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

Ladies and gentlemen, welcome to the Full Year 2023/2024 Financial Results Conference Call. I'm [indiscernible], the Chorus Call operator. [Operator Instructions] And the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions]. At this time, it's my pleasure to hand over to Kyrill Turchaninov, CFO; and Alexander Kroth, CIO. Please go ahead.

Hello, everyone. Good morning. This is the Deutsche Consumer presentation of the annual financial results for the financial year that ended on the 30th of September '24. The past financial year for the company was turbulent, and we have covered in past presentations, all of the events that took place at or short after the beginning at the end of the previous financial year with [ Deutsche REIT's year ] Repayment or nonrepayment with tax authorities, payments and other matters, which were present within the financial year. So let's take a look at Page 4, where we present the highlights of the year. So the rental income has decreased to EUR 77.4 million. It is down from the prior year of EUR 79.7 million, so down by EUR 2.3 million, mostly due to portfolio sales. Net rental income slightly decreased. It was EUR 48.2 million last year and went down by about EUR 200,000. So it is now at EUR 48 million. FFO was driven by higher debt costs. And we have now confirmed the guidance that we provided previously. The range we gave was between EUR 27 million and EUR 29 million. Our FFO is confirmed with EUR 28 million. So per share on an undiluted basis is EUR 0.80. The AFFO undiluted is EUR 0.44. And that obviously was due to the reduction of CapEx investments in the financial year compared to the previous financial year. There were positive events in the financial year, not just negative, and we are happy that we were able to reduce debt burden by EUR 88.6 million which is about 14% reduction year-on-year. This were primarily driven by sales of our assets, which we also communicated in our prior call, 14 assets were -- 14 properties were sold with purchase price or sales price of EUR 78.3 million. An additional 5 properties notarized in May this year, 4 were closed, and there's still remaining at the purchase price of EUR 11 million. There are further properties under consideration, of which 3 are notarized. The volume or the sales price is about EUR 9 million, about or slightly above the book value. We have refinanced the bonds that were maturing. And we have refinanced EUR 145.9 million that was finalized in June this year. The new instruments are skewed and mature on the 30th September. The good news is that we were able to repay about -- well, actually, exactly EUR 60 million of these instruments in July and November and EUR 50 million repayment in July was from the sales proceeds of the 14 properties portfolio. So the remaining EUR 85.9 million, as mentioned, are maturing on September 30, '25. There were also events which took place after the end of the financial year. And those are significant events, which I will obviously also mention. Within the financial year, Obotritia repaid EUR 11.6 million of its obligations. And after the close of the financial year in October, we have reached an agreement that we received EUR 38 million until the end of '24 and indeed, the total amount was received and was partially used to pay down some additional debt. That receipt of payment from Obotritia resulted in a reversal of provision because in the prior year, we made a provision or bad debt provision against Obotritia receivables and resulting effect on the P&L is EUR 28.2 million, sort of an extraordinary income, certainly noncash item on the P&L, but it improved our financial results. KPIs are solid. LTV went down, which is a very important KPI for us. It was decreased to EUR 57.2 million, primarily obviously from repayments. NTA, a fully diluted basis at EUR 7.55. We'll have some details on that later on in the presentation. And the weighted average cost of debt is at 3.93%. As mentioned before, the guidance we provided previously for the year is confirmed and we can take a look at the next slide. The key financial figures are obviously rental income FFO, FFO per share, AFFO and investment properties as well as EPRA NTA. The portfolio was obviously influenced due to sales of properties that affected the rental income, which went down to 2.9%. FFO has also decreased because the financing costs have been risen. And we sold also some properties. Now we can take a look at the Slide #7, where we provide details on the portfolio itself. So we currently have 167 properties, and that is obviously a reduction because we have sold some assets. Some properties were already fully closed, but we still have 2 that were not closed at the date of 30/09/24, which is the balance sheet date, and that's what those numbers pertain to. In terms of the total fair value of the portfolio, we have now about EUR 886 million, the range we provided in our prior guidance in November is met, actually slightly better. We provided the range of EUR 860 million to EUR 890 million. So the range on the valuation multiple, we also more or less -- we are in line. The range we provided was 12.4x to 12.7x and we are now at 12.5x and certainly very important operational KPIs for us are vacancy rate and WALT. 14% vacancy is slightly higher than we would like to have it, and it was cost by sale of the 14 asset portfolio as well as by the bankruptcy of Real supermarket chain, which resulted in a 20,000 square meters of additional vacant space. The portfolio of which in assets that we sold had a pretty low vacancy of about 5.3%. So certainly, that has an impact on our vacancy rate. WALT of 4.4 years is -- has gone down. However, an important to mention here is that 49% of our rental income is coming from lease contracts, which are 5 years or more in the future. So that provides a certain stability of the future income that we have obviously happy about. In terms of the CBRE valuations that we have received as every year, [indiscernible], the value of the like-for-like business portfolio went down by about EUR 15 million or 1.7%. So certainly, we did not expect and it didn't happen to the same extent as in the prior year, devaluations were relatively minor. And predominantly one particular single assets contributed to this devaluation significantly. That is one of the former Real assets, which is now at 52% vacancy and devaluation on that asset was EUR 9.7 million of the entire portfolio devaluation of EUR 15 million. Now we can take a look at Slide 9. Slide 9, where we have details on our tenant structure, which didn't change significantly since last time. 66% of rent is still coming from noncyclical tenants, 79% of the total annualized rent of 69.7% coming from cyclical tenants as well as do-it-yourself stores. So the rent distribution by major tenants, we have a breakdown by tenant group and food retail as before, remains a dominant contributor to our rent. We have 85% of our rental contracts or our rents actually are CPI-linked. So that preserves our cash flow in case there are inflations. CPI indexation obviously follows the inflation. So in the past year, it was not as high as it was in the prior years. And in the future, obviously, that depends how inflation develops. We can now take a look at Slide 12, where we present the valuation potential in the portfolio. So currently, with annualized total portfolio rent of EUR 69.7 million and the yield of 7.9%. We have a hypothetical EPRA NTA per share of EUR 7.55. The current trading is about EUR 3.77. Obviously, that changes. We basically think that the value of the portfolio is not entirely reflected in the purchase price, and there is quite some potential for the value increase of the company as well obviously portfolio. We can now take a look at the slide on financing, which is, of course, very important element in our presentation. The total financial debt, as I mentioned, decreased by roughly 14%. So we're happy about this, and this is the direction that the company will be taken and focusing primarily on orderly reduction of our liabilities and LTV is certainly a key indicator here. With 57.2%, it is somewhat higher than we would like it to be. However, there was an event that took place after the close of the financial year, a conversion of a convertible bond in the amount of EUR 20.4 million. And if we adjust LTV for that conversion, we will be looking at LTV of 54.9%. This is obviously not reflected in the financials at the year-end closing, but we are happy that LTV is going in the right direction. On the left-hand bottom side, we have split our loan allocation according to maturity and ending of fixed interest rate terms. So obviously, the '25 amount seems to be quite challenging. And we do break down this number. We provide quite some more details how this EUR 250 million will be handled in our management report, present in our report, which is open on our website on Pages 65 and 66. Just to sort of provide a bit more detail. We have convertible bonds, which mature in the first quarter of '25 in the total amount of EUR 57 million. Out of that amount, as I already mentioned, EUR 20.4 million was converted. As to the rest, until the conversion notices received and obviously cannot guarantee conversion but perhaps it will happen, which will reduce our debt burden for the first quarter of next year as well as improve our LTV further. Also in the total amount, I included the loans, which have an ending of fixed term in the financial year -- in calendar year '25. So those will continue on a variable -- with a variable rate. The repayment of the bonds, which are maturing in September next year, the EUR 85.9 million, which I mentioned previously, is also planned. Obviously, we have our forecast, we have our plan, how we want to do this. And this is expected to be achieved by refinancing and topping up the real estate secured loans to generate enough extra cash, which will go entirely into the repayment of their bonds. So it is going to be an interesting year '25. We started this very positively. We have some events which I mentioned, which improved our financial situation on the operational side, which is also a direction which is under focus. We are working with major supermarket chains to lease up those assets which are left empty after Real bankruptcy. So asset management is very close in certain cases to sign those leases, after which those assets currently unsecured, will also be available for financing, therefore, producing additional source of funding for repayment of the loans. So interesting year lies ahead of us. And at this point, I'm done with the presentation, and we'll hand over for questions.

[Operator Instructions] Our first question comes from Kai Klose from Berenberg.

I've got a question on the CapEx spending, which quite significantly reduced -- were very reduced in the last year. Could you indicate what is the run rate for the current fiscal year? And you mentioned that you're in talks with supermarkets for the reletting of properties. Is there any additional CapEx you intend to spend?

Sure. In the prior financial year, there were 2 assets which received significant modernization CapEx investments. Those projects were mostly done and therefore, did not require any additional CapEx in the financial year that just ended. Now in terms of the lease-up of the empty space, which we are working on with supermarket chains, yes, there will be some CapEx requirements, which will be well, investment requirements from our side, which will be spread over 2 years. And in total, it will be probably about EUR 2 million. Hope that answers your question.

Yes, if you compare last year's volumes of around EUR 12 million going into this year, would you expect this to be at the same level or more or less?

We do not expect it to be significantly more.

[Operator Instructions] It seems that there are no more questions at this time. I would now like to turn the conference back over to Kyrill Turchaninov for any closing remarks. Please go ahead.

Thank you. I would like to thank everyone for participation in the call, for your attention, patience and look forward to presenting and explaining the company results next time. Thank you.

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