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

Good day and welcome to the Deutsche Konsum REIT Q3 2021-2022 Results Call. For your information, today's conference is being recorded. At this time, I'll turn the call over to your host today, Mr. Rolf Elgeti, CEO. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to our call. I suggest we'll do it as per usual. I'll highlight a few slides and items out of the presentation, which is online, as you know. So let's start with Page 4 with the actual highlights. I'd like to go through the most of them actually because a few of them are quite relevant. So first, the rental income is up 9% year-on-year. Why is that relevant? Well, it's relevant because, as you know, we still have not issued any shares for about 2 years. So this is -- effectively, in terms of the capital employed, it's organic top line growth. The FFO, as a result, is also up year-on-year about 3%. And as the number of shares is unchanged, of course the FFO per share is up 3%. The aFFO is up much more because, as you know, we had unusually high CapEx numbers last year and this year is more normal. And therefore, that's lower CapEx. But the most important, I think, item worth stressing as far as the operational update is concerned is the rent increases. We have had rent increases of 2.4%, so that's like-for-like, which, as you know, was -- in the last quarter was 1.6%. So it is -- well, firstly, it's up. And secondly, it's accelerating from the last quarter. And this is, of course, what we've mentioned in the last call, is the fact that most of our rental contracts are inflation, i.e., CPI linked. And it's important to stress that this is only the beginning because, as you know, many of these contracts have hurdles and most of these hurdles have not been hit. But what we've seen so far is leading to a like-for-like rental growth of 2.4%. Or put in absolute numbers, we're talking about EUR 1.7 million of extra rent just in the first 9 months due to the inflation-linked nature. So this is very significant, I guess. Second, as you know, the 9 months' figures are the ones where we revalue our portfolio, which we do once a year, always sort of as of end of June. The valuation has come in with an uplift of EUR 64.5 million. That means our portfolio is now valued at 14.7x rent or a yield of 6.8%. Again, no real surprise. We've guided that we would see a valuation uplift. It's clear that they should be there because obviously, as you know, we have been selling assets at yields of just a touch over 5%, and we keep buying at attractive yields. So therefore, the valuation yield is still significantly higher than where our recent sales have been. So it's by no means sort of, I think, the end of the possible here. And clearly, if you look at the valuation, I think the fact that the rents are CPI linked is a key sort of variable when it comes to the investment market at the moment. Third point, we have been active this year in terms of acquisitions and sales. This is not new, but it's just worth sort of looking at the numbers. We've acquired 24 properties since the beginning of the year, and that's a volume of almost EUR 100 million. The average yield of that was 8.2%. So that's based on the rent in place. So it's still upside from vacancy reduction and the like. And we have sold 8 properties since the beginning of the year for an average yield of 5.2%, and I guess it's very clear how this creates value. Fourth point. At the same time, of course, our balance sheet remains very strong. Our interest cover ratio was 5.7x EBITDA. Our LTV is now below 50% again at 48.8%. And of course, due to the valuations -- valuation gain, our NAV per share and also the EPRA NTA has been increased. It's also worth noting that our debt cost has been more or less unchanged at 1.98%. The latest refinancings have still been below 2%. And what we're seeing now, obviously, it will start with a 2% handle, but this is, of course, rather modest. So all in all, we stick to our FFO guidance and no surprise price there. So that's sort of the highlights in terms of numbers. i guess none of you should be too surprised by any of this, although the magnitude of some of these numbers may be slightly higher than what one could have expected. If I may just go briefly to Page #5, please. Just to remind ourselves together of sort of how we create value at Deutsche Konsum because it's now been, as I said, over 2 years since we raised equity. And typically, many real estate equity stories are based on sort of aggressive or at least strong sort of external growth. We have not raised equity for over 2 years, but we still kept growing the business. Why is that possible? Because on top of the high yields that we get when we acquire and on top of the active asset management that we create, we do have these opportunistic sales. And of course, we then reinvest this money. And obviously, if you keep sort of selling at low yields and buying at high yields, then this sort of gradually but very steadily sort of increases the earnings generation capability of the company while, at the same time, leaving the balance sheet very stable and strong. Maybe going to Page 7 and 8. It's just -- I don't want to go through any of the details here, but it's just to show you the sheer numbers and the granularity of our acquisitions in the last 9 months. The initial yields, they are attractive. You see the key tenants. They're still all food anchors as before. Now we do occasionally have some vacancy, typically just over 10%, which we like to work with. But it's a fact. It's just to show you that in spite of the environment, it's still possible to do these acquisitions. And of course, they're very enhanced and accretive. If we're looking at the portfolio where it stands today on Page 12, as you know the most important variable to watch here is the last line in the table. It's the weighted average lease term. And that's still very stable at over 5 years. Why is that important? Well, it's important because, as you know, our strategy is to buy short- to medium-term weighted average lease lengths. And for that, we get compensated with a higher-than-average yield. We believe, as you know, in a -- that this yield is way too high considering the risk. But of course, so that strategy is only sensible if we manage to keep the leases together and basically sort of keep extending. And the key point here is that we are still doing this. So our strategy is still completely on track here. I also want to highlight the fact that if you look at the valuation of our portfolio, it is now at approximately EUR 1,000 per square meter of lettable space. It's very, very clear that it's impossible to create retail space at EUR 1,000 a square meter. The real replacement cost is probably twice that amount. And that's before we talk of the current sort of increases in prices for materials, energy and the like. So our portfolio and our portfolio approach remains extremely defensive, which is also evidenced by the fact that the rent is still very low. But of course, and this is where it sort of closes, this rent is now starting to increase with inflation links. You then see all the various charts updated from the previous presentations. I don't want to go through that. You see sort of on Page 14 the rent contribution by tenants and by tenant groups. That obviously is still on noncyclical base, the food anchors. Then on the following page, you see an update on the CPI link or not nature of our contracts, which is approximately 85% is directly CPI linked. But let's not forget that those contracts that are not CPI linked are effectively CPI linked because if the vast majority is linked, and that determines the market rents. And obviously, the non-CPI-linked sort of rental contracts will effectively have to follow. On Page 16, again just to remind our folks, is where we effectively just count how often we have the same tenants across the portfolio. This picture is getting nicer and nicer from quarter-to-quarter because it's more and more, which, of course, means that we were coming -- we are becoming a more relevant partner for our tenants. And that, of course, increases sort of our optionalities when it comes to discussions, rent negotiations, other negotiations, partnerships, ESG measures and the like. And this is where we really create value because ultimately, a portfolio of now almost 200 assets is obviously worth more than just 1 or 2 assets when it comes to all these things. On Page 17, there's an update on the sensitivity of kind of what you effectively get when you buy the shares in terms of the implied yield by the stock market. You know that. And then on the following pages, we update the financial data. I think no need to go through it. Of course, we're happy to take any questions on any of those numbers. I guess the key here is that the cost of debt is still virtually unchanged and the balance sheet remains extremely strong. That's it from me sort of in telecom style. Christian and I are happy to take any questions you may have.

[Operator Instructions] Mr. Elgeti, we do not appear to have any questions at this time, sir.

All right. Well, I guess we're getting too boring, so we'll come up with some crazy things next time. Anyway, thank you all for your time. If you want to ask questions, we are around. Happy to take them via phone or email as per usual. Thanks for your time and interest and trust in our company. Thanks a lot.

Thank you, Mr. Elgeti. Ladies and gentlemen, this will -- sorry, this will conclude today's conference. We thank you much for your attendance. You may now disconnect. Have a good day, and goodbye.