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

Ladies and gentlemen, good morning, everybody, and welcome to our results presentation for the first 9 months of 2021. Thank you very much for dialing in. I trust you are all well and healthy. With me here, as always, is Tim Bruckner, CFO; and Michael Tegeder, our Head of Investor Relations. I don't know if you're aware, but today is a special day, at least for me, as the [indiscernible] lender. It is the beginning of the session of Carnival, a happy and joyful time of the year. This, together with our set of results for the first 9 months of the year, I'm going to guide you through over the next couple of minutes, brings me into a good mood. Let's start with Slide #4. Another reason for an overall good mood is the corona impact on our operations. I used to start previous presentations with an update on the corona effect on our business. Although corona is not gone, the impact of our operations is not the most significant topic to speak about anymore. So I will come back to that later. So let me start with emphasizing our realized potential strategy and how we have applied it. Back in early 2019 when Tim and I came into office, we defined to focus on the main goals of portfolio optimization, financial strength, operational excellence and increased profitability. This has helped to improve the overall performance of the company and made DEMIRE more resilient even before the pandemic. Our realized potential strategy consists of 4 pillars: asset management, acquisition, financials, processes, which all have significantly supported us since corona came over us and contributed to our strong performance in 2021 so far. Let's hope that we will not have to get back to any pandemic cost measures at all, but the results and outcome of realized potential encourage us to keep going on this way. So let us look at what has happened in the first 9 months of 2021 from the 4 pillars of our strategy. Let's start with asset management. The first 9 months of 2021 were driven by a very strong letting result, more than 138,000 square meters were let, which is more than last year at this time. Almost 49% of that are new rental contracts, and about 51% are prolongations of existing contracts. As some of the new contracts kick in later this year or next year, the vacancy amounts to 8.8%. The world has come down slightly to 4.6 years and annualized rent decreased as planned due to disposals we executed in 2021 so far. Acquisitions or, we can call it as well, portfolio dynamization. Firstly, and most importantly, we were able to close the acquisition of Cielo at the beginning of July. As you know, this deal has a certain level of complexity and will be consolidated as equity. So it is not feasible at most of our KPIs, but it's already and will further contribute to our FFO significantly. In addition, we disposed 8 assets gaining proceeds that exceeded the last market value by about 6%, underlining the efforts of our active asset management approach. Hence, the average asset size and other KPI that does not include Cielo increased to EUR 20.7 million on September 30 from EUR 90.2 million end of 2020. Financials. The financials reflect well the execution of our strategy and that the strategy is right. While the rental income decreased due to the disposals of assets, the results improved due to lower admin expenses and lower impairment of receivables. Also, the positive Cielo effect is to be seen under the financial results, hence, the FFO improved. Tim will give you the details in a minute, but for the time being, I'm happy to confirm our guidance. Processes. In order to improve our transparency and to strengthen our external reporting, we have introduced and implemented the newly defined EPRA KPIs, which are available on our annual report 2020 and our half year report 2021. We are proud that EPRA has recognized this with the EPRA-Gold Award and a special award for the most improved [ process ]. Finally, the corona numbers. As of end of September, there are 2.9% of EUR 4.4 million of the agreed rent outstanding for both 2020 and 2021 since the beginning of the pandemic about a year ago. This has improved over the last 3 months quite significantly, and we currently hear no loud corona complaints from our tenants. The increasing share of vaccinated population and assumption of no further strict lockdown measures make us confident that our business will not be materially impacted for the remainder of the year and beyond. So corona is not that heavily impacting our business like before. Also, we all know we see that corona has not disappeared, and everybody should stay carefully. Let's have a more detailed look at our KPIs and follow me to Slide #6. Annualized rent and leasing performance. The annualized rent decreased due to the execution disposals over the course of the last 12 months and came in 4.3% lower at EUR 89.9 million (sic) [ EUR 81.9 million ]. Please note that Cielo with its EUR 10 million is not included in this number. The like-for-like rental growth of the top 10 assets increased by 1.7% compared to last year. The overall like-for-like rent decreased by about 2% due to temporary vacancy. I mentioned the letting activities earlier, they were again strong. Coming from last year's record level, I'm explicitly not promising you another record result for 2021 here, but some of you might remember that until 3 years ago, our annual letting performance was about 80,000 square meters. Some of the contracts we signed will start later this year or next year, like the Amazon contract, where the distribution hub is currently under construction, but this result underlines our strong asset management performance and makes us confident towards the [ 4 year ] development, including towards the valuation at the year-end. The letting activities in the first 9 months secured about EUR 10.3 million annual rent and a stand-alone WALT of almost 7.4 years. Let's look at the leasing performance. Within the first 9 months of the year 2021, we have signed about 108 contracts. New lettings account for roughly 49% of leased space, 41 -- 51, sorry, 51% of the agreed contracts were renewals. Total net cold rent amount to EUR 861,300 per month or about the named EUR 10.3 million per year. The agreed WALT amounts to 89 months with new lease significantly exceeding the WALT of renewals. In the tables at the bottom, you'll see that the new leases are topped by Amazon contract as well as a new contract for a hotel in Dresden, both exceeding 10,000 square meters space and both with very long duration. Plenty of further contracts are Mittelstand in size of below 3,000 square meter lease area, but high quality with strong corporate and some public tenants. The tail at our extended contract is comparably fat with 4 contracts exceeding 10,000 square meters in space each. This expresses the satisfaction of existing tenants to remain with us. The 2 contracts in Leipzig are -- as well as the Amazon contract logistics space, underlining the strong demand for this asset class also from tenants. Also, the rent per square meter is way below the office rent. The EPRA vacancy increased to 8.8% but not as a surprise, up from a strong 6.9% at year-end 2020. Some of the contracts I just mentioned will become effective later this year. And in case of Amazon, Regensburg and others, over the course of the next year. Please also note that in line with EPRA definition, we have excluded assets held for sale and assets who are in the development phase from a vacancy calculation. In line with the already reported strong asset management performance, the WALT decreased only slightly to 4.6 years from 4.8 years 9 months ago. The natural WALT reduction was mitigated by a prolonged and extended rental contract in one of our largest assets in Essen and the long-term rental contract with the new hotel operator in Dresden as already said. Amazon will take its positive effect in the second half of 2022. Portfolio development and the bridge to gross asset value. Also, we have been active and successful in our asset management efforts. The development of the portfolio is moving only a little. The disposals of assets amount to EUR 24 million and reflect an average premium of about 6% to latest valuations and were partly offset by EUR 11.4 million CapEx spend. As of end of September 2021, there were no reclassifications toward assets sold for sale or assets held for sale. Considering the sum of all these effects, but without Cielo, the book value of the portfolio as of end of September 2021 is only slightly below the end of December 2020. Tim, please go along with the details about the financial performance.

Thank you, Ingo. Good morning, everyone. I hope everyone is doing fine. As Ingo already mentioned, we had a strong Q3, but let's have a more detailed look on our year-to-date September numbers as shown on Page 11 and Page 12. As you can see on Page 11, our rental income is lower due to some disposals. The effect is partially mitigated by especially lower maintenance spend, deriving at an income from the rental real estate of slightly below EUR 52 million. As already said before, we had good effect from the disposal of properties at about 6% above book value. If you put together items 2 and 3, you see the positive effect in our P&L. The impairment of receivables is certainly a number where we all look close at due to the corona pandemic. What we see in 2021 is that the effects are lower than in the years before, and we are slightly concerned about the current high corona numbers in Germany, but at the moment, remain positive for the rest of the year and don't expect numbers to match the higher numbers from previous year. What is certainly a great success, when you look at our P&L, as we have been able to lower our G&A expenses despite the pandemic effects, the EUR 8.3 million is a significant drop versus last year. We hope to stay on that positive development also in Q4 this year, which brings us much closer to our peers. And I think it's a good sign for our operational performance when it comes to the management and the setup of the organization. The financial result, as shown on the #6 is also better than before. The financial expenses are roughly the same than previously. But as you know, we have done the Cielo acquisition, which helps us to increase our financial income and, thus, the net effect here is positive. Putting all this together, you see funds from operation numbers for the first 9 months of 2021 of EUR 30.4 million, which is slightly above the numbers of previous year. Jumping to Page #12. No big surprises here. You see little changes in investment properties, as Ingo already explained. You see a significant rise in other assets due to the Cielo transaction. We have currently no properties held for sale and our cash and cash equivalent position is roughly stable versus year-end 2020 is slightly below EUR 100 million. As we have paid for Cielo and sold only a lower amount of properties over the last 9 months, we have increased our financial debt position slightly via 2 new mortgage loans that helped us lower our average cost of interest on a nominal basis. A few words on that on the next page. But maybe a quick look on the NAV per share. Also no surprise. You have seen us paying a dividend in the second quarter of this year. The effect is partially mitigated by the positive income of the period, but the NAV per share is down to EUR 5.50 or EUR 5.52 on a not diluted basis. On Page 13, you see our leverage evolution over the last years. As you know, our leverage target is 50%. We now show the net LTV definition as defined in our bond prospectus here. I think that is for a good reason. As you know, Cielo is an at equity position and the bond definition is most relevant when it comes to the LTV for capital market participants. So you see a jump from 49.2% to 53% here driven by the Cielo transaction and the dividend paid in the second quarter of this year. The average cost of debt still keeps trending downwards. This number is obviously also excluding any debt in the joint venture of Cielo, which would lower the nominal rate further. As you know, most maturities are in 2024 or later such that there's limited further potential to lower average cost of debt. Before we open Q&A, a few words maybe on what we did over the last 2 years and especially in the corona pandemic. I think the team did a fantastic job. We increased the transparency of the company a lot. We increased the reporting power. We are reporting faster. We do monthly IFRS numbers. We report a lot of KPIs. We became part of the compliance organization of the real estate industry. And this also -- everything helped us to, as Ingo elaborated already, on to reach the EPRA Gold Award with our first set of EPRA numbers ever published last year. And I think that is something, a rather small firm like ours, can be really proud of. And so Ingo and myself would thank the team a lot. They did a great job. And I think that sometimes also need to be said in such an environment. But now let's not become pathetic. I hand back to Ingo and then we jump to Q&A. Ingo?

Thank you, Tim. Very good. After all, and to conclude, we delivered very satisfying results driven by a strong and motivated team and smooth running organization, as Tim said. Internally, we remain focused on our costs and sticking to our realized potential strategy. Improved financial results and the strong asset management performance make us optimistic for the remaining weeks of 2021 and the near future. Thank you very much for listening so far. We are now happy to answer questions you may have. And I hand over to the operator.

[Operator Instructions] And our first question today comes from Philipp Häßler from Pareto.

Philipp Hasler from Pareto. I have 3 questions, please. Firstly, on your guidance. You have reached an FFO of EUR 30 million after 9 months, and you are targeting to reach EUR 34.5 million to EUR 36.5 million for the full year. Given the strong performance of the 9 months, that sounds quite conservative to me. Or are there any factors we don't know that you expect for Q4 that you are very -- that you are so conservative for Q4? Secondly, on the financial earnings contribution from Cielo, am I assuming right that that's around EUR 1.6 million? And if so, is this the quarterly run rate for the next quarters? Or do you book that only every second quarter? Maybe you could elaborate a little bit on this. And last but not least, could you remind us again of your dividend policy?

Okay. Thank you. Maybe first on the guidance. It may look conservative, we agree to that. But as you know, we are reaching highest corona numbers every day now. So we don't really know what's happening over the next 8 months or next 8 weeks of the year. Based on our Q3 numbers, we have obviously looked very closely to our business plan. We -- as you might have seen, when you compare the half year numbers and the Q3 numbers, you see that maintenance spend was quite low in that quarter. We expect some catch-up effects in Q4 here. We expect some more corona effects, and we are obviously looking at our guidance constantly, but we'll review that based on October actual numbers and expect to have more clarity within the next 2 to 3 weeks. And if there is a necessity to update the guidance, then we would obviously do so. Then the second question was on the Cielo and the P&L effect. So I guess the numbers you stated for the current quarter was quite right. The overall positive FFO effect pretax in the future will be between EUR 6 million and EUR 7 million. In 2021, we would expect EUR 2.5 million to EUR 3 million overall positive FFO effect. And most of that is basically coming from interest income. Then maybe the last question on the dividend strategy. Well, as I said before, there is no precise dividend strategy formulated yet. We've paid a very high dividend for the last 2 business years. This is certainly paying a 10% plus dividend yield is certainly not operationally sustainable. So we have not decided yet on formulating a strategy, but it has always been part of our strategy to be able to pay a dividend. We are now able to pay dividends for 2 years, and we will be able to pay a dividend in the future, but there is still no strategy formulated.

[Operator Instructions] Gentlemen, we do not seem to have any further questions. I'd like to turn the call back over to you for any further remarks. Thank you.

Thank you very much for listening and again for dialing in, and stay healthy. Take care. Bye.