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 half of 2025. With me here is DEMIRE's CFO, Tim Bruckner; and our CIO, Ralf Bongers; and Julius Stinauer, our Head of Investor Relations. I'm sure many of you have already had the chance to review our results, which I would again characterize as solid. In fact, based on our performance to date and current outlook, we see potential to raise our guidance for 2025. Despite a still challenging economic environment and difficult real estate markets, we successfully completed several property disposals. The proceeds will be used to further reduce our debt and our loan-to-value ratio. At the same time, we are seeing clear operational progress with strong growth in our letting performance. After covering some of the highlights, let's turn to the executive summary slide, and I'll briefly walk you through our key metrics that developed in this first half year. All 4 of our strategic pillars contributed to a solid first half of 2025. Among the key highlights are the continued strong letting performance and the meaningful progress we've made in our asset disposal program. The asset management contributed with an annualized contractual rent of EUR 54.5 million, sorry. While this is lower compared to the end of last year 2025, the contractual rent grew compared to the end of the first quarter. This is due to the successful lettings, for instance, in Rostock Shopping Center. With more than 40,500 square meters, we leased 2/3 more space compared to the previous year despite the challenging market environment. This was driven by our enhanced asset management setup. Deutsche Telekom partially left spaces in our asset in Bonn, which countered our letting achievements in Rostock and Langenfeld. The EPRA-Vacancy rate increased to 17.3%. On a positive note, the new letting improved to a WALT of 4.8 years. We continue to take an opportunistic approach to transactions with a focus on smaller nonstrategic assets and mature properties. The executed disposal will deliver proceeds of approximately EUR 40 million. This is only partly shown in the H1 figures as some closings are pending. The financials show a rental income of EUR 27.8 million for the first half year 2025. This is approximately 22% lower compared to the previous period and due to the disposals, mainly LogPark Leipzig and the LIMES assets. The smaller portfolio also affects the funds from operations or the FFO I. They reached EUR 5.0 million for the first half of 2025. The net LTV was 42.4%, which is only slightly higher compared to the year-end 2024. With regard to our proceeds, we successfully extended two maturing mortgage loans on the first half of 2025 and continue to work on refinancing the remaining upcoming maturities this year. In June, we published our annual sustainability report, highlighting the 40% reduction of our company-owned carbon dioxide emissions. Additionally, we expanded our ESG data collection and made further progress on rolling out smart metering across the portfolio. Given the earnings performance for the first half year and our current outlook for the remainder of 2025, we see room to revise our full year guidance upwards. We see a rental income of EUR 52 million to EUR 54 million for the full year of 2025 and an FFO I of EUR 5 million to EUR 7 million. Ralf, I would like to ask you now to give us some insights on the portfolio.

Yes. Thank you, and good morning, everybody. And yes, I would like to explain a bit the portfolio highlights and comment a bit on this. The annualized contractual rent decreased slightly from EUR 56.4 million down to EUR 54.5 million. This reduction is mainly due to the disposal of two smaller assets and an increased vacancy in one of our larger assets. And as already mentioned by Frank, the letting performance increased significantly from 25,000 square meters in the first half of the year 2024, up to more than 50,000 square meters in this year. And the largest drivers are prolongations with our tenant, Deutsche Telekom in our asset in Kempten and Here, we are talking about more than 9,000 square meters and another significant prolongation is prolongation of more than 10,000 square meters with the DIY market. Yes. Coming to the EPRA-Vacancy, the EPRA-Vacancy increased a bit. This is mainly driven by the leaving by our tenant, Deutsche Telekom. They are leaving part of their rental space in our asset in Bonn. And this effect was mitigated by significant letting achievements in our assets in Rostock and Langenfeld. The WALT increased slightly from 4.6 to 4.8 years. And this is mainly due to the prolongation with Deutsche Telekom and our asset in Bonn and letting achievements in our largest asset in Rostock. Yes. Now I would like to hand over to Tim Bruckner, our CFO.

Good morning, everyone. Some quick insights on the P&L and the balance sheet. As Frank and Ralf already mentioned, rental income is down driven by disposals mainly versus the comparison period, LogPark and Leipzig and the deconsolidation of the Limes portfolio mid last year. So we are talking about EUR 28 million in rental income and NOI of EUR 18.6 million, which is an NOI margin of roughly 67%, which is a little bit higher than last year. and we hope to stabilize and increase that going forward. We have some losses from fair value adjustments in properties. Obviously, it's not the same properties than last year. We were looking here at ongoing disposal processes and some special situations and have taken write-offs of roughly EUR 28 million. We have also impaired some financial assets. Those are at #5 in connection with depreciation of intercompany loans granted to the Limes portfolio, given to -- given the expected outcome of the property disposals from the Limes portfolio, we had to take some write-offs for our intercompany loans into the structure here. We show slightly decreasing G&A expenses, and we will obviously try hard to decrease our G&A going forward, which has to be in line with the lower rental income. But as you can imagine, with our corporate structure, it's not that easy, but we will try hard. Finance expenses, you see a big shift versus H1 2024, quite easy to explain. You all know that. We have taken on roughly EUR 100 million shareholder loan from our main shareholder, Apollo last year and that interest on this EUR 100 million increases our financial expenses significantly. When we run further down through the P&L, you see that our FFO I as previously defined is negative. And after the adjustment on the shareholder loan interest, it is the before mentioned plus EUR 5 million. And Frank already commented on an increased guidance. On Page 11, you see our shortened balance sheet. What you see in investment properties and noncurrent assets held for sale is that we make some further progress on property disposals. As Frank said, we have signed some deals already and Ralph is obviously working hard with his team to conduct further sales such that we can pay down the envisaged EUR 50 million to avoid any further penalty interest on our bond. Given the negative results in the period, number two, you see that our reserves are declining. We hope to stabilize that, obviously. Let's see where we end up at the end of the year. And what has already mentioned as well is that our short-term financial and lease liabilities are partially already refinanced and on the remainder of one loan, we are working hard, and we are quite confident that we sign a new loan agreement here in Q3 this year. With this, Frank, I give back to you or no, let's have another look at -- Apologies, net LTV, net LTV, given the revaluation is slightly up to 42.4%. We expect that given the upcoming disposals in Q3 and Q4 to decrease to about 40% by year-end. The average cost of debt is about stable. That obviously excludes the shareholder loan. You can imagine when we refinance existing loans that are from the pre-increase period time that our average cost of debt will increase slightly further in the upcoming months. But now, Frank, back to the guidance.

Thanks, Tim. All in all, as I said, we delivered solid results for the first half of 2025 and feel well prepared for the developments ahead in the remainder of the year. In the view of the earnings performance in the first half year and the current outlook for the remainder of the year, we see room to raise our guidance for the full year 2025. We are confident to achieve now a rental income guidance of EUR 52 million to EUR 54 million and generate FFO I of EUR 5 million to EUR 7 million. Before we move on to the Q&A session, I'd like to reiterate our priorities in DEMIRE going forward. We remain firmly focused on strengthening our financial position with debt reduction and financial optimization as clear priorities. As part of this strategy, we will continue to pursue asset sales where they are economically justified. At the same time, we are placing strong emphasis on our operational excellence to unlock the full value of our portfolio. Thanks for listening, and we are now happy to answer your questions.

The first question is from Philipp Sennewald of NuWays AG.

I have a couple of questions, and I would say let's do them one by one. So first, on the new guidance, this still implies little to no FFO in the second half of the year. Can you explain this a bit?

Yes, Philipp, given that we are selling further properties, we face increasing costs on the portfolio management, and we have a bit of a backlog in maintenance expenses in H1 where we think that those will come through in H2. we would expect that, as you say, that there is little to non-FFO contribution in the last 6 months of the year.

All right. On the letting performance, can you tell me which percentage of those 40,000 square meters is new business and what percentage is extensions of existing contracts?

The new business is roughly 15% of it. So that's roughly 6,000 square meters, and the rest is letting performance for the prolongation of existing lease contracts.

All right. On the disposal of the two small assets you mentioned, what were the net proceeds there?

Sorry. I don't have the exact numbers available here.

Maybe we can get back to this later.

Sure. We'll send something around.

Cool. Tim, you mentioned NOI margin improvement, but you also talked about stabilizing and also improving this. What is your target there?

Well, we were at least able to stabilize the NOI margin, which I think in current times is a bit of a success, albeit at a very low level, 67% for, let's say, commercial real estate operator in Germany is not good enough. I think we came from values around the 80% mark. I don't see that going back to the 80% mark soon. But obviously, we are trying hard to get that to the low 70s again in the nearer future.

Low 70s understood and two...

On the two assets, we sold Bad Kreuznach for [ EUR 3 million ] and the [indiscernible] EUR 1.8 million.

All right. And maybe two further questions, if I may. You had some property devaluations now in the first half. What is your view on that for the second half? I mean, at least when I look at the result on property disposals, you made a slight gain there. Yes, what can be expected in the second half for property valuation?