Deutsche EuroShop AG (DEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Quarterly Statement 9 Months 2025 Conference Call. I am Valentina, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Hans-Peter Kneip. Please go ahead.

Thank you, Valentina. Good morning, ladies and gentlemen, and morning from Hamburg. This is Hans-Peter Kneip speaking. I'm pleased to welcome you to today's conference call and to present our financial results for the first 9 months of our fiscal year 2025, along with an update on the company's recent developments and achievements. As always, I will be happy to take your questions following my brief presentation. On behalf of my entire team, thank you for taking the time and for your continued interest in Deutsche EuroShop. Let me start with an update on our business activities on Slide 2. Compared to the first 9 months of 2024, we have seen a modest decrease in footfall of 0.2%, whereas our tenants achieved an increase of 2.2% in their sales. After a subdued first quarter, there has been a positive trend in both visitor numbers and tenant sales. I will provide further details, including a breakdown by sector in a moment. Despite increasing rents, our revenues came down by 1.3% to EUR 197.4 million. EBIT has decreased by 4.5% to EUR 155.4 million and FFO by 12.8% to EUR 108.8 million. The lower results are attributable to higher deferrals, one-off allocation and cost effects and increased financing costs in particular. This comes as no surprise. The results are largely in line with our planning and forecast, which we refine as usual with the 9-month figures and which I will discuss at the end of my presentation. I'm also pleased to report that our larger investment projects at several locations were completed on time and within budget, and I'll share further details on these later. Switching to Slide 3. In terms of funding, we are in a comfortable position after the latest financing measures and dividend payments with an LTV of 42% and a cash position of EUR 376 million. As you know, we paid out a dividend of EUR 2.65 per share, a total of EUR 200.7 million in early July this year. Our funding position remains stable and all financing schedules for this year have been completed. Our next loan is only due in June 2026, and an early extension is already in the works. In June, we successfully placed our first green bond with an aggregate nominal amount of EUR 500 million. The bond has a term of 5.3 years until October 2030 and an annual interest rate of 4.5%. The issue attracted strong investor interest and was 7x oversubscribed, underscoring Deutsche EuroShop's attractiveness as a borrower. The bond is listed on the Euro MTF market of the Luxembourg Stock Exchange. Prior to the bond issue, Deutsche EuroShop received a long-term issuer rating of BB+ from S&P. The new bond is rated BBB- by S&P, reflecting our strong investment-grade profile. I'll move on to Slide 4. Deutsche EuroShop is taking forward-looking steps, not only in the area of sustainable financing. Yesterday, we published comprehensive ESG policies, which you will find on our website. Our new ESG policies include a code of conduct for employees and a code of conduct for business partners and suppliers as well as topic-specific policies on climate protection and energy, water and environmental protection and waste. On Slide 5, we take a closer view at our centers. Looking at the third quarter of this year, we have seen a plus of 1.4% in footfall and 3.9% in turnover. As already mentioned, in the first 9 months of 2025, in total, we saw a minus of 0.2% in footfall and a plus of 2.2% in retail sales. This reinforces the positive trend we had already observed in the second quarter of the year. I probably don't need to tell you that the consumer environment remains challenging, influenced, among other things, by volatile political developments and geopolitical conflicts. However, we are seeing an improvement in consumer sentiment and an increase in our tenant sales, particularly in our foreign markets. German consumers remain more cautious and continue to spend comparatively little in retail compared to other European countries. In this respect, our portfolio may benefit from a catch-up effect if the consumer climate improves in Germany as well. This could be triggered by a resurgence in economic growth, for example, as a result of structural measures and investment programs by the new federal government, which has been in office since May this year. Regardless of this, we and our tenants are looking ahead to the year-end and Christmas business with optimism. The peak shopping season will start in the next few days. I would now like to take a closer look at the individual retail sectors and their development in Germany in the first 9 months of 2025 on Slide 6. This overview shows not only the development of turnover in the individual sectors, but also the respective share of total tenant turnover and floor space as well as the occupancy cost ratio. Compared to the end of 2024, our tenants in the German portfolio in the Health & Beauty segment performed well, achieving a 4.2% increase in sales. In particular, drugstores and pharmacies like drogerie markt are the main drivers here and continue their success story. Our largest tenant group with a share of around 28% of sales and 41% of retail space in Germany is fashion textiles, which was able to achieve a slight increase of 0.2%. Food, including supermarkets and discounters generated 0.7% higher sales as did general retail, which includes bookstores, toys, household goods and jewelry as well as department stores. On the opposite side, shoes and leather goods, sports, electronics and services have ended the first 9 months in the red. Overall, our tenants in Germany increased their like-for-like sales by 0.2%, while our tenants abroad ended more positive at plus 2.3%. In total, we have seen an increase of 0.7% across our entire portfolio. In absolute terms, our tenants generated 2.2% higher sales, as already outlined previously. And finally, this page shows that the average occupancy cost ratio, the so-called OCR, which is the ratio of rents and ancillary costs to be borne by our tenants relative to their revenues is 11.3%, a healthy ratio that enables our tenants to be successful in our shopping centers over the long term and that shows you that our portfolio is well balanced and not over-rented. Let us now turn to the financials and look at our revenues on Slide 7. These came out slightly lower at EUR 197.4 million after EUR 200 million in the first 9 months of 2024. This is a decrease of 1.3%. While contractual rents increased, revenue from rental income fell slightly overall due to rental incentives granted. Mainly due to the property tax reform in German, Grundsteuer reform, the revenue from property tax apportionments and insurance expenses decreased by EUR 1.2 million. The breakdown between Germany and abroad has shifted slightly in favor of foreign countries where we now have a 22% share. For our EBIT, let's have a look at Slide 8. With a decrease of 4.5%, our EBIT came out at EUR 155.4 million. A main driver here were increased shopping center operating expenses due to one-off expenses related to non-apportionable ancillary costs associated with the renewal of technical equipment. Noteworthy is that property tax expenses have fallen sustainably due to the already mentioned property tax reform. On Slide 9, we come to the financial result, which decreased by 13.8% or EUR 10 million and came down from minus EUR 37.8 million to minus EUR 47.9 million. Interest expenses increased by EUR 8.8 million due to loan increases in the second and third quarter of the prior year, higher interest rates for follow-on loans as well as the interest on our inaugural bond. The other financial results includes interest income as well as EUR 2.7 million expenses for the termination of swaps in the course of the early repayment of the underlying loans for Stadt-Galerie Hameln and Stadt-Galerie-Passau. On Slide 10, you can see that the EBIT, excluding valuation, came down from EUR 125 million to EUR 107.5 million, which is a minus of 13.9%. This reduction was caused by the downturn in EBIT, mainly due to higher center operating expenses as well as in the financial result. As mentioned, the main effect was the increase in interest expenses. The interest income from short-term bank deposits was below the prior year at EUR 3.3 million. Our consolidated profit was EUR 11.0 million, increased by 13.3% from EUR 82.5 million to now EUR 93.5 million, mainly due to a higher valuation result. Correspondingly, EPS increased from EUR 1.08 to EUR 1. 23. Please follow me now to Page 12 and to the development of the FFO. The FFO decreased from EUR 124.7 million to now EUR 108.8 million or on a per share basis from EUR 1.64 to EUR 1.44 due to the lower EBIT as well as the lower financial result. Let me now turn to the balance sheet, which you'll find on Page 13. Our total assets after the bond issue amount to EUR 4.55 billion. This is an increase of EUR 186 million compared with the reporting date end of 2024. We fully repaid the loans for Herold-Center Norderstedt and Stadt-Galerie Hameln in June; together, EUR 143.1 million and partly repaid a loan of EUR 34.5 million for Stadt-Galerie-Passau in August. Our consolidated liquidity as of 30th September 2025 stands at EUR 376 million. That is a plus of EUR 163.6 million. Please keep in mind that we paid out a dividend of EUR 200.7 million in early July. Total equity, including noncontrolling interests, decreased by EUR 101.5 million. As at 30th September 2025, current and noncurrent financial liabilities stood at EUR 2.1 billion, which was EUR 287.6 million higher than at the end of 2024, in particular, due to the EUR 500 million bond issue issued in June. Noncurrent deferred tax liabilities increased by EUR 13.9 million to EUR 364.7 million. Our equity ratio decreased to 44.9% and the consolidated LTV now stands at 42%. The EPRA LTV calculated proportionally according to the group share in all assets, so to say, on a look-through basis, stands at 44.2%. On Page 14, let me give you some updated information on our financing structure. As just shown in the balance sheet, total debt amounts to EUR 2.1 billion. On 30th September, our average interest rate stood at 3.2% and the weighted average maturity at comfortable 5.2 years. After issuing our EUR 500 million bond in June, we remain in a good position with strong and sustainable investment-grade credit metrics, including an LTV of 42%, net debt-to-EBITDA of 8x and interest coverage of 4.3x. On the right-hand side, you can see Deutsche EuroShop's long-term diversified maturity profile in more detail, now including the bond maturing on 15th October 2030. Our next refinancing obligations do not arise until mid-2026, and we continue to refinance cautiously and early as always. We summarized the key details of our green bond on Slide 15. We reached a financial milestone by attaining a corporate rating and tapping the capital market for future corporate financing. By successfully placing our first bond in June, we have expanded our sources of funding and diversified our financing structure. As already highlighted, the EUR 500 million bond was 7x oversubscribed, reflecting the confidence that institutional investors place in the retail real estate market and Deutsche EuroShop in particular, as well as the willingness to invest in our shopping centers as eligible sustainable projects in line with our green finance framework, which we have summarized on the following page, Slide 16. We are well advanced in optimizing our capital and financing structure. With the publication of our green finance framework, we created the basis for the possible use of green financing instruments in the future. The framework has been rated Excellent by Sustainable Fitch, which is the highest possible rating. Coming to some news on our portfolio on Slide 17. The Food Garden is the new highlight of the Main-Taunus-Zentrum near Frankfurt, giving it a new lively and urban atmosphere. The high-quality varied restaurant and food area opened in April. The Food Garden was built on an area of around 7,000 square meters in the heart of the shopping center in place of a former department store building at high sustainability standards. The Food Garden is fully let to high-quality tenants. Those of you who have not yet had the opportunity to check out the project on site, our IR team is happy to provide guided tours as well. The feedback from customers and tenants is excellent and is impressively reflected in the center's footfall. Visitor numbers went up by 17% since the opening. By the way, this area is open 7 days a week and is also very popular on Sundays. On Slide 18, we have an update on the Rhein-Neckar-Zentrum close to Viernheim. A larger investment project has just been completed and the center expanded with attractive tenants in gastronomy, sports and entertainment. Since February, a new and modern freestanding L'Osteria provides highlights from the Italian kitchen to our visitors. In addition, 3 exciting tenants moved into the renovated former Bauhaus building, providing plenty of retailtainment, as we say. A trampoline park and a successful cycling store are each an attraction. An interactive indoor entertainment, so-called family action concept with a dark light mini golf course and an escape room experience will open next week. Only a few meters away, you can find an indoor skydiving center, which is running very successfully. These tenants are positively benefiting from each other, and we expect further synergies with the adjacent existing cinema and restaurants, giving the entire center a further boost. This new leisure area has been given a name that sums up the diversity and vibrancy of the location, the Food and Fun Park. This new branding will become visible in the coming weeks. Finally, I would like to come to Slide 19 and the forecast and outlook. In light of the developments over the first 9 months of the year, we are refining our forecast for the financial year 2025. We expect revenue to be in the lower range and EBIT and FFO in the middle range of the original forecast. EBT, excluding valuation, is expected to be slightly below the original forecast, partly as a result of the increase in interest expenses due to the adjusted financing structure. In detail, we expect a revenue of EUR 268 million to EUR 273 million, previously EUR 268 million to EUR 276 million; an EBIT of EUR 211 million to EUR 216 million, previously EUR 209 million to EUR 217 million; an EBT excluding valuation of EUR 144 million to EUR 149 million, previously EUR 150 million to EUR 158 million; and finally, an FFO of EUR 146 million to EUR 151 million, previously EUR 145 million to EUR 153 million. Ladies and gentlemen, thank you for the confidence you have in Deutsche EuroShop. We expect the recent positive trend to continue for the rest of the year. Although there is certainly room for improvement in the overall retail environment, there are good reasons to be optimistic for the rest of 2025 and the coming year 2026. You can rely on us to continue investing in our shopping centers in a targeted, strategic and sustainable manner to create future value for our shareholders. Ladies and gentlemen, in light of our company's recent development, we can look back on an encouraging first 9 months of 2025. We appreciate your continued support and engagement. That concludes my presentation. Thank you for your attention. I'm now happy to take any questions. Valentina, back to you.

[Operator Instructions] The first question comes from Kai Klose from Berenberg.

A few questions from my side. First of all, some basic questions on the portfolio. What were the occupancy levels as of 9 months? And what was the rent collection rate for the 9 months?

Yes. Thanks, Kai, for this question. For the first 9 months, we had an occupancy of around 95% and the collection rate was again close to 99%.

And occupancy levels have changed in which way?

Well, they have somehow improved. You have seen that in the half year, we were around 94.5% occupancy rate. So now we are at around 95%. So it has improved somewhat over the last 3 months. But no major changes overall. So you know that our target is to be at around 5% vacancy, and that's where we are at the moment.

And second question, could you indicate what is the split of the like-for-like rent growth? And you mentioned in the report or in the release about rent -- you talked about rent incentives. Could you give -- be a bit more clear on that and also by regions and by segment?