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

Ladies and gentlemen, welcome to the financial results of the first half year 2024-2025 conference call. I'm Sargen, the Chorus Call operator. [Operator Instructions] And 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 Kyrill Turchaninov, CFO. Please go ahead.

Hello, everybody, and welcome to the presentation of the financial results of Deutsche Konsum REIT for the first half of the financial year '24-'25. We will be covering the events of the 6 months, but we'll also take a look at some items which happened after the closing date end of March. And then we will open up at the end for questions and answers. So let's jump right in and take a look at Page 4. In the 6 months, we had stable rents in the existing portfolio. Compared to the first 6 months of the prior financial year, where the rental income was about EUR 39.8 million, we had a decrease by EUR 4.4 million. So it is currently at EUR 35.4 million, down 11%. This is driven by asset sales, which took place as we already reported in the past calls. That reduction of EUR 4.4 million had a significant impact on our FFO, which decreased by EUR 8.4 million. So EUR 4.4 million is driven by the lower rent. However, interest rates has impacted that as well, which contributed another EUR 1.5 million to the difference. I'm sorry, the interest rates contributed EUR 2.1 million to the difference. And also EUR 1.5 million came from the lack of interest income in the current financial year, which was present in the prior financial year. We have continued to reduce our liabilities to reduce our debt. And in the 6 months, we reduced by EUR 79 million, which corresponds roughly to 14%. A few events contributed to that. The conversion took place, which was EUR 30 million as well as we repaid EUR 10 million of registered bonds, we have repaid EUR 10 million of unsecured notes. And we have also repaid about EUR 7.2 million of liabilities secured by assets, which became due. So overall, we continued on our course of reducing the debt. We had sales of 4 assets or 4 properties, which were actually closed and the purchase price of EUR 11 million was received in the reporting period. We also signed a sale of 11 properties portfolio with annualized rent with an annual rent of EUR 1.5 million. However, this is not yet closed. It is expected to take place later in the financial year, and the purchase price is EUR 19.4 million. There was a small decrease, a small loss in terms of our fair book -- fair market value on this portfolio of close around 7%. We have received EUR 38 million from Obotritia. Most of those funds were used to reduce our liabilities. The outstanding receivable against Obotritia is around EUR 16 million. It is deferred payment of this deferred until the end of December '25. And we have made a provision against it. So just in case, however, there is currently no indication that this amount will not be repaid. Due to the debt reduction and conversion, mostly conversion of bonds, our loan-to-value LTV decreased, and it is now at 52.5%. EPRA NTA is more or less the same as it was at the end of December '24, so end of last quarter at 7.6%. Average weighted debt cost has continued to increase as expected and is now at 4.1%. We do not provide any guidance right now for the financial year. We are in the middle of creating a restructuring plan, which I will cover on the next page, which makes providing any guidance rather difficult. However, rental income is expected between EUR 66 million and EUR 71 million. On the next page, Page 5, we have some details on our restructuring plan, which we communicated in some releases, which we made earlier this year. The sheer volume of liabilities, the sheer volume of maturities, which we are looking at in '25 is significant. We started discussions with the lenders relatively early on, and it was clear that in order to have a clear restructuring process, we need a restructuring opinion, which is a common practice in Germany created under so-called S6 standard. And for that purpose, we engaged FTI-Andersch to prepare this. FTI was engaged at the end of February. And on the 13th of March, we have released an ad hoc communication detailing that we have started the process, but also secured a bridge financing of EUR 14 million at 5.5% interest, which is currently running out at the end of May. We have obviously contacted all the lenders with maturities in predominantly February and March this year, and extended those and entered into standstill agreements with those lenders also until end of March -- end of May this year. We are currently in discussions and constructive discussions. They are progressing to extend those standstills further until the end -- at least until the end of August '25. We have also, together with FTI-Andersch, contacted pretty much all the major lenders with maturities not only in '25, but also in the later years because it is important that all the lenders understand the process, understand what we are doing and understand the plans that we are putting together with FTI-Andersch. Current version, current draft of the plan, the restructuring plan envisages significant dispositions of the properties in the amount of EUR 350 million to EUR 450 million, which might be necessary to do -- to dispose of until the end of '27. However, this is not yet in the final restructuring opinion, which is expected at the end of August. Those talks with the lenders have been progressing, and they -- we have contacted, as we mentioned, most of those lenders because it is important that they understand that the company is going to be in a position that all those obligations, all those liabilities will be met. However, we do require time. So the maturities of '25, we are discussing and extending those maturities or prolonging them so that we have time to cover all those obligations. The company is not over-indebted. So if you look obviously on our balance sheet, you will see that we have significant positive net asset value. Our loan-to-value has been continuing to reduce. From that point of view, there is obviously not such a problem. In terms of liquidity, as mentioned, we have secured the EUR 14 million bridge financing, which is there to ensure that liquidity is available. However, liquidity is available not only until end of May. As mentioned, we are discussing to extend the facility to the end of August. The finalization of the plan of the restructuring concept is going to be a so-called Restructuring Opinion, which will detail more specifically precisely all the measures, which are necessary to -- obviously, to cover all the liabilities in the next years. And the lenders we all have to agree to this. So it is a process, which is ongoing. We're working on this together, and we expect that there will be a positive result. We can now move on and take a look at the portfolio details, which is on Page 8. We currently have 163 properties, which is a reduction versus the end of the prior financial year, as mentioned before, by 4. The total fair market value has obviously moved due to the asset sales. However, there was a CapEx included there of about EUR 2.8 million as well as an acquisition of land for EUR 2.4 million earlier in this financial year. The total annualized rent has increased slightly by about EUR 700,000, and there are a few factors in that. Obviously, we had asset sales. However, on a number of assets, on a number of tenants, there was an end of free rent periods, which were previously contractually agreed upon. Those contributed to the increase in our annualized rent as well as a number of smaller lease-ups. The vacancy rate has gone slightly up. However, this is mostly a technical increase since the assets, which we have sold, were 100% let. So in terms of new vacancy due to end of tenant leases, there isn't really that much movement. And the WALT is now slightly lower than in the prior period with 4.3. We can now take a quick look at Page 10, where we have some details on our tenant structure, which since last time didn't really move that much. The 66% or EUR 46.5 million of rents coming from noncyclical tenant, including the do-it-yourself stores, that will be 78% or EUR 55 million. The EUR 46 million of the noncyclical tenants, as I mentioned, about EUR 46 million, which the 84% of rents, which we have are linked to CPI, which obviously helps us to preserve the value of the future rent cash flows should there be an inflation. 47% of rental contracts are over 5 years, and that gives us some security. Now we can move on to Page 13, which details our debt structure and the financial KPIs. As mentioned previously, total financial debt was reduced by about EUR 79 million. That total cost of debt on average is -- keeps rising. However, the major impact in terms of the total cost of debt was the increase in interest rate on the bonds, which we have in the amount of EUR 85.9 million maturing in September this year. And overall, the structure of our maturing or the end of fixed interest rate liabilities is detailed here in the graph. It is now at about EUR 196 million of maturities or end of fixed term loans in '25, which is a reduction from the point we had on 30/09/'24 of about EUR 250 million. The major effect are conversions, EUR 30 million of conversions already done and EUR 7 million is still in progress. Some loans were repaid at the end of December last year, and we continue on this direction. So to sum it all up, the most significant event is, of course, the restructuring process. Certainly, all the lenders we have contacted need to contribute in terms of timing to our efforts. And the volume of the -- which we have provided in the range of EUR 350 million to EUR 450 million is in a draft form. However, it is expected that until the end of '27, there will be significant sales. Now that concludes our presentation part of this call, and we would like to open this for question and answers. Operator, please.

[Operator Instructions] And we have the first question coming from the line of [indiscernible]

But once again, this is more pressing than every other presentation I've seen, especially if you compare it with the peer group. I had the possibility to meet Mr. [indiscernible]. And what he is telling is that he's rapidly expanding his business. He's buying 10x objects at below 10x cold rent and that the market is full of possibilities and objections. Hardly can find any reason why to invest in Deutsche Konsum REIT, which is a shrinking share in a shrinking company in a growing business in a spaces where the major competitor, despite the fact that [indiscernible] is, let's say, 50% below them, that one is expanding and Deutsche Konsum REIT is really getting worse and worse. Additionally, I can hardly understand why you spend money or let me say, waste money for asking people for the restructuring of the company. You have to find people from outside the company despite the fact that you obviously, I have very skilled people, the CEO, the CFO, the people and the Management Board. But you spend -- and in my example, this is a task from you, the people running the company, but you're still spending money and wasting money. And this is also, of course, not acceptable for the shareholders. And I'm deeply convinced what the future of the company is. Last item is what is -- maybe I missed this, what is the current situation with the missing payment from [indiscernible] former CEO or member of the Board, Mr. [indiscernible].

Right. Right. Now I understand there are 2 parts to your question. And obviously, the easier and the quicker one to answer is Obotritia. There is still about EUR 16 million of outstanding receivable against Obotritia. Obotritia repaid the majority of what they owed to the company, mostly in the last year, in the last calendar year, and the last payment was EUR 38 million. So the EUR 16 million, which is still outstanding is fully provided for, which means a bad debt accrual and is expected to be paid back by the end of '25. As to the first part of your -- well, question, the problem is the sheer volume of maturities coming due. So if the lenders insist that funds, the loans be repaid. So for example, in March alone, in March '25 alone, there was EUR 67-or-so million due and payable. Now obviously, if those lenders are not willing to extend, then we have to go into negotiations and understand how can we repay that. If those lenders are not willing to prolong or top up or definitely not top up the loans, then we have to go into discussions. Also, a major liability is coming up due in September. So this is a major lender with whom we also went into discussions. And as a normal market practice in Germany, a so-called Restructuring Opinion, which I mentioned, the called IDW S6 is a standard practice for an independent adviser, FTI-Andersch, to get all the lenders on board to make sure that all the lenders are treated equally, obviously, the lenders with the same ranking of their liabilities. As I mentioned before, the company is not over-indebted in terms of its loan to value. It is just the volume, which is not possible to repay from the current operational funds. To do that, the adviser, which provides this opinion, the restructuring expert, comes up with his work working closely with us, obviously, with the management of the company as well as with the lenders to ensure that there is sufficient time to pay the lenders, who want to obviously end their engagement. Yes, we have been talking to other banks. Yes, we have been talking to other potential lenders. But again, they all say that the volume of liabilities for '25 needs to be somehow resolved. Since, again, there is not enough operational funds. And one of the ways to resolve this is obviously to dispose of the assets. And that is the current situation, and this is what we are doing. In terms of what is acceptable and what is not acceptable to the shareholders, obviously, this is our key priority. But if the company cannot pay back a significant loan and the lender declares default, I'm not certain that shareholders will be better off in that case.

Yes. But don't you think that there's a possibility to speak with the lenders in advance? Are you in a regular speak because I can hardly understand why it's once again mentioning Deutsche -- [indiscernible] that they are able to get financing facilities or nearly every object they want without increasing the share capital and that you are not? Is it that you have, let me say, still on your head because of the past decisions or failures from the former Chairman? Or is it something else? Or is it as simple as you mentioned that it's a bulk loan, EUR 48 million coming to a Q and that is the only and the major ability to repay.

Okay. There is a simple answer. If the lender tells us that to extent he needs to have the S6, then pretty much we don't have many options. So if the lender says, okay, yes, we can try to restructure. Yes, we can see what we can do. However, in order to do that, we need to understand what other lenders are within or able to do. And we need an independent opinion that the company can repay this in the future. So in that particular case, when there is a significant liability coming up for repayment and that lender obviously tells us what needs to be done, that's what we need to be doing. Now the first part of your question is, as you probably know, Deutsche Konsum has some history, which dates back some goes back some time, and that did not make the discussions with the lenders easier.

[Operator Instructions] There are no questions at this time. I would now like to turn the conference back over to Kyrill Turchaninov for any closing remarks.

Well, as we mentioned also in our report on the first 6 months of the financial year, the management is really focused on bringing stability to the company. Under the circumstances, we do believe this is the best course of action, which we described in the call right now. So we appreciate your patience and understanding and support in those times. Thank you for your attention. I would like to close the call now. Thank you. Bye-bye.