Deutsche EuroShop AG (DEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Natalie, your Chorus Call operator. Welcome and thank you for joining the 9-month 2021 results call. Business information transparency is very important for DES. For this reason, the conference call will be recorded and shared on the Internet. [Operator Instructions] I would now like to turn the conference over to Wilhelm Wellner. Please go ahead.

Ladies and gentlemen, good morning. This is the team of Deutsche EuroShop, and I'm here on this call together with our CFO, Olaf Borkers, and our Investor Relations team. Thank you for joining us. We'll present you our results for the first 9 months of this year, and we'll give you an update on the situation in our centers. Before we look on financials and comment on outlook, let me first start with a short look back on the last now 20 months of the pandemic. This will be useful to get -- or to put the numbers and information that are contained in this presentation into perspective. The pandemic had, as known, a severe impact on Deutsche EuroShop's business. This impact is shown on Slide 6. And here, you can see the long closing -- shop closing periods in our countries of business. Our home market, Germany, which accounts for approximately 80% of our income, was affected very hard with 187 days of complete lockdown; the Czech Republic suffered from even more, 235 days of closing; Poland, 159; Austria, 111; and Hungary, 68 days. These were on the full lockdown days for nonessential shops, yet 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, we continue to see different governmental corona regulations among countries and German federal states, as you can see on Slide 7. For example, Hungary has lifted the duty to wear masks in shops beginning of July. Austria followed that route 3 weeks later but stopped that relief just recently. Poland, the Czech Republic and Germany -- sorry, Poland, the Czech Republic and Germany also still stick to this restriction. Here really, the mask-wearing requirement, besides some cultural effects, seem to have -- or seem to make the difference as countries that have abolished that requirement performed much better. What are the developments in our centers? Since the reopenings end of Q2, we see a similar pattern in the operational numbers, as we have seen it in the summer 2020 after the first lockdowns. People are enjoying the newly redeemed 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. In the third quarter, the footfall remained at approximately 75% of pre-corona levels. For October, the number improved slightly further to 77%. This level is still visibly below pre-corona period because of the extraordinary circumstances. You'll see the development of the footfall on Page 8. The long closing -- the closing period had also a dramatic impact on the tenant turnovers, as it is shown and known -- shown here on Slide 9 and is known. Compared to the 2019 levels, the turnover of our tenants decreased on average to 35% in Q1, to 58% in Q2. In the third quarter, the turnover level improved to 90% for our total portfolio and to 88% for our German centers. Here, we see as before that the people who come to the centers are, on average, more determined to buy goods and services in the centers while, e.g., the customers who spend dwell time in the centers are still lagging in numbers. On Slide 10, you can see our collection ratio since the start of the pandemic, which follows the pattern of the customer footfall and is strongly depending on the lockdown periods. The collection ratio represents the ratio of the received -- receipt-to-invoice trends, service charges and marketing contributions after corona-related concessions. For the first 9 months of 2021, the number was 90%. For the third quarter, the collection ratio improved further to 98%, close to normality. So far, the update on the situation in our centers. I'll now come to the financial results for the first 9 months of this year, and we'll start with valuation of our shopping centers on Page 11. The valuation results on our shopping centers was nearly unchanged. Including investment costs, the valuation result was minus EUR 37.6 million as of end of September 2021. This corresponds to an average devaluation of 1.1% and also includes a positive valuation effect of EUR 2.7 million from the revaluation of an undeveloped project which is currently unused and is in the vicinity of one of our centers. The stabilized net initial yield for our portfolio is slightly up and now stands at 5.45%. And sensitivities to the valuation results to changes in the main value drivers is provided, as usual, in the table at the lower part of this slide. As reported before, and especially from the beginning of the pandemic, there was very little investment activity in the shopping center market. And looking at our specific segment, transaction activities could only be observed in regions which were much less affected from shop closings or for very few landmark shopping centers. In the course of 2020, the pandemic and the increased uncertainty already had an immediate impact on shopping center yields. In 2021, the yields and thereby the discount and cap rates have been so far rather stable. So the main impact on valuation in 2021 comes from the adjustment of market rents. We have experienced these effects already in our valuation end of 2020 with, according to our appraiser, Jones Lang, only slight changes in the first 3 quarters of this year. Let's come to the revenues, which are shown on Page 12. Compared to the prior year period, the first 9 months of 2021 were substantially more affected by the pandemic, as just mentioned. Again, most rents were invoiced according to their respective lease contracts. The major exception in that respect came from our Polish center, where their specific legal situation led to a temporary suspension of rents for the period of lockdown. This accounted for minus EUR 2.4 million. The overall decrease of rent, which amounts to a total of EUR 10.9 million, was also influenced by lower shop rents as well as reduced mall marketing income, the loss of turnover base rents and higher vacancy resulting from insolvencies. The total revenues decreased by 6.4% year-on-year to EUR 157.8 million. On Page 13, we show you the development of our EBIT. And the major financial effect resulting from the pandemic is reflected, as last year, in allowances for rent receivables. These receivables were made in relation to realized and/or expected loss of rent in conjunction with tenant support measures, e.g., rent concessions on in relation to de facto or likely insolvencies. Such allowances amounted to EUR 20.5 million for the first 3 quarters of this year. Overall, EBIT decreased by 5.6% to EUR 111.5 million. The allowances for rent receivables have thereby been determined on the basis of the agreements with tenants for the lockdown starting end of 2020 and, in other cases, in which receivables were outstanding on the expected net rent reduction for the closing periods. I now come to Page 14 and to the financial result. The financial result improved by EUR 3.8 million. Interest savings of EUR 2.9 million and a slightly increased at-equity profit of plus EUR 1 million had a positive impact on the financial result. The minority share of profit ended nearly unchanged with minus EUR 9.9 million. On the next slide, you see that the EBT, adjusted for the valuation, came down from EUR 93.4 million to EUR 90.5 million, which is a minus of 3.1%. Again, corona-related decline in revenues and the rent concessions were partly offset by the just mentioned interest savings. Looking at the operating profit, the EPRA earnings, on the next page, that means the following. Such earnings declined by EUR 2.6 million to now EUR 88.2 million. And on a per share basis, the EPRA earnings decreased from EUR 1.47 to EUR 1.43. This leads us to the consolidated profit of the group on Slide 17. The consolidated result increased from minus EUR 105.5 million to a plus of EUR 44.1 million. And the main impact factor for the change came obviously from the valuation result that is a plus of EUR 150.5 million. The EPS increased from minus EUR 1.71 to plus EUR 0.71 in the first 9 months. Please follow me now to Page 18 and to the development of FFO, which excludes the valuation result. The FFO decreased from EUR 90.9 million to now EUR 88.2 million or, on a per share basis, from also EUR 1.47 to EUR 1.43. As the FFO is calculated earnings based, such numbers should therefore be still analyzed by considering our cash collection ratio, which has improved a lot, but also with the level of receivables, which still is a comparatively -- or we still are on a comparatively higher level. Again, and for the record, the cash collection ratio was 98% for the first 9 months of this year. And now coming to the balance sheet on Page 19. Our total assets amounted to EUR 4.26 billion. That is just a small increase by EUR 21.9 million compared with the reporting date end of 2020. Our consolidated liquidity as of end of September stands at EUR 306.1 million. That is a plus of EUR 40.5 million, excluding the effect from a repayment of the short-term credit line in the amount of EUR 30 million beginning of this year. The buildup of cash was, besides the normalization of the payment behavior of our tenants, also influenced by substantially lower investments into our assets as the works were largely stopped in the closing periods, and our liquidity was also influenced by a drawing of loan to finance CapEx. The total equity, including minorities, increased by EUR 49.7 million. As of end of September, current and noncurrent financial liabilities stood at EUR 1.51 billion, which was EUR 35.5 million lower than at the end of 2020, influenced by scheduled redemptions, repayment of the credit line and the drawing of the CapEx loan that I just mentioned. Noncurrent tax -- deferred tax liabilities increased by EUR 6.6 million to now EUR 331.6 million. Our equity ratio remains at a strong 55.5%, and the consolidated LTV now stands at 31.1%. On a look-through basis, that is the LTV calculated fully proportionally according to our share in all assets, the LTV now stands at 34%, also continued very reasonable and low level. On Page 20, we will find the EPRA NTA, and that increased to now EUR 38.16 per share. That is a slight plus of 2.1%, and this is mainly due to higher liquidity, which was partly offset by the lower property values. This equals to discount of the current share price of approximately 54% to EPRA NTA as of beginning of this November '21. On the next two pages, we give you some updates and information on our debt. Approximately EUR 430 million of our consolidated bank debt mature in the next 2 years. Currently, our consolidated debt bears an average interest rate of 2.09%, and our weighted maturity of the loan portfolio now stands at 4.9 years. Including our nonconsolidated loans, the weighted maturity of the portfolio now stands at 5.4 years with an average interest rate of 2.06%. On the right-hand side of Page 22, you will see that we have fixed loans of EUR 191 million recently, thereof EUR 70.3 million for our City-Galerie Wolfsburg refinanced on June this year but already fixed last year at a rate of 1.18% for 10 years. For the Billstedt-Center in Hamburg, we refinanced EUR 71.7 million at a rate of 1.46% also in June this year and also for 10 years. For the Phoenix-Center in Hamburg, we refinanced a total of EUR 49 million, again for around 10 years at 1.52% on average. This means that all refinancings due in 2021 are successfully closed, and the new financings will contribute close to EUR 5 million of interest savings on a per annum basis. After the presentation of the financials, I would like to give you a short outlook on our operations and on the upcoming refinancing. I'm now on Page 23 of the presentation. Leasing activities were, and of course, the central key in the current situation. Our occupancy ratio decreased during the new lockdown periods in the first half of the year from 95.4% to 93.8%. However, such number improved since summer by 0.9 percentage points and now stands at 94.7%. Besides the insolvencies since the start of the pandemic, the occupation ratio was also mainly influenced by the replacement of larger anchor tenants, e.g., the Altmarkt and our A10 Center. As reported before, substantial part of this space could be handed over to Kaufland already, but there is still considerable space to be filled with new, attractive tenants in due course. Talks are progressing there. Furthermore, the leasing of Karstadt department stores in two of our centers contributed to the higher vacancies. For Rathaus-Center in Desau, we could already secure one new anchor tenant and are in advanced negotiations with another new anchor tenant. And for the other center, our Main-Taunus center, the demolition of its old Karstadt building is underway. There are various ideas for the newly created space, e.g., for attractive events, for gastronomic concepts in an inspiring in and outdoor environment, potentially accompanied by an open platform to be used for entertainment, e.g., dance, music or other performances. So there are ideas and concrete plans and talks, and we are working on that. During the pandemic, we were able to extend these contracts with many tenants, including our top 10 tenants and other prime retailers such as Apple, Kaufland or lately also H&M, Rossmann, Thalia or C&A. A sample of such tenants is shown on Page 23. Additionally, we are in negotiation with our major and well-known anchor tenants to newly move into our shopping centers. In some cases, we even try to relocate them from other retail spaces in the neighborhood of our centers. While we make all the legal progress, it needs to be mentioned that the leasing market conditions in this environment remains challenging and that there is pressure on rents. The first real overall effect on top line rent will become visible once we have finalized our budgeting process for 2022 and after a hopefully successful full Christmas sales as a basis for new -- or for further normalization. We expect the overall impact on rents were manageable though visible. Looking at the digitalization process in the retail business, we connected our first international center, the City Arkaden Klagenfurt in Austria to the Digital Mall in the first half of this year. Now 18 out of 21 of our shopping centers have this valuable link to the omnichannel world. While the online availability check is now working for 910 shops and roughly 3.1 million products in the ECE portfolio, one important next step is the testing of deliveries out of the center serving the last mall. The Digital Mall project is now ongoing with 64 centers live in total. You can see a summary of the participating partners on Page 24. Finally, I would like to come to Slide 25 and look at the financing activities and our financial forecast for 2021. We are working on the refinancing of four loans with a total amount of EUR 224 million becoming due next year. While the number of banks looking at real estate financing, e.g., shopping centers, has decreased lately, we have received good interest in our refinancings in the market, and we'll follow up on that in due course. Furthermore, we continue the regular dialogue with our banks about the impact of the pandemic on our financial governance. And until the reporting date, all of our financial governance were either met or they were, under these extraordinary circumstances, temporarily suspended by the banks. Coming to the financial outlook. We expect, as before, total funds from operation of EUR 1.70 to EUR 1.90 per share for the financial year 2021. It is still too early to position us in or around that forecast as it is still very much depending on the rent agreements with tenants or the rent -- yes, concession agreements with tenants, which also relates to earlier quarters of this year, but we are confident to be within that range and that we can manage that. This forecast, however, again assumes that the pandemic situation can be broad and kept under lasting control without further store closures or significant restrictions on center operations, the continued uptick on private consumer spending and an associated further recovery of the tenant turnovers, especially during Christmas sales as well as the preservation of high collection ratios. This forecast is also based on the assumption that the government coronavirus support programs established in Germany are effectively granted and paid out to a significant proportion of our tenants. Ladies and gentlemen, we remain optimistic even though there's still some way ahead of us to come to normality and even though, as you will be aware by following the public news, the currently increasing corona incidences again lead to a discussion around new restrictions which could also be relevant for us indeed in Germany, the so-called 2G or 3G regulations or other. But others speak about a potential freedom day in Germany next spring. So let's keep our fingers crossed that we all can enjoy a beautiful end of the year and the respective season sales, and then we can start into a healthy new year 2021. So for my presentation, thank you for listening, and I'm happy to take your questions now. Operator, please take over.

[Operator Instructions] So there are no further...

Yes, it seems there are no questions. So again, thank you for joining. Stay healthy. And we're happy to talk to you soon again.

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