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

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Deutsche Konsum REIT-AG Q1 2022-2023 Financial Results Call. [Operator Instructions] I would now like to turn the conference over to Rolf Elgeti, CEO. Please go ahead.

Yes. Good morning, everyone, and thank you for your time and interest in Deutsche Konsum REIT-AG and our Q1 '22, '23 figures. So just for the avoidance of confusion, we're talking about calendar Q4 last year. The presentation is online, as you know, you've seen the press release. So what I suggest I do is just highlight very few data points that are worth mentioning in my opinion, relative to the last quarter and in particular, in the backdrop of the current environment. So let's start with the operational business, our rental income is up. It's up 2% year-on-year. But what's actually more interesting, personally, I think, is the like-for-like rental increase and our like-for-like rents have increased by 1.1%. However, that's quarter-on-quarter. So the in-place rents have been increased by 1.1% quarter-on-quarter. So if you were to annualize this, obviously, that would be about 4.5%, but we wanted to show the quarter-on-quarter impact because as we mentioned in previous calls, we are now, of course, benefiting from the indexation of the leases kicking in. By the way, 0.7% of the 1.1% quarter-on-quarter was due to CPI-linked rent increases. And as we mentioned before, as you know, these indexation clauses typically have a hurdle and given the inflation picture in Germany, we're always talking about sort of this wave that's going to positively impact our rental income will likely sort of peak in Q1 this year or Q2 this year. But in any case, it's stronger than in the quarter before and therefore, we wanted to show this quarter-on-quarter. So 1.1% quarter-on-quarter. That's not bad for retail real estate. It's interesting also to note that the CPI-linked is 0.7% of that. So in other words, that's 40 basis points of non CPI-linked rental increases like-for-like quarter-on-quarter. And I stress this with this clarity because we've discussed in previous calls and also in many of the Investor Relations meeting always this relationship of what will happen to the other rents. And as you know, approximately 84% of our rental income is legally contractually inflation-linked. But we've always sort of also said that obviously, that will push up the market data, the market rents and the rent comparables. And therefore, one should expect revenue increases also for the non CPI-linked sort of rental contracts. And I think those 40 basis points coming from 16 basis points -- 16% of the portfolio is a very strong indication that, that thesis is true. So the rental increases are not just happening with the CPI-linked clauses. But of broader nature, again, sort of supporting our arguments that the affordability of the rents are very strong, supporting the arguments that we always said that the rent in place [ 60 or 70 ] at the moment is still way, way, way below the rent that's needed to trigger new construction. And therefore, that's fundamentally strong reason that our rents would continue to grow. I mean not exploding, but growing. So that's the first important point I wanted to make here on the like-for-like rental increases. Then you can see, if you look at the P&L that our rental income was also up, though it was up by only 0.2%. So we had a small operational margin contraction but the net operating income is still up quarter-on-quarter and year-on-year. Now that's also important because as I sort of get the impression from many investor conversations we have is that if you look at the real estate industry more broadly, then obviously, there is the big question -- well, there's 2 big questions for the operational cash flow is -- the first is, will the positive inflation impact on rents outweigh or not the negative inflation impact on the cost picture? And of course, for many real estate [indiscernible] , that is already sort of a negative total relationship, i.e., cost inflation in total worse than positive rental inflation. For us, that's not the case. So the net impact of inflation on our net operating income is still positive because the damage that the cost inflation does is smaller than the positive impact of the rental income. So that's, I think, is also worth struggling. So it takes for us in order for the FFO sort of to be negatively impacted, it takes the interest cost. Interest costs are up, as you see, we're now at 2.3%, weighted average debt costs and therefore, the FFO year-on-year is actually slightly down by 5%, which is sort of mainly due to these high interest costs. Still, the FFO is EUR 10.2 million on the quarter. That means already sort of in the first quarter, we are sort of above the lower end of our FFO forecast range and that obviously is before we're talking new acquisitions. And before we're talking further rental increases, we already sort of annualized in our forecast range. So that means that we -- we haven't explicitly said so because it's an awkward thing to deal with the Q1 numbers, but we would obviously reiterate our guidance for the FFO for this year, which would then be broadly flat compared to the last year, which I guess is good news if we're talking about this development ex new acquisitions. That's the first part. The second part, briefly on acquisitions and sales. It's short and sweet because we haven't acquired anything at all in Q1 -- Q4 last year, calendar Q4 and which is unusual because usually that's a strong sort of acquisition quarter. And we have sold one more asset. We actually sold a DIY property with a yield of 5.7%, that's worth noting. It's not particularly huge at EUR 7.4 million, but it obviously was above the book value. And again, it was at a very high rent multiple and in particular, considering that this is sort of DIY. So not exactly sort of the typical [indiscernible] food anchored retail. So I'm striking that just to say because we often get asked like how is the acquisition and disposals environment changing? And the answer is, obviously, and that's what everyone sort of assumes is that we are in a position, we see a very attractive acquisition pipeline. Sounds awkward saying this, having just said that we didn't acquire anything at all last quarter, but that has more to do with the fact that we are looking at almost so many different options and we're weighing our options here a little bit. But more crucially, and maybe less intuitively, we still see the disposals pipeline even in this environment. And even sort of a DIY, even in Eastern Germany, if you want to add that. And also, again, still at those yields of 5.7%, which means that the story that we don't actually need, but we have delivered last year on is that we can sell at much tighter yields relative to where we buy is still very, very much intact. That was the second key point. And the rest is just to say that obviously, our balance sheet remains what it is. Our LTV is just over 50%. Very strong interest cover still at over 4x EBITDA. Clearly, of course, we increased the NTA per share that's probably given the operational -- operational cash flow. We continue working on our debt. We've extended some of our loans into this year and extending some for longer, that's all very much sort of course of normal business. And lastly, just to mention that we -- I mean, there's no real news, but we have, of course, appealed against all sort of the tax action that we reported in the last quarter, and we'll continue to do so, but I have nothing concrete to report on that. And I'd like to stop here, actually, and see whether there's any questions or comments on any of those points.

[Operator Instructions] Our first question is from the line of Kai Klose from Berenberg.

I've got 3 questions from me. The first one is on Page 10 of the Q1 report. There you mentioned we had [ EUR 300,000 ] of onetime adjustments in the admin expenses. And then we had about [ EUR 800,000 ] of adjustments of onetime -- for onetime effects in the [indiscernible] ? And do these 2 numbers belong together? Or could you have -- may have more details on each of them? And second question would be, you mentioned the still stronger growth in NOI compared to like-for-like intervals? Which portfolio size are you assuming will be a net seller in this year? Which portfolio size that positive spread [indiscernible] would so to say, reverse? And the last question would be ,you have maybe more details on the investigation with [ Barron ] which the [indiscernible] was asking for in the last year?

I'll answer the second question to give Christian time to look at the numbers for the first. So really the margin and size, actually there's no real relationship because I mean, yes, the margin would expand if we had to grow and shrink slightly if we were to think. But that effect is really marginally given our size. The effect why we sort of increase the NOI in spite of cost inflation has simply to do with the fact that even if the cost inflation percentage-wise is maybe higher than what we achieved on the rental indexation. The cost in absolute terms is so low in our business, I mean, relative to other real estate industries, that the net effect is still sort of a positive one on the NOI. And so to maybe illustrate this, I mean, clearly, we're talking about cost inflation for maintenance, and there's also energy. I mean the service charge leakage sort of naturally increases in times of higher inflation and those are the effects here. So they've got almost nothing to do with size, and we are working on them to -- working on sort of minimizing the cost inflation as best as we can and I'm sure we'll achieve something then in particular with regard to the service charge leakage because that's something that post acquisition of new properties can take 2 to 3 years to probably fix. So not really a relationship on size, but sort of just like in the nature of the P&L structure, basically. With regards to the Barron inquiry on our accounting, there's no news. We've supplied the information Barron has asked for but that has only been sort of 5 or 6 months ago. So it's not logical to already expect a response. But we're simply waiting, is the short answer. We try to contact Barron and then -- so did our lawyers, but obviously, that didn't have an effect. But that's just probably normal for these sort of accounting inquiries. They take that long. The difference to sort of previous years is just that the -- in previous years, they haven't been published before there was a result. That policy has changed. And therefore, it's out there. We are out there, I think, together with 800 other companies at the moment. So it's embarrassing, but we just have to wait until the Barron's responds to our letter.

This is Christian. You asked for the reconciliation items regarding the FFO. So we have 2 -- we have made 2 adjustments as we regularly do. So the first one are noncash expenses. This has to do with the IFRS 9 [indiscernible] valuation, which we have to do on our financial assets we have on the balance sheet. We have to estimate every quarter the various default probabilities on our receivables. And therefore, we have to make a kind of impairment or write-off which is a noncash effect. And this is what is included here mainly in EUR 0.9 million. And then on the other hand, we have cash items, which are nonrecurring and this is included in the EUR 0.8 million in the line below.

All right. And may I ask one follow-up question on Page 14 of the presentation. On the debt expires this year of EUR 86 million, when you would expect this amount to be renewed and to be extended? And roughly speaking, at which cost?

Yes. This is the EUR 28 million of that is loans that are expiring sort of at the middle of this year which we are in talks to extend and the remaining roughly 50 loans from last year that we had only extend to the first half of this year with a view to have more time to talk about terms, possibly refinancing, et cetera. So that was sort of short-term prolongations we've done basically to give us more time and options to look at other alternatives -- better alternatives and also to see what we would do with regards to interest rates, fixing and that sort of thing.

And what are your thoughts on the extension?

Well, I think -- I think the real answer is we haven't really decided yet what we want to do. I think in all likelihood, we will do what we have done in previous years, which is simply sort of extend for between 5 and 7 years. But we may decide differently because we're also exploring options what we can refinance in parts of those portfolios with other banks, in particular here, we're in talks with local savings and loans in the cooperative banks. And there, when sometimes often actually gets better terms for longer term -- longer-term loans. So we may split these portfolios. And we simply want to optimize sort of cost of debt really rather than having a very specific view on the maturity, but it may turn out that we will go for part of this for longer and cheaper.

[Operator Instructions] The next question is from the line of Manuel Martin from ODDO BHF.

Yes. A few questions from my side, please. The first one is rather mathematically, I think the like-for-like rent increase, which you said it's 1.1% quarter-on-quarter. On an annualized basis to compare that with other companies, is it fair to assume that it would be 4.4%? Just excuse my simple calculation.