Deutsche Konsum REIT-AG

XETRA:DKG

Earnings Call Transcript 2021-Q1

[Operator]

Dear ladies and gentlemen, welcome to the conference call of Deutsche Konsum REIT-AG. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Rolf Elgeti, CEO, who will lead you through this conference. Please go ahead, sir.

[Rolf Elgeti, CEO & Chairman of Management Board]

Thank you very much. Good morning, everyone. Thank you for your time and interest. We will be going through the Q1 results of Deutsche Konsum REIT-AG. There is, for those of you who haven't seen it yet, a presentation on our website. And I will be referring to 1 or 2 slides of that presentation. As you know, I do that in telegram style and then leave ample space and time for questions, should there be any. I'd be starting on Page #4 of the presentation, just to go through the highlights of the first quarter. Of course, the first quarter of our fiscal year is the calendar quarter Q4. So what has happened, we have grown the portfolio further. We have acquired 11 additional properties with an investment volume of over EUR 70 million, EUR 73 million, in fact, at an average yield of 9.4%. That's worth noting because, a, it shows you that we can still find deals in this market, although this asset class is becoming increasingly popular. I'll get to that later. So that's the first point. And the second point is that the yield of 9.4% is still very much in line with the yields that we've been acquiring so far. So the first important message that I want to leave with you today is that our acquisition pipeline is good. And we can keep acquiring at the metrics that you are used to from us. The second point worth mentioning in terms of the portfolio is that we've sold one property, not huge, but it's just worth mentioning that we sold the property here in Berlin-Pankow, a discounter that we have had for 2.5 years. We sold it with a yield in place of 4.5%, and we have acquired it with a yield of 9.7%, and there has been no improvement to this asset since we bought it. There was no [ approval ] necessary, but just worth mentioning that there was no CapEx, no asset management improvement. So just to make the point that what we always tell you that we go through a huge pipeline, and we try to work hard and try to find the undervalued assets. This is actually happening. And as can be seen in this particular case, albeit a small one, well sold at a significant premium to where we bought. That's the portfolio. Moving on to the operations. Our rental income was up 32% year-on-year. That's like the quarterly comparison. That, of course, is mainly driven by the acquisitions we've made. I think it's a large number. But of course, it's an easy one. More interestingly, the FFO has grown by 38%, which effectively implies a margin increase by 2% -- 2 percentage points, that is, to be precise. And therefore, the FFO per share has gone up by 26%. So as you see roughly, we've increased the number of shares by approximately 10% over the last 12 months. The FFO has grown by 38%. And therefore, the FFO per share growth was approximately 26%. I'd like to stress this again. I mean it's just a number, but it's just to make the point that the business we are operating in is -- of course, it's retail. So it's a very, very bad word. Of course, basically very resilient, et cetera, et cetera. There's not huge growth potential investment. And still we can produce these FFO rates even on a per share basis, which is simply a function of capital discipline in our acquisition policy and our sales policy and, of course, also the way we manage and we finance. Moving on to the balance sheet. Our balance sheet is still very strong. That hasn't changed our ICRs currently at over 8x EBITDA, LTV just over 50%. And we're just noting here that we are currently taking on new loans. These are senior secured fixed loans. In the last quarter, the lowest cost of debt, we've taken almost 1.18%, and the highest 1.50%. So the likelihood is that our average cost of debt will still fall further from an already quite acceptable 1.9%. And the last point we are making here in terms of the highlights for the last quarter. It's just a sort of verbal observation that we are seeing increased demand for our properties. The number of unsolicited bids for properties has risen significantly in the last quarter and even more significantly since the beginning of the year. So the reverse inquiries for our assets. As you know, our assets, they're all transparent on our website. So you can all see them. But of course, any sort of physical market participants can also see them, and we're increasingly getting offers. So whilst we don't want to guide for anything or even promise anything, I think the one thing I would say though today is that the likelihood of us sort of doing some sort of capital recycling within the portfolio is gradually increasing at the least. So far to the highlights, I'll move on to Page #8, where we show you the portfolio overview. I mean all these metrics, they are -- but I'd like to highlight one in particular here. And this is the WALT, the weighted average lease term. And just to make a point I always tend to make, but it's -- the key thing here is that the WALT has been largely unchanged. I mean it's now slightly up compared to the last quarter from 5.4 years to now 5.5 years. Why is that worth stressing? I mean as you know, the key to our investment thesis is that we acquire assets with medium sort of 5- to 6-year remaining lease terms because many of the German investors on the physical asset side are not very attracted by this and are very risk-averse to lease extension risk. But the point is that, of course, whenever we show quarter-on-quarter that the WALT has not gone down by 0.25, by a quarter [ of a ] year. And obviously, we have been able to extend the leases. And we have -- since inception of the company, we've been able to do this. And so the point here is very simple, is that we are taking one risk, one operational risk, which is the lease extension risk. And we are being compensated for this lease extension risk by an extraordinary high initial yield of between 9% and 10%. And therefore, it's very key to our investment thesis, to our risk management and I guess to our equity story as well that we are able to extend the leases at least sufficiently for the WALT not to drop significantly. And again, in the last quarter, we've done this as in all quarters since inception of the business, but I'd just like to stress this because this is so all important to our investment thesis. And of course, it's also worth mentioning that even in spite of all the uncertainties around COVID-19, we've been able to extend leases to actually overcompensate the natural sort of depreciation of that length. So that, I think, is extremely important and worth noting from that point of view. On Page 9 and 10, we'll show you some more details on the last acquisitions. I mean they are what they are. The yields, I would say, I also mentioned that. But for just the detail, I'll take those questions later on. I'd like to move over to Page 12, which shows you more data on our tenants. And the left side chart, I think, is extremely important to our strategy. It shows you by ownership group, so by leasing counterparty, if you so wish, like how often we have the same tenant again and again across the portfolio, which, of course, is also very key and very sort of intrinsic to our investment policy and our risk management at the end of the day. And you can see how this has expanded again compared to the last quarters and how we're gaining more and more clout with our tenants and to effectively move the relationship from just sort of landlord-tenant to more sort of eye-to-eye sort of partnership level that, in our view, leads to a significant metamorphosis effectively of this asset class because 200 supermarkets at the end of the day is different to owning one supermarket. And that's the point we're trying to make here. On the right-hand side chart, you can see the lease expiry profile. And again, you see there's nothing to worry about. It's fairly evenly spread over the next 5 years. Approximately half the leases are running at 6 years and longer. So we have those significant anchors, again, leading to the low risk of our portfolio, as mentioned before. On the next 2 pages, we've added something to illustrate that over the last couple of quarters, we've been sort of more aggressive on our CapEx policy. So on the CapEx, that is not true. We have not changed our CapEx policy, but what we have done is we spent more CapEx than we would normally do. And so we're detailing here those redevelopment programs that we have. And for illustration purposes, we show you on Page 14 what we've actually done in one particular case, in a case where we finished this. And I think it's worth just running through these numbers just fairly quickly. The -- what we've done here is you see the math summarized in the table. We've spent EUR 2.4 million of CapEx, which is approximately almost exactly the purchase price again. But at the same time, we've increased the rent from EUR 240,000 per annum to almost EUR 0.5 million per annum. But more crucially, we've actually increased the quality of the tenant mix. And even more crucially probably, we also increased the average lease term to almost 10 years now. So we've completely transformed this asset to now a sort of strongly food-anchored asset with a long lease, a high quality and a good layout. And we are still owning this at an unlevered gross yield of over 10%. So ironically, almost exactly unchanged to the purchase. So you could argue it was completely unnecessary to do this because we bought it at a 10% yield and post CapEx, we still own it at 10% yield. However, it's a much lower-risk and much higher-quality property now that is certainly worth much more than being valued a 10% yield. And it's also -- and maybe that shows you something about us and the way we do this, too. But even post the complete redevelopment, we still have over 12% vacancy. I mean the vacancy is down from 18% to 12%. But we haven't reduced the last bit of vacancy because we simply thought it's not economically viable. So we're driven by cash flow returns on investments and not by sort of vacancy uptakes. But clearly, this is a very interesting, I think, example, a very lucrative example of how this money was spent. I'd like to move on to our financial structure on Page 17. I mean basically, there's no news here other than all the numbers have kind of improved a little bit since the last quarter. I mean clearly, at over 8x EBITDA coverage, that interest cover on an EBITDA basis, an LTV of 50%. And don't forget the LTV is based on a fairly low conservative valuation of our books. The -- I think our balance sheet can be very safely considered to be a very conservative one. We have almost no loan expiries this year. And so that also, I think, is worth noting. I mean although I'd almost love there to be some debt that we could refinance at lower rates, but for this year, there's almost nothing. I give the numbers on the -- from the P&L, et cetera, we can go through if there's questions on it, but they are self-explanatory, of course. And just like to finish by saying that we are sort of confirming our guidance of EUR 42 million to EUR 45 million of FFO this year and also for the run rate of FFO, EUR 47 million to EUR 51 million by September, our fiscal year-end. So with this, I'd like to pause, and we're very happy to take any questions.

[Operator]

[Operator Instructions] And the first question we received is from Manuel Martin of ODDO BHF.

[Manuel Martin, Analyst]

Two questions from my side, please. Question one, could you elaborate a bit on the rental situation of your tenant during the pandemic, maybe on rent collection rate problems, maybe a bit of outlook on that? And the second question would be on the CapEx. Having seen the CapEx in the first quarter, do you have an indication for the CapEx for the rest of the year? These are the 2 questions.

[Rolf Elgeti, CEO & Chairman of Management Board]

Yes. Thank you. First, on the rent collection rates, I mean, we have collected slightly over 80% of the January rent. So we're short, a little bit less than 20% of the January rent. However, we are still talking to the tenants and negotiating and cutting deals, et cetera. So our expectation is that the actual rent collection rate will probably improve by, say, half of this delta. So while it's early days and it also, I think, depends on when and how exactly they open and what sort of catch-up effect some of those tenants have and/or may not have, et cetera, et cetera, so we will take a very case-by-case view on how we deal with this. But currently, we are a little bit less than 20% short of the January rent. In terms of the CapEx, I mean, the way we do this is we kind of work very bottom-up case by case. And so we don't have a top-down CapEx planning, but we will judge the project individually. Having said that, sort of the way it looks at the moment and if you add the CapEx that we will likely spend on all our existing revitalization project, you'll get to a range of between EUR 8 million and EUR 10 million for the full year.

[Operator]

[Operator Instructions] So there are no further questions. I hand back to Mr. Elgeti.

[Rolf Elgeti, CEO & Chairman of Management Board]

Great. Well, thank you. Thanks, everyone, for your time and interest. If there are any further questions, let us know. We are around, our CFO, Christian, and myself, to take any more questions. And if not, well, in any case, have a great day. Thanks very much and speak soon. Thank you. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.