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

Good day, and welcome to the Deutsche Konsum REIT AG Q3 Report 2020/2021 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Rolf Elgeti. Please go ahead, sir.

Good morning, everyone, and welcome to the call about the 9 month figures 2021 for Deutsche Konsum REIT. We will go through the presentation, which you can see, but it's also on the website to download, if you want to. We'll start on Page 4, where we just summarize sort of the key highlights of property portfolio. So I guess the most important point on today's call is we had the reevaluation. It's a strong reevaluation at an uplift of about EUR 65 million, and that's only the like-for-like part or approximately 8% relative to last year's number. Just to remind you, we value our properties once a year, and we do this for the Q3 figures. So what we've done here. So this is the comparison to last year, Q3. So it's not quarterly, but it's the annual valuation uplift that you see here. Second point, on acquisitions, we have acquired year-to-date. So that's our fiscal year-to-date 13 properties with a total volume of EUR 120 million. You know that our guidance for the full year was EUR 150 million. So, so far, we are on track with that, and we have an average yield upon acquisitions of 9.1%, I guess, also what we communicated previously. The property sales, the discounter in Berlin that has happened [indiscernible], so no news to you and just of anecdotal evidence or relevant, I guess, or not redevelopment. But anyway, our property portfolio has now exceeded the number of EUR 1 billion with an annualized rent of about EUR 73 million. If we talk about the balance sheet a little bit, then you see that we have an interest cover ratio of 6.8x EBITDA, our LTV is at 53.6%. So at about where we wanted to be. Our target is 50%, so was slightly above, but not massively. The NAV per share as a result is just under EUR 13, and that's up 17% year-on-year, 1-7 percent year-on-year. What does it mean that, of course, increases also our firepower. Our firepower today is about EUR 120 million. So today, we have firepower of about the same amount that we acquired in this fiscal year so far. And that's pre any possible disposal. So it's very clear that our company doesn't need any equity for a very long time, and we can still keep growing at the current pace for a long time, too. Turning about the -- to operations a little bit. The rental income was up 26% year-on-year. The FFO is up slightly less than that, 22%. The explanation, obviously, is that we've partly financed the growth with debt. Crucially, the FFO per share is up 12%. So I repeat, we own retail properties, and our FFO per share is up 12% year-on-year, and we still have very high rent collection rates of about 98%. Turning to the outlook. We have amended and slightly reduced our FFO guidance for the current year by approximately EUR 2 million. So we're now guiding for EUR 40 million to EUR 41 million, sort of EUR 42 million to EUR 45 million. That is the FFO for the current year. The main explanations for this is that the EUR 120 million that we acquired, on average, these transactions have closed much later than we planned. So whilst we are fully on track in terms of the acquisition volume. In fact, we're actually above track. But in terms of the speed of the closing and therefore, once these properties start to kind of clock rents for the P&L, that has been later than planned. And therefore, for the current year, we're slightly reducing that. We're sticking to our guidance for the run rate of the FFO logically. I also just want to make a quick point that we continue to receive expected proposals to possibly dispose of some of our properties. And we hinted at this in the previous call, and we delivered nothing on this. So take this with a pinch of salt. But it still looks increasingly likely that we will actually sell 1 or 2 assets going forward at significant premium to book value and we'll use this capital to recycle. So that's something that I want to guide to again. On the following page, you see this sort of slightly graphically sort of underlying all of this pie chart, just the FFO per share going up, which I think is the most [ crucial ] number. We are driven by returns per share at the FFO is the key number we look for. So a 12% year-on-year growth, I think, for [ basic retail ] properties is not bad. And the NAV share as seen in the chart below that, that has grown sort of year-on-year of twice over the last 2 years to now approximately at EUR 13. And that, of course, is in spite of the dividend that we paid over the current year. So that's also pretty strong, I guess. Moving to some of the portfolio data. 2 points I want to make here. Firstly, the vacancy is up, but that's only due to vacancy that we've acquired. So like-for-like later, that's actually going down. But crucially, if you look at the WALT on the top -- the bottom right chart, the WALT over the last 9 months is up by 0.2, so give or take approximately 2 months. And if you think about this, this is the 9-month period and the WALT has gone up by approximately 2 months. So a different way of looking at this is to say that over the last 9 months, we have extended leases on the weighted average by approximately 11 months, and we are talking retail properties within the COVID crisis. So this is, I think, is a very, very key indicator here that underlines how resilient the portfolio is, that our tenants are very happy to stick to the properties and to stick to their business and to extend the leases and to actually overcompensate sort of the natural reduction as time passes of businesses. Otherwise, we hear the word would have gone down, which will even to a degree, wouldn't be a problem. But the WALT has gone up in spite of all that. Over the next sort of 2 slides, just give you a couple of examples that we acquired in the first 9 months of this fiscal year. I flip to this, it's just to say that there's a lot of it. It's all the same. It's [indiscernible] and yield is still very good. Moving on to the portfolio overview. There's a couple of numbers I want to highlight, mainly in the right column. So firstly, our valuation multiple, as you see here is now 13.8x. And you're right, so by no means demanding, I would guess. And the fair value in our book value, so that's driving the NAV, is EUR 976 per square meter, so still a very modest number and I can imagine much, much less than the cost of construction. Crucially, the in-place rent since the last quarter has gone up from EUR 6.50 to EUR 6.65. So it has gone up, just to stress this at all. And also the degree, I think, it's not irrelevant. But at the same time, it's still very modest and still too low to justify new construction. So this is actually from a landlord point of view, a very sort of sweet set of combinations of parameters. So the rent is up, and it's still low and affordable and too low to justify new construction. And you can see that the vacancy actually has gone up by -- gone down, sorry, by 10 basis points. The WALT also on the quarter has gone up slightly. So just confirming what I said earlier. Moving on, you see sort of the rent distribution by tenant classification. You can see it's mostly food anchored, that hasn't really changed. I'd like to draw your attention to 2 points on the following page. First, the top right chart to source the rental collection during the pandemic, we're currently at 98%. So that's not 100%, but that's not bad at all, I guess. And also kind of as we read more and more about inflation, some of you may be interested to hear that approximately 75% of our rents are CPI-linked. So we are reasonably protected or actually, we are beneficiaries from rising inflation because the inflation link, of course, is higher, it's sort of net positive if you think of it from a [indiscernible]. Moving on to the next page. Just my favorite chart here on the left-hand side is just sort of [ rent ] accounting of [indiscernible] tenant again across the portfolio, bringing our market position and our cloud and also the increasing strength of our relationship, I think that is sort of a nice chart to look at. In terms of the rental expiry profile on the right-hand side, that's nothing new, it's just to say that there's no cluster here. It's fairly evenly spread for about half of the rents for the next 5 years. And then the other half is kind of 6 years and longer. So there's no particular exposure here, which I guess is fairly healthy. Moving on, you see then the usual sensitivity table of the historic share price and what that implies in terms of the yield. So effectively, if you -- between this presentation and events that moved. So I guess now, we should probably say that current level the share price implies an unleveraged [indiscernible] [ 7% ] on the properties. And maybe lastly, just on the financing side. Again, there's no massive news, but I just want to draw your attention to this. So there's almost nothing expiring this year. That's over EUR 100 million expiring next year. Those EUR 100 million have an average coupon rate of [ 2.75 ]. We are currently refinancing just over 1%. So just the refinancing of what expires next year should easily boost FFO by at least EUR 1 million per annum. So that is sort of it from my side. Then afterwards, you have figures. I'm sure you looked at them. We're happy to take any questions, of course, and Christian, our CFO, is here with me, to also answer your questions if you have any. So that was the highlights. Happy to hear any questions or comments you may have.

[Operator Instructions] We will now take our first question from Kai Klose from Berenberg.

May I -- can I ask 2 questions. The first one, can we [ clarify ] that the -- in the closing of transactions, which caused the reduction of the outlook in FFO for this year, was it -- how many months? Or was it on assets? I think give a bit more details given the fact that the transaction volume in total, as you mentioned, was more or less on track? And second question, could you indicate a bit more on -- give a bit more information regarding Real as a tenant in your property? And how are the negotiations going regarding the lease contract and if this stays on or not?

Yes. Thank you, Kai. I think on Real, that's very easy. We have 3 Reals and 2 of which we have just extended. So there's no negotiations there whatsoever. And the third one is an asset that we are sort of repositioning, redeveloping anyway. So sort of knowing that Real would leave, and we are processing this sort of over the next year where Real is still in the segment, but we're planning for a new set of -- in terms of the delay, we can't really tell you in terms of the exact months. If I had to guess, I think it would be 4 to 5 months sort of delay on average. It depends sort of asset by asset and it was not one single asset. But of course, the -- as you know, the way that works in Germany is that we -- you go to the notary and then the closing happens once all the various conditions, precedent sort of fall into place and that involves authorities, that involves the land registry, that involves banks and various people. It depends on where you are in Germany. And then usually, that takes between 2 to 3 months or actually 1 to 2 months, I guess. But we have experienced properties where this is now taking 6 and 9 months because some authorities have closed and don't have access to their documents at home office and all of these things. And so we have sort of -- probably we have underestimated this effect when we sort of guided for the FFO for this year. And we're already optimistic that this would stop, but it hasn't. And it's just sort of a couple of months is the answer. But as we sort of acquired a lot in the second quarter of the fiscal year, and as this has only now just closed and we're talking August, so we have literally 1 more month of this cash flow coming in as opposed to 6 months. And that, of course, makes a difference which is why we haven't adjusted the run rate for the FFO.

We will now begin with the next question from Manuel Martin from ODDO BHF.

Two questions from my side, please. One follow-up question on the guidance. So we learned that the processes, that the acquisition process has been slowed down. How do you see the situation, the current situation or the future situation? Is there a speeding up in the processes to be seen? That's the first question.