Deutsche EuroShop AG (DEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the preliminary results for the Financial Year 2023 Conference Call. I'm Mohit, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Hans-Peter Kneip. Please go ahead, sir.

Thanks very much, Mohit. Good morning, ladies and gentlemen. This is Hans-Peter Kneip speaking. On behalf of the Management Board of Deutsche EuroShop, I'm delighted to have this conference call with you and share our preliminary results for the financial year 2023 and the development of our company with you. Thank you for taking the time and for your continued interest in Deutsche EuroShop. The cover of the presentation and some of the images it contains already reveal the theme of our annual report 2023, which will be published on the 26th of April 2024. The title will be Eat. Shop. Laugh. At this time, we are focusing on the topic of food and the variety of culinary experiences we offer at our shopping centers. To begin with, the Deutsche EuroShop team, together with our asset manager, ECE, have done an excellent job to achieve these results. In the current transformation space in the real estate and retail sectors, such good results cannot be taken for granted, but are the result of intensive work by our leading team, both at a strategic level and on site in our 21 shopping centers. But enough words of introduction, let me now take you through our preliminary results and address any questions you may have. Let's get started with an update on our business activities on Slides 2 and 3. Overall, we have seen a sustained comeback of our operational business. Compared to 2022, footfall and retail sales of our tenants have increased by 5.7% and 8.6%, respectively. As a result of the acquisition of minority interest in our own shopping centers in early 2023, Deutsche EuroShop has considerably strengthened its return profile. Our revenues went up by 28.4% to EUR 273.3 million, and FFO increased by 31.7% to now EUR 171.3 million. Even without the acquisitions, revenues and FFO have developed favorably, as we will discuss in detail shortly. In terms of financing, we are in a very good position with an LTV of 33.2% and a cash position of EUR 336.1 million shown on Slide 3. As you know, we have paid out a dividend of EUR 191.2 million, EUR 2.50 per share, in September 2023 and additionally, EUR 149.1 million, EUR 1.95 per share, in early January 2024. Adjusted for the dividend in January, the LTV still remains at a low level of approximately 36.9%. We have a steady funding situation and all our financings for this year are completed. The next loan is due in 2025, with major financings only coming up from 2026 on. Our newly established share buyback program is progressing, and we have bought back over 150,000 shares meanwhile. On Slide 4, we have a closer look into our shopping centers. In Q4, footfall went up again by 1.6% and the turnover of our tenants by 3.5% compared to the prior year period. As already mentioned before, looking at the entire year, we have seen a plus of 5.7% in footfall and 8.6% in turnover, as shown in the yellow bar chart. The good news is that both inflation and interest rates have stabilized on lower levels in the meantime. However, consumption continues to be influenced by macroeconomic uncertainties, such as fears of recession and inflation as well as geopolitical conflicts, e.g. in the Ukraine and the Middle East. Insolvencies in the retail sector are still continuing, albeit at a much lower level. The most difficult phase seems to be over in that respect, but the retail sector may not have bottomed out quite yet. Overall, we were satisfied with our retailers' Christmas business as well as Black Friday and Black Week, although there was no strong development compared to the previous year. On Slide 5, you will see that the weighted maturity of our rental contracts is now at 4.7 years, up to 5.7 years 1 year before. That reflects shorter lease terms we have been agreeing to for a couple of years. The occupancy rate at the end of the year was 93.3% versus 94.3% in 2022, partly due to temporary vacancies as part of major restructuring measures. I will provide some key examples of this later. On Slide 6, you will find our top 10 tenants with only minor changes. Our biggest tenant, H&M, has a share of 2.6%, followed by New Yorker and Deichmann with 2.3% each. The 10 largest tenants only account for 20% of our rental income. Our sector mix on Slide 7 shows that fashion is focus of our malls as it has always been, and that's a good thing because visitors have proven to value our attractive tenant mix here also in times of online retailing. As a result, a number of fashion retailers in our portfolio have recently developed strongly and may expand in our centers to replace less popular concepts. Contrary to popular belief, a well-assorted fashion range exerts a strong attraction of visitors from which other segments and shopping centers benefit. At the same time, we aim to diversify our sector mix and, for example, strengthen gastronomy and entertainment offerings in our centers, which are similarly popular with visitors and increase the length of stay. So far, the update on the situation in our centers. Before I come to the financial results for 2023, I would like to remind you that we acquired additional shares in 6 of our shopping centers early in January of last year, which have considerably increased Deutsche EuroShop's revenues and earnings. These acquisitions were financed for a capital increase against cash and noncash contributions. As a result of the acquisition of additional shares, 4 property companies previously accounted for using the equity method were fully included in the consolidated financial statements for the first time, with economic effect from the 1st of January 2023. When describing the results of operations, financial position and net assets of the group, I will provide this information where appropriate on the basis of a comparable group, i.e., pro forma. The comparable group was prepared under the assumption that the acquisition of the 6 property companies had already taken place at the beginning of 2022. We have highlighted the effect in red for the 2022 figures on the following pages. I would like to start by addressing the valuation of our investment properties on Slide 8. The valuation result of our shopping centers was again negative in an environment still characterized by downward pressure. Although valuation declines in other subsectors were certainly higher, the retail sector was not exempt from further write-downs. The positive operating performance in our centers was counteracted in particular by higher interest rates, increases in real estate transfer tax and a nearly stagnant transaction market for shopping centers. Including investment costs, the valuation results before taxes was minus EUR 209.1 million as at the end of the year. This corresponds to an average decrease of 4.2% after 3% in 2022. The increased net initial yield for our portfolio now stands at 6.25%, whereas the EPRA net initial yield stands at 5.91%. The sensitivity of the valuation results to changes of the main value drivers is provided in the table in the lower part of this slide. Let's come to the revenues on Slide 9. This came out slightly higher at EUR 273.3 million after EUR 264.7 million in 2022. This is a pro forma plus of 3.2%, which essentially comes from index adjustments and higher turnover rents. The breakdown between Germany and abroad is unchanged. We still have 20% share abroad. The EBIT illustrated on Slide 10 amounted to EUR 212.7 million after EUR 194.2 million in 2022. That is a pro forma plus of 9.5%, which is the result of higher revenues, income from the reversal of provisions as well as lower value adjustments and consultancy expenses. This increase was partly compensated by higher operating and maintenance costs. The EBIT, more precisely the other operating income, includes a positive one-off effect of around EUR 15 million, which is still related to the coronavirus pandemic and therefore not expected to recur in the future. Our financial results on Slide 11 improved pro forma by EUR 1.4 million or 3.2% to now minus EUR 43.2 million. Our interest expenses went up by EUR 4.5 million due to loan increases and higher interest rates for a follow-up loan. In contrast and also owing to the rise in interest rates, we achieved an increase of EUR 5.2 million in interest income from our bank deposits. This financial result, deducted from the EBIT outlined just before, results in an increased EBT excluding valuation. As you can see on Slide 12, the EBT adjusted for valuation rose from EUR 149.6 million to EUR 169.5 million, which is a pro forma plus of 13.3%. On Slide 13, you will find our consolidated result, which is a negative territory for 2023 with minus EUR 38.3 million. Compared to 2022, the consolidated result decreased by EUR 68.7 million. This is due to the negative valuation result discussed earlier, which has overcompensated the overall positive development of the EBT as well as lower taxes. Please follow me now to Page 14 and to the development of the funds from operations. The FFO formed the basis for the distribution of dividends, regular loan amortization and ongoing investment into our portfolio. The FFO increased pro forma by 14.5% from EUR 149.6 million to now EUR 171.3 million or, on a per share basis, from EUR 1.99 to EUR 2.28. The marked increase in FFO stems from the higher result from operating activities, the improved financial result, as well as lower taxes. The FFO eliminated valuation effects, deferred taxes, as well as special one-off items such as in 2023, the result from changes in the scope of consolidation. With FFO per share of EUR 2.28, Deutsche EuroShop thus exceeded its already-increased forecast of EUR 2.08 to EUR 2.18. I'm now coming to the balance sheet on Page 15, where we can also see the effects of the acquisitions. Our total assets amount to EUR 4.5 billion. This is a change of EUR 252.1 million compared with the reporting date end of 2022. Cash and cash equivalents as of the 31st of December 2023 stood at EUR 336.1 million, at a similar level compared to the end of 2022. As mentioned previously, please keep in mind that we have paid out a dividend shortly after the reporting date in early January, which has reduced consolidated liquidity by EUR 149.1 million. Total equity, including minorities, increased by EUR 35.7 million. At the end of 2023, current and noncurrent financial liabilities stood at EUR 1.68 billion, which was EUR 198.3 million higher than at the end of 2022, in particular due to the liabilities assumed from the minority acquisitions. Noncurrent deferred tax liabilities decreased by EUR 2.5 million to EUR 331.9 million. Our equity ratio decreased slightly but still stands at a solid 53.3%, and the consolidated LTV stands at a low 33.2%. The EPRA LTV calculated proportionally according to the group share in all assets, so to say, on a look-through basis stands at 34.8%, a continued very low level. As already mentioned at the beginning of my presentation, the LTV has increased by approximately 370 basis points following the dividend payment in early January. Please have a look on Slide 16, where we show the EPRA net tangible assets, which increased by 3.4% from EUR 2.34 billion to now EUR 2.41 billion. On a per share basis, however, the NTA decreased from EUR 37.81 to EUR 31.58, mainly due to the higher amount of shares issued following the capital increase in early 2023. The discount of the share price to the EPRA NTA as of the 18th of March is 40%. On Page 17, we give you some information on our debt. There are no expiring loans this year. Our consolidated debt bears interest at an unchanged average rate of 2.43%. As at the 31st December of 2023, the weighted maturity of our loan portfolio stands at 5.8 years. Deutsche EuroShop continues to envisage loan increases and optimizations where appropriate and seeks to manage upcoming maturities in 2025 and 2026 at an early stage. Coming to some news on our portfolio on Slide 18. The construction work for the Foodgarden in the MTZ is progressing successfully, and the topping-out ceremony will be celebrated at the end of April. The Main-Taunus-Zentrum, one of the largest and highest turnover shopping centers in Germany, is among the jewels in our portfolio. The Foodgarden will be a new highlight for the center, giving it a new, lively and urban center point with a high-quality, varied restaurant and food offering. New freestanding restaurant buildings are currently being built, some with roof terraces, some with outdoor terraces, attractive landscaped exterior areas and sophisticated architecture, and all of them meet the highest sustainability standards. Wood is used as the main building material. The new Foodgarden is built on the area of around 9,000 square meters in the heart of the shopping center in place of the former Karstadt building. The corresponding investment is around EUR 28 million, and I'm very happy to tell you that we are already completely pre-let with high-quality restaurant tenants such as L'Osteria, Alex, The Ash and MoschMosch. The grand opening is planned for spring 2025. And there is also good news from Viernheim, where the Rhein-Neckar-Zentrum is located. You will see those on Slide 19. In February, a new and modern freestanding L'Osteria is providing highlights from the Italian kitchen to our visitors. In addition, 3 exciting tenants will move into the adjacent, completely renovated former Bauhaus building in summer, providing plenty of retailtainment, as we say. An interactive indoor entertainment concept, a trampoline park and a successful bicycle store will each be an attraction. Already opened and only a few meters away is the indoor skydiving center, which is hugely successful. All these tenants will positively benefit from each other and will further boost the entire center by increasing frequency and dwell time. Furthermore, a photovoltaic system is currently being installed on the roof of the Rhein-Neckar-Zentrum, with completion scheduled for April 2024. You will find a snapshot on Slide 20. The investment for the photovoltaic plant amounts to around EUR 1.1 million. Based on an output of 770 kilowatt peak, EUR 139,000 of electricity cost per year can be saved in the future. I mentioned to you earlier an increased vacancy rate of 6.7%, which is partly due to temporary vacancies as part of larger restructuring measures to increase the strength and the attractiveness of our shopping centers. On Slide 21, I would like to highlight 2 representative examples. In our Stadt-Galerie Hameln, an area previously used by the hypermarket Real, is currently being renovated and restructured. We are investing approximately EUR 5 million into the center. The food retailer, Netto, and the highly popular nonfood discount, Action, will open here in autumn 2024 and will give the entire center a boost and attract further tenants to the center. In the A10 Center in Wildau near Berlin, construction work is underway to build a new MediaMarkt electronics store, as well as the TK Maxx department store in the immediate vicinity of the very successful Kaufland. Similar to Hameln, we are using vacant spaces for the project that were previously occupied by Real. The successor, Kaufland, operates in a much smaller area and leaves room for additional tenants. The A10 Center is a leading shopping center in Germany with a privileged location South of Berlin, and we expect the investment to have a further positive impact on the center. We're investing approximately EUR 16 million here. Finally, I would like to come to Slide 22 and the outlook. For the 2024 financial year, we were once again publishing a guidance for our most important key figures, revenue, EBIT, EBT and FFO, as was the case until the outbreak of the COVID pandemic. We can look back on a successful year for Deutsche EuroShop, and the outlook is encouraging. For 2024, we expect funds from operations of EUR 1.91 per share to EUR 1.99 per share, or in total, between EUR 146 million and EUR 152 million. Please keep in mind the increased number of shares and that we have not taken into account any share buybacks yet. This forecast is based on an expected revenue between EUR 268 million and EUR 274 million and EBIT from EUR 204 million to EUR 210 million, and an EBT excluding valuation from EUR 149 million to EUR 155 million. As already explained, 2023 was influenced by positive one-off income of around EUR 15 million, which was still related to the coronavirus pandemic, and will therefore not be repeated in the financial year 2024. We have highlighted this effect in orange to compare the forecast with a largely unaffected year 2023. Whereas revenues for 2024 are forecasted at similar levels compared to 2023, we expect mid-single-digit growth of the unaffected EBIT. However, we expect this growth to be largely offset by increased financing costs resulting from higher leverage and increased interest rates, leading to a stable to slightly positive development of unaffected EBT excluding valuation and FFO in 2024. As you have seen, we are continuously investing into the portfolio in line with our strategy, with a particular focus on the competitiveness of our shopping centers on the one hand and ESG on the other. This will further increase the quality of our assets and strengthen their market position. At the same time, we are progressing with the optimization and diversifiation of our financing structure, including a moderate increase of our corporate leverage and respective distributions to shareholders. We will publish our final and audited results as well as our dividend proposal with the annual report 2023 on the 26th of April 2024. Ladies and gentlemen, based on the strong position of our company, we can look back on a successful 2023 and face the challenges of 2024, which will also bring opportunities for Deutsche EuroShop. We look forward to your continued participation and enthusiasm for our company. So far my presentation, thank you for listening. I'm happy to take your questions now. Mohit, please take over.

[Operator Instructions] And the first question comes from Andre Remke from Baader Bank.

Yes. A couple of questions from my side, please. First, starting with the vacancy rate, how much is related to the restructuring measures you mentioned? And when do you expect that this can be reduced again? Or is it fair to assume that continued new measurements in your centers will keep the vacancy rather higher in the future? This is the first question, please.

Thanks very much, Andre, for this question. Yes, indeed. So this 1% uptick in vacancy is due to the restructuring measures, the additional measures which we had. And yes, we expect vacancy to come down, especially after 2025, because as you have seen in the presentation, we have the first big measures by the huge Real hypermarket stores. You see that those are rather big surfaces and also considerable rents, which have vanished and which are now vacant places. So you will see a first impact in 2024, but the larger impact of vacancy reduction, and I would assume this to be around 200 basis points, you will see only in 2025.

Okay. Perfect. And then some questions on your guidance. First, thanks for the more detailed outlook now starting now again. Firstly, on the rental income, it is rather stable. Do you expect any like-for-like rental growth and the higher vacancy will counterbalance that? Is this the right assumption?

Well, on the rental income, at the moment, you see that we have temporarily higher vacancy rates. So this is, of course, one explanation for this. But I mentioned shortly during my presentation. So from our perspective, we see a temporary effect from the retail sector, which hasn't fully bottomed out yet. You may have seen in the press that there are still insolvencies in the sectors, and that's a process we have to manage. So there are -- whereas the big positive effect is, and you may have seen this, is that we have index adjustments which are very positive and which we also could realize almost fully. So that's the good news. The other good news is also that we have had a significant amount of turnover rents as well. But contrary to this development, and that's why the revenue this year was not as high as we may have wished, and we are more cautious for the next year, is that given the transformation phase in the retail sectors, we either have to decrease rents from time to time, or which is more our strategy, we give building cost subsidies to new tenants. You may have seen the 2 examples in our presentation where we do attract new very attractive tenants to the center. But very often, this comes with a certain cost in terms of building cost subsidies for Deutsche EuroShop, and you know that under IFRS, we have to take those into account as we would have reduced our rents. So that's the overall positive picture. But given the transformation in the retail sector, which we -- and we want to accompany our retail partners and also attract new retail partners to our center, this reflects the negative effect, whereas as a result, revenues remained roughly flat.

Okay. Excellent. And secondly, on your guidance on the profitability side with an increase in EBIT and the decline in EBT and FFO, what are the main drivers here? I think you mentioned higher financing costs. Is this the main bulk of the deviation?

Exactly. So first on the EBIT, you may have seen the development, compared to the unaffected 2023, is quite nice. So that's 5% and higher depending on which end of the range you take. So the development of the EBIT is quite positive because especially we expect significantly lower amount of value adjustments, i.e., write-downs and also some lower costs ahead. So the very nice outlook on the EBIT side, which is then on the EBT and FFO, as you rightly say, compensated, especially by higher financing costs. So you know that in our portfolio, we still have a lot of loan contracts with sometimes around 2% or even lower financing costs. So those to be extended going forward, this will have a negative impact. And that's the more prominent effect. We are in the process of increasing leverage moderately. And this additional leverage comes at a higher price compared to the previous years. So yes, the main effect definitely is the increase in leverage, which will drive down EBT and FFO. And therefore, you see only a slightly flattish or slightly positive development compared to the unaffected 2023.

Okay. And remaining on the financing topic. Did you reach any new financing in the last quarter to step up the existing loans? And if so, what were the terms you received from the bank?

We are actually in negotiations on a variety of loan increases in excess of EUR 100 million, but we have not reached the final agreement yet, so therefore also the terms are not yet fixed. The good thing is that interest rates over the past few months have stabilized on a slightly lower level. You may have seen that for 10 years, interest rates have reduced from roughly 3% to now 2.7%, which is a good development in the current phase when we plan to increase loans. But we will follow up on this topic once we have signed for the loan agreements, but at the moment, this is not the case.

And as a rough indication, would the financing term of overall 4%, a good assumption?

Yes. Depending on the assets, which is underlying, it's probably between 4% and 4.5%, depending on the overall leverage you put on the asset and, of course, the quality of the asset. But calculating between 4% and 4.5% is probably a good assumption.

Okay. And next question is, given the number of measures you take in your centers, could you provide us with an expected investment cost this and next year, which is still open? And what would be the incremental rent income out of that, or let's say, the yield on cost?

Yes. On average, I think we have mentioned it also in -- on other occasions, our CapEx is around EUR 50 million, so that's kind of our base rate, which we have to invest into both competitiveness and ESG in our centers. For 2024, this will temporarily be higher. It be up to EUR 70 million because we have some very large special measures. That's also the reason why we have taken those up in the presentation that you can see that, for example, for Main-Taunus-Zentrum, we have EUR 28 million; for the A10 Center, we have EUR 16 million; and for Hameln, we have EUR 5 million. So you already see that there are big -- a certain amount of larger projects coming up in this year. So for this year, slightly less than EUR 70 million. Going forward, a running rate of more EUR 50 million, I think, is a good assumption. In terms of the yield on cost on these projects, this is quite different. So sometimes it's rather low when we have an interest can be between 3%, 4% when we really want to invest in the center overall and bring the center forward, so it's not -- sometimes the individual CapEx yield on cost does not pay off only with the rents achieved. And sometimes, we are very, very attractive, even double-digit yield on costs, when you look at the Rhein-Neckar-Zentrum, for example, which is highly attractive. So if you put all those things together, it's different measures for different purposes. Sometimes it's a pretty individual measure. Sometimes it benefits the center overall. But as a whole, you can expect that the yield on cost is somewhere between 6% and 7%.

Okay. Excellent. And the very last question on your dividend. You will propose a regulative, so to say, a regular dividend in April. Could you remind me on your general dividend policy, what is it based on?

Yes, as said, so the dividend proposal is not yet final and agreed, but you may reminder that before the COVID pandemic, the Deutsche EuroShop usually was in a position to distribute 50% to 60% of the FFO. And as we are now back to full strength, as you certainly have seen in the presentation, you can certainly take from the ongoing business, the assumption that we will reach up to 60% payout ratio just from our operational business. And then, of course, you have some special effects and the financing we just discussed, which will then come on top. But this is something which is -- hasn't been defined yet. So at the moment, I would calculate with -- just with a payout ratio of 60% of the FFO plus x.

Okay. Excellent. Thank you very much.

Thanks very much, Andre.

[Operator Instructions] So it seems there are no further questions at this time, so I would like to turn the conference back over to Hans-Peter Kneip for any closing remarks.

Ladies and gentlemen, thanks again for your interest in Deutsche EuroShop. Thank you, Andre, for your questions. As said, based on the strong position of our company, we can look back on a successful 2023 and face an interesting 2024, which will bring further opportunities for Deutsche EuroShop. And we, of course, look forward to your continued participation and enthusiasm for our company. Thanks very much, everyone.

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