Deutsche EuroShop AG
XETRA:DEQ
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Deutsche EuroShop AG
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Ladies and gentlemen, thank you for standing by. I am Esme, your Chorus Call operator. Welcome, and thank you for joining Deutsche EuroShop conference call on the Q1 results 2018. [Operator Instructions] I would now like to turn the conference over to Mr. Wilhelm Wellner. Please go ahead.
Yes, ladies and gentlemen, good morning from sunny Hamburg. This is Wilhelm Wellner speaking, and today it's my pleasure to present you our results for the first three months of the financial year 2018. I'm here together with my colleague, Olaf Borkers, and Patrick Kiss, our Head of IR.As introduction, I would like to start with the operation, that is the retail turnover of our tenants and the split-up by retail segment, which you'll find on Slide 2. Starting with the overall picture, we have seen a plus of 0.9% for the absolute retail turnover of the portfolio with an, again, strong increase of our foreign centers of plus 3.6% and a slight plus of 0.2% in Germany. On a like-for-like basis, our retailers saw in Q1 a plus of 3% abroad and a minus of 0.5% in Germany. That's a total plus of 0.2% for our portfolio on a like-for-like basis.There has been a visible spread between the performance of the various segments. In our German centers, on a like-for-like basis, department stores, plus 2.2%; food, plus 2.7%; sport, plus 2%; health and beauty, plus 1.6%; general retail, plus 2.5%; as well as catering was plus 2.1, performed comparably well, while services stood out positively with plus 4%.On the other hand, fashion textiles saw a rather weak first quarter, with minus 0% (sic) [3%] for the textiles, and shoes and leather saw disappointing minus 9.5%. Having in mind the unfortunate weather conditions, with cold temperatures even well below 0% for long periods of time and snow elsewhere in Germany, even until mid- and end of March, such numbers do not surprise, as it was difficult selling the spring collection, which was already displayed in the stores. We'll have to see whether the summer-like weather conditions in May can make up for the poor result in Q1 in those two segments, which account for 50% of our space and 37.5% of our retailer sales.To complete the picture for the segments, electronics, in comparison to a very strong first quarter 2017, was a growth of 4.7% back then, so now a decrease of minus 2.7%. Finally, our rent to sales ratio stands at 9.2% [after] 9.1% year-end 2017. The good news was that customer frequencies in the first three months were positive. We saw a plus of 0.9% for Germany, and also plus of 1.1% for international centers.Let's get to the financials and start on Page 2 with the P&L. Our results after the first quarter of 2018 look as expected. Revenues increased by 10.5% year-on-year, with the major effect coming from the acquisition of Olympia and Brno, which has been included in the consolidated figures since end of March 2017, and Olympia contributed EUR 5.1 million in this first quarter.Property operating and management costs were EUR 1.1 million higher than in the first three months of 2017 mainly due to slightly higher maintenance costs and non-distributable ancillary costs, as well as write-downs in the first quarter, [just the end here] right on the very low end 2017 overall.The operating and management costs now stand at EUR 5.9 million, and we're on line with our budget. And NOI increased by 9%. Other operating expenses were EUR 500,000 lower than the previous year's level. The decrease resulted from lower due diligence costs in respect of acquisitions. In Q1 '17, we had higher consultancy costs in connection with acquisition of Olympia. As a result, EBIT increased to EUR 49 million, which corresponds to plus of 11%. Net finance costs were EUR 500,000 higher, and now amount to minus EUR 9.6 million. The major effects here will be explained in a few moments when we come to the bridges.So all in all, EBIT, excluding measurement gains and losses, rose by 12% to now EUR 39.5 million, again in particular due to the addition of Brno. The measurement gains and losses consist of the investment costs of now EUR 1.2 million. This number is EUR 500,000 higher than in the first months of 2017, and such investment costs vary over time, depending on the realization status of ongoing refurbishments, constructions, or alterations. However, the investment costs are fully in line with our planning for this year.With cash taxes of EUR 1.7 million, which are EUR 0.6 million higher compared to the first three months of 2017, and another EUR 6.3 million deferred tax to be compared with EUR 5.9 million the first quarter 2017. Consolidated profit increased by 10% to now EUR 30.4 million.For our key figures, which you will find on the next page, that means the following. FFO per share declined slightly by EUR 0.01 to EUR 0.61 in the first three months after EUR 0.62 months before. This is because of the higher number of shares. While additional shares issued in conjunction with the acquisition of Olympia were FFO-accretive, unfortunately, the dilution effect of the conversion of the convertible bond compensated that effect.For the same reason, our earnings per share came down by EUR 0.01 to now EUR 0.49, and April earnings per share remained at EUR 0.60 compared to prior year level. You'll find the detailed calculation of the FFO and EPS on the following two pages.Let's get to our balance sheet on Page 6, which looks strong and conservative as you know it. Our asset base rose by EUR 31.9 million to now EUR 4.7 billion compared to the last reporting date end of the year, end of last year. And this is primarily due to the increase in cash and cash equivalent in an amount of EUR 33.3 million. As at end of March 2018, financial liability stood at EUR 1.5 billion, which was EUR 3.2 million lower than at the end of 2017. Non-current deferred tax increased by EUR 6.5 million to now EUR 446.3 million due to higher regular tax depreciation on the assets.The redemption entitlements of third-party shareholders increased by EUR 1.3 million to now EUR 338.7 million. And our current and non-current liabilities and provisions were reduced by EUR 4.3 million. The major effect here is coming from the appreciation of the negative interest swap values [at] interest rates have increased slightly in Q1.The total equity, including minorities, increased by EUR 33 million, or approximately 1%. And our equity ratio is now strong at 56%, and the consolidated LTV is at 31.5%. On a look-through basis, that is the LTV calculated fully proportionally according to the group share in all assets independent whether they are consolidated or held at equity -- this is a problem of fair view -- is the LTV now stands at 33.6%, also a very reasonable number.On the next page, we give you some more information on our debt. Of our consolidated debt, some EUR 630 million become due in the next five years. We still see potential for some reductions of our interest cost over the next years. Currently, our consolidated debt bears an average interest rate of 2.76%, and such rate came already down significantly in the last years.Given the current interest rate level [and] quotation from banks, we can refinance our debt around 1.75% without any forward cost component in Germany, and in CE around 25 to 50 basis points above that. And our weighted maturity of our debt now also went up, and it stands at a little above six years. That's 6.1 years, to be exact.On Page 8, you'll find a more detailed maturity profile and the corresponding interest rates of the gross pending debt. And as further information on the right, you'll find some contractually agreed [prolongation] and interest rate fixings that we have done in the past already, and those numbers include forward costs. See as an example in the first line an amount of EUR 72 million for Dresden, which we closed at 1.6% for 10 years. Again, these interest costs are already including the forward agreement cost. For Dresden, this effect will only become visible in Q4 this year. Furthermore, on the table at the bottom of the slide, you see that also the non-consolidated loan offers from [the date] point of view, some room for low interest expenses, but not before 2020.We now come to the bridges, starting on Page 9. For the first three months of 2018, revenues came out at EUR 56 million after EUR 50.7 million in the quarter for year before. Olympia contributed EUR 5.1 million to that increase. The base rents of the standing assets were stable overall, and we saw slightly higher penalty payments in the first quarter of this year, that is 0.2 million.Let's come to the financial result on Page 10, starting from the left. In absolute terms, the financial results deviated by EUR 500,000 from the previous year's numbers. And following the steps in this bridge from the left, you can see that the interest cost for the standing assets now amount to EUR 12.2 million, which is EUR 0.6 million lower than in Q1 '17. And this is due to the loan repayments and, of course, the conversion of the convertible bond.Next, you can see the additional interest costs for Olympia, which amount to EUR 1.1 million. The operating result from the other equities was rather unchanged, and the P&L relevant swaps contributed to minus EUR 0.2 million to the change. And the minority profit share increased by the same amount. So all the financial result was at minus EUR 9.6 million.Let's now proceed to the EBT bridge on Page 11. EBT moved up in total by EUR 3.7 million and now amounts to EUR 38.2 million. The major change here comes, again, from Olympia, which contributed EUR 4 million, the standing assets another EUR 0.4 million. [However], the valuation accounted for minus EUR 500,000, and the non-efficient interest rate swaps contributed another minus EUR 0.2 million.Very similar, on the next page, you find the profit bridge. Here again, the biggest effect coming from Olympia, and the individual changes can be explained as follows. Olympia contributed plus EUR 3.5 million. The profit of operations of the standing assets improved by EUR 0.7 million, whereas the valuation after-tax contributed minus EUR 0.4 million in comparison to Q1 last year. Here, the non-efficient interest swaps contributed minus EUR 0.2 million, and other deferred tax minus EUR 0.7 million, all these effects resulting in a total profit of EUR 30.4 million.These were the bridges for the first three months 2018, so that brings us to our guidance, which is presented on Slide 13. We anticipated, as just recently announced, revenues of EUR 220 million to EUR 224 million for this year, and next year revenues should increase to EUR 222 million to EUR 226 million. EBIT should come in between EUR 193 million to EUR 197 million this year, and EUR 194 million to EUR 198 million next year. We expect earnings before taxes and valuation to be within EUR 154 million to EUR 157 million for this year, and between EUR 158 million and EUR 161 million next year.FFO per share are expected to end between EUR 2.35 and EUR 2.39 per share for 2018, and EUR 2.40 to EUR 2.44 for 2019. For the total FFO before cost, EUR 145 million to EUR 148 for this year, and EUR 148 million to EUR 151 million for next year.So far to the numbers and to the first quarter. Let's come to a short outlook on the next page. And looking to the operations, where we are currently rolling out our Mall Beautification and At your Service program, and we have started in five centers, that is in Dresden, Billstedt here in Hamburg, Magdeburg, Rhein-Neckar-Zentrum, and again in Hamburg Norderstedt. And for some of these centers, we expect to finalize those improvements already in the fourth quarter of this year. For others, it will last into 2019. Some visualizations of the approved design studies to be implemented are already included in our Annual Report 2017, which is available. This is just in for those of you who are interested to see what we are doing here in practice.Looking on our debt on the financing side, we are working on refinancings in a total amount of EUR 135 million and are expected to sign this in the course and until the end of this year. And looking on our dividend, we are, of course, really looking forward to pay a dividend of EUR 1.45 after the AGM this year, and we plan to increase our dividend for this year to be paid next year to EUR 1.50, and the dividend for 2019 to EUR 1.55.So far to the outlook. Thanks for listening, and we are now happy to take your questions. Please, Operator, go ahead.
[Operator Instructions] Michel Varaldo, Societe Generale.
I have three questions. The first one is like-for-like rents, which is plus 0.4%. Is it possible to have a split between Germany and the other countries, please?My second question is about the cash tax expenses. They are increasing a lot, by more than 60% in the first quarter. Is it possible to have more color for this year and the next years, if possible?And the last question is about the dividends, the payout increase, of course, with decreasing FFO per share. What is the maximum level for your in term of payout ratio if you compare dividend and the FFO, please? Thank you.
Yes, thanks. I'll start with the first one, like-for-like growth. It's probably a bit boring, but on average, on the standing assets and leaving aside the penalty payments, which are more fluctuating up and down, we saw a slight decrease in Germany, some EUR 200,000, and a slight increase internationally of EUR 200,000, so that nets to roughly plus-minus zero. But in percentage points, this is very, very marginal. So Germany, almost absolutely stable, and a slight increase internationally.The cash tax of EUR 0.6 million, the major effect here comes from Brno also. This is not a tax-transparent entity, and we pay some cash tax. So out of the EUR 0.6 million, EUR 0.5 million approximately comes from Olympia, so this can be explained here.And the dividend, yes, we don't have a maximum level, but we are now a little above 60% payout ratio and want to stay between 60% and 70% as a guidance. And we, of course, have seen now the dilutive effects of the convertible bond, so the FFO per share came down. But it should be developing rather well and stable. We don't have a guidance going beyond 2019, but [in] the level between 60% and 70% for [payout] ratio we feel very comfortable. We'll always judge that when we look at CapEx and other costs and opportunities that we have to -- or what we can make or have to make. I hope that answers the questions.
Georg Kanders, Bankhaus Lampe
When I look at the FFO of Q1 multiplied by 4, then I arrive at a total FFO exceeding your guidance. What are you expecting it to become worse in the course of the year that you stick to your guidance?
As you see, as I just mentioned, there were rather -- I wouldn't call it unusual, but a higher amount of penalties in the first quarter, and you can't just take them, multiply them by 4. So if you subtract them, go to last year's level, and still we have a year to come, yes with the index jump in the rents beginning of the year, and we have to do some realizing. As we have said before, in Germany, it's a little bit tough. Then, you could end up more at the higher end of the range of the FFO, but you're not automatically exceeding that.So it's not that easy just to take it times 4, but it's not bad news what we have here. We saw stable rents. Last year we had slightly decreasing rents for these standing assets. We see if interest rates stay low and the [next] effects coming in here, let's say we are confirming our guidance, and we have to reconsider as the year goes on next quarter, and then third quarter.
And can you mention the amount of the penalty payments in Q1?
Yes, that was roughly EUR 400,000. And last year we had EUR 700,000 overall for the full year. And they are very difficult to plan, yes.
Kai Klose, Berenberg.
Could you indicate a bit more on the letting activities, how much these contracts were fixed at the previous rent levels, or at lower rent levels, and also about the lease lengths? And what is the time preference for those tenants to keep 10-year leases or preference to have a bit of shorter leases? And the same question maybe on H&M. Have they given already some indications how many shops, if and how many shops potentially are going to close that are your shops in portfolio? Thank you.
Yes, I start with the last one, with H&M. No, there's no indication or signal or list, or whatever. We have, of course, [quite of those] shops. To be honest, we expect to extend most of them, but they haven't addressed to us that they want to close, or even earlier close, before maturity. But of course, it's very lengthy negotiations with them.And this maybe is a little bit a hint to -- not a hint, but at least to your first question where you said, I mean, there is no average rule that you could say that's a percentage of lease contracts that have been above, at or below market rent because it all depends on who are the tenants, which is a segment, and at what point in time the center, which is on the re-leasing, has been leased out. Was it more in a boom time or in a down time? So I think we see some effects with bigger tenants. Most tenants had had some problems, like last year's in [indiscernible], where we had to give in a little bit, but the others where we could increase rents nicely, even above inflation. So on average, as I mentioned before when the first question came, it's just a little bit below the base rent we had before in Germany, and it's well above abroad.
If you ask the question a different way, if you talk about your fashion tenants, which is the largest sector in your portfolio, how is the trend there regarding lease lengths and [indiscernible]?
Yes, I'm sorry, the lease lengths I, of course, forgot to answer. Yes, this is where the pressure is the highest, of course. And when you, on average, are more or less the same, and you can increase rents here, this is the sector, especially textile -- not that much shoes, for example, but textile, where the pressure is most. And there, the pressure is probably the highest, of course, with the bigger tenants.And lease lengths, there is a trend with the big anchors, of course, the standard 10 years, that they want to talk about especially cancellation rights, and the terms get shorter. There is not only risk management reasons behind, but also often shops need to be refurbished in shorter periods as the mood and -- for marketing effects they want to properly have the shops refurbished every five or seven years. So there's a trend that's getting shorter.What you read in the press, the Zara statement's only three years, and maybe also H&M. That's not what we're signing, but this, of course, is what they are asking elsewhere, but the standard 10 years with those tenants is, of course, not the easiest way to get at the moment.
[Operator Instructions] Thomas Effler, Oddo.
I just have a question regarding your innovation program. You mentioned the 5 centers for the approval end of this year you expect. Can you remind us what is the CapEx volume for these five centers? And are this all spend in 2019?
Yes. The first volume will be for this, for only Mall Beautification, At your Service, roughly EUR 15 million to EUR 18 million depending. We have not finally decided on each individual measurement, and this is the amount which accounts for our center. But many of those, a lot of portion of that is probably only cash flow relevant only in 2019 returns, then little into next year. We have, of course, a program. We try to speed it up, to have, of course, those effects once we decided to be as quick as possible. So it's front-loaded, but we have to see how fast we get now workers and construction companies or equipment onsite. Because you probably all know, have heard about, that's very high demand for such services in the market, so we cannot really see how quickly we really can get it on the ground.
There are no further questions at this time.
Okay, so if there are no more questions, I think we saw a good first quarter. Thank you for participating and joining and your questions, and I wish you a fruitful and constructive day from Hamburg.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Good-bye.