Deutsche EuroShop AG (DEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thanks for joining the 9-month 2020 results. [Operator Instructions]. And I would now like to turn the conference over to Mr. Wilhelm Wellner. Please go ahead, sir.

Ladies and gentlemen, good morning from the team of Deutsche EuroShop in Hamburg. I'm here on this call with our CFO, Olaf Borkers and our Investor Relations team. Today, we'll present you our results for the first 9 months of 2020 and will inform you about the situation in our centers. First of all, I would like to report to you the -- given the extraordinary circumstances, very respectable rebound of Deutsche Euroshop's operational numbers since the start of a pandemic up to the third quarter and well into the autumn. After that, I will inform you about the latest developments in our portfolio countries after the resurgence of the pandemic. Unfortunately, as you will surely be aware of, our centers are again subject to new soft or hard temporary lockdowns. But let's start with the operating numbers on Page 4 of the presentation, right after the summary of the business development. You can see that since the reopening of the centers, the customer footfall has stabilized at around 80% of 2019 levels until October 2020. The footfall numbers vary among the centers between 70% and 95%. As I outlined before, we believe that besides the tightened general economic situation and its impact on consumption, the mandatory wearing of mask was one major influence sector that impeded faster recovery. On Page 5, you can see that the turnover of our tenants improved on average to a level of nearly 90% until September. It shows that the conversion rate was higher compared to normal times as customers were more determined to spend money in the centers once they had entered them. So as expected, with the stabilization of the corona pandemic in Q2 -- sorry, Q3, life and business came back to the centers, even though the impact of the pandemic was substantial and tenant turnovers in certain segments were still materially lower compared to normal times. Our cash collection ratio presented on Page 6 also saw the positive trend until October, now reaching 92% for Q3 and 96% for October. This number had only been 55% in Q2. The insolvency ratio of our tenants stands at 7.3% of our rents. On a proportionate basis this number did not increase since September. But there is, as mentioned before, of course, the risk that we will see more insolvencies, especially in the light of new soft and hard lockdowns in the various jurisdictions. However, it's worth to be mentioned that the first tenants have successfully finalized the restructuring processes already like Galeria Karstadt Kaufhof, ZYN [indiscernible] Germany. Such tenants account for around 1/3 of the respective rents as mentioned. On Page 7, you find the current status of the new regulations concerning the shop closings in the various centers. So far, the rising numbers of infections have led again to a hard lock down in the Czech Republic as of 26th of October until further notice. And in Poland, as of 10th of November until end of November. In both countries, like in the first lockdown, all shops are closed, except in principal for Supermarkets and shops selling goods for the daily need. Gastronomy is limited to takeaway business. While there has been no information on specific state relief programs in Poland, the Czech government announced the support program for the tenants. Here, as we read it so far, closed tenants can apply for 50% cost contribution for their rents paid in Q3, which should give them liquidity to cover part of the fixed cost in the new lockdown. The exact terms of terms are still unknown, however, it looks that this could be a real relief for our tenants and us in the situation in the Czech Republic. In Germany, Austria and Hungary, we experienced so-called soft lockdowns. Here, mainly gastronomy, except for takeaway, cinemas and certain service retailers are closed. Stationary retail shops are allowed to continue to do business and restrictions like the wearing of mask obligations and the limitation of numbers of customers per square meter sales area. In Germany, in principal tenants that are affected directly from the closures shall receive, roughly speaking, 75% of the 2019 November turnover as cost contribution to cover part of their fixed costs during the current month. While there are several requirements and limitations, which are not clear yet, such help seems to be reasonable for the directly impacted shops and the gastronomy. However, there is no general relief program in place for the shops affected indirectly from the measurements. As of end of October, most shopping center destinations or general shopping destinations and also our centers experience already visibly lower footfall. Even though we have seen how quickly the situation can and is expected to improve again when the restrictions go away, such lockdowns are detrimental, especially in the vicinity of the start of the Christmas sales season. So far, the update on the current situation in our centers, let me now come to the financial results of the first 9 months of 2020, which show the impact of the corona pandemic on our business. The revenues and you find them on Page 8, after the first 9 months, show only a small part of the economic impact of the pandemic as most trends were invoiced according to the respective lease contracts. The only exception here comes as before from our Polish centers where the specific legal situations led to a temporary suspension of rents for the period of the spring lockdown. Correspondingly, revenues decreased only slightly by 1.9% year-on-year to now EUR 164.4 million. On Page 9, we show the development of our EBIT and the major financial effect resulting from a pandemic is reflected in the high increase of our operational costs. This increase was -- mainly comes from the allowances for rent receivables due end of September. These allowances were made in relation to realized and/or expected losses of rents in connection with tenant support measures, e.g. rent concessions on relation to actual or likely insolvencies. Such allowances amount to EUR 25.8 million. Correspondingly, the EBIT decreased by EUR 28.8 million to now EUR 118.1 million. The allowances for rent receivables have been determined -- had been determined on the basis of the agreements with the tenants or for the case is still being negotiated on the basis of various criteria such as the magnitude of the impact of the crisis on certain types of tenants and the capability to cope with this extraordinary situation. From the EBIT, now come to the financial results, you can track them on Page 10. The financial results slightly improved to EUR 24 million or minus EUR 24.7 million, several input factors neutralized each other here. Interest savings of EUR 4.6 million and the lower minority result of EUR 3.9 million improved the financial results. On the contrary, the at equity result was EUR 5.2 million lower due to the corona-related declines in revenues and higher allowances for rent receivables in our joint venture companies. The remainder of the result of the change comes from the exceptional tax-related one-off items last year. This leads us to the EBT adjusted for valuation on Page 11. And the EBT adjusted for valuation came down from EUR 121 million to EUR 93.4 million, which is a minus of 23.2%. Again, the main input factors here were the corona-related lower operating result, the interest savings and the tax one-off. The next page, you find the EPRA earnings, which declined correspondingly by EUR 29.7 million to now 80 -- sorry, EUR 90.8 million for the reasons that I just had explained before. On a per share basis, the EPRA earnings decreased from 100 -- sorry, from EUR 1.95 to EUR 1.47. Now I would like to come to the consolidated results of the group on the next page, and such results decreased by EUR 198.8 billion (sic) EUR 198.8 million to minus EUR 105.5 million. The main impact here came from the valuation results that contributed minus EUR 171.6 million, and the standing assets contributed a further minus EUR 20.5 million. And again, you see the effect from last year's tax-related one-off item here, minus EUR 9 million. Earnings per share decreased from EUR 1.51 to minus EUR 1.71. Our FFO has been outlined on Page 14. And for the first 9 months of the year the FFO, of course, excludes the valuation results and the one-off tax inter items decreased from EUR 111.7 million to now EUR 90.9 million or on a per share basis from EUR 1.81 to EUR 1.47. This is again mainly due to the corona-related lower revenues and the rent receivables -- sorry, the allowances for rent receivables, and you will find the detailed calculation, as usual, on the right-hand side of the slide. It should be mentioned that the FFO is calculated as usually earnings based and therefore, doesn't reflect untypically higher receivables outstanding. So in considering the actual cash flow of the company, one should analyze also our consolidated cash flow statement and other cash-based indicators such as our cash collection ratio. Coming now from the P&L to our continued very solid balance sheet on Page 15. Here you see that our total assets amount to EUR 4.41 billion, this is a decrease of EUR 148.3 million compared with the reporting date end of 2019, and this is mainly due to the lower market values of our properties resulting from the valuation of our portfolio midyear 2020. Because of the lower cash collection ratio in the first 9 months, our receivables after allowances increased by EUR 12.2 million. Nevertheless, our consolidated liquidity has further improved to now EUR 213 million as of end of September 2020. Due to the impact of the valuation results, total equity, including minorities, decreased by EUR 119.2 million. And as of end of September 2020, noncurrent and current financial liabilities remained largely unchanged at EUR 1.5 billion. This was EUR 5.6 million lower at the end -- than at the end of 2019, here scheduled repayments were offset by an increase of a loan of EUR 7.4 million to refinance some investments in our A10 Center close to Berlin. Noncurrent deferred tax liabilities decreased visibly by EUR 23.6 million to now EUR 355.1 million, resulting from the reduced fair values of the investment properties. Our equity ratio remains at a strong 56.3%, and the consolidated LTV now stands at 31.5%. On a look-through basis, that is the LTV calculated fully proportionally according to the group share in all assets, the LTV now stands at 34.3%, also a very reasonable and low level. Now let's come to our financial debt on the next 2 pages, where we give you some further information covering that topic. And you can see that some EUR 550 million of our consolidated bank debt mature in the next 5 years. Currently, our consolidated debt bears an average interest rate of 2.21% and our weighted maturity of the loan portfolio now stands at 5.4 years. On the right-hand side of Page 17, you will see that we were -- that we just recently have fixed a loan of EUR 70.3 million at a rate of 1.18% interest rate for 10 years for our Galeria, City-Galerie in Wolfsburg Now coming to the outlook after this sales report and the financial results. On the leasing side, we see that the market is understandably still in a rather weak condition like before. But we continue to sign lease agreements that come up for re-leasing. As an example, we were in the recent months able to secure 2 attractive and big supermarkets as anchor tenants, 1 for our A10 Center, which is located close to Berlin and the finally opened new Berlin airport. And on the other hand, we signed a lease agreement for the City Arkaden in Wuppertal for another good and big attractive supermarkets. And these are long-term contracts. For the City Arkaden in Wuppertal, we also recently signed a lease contract, for example, with Smyths Toys, another big and attractive new store for that center. Also, we continue to work on the Digital Mall, which develops further. Besides the continued onboarding of tenants, the Digital Mall is now for a test case for the first time connected to Google's See What's in Store feature. The next important feature to work on is the delivery out of the center. There's still a lot of work ahead, and it's not easy in this corona times to progress. However, we are moving in the right direction. Some words about our financing activities. As we have elaborated before, we renewed our credit line of EUR 150 million for 4 years beginning of this year, and we have signed, even after the start of the corona pandemic 2 loan agreements. One for the refinancing of EUR 70 million for Wuppertal, which becomes end -- becomes due end of this year. And the second one for the refinancing of another EUR 70 million due mid next year for our center in Wolfsburg. For the other loans becoming due next year, we are in constructive talks and negotiations with the banks. And as of today, we are also confident here to agree with the banks on this refinancing. Coming to the financial outlook. Given the, again, increased uncertainty about the duration and the magnitude of the impact of the corona pandemic and the current economic situation, as well as the development of the turnovers of our tenants and the outcome of the remaining tenant negotiations. Forecast for financial year 2020 is still not possible. Nevertheless, thanks to our solid balance sheet, low level of debt and continued stable liquidity positions, we are well placed to cope with these actual challenges. In a special situation, we will continue to act very cautiously going forward. This was my presentation. Thank you for listening, and we are now happy to take your questions. Operator, please go ahead.

[Operator Instructions] First question comes from the line of Rob Virdee with Green Street.

I have a couple of questions, please. The broad questions, I just appreciate your thoughts on them. So the first one is on tenant bankruptcies because of COVID-19, and how any news of the vaccine that we had on Monday or even further lockdowns that Macron's been talking about in winter has impacted your internal forecasts. So I know that you've got 7% of rent as insolvencies, and you're writing down 11% of your last year's rent in rent receivables, which is great disclosure. But where do you think tenant insolvencies will go in the future? And which segments of tenants are most likely going to go into insolvency? And who can you replace these with? That's my first question.

Yes. A very delicate question and very difficult. However, I give it a try. I mean, first of all, we should -- I should reiterate that even though we have seen some 7.3% in rent insolvencies, I can tell you that most of the shops are being continued with our expectations so far. We have some losses, and we'll have some vacancies, but we also have some ideas to replace them midterm. To replace anybody short term, let's say, '21, is in many cases, not that easy, and I think this is understandable. However, as I said before, 1/3 of the tenants that went into bankruptcy by now, and they all went roughly, let's say, in the second quarter, and we are at the beginning or in the mid of the fourth quarter. So we expect many of them to come out. And the discussions so far show us that for a major part of the shops, they can and will continue. However, this will cost rent here and there also, to be honest, which is natural if you have insolvency cases. Going forward, this is very, very difficult to estimate. Of course, we have segments that are much harder impacted than others. So I would expect this to be around more the textile and maybe the shoe business because, I mean, it's less appreciable for customers to do it in those times where we need to wear mask and where there's the general uncertainty. There are other goods that we'll still continue to buy. But also here, it depends, for example, we have seen over the summer and even in the third quarter, that for example, kids clothing is running absolutely fine, while business clothing and even in clothing is, of course, very bad. So it really depends on the mix, what you have and how you adjust properly as a retailer to those challenges. And so I don't want to say anything negative about the news, but these segments are -- and they do their best they can, but they are more affected. And of course, gastronomy with the second wave is also very tough, to be honest. On the other hand, at least we see in the Czech Republic and also in Germany, that they are, at this time, is a good help for them, at least. So I'm not able to predict, but I would assume with, let's say, now the Christmas sales being also distorted to some extent that there might be one or the other case and of course, we will be -- we have another guidance out for 2021 yet, and it will take some time, but we will do scenarios, and we will take that to some extent into our, yes, planning. As I said, we are very cautious going forward. We're not negative, but we're very cautious to that extent.

Okay. That's clear. My second question was more about credit markets. And the refinancing of the loan book. Can you just discuss how conversations are going with your banking partners? And how has that changed over the course of this year, kind of from the pandemic now there in March. Is it easier to get point out than a few months ago or are banks asking for more security or higher rates? Or how is it going?

Yes. This is Olaf Borker speaking. I would like to answer that. Our talks with the banks are ongoing and unchanged. Fortunately, we have signed as we reported 2 loan agreements. One at the beginning of the pandemic, one at the end. That was the second one, and we are very happy that both banks stand to the term sheets, which we signed at end of 2019, respectively, slightly before the COVID-19 pandemic. So that is -- shows a very good relationship at 2 of these banks. We are currently in negotiations with 2 other banks for our second financing, for the refinancing of a loan, which they'll also make us mid of 2021. And also, these talks are going in a friendly way. As already expected, some banks, which already in the past works skeptical about our shopping centers, they are hesitating even more to finance shopping centers but that are those banks, which we are not in contact with since many, many months. On the other hand, we have a strong reporting to all of our banks. That means we are very open in operative figures, which means a frequency turnover of tenants individually or very generally. And we gave information about collection rates, sometimes on a monthly basis to show banks we can cope with the situation. We are interested to see what the behavior of banks will do in the next month as we have some refinance also in 2022, and we will start negotiating these loans in the first quarter of 2021.

[Operator Instructions]. There are no further questions registered at this time. I would like to hand back to Mr. Wilhelm Wellner for closing remarks. I'm sorry, they have 2 questions coming. The first question is from Thomas Martin, HSBC.

Thomas Martin speaking. Just a question on valuation. I know it's very, very difficult and tricky, this one. I mean you saw a drop already in H1. What's your view on the full year and going forward? And did you have already discussions with your external appraisal regarding the next revaluation round? Maybe some insights you can share with us here?

Yes. Again, a very difficult question. It will really strongly depend on the discount rates and yields, the valuators will apply and how they adjust them. And of course, about -- will depend on the contracted and expected rents. And there is a higher uncertainty around that, that tells you property with high uncertainty where the direction and magnitude could go. However, we have not started discussing them. We provide them with the data that we have so far. And the valuation is only due beginning of next year. It's not an easy task. And we -- I mean, for that purpose, we have done the valuation already in summer, not to wait 12 months to get new values. You probably see what the market did was, it only did well for its German portfolio in the third quarter. This gives you also maybe a direction, even though they are all valued individually. So it's difficult, but it's tough at the moment. And we'll have long discussions with our valuators, of course, with our advisory -- or not advisory, [ Richard Steward ], to the extent and yes. It's hard to come up with expected numbers. I mean you see the huge gap between the gross asset value, the capital market is implying, with the implied yields and values and the net asset values. I mean this hopefully, with the stock price going up, this will close, but it might come in also on the net asset value side as well.

Yes. Okay. Fair enough. Maybe 1 follow-up. Regarding the negotiations you have, the running negotiations maybe you have with your tenants, with the retailers. And comparing this situation now with the, let's say, light lockdown in Germany with the national lockdown we have seen in Q2. Did you -- I mean, the negotiation you had with the tenants in Q2. Is there something already arranged for the case of a second lockdown or maybe for a third lockdown? Or is it completely new situation now because most hope that it will be just 1 lock down and then we come back to kind of normality? Or did you prepare yourself or tenants prepared for the next lock down in terms of the rental negotiations? This is something I have been thinking...

Yes. Of course, we talked about the first lockdown, not expecting a second to come, not -- or a soft one or whatever the intermediate ways from the politicians are to fight the disease. So no, we were talking and are talking, but for the remainder of the case, let's say, about the first half of this year. And we all have to make up our mind and see how the tenants react, how the turnovers are, what comes out of this soft or hard lockdowns. And what's the health program, so the state health programs do to our tenants. For example, the Czech Republic is doing a terrific good job, to be honest, to save this whole -- or save is the wrong word, but to stabilize this industry, the -- and do it with very rational support measures. So maybe I hope, I mean we have seen that now in Germany, I think it's a good measurement. The 75% cost contribution support for the mainly gastronomy and others. But we have to see what the health programs might be if there are any for the other tenants. So it's way too early. Again, until mid of October, you've seen the numbers, everything went fine, the trend went up. We are not that bad yet, but we can estimate that -- or expect that the impact on our tenants is not good at that moment. Yes, end of October, frequencies were at roughly 70% of normal levels before they were at 80%, but we assume that through the November, that number will go down again. So I think there will be discussions. We'll, again, have to look at the impact and now the length, and it all depends on the next weeks. How -- especially in our home market, the politicians react and whether we will get a full lockdown or an extended soft lockdown. So there is -- yes, there is no answer yet to that. But let my say for the first lockdown, what we have guessed and what we have put up in our scenario plannings, we were well within the ranges that we had, let's say, prepared in the second quarter besides the potentially new effects. So there is no bad surprise out of the first lockdown financially, and we have to see -- we're even a bit better than we were guestimating at that point in time, but we have to see what's coming out now of this November lockdowns.

Okay. And then maybe a general question regarding rent levels in your portfolio historically or the pattern you had seen historically between tenants footfall, tenant sales and the rents you charge at the end. Do you say there a clear correlation? And how does that eventually is reflected in the revaluation? Now does external appraisal manage that. I mean, you give them numbers, they can see, okay, look, we had a recovery in footfall or in tenant sales recently. Now the next slight lockdown, okay, rents temporarily may be depressed. So is that a parameter which is going into -- directly into the valuation and which will be reflected at the end in the discount rate? Or maybe something on that would be helpful.

Yes. And of course, there's a relation of -- between turnover what a tenant can make in a certain space and rent he can pay. However, it's not as easy as it was, let's say, like 10, 20 years before when there was no online business. And those spaces, it was rather very much straight. The percentage you could afford as a tenant and the room of negotiations. However, and we had elaborated in the last years around that also, more and more bigger part of the turnover becomes invisible in the center, through the omni-channel. I mean you -- we have seen online retailers or, let's say, stationary retailers, they've opened up online stores and suddenly found out when they closed down an online -- sorry, stationary store that the online sales in that region also goes down. So I would have to come up with a mix calculation. What is the value of the shop from our online business as the customer is more complex than saying I'm either online or offline customer. So it has become, let's say, more difficult to determine the value of a given space. But still, turnover is, let's say, a frequency, which is still very important in that equation. How that comes out, we will have to see how are the, let's say, the long-term effects out of this corona crisis on stationary retail turnovers and on the other hand, have to evaluate how good we are on becoming the omnichannel world. That's why we still report, of course, on work on the Digital Mall because, I mean, if you're part of a downtown location and can deliver from there, you can use that space. Again, a value you need to apply to the rents you're willing and able to pay. So it has become more complex. But of course, turnover is still valid and very important input factor to rent besides marketing value, logistic value and all the other points I just mentioned here.

[Operator Instructions] The next question comes from the line of Andre Remke with Baader Bank.

First starting with also a question on the lead contract. You mentioned some renewed contracts. What is here more concrete to comparable lease level, i.e. in comparison to the previous terms. And you partly answered that already, but how have the contract terms changed? For example, what you already partly mentioned, has been there a higher share of turnover rents to be agreed? Or how is the pressure from clients with respect to that? This is the first question, please.

I mean, it's a little difficult because I mentioned the specific rent contracts, and you can exactly know who that is. So I can't comment on that. But let me put them. We could agree with the 2 supermarkets on the level we had agreed in our planning last year before corona, yes. So they stick to the terms. Of course, they are also from a segment which is not that affected -- that much affected from the corona crisis, so we were quite happy on that end. In general, we have seen -- and these were very long term. Some -- one is 15, one 12-year contracts. So they are very long contracts. In general, what we have seen, even pre-corona is that a 5-year extension of a lease is more than normal, let's say, pattern that we had seen. And of course, we had seen a little more turnover rents pre-corona and maybe that's fair expectation that turnover base rents become a bigger proportion going forward. But we come from a level of 1% to 2% turnover rents. So I don't expect them to go to 10% or 20%, but we see that rising. However, it's interesting to see, I mean, if you share that risk a little more with the tenants, the turnover risk, the tenants are willing to give a bigger proportion of the turnover if turners are doing fine. So that doesn't necessarily mean that you are well off. It just means that a bigger proportion is more variable. So I mean, the leasing market, as I said, is tough at the moment. We extend, in many cases, also contracts in exchange for lease concessions for a couple of months or 1 or 2 years. So this is an untypical pattern of extensions, but I think it's fair for both parties in that situation just to do it for a couple of months or a year or 2, and see how the situation stabilizes, the pandemic situation, I mean, and we all depend on that and then agree on mid, long-term leases afterwards. So this is not a general case, but this is also a case what we see on the leasing market.

Okay. The second question, could you remind what is the percentage of lease expiry is due next year and probably also in 2022, and which centers are here mainly important.

Yes. We have quite a bit proportional hedge on half that is 30% for the 2 years coming up. And these were also some of the top end centers, I would say, in the portfolio. However, we are now amid this situation and this all intermingles to a certain extent. So there will be also some effect coming from the pandemic. And that's why I just said it's probably good in those centers, sometimes to just agree on a year or 2-year extension and then discuss when everything has come down. But we have, for the next 2 years, rather be a proportion of the re-leasings to come. However, we also make some good progress, as I said. For a A10 Center, we not even could, let's say, find a very good new supermarket, 12,000 square meter replacing REWE, which is a huge scheme. But we're also through with half of the normal extensions, and we're talking about roughly 80% of the leases -- sorry, 80 pieces, 80 shops coming up for re-leasing. So it's also progressing. But it's a very intermingled picture at the moment.

Okay. Then a very last question on financing. You mentioned that 2022 refinancing, I think, according to the presentation, it's roughly EUR 200 million, which centers are involved here?

That is Galeria in Gdansk with EUR 108 million. It is Allee-Center Magdeburg, roughly EUR 50 million, and it is City Point Kassel with EUR 55 million, roughly EUR 55 million, due in March for Gdansk, June in -- for -- Magdeburg in June and Kassel in September.

There are no further questions registered at this time. I hand back to Mr. Wilhelm Wellner for closing comments.

Yes. Thank you, gentlemen. And ladies and gentlemen, for dialing in. Stay healthy. Let's all hope that in all the countries, the situation improves. We know that our business is sensitive to that effect. And to corona pandemic, but we also have seen and proved how quickly our business can recover. But of course, the in-between lockdowns are rather harmful for our tenants and therefore, to a certain extent, also to us. So let's hope that the general health situation improves. And again, stay healthy and hear you on the next call. Thank you very much.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thanks for joining and have a pleasant day. Goodbye.