Deutsche Konsum REIT-AG

XETRA:DKG

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Deutsche Konsum REIT Q3 2022-2023 Financial Results Call. [Operator Instructions] I would now like to turn the conference over to Christian Hellmuth, CFO; and Alexander Kroth, CIO. Please go ahead.

[Christian Hellmuth, executive]

Thank you, and good morning, everyone. This is Christian and Alex, CFO and CIO of Deutsche Konsum REIT. Thanks for the time and interest in Deutsche Konsum's 9-month figures this morning. We have this morning uploaded our presentation to the website. So for those who cannot join this webcast where we flip through the pages of the presentation, please go to our website, open it, and we are also referring to page numbers so that you can follow us.

As per usual, we just give you a quick overview about what happened in the 9 months. We'll highlight the key issues, and we'll then have time to answer your questions in the Q&A session.

I would then start with Page #4, which is the summary of what happened in the 9 months of the current financial year '22, '23. I will start with the operational business, which was again very strong. As you have seen, the rental income went up by 6% year-on-year to EUR 58.7 million. This was mainly due to a large property portfolio compared to the prior year because of the acquisitions we did in the second half of the prior financial year, but also because of rent increases we did last year and also this year. I will come to that a little bit later.

However, the FFO is down by roughly 15% to EUR 27 million or EUR 0.77 per share. This is because of higher interest costs, obviously, which we have now taken due to refinancings we did lately. The AFFO per share also down by 38% to EUR 0.36 per share. And this is because we also had extensive CapEx measures this year of around EUR 40 million to various properties in order to enhance quality of the properties to reduce vacancy as on. Alex will explain about that a little bit later.

Regarding the rent increases I mentioned, we were able to increase rent by 3.7% per annum just because of the CPI linkages we have. In all, around 85% of our rents are CPI-linked and that also helped. So like-for-like rental growth was in total 3.7%, which is more than EUR 2 million every year, annualized rent. And this is why the annualized rent of the property portfolio we have in place has increased to almost EUR 79 million.

Regarding acquisitions and sales we had in 9 months. We have sold properties for almost EUR 10 million, the biggest one of that was at the DIY store in Chemnitz where we have sold in December for a very attractive yield of 5.7%. But also, we have sold two vacant properties from the Bavaria portfolio we have for an amount of EUR 2.4 million, which is slightly above the book value. This was kind of a clean up measure.

We also have in June notarized the sale of our vacant ex-Real hypermarket in Trier, which was vacant for more than a year now. We expect the transfer of title in the course of next year because some of the conditions of the purchase contract have to be fulfilled against that. [indiscernible] building permit [indiscernible] is on. Maybe Alex will tell a few words about that as well.

On the acquisition side, we were very modest this year. Last acquisition we did was at the beginning of this financial year and the acquisition of a small property in Suhl, which came at a very attractive year. But since then, the market was kind of frozen, nothing happened, and it was just too high spread between bid and asking prices.

And we see the gradual closing of this gap, but not until now. We were disciplined here, haven't acquired, and we guess that this will change soon after the summer break when maybe some sellers might have more pressure to sell their properties until the end of the year. So that's why we think that this could have also good opportunities for us to grow further on.

Regarding the balance sheet, I think here, everything is very stable and solid. ICR, interest cover ratio, is 3.1x the EBITDA, which is very comfortable. LTV went down to 51.2%, slightly down compared to the prior quarter. And it's in line with our actual target of 50%. So here's everything fine, I guess. The EPRA NTA per share, which is the NAV on a share basis, but on a fully diluted share basis. That means, if our 2 alternative quarters would have converted, has risen to EUR 11.37, which is embarrassingly high compared to the low share price we see at the moment.

One note I would like to make is that we have not done our valuation like in the prior years at the end of June because we did last year and then had to make another valuation at the end of September because of the interest hikes we have seen in the meantime. So that's why we have decided because of the volatility of the markets and so on that we, from now, would make our valuation at the end of September. That's why we don't have any valuation results here in our P&L. A little distortion of the P&L, but this will come then in September.

Regarding the debt, the average weighted debt costs, including unsecured and secured debt has increased to 2.8%. This is around 20 basis points above the prior quarter and it's because of the refinancings we did. Until now, we have refinanced around EUR 62 million of short-term debt, which we have paid down or refinanced with other debt. And this was EUR 62 million out of EUR 83 million. That means, until the end of the year, we have to refinance 2 more loans of total EUR 21 million. But I don't see any hindrances or problems here. I think that will happen without any problems.

And in the 9 months, we have refinanced the older loans with new loans we have taken of EUR 67 million, which came in at an average interest of 4.2%. And here, you can see that there's a gap of the interest cost between the old loans we have paid back, which were below 2%. And now we need to take new loans at the level of more like 4%. That's the main reason why the FFO has dropped.

Regarding the tax dispute we have with the Brandenburg Tax Office. As we have announced on July 7, the Financial Court of Brandenburg has decided to follow the alimentation of the tax office more or less and has denied our request to suspend the tax payments, which we have requested until the main topic is judged by a court. So this was very disappointing. And yes, but it doesn't help it, we have to pay taxes for 2016 until 2023 now. We partially have already paid the taxes, but we'll make in the next weeks out of the cash we have.

In the meantime, we have internal discussions with our lawyers and internally and the management and Board and Supervisory Board how to go on with that. Maybe, we will have the chance to get to a higher court where we hopefully get a more objective view on what has happened there. So we try to get to the Federal Court, financial court in Germany, and we will let you know what next steps will happen on this.

Finally, regarding the FFO guidance, we confirm our range of EUR 36 million to EUR 39 million. And yes, now I would like to hand over to Alex, who gives an overview about the portfolio on Page 7.

[Alexander Kroth, executive]

Yes, exactly. Thank you. So jumping to Page 7. I would like to highlight a little bit on the current portfolio development. As Christian just mentioned, we have not done any acquisitions in recent months, which is due to strategic decision under current market conditions. We see that currently property owners are rather reluctant to sell. The sellers who are actively selling right now, especially for the assets we are targeting and which are in line with our strategy, those sellers tend to have some sort of pressure to do that to sell their assets. And yes, we see and we believe that this pressure will rise in the second half of this year.

So we see actually more interesting investment opportunities for us, which are hitting the market. Thus, our pipeline is actually filling quite well. And we are actually letting time play for ourselves, and we are looking for a very interesting second half of the year.

On the other hand, as Christian also mentioned, we have sold a couple of assets, 1 in Chemnitz and 2 in Bavaria, which is actually the most interesting one is the one in Trier, which we notarized in June. There, actually, we had -- due to very strong interest from tenants as well as potential buyers -- so potential tenants and potential buyers were both very interested in this asset. So we were faced with a decision either to redevelopment -- to redevelop the asset ourselves or to sell the assets, and we decided for the latter, as from our point of view in the current market, we thought that this is the more efficient scenario for us. So we found quite a strong party who was very interested in the assets to redevelop it for itself or for themselves. And thus, with them, together, we will plan the next steps to fulfill this contract.

So looking at the portfolio development, there haven't been a lot of changes, but one very specific change is actually the vacancy, which is -- which went down to 10.5%, which is due mainly to the sale or sale of the asset in Trier, which was totally vacant and which is quite large. So this had a quite significant impact on the portfolio.

Another development which is at least as positive is, again, the development of the WALT, which stayed stable. We always like to highlight that while -- as time goes by, the duration of all the contracts in our portfolio and every contract in general, the duration goes down. However, with our active portfolio management, we can keep the WALT stable. And this is remarkable actually because while all of the contracts of the portfolio are decreasing or the duration is decreasing. Only -- yes, only a couple of contracts actually are to be negotiated and to be extended within a quarter.

So with these durations, we are able to maintain the duration on a stable level. So this is always something we'd like to highlight and which is very, very important for our strategy.

So mentioning the active asset development, I actually want to jump to page -- or this brings me to Page -- to Pages 12 and 13 where we have highlighted some of the major redevelopments in the recent quarters. So there, we have done for these assets that you can see here, which is just the selection of properties, we have fulfilled major redevelopments in recent quarters, which actually all have been done in running operations. So the tenants and especially the major -- the main tenants, the grocery stores, they could keep up their operations while the assets were extended, spaces were reorganized and especially also technical installations were modernized.

So this is quite significant because all of the rents could -- were paid full and the locations as such, could keep on running, which is always very important for the customers as well. So yes, these modernizations have been done after long negotiations always with the individual tenants and also in close reconciliation with the tenants, which resulted always in lease extensions, rent increases, also the stabilization of the individual assets because we also now have the potential to rent out further spaces. And which is also very important for our strategy is that with these redevelopments, we have the manifestation of the individual location as a retail location. So this stabilizes our assets in our portfolio for -- in a long term -- on a long-term perspective.

So as on a portfolio level, there hasn't been any further changes that's actually already the conclusion of the current development. But as I said, we are very -- looking forward for an interesting second half of the year up to the end of the year.

[Christian Hellmuth, executive]

Okay. Then, Christian again, maybe I would like to highlight Page 14, which is kind of -- you know that already, those who are familiar with us, we always said that. This is a kind of sensitivity analysis, how the portfolio is evaluated, referred to the current share price. You can see at current share price levels, valuation of property portfolio is around 9.5% yield or 10.5x the annual rent. Everybody can decide themselves whether this is sensible or not.

Then, we'll jump to Page 16, quickly, which gives an overview about our financing structure. I don't want to bore you with a table here on the top left side. I have mentioned the key figures here. Maybe going to the expiry profile, which has changed on the left, bottom side. You can see here that in 2023, we only have to refinance about EUR 20 million. We are here in conversations with banks, and we are very confident that we will refinance this very shortly.

When you look at the bar 2024, here, we have to refinance the senior secured bond of now EUR 36 million. Here, we are already in refinancings. We will swap those funds to our standard debt lenders, which are savings and loans and also corporate banks and so on. We are in good discussions and are confident that we will solve this. And we are also in discussions with bondholders of the corporate unsecured bond of EUR 70 million, which also expires in '24. Maybe, here, the solution could be a mix of paying down chunk of the EUR 70 million and prolong the rest. But that's an idea we have to discuss with bondholders.

On the right-hand side, at the top, you see the current debt allocation or the debt sources we are working with. Here, you can see the light blue box, which are the cooperative banks and also the red box, which are the Sparkasse, the savings and loans. Here, of course, this is not just one bank each. These are multiple banks we are working with under the same group name. And we have very good connections with them and very good [indiscernible]. And yes, this is very solid, stable [indiscernible].

So I think that's it from our side. We would like to stop here and are happy to take your questions now.

[Operator]

[Operator Instructions] The first question comes from Kai Klose from Berenberg.

[Kai Klose, analyst]

Jut a couple of questions for me. The first one, just in order to clarify because you were talking about transactions and the lack of potential investment opportunities. Do you see yourself as a buyer looking ahead or more as a willing seller in the context of having more than EUR 100 million of debt expiries annually in '24, '25, '26 where the financing costs will go up and your net profit and cash earnings will somewhat evaporate given the higher financing cost? Just to clarify on which side of the table you sit as a buyer or as a seller?

[Christian Hellmuth, executive]

Yes, let me answer that. Of course, we are scanning through the markets. We see interesting properties coming in at very attractive conditions, which we haven't seen before. So we, as before, will evaluate every single property, whether this is value-enhancing or not, and then we will decide given also the opportunities we have on the funding side.

You're right, we have to balance this very well. But we want to take the opportunities which will hopefully come. And if we can invest, then we will.

[Kai Klose, analyst]

But how do you want to invest in the context of having upcoming debt expiries? Or to put the other -- the question the other way around, how many properties have you put up for sale and have not been able to execute because you're asking for it. Is that why?

[Christian Hellmuth, executive]

We are not an active seller, but we are approached by potential buyers to -- or who ask for the properties to buy them at very attractive conditions as well. And if we have the chance to buy properties for high multiple as we did before, then we will do. And this also broaden our possibilities to buy new properties, of course.

And on the other hand, as I mentioned, we are in discussions with bondholders and this, of course, will impact the power we have at the end for further acquisitions. But it depends on any negotiations and the outcome we will have here.

[Kai Klose, analyst]

And how many properties does Deutsche Konsum put for sale -- has put up for sale and has not been able to sell yet?

[Alexander Kroth, executive]

Well, we haven't put up any assets for sale actually. So we are not actively selling. So that's the point I made before that sellers right now are facing a lot of pressure. However, the interesting thing is that we were approached regarding individual assets. So we have actually parties who are -- as in the past, who are actually actively buying and who are very interested in our assets, and we are only selling our assets when prices are right, and we are still keeping up our prices -- our price level that we had before.

So with these parties that are interested in the assets, they are still -- they are not faced too much by the current market decision in the financial markets. So there, the prices are also stable. So this is the only scenario where we sell assets, but we definitely see ourselves still as a buying party and buyer.

[Kai Klose, analyst]

2 more questions from my side. First, could you indicate why you decided to change the date of the valuation of the portfolio towards September? Is it that you want to have the CapEx investments completed to see a bit of a stabilization in asset values here or are there any other reason?

[Christian Hellmuth, executive]

No, it's just a technical reason. We had last year, our valuation at the end of June. And until September, which was our year-end, market conditions have completely changed. We have seen interest rate hikes and so on. So our auditors said, okay, they cannot -- at the end of June.

And then we had to [indiscernible] valuation, and we want -- we don't want to do that this year again. That's why we have decided to make the valuation now regularly at the end of September because of the volatility of the markets.

[Kai Klose, analyst]

And the last 2 questions from my side is on the ex-Real in Trier, how much do you intend to spend or need to spend to facilitate the transaction coming to an end?

And the second question on the letting volumes, you mentioned that the WALT remains fairly stable. How much you were able to rent out and/or to extend? And what was the average extension in years as well as the rent reversionary -- rent reversion compared to the prevailing rents?

[Alexander Kroth, executive]

So we don't have any costs regarding the further development of the asset in Trier. So for us, we don't have any costs. This was all on the buyer side. And regarding the extension, that's a little hard to measure because all of the assets or all of the rental contracts, which are in negotiation, of course, have different parameters lying underneath. So you can't really -- or we can't really put a figure on that. But whenever we have higher investments or where we redevelop the asset, the main tenant has at least a lease duration or a new lease duration of 10 years and the grocery stores and the retailers for daily needs usually have a lease extension of 15 years. So that's the lease amount.

Of course, we also then have additional options by the tenants. So all in all, these are usually 3 times 5 additional years. So all in all, that would be then 30 years if you would calculate those options if you take this into your calculation as well, which is usually done by the -- which we don't do in our evaluation, but which is done by the retailers themselves. So this is the time frame they are usually calculating with.

So all in all, I think you asked for our recomputation. So in these redevelopments, we usually -- or currently, we tend to have a yield of 9% on average depending on the individual assets, which is a recomputation for our current investments.

[Kai Klose, analyst]

Yes, last one to clarify. What was the amount of expiring leases in Q3 and you were able to extend or not in Q3? So just, was it 5,000, 10,000 square meters? Or do you have any number on that?

[Christian Hellmuth, executive]

So, Kai, normally we don't [indiscernible] any tenant has reported due to prolonged leases. So normally, if the micro location works for the tenant, then they keep their options and prolong by themselves, and we don't have to spend anything here.

What we have spent is just CapEx to enhance quality of assets, to give motivation to the tenant to stay or to come in newly to the properties. But normally, we don't pay any tenant [indiscernible].

[Operator]

The next question is from Andreas Pläsier from Warburg Research.

[Andreas Pläsier, analyst]

I have two questions. Firstly, on your FFO guidance. You guided EUR 36 million to EUR 39 million. You now stand at EUR 27 million and then you have a weak Q3 figure of only EUR 7 million. What should be the drivers for an improvement in Q4? That's the first one.

And the second one regarding the loans from Obotritia. We have only a small decrease in the third quarter. What are your assumptions regarding repayment until end of the business year because this could be positive for M&A and also for financing?

[Christian Hellmuth, executive]

Yes. So we have confirmed the guidance. Of course, when you compute, then we are -- since we end up at the lower end of the range. But of course, we have a few drivers, which could also be rent increases, of course. This could have an effect on the FFO also in this current financial year, which ends at the end of September, you mentioned.

Regarding loans, we have given to Obotritia. I mean, we have an agreement here with Obotritia that the funds will be repaid until the end of September. We have received collaterals on that to secure our receivables and it's the responsibility of the main shareholder, of course. And we expect that the funds will come until the end of September as agreed.

[Operator]

[Operator Instructions]

There are no further questions at this time. I hand back to Christian Hellmuth for closing comments.

[Christian Hellmuth, executive]

So thank you, everybody. Thanks for your questions. Thanks for your attention. Now we are ready to take your questions afterwards, if you have some. And yes, have a good day.

[Alexander Kroth, executive]

Thank you, everybody.

[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.