Graphisoft Park Real Estate Development European : Quarterly Report 2021 Q2

GRAPHISOFT PARK SE

Interim Management Report - First Half 2021

August 10, 2021

GRAPHISOFT PARK SE

BUSINESS REPORT

FIRST HALF 2021

Dear Shareholders,

The 2021 H1 pro-formanet results, in line with our previously published forecasts, are 2.45 million euros, which is nearly 310 thousand euros higher than the same period of prior year. The epidemic caused by the COVID-19 virus resulted in a protracted economic downturn, while the Park's tenant base, primarily in IT and biotechnology, remained stable. Utilization of office space after a slight decline in the previous year stabilized at 94% from 2020 Q4, while in 2021 Q2 the average vacancy rate in Budapest continued to rise, partly due to the growing office supply. The transformation of office use and the rise of the "home office" caused by the coronavirus has a noticeable impact on the demand for offices, however, no significant space reduction needs have arisen among Graphisoft Park tenants so far, and smaller reductions have allowed to meet growth needs of other tenants.

Today, international statistics show that working from home, despite all its benefits, results in lower productivity than creative teamwork with a personal presence. At the same time, it is a new challenge for many employers to lure workers back to work after the abolition of the mandatory stay at home, and in particular the increasing employee turnover in this context, which is an incredibly high loss for companies at the forefront of innovation. In the Park, on the other hand, we see that after closure, most employees are happy to return to work in a working environment dominated by airy, open spaces and a green environment, which also allows them to meet the new requirement of social distance. This also proves that the architectural concept works, continuing to ensure the profitable operation of the Company.

Based on our calculations, we continue to maintain the previously published forecast for 2021: considering the current level of occupancy, the expected development of operating costs and depreciation, and the level of interest payable on existing loans, we expect 14.5 million euros rental income and 4.3 million euros pro forma result.

In June 2021, based on a resolution of the Board of Directors acting on behalf of the General Meeting, a dividend of approximately 10 million euros was paid out, which meant an additional dividend of 6 million euros from the available funds in addition to the 4 million euros dividend corresponding to 90% of the 2020 pro forma net profit.

The cash from operations and the remaining available cash balance (around 9 million euros at the end of the period) ensure the further safe operation of the Company, as well as the financing of the preparation of certain refurbishments requested by tenants and potential future developments.

Property portfolio and fair value of net assets

At the end of the first half of 2021, the independent valuer estimated the fair value of the real estate portfolio at 241 million euros, which is around 540 thousand euros lower than at the end of 2021 Q1. Inthe second quarter of 2021, the decrease occurred in connection with development areas, as according to the decision of the Pest County Government Office, the latest deadline for remediation of the northern area is December 31, 2022, and which is the responsibility of the legal successor of Fővárosi Gázművek, MVM Next Energiakereskedelmi Zrt. The independent appraiser further reduced the fair value of the plots (similarly to the previous deadline changes), in this case by 760 thousand euro, taking into account the earliest start of possible developments with the new deadline.

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GRAPHISOFT PARK SE

BUSINESS REPORT

FIRST HALF 2021

The fair value of completed and delivered properties did not change significantly (increased by 220 thousand euro) compared to the previous quarter. This is largely due to the fact, that in the first half of 2021 the tenancy of the office park and the utilization of the areas remained stable for the reasons detailed above, despite the protracted economic downturn in COVID 19 and the increasing vacancy rate in the Budapest office market.

The fair value of the entire property portfolio is nearly equal to the fair value of prior yearend. The decrease in fair value due to the further postponement of remediation for the northern development area was offset by the 2021 Q1 acquisition of approximately 1,200 m2 property located between the already built-in South Park I and South Park II southern development areas. This acquired property combined with the plots already owned by the Company will enable the development of an additional 4,000 m2 of leasable office space in the southern area. The transaction represented an increase in fair value of approximately 530 thousand euro in the first quarter. In preparation for the developments in the affected southern areas, the archaeological and territorial planning works have already been completed, so a new development can be launched at any time if required.

The 10 million euro dividend paid in June 2021 reduced the Q1 net asset fair value by approximately 6.5%; the change in the fair value of investment property, the net income and the current loan repayments resulted nearly 145 million euro net asset fair value at the end of Q2 2021.

			[thousands of EUR]
	Dec 31, 2020	March 31, 2021	June 30, 2021
Completed, delivered properties	218,041	217,941	218,161
Development lands	23,100	23,630	22,870
Estimated fair value of the entire property portfolio	241,141	241,571	241,031
Net asset value at estimated fair value	148,653	152,272	144,879
Net asset value at fair value per share (EUR)	14.7	15.1	14.4

Pro forma results

Our "pro forma" financial results for the first half of 2021 were in line with our expectations: Net profit increased by 310 thousand euros, which is around 15%, despite the fact that rental revenue of 7.29 million euros is about by 120 thousand euros, or 1.7% lower than the 2020 H1 revenue. Starting from the fourth quarter of 2020, the occupancy of the office park and, accordingly, the rental income also stabilized, lagging only in the first quarter of this year compared to the same period of the previous year not yet affected by the coronavirus crisis. Net income increased despite a slight decrease in rental revenue, which was due to more favorable development of other income and operating expenses, as well as a significant improvement in financial results. Operating expenses were higher in the comparative period due to the occurrence of one-off expert fees, while expert, advisory and marketing costs budgeted for this year did not occur yet. Most of the current period other income was the result of the rental developments and renovations. Depreciation did not change significantly, while the decrease in net interest expense was the result of combination of two effects: on the one hand, interest payable on declining outstanding capital due to loan repayments, one the other hand interest income realized on forint assets developed more favorably. Additionally, the financial result for the comparative period was reduced by the exchange rate loss due to the significant weakening of the forint.

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GRAPHISOFT PARK SE

BUSINESS REPORT

FIRST HALF 2021

(million euros)	2020 H1 actual	2021 H1 actual
Rental revenue	7.41	7.29
Other income (net)	0.29	0.32
Operating expense	(0.85)	(0.76)
EBITDA	6.85	6.85
Depreciation	(3.53)	(3.56)
Operating profit	3.32	3.29
Net interest expense	(1.18)	(0.83)
Profit before tax	2.15	2.46
Income tax expense	(0.01)	(0.01)
Net profit	2.14	2.45

Forecast

According to our current expectations, revenue will continue to be around the forecasted 14.5 million euros in 2021, at the same level as in 2020. In terms of operating costs, we expect an increase overall, as the significant growth of the Park in recent years necessitates some reorganization of financial management and related IT infrastructure. As a result, EBITDA is expected to decline to 13.3 million euros, the 2019 level. Following the completion of improvements and renovations in previous years, depreciation charge will not change significantly, and is expected to be 7.1 million euros in 2021. By 2021, interest expenses are expected to fall to 1.9 million euros due to continued repayments. As a result of the above, the expected pro forma result in 2021 is 4.3 million euros, which is 130 thousand euros lower than in 2020, mainly due to the expected increase in operating expenses due to the above-mentioned reasons.

(million euros)	2019 actual	2020 actual	2021 forecast
Rental revenue	14.25	14.54	14.5
Other income (net)	0.51	0.59	0.5
Operating expense	(1.41)	(1.41)	(1.7)
EBITDA	13.35	13.72	13.3
Depreciation	(7.13)	(7.09)	(7.1)
Operating profit	6.22	6.63	6.2
Net interest expense	(1.26)	(2.18)	(1.9)
Profit before tax	4.96	4.45	4.3
Income tax expense	(0.02)	(0.02)	(0.0)
Net profit	4.94	4.43	4.3

We are right in our pursuit of the "micro Silicon valley" concept articulated some 25 years ago. Graphisoft Park houses the research and development centers of large international technology companies together with Hungarian startups and educational institutions operating in symbiosis with them.

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GRAPHISOFT PARK SE

BUSINESS REPORT

FIRST HALF 2021

Attracting talent is the key to success in these companies. The high-quality and environmentally conscious human-scale architecture, the uniquely quiet, richly preserved ancient trees on the truly green bank of the Danube, which preserved the wonderful atmosphere of the former Óbuda Gas Works and are surrounded by free space and green dominance have greatly contributed to attracting talent. With these special values, the Park is still considered exceptional in the Budapest real estate market. And in the current situation, when letting employees back from their home office to work is a new challenge for employers, after the mandatory stay at home is lifted, most staff will be happy to return to work in the Park.

Bojár Gábor	Kocsány János
Chairman of Board of Directors	Chief Executive Officer

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