Instone Real Estate Group AG

Investor Presentation • Jun 25, 2020

Instone Real Estate Group AG

Capital Markets Day 2020

valuehome Initiative

1

Presenting Team

Kruno Crepulja

CEO

Dr. Foruhar Madjlessi

CFO

Burkhard Sawazki

Head of Business Development & Communication

Stefan Dahlmanns

COO North Rhine-Westfalia

Agenda for today

• I. Current trading update
• II. valuehome Initiative
  • a) Introduction and rationale
  • b) The INS solution in detail
  • c) Financial implications and outlook

III. Summary and next steps

I. Current trading update

II. valuehome Initiative

• a) Introduction and rationale
• b) The INS solution in detail
• c) Financial implications and outlook

III. Summary and next steps

Q1-2020 Highlights

	 Adjusted revenues: €99.7m (+18.4%)
Q1- 2020 Results	 Adjusted gross profit margin: 29.8%
	 Adjusted EBIT: €18.0m (+14.6%)
	 Volume of sales contracts: €69.4m (+10.5%)

FY 2020 a transitional year – Positive outlook for FY-2021 reiterated

	 2020: Outlook suspended due to current uncertainty in context of Covid-19 crisis
	 2021: Sales target of >€900m-€1,000m reiterated
Outlook	 2021: Net profit guidance of at least €90m introduced
	 Target payout-ratio: 30% of net profit

Corona Virus – Operating Update

No impact on construction activities so far

	Key topics			Instone position
1	Sales			• Institutional: Selected concrete discussions resumed; expect instiutional focus on resi to increase
				• Retail: improving trend for reservation and sales; gradually normalising
2	Construction			• Construction activities remain unaffected from COVID-19 Pandemic • Expect decreasing capacity utilisation in construction industry to result in zero or
				negative CPI with potential benefit for margins of pre-sold INS projects
3	Liquidity			• Aggregate March-30th liquidity reserves of €500m provide substantial financial flexibility
				• Expect to generate substantial positive 2020 cash flow
4	Land Acquisition			• INS branches remain in close dialgoue with all relevant short and mid-term sellers • Purchase option to acquire c €150m GDV project in Rhein-Main exercised • COVID-19 pandemic may trigger incremental land sales (financially constrained resi developers; economically challenged commercial developments)
				• Absence in upward pressure for land prices presens a window of opportunity to acquire attractive projects over the next 12 to 15 months

Sales ratio gradually recovering

Sales ratio (in %) = weekly number of units sold ÷ total number of units on offer (four week moving average)

€5.7bn portfolio - €1.3bn prospective NAV

1 thereof 6.8% of delivered volume of the project portfolio

Prospective NAV (€m) as of 31 March
Expected selling prices of project pipeline (GDV)
- Payments received	-741
- Expected project costs	-3,197
- Net debt	-501
Net Asset Value
Number of shares (m)
Net Asset Value per share

• I. Current trading update
• II. valuehome Initiative
  • a) Introduction and rationale
  • b) The INS solution in detail
  • c) Financial implications and outlook

III. Summary and next steps

We strive to become the No.1 German homebuilder with a view to industrialising products and processes

Mid to long-term opportunity: valuehome

Entering the largest and most under-served residential market in Germany: "valuehome"

Instone's approach

Adding a new pillar to the existing Instone platform based on standardisation, digital processes and significant scale potential with game changing implications for production costs and pricing

Elements

• Modular planning: move from prototyping to standardisation
• Reduce complexities throughout the construction process; introduce lean construction management
• Digital platform including digital distribution channel and configurator standardising client optionality
• Focus on essentials: highly efficient floor plans, minimise costly underground construction
• Maintain high architectural standards with modern designs and strong sustainability marks
• Target increasingly attractive locations in B cities and in the commuter belts

Target customer

• Price points targeted to "lower mid markets" between social housing and Instone's core business
• Focus on institutional investors including municipal housing company's and professional landlords

Key benefits

• Substantially expand Instone's addressable market
• Enter less competitive land market
• Highly scalable, less complex low risk product with significant mid to long-term growth potential
• Improve Instone's economics for existing "social housing" demands and competitive position in the current core business
• Generate strong margins and highly attractive capital return

Addressing the most significant, largely untapped customer group: mid- to lower income households

► Significant customer potential and demand gap for Valuehome product

Notes: * 30% of disposable income

Rental markets in B locations benefit from positive spill-over effects

• Rent levels (in euro / as percent of household income) in Düsseldorf and Köln far exceed rents in B locations
• Conversely, rents in more affordable cities i.e. Mönchengladbach, Duisburg show higher growth reflecting a catchup in prices resulting from spill-over effects
• INS is well positioned to capitalize on these spill-over effects, leveraging its established acquisition network

Demanding challenges for cost-effective housing solutions

Cost efficiency requirements

Simplification of Product

Standardisation of Planning

"Industrialisation" of Development and Construction

Key challenges

Highly fragmented market

General building law and social housing pre-requisites are regulated on state level

Additional municipal statutes exist in each city (e.g. parking spaces)

Highly qualified staff required due to individual prototyping, complex construction process and customer individualisation

Low innovation spirit of construction industry

►Instone´s nationwide platform with long-term experience and in-depth development expertise offers opportunity to fill demand gap for valuehome product

Unrivalled 2,000€/m² total production costs achievable

Land acquisition

Preparation costs

Building costs (-20%)

Selling expenses (-50%) Personnel expenses (-50%)

Planning costs (-50%)

Outdoor facilities

Around 25% cost saving

potential

Ancillary costs

"PROJECT COSTS"

Around 25% cost saving potential

Reduction of total production cost including planning, marketing, sales etc. from ~ 2,800€/m² to c 2,000€/m² - 2,300€/m²

Cost savings by standardisation

• ~50% of selling expenses
• ~50% of personnel expenses
• ~50% of planning costs

~20% reduction of building costs

• Reducing underground construction
• Optimised floor planning
• Standardisation of materials

Further potential

• Prefabrication
• Scalability potential

Considerable savings in project duration resulting in superior project IRR

"PROJECT DURATION"

Time savings

• ~ 6m of planning and approval process
• Up to 12m of construction process

Additional potential

• Prefabrication / industrialisation reaching critical mass in scale
• Type approval

Highly attractive project economics

Project related economics

Project Size	 €30-50m
Target gross margin	 ~20%
Target EBIT margin	 In line with core product
Target IRR/ ROCE	 Exceeding core product

• Standardised planning and simplified execution provides for attractive economics in smaller size projects
• Projects gross margins expected to be lower compared to target margins for INS core product
• Lower margin reflects reduced capital intensity and risk profile of valuehome product

•	EBIT	margin	in	line	with	core	product

• Standardized planning and more efficient / repetitive construction works allow for leaner valuehome plattform vs INS core product
• Acclerated planning, reduced complexity, minimized underground construction as well as sales more geared towards institutions results in improved project IRR and superior ROCE

Notes: * Excluding corporate overhead allocation

Comparison of products

	Traditional Instone Product	Instone Valuehome
Price	 Mid to high price segment  No Luxury  Selling price €4,000/sqm – 9,000/sqm	 Lower to mid-price segment  Positioning between social housing and Instone core product  Selling price up €3,000/sqm – 5,000/sqm
Complexity	 Highly customised  Typically includes substantial underground construction (e.g. parking space)  Medium to high level of customer optionality	 Highly standardised  Minimising costly underground construction (e.g. parking space)  Low level of customer optionality
Location	 Focused on largest and fastest growing metropolitan areas (A cities and attractive B cities)  Mainly targeting coveted inner-city locations	 Focused on B locations in and around metropolitan areas  Certain B cities in commuter belts  Typically well-connected suburban locations
Project size	 Project size >€50m  Preference for development of entire residential quarters; typically including masterplanning process	 Project size >€20m  Less complex projects; lower share of masterplanning processes
Target Customer	 Mid- to high income owner occupiers  Affluent buy-to-let investors  Institutional investors	 Municipal housing companies  Institutional investors  Professional landlords  Affluent buy-to-let investors  To a lesser extent owner occupiers

• I. Current trading update
• II. valuehome Initiative
  • a) Introduction and rationale
  • b) The INS solution in detail
  • c) Financial implications and outlook

III. Summary and next steps

Innovating every step of the development value chain

Target lower cost land in well-defined B locations

Acquisition

1

Apply modular planning process

Optimise procurement of standardised parts and fit out

Construction 4

Introduce lean construction concept

• Targeted institutional block sales or digitalised condo sales

Instone valuehome product will be based on a clearly defined project acquisition profile

• Focus on attractive B locations in and around Instone's current focus markets
• Selected additional B cities in the commuter belts of economic centres and well connected to relevant city centres, benefitting from spill-over effects
• Seize opportunities for permitted land in substantially less competitive markets
• Target neighbourhoods with average household in the mid income brackets
• Reduce share of projects with complex and time-consuming masterplanning processes

► Instone's existing platform is well positioned to drive the sourcing of relevant projects

Illustrative example – suitable valuehome acquisition opportunities around Düsseldorf, Cologne, Bonn, benefiting from spillover effects

Average Purchase Price Condominiums (Düsseldorf vs. B cities)

► Substantially expand Instone´s total addressable market and acquisition opportunities

Innovative modular and highly standardised planning concept Planning 2

• Modular housing groundplan kit
• Gapless BIM-based planning process
• Fully integrated technical planning
• Realtime mass and cost calculation
• Standardised tender documents
• Digital interface to fit-out configurator

► Exceptionally rapid and highly efficient planning process with consistent quality

The modular planning process is the foundation of our new product Planning 2

Illustrative simulation of modular planning approach applied to Project Rottenburg

► INS Modular product uses BIM based standardized planning to reduce time and costs

Intelligent and strictly optimised apartment layouts Planning 2

• Space efficient and compact groundplans
• Small ratio of unused movement areas
• Optimised static structure
• Low technical installation effort
• Consistently simple but solid configuration
• Eliminated unnecessary building parts
• ► High-quality living and all required functions on less square meter

vs.

4-ROOM / 115 SQM

"TAILOR-MADE" "OPTIMISED"

4-ROOM / 89 SQM

Modern, liveable and demand-driven housing product Planning

• Contemporary architectural design
• 100% eligibility as social housing
• High energy standard (opt. state grant)
• Attractive outdoor facilities
• Sustainable mobility concepts
• Preference for eco-friendly materials
• Barrier-free access

2

Simplifying and standardizing elements will allow for more competitive procurement of materials and parts

• Scale effects (higher purchasing power for larger volumes of commoditised products)
• Many identical and prefabricated parts (industrialisation)
• Framework agreements
• Accurate costing: service specifications and tender documents generated by BIMsoftware

► Procurement benefits will further increase as valuehome business is scaled up

3

More easily scalable construction and potential for industrialized production processes Construction 4

• Lean construction process increase of efficiency
• Lower cost risks due to standardisation
• Standardised product leads to continuous improvement process
• Reduction of complexity leads to lower personnel expenses (also after-sale)

Private customers (condos)

Institutional investors looking for rental flats in low to mid-marketsegment

Municipal housing companies searching for social housing

Professional landlords looking for densification of housing stock and "organic" growth options

Larger corporates looking for company housing

Turnkey developments (B2B / B2C)

Potential for strategic partnerships

29 | 25.06.2020

Near term implementation of two valuehome projects

	DUSSELDORF Gerresheimer Landstraße	DUISBURG Dusseldorfer Landstraße
Plot Size:	5,369 sqm	5,463 sqm
Living Space:	5,024 sqm	6,582 sqm
Units:	66 + 28 parking spaces	81 + 70 parking spaces
Type of Usage:	social housing	freehold / rental flats
GDV:	€ 18.2 m	€ 26.5 m
Realization:	2021 / 2022	2021 / 2022

30 | 25.06.2020

I. Current trading update

II. valuehome Initiative

• a) Introduction and rationale
• b) The INS solution in detail
• c) Financial implications and outlook

III. Summary and next steps

Financial targets and outlook

Notes: * Excluding corporate overhead allocation

• I. Current trading update
• II. valuehome Initiative
  • a) Introduction and rationale
  • b) The INS solution in detail
  • c) Financial implications and outlook

III. Summary and next steps

Instone has a clearly defined path to rolling out the valuehome product

INS valuehome is a highly scalable new product based on proprietary modular planning technology

• first step towards industrialising the entire development value chain
• adress the largest end customer segment by income and substantially increase INS's adressable market as well as long term revenue potential

Expect to create a clear competitive advantage for INS

• INS valuehome production costs are unrivalled in the market at €2,000 2,300/sqm
• management believes valuehome product develompent is c 2-3 years ahead of competition

The new product is highly synergistic to the established nationawide INS plattform

• sourcing or attractive projects in and around our current focus markets
• improve economics of social housing sections in our existing projects

Roll out has started – more acquisitions to follow

• INS project pipeline already includes 4 valuehome projects
• acquisition teams have identified > €500m GDV of suitable valuehome projects

Appendix

Illustrative valuehome cash flow profile vs INS core product

1) "valuehome"

pre sale phase	8 month
sales phase	30 month
construction phase	18 month
project duration	36 month

Notarised land acquisition Start of construction Construction completion Start of sales and marketing Sales completion 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2) "Instone core product"

pre sale phase	20 month
sales phase	30 month
construction phase	24 month
project duration	50 month

Cash inflows Cash outflows Sales development Revenue development