DEMIRE Deutsche Mittelstand Real Estate AG (DMRE) Earnings Call Transcript & Summary

Thank you. Ladies and gentlemen, good morning, everybody, to our 2020 results presentation, and thank you for dialing in today. I trust you are all still well and healthy. With me here is, as always, Tim Brückner, DEMIRE's CFO; and Michael Tegeder, our Head of Investor Relations. And I am looking forward to report about DEMIRE's development in 2020. Unfortunately, and still, corona is the topic of the day and it is one word summary for 2020. This is what it feels like, at least for me, but the good news is that our 2020 performance indicators show something completely different. We have, of course, been affected by the pandemic, and we will provide you with all the details in a minute, but DEMIRE was also able to reach record levels at many relevant KPIs, including our most important rental income, FFO and letting performance. In fact, the impact of corona has been limited and is manageable for us. Those of you who are following DEMIRE for a while, are close to our realized potential strategy, which is not only our headline, but also a good approach to the bigger picture at what we do. You might recall that we have defined and introduced it back in 2019 when Tim and I joined the team. It focuses on the main goals of portfolio optimization, financial strength and increased profitability and has helped to make DEMIRE more resilient at all. Last year, as well as today, it has proven to be the right action at the right time. For all 4 pillars of our realized potential strategy, asset management, acquisition, financials and processes have continued working over the course of the year and sharpened our efforts. And not only that, we are benefiting from this strategic shift. It helps us through the pandemic. That encourages us to keep on going this way. But let's look at it step-by-step and let me underline that by the results of 2020. Let's start with the asset management. We have demonstrated the strong resilience and our asset management team delivered a record leasing performance of over 177,000 square meters, pushing the EPRA vacancy rate down to 6.9%. This is the lowest in DEMIRE's history. Another result of our outstanding performance. And here is the pandemic sidekick. We recorded suspended rents of 4.2% of the annualized rents. This rate has been higher in summer 2020, and most tenants have started to redeem the outstandings already back last year as we continue to work closely with our tenant to reduce open rental payments further. Second, acquisitions. Market environment has slowed our growth track record. As market activities 2020 was somewhat lower, but not the prices. Nevertheless, we have closed the acquisition of a hotel in Frankfurt in early 2020, and we have come back to the transaction market and find the acquisition of a joint venture stake in Cielo, a few days back in February. This is the deal we worked on since last summer. Cielo is EUR 270 million office property in Frankfurt that will deliver about EUR 5 million FFO to us annually. In line with that, we have also continued our portfolio optimization over the course of the year by selling 18 nonstrategic assets for a total amount of EUR 88 million. This is a 3% premium to market values. This underlines again the resilience of our portfolio with stable values in windy times. Financials. Our strong operational performance contributed remarkably to our FFO growth. And the reduced financing costs did as well with record level low interest expenses of 1.71% as of year-end 2020, we are able to report EUR 39.2 million in funds from operations after taxes and before minorities. It's a plus of 14% versus 2019. Higher rental income and lower costs, especially financing expenses, helped us to achieve DEMIRE's best ever FFO and enabled us to propose a substantial dividend to the AGM. Processes, the further increase transparency and asset management performance, we have introduced a portfolio management system, enabling us to access relevant asset management metrics in nearly real time, and more important, this system is our new operational backbone and will enable us to smoother and faster integrate future acquisitions. Despite other mostly digitalization enabled improvement in treasury, accounting and finance, we focus on managing the COVID pandemic. Until today, we have still no infection among our staff. We further improved our office and IT infrastructure to offer a safe environment allows seamless mobile working solutions. The DEMIRE team did a really fantastic job in 2020, and we are grateful to work with such a strong team. Thank you very much to all of you. Finally, I would like to summarize 2020, referring to our guidance and the results. We have delivered gross rental income of EUR 87.5 million, slightly above our expected range of between EUR 85 million to EUR 87 million. In terms of FFO, we expect it to achieve above EUR 38 million and reached EUR 39.2 million. On Slide #6, annualized rent and leasing performance. Disposal of nonstrategic properties result in reduced annualized rent of EUR 85.6 million at the end of 2020. Nevertheless, the effect of the strong letting performance in 2020, the Cielo transaction further expected new leases will help us to improve our top line going forward. Despite the COVID influence market environment, strong letting results exceed the 2019's record level. Letting activities in 2020 secured EUR 12.7 million, annual rental income with a weighted average lean term of over 7 years. New lettings account for roughly 64% of leased space, and we are confident that we are able to deliver a strong -- also maybe not again a record letting performance in 2021. The EPRA vacancy and the WALT. EPRA vacancy improved not only due to strong operational performance, but also due to smart portfolio optimization. Nonetheless, it is clear that the COVID pandemic has a negative effect on the letting market, and we expect, especially the retail segment to continue to suffer. But looking back into the last year, the strong letting performance and the portfolio optimization resulted in a stable WALT of 4.8 years. Portfolio development is shown on Slide #8. We have been very active working on our portfolio and despite the pandemic environment, we are satisfied with the outcome. It is not only expressed that our strategy works, but it's also underlying that the markets we are operating in and the assets we own have proven to be stable. Indeed, we saw somewhat limited acquisition activity but our strategic disposals and some limited revaluation effects result in the book value of our portfolio to decline marginally from EUR 1.49 billion to EUR 1.457 billion at the end of 2020. At the beginning of 2020, we acquired a hotel in Frankfurt, the iconic rumors pushing portfolio value up by more than EUR 40 million. CapEx investments offset by revaluation losses not on the same asset, of course, slightly reduced the portfolio value and the before-mentioned disposals of nonstrategic assets further pushed the book value of all our assets to the mentioned EUR 1.457 billion as of year-end. You would not be too surprised to hear that we have seen rather negative valuation effects on hotel and retail properties, while logistics and office assets have improved. Our offices, by the way, based on the strong rental performance and on the market resilience. So please let me take the chance to stress the resilience of our overall portfolio again. It does not only enable us to achieve strong operational results but also keep the portfolio value almost stable. We are confident that our approach will bear further fruit in the future and help us to manage the COVID pandemic successfully. I would like to fill the buzzwords with 2 REALize examples, underlining our strong performance and our sustainable medium-term approach to create value. Next slide, #9, the Logistic Park Leipzig seems to be our logistic gem. From the insolvency of [indiscernible] about 10 years ago to a state of the Art Logistics Park with multi-tenant footprint and further potential. Transformation of a single-tenant property towards a multi-tenant Logistic Park helped to improve the market value of the property on 50 [Audio Gap] on various levels. The acquisition via a joint venture structure enables an equity accounting and limit the net LTV increase. It further provides a call option for the stake of the joint venture partner and the plot of land after 5 years' time. In summary, Cielo is a great transaction, delivering FFO accretion of about EUR 5 million after-tax to DEMIRE in a year. Let me finish the portfolio highlights section of the presentation by summarizing the effect on our portfolio under the assumption that we include Cielo into our key metrics. Our portfolio will not only grow by about EUR 270 million, it will also benefit by higher gross rental income, significantly improved WALT and substantially reduced vacancy. All of this is a substantial contribution to the successful execution of our realize potential and growth strategy. We are of the firm opinion that we do the right thing to not only grow DEMIRE's portfolio but also improve its operational and financial performance, further strengthen the portfolio and its resilience and lay ground for the continued success of our business in the future. I'd like now to hand over to Tim. He is going to present some further insights on our financial performance, DEMIRE 2020.

Good morning, everybody. As Ingo already highlighted, we had a record year operationally and financially, despite the COVID pandemic and its negative effect. Looking at our P&L. Rental income and profit from the rental income of real estate is up 7%, mainly driven by acquisitions. We had some moderate negative effects on fair value adjustments, as Ingo elaborated already, mainly linked to retail and hotel properties. We had, and that it's pretty clear that COVID had an impact on us. We had significant COVID related rise in impairment of receivables that are mainly linked also to hotel and retail. Our operational cost improvements are partially mitigated by a one-off effect. You see a significant improvement of financial results, especially driven by the 2019 and '20 refinancing. As a result, our EBIT versus last year is significantly down, mainly driven by the big gap in fair value adjustments versus 2019. Finally, as we focus on our operational results, our FFO was up 13.5%, demonstrating our ability to manage COVID effects and execute our realized potential strategy. A quick look at our balance sheet, a slight 3% decrease in total assets, driven mainly by disposals. As a result of the dividend last year, equity and NAV per share are slightly down, partially mitigated by the 2020 positive result. A few more words on our debt book. After the larger refinancings in 2019, we have continued to work on our debt book to further improve our financial results and management efficiency. Overall, as you can see, we have increased our financial debt position by more than EUR 100 million from EUR 728 million at the end of Q3, 2019 to EUR 837 million at the end of 2020. At the same time, we pushed nominal interest down from 2.78% to 1.71%, and we improved the maturity profile. Noteworthy after the refinancing of the existing bond and the promissory note in 2019, especially the refinancing at fair value REIT level, enabling the company and all its fund investments to -- for the first time since financial crisis have a positive cash flow and profit outlook. Another quick look at LTV and cost of debt. At year-end 2020, our LTV was exactly at our target rate of 50%. The cost of debt is still on the continuous decline and as said before, now at 1.71% on a nominal base. Looking back to 2017, '18, as you can see on the slide or even further to 2015, '16, where nominal interest expenses of DEMIRE were above 5%, demonstrate the enormous effects on our P&L, and that is going to continue. With no refinancing due in 2021 and plans to grow financial debt moderately, there is some but now limited potential to reduce cost of debt further. Back to you, Ingo.

Thank you, Tim. We have talked about the effect of the COVID pandemic already, and we highlighted the success of managing it. But nevertheless, it is clear that we have been negatively affected, and this is not over yet. Last year's rent suspensions amount to about 4% of target rent. In 2021, the second lockdown in Germany and the relatively slow recognition have and will continue to have a negative effect on the markets and also in our performance. Rent collections until yesterday, the 16th of March, show suspension rate comparable to the second quarter of the last year. Until now, those suspensions amount to circa EUR 2.1 million, 3% of the annualized rent in 2021. We expect those numbers to improve along the line of the lockdown relief and do not foresee substantial effect on our P&L as we expect to collect the rental backlog in the future. We are in close contact with all our tenants, especially those who have been affected. What we hear is that the rent is part of the public pandemics subsidy, and we will be reimbursed by the federal government together with other fixed costs. But you might have heard from other sources as well that the payout is not going very soon but it improves day by day. Most of the tenants were even able to at least partly open their shops again and so we remain optimistic that our tenants will pay their delay over the next months. The opening of shops and services fits a bit like a ray of light at the end of a long tunnel. Guidance '21, DEMIRE's performance in 2021 will be affected by portfolio optimization measures conducted in 2020 and '21, disposals and acquisition and the COVID pandemic to the good and to the bad. We have included the CIELO transaction into our guidance and expect the closing halfway through the year. Rental income of between EUR 80 million and EUR 82 million is to be expected circa EUR 6.5 million less than in 2020. Strict cost management, the positive impact and improved financial results will help to limit the negative effect on funds from operation after tax and before minorities. We expect FFO to amount to between EUR 34.5 million and EUR 36.5 million. Our main shareholders are on our side to support DEMIRE's plan to optimize and grow further and generate stakeholder value in the future. Thank you very much for listening. We are now happy to answer questions you may have.

[Operator Instructions] We will take our first question from Philipp Häßler with Pareto.

Philipp Häßler from Pareto. I have 3 questions, please. Firstly, on the variation adjustments. Could you perhaps provide some more details, where there's only 1, 2, 3 properties or were there over your whole retail hotel portfolio? And also on the valuation adjustments, does this reflect the situation at the end of 2020 or is it more does it reflect the situation as of today? Or ask differently, can we expect further valuation adjustments in Q1? And then thirdly, maybe you could shed some light on your future strategy regarding acquisitions, in particular, the firepower you have for further acquisitions?

Thank you, Philipp, for the questions. The second question firstly answered. We don't expect revaluation effects in Q1 2021. We see -- and coming back to your first question, we see our portfolio fairly valued at this time. And so in the last 3 months, there were no new that gives us some hints to evaluate something. As you asked, it is just focused on some properties or is this an effect going through several asset class? Yes, of course, asset class hotel and retail are affected mostly. If you look at asset by asset, of course, our properties, our warehouses in Trier, in Sella, for example, are revalued strongly. And we have other effects on the hotels, look at Roomers in Frankfurt, for example. We are talking about revaluation effects of -- in the top of 3 million, and it's going down to smaller amounts, of course. On the other hand, we see a lot of positive effects coming from the logistics. We have a positive effect, for example, in the LogPark Leipzig of around about EUR 5 million through the revaluation, and we look at the portfolio coming from the Deutsche Telekom that we -- where we could realize potential through the fact that the tenant moved out and other tenants moved in, in Flintsbach, for example, in Ansbach, for example, and the revaluation was quite positive with in this case as EUR 2 million to EUR 3 million for each property. And you may have heard us over the course of last year, but still the success story we made is also reevaluated again and accounts for another EUR 3 million plus in value. You see the spread over the whole portfolio. And on your last question, I think Tim will elaborate a little bit.

Yes, sure. You asked for the firepower for further acquisitions. As Ingo said already, our plan is scheduled to grow the portfolio further. We have done a step with the Cielo transaction that we announced a few weeks ago. Obviously, you ask in light of the dividend proposal that we put to our AGM that is going to happen most likely next month. That will increase our LTV slightly. We have limited headroom within our covenants, but we have some headroom. We are going to use probably some of that headroom. We are fully aligned with our shareholders, and we expect our shareholders to support us as soon as we see COVID related opportunities. But at this stage of the year, there is a number of attractive COVID related opportunities is still comparably low, but we expect that to rise, and we remain optimistic that we do this or the other acquisition before the year ends. Giving you an exact number is difficult, but the EUR 2 billion portfolio size is still there.

[Operator Instructions] We have no further questions. So I would like to turn the conference back to our speakers for any additional or closing remarks.

So thank you, again, for dialing in and stay healthy. Take care. Bye.