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

Hello, ladies and gentlemen, welcome to the DEMIRE Deutsche Mittelstand Real Estate AG Q3 results 2023. [Operator Instructions] Let me now turn the floor over to your host, Professor, Dr. Alexander Goepfert, CEO; Tim Bruckner, CFO; and Ralf Bongers, CIO.

Ladies and gentlemen, good morning, everybody. Welcome to our live presentation for the first 9 months of 2023. Thank you for dialing in. I trust and hope you all well. With me here is DEMIRE's CFO, Tim Bruckner; DEMIRE's CIO, Ralf Bongers, as well as Julius Stinauer, our Head of Investor Relations. I'm sure you have had the chance to look at our results already, which I would summarize as solid and in line with our expectations. Before I start with the actual presentation of the results, let me briefly speak about the current economic sentiment and how it affects the operations of DEMIRE. A challenging economic environment continues to define the commercial real estate market in the third quarter. With the outlook for interest rate development is still uncertain. The transaction market is weak and deal volume is at historically low levels. Increased financing and costs make pricing difficult for market players and are leading to continued price pressure. In view of the difficult economic situation in many sectors, the rental markets are characterized by a reluctance of tenants to lead new space. On the other hand, the rent level seems to remain largely stable. The positive factors for lessors is a significant decline developer activity from [indiscernible] and retail space, which has led to many less fees being willing to renew their levers. In this challenging market environment, the DEMIRE continues to generate solid results in line with expectations in the first 9 months of 2023. On top of that, we continue to focus on refinancing our upcoming maturities and DEMIRE's engaged [indiscernible] and cohort Financial Adviser for the refinancing of our bond. Now after my opening remarks, please follow me on the next slide, let me shortly summarize the development of our key metrics for the first 9 months. All our 4 strategic pillars have contributed to solid first 9 months of 2023. Highlights clearly are a stable rental income despite a smaller portfolio and for our confirmed guidance for 2023. Asset Management reported a like-for-like annual rental decline of 1.1%, which was largely delivered by additional vacancy due to the insolvency of Galeria Karstadt Kaufhof. Most properties in our portfolio have benefit from indexation adjustments. After the disposal of our asset in Ulm, total annualized contractual rents decreased to EUR 77.1 million. The EPRA-Vacancy rate increased to 12.6% and the WALT remained relatively stable. Since selling our Telekom asset in Ulm in May, we have been active in the transaction market with disposal of 2 small assets [indiscernible] in Ulm. As announced earlier this year, this is probably more important, we are currently in a [indiscernible] sales process for our logistics as I have locked up lately. While we continue to focus on asset sales to create liquidity for upcoming refinancing needs. At the same time, we are sticking to our policy of only making sales on terms that are economically [indiscernible], in line with our strategic objectives. The financials show an unchanged rental income despite a smaller portfolio. The funds from operations have declined to EUR 27.8 million due to slightly lower rental profits and tax effects. The Net-LTV has been slightly reduced to 52.9%. We expect it to increase further with the planned disposal of LogPark and other assets. Our average 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 received an EPRA Gold Award for the first time for Sustainability report, which we published in June. On top of that, our 2022 financial report was once again awarded EPRA Gold. With regard to new bank financing, we have constructive talks with banks to refinance mortgage loans maturing next year. As a result, in the first 9 months are in line with our expectations, I'm happy to confirm our 2023 guidance on rental income and FFO. Let's now have a more detailed look at our operational KPIs on Page 6. After a year of significant uplifts in like-for-like rents, we see a slightly negative development, given the moving out of f Galeria Karstadt Kaufhof in Celle, a small city in Germany, after the insolvency filing and Barmer in Dusseldorf. If we adjust for this effect, like-for-like rent development would be approximately 2% as we still benefit from indexation adjustments across the portfolio. A decrease of roughly EUR 8 million of annualized contractual rent to a total of EUR 77 million is primarily due to the sale of the asset in Ulm and the moving out of Galeria Karstadt Kaufhof in Celle. However, please note that more than half of the properties experienced an increase in contractual rent since the end of 2022. The EPRA-Vacancy rate increased to 12.6% following the moving out of Galeria Karstadt Kaufhof in Celle and Barmer in Dusseldorf. For the rest of 2023, we expect the vacancy rate to remain stable as only a few rental contracts will expire until the end. The weighted average lease term has decreased slightly to 4.4 years, which we still see a very solid level for our portfolio with an office overweight. So Tim, please go along with details about the financial performance.

Welcome, everybody. As Alex already said, we report stable rental income despite a smaller portfolio due to positive effect of indexations. Lower energy prices to result in lower costs and allocatable costs, but overall, higher maintenance and other expenses result in lower profit from the rental of real estate. Negative, but not FFO relevant, valuation effects continue in Q3 with investment property valuations still based on the H1 valuation conducted externally by [indiscernible]. Previous year G&A was distorted by valuation effects of the long-term incentive program for management and is now back to normal levels this year with overall pressure on costs due to inflation. Financial income is mainly driven by bond buy-back but also positive effects due to interest rates on cash. Financial expenses are down due to the lower bond volume. Overall, and as Alex already said, the FFO are down to 27.8%, but they are completely in line with our expectations. Looking at the balance sheet. The balance sheet is affected by valuation effects and reclassifications and disposals. The group liquidity is now at roughly EUR 132 million. Given the valuation effects and disposals, total assets are down by about EUR 100 million to EUR 1.437 billion. On the liability side, reclassifications of loans due to its maturity profile to short-term debt are visible. And we have, as Alex said, ongoing discussions with banks regarding the prolongations of such loans. Looking at Page 11. LTV is slightly down to 53% despite the negative valuation effect and will further benefit from disposals that we are planning to conduct shortly. Average cost of debt remains low. Mortgage financing as we conducted over the last few months, and we are discussing currently for 3- to 5-year fixed terms is at about 5% cost, suggesting obviously that in the future, the average cost of debt of the DEMIRE will considerably improved to about 5% level. Alex, back to you.

Thank you, Tim. After all, and to conclude, we delivered solid results in the first 9 months of 2023 on track with our plans. To the sound start to the year, we are confident to exceed 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. Thank you very much for listening. We are now happy to answer your questions.

[Operator Instructions] And the first question comes from Philip [indiscernible].

Yes. Can you hear me well?

Yes, we can hear you.

Perfect. Philip here from [indiscernible]. So obviously, a question not going to be about the operating results or about the refinancing, just stating that you are in discussions with the bondholders to observe options or what kind of options are we talking there like prolonging a tranche of the bond for a higher coupon? And how big would that change be? Can you give us a bit more color on that? And second one, you were stating that you're also in discussions with banks for prolongation of the mortgage that we have out there, which is expiring next year. So I'm struggling to believe that a single bank would be willing in the current state to prolong such a loan, kind of like [indiscernible], what is the risk of the bond also maturing in November next year. So please elaborate a bit further on both issues.

So thanks for your question. We will not comment on the bond process, first of all, so apologies, but we are not able to answer that question right now. On the extension of existing bank financing, it's not only one bank, it's obviously several banks, and we are confident that we are able to extend existing debt facilities with mortgage bank. Maybe that was a bit of a misunderstanding. I did not suggest that we refinance the bond in the German bank market.

That wasn't what I meant. It's just about how confident are you about the prolongation of the bank financing? And I didn't mean did you refinance the bond fully via bank that it shift. It's just how confident are you that the banks are going to refinance a prolong debt that is out there?

We are confident.

Your next question comes from Neill Morgan, BlueBay Asset Management.

Can I just ask about disposals, I suppose, particularly LogPark. There's obviously some very decently positive commentary in the presentation about how far involved you are with that. Can you give us any color on that? Do you expect to have that sale agreed by the end of 2023, for example? And then secondly, away from LogPark, could you give us some color on the other assets which are held for disposal on your challenge sheet and how those processes are going?

Thank you for your question. And I will ask for your understanding that I cannot comment on current negotiations regarding LogPark. It's right, in addition to LogPark, we have additional negotiations, but here applies the same. I cannot comment on current phase processes and negotiations. I ask for your understanding.

[Operator Instructions] And there is a question coming from Simon Latimer, Deva Capital.

Just a follow-up to the previous question. Again, thanks for the presentation. It's very helpful. But just a quick follow-up to the previous question. Can you give us any kind of color in terms of maybe the number of assets that are being sold, what type of assets are being sold?

Sorry, we would like not to comment this. Just I ask for your understanding, again. Just we would like to avoid jeopardizing our current negotiations here.

The next question comes from [indiscernible] Research.

I just wonder why the 2 major department [indiscernible]. Can you provide us some details on that?

There was very -- not understand, but can you repeat, please?

We understand that 2 major department stores in Celle are leaving actually, if I got that right, could you provide us more color on that, what's the reason?

Due to the insolvency proceedings of Galeria Karstadt Kaufhof, they decided to close the store in Celle and what Alex earlier elaborated on was that they vacated the premise in Celle at midyear. And to add that rents had been -- for the other properties have been decreased.

The next question comes from Sanford Ngai, BlueBay Asset Management.

Just sort of related question [indiscernible] investor. Can you give some context on the leaving Barmer in the Dusseldorf asset?

Barmer was a major tenant in Dusseldorf and the lease run out, expired. And they decided to move into a new building, but this was already sometimes clear. They wanted to have a new one. And now we are looking for new tenants. We have developed a new marketing concept for this, and we are confident that we will find within the next months here new tenants for this.

And just let me add a detail here. Partly the Barmer space is already reletted. But it's a smaller part here, but we are in negotiations with additional tenants here.

Okay. Understood. That's helpful. And sorry, just as a follow-up question. On the Galeria Karstadt asset that's been vacated, do you have any immediate plans in terms of redevelopment? Or do you just expect it to stay empty for now? I mean, I understand the stores might be quite expensive to renovate it, but any color on that would be helpful.

Yes, we are in ongoing negotiations with the city of Celle and also with developers to find new plans to develop new plans here, but we are in a very early stage. Speaker 9.

And there is one final question coming from [indiscernible].

It was actually a follow-up on a previous question to LogPark. I appreciate you can't give much comment on it, but you...

Yes, yes.

I think you can't answer the question related to this stage is already written the above stage in the presentation. But -- yes, -- probably no comment. But, any color?

Adjust loss for LogPark. Okay. We have here made a typical [indiscernible] process, and we have come now in final negotiations with possible buyers in this way. But you will understand we can't comment on any details because we have here all with this agreed of confidentiality. And of course, you can be sure that we will not sell to a price, which is not in line with our strategy and with our plans.

So as there are no further questions, I'd like to hand it back to the speakers for some closing remarks.

Yes. Thank you again for dialing in, and we will be back with our results for 2023 and Spring 2024. But if you would like to speak without lingering time, please feel free to get in touch with out at any time. Thank you so much, and I wish you a good day and good time for Christmas.