Deutsche Konsum REIT-AG (DKG.DE) Q3 FY2025 Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q3 2024-2025 Financial Results Conference Call. I am Matilda, 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 Kyrill Turchaninov, CFO; and to Lars Wittan, CIO. Please go ahead, gentlemen.

Hello, everybody, and welcome to the Deutsche Konsum REIT Q3 Financial Results presentation, in which we will cover the 9 months of the current financial year, but we'll also touch upon the events which happened in July this year since they were important, and we will cover those as well. The highlights, which we have here on our Page 4, cover the main events of the 9 months. Well, the substantial impact on the portfolio had our sales of assets. Rental income decreased by EUR 6.5 million, which is 11% compared to the same period of the prior financial year and it is the same 11%, which we had when we reported our 6 months, half year results in last quarter. FFO went down by EUR 14.2 million to EUR 9.9 million. And the main impact comes, as I already mentioned, from asset sales as well as the higher interest rates. Net rental income is down by EUR 8 million and the entire interest result is EUR 5.3 million lower. There were 2 parts in our result or the financial result on the interest side. The interest expense went up, unfortunately, by about EUR 2.9 million. However, interest income decreased by EUR 2.4 million as well to a total of EUR 5.3 million. This year, we did a revaluation of the portfolio, which is traditionally done by CBRE as of June 30 and not as we usually did it to the end of the financial year, September 30. The reason for that was the transition of -- as we mentioned last time, a transition of asset management and property management services to a new service provider. So we are switching from Elgeti Brothers to GPEP. And also, it is better to have the results now in light of the restructuring. The result is a reduction of about EUR 47 million due to the revaluation of the portfolio. We have notarized sales and purchase agreements for 17 properties in the 9 months of the financial year. Those were spread out. Some took place early in the year, some took place late in the year. Annualized rent is EUR 2.8 million and the purchase price combined is EUR 35.4 million. Some of the assets which were signed will close or have actually closed at the very end of the quarter. As we already mentioned on prior occasions, in -- at the end of last year, we received EUR 38 million from Obotritia as a repayment on the loan, which was outstanding to Obotritia. Therefore, the principal of the loan was repaid in full. And the only outstanding receivable is fully provided for that accrual and that is going to be -- expected to be repaid until the end of '25. Most of the proceeds from that repayment were used to pay down the financial liabilities. Our loan-to-value is 55.8%. It went up compared to the last quarter, which ended at the end of March this year. However, versus September '24, it has somewhat decreased from the 57.2%. The net reduction of financial liabilities was EUR 74 million. It included a few items which sort of increased the financial liabilities and one of the main items was a drawdown of EUR 5 million on the bridge financing, which we -- the bridge financing we reported already in the past. We have in these 9 months, reduced the liabilities by convertible bonds. They were converted in the amount of EUR 37 million. We repaid EUR 20 million of unsecured notes and obviously did additional debt amortization through asset sales and normal regular amortization. At this time, we will not be providing any guidance for the financial year '24, '25 due to the preparation and ongoing preparation or the restructuring plan. So if we move to the next page, Page 5, we put together some highlights on the restructuring plan. As we already reported in the past, we have engaged FTI-Andersch to prepare a formal restructuring opinion in accordance to the standard of IDW 6. That restructuring opinion was completed in a draft form and expected to be finalized by the end of August. We also reported that we have entered into standstill agreements with a number of lenders with the maturities of their liabilities of their loans that were in February, March of this year. Those were extended first until the end of May and then during the course of summer, those were extended also until the end of August. With some of those lenders, we have already reached agreements that we will be extending the loans until the end of this restructuring period. The restructuring period is tentatively or actually according to our plan is going to be in September '27. We have secured bridge financing. It is now EUR 80 million with a 5.5% interest. We are expecting it to be prolonged and we are in discussions. So it will be prolonged after August '25. One of the major events since we presented results for the half year is a restructuring agreement with VBL. That restructuring agreement mainly includes the debt-to-equity swap in relation to the obligations to the financial liabilities to the notes or registered bonds that we have in the amount of EUR 86 million. So debt-to-equity swap will be at least or about EUR 86 million. Once implemented, it will have a major impact on our KPIs, obviously, loan-to-value ratio, current capital ratio. Debt-to-equity swap is a substantial support for the restructuring of the company. It has a positive message, it had a positive impact to other lenders in their decision to support the plan. Before debt-to-equity was agreed, however, it is obviously not yet implemented, the restructuring plan envisaged a substantial asset sales. Those asset sales were envisaged to be necessary to reduce our financial liability substantially. Due to the proposed debt-to-equity swap, those sales volume can be reduced to about EUR 300 million to EUR 350 million. The draft restructuring opinion was already presented and discussed with relevant lenders. As I mentioned, several lenders with maturities earlier this year have extended, but also the restructuring plan calls for extension of maturities and some other changes to the loan agreements, to the debt agreements we have maturing in '26 and the first half of '27. So those loan agreements are to be and already, to a large extent, are extended until the end of September '27 as well as some other covenants were changed as well. As of now, there has been no lender who categorically refused to support the restructuring plan. However, with a number of lenders, the discussions are still ongoing. We have been exchanging contracts. And so far, we are on track. Until the end of August, we expect to conclude the remaining agreements. And then, of course, an important event is an Extraordinary General Meeting, which should approve the debt equity swap. It is in preparation. The date is still to be determined. And obviously, there are some prerequisites for that as well. We can now move to Page 8, where we have some details on our property portfolio. We now have 152 properties with approximately 160,000 square meters. The reduction of 15 assets compared to the 30/09/2024 is obviously due to sales. The total purchase price of these assets was about EUR 30 million. Significant impact on our total fair value comes from the revaluation done by CBRE of EUR 47 million. Obviously, asset sales contributed to the reduction of fair value since those assets were sold. The annualized portfolio rent is at EUR 66.9 million. Last quarter, it was EUR 70.4 million, and the reduction is driven, as I mentioned before, by asset sales. The growth will have a slight increase in vacancy rate to 14.9% from the prior 14%, is again driven by sales of assets that were mostly fully leased up. We can now move on and take a look at Page 10, where we have some details on our tenant structure. It is important to note that the noncyclical tenants contribute a substantial part of our rents and the cyclical tenants amount to only about 21%. EUR 44 million of noncyclical tenants is our rent -- is our annualized rent, which is somewhat down from last time, a report from 6 months results where it was EUR 46 million. Total annualized rent is at EUR 66.9 million. We can now move forward and take a look at Page 13, where we have put some details on our financing structure. First important point to note here is that graphical representation of loan maturities is as a snapshot at the end of the reporting period on 30th of June '25. And that graph arranges pictures in maturities which is actually maturity of the fixed interest rate. So it is not the average loan -- it is not the end maturity of the loan. Now obviously, '25 shows a significant amount. If I break it down a little bit, there are 2 main items here of EUR 40 million and EUR 45.9 million are the registered bonds. Those are exactly the bonds which are held by [indiscernible] and are part of the debt-to-equity swap. Therefore, once the debt-to-equity swap is implemented, those loans, those bonds will not be there anymore. And an additional positive development here is that as these instruments are secured by real estate assets, those will be released and a substantial number of assets will be available for the normal business operations. That '25 also includes unsecured notes, which are already in part extended until the end of September '27. And in other case, we are very close to finalizing that. The real estate secured loans, which are shown here to be either fixing of interest rate out to '25 or matures in '25, where also some of them were also extended until the end of September '27. So we are making good progress. The maturities in '27 of the liabilities of the loans, which are maturing in '27 are also part of the restructuring process where we have already discussed and already, in some cases, signed with the lenders, the extension of the loan agreements until the end of the restructuring period, which is September '27. In the financial KPIs table below, there are some changes which we have done versus the last time. And one of the notable changes is the average loan maturity in years because we feel that this is very important that we show not only the end of the fixed interest rate, but also the actual maturity of the loans as there are quite a number of loans maturing after September '27, which do not need to be extended. So participation in the restructuring process for those lenders is quite limited. Overall, that restructuring process has significantly affected obviously, our financial landscape. Also transition to a new asset and property management is a significant effect and the asset and property management services will be fully transferred to GPEP as of the 1st of October, though, of course, the year-end closing will be done together with Elgeti Brothers. That pretty much concludes our presentation, and we will be opening for questions now. Operator?

[Operator Instructions] First question comes from the line of [Joseph Shaun from XAIA].

Just for understanding this right, does this mean that you will push out all the maturities from '25 until '27 -- until September of 2027. And is the pushing out of all the maturities, so including bank debt, but also other forms of financing necessary to conclude the restructuring?

That is mostly correct. There are some loans which are by their nature, by amortization plan run out in '25 and in '26. So during the normal amortization of these loans, they will just be completely paid off because the remaining balance is relatively long. Those which do have balances and maturities in the period, which you just described, correct. Those will be pushed to the end of September '27.

Okay. So then you will have a balloon on all the payments of '25, '26 and '27 at the end of September '27?

No, exactly. The plan, the restructuring plan envisaged that in that period until the end of September '27, we will be executing certain sales. And once those sales are executed, obviously, they are secured with real estate loans. So we will be amortizing those loans as we receive the sales proceeds, which will take care of the real estate secured loans. The unsecured notes with maturities in that period of time are indeed pushed until the end of September '27, at which point, we will accumulate as planned in the current plan or in current draft or the restructuring opinion, we will amortize those unsecured loans.

Okay. Understood. That's very helpful. And what if some of your lenders don't agree? Do you need an agreement of 100% of your lenders or it's also like, I don't know, like 95% necessary or do all of the lenders 2027 need to agree to the restructuring plan or to the prolongation of their liabilities?

Understood. Well, I can -- for more detail, I can refer you to the risk section of our quarterly report, which we put online this year. In short, as we obviously have to disclose all possible potential risks, yes, it is possible that a lender might not agree. It is not completely out of the realm of possibility. So that will be rather unpleasant. However, we are carefully confident that we obviously know how things are progressing that, as I mentioned previously, no lender has flat out refused to support the plan. So we are confident that we will get all lenders on board. In such cases, as you know, there is a principle of the equal treatment of the lenders of the same ranking. So no lender can receive a preferential treatment. And that's obviously where a very reputable restructuring expert, FTI-Andersch comes aboard, who supports us in discussions with the lenders and explaining how the restructuring opinion works.

Understood. So every lender needs to essentially agree. Otherwise, the restructuring plan falls through?

Yes, that is correct.

[Operator Instructions] The next question comes from the line of [indiscernible] from Independent Property Analyst.

Last year, in March, you mentioned that you intend to delist from the JSE, your secondary listing. How is that happening? Or is that put on hold?

That is correct. We still intend to end our secondary listing on the Johannesburg Stock Exchange. That process is progressing slower than we expected. There is one remaining shareholder who holds the shares in South Africa. And while there are certain legal constraints as to what we can do and what we cannot do, so the idea is that we will be discussing that indirectly with the shareholder, and we'll end the listing on the Johannesburg Stock Exchange.

[Operator Instructions] Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Kyrill Turchaninov, CFO; and to Lars Wittan, CIO, for any closing remarks.

Well, thank you, everyone, for your attention and interest during this call and for your questions. I hope we were able to answer those correctly. Well, we did answer those correctly. But I hope that we made clear and transparent the current situation and the progress of the company. Once again, thank you, everybody, and that ends our call. Goodbye.

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