Deutsche EuroShop AG (DEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome, and thank you for joining the H1 2021 Results Call. Business information transparency is very important for DES. 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 Hamburg. This is the team of Deutsche EuroShop, and I'm here on this call with our CFO, Olaf Borkers; and our Investor Relations team. Thank you for joining us. We'll present you the results for the first 6 months of 2021, and we'll give you an update on the situation in our centers. Before we take a look on the financials and come to an outlook, let me first start with a look back on the last 16 months of the pandemic. This is important to put all numbers and information that are contained in the half year report and in this call into perspective. Pandemic had, of course, a severe impact on DES business. So the fairness of the impact of the lockdown is shown on Slide 4, where you can see the long closing periods for our countries of business. But there are differences among the countries which are also reflected in the performances of the various centers. Our home market, Germany, which accounts for approximately 8% of net income was affected very hard with 187 days of complete lockdown just topped by the Czech Republic with 235 days. Poland saw 159, Austria 111, and Hungary, a much less drastic 68 days of closing. These were only the full lockdown days for nonessential shops, but it's important to mention that the periods between and right after the hard lockdowns were and still are subject to limitations and impediments, which continue to have depending on the segment substantial influence on the business. Currently, in the immediate aftermath of the closings, we see a deferring dynamic concerning governmental corona regulations among the countries and German federal states, as you can see on Slide 5. For example, Hungary has lifted the duty to wear masks in shops in calendar week #27, and Austria followed that rule 3 weeks later in the state of Carinthia. That is a state where our center is located. Poland, the Czech Republic and Germany stick to this burdensome restriction for the time being. And in Germany, talks are that the government wants to keep the mask mandatory for retail until spring 2022. We hope that the politicians will not follow this way, but we'll focus on a more regional and a flexible approach adjusted for the respective local pandemic situation. I now come to the centers. After the reopenings end of Q2, we see a similar pattern in our operational numbers as we have seen last summer after the first lockdown. People are enjoying the newly regained freedom and a certain kind of normality. What we see is that the people return to the malls and shops even though there are and will be for some time, distractive restrictions in place. The footfall climbed back to 77% of the pre-corona levels end of July, and it's fair to say that these levels are still visibly below their normal levels given the extraordinary circumstances. We'll find the development of the footfall on Page 6. The loan closing periods had a dramatic impact on the tenant turnovers, as it is shown on Slide 7. Compared to the 2019 levels, the turnover of our tenants decreased on average by 65% in Q1 and by 45% in Q2. Again, please bear in mind the long closing periods in Germany our last center opened up only early of June, early June. Looking on the latest developments and the June turnovers for the tenants, we see a further and orderly improvement on average to a level of 85% compared to June 2019. Looking at the data, it should be mentioned that due to the loan closings and the limited sample of like-for-like observations, such numbers are still a bit sketchy, but they show the general trend. On Slide 8, you can see our collection ratio since the start of the pandemic, which follows to a certain extent, the pattern of the customer footfall and it's strongly depending on the lockdown periods. The collection ratio represents the ratio of the received to invoiced rents, service charges and marketing contributions after corona-related concessions. For the first half of 2021, this number was 80%. And for the month of July, the collection ratio improved further to 94%. So for the update on the situation in our centers, I now come to the financial results for the first half of 2021, and we'll start with the valuation of our shopping centers on Slide 9. The midyear valuation of our shopping centers by our external appraiser, JLL did not lead to any noticeable changes. Including investment costs, the valuation result was minus EUR 11.3 million as of end of June '21. And this corresponds to an average devaluation of 0.3% and includes also a positive valuation effect of EUR 4 million from the revaluation of an undeveloped and currently unused plot of land. The stabilized net initial yield for our portfolio came up by 2 basis points and now stands at 5.43% and the sensitivity of the valuation results to changes to the main value drivers is provided as usual, at the lower end of the table -- of the slide, sorry. As before and since the start of the pandemic, there was very little investment activity in the shopping center market. Looking at our segment, very few regular shopping center transactions could be observed with activities so far being limited mostly to some landmark shopping centers or centers in regions that have been much less affected by shop closings. In the course of 2020, the pandemic and the increased uncertainty already had an immediate impact on the shopping center yields and thereby on discount and cap rates. Furthermore, market rents were on average adjusted slightly downwards by our appraiser, whereas assumptions for re-leasing times and CapEx requirements have been raised. We had experience these effects already in our valuation as of end of 2020 with -- according to JLL, no substantial changes in the first half of this year. Let's come to the revenues, which is shown on Page 10. Compared to the prior year period, the first half of 2021 was, as said before, more affected by the pandemic. Again, most rents were invoiced according to the respective lease contracts. The major exception in that respect came from our Billstedt-Center where the specific legal situation led to temporary suspension of rents for the period of lockdown. This accounted for minus EUR 2.4 million. The remainder of the decrease that is minus EUR 7 million came from lower shop and parking rents as well as more marketing income, the loss of turnover rent and higher vacancy resulting from insolvencies. The total turnovers -- sorry, revenues decreased by 6.5% year-on-year to EUR 104.9 million. On Page 11, we show you the development of our EBIT. The major financial effects resulting from the pandemic is reflected in the allowances for rent receivables. 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 relation to actual or likely insolvencies. Such allowances amounted to EUR 18.1 million for the first half of this year. Overall, EBIT decreased by 10.2% to EUR 70.5 million. The allowances for rent receivables have been thereby determined on the basis of the agreements with the tenants for the lockdowns starting end of last year and in other cases, in which receivables were outstanding. There on the expected net rent reduction for the closing periods. I now come to Page 12 and to the financial results. This improved slightly by EUR 1.6 million, interest savings of EUR 1.5 million and the lower minority result of plus EUR 0.4 million had a positive impact on the financial results, and on the contrary, the equity result was EUR 0.3 million lower due to corona-related declines in revenues and higher allowances for rent receivables also in our JV companies. On Slide 13, you see that the EBT adjusted for valuation came down by EUR 62.1 million to EUR 55.7 million, which is a minus of 10.2%. Again, the main input factors were the corona-related declines in revenue and the rent concessions. Looking at the operating profit, the EPRA earnings on Page 14, that means the following: The EPRA earnings declined by EUR 5.5 million to now EUR 54.3 million. And on a per share basis, the EPRA earnings decreased from EUR 0.97 to EUR 0.88. This leads us to the consolidated profit of the group on Slide 15, and the consolidated results increased from minus EUR 129.3 million to EUR 36.8 million. The main change or the main impact for the change came from the revaluation result. That is a plus of EUR 169.7 million, and this was just marginally compensated by the lower operating result this year. And please follow me now to Page 16 and to the development of the FFO, which excludes the valuation result. The FFO decreased from EUR 59.9 million to now EUR 54.3 million or on a per share basis, also from EUR 0.97 to EUR 0.88. It should be mentioned again that the FFO was calculated as usually earnings based and therefore does not reflect untypically high receivables outstanding. The cash flow of the company should therefore be analyzed by taking into account our cash collection ratio. And this ratio was, as mentioned before, 80% for the full half year of 20 -- first half year of 2021. I'm now coming to our balance sheet on Page 17. Our total assets amount to EUR 4.25 billion. This is just a small increase of EUR 11.2 million compared with the reporting date end of 2020. Our consolidated liquidity as of end of June '21 stands at EUR 268.1 million, and that is a plus of EUR 32.1 million, excluding the effects from a repayment of a short-term credit line in an amount of EUR 30 million beginning of this year. The buildup of cash in the heavily corona impacted first half of the year was also influenced by substantially lower investments in our assets as the works were largely stopped in that period. And they were also influenced by a scheduled drawing of a CapEx loan. Total equity, including minorities, increased by EUR 40.6 million as at the end of the first half of the year, current and noncurrent financial liabilities stood at EUR 1.5 billion, which was EUR 33.6 million lower than at the end of 2020. Due to scheduled redemptions, the repayment of the credit line and the drawing of the CapEx loan that I just mentioned. Noncurrent deferred tax liabilities increased by EUR 5.9 million to EUR 330.8 million. Our equity ratio remains at a strong 55.4% and the consolidated LTV now stands at 31.9%. On a look-through basis, that is the LTV calculated fully proportionally according to the group's share in all assets, the LTV now stands at 34.9%, also a continued very reasonable and low level. On Page 18, you will find the EPRA net tangible assets, which we are reporting for the second time. And 1 should note that for Deutsche EuroShop, the formerly reported NAV figures or numbers were identical with the recalculated historic NTA values. So EPRA NTA increased to now EUR 38.03 per share, e.g., that's a plus of 1.7%, and this equals to a discount to the current share price of approximately 50 -- sorry, 46% compared to the NTA of end of June. On the Pages 19 and 20, we give you some information on our debt. Approximately EUR 430 million of our consolidated bank debt mature in the years 2020 and 2023. And currently, our consolidated debt builds an average interest rate of 2.1%. Our weighted maturity for our loan portfolio now stands at 5.2 years. On the right side of Page 20, you will see that we have fixed loans of EUR 191 million recently, whereof EUR 70 million for our City-Galerie, Wolfsburg refinanced on June 30 this year, but already fixed last year at 1.18% for 10 years. For the Billstedt-Center in Hamburg, we refinanced EUR 71.7 million at 1.46%, also in June '21 and also for 10 years. For the Phoenix-Center in Hamburg, we refinanced in total EUR 49 million for 10 years at an average interest rate of 1.52%. That means that all refinancings due in '21 are successfully closed. After the presentation of these financials, I want to give you a short outlook on our operations and on the upcoming refinancing. Leasing activities were and are, of course, the central key in the current situation. Our vacancy ratio has increased by 1.6 percentage points to now 6.2% end of June. Besides the insolvencies, since the start of the pandemic, such number was also influenced by the replacement of a large VR market in our A10 Center. And here, a substantial part of the space could be handed over to the new grocery anchor tenant that is Kaufland, and this happened already in March. Furthermore, the leaving of Galleria Karstadt Kaufhof in 2 of our centers contributed to that. Here, we are already in advanced negotiations with new anchor tenants for the Rathaus-Center in Dessau. For the other center our Main-Taunus-Zentrum, we are already in the process of starting the demolition of the old Karstadt building, creating space for something new. Our substantiated idea, which is very attractive, is to create a generous area for verrigated event gastronomy concepts and an aspiring in an outdoor environment, accompanied by an open platform to be used for entertainment, e.g., music or other performances. And because of the pandemic, we could extend lease contracts with many tenants including our top 10 tenants and also prime retailers such as Apple, Kaufland or lately also with H&M. A sample of tenants is shown on Page 21. Additionally, we are in negotiations with other major and well-known anchor tenants to newly come to our shopping centers in a given area and in some cases, even to relocate them from other retail spaces in the neighborhood of our centers. Here, we could further progress and we'll report going forward. Overall, and as mentioned before, these re-leasing activities will take some time in the aftermath of corona and also because of some time consuming building permit and construction processes. Looking at the digitalization process in the retail business, we connected our first international center, the City Arkaden in Klagenfurt in Austria to the Digital Mall in the first half of this year. Now 18 out of 21 shopping centers or have a link to this omnichannel world. And while the online availability check is now working for 850 shops and 3.1 million products in the ECE portfolio, 1 important next step is the testing of deliveries out of the centers, serving the last mile. The Digital Mall project is now ongoing with 62 centers lives in total. And you can see a summary of the participating partners on Page 22. Finally, I would like to come to Slide 23 and look at the financing activities and our financial forecast for 2021. We are working on the refinancing of 4 loans with a total amount of EUR 224 million becoming due next year. While the number of banks looking at retail real estate financing, e.g., shopping centers has decreased, we have so far received good interest for such refinancings in the market, and we'll follow up on that in due course. And as before, we continue the regular dialogue with our banks about the impact of the pandemic on our financial governance. As of end of June this year, all of our financial governance were either met or they were under these extraordinary circumstances temporarily suspended by the banks. I'm coming now to our financial forecast. After the openings, the operating KPIs, particularly footfall and tenant turnovers have trended upwards and the collection ratios have also continued to improve of late. With the store openings, we are optimistic and confident that the direction of travel in the second half of '21 will continue to be positive for our tenants and that we will be once again able to achieve rent income that is significantly more stable and more reliable to plan. However, as some of the key operating figures are currently still well below precrisis levels. And as mentioned, the first half of '21 was dominated by shop closes further lockdown and insolvency-related rent reductions or rent losses are to be expected. Added to this, it is uncertain to what extent the progress made in vaccinations will be sufficient to maintain business openings during autumn and winter months and also to protect against possible new virus variants. The brick-and-mortar retail trade will, for the time being, thus continue to face special challenges, resulting in a persistently evaluated uncertainty with regard to the economic trends and business performances. But still, having mentioned this reservation and based on the current situation, we expect total funds from operation of EUR 1.70 to EUR 1.90 per share for the year 2021, after EUR 2 in the year before. This assumes that the pandemic situation can be brought on a lasting control without store closures or significant restrictions on center operations, a continued uptick in private consumer spending over the course of the second half of the year and an associated further recovery of the tenant turnovers and the collection ratio. This forecast is also based on the assumption that the government coronavirus support programs promised in Germany will be granted to a significant portion of our affected tenants and paid out promptly. Ladies and gentlemen, we remain optimistic even though there is still some way ahead to us on the way to normality. So for my presentation, thank you for listening, and I'm happy to take your questions now. Operator, please take over.

[Operator Instructions] The first question is from the line of Kai Klose with Berenberg.

I've got 3 questions, if I may. The first 1 is on Page 11 of the presentation where you show the allowances. Could you give a bit more details on the negotiations with your tenants, what the outcome was regarding either rent reliefs or rent concessions, maybe have some more color how this has been progressing?

Yes, I'll start then with the first one. We have offered our tenants when we became clear the second lockdowns were announced that we would grant our tenants in Germany, a 50-50, let's say, regulation that when they pay all their dues outstanding plus 50% of the net rent, plus 100% of the ancillary costs that we would get a relief of 50% for all the closing periods, closing being defined, really shop closings or the limitation just to click and collect, which becomes more for most of the tenants, the same like a full closing. We had received good interest in that offer because it also regulated that this would be then a final regulation between the parties. You probably might have been aware of and we have informed about it that at the beginning of 2021, a new German law or, let's say, a change in law became effective that the pandemic situation gives the, let's say, the foundation for tenants to claim under Paragraph 313 of the general German law to ask for rent reductions. But there's no automatic in Germany, how much that will be. So it's then up to the judges to decide at the end on and nobody wanted that. So we thought it's a good offer from our side, and we saw a good interest of that. And maybe, let's say, because it's not clear who is taking that in full at the end. But we found a good interest, and this is a major part makes up for that number. There are also a substantial amount of tenants who did not follow that way. And we don't know yet what the outcome will be. In the meantime, the German government has announced was end of May or beginning of June, further more substantial support for the tenant. So maybe we become, let's say, less affected by the ones we haven't signed that offer, but this is still up to negotiations. So they all try to get there, and we expect them to get their subsidies from the state. And we have made some estimates below 50%, looking at those tenants. But it's not an easy process, as you can imagine, what the final outcome would be. Yes. But now the ball is in the court of the tenants, I would say, because we have made the offer at the beginning. And I think it was a fair offer. So this is contained in that, and we expect that -- yes, and that's why you see if you calculate that we will see further write-offs in the second half of this year. But of course, this is included in our forecast already. So this is a big variable at the moment, assuming we stay open.

Second question would be on Page 9 of the presentation, you mentioned also in the report that there was, I think, a EUR 4 million valuation uplift for a currently unused plot of land. Maybe could give a bit more details where this plot of land is located and what was the reason for the uplift?

Yes, it's not big in a number. If you look at the total size of the portfolio. However, that was in our Frankfurt Center, a huge plot that was the spillover parking place, and we now find better solutions for our customers to serve them in the high seasons. And as Frankfurt is booming, we got unsolicited offers for that -- and offer is exaggerated and unsolicited offer, which we now checked with valuators, and that's the effect on that.

And the last question is on Page 8 of the report of the H1 report, where it said that the loan covenants have been met or temporarily suspended by the banks. Could you give a bit more details on how many loans or let's say, what is the outstanding amount, the covenants were suspended or if they were not to reach if there was a covenant breach? What does this sentence mean in particular?

It means that we have 20 cabinets to be calculated out of which 13 once we have been met. And for the other 7, when it was obvious that we would perhaps not met them, then we agreed with the banks on out waivers. And the amount you are talking about is roughly EUR 250 million.

And the effect or was there any effect on the waiver?

No, not -- the loans which are linked to these covenants and which were not met. But there was a waiver for the covenants.

Understood. And waiver means that you have to provide some cash or?

No. It could mean that, yes, but we were -- we agreed with all the banks very frankly, without paying any amounts to the banks. We said or agreed that we will calculate even if there are ways, but we haven't paid anything for that.

The next question comes from the line of Michael Kuhn with Deutsche Bank.

Once again, on, let's say, tenant negotiations, let's say, outside the short-term arrangements that you were able to reach on what conditions do you currently do prolongations, both obviously, regarding the rent levels, but also regarding contract durations and so on, some more insight here would be helpful.

Yes. I mean in the corona environment of uncertainty and shop closings as I said before, there is pressure on top line rents, and those will become visual going forward. But given our financial strengths, we expect them to be well digestible. We see this extraordinary situation and orderly good interest from the tenant side. And we have shown you a sample of brands with which we could prolong lease contracts during corona, the corona period. But we think it will need more time -- the turnovers of the tenant stabilize and that the tenants will restart an accelerated expansion, e.g., signed leases for new shops. So our priority, therefore, is to keep vacancies low and to keep or attract tenants and rather fill the corona-related gaps, then keep them as strategic reserves or as 1 may call them. So I think we will need the rest of the year and look at the sales of the season. So that's mainly Christmas, I see that the situation stabilizes and the overall picture, we expect to be then soon or maybe readable in our 2022 guidance, which will, of course, put out, assuming that there are under the same assumptions that we have for financial year 2021 now, there is no further lockdowns. Yes. So yes, there is some pressure. I think the vacancy -- not the vacancy, sorry. The duration we kept also end of last year over corona rather at 5 years, so rather stable. And the top line effect, which I think is most important for you and for us, we really calculate now until the end of the year. We see how the sales are developed, how the signings are now, but it's too early to comment on them. Yes, they will be visible, but they will be digestible. That's our expectation.

Okay. So you can't give an indication yet, let's say, a rough indication on what concessions you're willing to make to keep the vacancies low as you just said.

No, unfortunately not. Because it would be -- then we would be able to even do, let's say, maybe a guidance for 2022, and that's too early. But that's why I try to give you -- it will be visible in the top line, but it will be digestible. That's what we guessed. But it's too hard to predict at the moment. The tenders now come back to the table. And the leases that have been temporarily extended in the course of last year and this year. Now we come, let's say, to the beef and need to talk about that and the rest will take a couple of months. But even that it's clear, we have seen insolvencies and we have reported on them. We lost some of the tenants there. We agreed on new terms with the insolvent partners on some other spaces. So there will be some effect on the top line.

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

Just a couple of questions on the leasing, please. Could you give me an idea in terms of volume where your leases have been versus 2019, say, for example. And then on the leases signed at the moment, can you give me an idea, how much below passing market rents, they are, what the re-leasing spreads are like? And then finally on that, could you give me an idea of how many as a percentage of short-term leases you're signing or if there has been a change to kind of how you've done it previously, more short term to keep the vacancy lower?

Yes. Starting with the first one, Rob, to be honest, I didn't understand it. What do you mean with volume. So we have some regular lease volume coming up that was roughly 10% for this year. And yes, we will continue in doing so probably -- or it's rough -- half of that has been done already. And to your last question, it's at the moment rather a smaller percentage, let's say, maybe 1/4 that is just short term to get more visibility for both the parties to maybe extend a year or even half a year or 1.5 years to agree on that. So I hope that answers those questions. And you were asking for the conversion ratio, I think that was it. And I think I would have to rather raise the answer I have given before. We have so many influence factors. That is higher vacancy, that is the short-term leases. There is some rents for the insolvent partners for that work are continuing. And they get, let's say, rent releases at the beginning plus the negotiations, which are now taking place so that we will have to wait to see the overall effect in the top line until we issue the guidance. So an isolated subset like conversion ratio, which we usually look at on annually is maybe a bit misleading in the 1 or the other direction.

[Operator Instructions] There are no further questions at this time. So I hand back to Mr. Wilhelm Wellner for closing comments.

Yes. Thank you, as I said before, for joining. We are open again. We'll do all what's possible and necessary to get back as close as possible and as quick as possible to normality. And yes, thank you for having interest in us. Yes, have a good day and weekend.

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