Hypoport SE (OTCPK:HYPOF) Q2 2022 Earnings Conference Call August 8, 2022 11:00 AM ET
Company Participants
Ronald Slabke – Chief Executive Officer
Conference Call Participants
Operator
Dear ladies and gentlemen, welcome to the Webcast Results Q2 2022 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 via the telephone lines. [Operator Instructions]
May I now hand you over to Ronald Slabke, who will read you through this conference. Please go ahead.
Ronald Slabke
Yeah. Welcome from my side as well for the half year report of Hypoport SE. As you know, we are on a growth track of digitalizing the credit real estate and insurance industry here in Germany. And as always, we kept growing in the first half of the year. We means, our multiple entities in the Hypoport network, a core presence in the German mortgage market platform for the credit industry was heavily growing to a new record of high €120 million in revenue, same with the Private Client segment strong growth, our new segments, real estate and insurance is an increasing level of dynamic and double-digit growth as well.
So, the new record numbers for the first half year, they are supported by all segments. We ended up with a plus of 23%, €260 million in total at the new profit record this 38% increase to €30 million for the first half of this year. This all be achieved in a pretty challenging market environment. It was changing a lot you can say on a monthly basis things changed as the total for the first half of this year, mortgage volume in Germany grew by 10%, so we outperformed this again as a group by double digit.
In general, you can say that in the other markets, the residential property transaction volume may have shrinked in the first half of the year. We don’t have current figures there for now. Last year, it was still plus 8%, but we expect a decline for the first six months, while the insurance business was a stable environment to say.
And with this, we are already a little bit in the environment of — or in the topic of market environment. So what happened around us in the first half year? And then you try to predict the future, how it may go forward from here?
First, I understand and this goes for the first half of the year and hopefully as well for the near-term future. The German mortgage market is not linked to let’s say, general economic environment. You can see here the development of a GDP for the last 15 years, even in a corona crisis where it noted heavily, mortgage volume was pretty stable over the whole time. So it’s not there that Germans finance properties because of prospering economy. They have other reasons.
Another reason, which is not core for the decision to finance in Germany is the interest rate, something pretty different from hundred different markets, even the interest rate for a long time were heavily going down in Germany from somewhere around 6%, 15 years ago to below 1% between 2019 and 2021.
Germans didn’t lend heavily more. They — there is an increase more or less on the level of inflation in the mortgage volume. But because of our market structure, especially, because of the inability to refinance at any moment, we don’t see an inflated market because of the interest rates.
And German don’t tend to buy properties because the interest rates are low or in this case, then the — the rate will be low. They have other reasons to buy and finance properties. So interest rate doesn’t trigger buying and doesn’t trigger refinancing so there is not a strong link between these two indicators, let’s say.
Yes. Next, what you could typically expect is that this rising prices, mortgage volume goes up. And you can say, in general this is true because prices are rising over a period of the last 12 years and mortgage volume went up as well.
But as you see here, not even as fast as the prices were rising and the core reason for this decoupling years that it’s not that the German price dynamic was fired by more and more mortgage volume and more and more transactions, something that you typically see in front of a real estate price bubble.
It was justified by exceeding demand and limited supply. And so the rising prices had an effect on the mortgage volume, but with declining numbers of transaction over the time because, especially, German native spare hesitating to accept this permanently increasing price levels.
While for enough for a long time, fair this Germany was pretty cheap and about mortgages — bought properties and just use mortgages to leverage this. So as well the prices were not inflating the mortgage market. They are not driven by the mortgage market. And you can turn this around. The mortgage market is not dependent on the prices of properties in Germany.
So when this is all not the core link, you may ask what is it then? To understand this, it’s important first to notice that we have a pretty stable market structure when you look on what mortgage used for in Germany.
Roughly one-fourth of the mortgages is used for refinancing every year because you’re only able to refinance even years in Germany and your new duration will be minimum 10 years. So there are no mortgages below 10 years fixed interest rate period in Germany. And only after this time, you were able to refinance. There’s no legal option for you to refinance earlier.
Next comes new construction, new buildings, roughly representing 15% over a long time of the mortgage volume as well pretty stable because the limiting factor here is land for construction, something which is highly regulated here in Germany because we want to keep our municipal areas dense and because of our — especially in environmental protection law, it’s pretty difficult for community to expand and designate new areas for new constructions.
It takes years, if not decades, to do this and limiting of this supply of land makes it more or less impossible even with the high demand side to increase construction and because of this, the share of new mortgage volume going to new construction over a long period with a huge change in interest rates, we are just stable more or less.
Yes, the last and major part is the purchase, so existing homes which are sold from a seller to a buyer, as well pretty stable with a market volume of roughly 50% over the time. As you know already, prices were going up in Germany. So, numbers of transactions declined and the recent German did trust in the price development for a long period even with interest rate below.
So, what triggers Germans and what triggered German in the first half of the year to buy properties, it’s a family issue, you can say. So especially buying in Germany, you do once in your lifetime. You do this when children’s are there, maybe you have to do it again if you divorce and both want new property, very seldom, when you change your job in a completely new area in a new city and you were a homeowner, you may acquire again something.
This is the core trigger for a transaction here in Germany. And while in earlier days, you could, as well easily solve such a trigger events with renting something new and the day half of the society in Germany is still renting properties. It gets more and more difficult to solve it in the renting market because of, you can say, a lock renting market, overregulated, difficult to adjust to a permanent changing society and lots of trigger events in the society.
This happened as well in the first half of the year. With some kicks from the other factors like interest rate and economy and so on. So, in some moments, people were hesitating to act in some they’re desperate to act. For instance, when the interest rates were rising fast and you had an open project, you wanted to buy something, then you were dealing faster with this, at this all we saw in the first half of the year and we ended up with a 10% increase in the market overall.
Looking forward, still then even none of these factors by itself has a determining effect on the size of the German mortgage market. They all together create right now a huge level of uncertainty, how the German mortgage market will look like in the next couple of months.
The – you can say, up until mid-June interest were rising. So, people were desperate to close their transactions. Since then, they came down by roughly 100 basis points, a hold percent already again. So now it’s again that rating is beneficial for you because it got cheaper. In June, for the first time, in German housing market, the prices came slightly down, especially for existing homes, new builds still went up. So, this may as well trigger some hesitation that people hope for better prices, better deals in the future and especially the seller side is willing to wait — sorry, the buyer side is willing to wait. We have this uncertainty about inflation, about energy prices, energy ability. This all creates some uncertainty for all market participants, and for us to predict the near-term future and how the second half of the year will look like.
What is important for you as shareholders, the long-term perspective is clear. Long-term means in the next couple of years, Germany will see a huge net migration because of the huge demand of our industry and at our society for skilled workers, even when we have again a surplus in birth rate. Right now, the boomers are leaving the workforce and they need to be replaced. And with the strong German economy, the periphery of Europe will supply the worker skills and a couple of hundred thousand people, young people will migrate every year to Germany.
This all happened since the European integration started and especially the free labor movement in Europe, we are getting active at 11 years ago. This is the core reason why the whole dynamic in the German housing market changed, while the prices were rising and looking forward, this will stay. So we will see this migration. We will see a huge lag on the supply side, because of our regulated construction site, construction industry and let’s say, and a supply of building land.
We will see that rents will go up, but because of the regulation much to slow compared to the building on construction costs, which are heavily affected by inflation. So the renting market is actually getting less and less attractive. Now the return in the vending market is declining while for new constructions, while on the homeownership on the property price side for home ownership, there’s no regulation and so new supply will focus on this one — this part of the market, while this general squeeze this locked renting market today.
So even for this additional demand side, the only way to supply is the sales occupied homeowner market, the renting market is inefficient to solve this in the near-time future means the next five to 10 years. Under regulation has sharply changed for the renting market here. So this means for the future, we expect a stable and slightly increasing volume of transactions. From today’s perspective, we don’t expect sharp price increases anymore. We see that after this long period of dynamic price development, we reached a typical European level.
Depending a little bit on how the inflation looks like in Europe in the future. German house prices should be in a similar dynamic like the inflation. And hopefully, inflation comes down and as well as the dynamic of the house prices comes down too just a couple of percent. Multiplied both increasing numbers of transactions and stable house prices will lead to a systematically increasing mortgage market on the long run. So we are in a healthy market environment long-term, and we will keep growing beside this by taking market share.
So much about the market environment. What happened in the last half year, how it’s looking in the second half of the year on what is the long-term perspective. Now how does the different segments of Hypoport performed during the first half of the year?
As always, we start with the credit platform and our offers and our ecosystem within the credit industry. Corus mortgages with EUROPACE besides this EUROPACE transact as well, personal loans and the funding part that we have at REM CAPITAL, we have an approach as well to digitalize corporate loan business with German Mittelstand here as in the recent years.
Mortgage business for the first half of the year was up 14%, so we took market share. Less than usual, typically, we took a double-digit market share gain. It slowed down because we had months, where there was so much demand that banks prioritized and let’s say, didn’t take too much third-party mortgages to keep their level of support and the level of service for their own sales channel, while in months where it was less business in the market, the demand for brokered mortgages went up sharp again. So this — but in the first half of the year, there were a couple of months where we had too much supply side, you can say, this slightly slowed us down.
In general, you can say that all sales channels that we support, so mortgage brokers and the free banking groups grew in the first half of the year. And together with them, we were growing in all four segments, actually above market. It’s a broker channel, the most dominant one. We reached now at an consideration of roughly 60%. As I just described, we took market share here, but brokers were under some trouble when there was too much business in the market.
The bank’s cooperative savings banks prioritized. And as you can see as well in our development in these groups because of their debt prioritization even within their supply lines, it’s, let’s say, our speed of adoption there slowed down slightly, plus 29% for the cooperative banks, plus 22% for the savings banks. So when there was too much, they were slowing down. When there was too less, they were not fast enough competitors. They reacted too slow. So in total, you can say they lost market share to private banks in the first – in the first half of the year. From our perspective, our dynamic was affected slightly.
Looking forward, if there is this volatility in the market, this is a perfect USP to sell our solution because the EUROPACE in place for all sales channels, you are much more efficient in not switching on and off or delaying certain applications, but to price correct that you always price in an efficient way for your production line. So, that your credit offices are not in one month overrun and in the next month without work because you are too slow on reacting.
Plus, when you own sales channel is so strong that even your own branches already let’s say, over fulfill your credit offices, let’s say, workload, then you can easily switch on some additional product supply from others and pass it through and broke it. And you are just more flexible on both sides to brief with the market up and down.
And so this USP, we are able to much easier focus on and sell in a market environment like right now with this permanent change on the supply side, then in pretty stable environments where it’s easy for a bank to meet supply and resources in their credit offices.
So next, market personal loan, plus 46% in the first half of the year, strong growth. We are focused on the refinancing side, the more complex personal loan business here in Germany, not a simple stuff, not the point-of-sale business or the card financing.
And the Contract business is a growing market because of as well the prominent changes in economic environment. In good times, people take more loans, consume more and when it gets tough and they need a restructuring and GENOPACE is the right to lose this.
The same that Europace is keep growing as price and risk event tiles for banks. So if their client, their risk appetite that doesn’t fit anymore or their client doesn’t fit to their risk appetite anymore.
They can broker to a third-party. Or if the client doesn’t accept the price, the bank asked for and they can broke it to the third-party and the third-lender and receive a commission. This is a growing offering in this whole personal loan restructuring market and we keep growing here.
Talking about growth, a couple of years ago, we entered the corporate finance market. We acquired REM CAPITAL and an advice company to initiate our marketplace fundingport. REM CAPITAL had a great development in the last couple of years, especially boosted by special programs for energy efficiency for the German by the last government, which were effective since 1st of July last year.
We are still working on this backlog had a great second half of last year, had now a great first half of this year. Now we are waiting for the new government to live up to its promises. Let’s say, the big problems of our times, especially climate change. Now even the energy crises are linked to this demand, huge programs and huge support by government-sponsored subsidiaries for our industry.
And still we are waiting for clear signals from the government side. So for now, we keep advising our clients, preparing them for what’s coming and waiting for the right decisions finally made and not just talked about.
In the meantime, we started funding part. In the first half of the year, we had our first transaction together with TKB, our joint venture partner and REM Capital.
Now, since the 1st of July, fundingport slowly opening for other, sales side partners. So, step-by-step, initiating this marketplace for corporate loans here in Germany. Still early stage, but it’s coming. In total, for the credit segment, it was a record half year as a result portfolio side we’re growing, so no surprise that the total is — it’s a huge success.
And let’s say, we don’t expect this to double this in the second half of the year. There will be a certain level of slowdown from this high dynamic, but we expect like in the beginning of the year that for the total of this year, we’ll see an increase compared to last year’s figures, even then we expect a slowdown in the second half of the year.
For next segment, Private Clients as well mortgage business here in Germany. In this case, a franchise system with roughly 200 franchisees operating branches. We acquire leads online for them, they have physical advisers, which are using EUROPACE to advise the clients and transact mortgages on our behalf.
Dr. Klein was growing by 18% in the first half of the year. It had pretty busy times when there was a lot of business in the market. And the challenge there was to find banks who were keeping their service levels.
In the other side — in the other months when there was not so much business in the market, it was more challenging in the competition. All-in-all, Dr. Klein outperformed the market by, you could say, 8%, 10% market, 80% Dr. Klein. So, keeping the golf track, which is intact now for 20 years — and our five years average — we met exactly our five years average in the first half of the year.
A little bit minus of this environment to acquire new advisers got more difficult. When there’s a lot of business in the market, advisers are too busy to switch to a new employer, to a new franchisee.
In times where there’s not enough business in the market, some hesitate because they fear the risk of a change. So, this plus 2% is below our long-term average. Usually, we were growing by 10% every year. We will try to ramp this up in the second half of the year, but the environment in the first half was not good for the acquisition of new talent. In the end, you can say as well, a lot of competition is there, too.
As a result, Dr. Klein provided record numbers, plus 14% in revenue, slightly less dynamic on the profitability side. Here, you can see that the cost savings linked to pretty digital business, which was — which easily could adopt adjust to this pandemic environment and operate as well remotely. They are declining. So, we had our gatherings again with our franchisees to be more emotionally connected, people are driving more, and visiting each other more. This just cost money in such a system, and we feel this on the profitability side slightly.
So we are getting now close to 50% profitability rate have and we expect to — that this will decline in the future still farther back to a normal level of something around 35% to 40%, in the next couple of years. So let’s see this is heavily linked to the costs of physical interaction within the franchise network.
We will try to keep as much of digital interaction as possible and then we may see even profit levels still above the historic level. So now we come to our growth segments. First, real estate. We are targeting here two client groups, home occupied private residential properties and their owners, and everything what is linked with this. And the institutional housing sector, which is responsible for the social housing renting market here in Germany.
The core strategy in the homeowner occupied area is to use our strong position in mortgages and expand along the value chain, gaining by integrating more and more relevant in the purchase market and the transaction side itself plus adding the value proposition of property valuation which is needed for every mortgage and supplying this integrated in our ecosystem, while this information is as well very valuable for the purchase perspective?
In the first half of the year on the property sales side, we saw strong decline of transaction volume of our clients, which are usually real estate agents, brokers linked to banks. So they lost market share because the total market may have been down, but not as strong as they lost the volume.
You can see here that their approach is to off-line. They are not on-line enough, plus consumer-to-consumer transactions gained as well in relevance in the first half of the year. We with our services help them to compensate both their delay in the digitalization in the online world and as well the fixation on brokerage and not on supporting different types of transactions.
And because of this approach, we were growing by 10% in the first half of the year. So we are more and more needed by our clients to compensate their let’s say, struggling position in the market. And especially when the market gets tough and this was true for the residential housing market here in — in the first half of the year, then our services are even needed more.
On the valuation side, we are — we keep staying on the strong growth track. Volume went up by 17%. We’re still adding clients and increasing the intensity of working together with each of the clients resulting in the double-digit growth of value. So we are on track, you can say.
We keep taking market share here. And with each step of integration with Europace system, it gets more and more value-add service for everyone, for our clients and for us.
Unfortunately, in the second quarter, the German authorities BaFin decided that virtual inspections of properties are not allowed anymore at least for the last five years, they were approved within the corona adoption package for the industry. And now they roll back the whole package and more or less accidentally rolled back as well the ability for virtual inspections as well.
So since 1st of July — 1st of June, we now again need to physically inspect all properties why we were up to 30% in the first half of the year, just virtually inspecting. This is a big issue for us. We really hope that BaFin will consider their decision as soon. In other European countries, it’s pretty normal to virtually expect properties, we learned in the last two years that it’s not riskier, virtually expected that it’s actually as safe as a physical inspection and that banks and consumers like this fast and flexible approach of a virtual inspection.
So we hope that this is sooner or later up until then we have quite an amount of additional costs on the execution side. We had to hire 40 people. We need 40 more cars to do the all traditional variant visit each property and inspect each property physical.
So this is a step back or setback for us, especially on the profitability side, because this is already an area where we heavily invested in digitalization, and such regulatory changes are just unnecessary when they are backwards. So — but it can’t stay long like this, even the authorities can’t stop the digitalization of the credit industry here at this part.
So now we switch to the other side of the property market, the housing market to the institutional business. Here, we saw a strong first half of the year. Housing associations where lending a lot of money in this time of increasing interest rates to finance new construction and renovations new record level for Dr. Klein, plus 28% to €1.3 billion in the first half of the year. And because of the product mix and attractive products that we could offer as long — fixed interest period, revenue went even up stronger to €11.1 million for the first half of the year. It just it’s an amazing performance.
When you think about this that the whole industry still is not — let’s say, it’s still hesitating to fulfill the political a goal to build 100,000 new social homes every year. We are far from this, because the current subsidy structure for social housing is just not in line with the construction cost and the regulated rents. So whole industry is waiting for the government to finance the gap between the construction costs and the regulated price.
And as soon as this comes up, this industry is ready to build tens of thousands of houses — but as long as it stays as it is right now without the necessary subsidies, they are just waiting and let’s say, focusing on other tasks than new social housing.
As a result, the segment delivered a growth, strong growth a 34% organic growth here. This is it shows — step by step it shows that it’s able to be one of the growth drivers of Hypoport in the future. Still we are in a heavy investing phase. So this minus €0.9 million is positively affected by the strong profitability of the financing platform for the housing industry in all other product areas here, we are heavily investing to ramp up our market position and integrate this, especially the mortgage growth to be in the perfect situation and provide a streamlined solution for our clients.
So last segment, Insurance. As you know, we are providing a platform for the insurance industry for — in the meantime now three insurance areas, private insurances. So consumer, broker and insurance companies integrated. Industrial insurances. There it’s usually in corporate, German Mittelstand, again, a broker and a specialized insurance company. And the third market, the employer linked insurance market where there are even four participants, the consumer, the employer, the broker at the insurance company, which needs to be integrated.
In all three markets, we have existing solutions out there. In the private insurance market and in the industry insurance market of on-premise with attract on migration. And in the employee-linked market, we have already a fully online digital solution there.
In the private client insurance business, our platform, Smart InsurTech, we’re growing by 23% and the migrated volume from our existing solutions. So our — let’s say, the total share of migration increased. But still this is a pretty slow process and there’s a lot of IT projects permanently heavily delayed to migrate the on-premise volume, which is still roughly €5 billion to our centralized solution. And then it’s migrated to the centralized solution, then we link this contractual information to the core systems of the insurers. And if we are able to successfully link them via interfaces, we have validated data set in our platform. And by now, 35% of all contracts and the Smart InsurTech database are validated, up from 80% a year ago.
Both processes are greatly slow, how they go forward. And in the sub where you can say it keeps being disappointing. It’s hard work, high investments from our side to force this industry step-by-step on the platform.
And for now, we are focusing our existing clients, which are using our solutions where the migration path is clear and repetitive. So from client to client, we are getting better in the migration. But still, we are struggling to speed up this process.
We are looking for a silver bullet to change this. So permanently, we change our tactic here, but still we didn’t find it. And, yes, keep working in this muddy area and hard work to come forward.
One way to improve is that we are right now in the process of spinning off the industrial business out of Smart InsurTech. In this market, we have a pretty high market share from the perspective of the total market.
Our partners are highly dependent on us and very interested in bringing their competencies and our on-premise solutions together and create a platform. We are in intensive talks with them to create a solution which all is benefiting.
And this project is going pretty well, could be faster as well, but we expect in the second half of the year to start a new marketplace to start the development of a new marketplace here, so that we address a very special market here with a premium volume of €30 billion and very interested partners here of us.
Yes, the last segment, the area of employer linked insurance products, especially pensions. It’s on growth track, 41% up to a year ago. It’s a huge market opportunity for us, heavily under digitalized in this complex world between these four participants.
Still a lot of the market is manual information transfer between these four parties with a lot of errors in between. And step by step, we convince, especially employers that working with ePension is a much more efficient solution for their HR department than dealing with all the insurance companies the manual way.
We gained some pretty interesting client here in the first half of the year with huge numbers of volume pension schemes behind this. And this is an ongoing process of migration then, so that we have a pretty well visibility that this growth track will continue in the next couple of years.
For the segment in total, it means a growth of 24% top line. This includes some inorganic growth from an acquisition of a small broker pool in last year. So this — without this, the pure organic growth is slightly below 10%. This is still below our expectation. We want to see double-digit growth in every entity organically.
And we are still struggling, especially in the Smart InsurTech world with the technical complexity of this insurance market. But let’s say, all in all, we see a progress, our relevance in these three markets is increasing every quarter. And with our approach of heavy investments in long-term B2B business models, we choose to as the right difficult market to be the next B2B lead by us.
Sorry, in the summary, record year because if you have four segments with new record numbers, it automatically sums up to a great start of the year. On a long term perspective, you see this dynamic year growing and that this half of the year is just a prolongation of what we did in the last, more than 20 years now.
Especially on the profitability side, be aware that we keep heavily investing in the development of our platforms and the acquisition of additional transaction volume there heavily in the credit industry, in all product areas there, but as well in insurance and real estate. These investments are the P&L relevant investments is 45 million last year, so the first half of this year will have been in a similar level. So, something close to 25 million in the first half the year be invested already again.
So outlook, when I talked about market environment, I think I made it clear already that it’s really getting difficult right now to predict the near time future, what is certain, even for the near time future that we will have a net migration to Germany. So the stress in the housing market will increase and if it will lead directly to more transactions or if there are other reasons overlapping this fundamental approach with some short term developments, it’s difficult to predict in an environment where you have a war. Where you have a potential upcoming recession. Where you have a lack of energy. Where you have an inflation in European Central Bank trying to counter this, where you have declining interest rates. Again, and then you have an uncertainty about the development of house prices short-term.
What is certain is that because of the higher interest rate level and the regulated renting market that home occupation will go up in Germany. Renting, especially renting a newly built home or a newly acquired home is just not attractive anymore from the investor side, landlord side. And especially because of taxation issues that after 10 years, you can realize capital gains without taxes. There is there an incentive as well for existing landlords to reinvest in a certain moment.
What stays pretty uncertain is how much our new government is willing to live up to the promises and bring efficient subsidiaries and programs to the market, which help which help German Mittelstand to counter the different challenges right now out there. And what we absolutely uncertain is how the Russian aggression against Ukraine will affect via its dependencies German economy here, and what we actually create.
What is certain from our side is we keep heavily investing in our future projects. We keep fully digitalizing the mortgage market and automating their credit decision process with OneClick. We will keep expanding our network and our reach in the personal loan business, fundingport launch, and we will keep bringing this marketplace to life in the second half of the year. We will integrate there’s a residential property market from the transaction via the mortgage under valuation even more and we spin off the industry. insurance in the second half of the year from Smart InsurTech.
So we have a lot of things to do. Market has volatile around us. And because of this, we just stick with our forecast for this year from the beginning of the year, even when first half of the year was very strong and above expectation. And let’s say, we don’t expect right now that the second half of the year will be so easy, but to be fair, we didn’t expect at the beginning of the year as well that the first half of the year will be so far. So — looking forward, there’s a lot of things to do for us, a lot of chances to take. And with our culture, our decentralized structures, we are pretty well able to use a lot of these chances that are offered right now to us.
With this, I would open the Q&A session and hand back to the moderator.
Question-and-Answer Session
Operator
Ronald Slabke
Okay, then, No problem. Let’s assume I answered all the questions already. We will meet us again here in three months after third quarter is finalized and we know what happened in the German market. We will deliver a big progress and we expect to gain market share, however the market will look like in the next couple of months. And we will set the basis for a great year 2023 as well in the next couple of months. So thank you guys for listening. Hope to see you so. Bye-bye.
Operator
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.
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