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] May I now hand you over to Rolf Elgeti, CEO, who will lead you through this conference. Please go ahead.

Thank you. Good morning, all. Thank you for your time to listen to this call on the full year figures 2019/2020 for Deutsche Konsum REIT. We published the figures already yesterday and the new presentation is already uploaded in the Internet. I assume you have seen it already or have it in front of you. So I'll be very brief and just highlight a few points that we think are worth mentioning, and then there'll be time to go through questions. Well, firstly, if you look at Page #4 in the presentation, just what are the highlights for the last year. Let's first look at the portfolio growth and our acquisition. We have acquired 39 properties with a total investment volume of over EUR 100 million. That's decent. That's in line with guidance or maybe slightly at the upper end of that. And most importantly, the initial yield, the weighted average initial yield of what we bought in the last 12 months was 9.3%, which is still very much in line with our acquisition policy. And of course, very significantly above our cost of debt. So I think that's the first point to note, is that the -- in spite of everything that's going on out there, we have been able to acquire sort of a reasonable size given our context and given our company size. So that's -- I think it's the first of green tick that the acquisition strategy is still working. We have had one tiny disposal, one property, which we sold for over EUR 4 million, something that we acquired for EUR 2 million. So we doubled on an unlevered basis. That's tiny, but it's worth mentioning because it's something that we mentioned a lot in the past that, obviously, we are trying to pick cherries within the huge acquisition pipeline that we got and just buy the odd property with a high yield and where we see value and where we see the market being mispriced. And obviously, the quid pro quo is that occasionally, we get unsolicited offers for our properties at much higher or, I should say, at normal prices. And we are more and more keen to occasionally use these opportunities to dispose of assets. So in the last year, this was only one, but I stress this, although it's small because it is our sense that since, let's say, a few months, I would say, we have noticed a very significant pickup of demand by investors for this asset class because people are realizing that, of course, food-anchored retail is a very stable asset class. I mean, no surprise, but more people are realizing it now. And therefore, we see investment appetite for the assets in our market niche growing significantly. And therefore, this -- there could be more to come on this, which is why I'm stressing this may be more than I should for EUR 4 million transaction. So that's sort of the portfolio growth. Let's look at the operations. You see all the numbers in the presentation. I don't want to go through all of that. But just I want to highlight and I think the chart on Page 5 sort of underlined this very nicely. Just to remind ourselves what we're doing with our extremely boring sort of business model in a way. If you look at what has happened last year, then the rental income has gone up by 34%, where you might say, well, that's not much of an achievement because we bought more properties. But of course, the key thing is that our number of shares has only gone up by 10%. And so the fact that the rental growth is 34% and the number of share growth is 10%, that shows you how accretive our acquisitions are, which is why they're so important for us to deliver the shareholder returns we are aiming for. More crucial is the fact that the FFO year-on-year has gone up by 40%. So not only is that nice because that leads to an FFO per share growth by over 25%, so 25% FFO per share growth. I think let's not forget, we're talking crisis here. We're talking retail properties. I think that's a very interesting number. But what's more important even, I think, is the fact that the FFO has grown by more than the rental income. So we have not just bought accretively. We've also managed the company accretively because this effectively translates to a margin increase of over 2%. Part of our top line is not just -- has not just grown by buying more assets, but we've also managed to increase rents. And we managed to increase rents sort of on a like-for-like basis by 0.9% year-on-year. Again, that's not a huge number. But I guess the most market observers for retail properties, I think it's a surprise that it's positive at all. So this is comparing less square meters with less square meters year-on-year. But the like-for-like vacancy decreased on top of that by 4.4 percentage points. So that's a very significant number, which of course, also increases the rental cash flow. We've managed to sort of come in line with our FFO forecast in spite of COVID-19. I think that tells you a lot about the resilience of our rental income. When it comes to the fact that the businesses are noncyclical, they are not very sort of at risk when it comes to e-commerce and also they have been sort of crisis resistant given that they are largely food-anchored. So that's the operations. A quick look at the balance sheet. Our balance sheet remains strong, as you would expect for a REIT, as you would expect for such a strong cash flow providing business model. So our interest coverage ratio stands at 7.7x. That's, of course, a very comfortable number. Our LTV is at 51%, more or less at our target of 50%. Our average cost of debt is 1.19% (sic) [ 1.91% ], that's slightly down year-on-year. And as you can also see here that the new secured debt that we're taking out is significantly lower. Therefore, it's fairly safe to say that our cost of debt will fall further from here. So that really is sort of the key highlights of the year. We've also issued a new guidance for the fiscal year that has just started, which is an FFO of between EUR 42 million and EUR 45 million. And an FFO run rate for the end of the fiscal year, i.e., September 2021 of between EUR 47 million and EUR 51 million. I think that's where I'd like to pause and prefer to take questions if there are any.

So there seem to be no questions, which is probably...

Yes, we received the first question now. And it comes from Kai Klose from Berenberg.

I've got 4 questions, if I may. First of all, regarding Page 26, where you show the -- of the presentation where you show the outlook for the current fiscal year. Just to be clear, there is no indication mentioned regarding acquisitions. Is this obviously by purpose? Is it because of the tight market or because of the high competition on the market that you are more cautious regarding acquisition volumes? Secondly, you spent quite a high amount for CapEx shown on Page 24 for the refurbishment of a couple of properties. Could you indicate what will be the outcome of that or what will be the additional or new rents from reducing vacancy rates and from these CapEx spendings? And then a question on Page 23 -- no, on Page 24, where you show, say, that we had about EUR 1.8 million of noncash items due to IFRS, but also because IFRS of the bond, but also of short-term receivables. Could you indicate what is the split and how much of the impairments of unpaid rents you expect to be collected? And the last question would be, given the fact that we are now in the second lockdown where also the DIY market as a whole had to close. Have you been already approached by more tenants or also by the DIY tenants asking for rent deferrals?

Yes. Thank you, Kai. I'll start with the last question. I mean we have so far not had any conversations with tenants regarding sort of rent deferrals for the current lockdown. I'm sure that's to come. And you're pointing at the most sensitive issue here, clearly, which are the DIY companies. So we will see what will happen and will take a sensible approach. I mean, in the very worst case, some 30% of our rental income might be affected, and we'll have to take a view on how much of that will be deferred and how much of the deferrals -- will be deferrals and how much will be actual rental cuts and for how long that's going to take. So if you want to take a risk adjustment on that, then you could say, let's say, we -- let's assume we're fully affected by those 30%, let's say, for 1/3 to 1/2, we get to rent deferral. And let's say, for, again, half of that kind of we agreed to sort of meet in the middle and just not receive the rent, then we might talk about a rental loss between sort of 1/5 up to 1/4 of that. So we're talking maybe 7% or 8% for a 4-week period. So let's say that this is 10% again. And so we're talking probably 70 to 80 basis points of rental loss that this lockdown will cost us for the full year, assuming there's no third lockdown. So that's sort of how I would frame the risk. But to answer your question, we haven't had those conversations yet, but that's what I would expect. In terms of the guidance, we have -- in the past, we have not given formal guidance on where we see the acquisition pipeline because it's just too difficult to do because we're going through billions and billions of properties and whether we buy EUR 400 million, EUR 150 million or EUR 250 million, it's just not visible. I mean, we have taken a cautious assumption on the acquisitions to get us to the FFO guideline that we issued, but it's -- we haven't put out a concrete number to that. On the CapEx side, you're right. We spent a lot of CapEx in the current -- in the last fiscal year. And in the next fiscal year -- or the current fiscal year, this will be a lot less. That's just because we've had those 5 key redevelopment projects that we've been working on. I mean -- and obviously, they will lead to a very significant sort of rental uplift. We typically work with hurdle rates for the long-term CapEx measures that are between 15% and 25% of rental increase on the CapEx spend. So depending on how you treat the rent in place and whether you look at just the near end or the rental increase and how much of the vacancy reduction you actually assign to the CapEx. I mean you could argue that some of the vacancy might be reduced even without CapEx, but for bigger refurbable projects, that's sort of unclear on how you actually account for that. But with those uncertainties, you could roughly say that the big projects that we are working on will lead to a rental uplift of almost EUR 3 million. And then the third question you asked, I think I'll pass over to my colleague, Christian.

Kai, you asked for the noncash effects, which we have adjusted in the FFO reconciliation. This is actually what we always have. It's an amount of around EUR 700,000 accounting effects regarding the revaluation of the convertible bonds, which we have accounting wise and also where we have to distribute upfront fees for liabilities, which we have taken bank liabilities throughout the duration of the liabilities of the bank loans we have. And another portion, the main portion, are EUR 800,000 impairments on deferred rents, which we had in March and April. And according to these IFRS 9 accounting principles, you have to make impairments after a certain duration. So for example, after 6 months, you have to make a general impairment of around 50% to 75%, which we have adjusted here because we think that these receivables are valuable, and we will receive them later. But accounting-wise, you have to make these impairments. And this is why we have adjusted it here as well.

And the last question, if I may, would be on Page 15 of the presentation. I think you have about 3 Real hypermarkets. Given the change of ownership there, just being curious if you also have been in contact -- whether you've been contacted by new owners and what their plans are for the 3 properties being a tenant of Deutsche Konsum?

Yes, that's a good question. I mean we are in talks with some of them, and we have very different situations. For one of the Reals, we actually have a new sort of, let's say, plan B. So we have an alternative use. So we actually wouldn't mind them disappearing, and we bought that on purpose for the short lease anyway. And the other 2 Reals have a very long lease. One is almost 15 and the other one is 7 or 8 years. And in both cases, we have a plan B because one of Real's competitors in each case actually wants their space. And it's not clear whether the current -- the new Real owners want to continue that space. I mean, it's obviously, in both cases, a functioning site and profitable. But the -- we haven't heard from them whether they want to leave. So I mean it's -- from us, I think for those 2, it almost doesn't matter because either they stay and keep paying the rent, then all is well. Or if you want to get out early, they need to pay us, sort of, obviously, a certain amount, but we have one of their competitors in either case ready to move in. So we'll -- we're just waiting without any, I think -- how to put it, without any preference for either scenario really or it doesn't really matter.

[Operator Instructions] And we've received another question. It is from Manuel Martin of ODDO BHF.

Two questions from my side, if I may. One question is regarding valuation, property valuation. I noticed that there was a slight property valuation loss in Q4, which has apparently to do with CapEx. Maybe you could elaborate a bit on that on the mechanics. And linked to that is how do you perceive the valuation environment for your properties? Besides that, also the dividend per share suggestion was lowered. Maybe you could elaborate on that and what's the aim for the money that you're saving there?

Yes. I think let's start with the dividend. I think the dividend is -- we've increased the dividend from EUR 0.34 -- EUR 0.35 to EUR 0.40. And we've previously guided for EUR 0.55. And we thought sort of on the one hand, I mean, we say this is about sort of caution going into the second lockdown and all of that. But equally, I think there's also -- which we haven't said like this in the press release, there's also an element in that like if we're talking to the tenants now about how to -- what to do with the rent in the second lockdown, I think just if they read in the paper that we've almost doubled our dividend payment just 2 weeks before, then that's probably a different negotiation position. And so we thought, well, let's be a little bit more cautious. I mean the actual cash impact isn't all that huge, if we're being honest to ourselves. I think it's more about signaling on the one hand sort of showing a growing dividend. But on the other hand, maybe sort of holding back a little bit in this environment, sort of more as a sort of cosmetics hygienic measure, you could almost call it. So I think that's the dividend. I think to the valuation, I mean, the valuation is -- the very simple answer to all of the valuation questions would be why does any of us bother what the valuation is. But I'm sure that's what you don't want to hear. Yes, the longer answer, I think, is that if -- you know that our valuers, they do a DCF model and the DCF model, as you're all aware, is sort of very sensitive to the various assumptions in there and people can tweak with it as they wish. So it's a bit difficult to really take sort of the result seriously. I mean it's a very intellectually thorough process that our value has run through. But how sensible it is sort of on an aggregated basis for the portfolio you may argue. And of course, I mean, what are the key drivers here? The key drivers are kind of the rental development, where the rental development is easy because that's more or less in line with inflation for our asset class. There's not much risk, and there's not much upside either beyond that. In terms of the CapEx that you're asking, that's pretty visible, too. So -- and when we have strong CapEx like last year, then it corresponds to rental increases. And if we don't have that CapEx, then we don't have huge rent increases. So from a DCF model point of view, the CapEx isn't that important a value driver. So what that really means is that the one variable that drives the valuations is the discount rate or call it yield, call it cap rate or whatever. I mean what people are prepared to pay for these cash flows that we could use. And there, of course, the valuers have their opinion. The market participants where we buy and sell assets have their opinion and the stock market has one opinion, too. And who is right? I mean that's up for anybody's guess. But you can just -- all we could say is if you look at the valuation page that we've put in that currently, the stock market assigns an unlevered yield of 6.9% to our assets and the valuers are assigning a yield of 7.8%. Where we sold assets, the yield was 4-point something percent. And when we acquired assets, the yield was above 9%. So I mean that is where we're at. And of course, we -- I would argue that we are creating value with purchases and with sales if we're using this yield spread, I mean stating the obvious. And I would also be of the opinion that a 6.9% yield for such a stable cash flow stream is way too generous for the risk that we all take here. But of course, we'll have to say that, so take it with a pinch of salt. But obviously, we wouldn't bother doing this if we didn't believe in this. Okay?

[Operator Instructions] There are no further questions. So I would like to hand back to you.

Great. Well, thanks, everyone, for your time and for your questions. If there are any further questions, let us know, we're here to answer them. And again, thanks for your time, your confidence and trust and interest and speak soon, hopefully, and have a very merry holidays, if you haven't. Thanks very much. All the best.

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