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

Good day and welcome to the DEMIRE Deutsche Mittelstand Real Estate AG event H1 results 2021 conference call. Today's conference is being recorded. At this time i would like to turn the conference over to Mr. Ingo Hartlief. Please go ahead sir.

Ladies and gentlemen, good morning, everybody, and welcome to our half year results presentation 2021. Thank you very much for dialing in. I trust you are all well and healthy. With me here, as always, is Tim Bruckner, DEMIRE's CFO; and Michael Tegeder, our Head of Investor Relations. And I'm looking forward to updating you about DEMIRE's development in the first 6 months of the year. So let's start. Corona is still the topic of the day. Also we perceive it in the media being more present that when speaking with our tenants. This indeed is a good sign as the increasing vaccination rate and the preparation for autumn and winter now will hopefully prevent another locking later this year and hence affect our performance and the one of our tenants positively. In fact, the impact of corona has been and remains limited and is manageable for us. Our realized potential strategy has proven again being the right approach to the bigger picture at what we do. After being defined and invented back in 2019, it focuses on the main goals of portfolio optimization, financial strength, operational excellence and increased profitability. And it has helped to make the DEMIRE more resilient at all even before the pandemic. All 4 pillars of our realized potential strategy: asset management, acquisition, the financials and the process side, have contributed again to the strong performance in half year 1 2021. And not only that, we are also benefiting from this strategic shift. It helps us now through the pandemic. That encourages us even more to keep on going this way. So let us look together at what has happened in half year 1 '21 from the numbers point of view. Let's start with Asset Management. The first half of '21 was driven by a strong letting result, more than 120,000 square meters were let. Almost 47% of that are new rental contracts. I will give you some more context on the most exciting one, about 26,000 square meters to Amazon on a separate slide in a minute. As some of the new contracts kicking later this year, the vacancy rate increased to 10.2%. The WALT remains constant at 4.9 years and annualized rent decreased due to the planned disposals we executed in half year 1. The second, acquisitions, or better call it portfolio dynamization we were able to close the disposal of 5 assets in Bremen and Cologne, gaining proceeds that exceed the last market value by 3%. Further, we signed the sale of an asset in Ansbach at a premium of 13% to the market value. The closing took already place in July '21. So in Q3, you will see it. This is a former telecom office. And after telecom left, we were able to successfully reposition the asset, attract new tenants like the local administration at the University of Applied Science before it was sold. The premium to the market value is earned by our active asset management approach. Finally, and unfortunately, after the books were closed for the half year, we closed the acquisition of the Cielo office in Frankfurt at the disclosed terms, the transaction I have presented in my last call already. This will contribute to our performance from the beginning of Q3 onwards, and we expect this to overcompensate the effect of the disposals. Financials. As a consequence, from our strong operational performance, our financials have improved and looked promising as well. The earning quality remains good. The profit from the rental improved despite lower income after recent disposals to EUR 34.2 million. The FFO I increased even stronger by 15.2% to EUR 19.4 million and leaves us very confident to reach our full year guidance. Tim will speak about the contribution of the finance team, which was again able to further improve financing costs in a minute. Processes. While the improvement in our receivable management has become rather a part of asset management and processes, we have introduced and implemented the new defined EPRA KPIs, which are available in our official report. In addition to that, we are further streamlining the property management setup and expect this to become effective towards end of the year. In line with that, we aim towards more efficiency and we expect closer contract to our tenants, become part of the asset management efforts rather than being part of the processes in the future, of course. Finally, the corona numbers. Currently, there are 4.5% or EUR 6.5 million of the retrend outstanding for 2020 and 2021 since the beginning of the pandemic about a year ago. For '21, stand-alone, about EUR 2.4 million of rents or 3% of our expected annual rents are outstanding. Although this sounds a lot, and of course, it is a lot, we are keeping close contact to our tenants, especially those in delay or trouble. By that, we have already received about EUR 0.8 million of outstanding rents from the last year in 2021, and finding ways to reduce the amount further. And now let's have a look, a more detailed look at our KPIs and follow me on Slide #6. The annualized rent decreased slightly due to the executed disposals over the course of the last 12 months and came in 2.9% lower at EUR 83.1 million. The like-for-like rental growth of the top 10 assets increased by 1% compared to year-end 2020. The overall like-for-like rent decreased by about 2% due to temporary vacancy. I mentioned the letting activities already. They were really strong coming already from a very sound basis. Some of you might remember that until 3 years ago, our annual performance was about 80,000 square meters a year. And now we see significantly more than that, even half of the time. Some of the contracts we signed will start later this year. The Amazon contract probably in the second half of 2020 -- sorry, 2022. But this result underlines our strong asset management performance and makes us confident towards the full year development, including towards the valuation at the year-end. The letting activities in the first half secured EUR 9.1 million in our rent income and a stand-alone WALT of almost 8 years. New lettings account for roughly 46% of lease space, 54% of the agreed contracts were renewals. Let's look at Amazon. We managed to strengthen our relationship with Amazon by signing a new 15 years rental contract for a distribution center, our LogPark Asset at Leipzig. We distributed hub with size about 26,000 square meters. Already under construction and inspected to be handed over to Amazon in autumn next year. The site will be created at the former Quella High-bay warehouse, which we've considered so far as structural vacancy. The existing contracts about another 20,000 square meters that was signed last year with Amazon is extended along the new contract for another 15 years as well. Unfortunately, I cannot provide you with more numbers on this project. We agreed with Amazon to not publish it. But I can tell you that we expect a material value increase when it comes to our external valuation at year-end. As the key parameters of this asset improved so significantly. The EPRA-Vacancy increased but not on a surprise. On the one side, some of the contracts I just mentioned will become effective later this year, and in case of Amazon, next year. On the other side, the vacancy increased due to the temporary vacancy of 2 assets. 1 retail asset in Trier and 1 office asset in Regensburg, which is being repositioned after Deutsche Telekom partly left. We have signed new rental contracts already that become effective over the course of the year. In line with the already reported strong asset management performance, the WALT increased slightly to 4.9 years. Let's look at the portfolio development. Also, we have been active and successful in our asset management efforts. The development of the portfolio is moving just slightly. The CapEx spendings are fully offsetting the disposal and the classification to asset as held for sales mix about EUR 18 million. Considering the gains on the latest valuation, the book value of the portfolio as of end of June '21 is pretty much the same as of end of December '20. So now let's look deeper into the financial performance. Tim, please go along.

Thank you, Ingo, and welcome also from me. As you see on Page 11, we have delivered strong income from the rental of real estate of EUR 34.2 million, positive impact from some smaller disposals, low impairments corona-related but probably not characteristic for the full year 2021. SG&A stable with further reduction efforts ongoing. Lower financial expenses, as Ingo already mentioned, despite a higher debt volume. All of this leading to EBIT up 60% to EUR 21.1 million and funds from operations up about 15% to EUR 19.4 million. In total, despite the corona-related effects in H1, we have delivered a strong set of results and remain well on track for the full year 2021. And based on this, as Ingo already hinted to, we confirm our guidance of EUR 80 million to EUR 82 million rental income and EUR 34.5 million to $36.5 million funds from operations. On Page 12, no major effects really on the balance sheet. Stable total assets despite the significant dividend paid in H1 this year. The dividend-related NAV reduction to EUR 5.43 is partially offset by the strong results for the period as stated before. On Page 13, we'd like to update you on our financial debt relate KPIs. Our net LTV is still in line with our target ratio but will increase temporarily after the closing of the Cielo transaction that happened in July this year. Our cost of debt is trending down further to now 1.68% on a nominal basis. Furthermore, not shown on the page, but maybe important for you, furthermore, our bond covenants provide significant headroom. With this, back to you, Ingo.

Thank you. As you hear, our financial performance is underpinning our performance overall. So initially, I have covered the corona effect already. It is remarkable but absolutely manageable for us. Last year's rent suspension amounted initially total to more than 5% of target rent '20. But over the course of '21, about EUR 0.8 million have been repaid already, and we are in close contact with all tenants with arrears. For '21, so far, about EUR 2.4 million or about 3% of the expected annual rent are outstanding. The effects of the second lockdown in Q1 '21 are at about 4% of outstanding rents as the majority of the affected tenants received state subsidies to pay their fixed costs, including the rent. Q2 '21 looks unfortunately not like an improvement, but it's mainly driven by only a few tenants with good rental securities. We are, of course, in close contact and intensive talks and overall optimistic to find a good solution. Hence, we have classified only EUR 0.5 million as irrevocable receivables so far after more than $3.5 million in the last year. To conclude, the total EUR 5.6 million of outstanding rent for the last 2 years is significant but under control. But we assume to collect the outstanding rent and do not expect larger P&L effects to come. After all, we see light at the end of the tunnel with more and more people geting vaccinated and authorities that appear to prepare for the months to come. Internally, we remain focused on our costs and believe that the positive Cielo impact improved financial results and the strong asset management performance will help us to limit the negative effect of the pandemic might cause and allows us to confirm our guidance on rental income and FFO for '21, as Tim said. Let me end with a summary. We delivered strong results driven by a strong and motivated team and smooth running organization that make us optimistic for the further development of '21 and beyond. Thank you very much for listening. We are now happy to answer questions you may have.

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

Philipp Häßler from Pareto. I have three questions, please. Firstly, on your guidance. You've reached FFO of 19.4 after the first 6 months. and you target between 34.5 and 36.5 for the full year. So it looks a little bit cautious from my point of view or do you expect any deterioration in H2? Secondly, on the vacancy rate, maybe you could provide some more details what vacancy rate do you target or do you expect for the end of the year? And last but not least, a more general question, maybe you could give us an update on your view of the office market. I mean there's a lot of talk now about more work from home and lower demand for office space. Maybe you could share your view on this topic.

May I start with the first -- with the last question first. Philip, Ingo here. The development of the office market, a very good question and you know that this is discussed controversally. At the moment, as we see it, and you see it in our letting performance of the first half year, 120,000 square meters, this is all-time high for us. We don't see a shortfall are completely decrease at the moment. So in the midterm, of course, there will be more pressure on that. But at the moment, we don't see any affecting on our renting activities. This may have the reason in our type of properties. As you know, we are located in B and C locations. And our average rent is about EUR 8. So compared with the A locations and EUR 30 and above, we are flavor of the month if companies look for new space and look for cost reduction. Okay. The second one, the second question goes to the increasing vacancy rate. It really moved up 3%. And the cause for that is just 2 properties mainly. One department store in Trier is vacant, completely vacant now, 11,000 square meters and EUR 1 million and more rent. And we are, at the moment, it's a former [indiscernible] property. We at the moment in the phase of repositioning the assets. And letting it new. This is ongoing. And another property, the second one that is mainly responsible for this increase in vacancy is the asset in Regensburg. Regensburg was completely led by Deutsche Telekom. They moved out, and we are also repositioning it. But in this case, we have already signed a lot of contracts with the University of Regensburg, for example. And so we are very confident to kick this in in the second half of the year '21. Our overall goal in vacancy is to get under 7%. And maybe Tim can elaborate on the FFO

Of course, the FFO question, whether the guidance is conservative. Maybe first on the H1 numbers. While FFO came in a bit higher than we expected, mainly driven by lower maintenance costs, a bit higher capitalization of TIs and really very moderate impairments, as you can see from our numbers. For the second half of the year is as a really conservative. I would suggest only if there are no corona effects in H2, especially impairments of any rent receivables. And as you have probably seen, there's a lot of court cases ongoing. So it's not 100% clear whether tenants have the right to lower their rental charges. So I guess, with our FFO guidance, we remain on track, and we have a chance to come up higher, but only really if there are no corona-related effects.

We will now take the next question from Stephen Wong from Allianz Berstein.

Okay. So I -- we were reading actually just a news report in the London commercial property market, which pointed out more environment-related regulations on commercial properties in -- obviously, in the U.K. market, which was going to require a lot of refurbishment expense, et cetera, to avoid those properties not being allowed to be let out. I just -- so we were just curious within this context for the German market where update, are there like the environment regulation which require you to substantially invest in refurbishing your properties, some color around that, that would be helpful.