Deutsche EuroShop AG

XETRA:DEQ

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining the Q1 2021 results call. Business information transparency is very important to Deutsche EuroShop. For this reason, this conference call will be recorded and shared on the internet. [Operator Instructions] I would now like to turn the conference over to Mr. Wilhelm Wellner. Please go ahead, sir.

[Wilhelm Wellner, CEO & Member of Executive Board]

Ladies and gentlemen, good morning from the team of Deutsche EuroShop. I'm here on this call with our CFO, Olaf Borkers, and our Investor Relations team. Thank you for joining us for the presentation of our results for the first quarter of 2021 and an update on the situation in our centers. We'll start with the later one.You'll find a map showing the situation in our centers and countries of business on Page 4. The good news is that at least for all of our centers abroad shops beyond the daily goods sector are again open to do business while still subject to some limitations. Our selling client with Austria has been able to open up shops already since 8th of February this year, with potentially more restrictions to fall away mid of May, according to statements made by the Austrian government. Further openings were allowed in Hungary and so April 7 and Poland as of May 3 and in the Czech Republic as of May 10.In Germany, as you will know, if you have followed our reporting in the recent months, a soft lockdown that started at the beginning of November of last year and then was tightened to a hard lockdown mid of December last until today with very few and short exceptions. With the new [Foreign Language] or in English, the Infection Protection Act of the federal government, the German, which became applicable in April. This is extensive and hard lockdown is expected to last potentially longer into -- or even through the second quarter of this year. The store, which is also called the [Foreign Language] or really translated the federal emergency brake is the decision for corona-related business reasons, which is local state government, as long as the indices are below 100 infections per 100,000 inhabitants within a period of 7 days.However, above the number of 100, it is mandatary for the state government to limit business to shops to click and meet, and above that number of 150 to click and collect only. At the local state levels, their exists, unfortunately, a variety of mandatory complex and sometimes confusing regulations, cash requirements and click & x approaches. By no means a gloried performance of the German politicians on various levels of the administration.Overall, this high level of restrictions led to the situation that stationary retail was and still is very limited. And in most cases, the click and x concepts were hardly profitable so far for the stationary retailers.So we will have to continue to weather through the storm a bit longer. And as before, we will focus on limiting the downside for our business and also looking on the upside. And such positive signs of potential release and improvements are there, and we have made a development to our main module for our magazine, which was published alongside our annual report just recently, anticipation, anticipation of the time after corona.People are looking, as observed before, forward to return to normality. What we, and not only we, continually see is that people quickly return to the malls and shops whenever they get the opportunity. It is positive to observe this to happen, even though there are and will be still restrictive restrictions in place for some time, such as the limitation of the number of visitors, mask-wearing requirements or limited gastronomy offerings.In autumn last year, the footfall climbed back to 80% of pre-corona levels and the footfall also improved visibly in the short opening periods in the first quarter of 2021. Fair to say, that these levels were still below their normal levels, given the extraordinary circumstances. We'll find the development of the footfall on Page 5.The long closing period hedged and continue to have a strong impact on the tenant turnover. However, the limited amount of numbers and data reported cannot be analyzed usefully. So the data provided on Page 6 for Q1 '21 are of limited explanatory power, but show the magnitude of the impact. Segments that have been hit more before are again affected high such as textile, where the numbers show numbers as high as minus 70% in turnover, not surprisingly.On Slide 7, you can see our collection ratio, which since the start of the pandemic, which follows through a certain extent the pattern of the customer footfall and also strongly dependent on the lockdown periods. Collection ratio represents a ratio of received to invoice rents, service charges and marketing contributions always after corona-related concessions. For the full year 2020, this number was 89.6%. And for January to April, the number was 67%.So for the update on the current situation in our centers and concerning our portfolio, and I will now come to the financial results for the first quarter of this year.Our revenues are shown on Page 8. Compared to the prior year period, which was still mainly unaffected from the pandemic, the revenues show part of the economic impact of the pandemic. Again, most trends were invoiced according to their respective lease contracts. The only exception in that respect comes from our Polish center, where the specific legal situation led to a temporary suspension of rent for the period of lockdowns, and this amounts to minus EUR 0.8 million. The remainder of the decrease in turnover, that is minus EUR 4.5 million, comes from insolvencies, the loss of turnover base trends and higher vacancies. In total, revenues decreased by 9.2% year-on-year to EUR 51.9 million.Our regional profile of business is shown on the lower right of the slide, with 84% of the revenues coming from our home market in Germany, which is, compared on an international level, unfortunately, most affected by the intensity and duration of the shop closings, at least as far as we can observe that.On Page 9, we show you the development of our EBIT and the major financial effect resulting from the pandemic this year reflected in the high allowances for rent receivable. These allowances were made in relation to realized and/or expected losses of rent in connection with tenant support measures, e.g. rent concessions, or in relation to actual or likely insolvency. Such allowances amount to EUR 11.9 million for Q1. Overall, EBIT decreased by 34.9% to EUR 31.4 million. Allowances for rent receivables have been determined on the basis of agreements with tenants for the lockdown starting end of last year. On other cases, in which receivables were outstanding on the basis of the 50% net rent reduction for the closing periods.Let's come to Page 10 and to the financial results. The financial result was nearly unchanged at EUR 7.7 million, several input factors almost neutralized each other here. Interest savings of EUR 0.8 million and a lower minority result of plus EUR 2.1 million had a positive impact on the financial results. And on the contrary, equity result was EUR 3.1 million lower due to corona-related declines in revenues and higher allowances for rent receivables in our JV companies.On Slide 11, you see that EBT adjusted for valuation came down by EUR 40.8 million to EUR 23.7 million, which is a minus of 41.9%, again, here, the main input factors were corona-related declines in revenues and higher allowances.Looking at the operating profit, the EPRA earnings on Page 12, that means the following: the EPRA earnings declined by EUR 15.4 million to now EUR 23.1 million. On a per share basis, the EPRA earnings decreased from EUR 0.62 to EUR 0.37.Let's move on to the consolidated profit of the group on Slide 13, and such results decreased by EUR 5.7 million to EUR 22.3 million. The main impact here came from a reduced result from the standing assets, which contributed minus EUR 15.3 million and a positive effect from the variation result of plus EUR 6.9 million. Here, low investment cost and a revaluation of an undeveloped plot of land based on an initial sale offer were the major input factors. Changes to other deferred taxes contributed further a plus EUR 2.2 million.And if you want to follow me now to Page 14, you can see the development of the FFO, which excludes the valuation result. And here, you see that the FFO decreased from EUR 38.6 million to now EUR 22.5 million or on a per share basis from EUR 0.62 to EUR 0.36. You'll find the detailed FFO calculation on the lower part of the slide. And it should be also mentioned here again that the FFO is calculated as usually earnings base and therefore, doesn't reflect untypically high receivables outstanding. Cash flow of the company could, therefore, be analyzed by taking into account also the cash collection ratio. And this ratio after legally required or contractually agreed corona-related temporary brand concession was, as mentioned before, 67% in Q1 2021.And now coming to the balance sheet on Page 15. Our total assets amount to EUR 4.23 billion. This is a slight decrease of EUR 7.2 million compared to the reporting date end of 2020. Our consolidated liquidity as of end of March now stands at EUR 244 million. It is even a slight plus of EUR 8 million. Excluding the effects from the drawing of the short-term credit line in an amount of EUR 30 million over the balance sheet date end of last year.Total equity, including minorities, increased by EUR 26.3 million as of the end of the first quarter, current and noncurrent financial liabilities stood at EUR 1.51 billion, which was EUR 34.5 million lower at the end of 2020 due to the scheduled redemption and repayment of the credit line.Noncurrent deferred tax liabilities stood almost at the same level at EUR 327.1 million. Our equity ratio remains at a strong 55.3% and the consolidated LTV announcement at 32.5%. On a look-through basis, i.e. the LTV calculated fully proportionally according to the group share in all assets, the LTV now stands at 35.4%, also continued very reasonable and low level.On the next two pages we give you some information on our debt. Some EUR 600 million of such debt matures in the next 5 years. Currently, our consolidated debt is an average interest rate of 2.17% and the weighted maturity of our loan portfolio now stands at 4.9 years. On the right side of Page 17, you will see that we have fixed a loan of roughly EUR 70 million for our [indiscernible], which is effectively to be refinanced end of June this year, already last year at the rate of 1.80% interest for 10 years.After this status report and the continued impact of the pandemic on Q1 '21 and looking confidently ahead, I want to give you a short outlook on our normal operations and our financing activities. And you will find a summary of such points on the next 2 slides, that is number 18 and 19.Leasing activities were and are, of course, the central key in the current situation. As reported recently, we could keep the weighted maturity of our lease portfolio at around 5 years. This shows that besides the big current challenges, stationery retail has its valuable place in the segment. In the course of the pandemic, we could also prolong lease contracts with many tenants, including our top 10 tenants and also primary dealers, such as Apple, Kaufland or lately, also H&M. Furthermore, we are in negotiations with other major well-known anchor tenants to newly come to our shopping centers in a given area, and in some cases, even relocate from other retail spaces in the neighborhood of our centers. While this, especially in the current situation, is still to be proven and finalized, and it will take some time, it takes -- or it shows that the quality and attractiveness of our assets and locations is existent.Looking at the digitalization and the process in the retail business. We are happy to see and report that our first international center, the City Arkaden in Klagenfurt in Austria, has been connected to the digital mall end of March of this year. Now, 18 out of 21 of our shopping centers have this valuable link to the omnichannel world. While the online availability check is now working for 800 shops and roughly 3 million products in the ECE portfolio, one important next step is testing the delivery out of the center, serving the last mile. The digital mall project is, therefore, ongoing. And now more than 60 centers are live in total. And you can see a summary of the participating partners on Page 19.Looking at the financing activities, we are working on the signing and the disbursement of in total 3 loans, on a proportionate basis amount of EUR 156.4 million. And the due dates for such loans are end of June or end of July this year. Here, we are on track.Given the length of the lockdowns and the unprecedented and extraordinary impact on our business, we are in regular dialogues with our banks about potential impacts on our financial covenants. As of 31st of March, all of our financial covenants were met.Under the current circumstances, it is unfortunately still not possible to estimate the group earnings. Forecast were issued as soon as it is feasible. However, we are looking confidently ahead. And at the end, we are optimist, and as stated before, we are in anticipation. So far my presentation, and I'm happy to take your questions now with my colleagues here.

[Operator]

[Operator Instructions] First question comes from the line of Rob Virdee with Green Street.

[Rubinder Singh Virdee, Analyst of Research]

Rob Virdee here. A couple of questions. Firstly, on your leasing. I appreciate there's very little out there, but could you give me some quantitative numbers on what happened in the first quarter? So for example, how are re-leasing spreads of some of the renewals? And also, where are you with tenant negotiations with rents that have not been paid in the last year? Are you giving concessions to these retailers to extend the leases to get the money in?And perhaps also just on new lettings, I know you say there are -- there's interest for people to join your centers. What type of category of retailers are you seeing that in? Are you seeing some retailers who maybe want to open new physical stores for an increase in footfall maybe in the second half of the year. That's kind of on my first question. Then I've got another one on some kind of the click-and-collect comments you made in your release.

[Wilhelm Wellner, CEO & Member of Executive Board]

Yes. I mean it's just hard to give general applicable numbers on the releasing activities as the quantity is, as you certainly stated, rather low. It's more extensions, yes. And it's really the proof that our anchors stay with us. And to be honest, the top anchors, it's a hard pressure on the negotiations, and it will have some impact on the topline, as you probably can imagine. However, we also extend lease contracts on terms as we had before and continue them. So the problem is that is an average number would potentially mislead any kind of guidance you would try to derive from that. And we cannot be precise enough to give you that at the moment. We have said before corona, that topline -- keeping the top line is the main task for the next year, foreseeing quarters, so several years in the online or omnichannel world that is being developing and we also have said that especially after corona now that we will see some impact on the topline, but we definitely do not see the magnitude, not that far, not as big as you probably see in the U.K. Soon in half a year to put pressure too early on them to repay that. So the recovery ratio of this increased receivables, we'll have to see improve going forward.With the concept of the new tenants that we try to get in our centers, which is normal task, pre and after corona, but we are happy to see that there is interest, even though it will not be that quick that this will be end of this year. I mean, if you move on an anchor tenant, you usually have worked on them for a couple of quarters, put it that way. And have to wait until their lease expire in other locations and then you have to rebuild your center or, let's say, the part where the shop should be to include it. So it will be more midterm, I'd say, a 1- to 2-year process to get them over when we had vacancies and availabilities for them at that moment.

[Rubinder Singh Virdee, Analyst of Research]

Okay. I do appreciate it's difficult to give quantities. So thank you for the color. Just on your remarks in the release yesterday, you said that click and collect and click and meet are rarely profitable for your retailers. And so I just want a bit more detail on that. What kind of gap in profitability do you see from the physical to that click and collect and click and meet? Why is that there's such a big gap there, in your opinion? And therefore -- and the next question is if omnichannel is going to be more of a feature for retail now. What are your retailer tenants doing to close that gap?

[Wilhelm Wellner, CEO & Member of Executive Board]

So first of all, click and collect is a good thing. The problem is, if you only can do click and collect. And just to do open up a shop, you have electricity, you have all the stuff, and then you are open, yes? That if you cannot claim, for example, from the government, the little aid that is available because you're then open. So the overall equation for many of them is not earning money when they do it, but to just keep their contact to their physical customers in a sense, they have to serve them. But the fixed costs are so high you need high frequency. So this is the value of our places, but if these frequencies are reduced by, you've seen the number, 60%, 70% on average, it's not enough to really do that. I mean, they are really, let's say, practical things. I mean, you have -- you're not allowed to get the people into the store.So then you have more door properly per floor. And there you have to install a cash. And then they, again, you have a line for the waiting to do click and collect. So it's really a small relief measure and it's better than nothing. But it's not really something where you can click and meet our test now -- click and meet and test all those concepts. There are so many elements of the individual, let's say, for the individual customer that just don't work to be profitable.Nevertheless, it's being done from some tenants, and they will continue to do. But for many, it's so cost expensive that they -- it's better for them to close down and bring fixed store costs down as much as possible -- sorry, variable cost down as much as possible. Fixed cost, they negotiate with us and others.So what our people -- our customers are doing. I mean we have seen the interest on the omnichannel part by introducing the digital mall. When I say we, it's, of course, doing that for also many other investors where they manage the shopping centers. There was a high interest, but there was also for a certain visible segment, certain reluctancy of tenants to do it or to do it now because it involves investments in their ERP systems and logistic systems and there really -- we could see or we got reported a shift that many of those tenants now have understood, not that it's important but that it's important now, so we see that still or even a further improved interest in the digital mall.The issue is now to bridge the timely gap from deciding that you want to start and then to ramp up your systems like ERP, logistics, to be able to be hooked on, on the system, which is not an issue on, let's say, our end or the ECE end, but you have to run your systems in a way that you can participate. So -- but the interest has increased. The pressure on the tenants, of course, at the moment in investments and effectively introducing them is higher than before. So there's a plus and a negative sign. But as the openings are hopefully not too far away in the normalization, we'll see -- yes, and even increased interest in the digital mall. I hope I covered that.

[Operator]

[Operator Instructions] You next question comes from the line of Thomas Neuhold with Kepler Cheuvreux.

[Thomas Neuhold, Head of Research of Austria]

I have 2 and maybe we take it one by one. The first is on the CapEx this year. Can you give us an update on how much CapEx you plan to spend this year? And specifically, if you did use the lockdown to beautify 1 or the other shopping centers in your portfolio in Germany?

[Wilhelm Wellner, CEO & Member of Executive Board]

Yes, surely. We have said, and this number is roughly what we have planned before that we have a run rate of approximately EUR 30 million a year, which usually -- in CapEx, which usually is front-ended in the planning that is, for example, for this year, we plan EUR 50 million to EUR 60 million and also for the next year. And then it's going down effectively, usually such CapEx because it depends on the decision of tenants and so on -- doesn't show up that high as we plan them, but we want to be prepared to be able to do the investments in a given year.So I mean with the plan that we did end of last year was a number, as I said, EUR 50 million to EUR 60 million, not as a run rate, but for this year and next year. However, we see -- and you will see that in the number that CapEx in the first quarter was rather low because, I mean, the centers are closed. We have some anchor tenants that moved in, like the Kaufland and the A10 and some other activities are going on. But I don't think that we will see the pool number this year. Just again, because the shops are closed and people aren't there, and some decisions are even being delayed for a quarter or 2.

[Thomas Neuhold, Head of Research of Austria]

Yes. Okay. Understood. And my second question is on the investment market for shopping center properties, can you provide some color there? What you see in your core markets in terms of contractions and prices?

[Wilhelm Wellner, CEO & Member of Executive Board]

Yes. As we've said before, the market was rather quiet, but it wasn't 0. So last year, we have seen some transactions in the market, and you probably have also observed them that there was some traffic. The [ Olympia ] was selling something, ECE group was selling something. There was a big center in just the Zurich, one of best in Switzerland that was being sold recently. You probably have seen our big peer, Unibail, who has sold very good shopping centers close to Vienna and Bratislava, reportedly at market or at the book values.So it's good to see that for the prime market, that there seems to be interest again. I heard from another deal that has been transacted in Poland for a secondary city, but also good center. So there seems to be still some appetite probably coming back for a certain quality of assets. I wouldn't call that this is a rebound, but it's some first transactions, and we'll have to see what is and what's coming more and how value adders will take into consideration. But it seems to improve in a certain sense.

[Operator]

And there are no further questions at this time. I would like to hand back to Mr. Wilhelm Wellner for closing remarks.

[Wilhelm Wellner, CEO & Member of Executive Board]

So yes, it would seem there are no more questions. Yes, thank you for following us, also through this crisis for the industry. I hope I could give you some confidence that even after this long, long lockdown in Germany, which is in the numbers, which we'll see a little more in the numbers, but that we are stable enough and positive looking ahead. And maybe you're also following us with our anticipation to a more normal world after corona. So thank you for joining and the questions, and see you next time. Thanks. Bye-bye.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.