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

Hello to everybody. I see we have relatively many have dialed in, and welcome to our results presentation for the first 6 months of 2023. Thank you for dialing in. I trust you are well. With me here is DEMIRE's CFO, Tim Brückner; and DEMIRE's CIO, Ralf Bongers, as well as Julius Stinauer, our Head of Investor Relations. I'm sure you have had a chance to look at our results already, which I would summarize as solid and in line with our expectations. However, before I start to dive into the presentation and provide you with the latest figures, let me briefly touch upon the current economic sentiment and how it effects the operations of DEMIRE. In the first half of 2023, situation of the commercial property market in Germany, which has already been tensed in the previous years already, deteriorated further. The general economic conditions remain challenging with the ongoing uncertainty about future economic developments having a strong impact on the market activity. You all know, high inflation increasing interest rates continued to have a negative impact on transaction dynamics. There is no asset class, as we saw significant slumps in transaction volumes combined with pronounced price reductions. In spite of these challenging circumstances, DEMIRE managed to achieve at least solid results in H1 2023 in line with our expectations. We continue to see rising property cash flows, mainly from indexations. Furthermore, we progress on our goal to create additional liquidity. Our cash position more than doubled compared to the end of last year and reached about EUR 123 million. So after my opening remarks are made, please follow me on the next slide, and let me shortly summarize the development of our key metrics in H1. All our 4 strategic pillars have contributed to a solid first half of 2023. Highlights clearly are continued strong like-for-like growth on the top line and our progress in disposing assets. The asset management contributed with a material like-for-like annual rental growth of 5.6%, which was largely driven by indexations. However, total annualized contractual rents decreased somewhat to EUR 79 million after the disposal of our asset in Ulm. Meanwhile, the EPRA-Vacancy rate and the WALT remained relatively stable. The current market environment with rising interest rates made it sensible in our view to conduct another external valuation of our properties at the end of June. The valuation resulted in a value adjustment of 5.9% in line with our peers. As announced last year, as you probably have seen in the high-volume asset held for sale on our balance sheet, we are currently highly active in the transaction market. We successfully closed the sale of the telecom asset in Ulm in May. On the other hand, the contract for the sale of the logistic property in Leipzig which was [indiscernible] in December 2022 was not fulfilled. After reporting date, the buyer withdrew from the contract in early July. We are currently examining legal steps, but at the same time, we relaunched the sales process and are optimistic that this property will be sold in the second half of the year. On top of that, we continue to focus on full disposal in the coming months to decrease leverage and create liquidity for refinancing purposes. The financials show an increase in profit from our rental activities clearly driven by rent indexations. The FFO, however, declined to EUR 19.3 million due to tax effects. Net LTV has been slightly reduced to 52.9% and expected to decrease further with the disposal of LogPark and other assets. However, cost of debt remains at a still very attractive level. In order to further reduce the upcoming refinancing burden, we bought back EUR 51 million notional of our bond below par in April. Tim will provide some more details on the financials in a minute. On processes, we published our second sustainability report in June which included, for the first time, a record of our own company emissions. On top of that, the report was externally audited to ensure high data quality. With regards to new bank financing, we are in constructive talks with banks to refinance mortgage loans maturing next year. As a result, we can say that H1 is in line with our expectations. And so I'm happy to confirm our 2023 guidance on rental income and FFO. So let's now have a more detailed look at our operational KPIs here on Page 6. Our record level letting performance in previous place in combination with indexation adjustments result a strong like-for-like rental growth of 5.6% compared to the end of H1 2022. This positive development of rents is spread across almost all our properties. However, in light of the property size and the new tenant, Amazon, the LogPark and Leipzig, you remember, our logistics property, contributed more than half of the like-for-like growth. The decrease of roughly EUR 6 million of annualized contractual rent to a total of EUR 79 million is primarily due to the sale of the asset in Ulm. The EPRA vacancy rate is almost unchanged at 9.6%. For the rest of 2023, we expect the vacancy rate to remain stable as only a few rental contracts will expire until year-end. Including our equity property, Cielo, our vacancy rate would be around 8%. The weighted average lease term has decreased slightly to 4.6 years, which we still regard at a very solid level for our portfolio with an office overweight. So Tim, please go along with details about our financial performance.

Thank you, Alexander. Welcome, everyone. On Page 9 of the presentation, we demonstrate the operating stability, and as Alex already elaborated, the positive impact from rent indexations which, as a total result, leads to a stable NOI of roughly EUR 32 million despite the before mentioned disposal. Our EBIT line is heavily negatively impacted by the revaluation and the disposal effects. Furthermore, you see a slight increase of G&A expenses which are, in general, driven by the inflationary environment and the accounting of the stock option program. Our financial results for the first time ever and probably also for the last time ever shows a positive impact driven by the below par buyback of the bond in H1. And as Alex already said, our current financing costs are stable, but obviously, we all have in mind the rising interest expense on the market that will affect the company going forward. Looking at the FFO level, our FFO was also nearly stable negatively impacted slightly by increasing income taxes. Having a look at our balance sheet on Page 10, you also see the impact of the revaluation result. On the other hand, the disposal, especially of the property in Ulm, enabled us to increase our liquidity position which is now of above EUR 120 million. Also impacted, obviously, is the reserve position in equity capital, the negative EBIT results in lower NAV. On Page 11, as promised, we lowered our net LTV for the portfolio from 54% to 52.9%, on the one hand, negatively impacted by the below book disposals and also by the revaluation effect on the other hand, positively impacted by the bond buyback below par and the disposal of unencumbered assets. As I said before, the average cost of debt remains nearly stable at that point of time and will only change as soon as we refinance upcoming maturities going forward. Alex, back to you.

Thank you, Tim. After all, and here to conclude, we delivered, as you can see, solid results in H1 2023 on track with our plans and are looking forward to and be prepared for the remaining months of the year. With the sound start of the year, we are confident to achieve our rental income guidance of EUR 74.5 million to EUR 76.5 million and to generate FFO of EUR 33 million to EUR 35 million. So thank you very much for listening, and we are now happy to answer your questions.

[Operator Instructions] The first question comes from Andre Remke.

Andre Remke from Baader Bank. A couple of questions from my side, please. Starting with the LogPark sales process. What is the latest value of the property in your boxes, still at around EUR 121 million or do you face any change here with the H1 valuation? And do you expect any positive compensation from the withdrawal by the buyer? Or is it fair to assume that this could be a legal long year's process? That's the first question, please.

Yes. In short, the value is still EUR 121 million. There was no revaluation at this point of time. And what the outcome of the legal dispute or, let me say, the negos -- first we are starting negotiations of course before we start the legal proceedings. It's absolutely open to be very honest. You know, different lawyers, different opinions. And at this time, we cannot predict any outcome exactly what will happen there. It depends on, of course, a little bit about the outcome of the started transaction process. We have started a new transaction process now for logistic park and, of course, depends on what the outcome there will be.

Okay. Okay. A question on your asset held for sale. You adjusted by -- for the first half, EUR 9 million negative, i.e., in the second quarter, there is an uplift of EUR 60 million. Do I have to assume that the properties you shifted to the disposition that you already have a sound basis for -- in the negotiation processes? Or why did you uplift disposition in value?

Well, the values that we reflect in the asset held for sale line of the balance sheet reflect the LOI level of offers we received.

Okay. And excluding the or apart from the LogPark property with EUR 120 million, are there any larger properties included here? Or is it so to say, too fragmented to give some examples here?

You'll understand that at present we do not want to comment here on single assets which are held for sale. You have seen the overall amount of -- around about EUR 280 million. And it's a mixture. That is what I can say.

Okay. And you seem to be now more confident than in the press release some weeks ago or a month ago with the withdrawal of the property process. You are more confident now to dispose the LogPark until year-end. So how confident are you on the other potential disposals?

Possibly Ralf, our CRO (sic) [ CIO ], probably, you can say something, comment on this.

Maybe I'll take this one, yes. Yes, we still see a strong buying interest also for smaller assets and midsized assets despite the current very challenging market situation. Therefore, we are slightly optimistic, but it's definitely too early to report on concrete expectation of results here. And coming to the LogPark, again, there we see very strong buyer interest in the renewed sales process. But I ask for your understanding, as already mentioned by Alexander, that I will not want to go into details here in view of the current negotiations.

Yes, absolutely. The next question is concerning the bank financing. You highlighted that -- you are phrasing the 2024 financing -- the existing financings. Are you already in the phase to elaborate with banks about the financing of unencumbered assets to provide higher cash position? Or is this, from a time perspective, too early?

Well, we have signed 3 new for additional mortgage financings in May and June this year. But as you could see from our numbers, the total amount of new financial debt is considerably small. Obviously, we are in continuous dialogue with financing providers, and this obviously also includes discussion on both the mortgage and capital market financing, but we cannot elaborate on this any further at this moment.

Yes. Okay. Okay. And the very last question from my side on your current cash position of EUR 120 million. Do you envisage any further bond buybacks this year?

Well, we have concluded 2 successful bond buybacks in the future, and we would not excluding -- we would not exclude any further buybacks in the future, but it's not yet decided on and we cannot really comment any further on this.

The next question comes from [ Daniel Ardent. ]

Just 2, 3 questions. Maybe following up on the LogPark. Can you remind us how much of the annualized contractual rent was attributable to LogPark as of June 2023?

Round about EUR 8 million.

EUR 8 million. And okay, and you left the value stable at EUR 121 million you said, right?

Yes, that's right.

So EUR 6.6 million a year. Got it. Second question on the -- well, actually, I wanted to ask about the bond buybacks as well, but you just answered that question. Maybe on the -- with respect to the assets held for sale, just out of curiosity to better understand how -- like what's the plan going forward on the fair value re-participation? I mean there have been some rumors in the market that a sale is being considered, there has been some press releases on this as well. Is there anything you can share with us? And if not, maybe second question, given the large share of participations on that side, are you in any way able to lift the unencumbered asset base that is predominantly at the fair value level to refinance wider group efforts?

Model to the first part of your question, strategic, there is no trend in our study regarding Fair Value REIT. We know that there are rumors in the market, but you will understand that we do not comment any -- on any rumors. Probably, I can say our strategy is actually the same as we had in the past. We have, in particular, here, for example, implemented further steps to streamline processes and property management and asset management, we still are responsible for the Fair Value REIT and do here our work. The other question, Tim?

Sure. I mean there are a number of unencumbered assets in the Fair Value REIT. Nevertheless, it is sole, independent, listed entity and shifting cash flows or cash from this entity to the remainder of DEMIRE is structurally usually only possible via dividends. And fair value is and will most likely remain a continuous dividend payer, but the uplift of cash flow from any mortgage financings at the finance or at the fund or at Fair Value REIT level is rather unlikely.

That's understood. But maybe then on the financing on these assets given the 50% to 60% stakes in these fund participations at fair value level. I mean because -- just for my understanding, again, how much -- given that there is a third-party manager as well, how much influence do you actually have on these particular assets? I mean LogPark, for example, is one of the larger assets that's in your top 10 asset list included, but ultimately, you own, I don't know, 55% to 60% in that asset. How much control do you have over that?

Well, I think the information you have is not entirely correct. Asset management is conducted by DEMIRE Group. Property management is conducted by STRABAG as for every asset in the entire DEMIRE business. And only the -- in German so-called [indiscernible] with an external third party. So we have full control over the asset management from the fair value REIT level.

Okay. Perfect. Okay. Then it was a misunderstanding, good to know.

The next question comes from Tao [indiscernible].

My question is what type of rates are you seeing in the mortgage market right now when you're trying to refi -- refi those?

The latest 3 mortgage refinancings were done slightly below 4.5% for 5-year fixed-term mortgages.

Okay. And then is that what you're kind of seeing today in the current market environment?

That was signed in May and June. It has slightly increased, I believe, given that the base rate slightly increased -- it's very much dependent on the spot rate.

Got it. And have you bought back any more bonds after quarter end by any chance?

No.

And then, would you consider maybe some sort of secured issuance to help refinance your EUR 178 million due '24 at all? Is that something that you're thinking about, maybe not a mortgage but a secured offering?

Yes. I can basically only repeat what I've already said. We are really in continuous dialogue with financing providers and include all options.

Okay. So at the moment, there are no further questions. So now let me hand back over to Professor, Dr. Alexander Goepfert, for some closing remarks.

Yes. Thank you. Thank you, again, for dialing in. We will be back with our Q3 results on the 9th of November. But of course, you know, if you would like to speak with us in the meantime, please feel free to get in touch at any time. So I will say thank you to all of you. And wish you now still a wonderful day and a good post-summer period. Thank you so much.