Deutsche EuroShop AG (DEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Sue, your Chorus Call operator. Welcome, and thank you for joining the Preliminary Results for Financial Year 2020. [Operator Instructions] Business information transparency and any other disclosure are very important for Deutsche EuroShop. For this reason, this conference call will be recorded and shared on the Internet. [Operator Instructions] I would now like to turn the conference over to Mr. Wilhelm Wellner. Please go ahead.

Ladies and gentlemen, good morning from the team of Deutsche EuroShop in Hamburg. I'm here on that call with our CFO, Olaf Borkers; and our Investor Relations team. And thank you for joining us for the presentation of our preliminary results for 2020 and an update on the situation in our centers and for the Deutsche EuroShop Group. We're all confronted with the continuing spread of the coronavirus and its strong impact on the economy and our business, too. You'll find a map showing the situation in our countries of business on Page 4. As of yesterday, 18 out of 21 of our centers were open only in respect of shops, which sell goods for the daily needs or takeaway in case of gastronomy. But this change nearly daily. In Germany, a soft lockdown started at the beginning of November and was then tightened to a hard lockdown mid-December, which lasts until today and after the decision of the German government yesterday, will continue at least until the 18th of April. In that period, there were just very few exceptions for nonessential good retailers to operate, e.g., short-term regional openings, or click and need offerings. The situation was just slightly better in our foreign markets. Since late 2020, there have been some openings for limited time in Austria, the Czech Republic and Poland, giving some relief and opportunity for tenants to do business, especially around Christmas. The situation in Hungary was better for most of the duration of the pandemic as stationary retail was only subject to a soft lockdown. However, since 7th of March, also Hungary has a hard lockdown for stationary retail. The situation is, therefore, again, challenging and this is also visible in the development of the overall frequency of the group, which you'll find on Slide 5. Nevertheless, to get a more balanced view, one should also look at the positives. It's what we use as a model for this year that is anticipation. People are looking forward to the return to normality. What we, and that only we see, is that people quickly come back to the centers and shops wherever they get the opportunity. It is positive to observe this to happen continuously even though there are always still distractive restrictions in place, such as limitations of numbers of visitors, mask wearing requirements or very limited gastronomy offerings. In autumn, the frequencies returned quickly up to 80% of the pre-corona levels, as if the numbers could be also achieved in the short opening periods between lockdowns since end of 2020. Fair to say that these levels were still below the normal levels, given the extraordinary circumstances. That's all had, of course, and continues to have a strong impact on the tenant turnovers. On Slide 6, you see the retail turnovers of our German tenants was a minus of 23.1% for 2020. You can also see the development of the turnovers over the quarters, Q2 and Q4 being hit most. On the next slide, you can see the number of tenants -- the numbers for the tenant turnovers for the portfolio on a like-for-like basis. We saw similar numbers in Germany that is for the full year, a minus of 22.7%. Abroad, the number was minus 11.1%. However, in general, the numbers have to be interpreted with some caution as many tenants did not report due to the pandemic and the shop closings. However, the magnitude of the impact is obvious, especially for some segments, such as services. This is mainly travel agencies, with minus 59%; food catering, minus 73.5%; or very important for us, shoes and textile with minus 33% and minus 29.4%, respectively. Consequently, most of the insolvency seen so far came from the retail sector. The insolvency ratio of our tenants, that is the proportion of retailers that have filed for insolvency since the start of the pandemic, stands at 8.9% of our rents. Last reported number in November was 7.3%. Most of the tenants target to restructure their businesses and some retailers have already successfully ended the insolvency proceedings. On Slide 8, you can see our collection ratio since the start of the pandemic. It follows, not surprisingly, the same pattern as a customer footfall and is strongly dependent on the lockdown periods. The collection ratio represents the ratio of the received to invoiced amounts after corona-related concessions and this for rents, service charges and marketing contributions. For the full year 2020, this number was 89.6%. And for January and February of 2021, it is currently around 60%. I'll now come to our leasing portfolio on Page 9. The proportion and ranking of our top 10 tenants was mostly unchanged. This group now accounts for 20.8% of our rental income and the weighted maturity of our lease contracts, you'll find them on Page 10, remained at around 5 years, and that's the level of 2019. This shows that we were able to sign or prolong a substantial proportion of leases, even in the very specific corona year 2020. For the next 5 years, we see a rather equal share of leases that come up for releasing, e.g., yearly around 9% to 13% in terms of rental income. Our occupancy ratio now stands at 95.4%. That is 2.2 percentage points lower than at the end of 2019. It remains an important target for us to keep vacancies low, even though that's not easy in times of shop closings and corona and presumably more insolvencies to come up with the extended duration of the lockdowns. ECE, our operating partner, is in continued dialogue with our leasing partners and this in further cooperative spirit with the aim to find mutually feasible solutions for the period of mandatory shop closings. However, the magnitude of a negative impact of corona on stationary retail as well as the legal framework we are working in let and will also lead to the need of rent concessions in 2020 and 2021, respectively. We'll come to the impact on our P&L last year in a minute. We are confident that we are, with our strong balance sheet and solid financial resources, good positioned to weather also the ongoing challenges. However, as the duration of a pandemic, and especially the shop closings is uncertain and the economic situation and the aftermath of the next shop reopenings may be challenging, we have decided to take extraordinary steps as precaution. To preserve the company's financial flexibility in this extraordinary situation, we've decided to propose to the general assembly to limit the payment of the dividend for 2020 to the mandatory minimum amount of EUR 0.04 per share. So for the update of the current situation in our centers and concerning our portfolio, and I will now come to the preliminary results for 2020, and we'll start with the valuation of our shopping centers on Page 11. Last year, we carried out a valuation for our shopping centers mid-year for the first time as the extraordinary conditions required a review of the fair values of our centers by our external appraiser, GLL. Since then, there were very little investment activities in the shopping center market and already before the breakout of the virus, transaction volumes had slowed down due to the special market sentiment concerning e-commerce. And for this comprehensible, demand reduced further in 2020 as the stationary retail and shopping center business was hit hard by the lockdown. However, again, important and worth to be mentioned, the market did not come to full standstill. Certain sizable or even landmark shopping center transactions could be completed in France, Germany and Switzerland after the start of pandemic. Nevertheless, the enduring pandemic and increased uncertainty had an impact on shopping center yields and thereby on discount and capitalization rates. Furthermore, market rents were, on average, adjusted slightly downwards by our appraiser, whereas assumptions for releasing times and CapEx requirements have been raised. All those factors led to a negative valuation result of EUR 429 million, and this corresponds to an average devaluation of 10.7%. The stabilized net initial yield for our portfolio came up by 29 basis points and now stands at 5.41%. And you can find the sensitivity of the valuation results to changes of the main value drivers provided or you can find them at this table at the lower part of the slide. I'll now come to the revenues on the next page. And the revenues should only a part of the economic impact of the pandemic as most rents were invoiced according to their respective lease contracts. The online section here were -- or came from our Polish center where the specific legal situation led to a temporary suspension of rents for the period of lockdowns, and this accounts for minus EUR 3.2 million. And for the whole portfolio insolvencies, the loss of turnover-based rents and higher vacancies led to a further decline of minus EUR 4.3 million. Furthermore, there is an extraordinary item to be considered due to a change in the disclosure, the revenues as well as the operating costs. The revenues increased by EUR 5.7 million in 2020. The corresponding change in 2019 was an increase of EUR 5.6 million. Property tax and building insurance are no longer reported on a net basis. However, such accounting change leaves the NOI unchanged. The like-for-like effect of such service charges, changes contributed a slight plus EUR 0.1 million to the revenue change. And total revenues decreased by 3.2% year-on-year to now EUR 224.1 million. Our regional profile remained unchanged with 83% of revenues coming from Germany. On Page 13, we show you the development of our EBIT, and the major financial effect resulting from the pandemic is reflected in the allowances for rent receivables due end of last year. These allowances were made in relation to realized and/or expected losses of rent in connection with tenant support measures, e.g., rent concessions, or in relations to actual and likely insolvencies. Such allowances amounted to EUR 29.2 million for last year and should reflect the major part of the negative effects from the first lockdown. In that respect, we expect another EUR 5.5 million -- or minus EUR 5.5 million, I should say, that will affect the results for the following financial years due to the straight-line accounting method. Overall, EBIT decreased by EUR 36.3 million to EUR 161.2 million. The allowances for rent receivables have been determined on the basis of the arrangements with the tenants and for the case is still to be contractually finalized on the basis of various criteria such as the magnitude of the impact of the crisis on certain types of tenants, and their capabilities to cope with this extraordinary situation. Let's now come to Page 14 and to the financial result, which slightly improved to minus EUR 33.6 million. Several input factors almost neutralized each other. Interest savings of EUR 5.6 million and lower minority result of EUR 4.9 million had a positive impact on the financial result. Whereas on the contrary, the equity result was EUR 7.6 million lower due to corona-related declines in revenues and higher allowances for rent receivables also in our JV companies. The remainder of the change resulted from the exceptional tax-related one-off items last year. On Slide 15, you see that the EBT adjusted for the valuation, which came down from 160 -- down from EUR 163.1 million to EUR 127.6 million, which is a minus of 21.8%. Again, the major input factors were the corona-related declines in revenues, higher allowances, the interest savings and the tax-related one-off item. Looking at the operating profit, the EPRA earnings on the next page, that means the following. The EPRA earnings declined by EUR 33.8 million to now EUR 124.5 million. On a per share basis, the EPRA earnings decreased from EUR 2.41, excluding the one-offs of 2019, to now EUR 2.02. And for the purpose of transparency, the EPRA earnings per share, including one-off 2019, were EUR 2.56 million. We now move on to the consolidated profit of the group on Slide 17. And the consolidated results decreased substantially by EUR 363.8 million to now minus EUR 251.7 million. The main impact here came from the valuation result that contributed minus EUR 254.1 million. And last year's extraordinary positive effect from the release of deferred tax and tax refunds in the amount of minus EUR 73.4 million and EUR 9 million, respectively. The standing assets contributed a further minus EUR 35.5 million to the change and earnings per share decreased from plus EUR 1.81 to minus EUR 4.07. Please follow me now to Page 18 and to the development of the FFO, which excludes the valuation results and other one-off items. The FFO decreased from EUR 149.6 million to now EUR 123.3 million or on a per share basis from EUR 2.42 to EUR 2. We'll find the detailed calculation on the right-hand side of the slide. It should be mentioned again that the FFO is calculated as usually earnings based and therefore, does not reflect the untypical high receivables outstanding. The cash flow of the company should, therefore, be analyzed by taking into account the cash collection ratio. This ratio after legally required or contractually agreed corona-related temporary rent concessions was, as mentioned before, 89.6% end of last year. I'm coming to the balance sheet now on Page 19. Our total assets amounted to EUR 4.24 billion. This is a decrease of EUR 321 million compared with the reporting date end of 2019, which is mainly due to the lower market values of our properties as of 31st of December 2020. Because of the lower cash collection ratio last year, our receivables after allowances increased by EUR 12.4 million. Nevertheless, our consolidated liquidity as of 31st of December 2020 had further improved to now EUR 266 million or net EUR 236 million, excluding drawing of the short-term credit line in an amount of EUR 30 million at the end of the year. Due to the impact of the valuation of the result, total equity, including minorities, decreased by EUR 286 million. And as end of the year, current and noncurrent financial liabilities stood at EUR 1.54 billion, which was EUR 29.1 million higher than at the end of 2019. Here, scheduled repayments were offset by an increase of loans in an amount of EUR 15.7 million to finance investments in our A10 Center and the City Arkaden, Wuppertal. In addition, and as just mentioned, the credit line was drawn in an amount of EUR 30 million as at balance sheet date. Noncurrent deferred tax liabilities decreased visibly by EUR 53.8 million to now EUR 325 million, resulting from the reduced fair values of our investment properties. Our equity ratio remains at a strong 54.6% and the consolidated LTV now stands at 32.9%. On a look-through basis, that is the LTV calculated fully proportionally according to the group's general assets, the LTV now stands at 35.8%, also a continued, very reasonable and low level. On Page 20, we'll find the EPRA net tangible assets, which are reported for the first time. I wanted to note that for Deutsche EuroShop, the formally reported EPRA net asset value numbers were identical with recalculated historic EPRA NTA results. EPRA NTA decreased now to EUR 37.38 per share, that is a minus of 11.6%. And this equals a discount to the current share price of 53%. So far, the preliminary numbers, we'll provide you with all further details in our annual report to be published in April. On the next 2 pages, we give you some information on our debt. Some EUR 600 million of our consolidated bank debt matures in the next 5 years. Currently, our consolidated debt is at an average interest rate of 2.18%. And our weighted maturity for our loan portfolio now stands at 5.1 years. On the right-hand side of Page 17, you will see that we have fixed loan of EUR 70 million at 1.18% interest rate for 10 years for our City-Galerie Wolfsburg already last year. After this status report about the impact of the pandemic on 2020 and early 2021, and looking confident ahead, I want to give you a short outlook on our normal operations and on our financing activities, and you will find a summary of the major points on Slide 24. Leasing activities were and are, of course, the key or the central key in the current situation. In 2020, we could keep the weighted maturity for our lease portfolio at 5 years. It shows that besides the big current challenges, stationary retail has its valuable space in the segment. While omnichannel, obviously, gets more important, physical shops remain a very important part of the business of retailers. In this difficult times, we have proven that we could prolong these contracts with many tenants, including our top 10 tenants and also primary retailers such as Appel or Kaufland. Looking at omnichannel, we are happy that all of our German centers are connected to the digital mall. While the online availability check is now working for 780 shops and 2.8 million products in the German ECE portfolio. One important next step is the testing of deliveries out of the centers and this project is ongoing. Looking at the financing activities. Last year, we extended our credit lines of EUR 150 million for 5 years and have closed or signed 2 loan agreements with a total amount of EUR 127 million with due dates in December 2020 and June 2021. Furthermore, we are working on signing 3 more loan agreements with a total amount of EUR 118 million with due dates in June and July 2021. Here, we were on track. All banks we are working with have confirmed us that they continue to work on such refinancing also under the current extraordinary circumstances. Looking at liquidity and dividend. As said before, as the duration of the pandemic, and especially the duration of the shop closings is uncertain, we have decided to propose to the general assembly to limit the payment of the 2020 dividend to the mandatory minimum amount of EUR 0.04 per share. We do this for prudent liquidity management and risk management reasons. We will return to our policy of stable and continuous dividend payment after this extraordinary situation has been overcome. For the same reason, as just mentioned, it is currently not possible to estimate the impact on the group's earnings. Therefore, the forecast for the financial year 2021 is not possible. A new forecast will be issued as soon as this is feasible. One final and closing remark. Based on our solid balance sheet, low level of debt, continued stable liquidity position and the expectation that vaccine now becomes more and more available, the management of Deutsche EuroShop is confidently looking ahead. So for my presentation, and we are happy to take your questions now.

[Operator Instructions] The first question is from the line of Jaap Kuin from Kempen.

A few questions from my side, if you don't mind. Maybe just do them one by one to keep a bit of overview. So looking at your rent collection rate for 2021 obviously, this is shaping up quite negatively, and not surprisingly, how would you say is your current expectation for 2021 versus 2020. Should we already expect a similar or even worse rent collection rate for the full year? And what is the current status of the government support for tenants to also pay a rent? And would that influence the kind of recovery expectation for those uncollected rents so far?

Yes. I think your first part of the question is really unanswerable, to predict the cash collection ratio for 2021 as it really depends on openings. But we have seen once openings take place, the cash collection ratio really quickly, at least, over the course of -- or until today, has picked up quickly as the tenants make turnover. And as they make turnover, they are able and willing -- I mean, they're always willing to pay rent, but are also able to pay the rent. So I mean, we see the 60%, in general. We saw it in January and February, which is similar to what we, at the end saw for Q2 of last year. So it's a similar pattern, and it really depends on the openings. Concerning the government support, we see totally different approaches in the countries we are working in. Maybe the most positive example is the Czech Republic, where there were really specifically rent payment based support for tenants where we or the landlords would give up some of the rent really, the government would pick up 50% of the rent and the tenant had to pay 30%. So that was really a help. And accordingly, the Czech Republic had, at the end, very good cash collection ratios. On the other hand, the other countries that don't do anything, put it that way, like Hungary. But here, the centers were never fully closed. They were always working on a soft lockdown -- in the soft lockdown mode with the exception now from 7th of March. So we have to see how quickly they open up again. And our main markets in Germany and here, there are several support measures. But to be honest and straight, for midsize or big tenants, the support is really, really limited and the payout performance of the government is slow. I have to admit that. They have announced with the extension of the closings now until 18th of April that they will come with another support package. We are, through the associations, are working on that, doing lobbying to get that running and working, but it's just limited. It works for gastronomy, and smaller tenants, okay, I would say. So if you would ask them, they would say no. But at least there are some substantial money being paid. But for bigger tenants, it's tough. So that's the situation. We're really looking forward to open up again when now the weather is improving, when Rexam becomes available. It's unfortunate to see that the German government is the slowest or the least active in these activities. Yes, but we have to bear that for the time being. Sorry to be that -- and I think it really depends on closings.

Yes. No, that is clear. And maybe coming back because I think initially, you were also giving collection rates before concessions. So because you're now say 90% after concessions for 2020. What will be the number before concessions?

84% for 2020.

Okay. So that's 84%. Okay. And if you look at the dividend, I might have missed it at the beginning of the call, but the EUR 0.04 dividend, can you kind of explain the rationale behind the absolute level of that dividend?

Yes, the German law for stock listed companies foresees that there is to be -- or that there is a minimum dividend to be paid, if you have profits and the leading company of the group is Deutsche EuroShop AG and we still show there an operative profit. And it's 4% of the registered capital, which is a rather small amount. And this is meant to be, let's say, a defense for minority shareholders that, if a company never pays their dividend that they at least get a small share of that. We've done so this year because it's not a duty to pay, but it's a right of an investor or a stockholder -- shareholder sorry, shareholder to ask -- to levy us for that and to see the company. And that's why we said this time, it's small money, and we want to legally not to have any battle with somebody. So we, at least, pay this minimum amount, which commercially doesn't make much a difference. Yes.

Clear. That makes sense. And then my final question is on the valuations and the NAV because -- and that also may be due to limited disclosure at this point. So I haven't found the data to corroborate my feeling here, but my feeling is that if values are down 11%, that it's not intuitive that NAV is only down 12%. And I was looking at the bridge for earnings, but I couldn't really see a reason why the NAV is only down 12%, if your values are down 11%, because I think, intuitively, we'd expect a higher number. So could you maybe elaborate on that?

Yes. We will present that, of course, with the annual numbers. Can't do it now. But of course, we also have cash kept in the company, which is value, yes? And it's not just the property values, but it's also the reserve that we have built up over the time, which is substantial. It's okay for today's time, and we feel safe with that, but this is also part of that.

So it's mainly retained earnings, I guess, in your view?

Yes.

Okay. All right. And more or less the same for leverage because, again, I think the look-through leverage goes up from 34 to 36. And there's also a cash component there, of course, but still, but I think we have to wait until the full data is released, but it feels that it's a lower increase on the back of a, if I put 11% in my model, my LTV goes up more than -- including retained earnings. So it's something that's not completely clear to me why -- it's a positive because it's lower than I expected, but still I don't fully understand it.

Yes, but the same answer. It's a liquidity. We come from close to EUR 150 million to now EUR 266 million for the whole group, and this is a major impact. And we'll release it and you will be at least for the group level of LTV, you will be really -- or it's easy to derive that from the balance sheet, yes.

[Operator Instructions] The next question is from the line of Thomas Neuhold from Kepler Cheuvreux.

I only have 2, actually. Firstly, I was wondering if you can elaborate a little bit on what kind of spot interest costs you would currently face? And if banks require currently higher risk premiums to the ongoing COVID-19 situation? And the second question is on your ESG strategy. Can you give us an update there? Will you publish specific CO2 reduction target this year? And when will the next sustainability report be issued?

Yes. Maybe let me ask with a later one before I hand over to our CFO, to Olaf Borkers, for the financing question. Yes, I mean, it's an ongoing process ESG as a topic. And as we are just a small investment company here, our main focus is really on sustainability in our centers. And here, we have over the last years, always got, let's say, certificates, how good those centers are, and it's a very complicated task because they look into everything, whatever the carbon footprint is, energy consumption, stuff like that. And we have a -- we had a full report on that last year, and we will have a full report on that this year also, not in the financials. The financials will be published early April, but we'll have the second report more the operational side of the business, and there you will find, besides many other information, also the development on all those issues. And it's very detailed if you want to look at that, yes? So it's important also in times of corona, yes.

Okay. Coming to the first question about the risk premium. We are discussing currently with 4 banks about 2 loans or 3 loans, as Wilhelm Wellner presented, and the risk premium is roughly 30 basis points up. So the current indication for 10 years loans is currently at 1.60%.

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

Yes. Thank you for joining, listening and your questions. It's rough times out there for stationary retail. We are working on the politicians, and we hope that they understand that stationary retail can be operated safely and does not need to be closed. This is proven by other European countries, and we hope to go back into a normal mode. We are really positive to see how quickly frequencies are jumping back. That doesn't mean that the thing goes away first day after the reopenings, but that we have a good chance to work our way out of this valley, and we do so out of a very strong position. Always have been conservative on our balance sheet and liquidity, and we continue to do so. Yes. And we hope that you stay positive on us and yes, stay safe. And yes, have a good day. Thanks.

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