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

Dear ladies and gentlemen, a warm welcome to the DEMIRE Deutsche Mittelstand Real Estate AG Financial Year Results 2024 Conference Call. [Operator Instructions] Let me now turn the floor over to your host, Frank Nickel.

Ladies and gentlemen, good morning, and welcome to our results presentation for the fiscal year 2024. Thanks for dialing in. With me here is Tim Brückner, DEMIRE's CFO; and Julius Stinauer, our Head of Investor Relations. Ralf Bongers, DEMIRE's CIO, is dialed in as he's traveling today. I trust you have had the opportunity to review our results, which are operationally solid. We are pleased to report that our rental income and FFO for 2024 are aligned with our expectations. Before we dive into the specifics of our results, I'd like to highlight some of our key achievements in 2024. First, we reached a significant milestone for DEMIRE AG with the successful extension of our bond, which included a partial redemption below par. This initiative has effectively reduced our indebtedness and strengthened our overall financial profile. Second, our focused approach on transactions resulted in 2024 in the highest property sales volume in the company's history. This achievement has bolstered our deleveraging efforts. Lastly, we enhanced our operational capabilities and strengthened our asset management team. These improvements position us to unlock further potential within our portfolio and reinforce our earnings base moving forward. So let me now jump into what has happened over the last year at DEMIRE and flip to Page 4 of our presentation. I'd like to start on the right side. Transactions, as mentioned before, in 2024, we had the highest annual disposal volume the company ever had in history. This resulted mainly in the sale of LogPark in Q1 2024 and the disposal of 6 further assets in the total volume of EUR 28 million. Three of them have already been closed in 2024, 2 have closed in Q1 '25 so far. We will continue in our opportunistic disposals of smaller nonstrategic assets and mature assets. In the processes, our -- the extension of our Bond 19/24 until the end of 2027 reduced our outstanding principal amount from EUR 499 million to EUR 253 million. We will assign a second rating. And in '24, again, we won the EPRA Gold Award for our sustainability reporting. As mentioned before, and now switching over to the asset management side. As mentioned before, the [ sales ], of course, reduced our rental income. So the rental income as of December '24 is at EUR 56.5 million, which is compared to the EUR 76.7 million in '23, of course, lower because of the sale of LogPark and the deconsolidation of the LIMES portfolio. Nevertheless, we had a solid letting performance of more than 68,000 square meters in 2024 despite the still challenging market in Germany. Our EPRA vacancy is at the end of '24 at 15.1%. Our WALT is at 4.6 years. In the financials, our rental income with EUR 65.3 million, 17% lower compared to the previous period. Our FFO I is at EUR 23.4 million, of course, again, as well lower than in 2023. The net LTV because of the repayment of parts of the bond was -- has gone down from 57.7% to 40.9%. The rental income of EUR 65.3 million and the FFO of EUR 23.4 million are both in line with our expectations and the communicated guidance. Ralf, I would like to ask you to continue with the portfolio highlights.

Yes. It's mainly already mentioned by you, Frank, portfolio highlights.

Sorry for that.

The key messages are the occupancy rate is the annualized contractual rent is lower, mainly driven by the smaller portfolio. The letting performance is stabilized. The letting performance is -- comes close to the level of the previous years. In this year, we -- the team was able to finalize rental contracts within -- for -- with an amount of 68,000 square meters. And in previous years, we talked about 74,000 square meters. So it's very close and mainly driven by the smaller size of the portfolio. And yes, regarding the EPRA vacancy, you already mentioned the numbers here, Frank, and which is quite positive that the WALT is still stable. And despite the natural WALT reduction, the WALT for the entire portfolio still amounts and remains to 4.6 years, which is -- which we see as okay for a portfolio within predominant office part. That's it from my side.

Okay. Thank you, Ralf, for that. So I'd like to hand over to Tim to run us through the financial highlights.

Thank you, Frank. Well, the main drivers in our financial highlights on Page 10, the P&L are obvious, the disposals, the valuation effects, the deconsolidation of the LIMES portfolio, some effects from the before mentioned Cielo JV and obviously, the bond restructuring. So when we go from top to bottom, we see declining rental income, and we also see slightly declining margins where we hope that we are able to stabilize them and increase them again in the future, obviously. We saw, again, a negative effect from the revaluation of the portfolio. But given the overall market sentiment, we may have reached the bottom when we speak about further devaluations of the portfolio, which I think is positive and will also help us on our LTV ratios. We see stable administration expenses in the previous year, we had some increase because of P&L effects from the bond restructuring. Looking into 2025, we will, of course, be able to lower that number again. I think what is one positive, obviously, is the #8, the financial income. We see some positive effects from the purchase of bonds via the tender offer that we conducted last year. So we have maybe for the only year of the company, we have higher financial income than expenses. We will have a small look at the financial expenses going forward on the following slides. And then when we go further down the P&L, we see lower FFO I after taxes before minorities and after interest on the Apollo shareholder loan of EUR 23.4 million, which were in line with what we expected. On the next slide, the balance sheet, the main drivers are, again, the LIMES deconsolidation, the revaluation of the portfolio, the disposals and derived from the P&L, obviously, the negative profit, which had a negative impact on the equity position of the company. On the positive side, I think it's important to mention that we delevered the company by roughly EUR 300 million. And this probably also than what we show on the next slide, we saw that the net LTV of the company declined from 57.7% to 40.9%. That's according to the bond terms. And this excludes the shareholder loan, including the shareholder loan we currently stand 51.7%, which is also a deleveraging against the past. And I think for a portfolio like this mixed commercial portfolio, 50% leverage ratio is quite stable. When we look at the average cost of debt, obviously, we were not able to keep that at a very low level of the past. The effect of the higher interest rates on the bond increased to 4.35%. And when we -- looking to the near future, we will obviously also sign some new mortgage loans at a higher rate than the before of 1.75% average, which means that we expect the average cost of financing to increase further, but only slightly further. And with that, Frank, back to you.

Thank you, Tim. So we are coming to Page 13, the guidance '24. I already mentioned in the beginning. Rental income, we guided between EUR 64 million and EUR 66 million, we achieved EUR 65.3 million. The FFO, we said will be significantly lower than in '23. We reached EUR 23.4 million, which is in line what we expected. The guidance for 2024 is that the rental income will be reduced to an amount of EUR 51 million to EUR 53 million and the FFO I will be reduced to EUR 3.5 million to EUR 5.5 million. Before we move into the Q&A session, I'd like to take a moment to outline key plans for DEMIRE moving forward. Building on the successful extension of our bond, our objective still to deleverage and optimize our financial profile. As part of this strategy, we are committed to pursuing opportunistic asset sales. Additionally, we will maintain a strong emphasis on enhancing our operational performance, ensuring we fully leverage the potential of our asset base. Main topics are still to reduce vacancies. We are definitely not satisfied with the vacancy figure that we had to report and optimize the structural and economic conditions of our assets. This concludes my very brief outlook, and we're now happy to address any questions you may have.

So dear ladies and gentlemen, we will now start with the Q&A session. [Operator Instructions] So the first question is from Philipp Sennewald of NuWays AG.

Thank you very much for the presentation. I have a couple of questions. Do you like me to ask them one by one? Or should I ask them all at once?

[ That's a little bit of what a couple of means. ]

I will ask them one by one, maybe. So you were just speaking of vacancy, which obviously increased compared to 2023. You want to improve it in '25. Could you maybe specify on that? What is the possible target for FY -- for the end of the year??

A little bit of that, Philipp, is out of our control, of course. So the raising vacancy in 2024 had something to do with the insolvency of “meinREAL”, which is a big retail company. And we hope this will not happen in '25 with another name again, but this is out of our control. And this has a big, big effect on our figures. So as said, we were able to relet 68,000 square meters last year. Nevertheless, the final effect was negative and our vacancy was rising.

Okay. Understood. And maybe 1 question when you spoke of LIMES. What is the status -- current status of the insolvency process there?

It's currently -- the assets are marketed by the insolvency administrator with the help of 2 advisers, and we were supposed to get final bids in for last Wednesday, but this is a little bit delayed. Maybe because of the real estate guys here on the phone. Know that last week, it was [ me PIM. ] So maybe some of the companies just didn't have the time to deliver. We hope we will get something by the beginning of next week.

Okay. That's great to hear. That helps me. Maybe a couple of questions for Tim. Tim, you were just speaking of new mortgage loans that the average rate will further increase. So that implies that the rates you expect are about [ 12.35% ], right?

No, that's only said that the rates are above the 1.7% rate before. So we would think that new mortgage loans currently come in between 4% and 5% on a fixed term 5-year basis.

All right. Understood. And regarding your FFO target, this is now significantly lower than in the market update you provided in June where you give a midterm outlook for EUR 18 million in 2025. Is this gap mainly explained by LIMES or what are possible other drivers?

It's a mix of various drivers really. I mean, the effect of the deconsolidation of LIMES, some expected further disposals, the effect from the lower NOI margin and also increasing financing costs. So it's really a mix of all of that.

Yes, understood.

And all of that was unforeseeable in June last year.

Yes, yes. I just wanted to ask for the reason that explains it. Perfect. Revaluation, I mean, that's also hard to assess for you, but you mentioned you might have sort of a bottom and my estimates also have a neutral result for this year. Do you think that is reasonable?

Well, we are in March currently. So we don't really know. But from today's perspective, I think it's reasonable.

Philipp, 3 weeks ago, we would definitely have said yes. Let's see.

All right. That was very helpful. That's it from my side. Thank you.

Thank you very much also from my side. [Operator Instructions] The next question is from Andre Remke of Baader Bank AG.

A couple of questions from my side, please. First, a follow-up on the vacancy rate. What are the potential cost to attract potential new tenant for the open space at the moment? [ Do you get in ] something for this year?

This year, we've got quite a big target in front of us. We will talk about new lettings of more than 100,000 square meters. It's just an effect. New lettings have to happen when the old contracts just are running out. So this year, we have had a great start. We already leased 20,000 square meters and a big parking garage so far in the first weeks of this year, and we hope it goes on. But that's definitely an individual thing. We can't market our assets in some kind of letting plan or whatsoever. It's a lot of individual work.

Okay. Second question on your disposals, which are not closed until year-end. You mentioned 6 properties, 3 of them not closed until year-end. What is the volume for these remaining 3 and especially in comparison to the last [indiscernible] And additional question on that. Do you have any further pipeline for disposal?

Yes. Let me answer your question, Ralf Bongers speaking. There's only 1 remaining asset which is not closed yet. They're representing a volume of EUR 8 million, roughly EUR 8 million, close to EUR 8 million. And of course, we have numerous promising negotiations. But of course, I would like to ask for your understanding that I will not comment on running deals here. But I'm quite optimistic that we will -- that the team will achieve a reasonable performance in the course of the year -- of the current year.

Yes. And what was the volume of the 2, which you mentioned which have already closed?

They are already closed. We are talking here about 2 assets, small assets, 1 is around EUR 1.8 million, the other 1 is EUR 3 million.

And all the 3 properties are at the last stated value?

Sorry?

The selling price or the current value, is it in line with book value?

Sorry, I don't have the numbers here available at the moment. I would say more or less, yes.

Okay. Then in the first quarter, you mentioned in report that you successfully refinanced the pending EUR 35 million loan. What are the terms here? Could you give...

Yes, we have extended the loans by more than 1.5 years, but we are not talking about the terms given the contractual regulations.

Okay. Fine. A more general question, given the still high leverage, you made some progress last year. But looking at the -- not the bond LTV, but putting into that account also the shareholder loan and looking especially on the EPRA LTV of [ 70%, ] and this compares to a very low profitability already now. What is your strategy in general for this next year to again repair the balance sheet or to strengthen the balance sheet at least because the status quo seems not very satisfying at all, so to say. Is further -- a further disposals key element? Or do you already work on some refinancing measures?

I think it's a mix of -- it's absolutely -- it has to be a mix of both. I think we have to deleverage further. And as Ralf mentioned, and also Frank mentioned, we have, let's say, a wide-ranging disposals plan, and we are optimistic to be successful and not only to fulfill the hurdle ratios in the bond terms and conditions, but also deleverage the company further. And at the same time, I mean, you have probably seen that the [ first sub IG issuer ] in Germany for real estate went out. I'm not saying that we are 100% comparable. But there seems to be capital market willingness to refinance German real estate, sub IG again. And I think that is the other plan for the company that we obviously have to refinance and repair the balance sheet long term.

Okay. Okay. And then the last question on the LIMES portfolio, the deconsolidation. Could you remind me whether there are any further financial risk or even chances of the consolidation and the write-down?

Well, the portfolio has been financed by intercompany loans. Given that it's now deconsolidated, those intercompany loans are now kind of external loans that has been value adjusted partially, but not 100%. And whether there is a risk or a chance very much depends on the outcome of the disposal process. And at the moment, we would think that the effect is more or less neutral.

Okay. Excellent. That's from my side. Thank you very much.

Thank you very much. [Operator Instructions] At the moment, there are no more questions in the queue. So let's wait a little more. There seems no questions to be incoming. So I'm handing the floor back over to the host.

Okay. Thank you once again for joining us today. If you have any further questions following up our call, don't hesitate to reach out to us. The team and I are more than happy to assist you on everything. Thank you very much.