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

Ladies and gentlemen, welcome to the Deutsche Konsum REIT AG H1 2023/2024 Financial Results Conference Call. I am Shari, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christian Hellmuth, CFO; and Alexander Kroth, CIO. Please go ahead, gentlemen.

Good morning, everyone. This is Christian and Alex from Deutsche Konsum. Thanks for your time and interest in the H1 financial results call of Deutsche Konsum. As you may have seen this morning, we have uploaded the presentation to our website. So for those who are not able to follow this webcast, please go to our website, download the presentation. And then you can follow us, we will refer to page numbers. And then yes, if you could follow us. But as usual, we will give a very quick overview about what has happened in the first 6 months of the current financial year '23/'24. And afterwards, we are happy to take your questions in the Q&A session. Yes. I would like to start on Page 4, which is the summary on the highlights presentation, what has happened in the first 6 months. So to be expected, the operative business remained very stable, means we were able to prolong leases. We have reduced vacancies or tenants have exercised their prolongation options. We were also able to increase rent slightly by indexation and all. But the main focus, obviously, was in the refinancing of the short-term maturing corporate bonds. We have 2 bonds outstanding EUR 170 million unsecured bond and another EUR 35.9 million secured bond where we are negotiating about prolongation. I'll come to that a little bit later. Let's jump directly into the -- to operative business numbers. The rental income has increased year-on-year by almost 3% to EUR 39.8 million. This was mainly due to a slightly larger property portfolio compared to the prior year. Our last big acquisition was the big center in [indiscernible] which became effective in November '22. So that has a slight contribution to the rental income increase in the first half year of the current financial year as well. And of course, we had a few rent increases by indexation, although we see that this gradually runs a little bit out because meanwhile, we have went through the whole portfolio, I guess. And yes, we don't expect any significant further rent increase from indexations in the near future and inflation is going to be decreased. So I think we have done what we could do regarding the rental prices here. However, the net rental income has decreased, as we have already seen in the prior quarters, by 6.5% to EUR 24.8 million. This was mainly due to higher nonreg running costs, and we had also a few one-offs in the cost positions. And we have also a slight change in the accounting approach of running costs to be built to the tenants. Since last year, we have decided that we quarterly just booked to receivables at the same size like the prepayments received from tenants. So that simplifies the whole accounting methodology a little bit and we don't need to make any estimations from -- on a quarterly basis, but we'll just book the receivables when we have made the final invoices to the tenants at the end of the year. The funds from operations have decreased by 17% to EUR 16.5 million or EUR 0.47 per share on an undiluted basis. This is as we have seen already in the previous quarters, mainly due to higher interest costs, where we have to spend by the whole sector and the AFFO, which is the adjusted funds from operation. After reduction of CapEx investments, we have achieved EUR 0.31 per share, which is an increase by around 25%, simply why because we have invested less CapEx than in the same period of the prior year. We plan to have more CapEx investments in the future, but this will probably not have any big impact anymore to the current financial year because it ends already in 4.5 months. So that's it to the FFO numbers -- AFFO numbers. Regarding the property portfolio, we have announced at the end of March that we have sold a property sub portfolio of 14 properties at actually very attractive conditions. It was at the level of the book values, the IFRS book values after the last valuation end of September '23. We had to give some slight deductions because of our short-term maintenance requirements. But overall, it was a very good sales transaction, which is going to be closed by the end of June. Before, we had already reported the sale of the former vacant [indiscernible] which became effective end of December '23. And at the moment, we are also examining selective further sales, which was -- which would, of course, support to refinance the debt structure. I will come to that a little bit later. But here to focus more on nonstrategic properties with more cyclical tenants, which we try to sell selectively at around book value as well. The proceeds will mainly be used to repay debt instruments and with the aim to reduce the LTV levels, obviously. Regarding the refinancing of the 2 maturing bonds. The whole process took a bit longer than expected. But I guess we are here in the final phase. We -- before, we had to figure out how much we could repay coming out of the sales proceeds, proceeds that we have now the size of around EUR 50 million, which we are going to repay against EUR 70 million bond. That means we will have a remainder of around EUR 20 million. And we are trying to prolong them until next year, together with the secured bond of EUR 35.9 million. And for the EUR 20 million remainder, we have to provide some more collaterals in the form of 3 other properties, and the bondholder has done an extensive due diligence process with the legal tech DDS on, which took also time. And that's why we have to target initially prolong both bonds until the end of June '24. At first, we have announced that 2 weeks ago to take our time to finalize on negotiations and processes necessary. And I guess we will not take until the end of June to get those bonds prolonged. But yes, here, I guess, as I mentioned, everything is -- goes into the right direction. Regarding the KPIs, the main KPIs, they remain basically solid. LTV level is 61.4%. This is going to be reduced within the next quarters by repaying debt out of the proceeds from sales, as I mentioned. And furtherly, we have also ongoing amortization of loans, so that will also help. And we will try to achieve an LTV level of below 55% by the end of this financial year at the end of September. The EPRA NTA is EUR 7.91 per share on a fully diluted basis. This does not reflect the last convertible bond, which we have issued at the beginning of April this year. If you take this into account, then the EPRA NTA on fully diluted basis with overall 3 convertible bonds is around EUR 7.20. ICR, the interest cover ratio, is 2.6x. The cash base EBITDA, which is still comfortable and the average weighted debt costs have increased to around 3.1%, including secured and unsecured debt. This number is going to increase over the next quarters because new refinancings we do now will come at the current interest levels, obviously. Overall, when we summarize that and reflecting the sales and [indiscernible] of the bonds, the current forecast sales that the funds from operations for this financial year will lay around EUR 27 million to EUR 30 million, just doesn't reflect any more sales we are estimating at the moment, but sales we do now will not have any theory effect to the AFFO in this current financial year any more because as I mentioned, it will be over in 4.5 months already. I will turn to Page #7 which shows you an overview of our portfolio. On the right-hand side, you can see on the map the properties of the sub portfolio we have sold. And if you look at the left-hand side and to the table with a gray light background, you can see the numbers end of March. Here you can see that actually everything is in order. Both levels are more or less stable. We have 183 properties which are valued at around EUR 1 billion. What you see here, the vacancy rate has been stable at around 11.7%, although we have sold the big vacant tier property. Unfortunately, in the meantime, we had get another vacant space in [indiscernible] whether the franchisee has left and has gone to detention. We are already in negotiations with the potential successor and we are very confident that we can present a new tenant within the coming weeks or months and then the vacancy rate will drop again. The right-hand column in the table shows how the portfolio will look like after the sales of the sub portfolio has been closed. So then we will have around 170 properties still and the total annualized rent will be around EUR 72 million. And we will see -- or we expect a slight increase in the vacancy rate because the vacancy levels of the sub portfolio were lower than the average vacancy rate and the whole portfolio, obviously. But I guess that's not really crucial here. Then we'll jump to Page #9, which shows [indiscernible] based on the current portfolio at the end of March. Here, everything is an order, nothing has changed. Everything works pretty well. And we expect that this pie chart will look like same also after the sales have closed. We'll jump to Page #12. In order page -- already that shows you how the market, when to use the property portfolio. So when you start from the right-hand side at the current share price level of EUR 2.70 per share, the market cap is around EUR 95 million. When you then add up the outstanding debt of EUR 533 million after we have repaid bonds and loans out of the sales proceeds, then the share price evaluates the portfolio value at around EUR 630 million, which is an implied across rental year of 11.5%, which sounds very, very poor given the low risk profile of the portfolio. But of course, we have to do our homework before and has to prolong the bonds, which are weighing on the share price development, of course. But then I guess, there should be enough headroom for the share price to recover. Then, I will jump to Page #14, the last page I would like to present here. There's the finance overview. Here, you can see all the numbers, which are connected to the finance side. But the most crucial chart here is on the left-hand side at the bottom that shows you the maturity profile of the debt we have to refinance within the next 24 months. And you can see here when you start at the left in '24 that we have to refinance still around EUR 150 million. But as I mentioned, if you take the light gray box here, the EUR 70 million box, we are going to repay EUR 50 million of that. And then the remainder of EUR 20 million, together with a secured bond of EUR 35.9 million will be prolonged until '25, and then the rest is our EUR 33 million of normal senior secured bank financings allocated to [indiscernible] where we are already in discussions. And the assumption is that once we have prolonged the bonds, then we can also prolong these normal bank financings with the same banks. And then the concept is that we take the collaterals behind both prolonged bonds, which are now around 15 properties, which we have given as collaterals, which were also before giving as collaterals, they are valued at around EUR 100 million after last valuation, and this should enable us to refinance them at 50%, 60% LTV levels, which will generate EUR 50 million to EUR 60 million cash and this will suffice to repay the rest of the prolonged both bonds in the next year. That's the strategy. And then, we will have some more capital market debt instruments, what we also have to refinance. And here, the concept is what you're thinking is, that we -- when you sum up the dark blue boxes in about all years, illustrating a normal bank refinancings, then that's an amount of EUR 300 million, normal loans outstanding. And compared to the portfolio size of around EUR 900 million, that's a very low LTV level of around 30%, which gives us more headroom of EUR 100 million to EUR 130 million, new cash, which we can generate by refinancing the normal bank loans, and this will suffice to repay all the capital markets instruments then. So that's the concept we are going to implement. That is actually from my side. Now Alex and me, we are keen to take your questions.

[Operator Instructions] The first question comes from the line of [indiscernible] Consult Private Equity.

Do I understand that correctly that the refinancing is not connected at all to what happens with -- yes, our organ of the company, Mr. Elgeti [indiscernible] and the funds that marked down by 70% as of now. So the bonds will not be related to that in the prolongation.

Thanks for your question. I would answer this way. I mean we have collaterals for the outstanding receivables towards Obotritia, that helps a lot. We are now waiting for Obotritia to repay gradually, the outstanding amounts. There have been some repayments in the meantime. So I guess everything here goes to the right direction. It's obviously a point which we have to discuss with every lender, which we do. But I guess the underlying property portfolio runs pretty well, and the banks like the business model. And the only thing we have to solve now is prolongation of the bonds because otherwise, no bank is able to give new loans or to prolong any loans. So prolongation of the bonds is the first priority at the moment, and the Obotritia is not a hindrance here.

That's great. However, it's also news to me that [indiscernible] Obotritia has started repaying by now. Has that been communicated in the past?

Yes. So we have received some payments of Obotritia over the last 6 months. And yes, actually, we have agreed upon confidentially about that. But what I can say is that it goes to the right direction.

Okay. Great news, actually. But you're still keeping the receivables marked down by to 30% in the balance sheet?

Sorry, say again?