Deutsche Konsum REIT-AG

XETRA:DKG

Earnings Call Analysis

Deutsche Konsum REIT's Financial Outlook and Strategy

Deutsche Konsum REIT reported stable operational performance for the first nine months of FY2024, with rental income remaining flat and net rental income showing a slight increase. The company faced an 11% year-on-year decline in FFO due to higher debt costs. Notably, it confirmed an FFO guidance of €27-30 million for the financial year. Key activities included the sale of 14 properties for €5.5 million annually, using proceeds to repay €77 million in debt, and a further sale of five assets. The management emphasizes debt reduction, having refinanced maturing bonds totaling €145.9 million, aiming for an LTV around 58% by year-end.

Stable Operations Amid Rising Costs

Deutsche Konsum REIT-AG recently reported its financial results for the first nine months of the 2024 fiscal year, highlighting stable operations despite rising financing costs. In this period, rental income remained almost flat year-on-year, while net rental income saw a slight increase. The Funds from Operations (FFO) decreased by 11% compared to the prior year, primarily due to higher debt costs. This underscores the impact of increasing financing expenses on the company's profitability.

Strategic Asset Dispositions

In a move to manage debt effectively, Deutsche Konsum REIT successfully sold 14 properties between January and July 2024, generating annual rent income of €5.5 million. The proceeds from this sale, totaling €77 million, were predominantly utilized to repay debt. Additionally, the company is in the process of finalizing the sale of another five assets, further emphasizing its commitment to reducing leverage while maintaining strategic asset management.

Financial Stability Indicators

The company reported a loan-to-value (LTV) ratio of 61.4%, slightly lower than at the beginning of the financial year. The confirmed FFO guidance for the fiscal year is projected to be between €27 million and €30 million, reflecting a cautious but optimistic outlook. The net tangible assets per share are reported at €7.69, indicating slight growth over the year. This data suggests that while the company faces challenges with rising debt costs, it maintains a reasonable outlook for its operational stability.

CPI-Linked Rental Stability

Approximately 68% of rental income is generated from non-cyclical tenants, and a significant 86% of the rents are linked to consumer price index (CPI) adjustments. This linkage acts as a buffer against inflation, contributing to a more stable revenue stream amid fluctuating economic conditions. Although CPI adjustments are slightly lower this year compared to the previous year, this structure provides some resilience.

Debt Management Strategy

The refinancing of maturing bonds totaling €145.9 million was a significant operational highlight, with new instruments differentiated by maturity dates and interest rates. While the average weighted cost of debt is recorded at 4.28%, projected increases in interest rates following the maturity extensions may significantly impact future expenses. Investors should be mindful of potential shifts in financial obligations, especially as some debt instruments will begin showing higher yields next year.

Proactive Measures for Improvement

Management's priority continues to focus on enhancing operational performance, particularly in reducing vacancy rates, which currently stand at approximately 14.3%. The firm aims to maintain an active strategy for portfolio management while being cautious not to engage in sales that would compel fire sales, denoting its focus on preserving value until the market conditions are favorable.

Valuation Insights

Despite solid portfolio valuation indicators showing a fair value of €998.8 million against a share price trading at around €2.37, there is a notable discrepancy between the underlying asset value and current market price. The company’s ability to align its market capitalization with the intrinsic value of its properties remains a crucial point for investors to monitor closely.

Risk Management Outlook

In terms of risk management, CFO Kyrill Turchaninov reassured investors there are no current signs of insolvency, positioning the firm cautiously as it navigates through higher borrowing costs and strategic asset sales. Provisions are made within their mid- to long-term liquidity plan to accommodate potential financial stress without relying solely on anticipated cash inflows from debt repayment structures.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, welcome to the Deutsche Konsum REIT-AG Q3 2023/2024 Financial Results Conference Call. I'm Iruna, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions]

At this time, it's my pleasure to hand over to Kyrill Turchaninov, CFO; and Alexander Kroth, CIO. Please go ahead.

[Kyrill Turchaninov, executive]

Good morning, everybody. My name is Kyrill Turchaninov, and together with my colleague, Alexander Kroth, who is the CIO of Deutsche Konsum REIT, we will be presenting the financial results of the first 9 months of 2024 financial year of Deutsche Konsum REIT.

We will start with an overview on Page 4, which shows us the highlights of the 9 months ending on 30/06/24. There are some events, which happened after the end of these 9 months, which happened in July, and we will touch upon those as well because they are important to understand what happened in the business and how things have developed.

We had stable operational business in the 9 months, and there are some effects, which we have on FFO coming from the higher financing costs. Rental income remained almost flat versus the prior year. There were almost no changes in those periods to the portfolio composition in terms of assets.

Net rental income slightly increased, which was mainly driven to the nonperiodic items in the prior period. And in the current 9 months, we did not really have those nonperiodic items.

The FFO went down, as mentioned, somewhat -- well, by 11% year-on-year and that was driven by higher debt costs, which we are going to take a closer look at later on in the presentation there.

aFFO per share is up, but that is due to the reduction in CapEx compared to prior year. In the first 9 months of the prior financial year, there was substantial revitalization of CapEx investments made. And in this financial year in 9 months, that remained more or less flat. There were no extraordinary investment projects.

In July, we closed a sale of 14 assets -- 14 properties, which was -- the sale was notarized at the end of March in '24. The annual rent is EUR 5.5 million and we received the payment of the purchase price in full. It was closed by the end of July. The proceeds were used predominantly to repay debt in the amount of EUR 77 million.

And we have also notarized additional properties in major smaller portfolio of 5 assets with expecting to close that deal in the near term, perhaps -- well, which is predominantly by the end of August.

It is planned that there will be further disposals that we will be selling some select assets in the future that we are actually looking at those transactions right now, obviously, to realize proceeds to pay down the debt.

An important event took place in June and that was refinancing of maturing bonds in the total amount of EUR 145.9 million. And new debt instruments were issued that mature on 30 September '25. EUR 50 million of these new instruments were repaid already with the sales proceeds of the 14-asset portfolio and that repayment took place in July.

The key KPIs remained solid. And LTV, even though it is somewhat high at 61.4%, as of now slightly lower than at the beginning of the financial year. The plan is to continue to reduce the LTV by selling additional assets and obviously paying down the debt.

The net tangible assets we had per share at EUR 7.69, which is slightly higher than, again, at the beginning of the financial year. The average weighted debt costs are at 4.28%, which includes all debt secured and unsecured.

We are confirming our FFO guidance for the financial year to be somewhere between EUR 27 million and EUR 30 million.

We can now switch to the next page, which is Page 5, where we show some key financial figures. Rental income, which I mentioned already, has slightly increased. There are a couple of factors affecting it. CPI increases, as you might know. Our lease agreements with tenants have -- the majority of them have CPI [ clauses ]. Even though in this financial year, those are somewhat lower, those increases as in the prior years, because obviously inflation was somewhat lower.

Another notable development is investment properties, which were down predominantly because of the revaluation, which took at the closing of the prior financial year. And one asset sale was closed as well.

We can now take a look at Slide 7 , where we have details of our property portfolio. And on the very right-hand side, in the table, we show the pro forma, which is, as of now, includes notarized disposition -- disposals. In the middle, more or less, we have the key numbers for 30/06. So the reporting date, which is 30/06. And we had 183 properties, which are now 164 properties.

Two portfolios are notarized, one has completely closed, the 14-asset portfolio. 5-asset portfolio is still in the process of being closed.

Total fair value obviously declined to EUR 905 million. Net leasable area is close to 100 million square meters -- 990,000 square meters.

Another notable development here is an increase in vacancy rate, which is at pro forma of 14.3%, somewhat higher than where we obviously wanted to have it driven primarily by the fact that the assets we have sold at the 14-asset portfolio were predominantly fully let. So there is obviously something, which the management is going to be working on to improve our occupancy.

Now we can turn to page -- sorry, Page 9, where we show our tenant structure. So 68%% of rent comes from noncyclical tenants and that remains more or less stable over the course of the last year.

We have a breakdown by tenant group on the right-hand side of the slide by -- in the table, where predominantly we have full retail and do-it-yourself stores. What is probably most important here is that 86% of rents are CPI-linked, which helped the company in a higher inflation time. Now it is slightly lower, but still there are CPI adjustments, which obviously helped our rental income.

We can now take a look at Slide 11 where we show a valuation potential of our portfolio. I think this slide we presented in the past as well. So 11% yield is about the same for the shares trading at 11% yield, about the same as 6 months ago. And right in the middle, we are showing current trading of about -- the trading is somewhat higher right now as than EUR 2.37.

But current portfolio is the first line of the table with a portfolio value of EUR 998.8 million corresponds to hypothetical EPRA NTA per share on a fully diluted basis at EUR 7.69. So obviously, there is a substantial gap between that and the current level of trading of the share. So value of the portfolio is perhaps not reflected in the share price to the full extent.

We can now take a look at Slide 13 where we show our debt structure. So on the 30/06, our total debt was EUR 629.6 million. And the interest rates were -- well, a total debt cost of 4.28%, which is obviously an increase versus the 30/09/ 23.

That is driven by a few factors. First of all, the total debt cost is calculated on the reporting date, which is the 30/06. It does include the effect from the new convertible from April this year with EUR 10 million, which carried an interest of 12%. So that obviously is already by itself a substantial amount.

We also have, as I mentioned previously, exchange refinanced the bonds. And on the 30/06, the repayment of EUR 50 million, which took place at the end of July is not yet reflected. So there is this higher effect already included in the 4.28%. Obviously, this is something, which we will be working on in the future.

And as well, if we look at the loan allocation table on the left-hand side of the presentation, we can see that the distribution of maturities has substantially changed versus the last time -- well, from the first quarter presentation. We had EUR 145 million of maturities of fixed interest rates in Q1, EUR 145 million happening in '24. Now that shifted substantially into '25. So for this year, only EUR 24.6 million remain in maturities, however, for the next year with around EUR 250 million of fixed-rate maturities. And certainly, our plan is to refinance, repay and extend those loans.

So in terms of the plans of the management is to -- well, pay outstanding loans, refinance where possible, so obviously, taking care that our LTV does not go any higher. And by the way, with EUR 50 million repayment, which we did at the end of July, we expect our LTV to be probably around 58% or so or maybe slightly below by the time we close the financial year. And also, as I mentioned previously, the plan is to have select sales of assets. But in addition, as already communicated, I think, at the Annual General Meeting, the management remains focused on operational excellence in terms of portfolio management, in terms of asset management, in terms of continuing to execute on the asset level lease up. Certainly, reducing the vacancy rate is a high priority and seeing on what we can do on operational cost side as well.

The graphical presentation on the right-hand side, where we have the pie chart is already including the EUR 50 million pay-down as well as the EUR 27 million of other debt, which was paid from the sales proceeds of the 14-asset portfolio. And that shows us the numbers as of 31/07.

I think this is it for now in terms of the slides that I want to present this time, and we can open the floor for questions.

[Operator]

[Operator Instructions] The first question from the phone comes from [indiscernible] with [indiscernible] Bank.

[Unknown Analyst]

I hope you can hear me.

[Kyrill Turchaninov, executive]

Yes.

[Unknown Analyst]

I wonder whether you could shed some light on the terms of the new bond you have issued at the end of June '24. It was an extension of existing bonds volume around EUR 100 -- what was it, EUR 145 million. I couldn't find anything with regards to the interest you're paying.

[Kyrill Turchaninov, executive]

Sure. There were 3 original bonds. There were 3 original corporate bonds. One in the amount of EUR 40 million with original maturity in March '25 and an interest rate of 4%. And there were 2 additional bonds in the amount of EUR 70 million and EUR 39.5 million, so to a total of EUR 109.5 million, which had original maturity date extended to the 30th of June this year. Those carried somewhat lower interest, I think, than that.

What we have done is we have exchanged these 3 bonds in a total volume of EUR 149.5 million for 2 new bonds, which are different kind of instruments. They are registered bonds, one with EUR 40 million remained with the same interest rate of 4% until the original maturity in March. And the maturity of that EUR 40 million bond is extended to 30th of September '25. And the interest rate from March to September is going to be somewhat higher.

Of the EUR 109.5 million bond, we have repaid EUR 50 million. So as of now, the remaining EUR 55.9 million held a maturity on the 30th of September '25. The interest rate is 8.5% until January '25 when the interest is going to go somewhat higher.

These bonds can be repaid partially or fully at any time, which gives us the flexibility to do that, and this is exactly the plan because obviously, next year, the high interest rates kick in and we have time until then to provide funding or actually to collect financing to ensure that the higher interest rate instruments are repaid first.

[Unknown Analyst]

Could you be more specific on the term somewhat higher?

[Kyrill Turchaninov, executive]

These are different instruments. These are registered, sort of private, if I may call them so, bonds. So somewhat higher is going to be higher than 8.5%.

[Unknown Analyst]

Like double digit? Or what is the new...

[Kyrill Turchaninov, executive]

It will be, well, higher than 8.5%. As I mentioned, those are different instruments. These are not the same corporate bonds that were there before.

[Unknown Analyst]

Is it a secret, the interest rate after the 8.5%? Or why are you so unspecific?

[Kyrill Turchaninov, executive]

It will be higher. It will be -- well, it will be low double digits, yes.

[Operator]

[Operator Instructions] The next question from the phone comes from [ Olov Kretzky ] with private equity.

[Unknown Attendee]

Thanks very much for the insights of this call. Personally, I am very pleased that you could sell 5 more properties at only 1% discount, which is even better than the last sale of 14 at, I think, it was 3%. So great news actually.

However, the interest rate going double digit with the structure of your balance sheet is, of course, not as nice a surprise. So I can assume you are working hard to sell more property before those double-digit interest kicks in. And do you expect them to be sold at a similar low discount?

[Kyrill Turchaninov, executive]

Yes. We are definitely not doing any fire sales. As I mentioned in the presentation, the operational business remains strong and there is no need to do that. The low -- very low double-digit kicks in next year, but obviously on a lower amount of the principal.

So even though it is the goal of the management to pay down those loans as much as possible as soon as possible by orderly select sale of individual assets or smaller or midsized portfolios with at or, well, very low, maybe 1-or-so percent below the book value. So that continues to be the goal of the management.

[Unknown Attendee]

Okay. That's helpful. And second question would be regarding our favorite topic, Obotritia [ LDT ]. So two questions on that, actually.

So again, are you still confident no shares held by Obotritia will have the market -- hit the market in the foreseeable future?

And b, how much of the money has been collected by now and how much is still outstanding?

[Kyrill Turchaninov, executive]

Yes. I cannot speak for Obotritia, what they plan to do or what they do not plan to do in terms of what you're saying, hitting -- shares hitting the market. For that, you obviously have to ask them.

In terms of the debt fund collected. In the 9 months of the financial year, EUR 9.9 million was actually paid by Obotritia on the original loan of around EUR 64 million, which remains at about EUR 54 million plus a little bit still outstanding loan.

[Unknown Attendee]

So basically, half of it was interest and half of it was principal paid back of those EUR 10 million...

[Kyrill Turchaninov, executive]

EUR 9.9 million was paid in total.

[Unknown Attendee]

Yes. That includes interest?

[Kyrill Turchaninov, executive]

That includes some interest, yes.

[Unknown Attendee]

Okay. And do you have any guidance on how this is going to develop from now?

[Kyrill Turchaninov, executive]

Well, obviously, we have an agreement with Obotritia when the loan is expected to be paid in the middle of next year in full. By that time, Obotritia obviously can make prepayments or pay at any time any installments. We will obviously be very happy when that happens.

In fact, in July, we have received additional EUR 1.65 million from Obotritia. So there is some progress on that. I obviously cannot -- we expect that Obotritia will obviously pay the loan in time. There is no indication that this will not happen.

[Unknown Attendee]

Okay. And the interest is around about 12% right now still?

[Kyrill Turchaninov, executive]

I think it is 8.62%.

[Unknown Attendee]

Okay. So it's basically the same what you are paying to [indiscernible] right now and it will be kind of a negative impact when the interest rates to probably go up in March until Obotritia pays...

[Kyrill Turchaninov, executive]

Well, if we are currently receiving 8.62% on that loan and interest on our liability is going to be higher than that, so obviously, mathematically, there is going to be a high interest expense on that particular amount than the interest income on Obotritia loan.

[Operator]

The next question from the phone comes from [ Christophe ] [indiscernible] with [indiscernible].

[Unknown Analyst]

A question to Mr. Turchaninov. Would you please repeat the numbers for the 2 private bonds, the volume of the 2 bonds and the interest rates. I wasn't able to write it down, sorry.

[Kyrill Turchaninov, executive]

The 2 private bonds are EUR 40 million with a maturity on 30/09/25 and an interest rate of 4% until the original maturity in March '25. After that, an increase in the interest rate.

The second private bond issued end of June was EUR 109.5 million with interest rate of 8.5% until the beginning of next year and then an increase in interest rate. And the maturity, the end of September '25. EUR 50 million, 5-0, of that bond was repaid at the end of July. So after the reporting date. So as of now, obviously, only EUR 55.9 million remains.

[Unknown Analyst]

Okay. And -- hello?

[Kyrill Turchaninov, executive]

Yes, yes. I'm here.

[Unknown Analyst]

Yes. And the numbers for this Obotritia loan, sorry to -- that I have to bother you again. Please, the numbers again.

[Kyrill Turchaninov, executive]

The remaining balance is somewhat higher than EUR 54 million. In the course of 9 months to the 30th of June '24, EUR 9.9 million of both principal amount and interest was repaid by Obotritia. And in July this year, an additional payment of EUR 1.65 million was made by Obotritia. The loan is to be repaid by 30/06/25.

[Unknown Analyst]

And it has an interest rate of 8.62%.

[Kyrill Turchaninov, executive]

That is the current interest rate, correct.

[Operator]

[Operator Instructions] Gentlemen, there are no further questions -- oh, I'm sorry, there is a follow-up question from Mr. [indiscernible]

[Unknown Analyst]

Yes. One last question. Is there the risk of an insolvency case for Deutsche Konsum REIT if everything not works the way you just outlined?

[Kyrill Turchaninov, executive]

Well, I -- everything -- I cannot obviously say what happens in the future. At present, we have a solid plan. There is no risk of insolvency. The plan is conservative. There are certain provisions made in our mid- to long-term liquidity plan that we, for example, expect Obotritia to fully repay its loan.

However, in the contingency that, in theory, it doesn't happen, we don't depend on this incoming cash to keep afloat. Our stress case or our plan takes into consideration that also if hypothetically that shouldn't happen, there is no risk of insolvency.

We are in discussions with various banks after the refinancing of the bonds, which produced positive results. So we have been able to extend some of the loans already. This is an ongoing work. An additional 5-asset portfolio, as I mentioned before, is being notarized. So there is no indication that plan is failing. And there is no indication that we're going to have any insolvency concerns.

[Operator]

Gentlemen, it seems that there are no more questions at this time.

[Kyrill Turchaninov, executive]

Well, if there are no more questions, I would like to thank all the participants for their time, attention and patience during this call. Much appreciated.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.