain parts are already scaling well. Looking forward, we expect here double-digit growth in top and bottom line in the midterm for this year can still be single-digit growth, but latest next year it should celebrate when the newcomers start to be more relevant than the flagship Smart InsurTech.

Okay. For the whole group, the most important change in recent history was that we had to perform a cost-cutting program and transition the whole group. We saved EUR35 million with this, what we did end of 2022 and with this in the end saved our profitability for the group. Made it possible as we keep investing in certain promising innovative projects and in the same moment balance our income and cash out so that we are safe going through this whole current environment in the private mortgage business.

Here are some numbers for the total year as well. So I would say most important, adjusted EBIT plus EUR1.3 million for last year. So we stayed profitable in our operational business. When we see the reported numbers, including one-offs, it’s actually EUR12 million higher. So we have a net one-off effects of EUR12 million, especially in the last quarter realized. So you see a strong last quarter. First quarter was positive, second and third quarter where EBIT negative, and the last quarter is again adjusted positive, and with additional strong one-offs. Actually, from a tax side, even additional one-offs on the tax side which brings us to more than EUR20 million in profit after tax restructuring of the whole group as well, released some positive tax benefits and improved from this perspective, our near time future, let’s say tax statements.

Okay. All in all, a transitioning year for Hypoport. As you can imagine, we see us in the fourth stage of development at Hypoport after seven years of startup-like strong growth, we saw already our first crisis environment around the financial crisis where we kept growing and kept taking market share. While it was tough to improve probability, that came a scaling time where we could just expand and improve our top and bottom line and now we are in a new phase where for the second year in a row it’s challenging to be especially profitable. But we keep taking market share in a distressed market environment and as soon as the market recovers, we will massively outperform our recent history when it comes to profitability.

So there we are at the outlook. Core topic for the outlook of Hypoport, short and midterm is how the home ownership market is going to change. As I mentioned already with the uplift in lead generation and consumer interest in mortgages at the end of last year. We saw strong numbers in January and February already. So we see a positive trend. And Bundesbank reported for January close to EUR15 billion in mortgage volume. So multiple three, it’s roughly EUR45 billion. You see, we are close to this green arrow then when it comes to where we expect the first quarter to end from a market side, we take market share. So we outperform this dynamic short term and long term. So talking about long term and everything, what is in the green space. The destruction of the renting market in Germany by regulation is irreversible. For the middle class there is no attractive renting offer anymore in the market. It’s actually more expensive to rent than to buy your first home.

So something which is natural for most of you, I would say in [indiscernible] world, it’s the most natural thing to acquire your homes then you start to earn money. And the same is going to happen here in Germany. Because let’s say we destroyed by regulation, our renting market as Italy or Spain did it 50 years ago, or the Nordics did it 30 years ago. Germany did it now. This will lead to more consumer loans needed to finance houses and homes because renting is not an option anymore. And this will bring us to volumes of above EUR75 billion per quarter. So market volumes which we didn’t see before this massive change in interest rates in the first half of 2022.

Plus there is an energy efficiency agenda on the European and German government level, which triggers investments of consumers of roughly 20 billion pack water for the next 20 years every quarter. So this on top, we see us solid at EUR100 billion [indiscernible] market in the near upcoming future. So the only question is how fast will it go from this where we are right now? So the start of the uplift to the moment when we are back to normal. So on a EUR70 billion level and from there up to EUR100 billion level. And this is in terms of quarters, it may take one, two, three years, yes, but please check your valuation of Hypoport with our current cost structure and with our new discipline in managing profitability, this is something that you need to be aware of when you evaluate Hypoport.

Okay. The most simple chart, but maybe the most important one. How does it look like short term in 2024? Besides this, what happened in the mortgage market? So we expect for the whole segment real estate and mortgage platforms, a positive uplift in market environment together with this, even a more than positive revenue uplift and strong growth in probability because of the scalability of this. Financing platforms and insurance, no relevant impulses from the market side for now, expected. Revenue up because we take market share and in a similar way probability up in both areas thanks to the revenue growth and a good management of the cost structures. In numbers for 2024, it means we expect EUR400 million plus in revenue and an EBIT between EUR10 million and EUR20 million for this year. This compares to EUR1.3 million EBIT adjusted for 2023. So an uplift of EUR9 million to EUR19 million for this year, depending on the market development, especially for private consumers, you can say if the market is slightly weaker than what we see right now and what we report right now this year. So if this dynamic slows down and actually trickles back, then we will be closer to the EUR10 million. If this dynamic keeps staying double-digit and we are getting to a EUR200 billion total market for this year, so EUR50 billion per quarter, then we will be close to EUR20 million in revenues.

If the market is even stronger this year, then it can be as well better. Long-term expect from us that we return to our normal double-digit top-end revenue and EBIT growth, top-line and bottom line. But first, we need to get back to our EUR50 million, which we had already in 2021, from there on, then you will see this development. I’m often asked if we will fast return to our, let’s say, very investive dynamic, that more or less all what improves the probability. We keep reinvesting in new ideas and new products along the value chains. And I can tell you to answer discussion here already at this moment, that for the next years we plan to adjust our, let’s say, risk profile and keep more staying focused on probability then on innovation because we saw how massive and how fast our market can change. It was a black swan hit us first time. Next time, when the black swan comes, we want to be certain that we stay profitable even in such an environment. And for this, we changed our risk appetite and our willingness to fast reinvest our profits for the next couple of years.

Okay. So much from my side, I hand back to the moderator if there are any questions today in the English call.

Operator

Thank you. We will now begin our question-and-answer session. [Operator Instructions] And as there are no question registered, I hand over back to the speaker for closing comments.

Ronald Slabke

Okay. This was a quick check. I welcome you to our next call as you’re aware of, it’s in two months, just so 8 weeks. And hopefully, we will talk about solid first quarter numbers thanks to the market environment. And let’s just do it and improve the probability of this company back to normal. So looking forward to share with you the news then in eight weeks and have a nice evening wherever you are right now. Bye-bye.

Operator

This now concludes our conference. Thank you all for attending. You may now disconnect.

Question-and-Answer Session

End of Q&A