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

Ladies and gentlemen, welcome to the Full Year 2024-2025 Financial Results Conference Call. I am Sandra, the Chorus Call operator. The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Kyrill Turchaninov, CFO. Please go ahead, sir.

You Hello, everybody, and we will be starting our presentation with the highlights of the '24-'25 financial year. We will go over quickly over the entire year on the events which happened since we presented our 9 months results in August because there obviously have been some important development. We can now turn to Page 4, where we have a short summary of the main points of the financial year. The results we are comparing year-on-year. So the financial year '24-'25 versus the financial year '23- '24. Rental income decreased to EUR 70 million, predominantly, mostly due to the asset sales, which we have done during the financial year. FFO, a major indicator and KPI for us decreased by about EUR 15.6 million to EUR 12.3 million, which is a substantial decrease. However, this decrease is mainly driven by the sale of assets. So net result impact on FFO is EUR 8.5 million as well as other major variance versus the last year is a so-called net interest. That net interest has obviously interest expense, as well as interest income. So the net amount effect in the FFO was EUR 4.6 million. However, in stand-alone Q3 of the financial year, our FFO was EUR 1.9 million. And in the last quarter, Q4, which ended obviously September 30, our FFO was EUR 2.4 million. During the year, we have reduced debt by about EUR 78 million, corresponding to roughly 14% year-on-year. And that was driven by a number of things. We sold properties with a total volume of EUR 34 million. And the major impact came from conversion of EUR 37 million of convertible bonds, which happened mostly earlier in the financial year. As we have already reported previously, especially with more detail in our report for 9 months, which we did in August, the company is in restructuring projects. We will have a special slide for this, so I will go in more details later. However, the restructuring, obviously, costs and we had legal and consulting costs, which are direct restructuring costs of EUR 3 million. We also had additional costs, which were charged to the company by the lenders is customarily in such restructuring process when we are asking lenders to restructure the loans. Obviously, they incur some costs, and they charge us specific fees. Those amounted to roughly EUR 5.5 million. An important event which took place in the first quarter of the year, in the financial year, was a repayment by Obotritia, of its entire principal debt amount of EUR 38 million. There is an outstanding receivable of about EUR 60 million, still due from Obotritia. It is we provided for, which means we have booked a provision -- a financial provision against this debt. And it is supposed to be repaid by the end of December this year. Loan-to-value is almost unchanged compared to the prior year. We have, again, not met the REIT equity ratio requirement of 45%. And again, I will say a few words about this later on in the presentation. A big impact to our financial results came from a valuation impairment of a revaluation adjustment of almost EUR 70 million. We did report, about a substantial devaluation of our portfolio. We do an annual valuation by an external appraisal. This year, we actually did two valuations. One was the major one on indiscernible] , which resulted in about EUR 47 million of devaluation. And we also made an update for the -- at the end of the year on 30 June, which added another about EUR 22 million. So that obviously had significant impact on our financial results. The cost of debt is expectedly higher at roughly 4.5%. We have decided to give a range in terms of the guidance for rental income for the next financial year. And that would be between EUR 58 million and EUR 63 million. We are not providing any FFO guidance due to restructuring process. And as we mentioned on a few occasions, a major element of the restructuring process, obviously, in addition to the debt-to-equity swap, is going to be a sale of assets since we do not know exactly which assets at what period of time will dispose of the FFO guidance at this time is very difficult. The focus will remain on finalization of restructuring plan in the sense that we will be implementing and already finished and agreed with the lenders, restructuring opinion, and obviously improving the portfolio performance. We can now turn to the next page, which is Page 5. Where we recap mostly what we did already in the last time we presented the results. Well, the need for restructuring, the need for the engagement of FTI-Andersch as a restructuring expert. The need for the preparation of the restructuring opinion was predominantly driven by 2 factors. One is the sheer volume of maturities historically aggregated on that the volume of maturities in '25 was originally very substantial, over EUR 200 million. And once we entered the discussions with the lenders to restructure those obligations, it was clear that they require a formal restructuring process, which includes the preparation of the restructuring opinion. We, as I mentioned, engaged FTI-Andersch to the do that, and the final version was completed as well as presented to the lenders, completed on the 1st of September and communicated to the lenders shortly after that. What helped us on the way and what supported us is the [indiscernible] Financing, which we agreed earlier in the year, with the amount of up to EUR 80 million at 5.5% interest. We have also entered into a restructuring agreement with VBL, and we concluded an investment agreement with holders of their convertible bonds. So the entire amount of those instruments of up to EUR 120 million, we'll be taking part in the debt-to-equity swap. Now that signaled and that obviously was implemented, that is a very serious support for our company. It will improve always the KPIs as that will be converted to equity in LTV, and capital ratios will certainly change. Now that debt carried a substantial interest for the most part of this year, which will obviously help us as that will reduce our interest expense. The assets, which are used as a security for those loans, for those instruments will be freed up and will become available again to the company. The message to other lenders was very positive. And the original restructuring opinion restructuring plan envisaged a substantially higher sales volume in order to cover our obligations. Now we are talking about up to EUR 300 million to be sold by the end or latest by the end of September '27. The lenders went along and then supporting the restructuring opinion and they did this with extension of the maturities for their claims or we have entered into comparable arrangements with the lenders. The debt-to-equity swap was approved by a majority vote, well, 99-point-something percent vote by the Extraordinary General Meeting, and I will say a few words about this later. Now during the restructuring period, and that was also requested by the lenders that FTI-Andersch stays on board and then supports us in terms of reporting the progress and basically confirming to the lenders that the company is staying on the restructuring plan. So this is a crucial element, which will be doing regularly with bank reporting over the next 2 years. We can now move on to Page 6, where we put some details together about the Extraordinary General Meeting that took place on the 4th of December. By the way, a few items on the agenda for that meeting and the most important one is obviously the debt-to-equity swap. We have some details in terms of known number, the exact number of liabilities to be used is about EUR 180 million. And there are subscription rights. And obviously, there will be increase in the share capital accordingly to up to EUR 125 million. As I mentioned, once executed, the KPIs of the company will be substantially improved. However, some recorded objections to the agenda items at the meeting might lead to legal challenges and effect further schedule. However, the majority, as I mentioned, already more than 99% of the present votes improved the measures. The fact that the company did not meet the requirements of the REIT Law for the 3rd time in the year, and that is the statutory equity ratio of 45%, basically means that the company is going to lose or actually has already lost as of the 1st of October, the tax exemption. We expect that is going to happen. And -- by the way, as also in the past, we have prepared our financial statements as if we are fully taxed. So there is not going to be any adverse tax impact because of the loss of the tax exemption. And we prepared for that, that has also reflected full taxation going forward in the restructuring plan. We are expected to change the name of the company, to the Deutsche Konsum Real State AG. Now we can skip a couple of slides and move forward to the portfolio details, which we have on Page 9. We have disposed of a number of properties, while 16 actually. With the total square meters of 36,000 square meters. Now the volume of sales was EUR 34 million and obviously, that had an impact on our total fair value, while the biggest impact, as I already mentioned, on the total fair value was the devaluation result of almost EUR 70 million. Now in terms of vacancy rate, it is slightly higher than the prior year. However, there is some development on the vacancy rate, which is, well, a little bit of good news. We had -- last time we reported in August, our vacancy rate was 14.9%, and it is now 14.2%. Now the difference is obviously not that much. However, the entire reduction of vacancies due to basically a few things. We have leased up number of vacant spaces of about 5,7000 square meters. But also the assets which we were selling were not 100% leased. So a small number of about 1,200 square meters of vacancy was in those assets which we disposed during the year. That is reflected in a total annualized portfolio rent which is [indiscernible] . So there are a few moving parts behind that number and the variance to prior year. So obviously, sales impacted that, and the assets we sold had annualized rent of about EUR 2.7 million and there were some other movements in the of vacancy periods where obviously we had a higher rents. Now we can begin -- skip a couple of slides and move to Page 11, where we present the tenant structure of the portfolio. It didn't change in terms of the percentage of rent contribution from cyclical and noncyclical tenants versus last time. So all those noncyclical tenants are stable versus last quarter and they contribute EUR 44 million of annualized rents. Those rents, which we have -- the 85% of rents are linked to the CPI, so that pretty much stayed the same versus last quarter or maybe slightly higher. And then almost half of rental contracts are over 5 years long. So that gives us certain security or certain assurances in terms of the rent flows in the near future. We should now move from to financing, which is Page 14, where we present the maturity profile of our financial obligations by financial year. So in the graphical representation, we can see that in '25-'26 financial year, there are no maturities, which is obviously, the result of the finalization of the restructuring opinion and restructuring plan, where all the maturities were moved to September '27. And that means, obviously, that in the year '26-'27, we have a substantial number of maturities coming up for repayment. One note here is that, that number, which we show and obviously split by the annuity loans, amortizing loans and promissory notes and corporate bonds. That number in '26-'27 does not include EUR 180 million of obligations taken part in the debt-to-equity swap. It is assumed that debt-to-equity swap will take place. However, those instruments are formally prolonged to at least September '27. The total financial debt, which we show here, which is EUR 471 million does include those financial instruments. As expected, total cost of debt is higher than in the prior year. LTV, I mentioned before, it's almost flat and the interest coverage ratio last year at the end of the financial year '24, with a rather high number, predominantly was impacted by overtreat development, which obviously are not present in this financial year. Now overall, perhaps to recap and close the presentation part and to open for questions. There Important thing is for the company is that we have successfully concluded the restructuring opinion that all the lenders agreed to support the restructuring measures. Now we have to obviously execute on the restructuring plan by obviously asset sales and also improving the key numbers on the property side. There are some small steps already made on the vacancy and the management and the vacancy improvement and the management will continue in this direction. We will now open for questions.

[Operator Instructions] So far, there are no questions -- sorry to interrupt, we have now registration from [indiscernible] from [indiscernible].

I understood that on the general meeting, there was some kind of statement by the VBL about how many shares they wish to acquire? Is it as many as they are obliged to by their own statement? Or is it as many as they can? From my point of view, the difference is about 15 million shares. Can you say anything about that?

Yes. Now the entire number of shares, which we currently have is round number, 50, 351,000. Now the company's share capital can be increased by up to EUR 75.5 million additionally to a total of 125.8 million shares. It is expected that [indiscernible] , well, actually, it is agreed that [indiscernible] Will use its entire receivables against us, against the [indiscernible] , even debt-to-equity swap. So in that case, they will obviously receive shares equal to EUR 86 million, times the number of times the EUR 2. So divided by EUR 2, obviously.

So 43 million shares basically?

Well, the entire number of shares, let me backtrack on this. The entire number of liabilities from our side or receivables from the lender side is EUR 118 million. Of that, EUR 108 million is -- about EUR 108 million is [indiscernible] . Now if we divide EUR 108 million by 2, we have 54 million shares.

So that means all that they are obliged not all they can because the rights to receive shares will not be traded. So basically, there will be no dilution for shareowners that don't execute their right to receive shares and VBL is not executing their right to take these shares as well.

Well, there will be dilution because we will issue shares but only for ...

But I mean the additional -- basically, they are taking these 54 million that they have basically already subscribed, but no additional ones on top, which they could take these shares as well.

They are not expected to be taking any shares on top of what we just mentioned.

I mean honestly, with the shares trading weigh a lot below the capital increase price, I suppose the free float is not going to take many apparently. So basically, the debt-to-equity swap is the dilution period?

Yes. Well, I cannot possibly comment on how the shares will be trading. However, you're correct, there will be dilution once the debt-to-equity swap executes.

Okay. And regarding the costs I had assumed that because of the restructuring, they are mainly your advisers. You mentioned EUR 5.5 million of costs incurred by the lenders, is that penalty fees or their advisers or what is that? I mean in relation to the debt, EUR 5.5 million is not a cappuccino actually.

Well, yes, we have restructured, as we mentioned, a bit more than [ 200 ]. The lenders were very different. We had and still have obviously that secured bonds, while the secured corporate loans, those held by [indiscernible] , obviously, we have convertible bots. We have unsecured promissory notes. We certainly have the amortizing loans and maturity loans. The fees were a few categories, the big feeds, which varied by lender, those, we unfortunately had to agree to reimburse. The fees were also for restructuring the capital -- the loan itself. So there is customarily, unfortunately, also fees which the banks charge and are sometimes a substantial number because of the well perceived, I would say, damage due to the delay of repayment. And all of that amounted to that number. We do provide more a bit more details in our notes to the financial statements, which we have published earlier today.

Okay. So is that passed pain? Or do you expect further similar costs for '26 in addition to the cost of the capital increase?

No. This is pretty much in terms of restructuring itself. This is it with production of the restructuring opinion, the so-called IDW 6. The FTI-Andersch is completed the bulk of the work. However, as I mentioned previously, the majority of lenders required reporting a regular monthly and quarterly reporting than unfortunately not by us, but by restructuring expert, FTI-Andersch. So FTI-Andersch Ds will stay on board obviously much more reduced capacity, and we'll provide the reports to the banks as stipulated in all those extension and restructuring agreements we have entered into the banks.

That's helpful. Can you give any ballpark figure, how high these recurring costs will be? Will that be kind of a 7-digit figure or a high 6-digit figure annually for the coming like 3 years? Or what kind of dimension can I expect from that?

Well, sure is what we expect until and including September '27. Monthly reporting is going to be done, as I mentioned, by FTI-Andersch as well as a quarterly report. Now quarterly reporting, certainly, we do quarterly reporting ourselves. So that is not terribly time consuming on the side of FTE. The monthly reporting is a little bit different. However, and this is just an estimate based on what we already did in October, for example, between EUR 25,000 and EUR 30,000 per month.

So like EUR 300,000 a year?

Roughly, something like that. Perhaps.

Okay. So then the large number of [indiscernible].

The next question comes from Vincent [indiscernible] from DPAM.

I would like to know if you are invested in the company you are managing, do you have shares in the company?

I personally do not have shares in Deutsche Konsum REIT.

Okay. Second question goes about corporate governance. Could you explain if Rolf Elgeti is still in the Board or not? And his position and his influence?

Of course. On the 1st of April, this year, Annual General Meeting took place. Mr. Elgeti did not provide his candidature for the nomination to the Supervisory Board. Therefore, he was not anymore elected to the Supervisory Board, instead -- and well, did not elect -- he was not elected to the Supervisory Board. Instead 2 other people were elected to the Supervisory Board in the past. As to the Rolf Elgeti, he does not have any official position. Obviously, he is not a member of the Supervisory Board. He is not a member of the Management Board since quite a long time. There is no operational or any other control or relationship between the company and Mr. Rolf Elgeti with one exception. Well, actually, with two exceptions, if I may. But one is the big one. And this is the EUR 16 million of accumulated interest, which we still have as a receivable against Obotritia, I mentioned this earlier in the presentation. And the second, which we obviously disclosed in our financial statements is a very small business, which we have with one of the companies in Obotritia structure in terms of leasing rooftop pace for the photovoltaic arrangements, which is a really small amount EUR 2,000 to EUR 3,000 a year. These are the only relations we have.

Okay. Last question goes about valuation. When do you see you are going to find the trough, the bottom of the valuation of the portfolio by appraisers?

Our variation of our assets is done by CBRE. Now obviously, they're using a discounted cash flow methodology. There is a discount rate, there are market comparables. There are a number of factors which go into valuation of real estate assets. Greatly depends on how the interest rates develop in the future. So in terms of our specific portfolio, because I cannot possibly speculate on the market developments in 6 months. In terms of our specific portfolio, the measures we are taking, and that is investing in improving the value of the assets, sometimes investing is necessary to just keep the value of the assets at the current level, but also working methodically carefully, painfully with -- also with our new properties and asset manager in GPEP in terms of reducing the vacancy and increasing weighted average lease terms. All that should have a positive effect on the valuation of portfolio. I cannot possibly say where is the bottom.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Kyrill Turchaninov for any closing remarks.

Thank you. Well, as I mentioned, this was a challenging financial year, and we, as a management of the company are grateful and thankful for the support we have been receiving from the shareholders and obviously the lenders who have supported the restructuring plan. And we do have quite some work ahead of us. We hope for your continued support, and I thank you for your attention during this call. We will close the call. Thank you.

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