Deutsche EuroShop AG

XETRA:DEQ

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Natalie, your Chorus Call operator. Welcome, and thank you for joining the quarterly statement of the first 3 months of 2022.

Business information transparency is very important for DES. 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 the sole Director of Deutsche EuroShop, Mr. Olaf Borkers. Please go ahead.

[Olaf Borkers, executive]

Thank you, Natalie. Hello, good morning from the team of Deutsche EuroShop in Hamburg. With me the call is our Investor Relations team. As you will have noticed, my colleague Wilhelm Wellner is currently taking a break for health reasons. However, he will certainly be listening to us today, and we wish him a speedy recovery. Wilhelm, we wish you all the best.

Thank you for attending the presentation of our results for the first 3 months of 2022 with an update on the situation in our centers, and on the development of Deutsche EuroShop Group. Let's start with a short update on positive business activities even though the situation has changed only marginally since our last conference call on the preliminary figures for full year 2021 6 weeks ago, which many of you have attended. So I do not comment further on Slide 2 and Slide 3.

After 2 financial years overshadowed by the pandemic, we are confident that 2022 will be impacted to a much lesser extent. We expect 2022 to be a transition year on the way to new normal operational as well as in terms of how we deal with the coronavirus. Reliable forecasts are hard to make, however, given the uncertainty caused by the war in Ukraine. In March, rise the relaxations of the corona regulations in our foreign markets were helpful. In Poland, the Czech Republic, and Hungary, there are meanwhile almost no restrictions.

As of today, as you can see on Slide 4, the masks requirement remains in place only in Austria for the time being. In Germany, the mask requirement was last year relaxed in the retail sector at the beginning of April and has been dropped throughout the country, beginning of May. Since then, there's no longer any obligation to wear masks for our customers and salespeople, even though we are currently observing that many people are still wearing masks voluntarily and seem to feel safer at that moment.

What happens in our centers? On Slide 5, we take a look at our footfall. January and February were still heavily affected by severe restrictions in our main market, Germany. Just as a reminder, until mid-February, access to retail was restricted to vaccinated and recovering customers only. This means that you actually had to show your vaccination pass before entering a boutique for example. This was a deterrent for customers, and of course, very complicated for retailers.

Exceptions existed only for grocers and such like. In the first quarter, footfall was nevertheless able to reach a level of 78% of the comparable period pre-pandemic in 2019. Despite invasion of Russian troops in Ukraine and the associated damping of consumer sentiment, footfall rose to a level of 79% in April. In summary, this means people are enjoying the regained shopping freedom and a certain normality. They are returning to the city centers, shopping malls and shops.

Coming to the Retail turnover on Slide 6. Looking at our portfolio at the whole tenant turnover averaged around 83% of 2019 levels in the first quarter, slightly lower at 76% in Germany. It is worth mentioning that the turnover in March developed slightly negatively in contrast to the footfall. This certainly related on the one hand to the fact that people are more afraid for their own income perspective since the beginning of the war in Ukraine than they were at the peak of the pandemic. In addition, the propensity to buy is a record low and rising prices, especially for energy leave less room for consumption.

On Slide 7, you can see our collection ratio since the beginning of the pandemic, which initially followed the pattern of a customer footfall and strongly depending on the lockdown periods. The collection ratio represents the ratio of received to invoice rents, SaaS charges and marketing contributions after corona-related concessions. For 2021 the number was 95%. From the third quarter of 2021 onwards, the collection ratio improved further and is now closely to normality.

In Q1 2022 the collection rate was 99% with only very limited rent concessions granted resulting from some cleanup for 2021. We assume that the values for March and April will also be corrected slightly upwards as experience shows that incoming payments can still be expected here so that we will reach a level of almost 100% too. So far the update on the situation in our centers.

I now come to the financial results of Q1 2022, and we'll start with revenues on Slide 8. This came out nearly unchanged at EUR 52.1 million after EUR 51.9 million in Q 2021. In contrast to the previous year, which was significantly affected by shop closures due to the pandemic, almost all our tenants were able to open their shops in the first 3 months in 2022.

Looking at the bridge, you'll see that Q1 '21 was influenced by temporary legal rent suspensions in Poland, plus EUR 1.6 million. But the protective measures were still in place in the first quarter of 2022 and the continuing effects of the corona pandemic, such as default by tenants and payment difficulties, lower turnover rents as well as longer relating periods and higher vacancy rates mean that revenues are still below the pre-pandemic level.

On Page 9, we show you the development of our EBIT, which increased significantly to now EUR 39.3 million which is a plus of 24.9%. The major financial effects resulting from the pandemic last year was reflected in the allowances for rent received. These allowances were made in relation to realize and/or expected loss of rents in connection with tenants support measures. For example, rent concessions, or in relation to de facto or likely insolvencies. In Q1 '22, these allowances came down to EUR 3.5 million compared to EUR 11.9 million in the first quarter 2021.

I now turn to Page 10 and to the financial result. The financial result improved by EUR 1.8 million or 23.7%. Interest savings of EUR 1.1 million due to several refinancings for our Billstedt-Center Hamburg and our City-Galerie Wolfsburg in June 2021 and an increased at-equity operating profit of plus EUR 2.3 million had a positive impact on the financial result. The minority profit share was EUR 1.6 million lower.

On Slide 11, you'll see that the EBT adjusted for the valuation increased from EUR 23.7 million to EUR 33.4 million, which is a plus of 40.8% due to the high operating result, which was plus EUR 8.6 million. Another positive impact came from interest savings. This amounted to EUR 1.1 million.

Let us look at the operating profit, the EPRA earnings on Page 12. The EPRA earnings were improved by EUR 8.2 million to now EUR 31.3 million. On a per share basis, the EPRA earnings increased from EUR 0.37 to EUR 0.51.

I now come to the consolidated profit of the group on Slide 13. The consolidated result increased from EUR 22.3 million to EUR 24.5 million. The main impact for the change came from a higher result from the standing assets, a plus of EUR 8.1 billion. Furthermore, last year's Q1 valuation result was influenced by the revaluation of an undeveloped plot of land. Correspondingly, the EPS increased to EUR 0.36 to EUR 0.40 in Q1 2022.

Please follow me now to Page 14 and to the development of the FFO, which excludes the evaluation result. The FFO increased strongly from EUR 22.5 million to now EUR 31.3 million or on a per share basis from EUR 0.36 to EUR 0.51. The receivables are still on a more elevated level in comparison to pre-corona, but we are working with our tenants to recover.

I'm now coming to the balance sheet on Page 15, where you will only see small changes compared to the figures of December 2021. Our total assets amounted to EUR 4.3 billion. This is just a change of EUR 22.1 million compared with the reported date of end of June -- sorry, end of 2021. Our consolidated liquidity as of end of March 2022 stands at EUR 356.6 million. That is a plus of EUR 72.7 million in 3 months. The buildup of cash was influenced by the normalization of the payment behavior of tenants.

Total equity, including minorities, increased by EUR 31.1 million. As at the end of the first quarter 2022, current and noncurrent financial liabilities stood at EUR 1.5 billion, which was EUR 2.5 million lower than the end of 2021, influenced by scheduled redemptions.

Noncurrent deferred tax liabilities increased by EUR 4.7 million to EUR 337.7 million. Our equity ratio increased slightly and now stands at a solid 56%, and the consolidated LTV now stands at 29.7%. On a look-through basis, that is the LTV calculated fully proportionally according to the group share in all assets, the LTV now stands at 32.4%, also a continued very reasonable and low level. While earnings and profits are still below pre-corona levels, our balance sheet today is stronger than before corona.

On the Pages 16 and 17, we give you some information on our debt. Approximately EUR 130 million or 8.6% of our consolidated bank loans expire this year. Currently, our consolidated debt bears an average interest rate of 2.08%. The weighted maturity of our loan portfolio now stands at 5.2 years. Including our non-consolidated loans, the weighted maturity of the portfolio now stands at 5.4 years with an average interest rate of 2.05%.

On the right side of Page 17, you will see that we have fixed a loan of EUR 107 million this year. And I'm very happy to tell you that we have yesterday signed a new loan agreement in the amount of EUR 52.2 million for our City-Point in Kassel for a duration of 10 years.

Looking at the digitalization process, in the retail business, on Page 19, 18 of our 21 shopping centers already have this valuable link to the omni-channel world. While the online availability check is now working for more than 1,000 shops and 3.7 million products in the asset e-portfolio, setup and testing of deliveries out of the center is an important task as a preparation for serving the delivery out of the center.

An exciting and promising pilot project is currently underway in a shopping center from the EC portfolio in Hamburg. The digital mall project is now ongoing with 65 centers live in total. You can see an extract of the participating partners at the bottom of the slide.

Right for the start of the summer, we got good news from the Main-Taunus-Zentrum, which you can see on Slide 20. The demolition work for the former Kassel building has been completed. In our last call, we already showed that we are working on a promising solution with an attractive gastronomy and entertainment offer.

In the meantime, we are using part of the site, which is located in the heart of the center for at least 1 year to offer with us a completely new urban lifestyle atmosphere under the name Foodtrucks.365, the right program of different culinary offerings is offered here, which will be constantly changed. The new offer was already very well received in the first days of opening.

Finally, I would like to come to Slide 21 and look at the transaction market and the financing activities. Financing first, as mentioned, we have already agreed with the banks on the EUR 107.4 million loan with 10 years maturity and a fixed interest rate on 2.45% to refinance a loan for our Altmarkt-Galerie Dresden that became due end of March 2022. And as already said, we signed also yesterday a new loan in the amount of EUR 55.2 million for a duration of 10 years for City-Point in Kassel.

Interest rate is 3.81% -- sorry, it's 3.18%. So currently, we are working on 2 additional loans with a total amount of -- sorry, for this year, we are working with one loan with a total amount of EUR 52.1 million becoming due in 2022 and EUR 209 million becoming due in 2023. I'm optimistic that we will fix the new loans within the next weeks and the loan for 2023 in the third quarter this year.

While the number of banks looking at retail or retail real estate financing, for example, shopping centers has decreased, we have received good interest for our refinancings in the market. We continue the regular dialogue with our banks about the impact of the pandemic on our financial covenants. Until the reporting date, all our financial covenants were met.

The transaction market has been not surprisingly in the given situation rather dry. However, there are signs that the transaction market is slowly coming back, even though it is currently again affected by the terrible Ukrainian war. The shopping center, Boulevard Berlin, was sold end of 2021 and Gera Arcaden in Gera, Germany in the first quarter 2022, at as we referred, fare prices. If the impact of the Ukrainian war on investors and their financing banks stays limited, one may expect to see some further transactions. As we hear from the market, some transactions are currently being prepared. The yield differential between shopping center assets and the other real estate asset classes, for example, office, residential and logistics seems to be just too big to be ignored. The spike in interest rates may support the shift of demand among real estate asset classes.

Finally, let's come to the financial outlook on Slide 22. We expect total funds from operations of EUR 1.95 to EUR 2.05 per share for the 2022 financial year, which still will be in our expectation a transitional year on a way to a normality of after corona. Accordingly, we have applied a bit more cautious assumptions on rent write-offs in comparison to pre-Corona times. This forecast again assumes that the pandemic situation can be brought under lasting control without further store clauses or significant restrictions on center operations. A continued uptick in private consumer spending and an associated further recovery of the tenant turnover as well as the predation of recovered high collection ratios.

The war in Ukraine may have a negative impact on consumer behavior, supply chains and ultimately our business. This note has been reflected in our forecast as the potential impact cannot be estimated at present. We do not see it in the figures yet. After the attended fixing of the refinancings 2022 and 2023 this year, no further loans fall due before 2025. It's only EUR 58.3 million in September.

Ladies and gentlemen, we remain optimistic as before, even though there's still some way ahead of us. So far my presentation. Thank you for listening. I'm happy to take your questions now. Operator, please take over.

[Operator]

[Operator Instructions] The first question is from the line of Markus Kulessa from Bank of America.

[Markus Kulessa, analyst]

I would have 3 questions. You want me to do them one by one or all at the same time?

[Olaf Borkers, executive]

Yes, just one by one is the best way I think, Markus.

[Markus Kulessa, analyst]

Okay. So the first one is on the guidance for the full year. If I just annualize your Q1 EPS or FFO, this would imply no further improvement in the following quarters. It is due to a conservative view or is there a specific reasons, which would mean your especially H2 would be then below last year?

[Olaf Borkers, executive]

I think it is the most realistic view which we have -- we had said that we have a cautious look on Corona, and we have the impact currently not seen from the Ukrainian war, but we still feel very comfortable with this forecast. We have got a new forecast from ECE after the first quarter. And so we still can stick to this forecast. I think it's the most realistic view.

[Markus Kulessa, analyst]

The next one is on the like-for-like growth, which was flat. If I look at your gross rent in Q1, I wanted to know what the indexation was in Q1 because I suppose it was positive. And what has been the effect compensating on the other side?

[Olaf Borkers, executive]

Our inflation, our indexation is every 2 years. So the impact is not very big in the first quarter 2022. It's roughly slightly below 1%. We will see, hopefully, a bigger impact in the coming 9 months if inflation is still very high. But at the end, that is also what we have to see, indexation is very helpful for us, but we will see at the end whether we can push this through with our tenants over the time.

[Markus Kulessa, analyst]

Then on if you have -- if you can share how your valuers will take into account or take generally into account the rising rates? And a bit related question, you said you saw fair prices for the transactions in the market, maybe you have an idea of the yields for the recent transactions like Gera Arcaden?

[Olaf Borkers, executive]

Yes. These are all market rumors. And so I do not want to comment on deals of third parties. You have to ask Unibail-Rodamco. It's what we have heard, we feel very comfortable with our valuation, for example, for the Rathaus-Center in Dessau, which is very comparable to the Gera Arcaden. So we see -- that's the reason why we call it fair. And also Boulevard Berlin, yes, we have heard a figure, and we also feel comfort with it. But I ask for your understanding that the comment on yields, which haven't been published by sellers and buyers.

When you asked about interest rates, I'm very happy to tell you that we will be able to reduce our average interest rate also this year. We have refinancings already done. Altmarkt-Galerie Dresden the old interest of 3.45%. The new one is 2.45%. That's what we have said to you. Then City-Point Kassel, the old interest rate 2.95%. The new interest rate 3.18%. So it's higher. But on average, I assume that we will be cheaper for all the refinancings in 2022. So our estimate is that our interest payment 2022 will be EUR 2.5 million lower than the payments in 2021.

Regarding the major loan 2023, the actual interest rate, 2.99%. According to the actual indication, we are slightly lower to EBIT, but perhaps it's a little bit equal and then there's no reduction.

[Operator]

The next question is from the line of Thomas Rothaeusler from Deutsche Bank.

[Thomas Rothaeusler, analyst]

Two questions. One on -- I mean, the turnover actually came down most reasonably relative to footfall. And I think you refer to first impact from weaker consumer confidence. I mean, what is your expectation here looking ahead?

[Olaf Borkers, executive]

That's a good question, Thomas. But you're right. In the pandemic, we saw that turnover performed better than the footfall. And now since roughly 4 weeks, it's widely worse. As I said, we currently kind of figure this but we have to be cautious on that. And as also already said, even if inflation is helpful with indexation at the end, we have to see whether we can push through this with all the tenants. Because at the end, the turnover of our tenants is the main topic for paying leases.

[Thomas Rothaeusler, analyst]

Okay. And the second question I do have is actually on CapEx. I mean can you provide any update on CapEx measures? And do you stick to the budget? I think you've said it's EUR 40 million annually. Is that right?

[Olaf Borkers, executive]

Yes. You're right. So we start all our CapEx measures this year or what we have planned for 2021 is now starting. And yes, the figure is still that we want to invest between EUR 30 million to EUR 40 million for more beautification at your service and CapEx in the next years. And yes, that is what we are kicking off now.

[Thomas Rothaeusler, analyst]

Do you...

[Olaf Borkers, executive]

And that is also -- Thomas, let me add that, Thomas. That is also one reason for our high liquidity. We are very cash rich, roughly EUR 360 million. But keep in mind, we haven't done any CapEx in the last 2 years. And we want to spend EUR 30 million to EUR 40 million CapEx per annum in the next years.

[Thomas Rothaeusler, analyst]

I mean do you already send some like some supply constraints with regards to maybe labor or material on refurbishment? Or I mean, it's obviously currently a key topic here in the market and also on construction costs, maybe you can comment.

[Olaf Borkers, executive]

Yes. Indeed, we have to expect this due to the current situation. But perhaps we have also experienced already in 2018-2019 due to other reasons. But currently, we haven't heard from ECE that we get problems, but we have to expect that we can't spend all the CapEx amount, which we are planning, as I said. And that's the reason why I told you that we are hopefully spending EUR 30 million, not the expected EUR 40 million.

[Operator]

The next question is from the line of Manuel Martin from ODDO BHF.

[Manuel Martin, analyst]

Yes. I've actually 2 questions, maybe one by one. First question is on the leasing situation. Could you give us an impression or a feeling how you see the reletting situation in your shopping centers, the decrease of vacancy rate in the future and also the level of rents when you relet vacant spaces? Maybe you could give us some color or feeling on that, please.

[Olaf Borkers, executive]

Yes. At first, we can tell you, after the first 3 months that our reletting results are according to our plan. But reletting is still difficult, especially negotiating lease agreement with the big tenants, or a big fashion retailers is very difficult. It takes a long time, and we have to do a lot to keep them in our shopping centers, and we have to reduce rents. At the end, also due to the full reletting activities reducing vacancy, we believe that we can stick to a rent level like in 2021 at all as a total amount.

Retailers are immediately more optimistic and positive if turnover is running better. So we have expected end of 2021 in the first 2 to 3 months this year that retailers are more optimistic are willing to sign new lease agreements also for 10 years. It's not like you reach in media that's only 5 years. It's not true. It's mostly 10 years. It's very often we see possibility to cancel after 5 years, yes, that's true, but we still have our standard lease agreement with a minimum rent. We only have 1 or 2 lease agreements in our total group, which we have agreed with the tenants only on a turnover base rent. So it's currently better than in the last 24 months.

[Manuel Martin, analyst]

Okay. Second question is it's somehow related. It's on the write-downs of branch receivables allowances. Do you -- what's your feeling there? Can we expect a decrease of write-downs over the remainder of the year?

[Olaf Borkers, executive]

Yes, we have -- we believe that for this year, we have a cautious assumption on that, that is an amount which is half of that what we have realized last year. And also for 2023 and 2024, we see a further reduction in the write-downs. And starting with 2021, we expect normal levels.

[Operator]

So there are no further questions at this time, and I hand back to Olaf Borkers for closing comments.

[Olaf Borkers, executive]

Yes. Ladies and gentlemen, thank you very much for listening, hearing our news, and I wish you a nice and sunny weekend. See you in June at our -- hopefully, in our annual meeting or in our next conference call. Bye-bye.

[Operator]

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