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

Ladies and gentlemen, a very good morning to everybody, and a warm welcome to our results presentation for the fiscal year 2022. My name is Alexander Goepfert, I'm since January 12th this year the new CEO. In the past, I was Chairman of the Supervisory Board. And I return to the operating business at the beginning of this year. Thank you for dialing in. I hope that you are all well. With me here is Tim Brückner, you know him, DEMIRE CFO and Michael Tegeder, our of Investor Relations. I'm sure and I hope so that you have a chance to look at our wells which are very strong operationally and show a record rental income on FFO I for the past year. So let me jump right into what has happened in 2022 at DEMIRE and flip to Page 4 of our presentation, which I hope that you can see it. You will surely remember that we defined and implemented some years ago, the real life potential strategy. The main goals of the strategy were portfolio optimization, financial strength, operational excellence and increased profitability. We have already come a long way in the process of implementing our strategy. And as you can see from the figures of 2022, a hard to improve the overall performance of the company and made DEMIRE more resilient even before the pandemic and economic headwinds of the start of the war in Ukraine and some other disruptions we can at presents in the world. Our realized potential state consists of 4 pillars: one is the asset management or strong asset management, focusing on assets, transactions, financial and processes. And they altogether contributed here to our very strong performance in 2022. And the results and outcome of DEMIRE potential encourage us to continue this success story in 2023 and beyond. Let me now briefly highlight the clinical contribution of each of these 4 pillars or stay in 2022. Asset management. Asset management in 2020 was really great. I was say, once again achieved a record letting regard. More than 287,000 square meters well at. We use more than a year's record of 183 square meters. And that is a more important figure, roughly 32% of that are new rental contracts and about 68% are prolongations. And this in a market situation, which was already last year, not very easy. Our extraordinary letting results are also reflected in the EPRA vacancy rate. It declined from 11% to 9.5%. The [ income ] of the WALT was increased slightly to 4.8 years and our like-for-like growth leads a very strong 10.2%. Consequently, the annualized contractual rents increased substantially to EUR 85.1 million. So that's really great. Our excellent operational performance however, and this is what we have had, of course, not fully balance the market even yield expansion. Hence the market value of our portfolio slightly increased by 4.7%, following the disposal of the revaluation results at year-end. And this reflects, of course, a different market situation or the rate of the interest rates. We can see from nearly all real estate companies.  Second pillar transaction or the portfolio, as better, dynamization. We continue to optimize our portfolio by disposing small and nonstrategic assets over the year. And as part of this process, we have also sold our logistic assets lookback a life at the end of 2022. LogPark has been successfully repositioned with long-term leaders with momox and Amazon. And this is part of '22 in terms of that our job is done. And as we announced last summer, we aim at creating electricity cushion for refinancing purposes. In this regard, we achieved important milestones and venerated proceeds from disposals of more than EUR 132 million in 2022. Financials, Tim will explain a little bit more in detail. Again, the underline the execution of the strategy. And while the profit from rental of real estate was moderately lower at EUR 62.3 million, mainly due to the reduced asset base or key performance indicator, the funds from operation of no FFO improved by 4.8% to EUR 41.9 billion. This is a new record high for DEMIRE. Following the dividend payout last year, the reduced portfolio value DEMIRE's net LTV increased to 54%. However, very important after collecting disposal proceeds, it will drop to below 50% again in this year for please keep in mind.  Average cost of debt remained low at roughly 1.7%. We will also give you some more details on these financials in a minute. Processes, transferring from financials to processes, we see another reduction in G&A of almost 5% compared to last year due to the ongoing implementation of our realized potential strategy [indiscernible] we strive for transparency. Our financial reporting has again been recognized with the EPRA Gold Award for implementing the EPRA Best practice recommendations. On top of that, we published our first sustainability report, which is pre-recognized with the server award and the most improved award. We are keen to improve here our reporting even further. So I hope we can use more news in the course of this year in this respect. ESG is really a big, very important issue for all companies and as well as here at DEMIRE. Coming to last year's guidance, we can proudly say promises over delivered. We've exceeded our target for 2022 with a rental income of more than EUR 81 million, while we only guide up to EUR 80 million. As for the FFO, we also outperformed organ more than EUR 1 million and came out at EUR 41.8 million.  So now let's have a more detailed look at our KPIs and follow me here on Page 6. The letting reward once again big solar coming from a very strong basis, we were able to record level of 2021 to tap this level by more than 100,000 square meters, nearly 1/3 of our letting space. Highlights here, we are certainly -- most of you have, I think, seen it from the press release that certainly a new rental contract with the state of North Westralia in Essen and the prolongation of IMOTEX Neuss and the new contract with PremierInn in Kassel. These contracts here underline our strong asset management performance. We think that we will continue it successfully in the future, too. The 2022 lending activities secured about EUR 24.3 million annual rental income and the stand-alone growth of about 7.5 years.  On the right of the slide, you will see that our ongoing store letting performance reflects well in our annualized contractual rent. The uplift of here EUR 7 million is mainly to be Amazon and Leipzig and the indications. Like-for-like rent growth was strong, 10.2% in 2022. You look on Page 7, you see on the right side, the EPRA vacancy, which decreased to 9.5% driven by our strong letting performance, particularly, again, Bad Vilbel, Kassel and Flensburg. If we included the joint Cielo, you remember in our vacancy rate, it will show even lower at around about 8%. In line with the already reported asset at performance, the WALT increased slightly to 4.1% 4.8 years from 4.7 years more a year ago. This natural WALT reduction was compare to our excellent leading performance. So now let's have a look on the financials more in detail. Tim, I would like to ask to continue now with the next slide.

Thank you, Alex, and welcome also from my side. As you have already heard from Alex, we had an operationally a very strong year. This is very much the result of a great team effort. So thank you, everyone in the team who enabled this. I think the results speak for themselves. Let's have a look at the P&L on the next slide. As Alex already said, the P&L is heavily impacted by higher energy costs and fair value adjustments that cost is to pin help to increase FFO to a historical high. Filling down the P&L, starting from rental income. Despite the smaller portfolio, rental income remains almost stable due to strong letting performance and positive impact of indexation. NRI margins are negatively affected not only by significantly higher energy costs but also by higher maintenance spend into our portfolio, partially connected to ESG investments. Looking further down to fair value adjustments for clarity purposes, we have separated fair value adjustments in our investment properties portfolio at minus 4.7%, which I think is in line with the market. And I think it reflects fairly the market conditions at this stage. The next 2 lines, fair value adjustments and asset held for sale and profit loss from the sale of real estate are mostly connected to the already announced disposal of LogPark that we successfully concluded at the end of last year. Proceeds from the transactions are to be expected in about mid this year. Impairment of receivables, down from minus EUR 3.5 million to minus EUR 1.5 million, which again reflects very much the operational performance of our asset management team and the strong tenant base we have.  Other operating expenses negative at minus EUR 16 million. Large one-off in 2022 reflects the final depreciation of goodwill related to fair value reads and talent improvement that have been activated in the past at fair value reach level. Looking forward, this one-off depreciation will push the fair value REIT P&L slightly upwards as there is no further depreciation to be expected from tenant improvements in the P&L of our subsidiary. G&A expense is down from EUR 11.2 million to EUR 10.7 million despite the inflationary environment, very much connected to cost discipline when spending especially external costs. In total, EBIT is down from EUR 102 million to minus EUR 73 million, as you can imagine, very much driven by a fair value adjustment in our portfolio. Looking at the financial income and expenses section. Financial expenses roughly stable, a slight increase connected to costs associated with our bond repurchase conducted at the end of last year. Financial income, huge increase due to the positive impact of the EUR 50 million nominal bond buyback as before conducted in Q4 last year. After development FFO adjustments, and Alex talked about that already, FFO I after taxes and before minorities at a historical high of EUR 41.8 million, exceeding our guidance slightly.  Let's at look at the balance sheet. There's not much of a surprise here. The revaluation has a negative impact on the total assets, total liabilities amounted also on equity capital. Going down through the numbers, investment property is down from EUR 1.4 billion to EUR 1.2 billion, partially because assets have been transferred from investment properties to assets held for sale. The EUR 121 million will fully reflecting the asset lock part, which has been signed but not yet clone. Cash and cash equivalents, down from previous year EUR 140 million to close to EUR 60 million at year-end 2020 to connected to the dividend payout and the bond rescale. Total assets reduced from EUR 1.7 million to EUR 1.5 billion. And I think one other item is quite important, the long-term financial liabilities decreased from roughly EUR 900 million to EUR 840 million, reflecting regular amortization of existing loans and the bond repurchase, helping us in our refinancing efforts. Let's have a look at 2 other parameters. The net LTV on the next slide, as we have already seen the LTV increased slightly from 49.7% to 54% on a pro forma basis, meaning after the sales proceeds of Ludwigsburg and LogPark are received, the LTV will go down again to below 50%. And as you could already read in our press release, we expect to lower the LTV to below 45% at year-end 2023. Average cost of debt remained stable. As you all know, there are no final relevant maturities of debt instruments until mid and the bond end of next year 2024. And with that, back to you, Alex.

Yes. Thank you, Tim. After all, and to conclude, I think we delivered impressive results, driven by a strong DEMIRE team, all my thanks for me, too, to them. It is absolutely great when I hear found here in the company. We remain, of course, focused on our long-term growth of the realized potential strategy, which proved to be very successful. And we are very confident that we will achieve our short-term goals as just as well. We will focus all our assets, not only on our asset management, but in addition, this year on all options of refinancing have all companies that plan have to do here in this present market situation. We already executed and the expected propels poll in line our strategy. You see the sale of Ludwigs and the sale in particular locale. And if we go on a little bit with disposals, in particular, such assets where we think that our drop has been done. This will result assumed reduction of rental income next year or this year by roughly EUR 10 million compared to 2022, and the FFO I will also reduce by roughly EUR 10 million in the year, again, against the background of intended sale of -- yes, I would say, where we think that they are now arrived for sales. As regards to fiscal year 2023, we guide rental income of EUR 71 million to EUR 73 million, and we plan to generate net of one of EUR 30 million to EUR 32 million. So thank you very much for listening. This was a very brief summary on what has happened last year. And we are now happy to answer questions you may have.

[Operator Instructions] And the first one comes from Andre Remke.

Couple of questions from my side, please. First, on your guidance, what kind of disposal volume is the base for your rental income guidance, i.e., in addition to the announced LogPark disposals, get it right at mid of the year. That's the first question, please.

It is difficult to say what the exact volume will be. It depends on the market situation. We are observing the market. We are observing the offers we have got. So it's more a pleasant rough estimate. And it will highly depend on which sort of assets we will sell. It will depend, of course, on the price we will get. Of course, we hope that we get something above market price, but this will depend again on the market situation.

Okay. Probably around what would be the rental income level if there are no further disposals for us has already agreed disposals? To get a feeling from that, how is the impact of like-for-like rental growth and your major site rents last year to kick in, in higher rental income?

I think you can do the math, basically. We have highlighted that we expect the closing of the LogPark transaction midyear. So there will be a negative impact of about 50% of the annual rent of LogPark. From other disposals are not really relevant for a stabilized rent and from the background of the indexation and the inflationary environment, we would expect them to increase further. But it clearly has also elaborated indicated in our aim to reduce the LTV to below 45%, you can see that we are aiming to generate liquidity by disposals.

Okay. And then the next question is around the guided FFO declined by EUR 10 million. This is the same with rental income. I guess not all from the reduction will come from lower gross rental income. Do you already expecting higher interest costs this year? Or are there any other topics to take into consideration?

No, I don't think that there are any other relevant topics, Andre. It's really mostly driven by a direct effect of lower rental income, potentially slightly higher modernization and investments in our portfolio that go through the P&L.

But not yet an impact from higher interest cost?

There are no final maturities this year. Our base case assumption does not assume any well interest expenses.

Okay. Leads me to the third question of the refinancing needs. Are you already in discussions with banks to use mortgage loans on your existing stock. You already expect something in due course? And if so, at what terms?

We are certainly actively working on the recent upcoming refinancing next year. We are talking about this since basically last summer. We are not only in discussions with various mortgage banks about mortgage loans, but also considering all other options. And we would think that over the coming months, there will also be some news about that.

Okay. Excellent. And the very last question is on the dividend. In the annual report, you said not to pay a dividend. Is there still the possibility or risk that the majority shareholder will request payout as happened last year?

If you have a look at the also published German GAAP accounts of business, there is no dividend capacity on the balance sheet.

And possibly, I can add that, of course, the major shareholders support here the efforts of the management to find good options for the refinancing next year.

And the next question comes from Philipp Sennewald.

I was a bit surprised this morning and the results were, frankly, above that. So I want to connect a bit to the question of my predecessor, mainly on the disposal strategy for this year. If you do the math, I would say you have to dispose around about EUR 300 million to be in the range net rental income, FFO, you guided. So there is still some work to do. Can you give us a quick update on the transaction market. How do you measure it right now? Are you confident that you can get the prices you want to achieve? I mean you disposed LogPark quite significantly below book value. Can you give us a bit more color on that?

You know how the market is at present. We are confident that we get a good price for such assets we want to -- or we could -- we are examining that they could be sold. We have to be, of course, careful. We don't want to lose money. You can understand this. And that's the reason why we observed the market very well and see what will happen. Nobody of us can look into the future, you see every day new use. Look at Credit Suisse, surprised everybody. And so it's very difficult to make -- to give you here something which is where we will really rely on this. But you can be sure that we will be very careful look on the market and see what can be achieved. And very important, I mentioned this already. We will -- if we sell or dispose -- we make disposals of assets, these are, in principle, those assets where we have already done our asset management work, like LogPark. LogPark has come to an end. We have bought them some years ago for EUR 35 million. This we shouldn't forget here and with [indiscernible] now the value of this. And this is a typical example what we are looking for. If we have done our job and there is a good profit margin in this then okay. And then there comes a buyer that has pay your high price and say, okay, that could be work.

Okay. I understand. Fair enough. And maybe one more question. You already mentioned that you can see an import this year that the depreciation on your receivables declined compared to last year. Now with your index contract, you have a very high share of index contract when it will go out. And of course, you have some flagship tenants also, but also some smaller tenants. We there any pushbacks on those index-related rent increases? And do you feel that some of your clients or some of your tenants might be not able to go along with that?

Interestingly not. Some expected business, I believe one of the last [indiscernible] not such is questions. And at present, we do not see any major pushbacks. And possibly, you can see here the advantage of the DEMIRE portfolio, which are ever strategy, we have a B cities. And in the B cities, there is a relatively strong tenants, which have as far as at present, what we see no problems with these indexations. So no major prospects at this stage, and we don't expect any major pushbacks.

And the next question comes from Mattieu Reinholdt.

A few questions from my side. First of all, on the LogPark, could -- so you said -- you mentioned that you have sold that for 121. How much cash proceeds do you think you will receive from the call? Presumably, I guess you have some taxes related, some costs. And I presume there will be some bank debt that you will have to repay there as well. So maybe if you could provide a little bit more color there.

Roughly EUR 80 million.

EUR 80 million, right? And that's -- and how much...

After debt repayment.

And how much roughly debt repayment would you do? Is that 40 the difference? Or is there some other cost related?

It's a bit less than 40% and some other costs, but we will expect -- we do expect slightly more than EUR 80 million in cash received when the deal closed.

Yes. And we should expect a decrease then in the bank debt as well as what anywhere in Flat 35 or something like that.

Okay. Perfect. That's my first question. Just second question here. I see that you have sold Ludwigsburg asset as well. You have written here that you have a receivable of EUR 8.2 million. Is it correct and fair to assume that you have sold the property for EUR 8.2 million?

Yes. And we have received the cash already.

Yes. That's good to hear. However, I think you had that asset valued at EUR 10 million. So that's roughly 18% lower than book value, and the LogPark was sold at roughly 15% lower than book value. Do you feel confident that the 5% market revaluation downward is sufficient on the remainder of the portfolio?

I think the decrease in the value by the appraisers reflect the market situation, in particular, not so much the value itself of the properties, but it reflects the different markets expected to interest rates, and it's a CapEx influence and so on. And we think that's a fair price reflecting the current market situation.

Yes. Okay. And yes, so just one last question from my side. The rents on Cielo today, I think there was inflation indexed as well. Would you be able to say today how much in rental income is that JV generating the entire building?

We will have a look and answer the question later in the call because background it's a novel as you may know.

Yes. No, I just kind of want to get a feeling. I think it was close to EUR 10 million initially and like 9.8 million, something like that. I just want to hear where we are at today. Yes. Well, that's it from my side.

So currently, we have one question last. [Operator Instructions] And for now, the last question comes from Ulf van Lengerich.

Just to come back on the bond refinancing in 2024. You said that you are in to mortgage banks that you're considering all other options. Can you maybe share some thoughts about the other options that you're looking at?

Well, we consider all options as discussed with you and others before. Like elaborated already, we -- our guidance reflects some disposals. These disposals will help us to generate liquidity and lower the portfolio LTV on the mirror level. As Remke asked before, and we will replied to that, we are also considering options regarding mortgage loans. We have been in active or we are in active contact with various banks. Obviously, the lending environment, also in the German banking universe changed. But we remain a credible partner. We have long established banking relationships to smaller but also bigger banks and a mix of liquidity coming from disposals, mortgage financing and other financing options will put some money together, we will require for the bond refinancing in 2024.

So you're confident a mix of disposal and raising secured debt on unencumbered asset could be enough to refinance the bond in whole?

That is the clear aim of the business to repay the bond at home. And there was one remaining question regarding the yellow rent for this year. We expect Cielo rents to be close to EUR 11 million for 2023.

Well, it depends, of course, on the inflation, possibly maybe higher depends on what the inflation will be this year because fully indexed.

And the next question comes from Peter Wild.

I just wanted to pick up on the comment you made about restrictions on dividend paying based on German GAAP and whether that is likely to change if you achieve significant disposals in 2023. Coming into 2024, you're likely to have a higher cash balance, possibly a positive earnings at a group level and therefore, may be not restricted from paying dividends anymore. Is it possible that we will then see some of that cash strained as a dividend at the beginning of 2024? Or is there other restrictions in German GAAP that I'm not aware of?

No, I think you did the analysis, right. If we sell properties about the German GAAP book value, there will be positive results, potentially negatively affected by any other circumstances. But I think as Alex elaborated, we have a strong commitment from our large shareholders. And I think they are pretty well aware of the refinancing the company has and any cash out would make this more difficult. So from today's perspective, we don't see that.

So there are no further questions from the audience. With this, we are closing the Q&A.

So yes, many thanks to you all that you have dialed in, and would you have any follow-up questions, of course, please do get in touch with us. Tim and I and the team, we are more happy to answer them.

Thank you.