Deutsche Konsum Real Estate AG (DKG) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of Deutsche Konsum REIT-AG. At our customers' request, this conference will be recorded. [Operator Instructions] I may now hand you over to Rolf Elgeti, CEO, who will lead you through this conference. Please go ahead.

Good morning, everyone, and thank you for joining the results call for the first half figures of our fiscal year at Deutsche Konsum REIT-AG. You -- hopefully, you have seen the presentation on our website, which has been updated and includes the new numbers and charts and everything. And I may refer to 1 or 2 of those. But mainly we'll keep it brief and then leave time for questions because, I guess, most of the stuff is self-explanatory. Just to give you a brief overview, maybe first, on the general numbers and the growth. We have acquired 44 properties with a total investment of approximately EUR 170 million in the last 6 months. The average acquisition yield was 9.2%. This, in fact, was our strongest acquisition half year we've had in our, admittedly, very young corporate history. But it's worth noting that: a, in spite of the liquidity out there, we've been able to secure that significant acquisition pipeline; and b, that the initial yield at 9.2%, which compares to our cost of debt at the senior secured level of about 1.2%, 1.3%. That is a huge gap, and the yield is still there, and that's still working as previously. If you look at the operational numbers, then you can see that the rental income was up by 28%, which, of course, is no surprise, given that we've been acquiring. Our FFO was also up by 28%, which basically means that the operating margin has been flat year-on-year. Although it's already been quite high at 61% of rental income, the FFO margin. And as you may remember, in the first half of last year, we had a significant jump of that margin. So at 61% FFO margin, we're looking, I think, quite okay. Very crucially, the 28% in FFO growth compared to 21% of FFO per share growth because, obviously, we have issued much -- many less shares than we've grown. So not only have we been growing, but our growth has been very accretive at the FFO per share level, which is extremely important. Furthermore, on the operational side, you can see this on a summary on Page 4 and the chart on Page 5. It's very important to note that once again, the WALT has increased by 0.3 years to 5.9 years. I stress that because the lease extension risk is the only real risk that we take in our business. As you know, our game is effectively to acquire assets at a much higher-than-average yield because we typically take on average lease terms of around 5 years, which is a brilliant strategy if one assumes one can extend the leases. But yet again, we have shown that we have been able to extend the leases because bear in mind, if we don't extend leases. But of course, half year on half year, the WALT would actually come down by 0.5 years. But it actually has gone up by 0.3 years. So we've been overcompensating the natural reduction in the lease lengths by extending the leases more than we needed. So that's a very important point to stress that whilst the numbers and yields look good that the risk management has been good, and the lease extension has happened. Looking at our financial structure, we've issued some unsecured debt to increase our short-term firepower in order not to rely as much on the capital markets as one otherwise would. And due to that, the LTV has increased to 55%, which we regard as a temporary increase of the LTV. As you know, our target is 50% still. Given the strong cash flow nature of our business, our ICR stands at almost 7x EBITDA, which is, of course, a very strong and reasonably safe number. Let's talk about COVID-19. We've issued a press release sort of a couple of weeks back basically saying that we have not received about 30% of the April rent. It's important to stress that this rent has been deferred, and we expect that we will recover most of that rent. I mean, obviously, there's been the odd hairdresser and yoga studio that maybe will not be able to repay the rent. But the vast majority of this comes from tenants that are in a strong financial position. And many have effectively sort of been using or I'd almost say, abusing the situation of simply not paying rent. And we're having conversations with them to change that. It's worth noting that since the beginning of this month, May, only 4% of our shops have been shut down at the beginning of the month, and that number has been reduced further. You may have seen that the German government has initially introduced an 800 square meter sort of threshold, where smaller shops can be opened, larger shops not if they're outside sort of our food retail and drugstores, et cetera. And that's been coming down as well. So in terms of the May rent collection, we're talking about 96%. So that's almost back to normal, and we expect to, as I said, to recover most of the rent loss in April over the next couple of months. So all in all, this means that from a purely financial and numbers point of view, this is kind of exactly in plan as if nothing had happened. Therefore, we're actually confirming our FFO guidance. We're also confirming our FFO run rate guidance, and we're also confirming our dividend guidance of EUR 0.55 a share for the year ending September. That is the key thing, just for pure sort of background information on Page 6, we included the chart basically showing the footfall in grocery stores and pharmacies in Germany in April and in May. And you can see that the footfall is back to pre-COVID-19 levels. So back to normal. What I said, that in the rest of the presentation, you see all the charts that we have. They are updated. I don't want to run through most of them. You get some sort of details on the latest acquisitions, but they really are more of the same. But you have the addresses and photos and the numbers. And I just want to remind you also that on our website, you find a presentation that shows all our properties. I repeat, all our properties with addresses, photos and detailed numbers. So there's full transparency on the portfolio. What I would like to highlight very briefly is my personal favorite chart on Page #13, which shows you the -- just the lease contract simply counted by tenant group or by tenant owner, by owner group. And the point of this chart on the left side of Page 13 is very simply to say that we have the same tenant again and again across the portfolio. And therefore, we substantially change the relationship with the tenants. So we just simply don't have 1 or 2 of those and maybe easy -- easily blackmailed or put under pressure. Given the number of leases with the same tenants, we are effectively sort of a partner of our tenants. So that very significantly reduces the relationship, which I think has been evidenced by what I mentioned earlier in terms of our lease extension. If you want to look at the financing there on Page 16 and following, there's no major news here. I just want to highlight that almost nothing comes up for renewal. Only EUR 2 million this year and very little next year. As I said, the ICR is strong. Our average interest rate has come down a little bit. We're very widespread in terms of our funding sources with all sorts of banks, savings and loans, cooperative banks in Germany and therefore, as I said, don't depend upon the capital market unless we want to. And I think that's probably strategically a good thing in today's time. So to sum everything up, basically, we're on track. We're on plan. We're reiterating our guidance. There's no issues on the funding side. Our portfolio is performing well. And of course, we had a very strong acquisition pipeline with, again, more of the same. If anything, the current pipeline looks a little bit more geared towards food retail, even more geared towards food retail in our portfolio. Recurring, about 50% of our assets are food retail, and in our acquisition pipeline, that's closer to 75%. That may be coincidence, but it's worth mentioning I think. So the pipeline is there, and we intend to make full use of it going forward, of course. So that's it from me for now. We are open for any questions. Thank you.

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

I've got 3 quick questions. The first one is regarding Page 20 of the presentation. Could you indicate why we had quite a significant drop in the net rental income margin? It was, I think, EUR 79.5 million. Now it's at EUR 69.7 million. Second question in the case of the rent deferrals, which you have been received so far, how much of that do you expect to be waived? And third question would be could you indicate in the context of the achieved lease extensions, what was the like-for-like rental growth? What was the like-for-like rental growth in that context?

Yes. Thank you, Kai, for the questions. I'll answer 2 and 3 and give Christian, our CFO, time to look into question #1. The rent deferrals, as I mentioned, we currently expect to get back at least 75% and maybe more of those because according to our estimates, only about 4 percentage points of the 30 points that we have not received were tenants like hairdressers and yoga studios and gyms and everything, where you can see why the -- I mean, they still have a contract. But you can see why you might want to be kind and nice to them, and why it was right for them maybe not to pay the rent. But the vast majority of those guys are people that have a little bit abused the situation. So for instance, we've had one tenant, a DIY portfolio. They've got 12 assets in our portfolio. And one of those assets was closed for 2 weeks in April, and they took this as the reason to not pay the rents for all 12 for the entire month. So that obviously is a different basis for talks than kind of the poor hairdresser that has lost all her or his business. So -- and for that reason and because the credit quality of the tenant is strong, obviously, we'll get most of this money back. And the way these negotiations are going, I mean, we just started them. It looks as if we agree sort of 4 to 5 months installments for the April end to get repaid. For the lease extensions and the rent, the changes in the rent, we currently sort of extend leases at about like-for-like at 1.4% above the previous rent. And that very typically is mostly a 0% change, and we very rarely have an uplift in the rent. But when we have an uplift, often, it's a large uplift. And that large uplift comes from sort of improvements in sort of retail space outside the tenants. So if we have, say, found new anchors and reduced vacancy in the entire retail outlet, then sort of a lease extension that comes up can have significant jumps upwards in the rent. For any, I'd say, in inverted commerce, normal lease extensions, the typical base for extension is simply a 0% change. Of course, there's the odd inflation index, but that can happen at the point of extension, but typically not. And sometimes, we have more significant rent increases if we spend CapEx, but we are adjusting those. So where we spend CapEx in order to increase rent, that's not sort of included in our like-for-like number. And we typically don't give incentives either. So the 1.4% is a function of sort of a few but significant asset management successes and lots of unchanged because everything is unchanged.

This is Christian, the CFO. I would like to answer the first question regarding the drop in the net rental income margin. Actually, we have 3 slight effects here. So the first one is that we actually had a onetime gain in the prior year period coming from gains of billing running costs. We had a positive impact last year of around EUR 800,000, what we are missing now actually in this year. So you have to take this into account because then we were actually a little bit too good in the prior year, given that we had this onetime effect. The other effect was that regarding the strong growth we had, the acquisitions. We have to estimate the amount of running costs we can bill later to the tenants. And given that we don't really know what we have to -- or what we can build to them. We have had a very cautious estimation in this half year according to prior year. So that's one effect, which led to a slight drop. And the third effect is that we had in this half year also a billing between us and the seller of many properties, what can last until 12 months after acquisitions, where the seller has paid more running costs pro rata. And after the transfer of ownership has happened, then you have to make a billing between the seller and us. And here, we had a nonperiodic effect coming out of that, which is also booked in the operating expenses on P&L side. But of course, that's not recurring. And therefore, we adjusted all these effects in the FO. And that's actually all the 3 effects would led to the drop here.

Okay. And just a quick follow-up. Could you indicate what was the REIT equity ratio by March?

The REIT equity ratio is, as you can see in our figures, around 45%.

And I'm just asking because as you had an increase in net LTV, is the REIT equity ratio is still in line with the required level? Or is it...

It is. It is.

[Operator Instructions] The next question is from Georg Kanders of Bankhause Lampe.

Regarding the equity ratio, you are now -- and the LTV. You have paid the dividend in March. So there is now the operational addition for the next quarters. But what is the importance of valuation gains that will happen in this quarter?

Yes. I mean, you probably answered the question yourself. I mean, the -- our LTV is at 55 and the equity ratio at 45 and simple numbers. And of course, we are now at sort of seasonally at the lowest equity ratio because we just paid the dividend. And in the next quarter, we'll have 2 effects. One, of course, the retained earnings, which are very significant at our FFO yield. And you need to, of course, look at the FFO yield on NAV, which is double-digit. And therefore, just a quarter of that will already bring the equity ratio down by -- sorry, the equity ratio up by almost 3% and the LTV down by the corresponding amount. And of course, as you are referring to, we have our annual property valuation sort of as of end of June, so our Q3, so the current quarter. And given that the portfolio valuation yield is still very high and given that we had lots of new properties where one could expect sort of a valuation impact plus as we reduced vacancy, increased rent and very crucially extended leases and also have the various revitalization projects going on, one should expect at least a couple of percentage points of valuation gains. So that alone would bring the balance sheet sort of back into our target corridor ratios.

But also some additional properties to be transferred, yes?

That, too, yes. Lots of moving variables, of course.

And are you still -- are there still some projects where there are major reductions in vacancy to be expected?

Yes. They're also listed in the report, not in the presentation. That is mainly the redevelopment project in Hohenmölsen near Leipzig, one in Rostock and one in Stralsund.

I didn't get the third name.

Stralsund.

Stralsund. Okay.

So the next question is from Thorsten Müller of Lighthouse Corporate Finance.

Previously, you mentioned that you are working on listing in South Africa. Can you just give us any news on that topic? And with regard to the next capital increase, is there any timing that you have in mind?

Well, the listing in South Africa is still a work in progress. And we've laid out the reasons why we are considering that and are looking into that. We're still quite keen on the idea. But obviously, the current environment is logistically not making this any easier. And as we're talking about listing and listing only and not sort of raising capital in South Africa for the time being, there's no time pressure. And we're still working on this, and we'll hopefully bring this to a conclusion if we still want to do it. So it's still a likely project, but it's not a finished project, and it's not a certain project. But we are still quite keen on the idea, I have to admit. And as far as capital increases are concerned, I can only give you the usual sentence in these circumstances that there are no concrete plans that I can talk about. But it's obvious that given our balance sheet situation and given the fact that as a REIT, we pay out most profits. And therefore, we have to fund any sort of significant growth plans externally, which means at least partly capital increases. And if we keep growing, we will eventually have to come to the market as in prior years. But we will, of course, only do this if and when the pipeline is strong. And we do this in small steps when the timing seems right and when this can be done in a very accretive fashion to existing shareholders.

If there are no further questions, I hand back to the speaker.

Great. Well, thanks very much for your time and your questions. If there are any others, please let us know. Either Christian and myself, we're around by phone and e-mail, and happy to answer anything that comes up. And again, thanks for your time. Thanks for your support and interest, and speak soon. All the best.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.