Deutsche Konsum REIT-AG (DKG) Q1 FY2026 Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q1 2025 -2026 Financial Results Conference Call. I'm Lorenzo, 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's my pleasure to hand over to Kyrill Turchaninov, CFO. You will now be joined into the conference.

Hello, and welcome to the Deutsche Real Estate First Quarter Financial Year '25-'26 Financial Presentation. My name is Kyrill Turchaninov. I'm the CFO of Deutsche Consumer Real Estate, and Mr. Lars Wittan is also sitting right next to me. We will be presenting today's results, today's numbers. We can start by taking a look at Page 4, where we have the highlights. It is a bit more compact than we usually do. We have last time presented our numbers just under 2 months ago. So some things will be repeated because the events took place already in Q1, and we talked about those a little bit last time in December. But anyway, the Q1, we have the rental income, which decreased by EUR 800,000 to EUR 16.9 million, about 4.4% down versus the same quarter of the prior financial year. So we are doing year-over-year comparison here, and that went pretty much as expected because of the asset sales. FFO went up by about 57%. So it seems to be somewhat significant number. The primary driver for this is the lower interest expense. We will expand on this and provide some more details once we talk about financials on the financial slide. We have sold 8 properties and sold in this particular case means that we have signed the SPA, the sales purchase agreement in December for those 8 properties with a purchase price of EUR 34.7 million. Two sales were actually closed in Q1, and they had some impact on our property metrics. We will also touch upon those later on. Obotritia sale did not repay the outstanding receivable of EUR 16 million. We have reported this and obviously shown this throughout the year and the due date was end of December. We are currently in discussions with Obotritia. We have consulted our legal advisers. We are working together with Obotritia to find the best possible solution and the best possible outcome. Now obviously, we did not give up on collecting the EUR 60 million and would like to find a really acceptable solution for us as well with Obotritia. Loan-to-value was slightly reduced to 56.4% compared to the prior quarter, which was, of course, September '25. What is not shown and what we do not have yet obviously reflected on the balance sheet is the results of the debt-to-equity swap. I will say a few more words about this on the next page. However, with all things being equal, if we take a look at the so-called pro forma, balance sheet as of 31/12, we are looking at LTV with obviously calculated effect of the debt-to-equity swap of about 41%. Average weighted debt cost was substantially lower at almost 3% this time. And again, we will provide more details once we look at the page on the financing. So now we can take a look at the next page, which is Page 5, where we provide a bit more details on the restructuring plan and obviously, the important event of debt-to-equity swap. Now to recap the main points of the Extraordinary General Meeting, which took place on the 4th of December. The mixed cash and contribution in kind capital increase was approved. The subscription rights, well, obviously, with subscription rights and the share price or issue price of EUR 2 per share. We already expanded on the positive effect of such a measure. So obviously, improved ratios, improved KPIs. We will also have a substantial number of assets released as a security, an important step and a major part of our restructuring plan. There were a few other items approved or actually on the agenda for the Extraordinary General Meeting. One of those was the change of the company name from Deutsche Konsum REIT to Deutsche Konsum Real Estate. That took effect upon the registration in the company register on the 27th of January. Now no legal challenges were logged to the commercial register. So we made an application to the commercial register for the capital increase. That capital increase will result in a total of about 59.4 million of new shares, new bearer shares. And the effect or the effective moment of this will be once the company register does make that entry in the company register. About 166,000 new shares were exercised against the cash contribution. And well, we, as of now, don't know who actually exercised that. Now again, net asset value pro forma, all things being equal, taken into consideration the capital increase would be around EUR 4 per share. As I mentioned before, the capital increase is not yet reflected in the balance sheet, and obviously not yet reflected in the list of the shareholders and their holdings. Once it is reflected, once the shares are issued and are exchanged in the debt-to-equity swap transaction, preliminary, we expect Faber to hold about 6.5% of the shares of Deutsche Konsum Real estate. Now we can take a look at the property or actually at the portfolio details on Page 8. As I mentioned previously, 2 assets, 2 properties were closed. So the total number we have as of the end of December is 149. That had effect certainly on our total fair value, which includes both properties held for investment as well as held for sale. And there was some minor CapEx, which also obviously impacted that number. There is a development in the vacancy rate, which went down from the 14.2% to 13.6%. And the primary driver for this is the closing of a sale of one of those assets which was closed in Q1, had a substantial vacancy. It was a former [Real] supermarket and had about 11,500 vacant space. So that obviously had an impact on our total vacancy. Other key property metrics, which we list below here in the table in terms of rent contribution from noncyclical tenants, in terms of the CPI-linked contracts remain unchanged versus the prior quarter. Now we can take a look at the financing details. And we show here on Page 11, the maturity profile of our liabilities. And as before, due to the restructuring and the agreements we have entered into with various lenders, there are no maturities coming up in the financial year '25, '26. And the substantial number of maturities in '27 is expected, well, is actually planned so in the restructuring opinion. The total debt cost of 2.92% is substantially lower than the one in the prior quarter. The main impact -- the primary impact for this is that the instruments, the financial instruments, the convertible bonds as well as corporate bonds, bear no interest as of the 1st of October until capital increase or debt-to-equity swap is implemented. Therefore, they obviously heavily impact the interest percent, the average interest percent as they are substantial in volume, and they bear no interest. Once debt-to-equity swap is implemented, they will obviously no longer be counted as our financial liabilities. So we expect that the average weighted debt cost will go up after -- well, truly mathematically after the capital increase is implemented. To recap, the main events, obviously, was the extraordinary general meeting, the implementation of the capital increase, which is ongoing right now and as the application was made to the company register court in the City of Rostock, there were no legal objections. We expect this to happen within the next few weeks. Obviously, we cannot control how fast this entry is made. We are done with our presentation part, and I would like to open the call for questions now, please, operator.

[Operator Instructions] There are no questions from the phone for now.

Well, if there are no questions at this time, we should...

One question, sir. So the first question comes from the line of Andreas Plasier from Warburg Research.

I have questions regarding your interest rate costs. You mentioned that we will see an increase after the capital increase. What level should we expect for the average interest rate cost in the next quarter?

Right. Well, there are obviously a few moving parts. As we close the sales and we sell the assets, obviously, we have to pay down the underlying real estate loans. So that needs to be figured in. The effect will come, as I mentioned, from reduction of liabilities with 0 interest-bearing. I don't have the exact number for you, but Andreas, I can get back to you once we do the pro forma calculation.

The next question comes from the line of [ Andreas Tillack ] from Alpha.

On the -- will you -- I think I've seen that you have quite a bit of cash -- increased your cash position. Will you be using the cash coming in from the sales and your current cash position to prepay existing loans? Or how is it agreed upon? Basically, part of the mortgage or the assets?

Sure. Right. Now when we sell assets, which are secured by real estate debt, well, always, assets are secured, they are security for the loans by lending banks. First and foremost, we have to make repayments to those banks to release the security. So part of these sales proceeds or the sales proceeds obviously goes there. As the loans are very different, the banks are very different and the security is very different. It depends on a very specific case. There is no special formula. However, that cash which is accumulated, which we are going to continue to accumulate as per our restructuring plan is going to be used to repay the notes, the promissory notes, which we have outstanding and due to our agreements with the lenders maturing at the end of September '27. So the restructuring plan, the restructuring opinion foresees that we will accumulate cash and repay those unsecured lenders in one shot. Now whether the cash will accumulate faster as it is expected in the restructuring plan, and we might enter into discussions with the lenders to repay that earlier remains to be seen. What is, of course, terribly important to keep in mind is that, we treat lenders equally. So there is no preference to one lender versus the other lender to other lenders. This is an underlying principle of the restructuring plan, which is, well, very fundamental. So we cannot make a preference and repay one lender with this accumulated cash and not the other. There needs to be a certain arrangement. There needs to be a certain agreement with all the lenders so that we don't endanger the restructuring opinion.

And how have the banks reacted to your restructuring? Are they willing to extend some loans because of the very low LTV right now, so you can basically reduce your debt program a little bit?

Well, we reported this, I think, in some call or in some presentation reports in the past. The agreement which we reached with all the lenders during the course of summer last year was necessary for FTI-Andersch to issue the restructuring opinion. That restructuring opinion foresees a certain plan of paying down the lenders. Now it does not foresee that the lenders will extend loans beyond the already agreed date of 30 '09 '27. So all those maturities, which were in place for the next -- well, what's now 1.5 years, they remain the same. We cannot deviate from the restructuring plan without agreement for the lenders.

But are you receiving some signals from banks or others that they are happy with the development with your -- that essentially you're also selling some not so great assets that they might be willing to say, well, an LTV of, say, 40% or 30% is fine with us. We will just extend some existing or issue some new bank loans?

Well, one has to take a look at the facts. First of all, as of now, we do not receive any negative feedback from the banks, which we considered as somewhat positive. But the capital increase has not been formally implemented. The debt to equity swap did not formally take place. So it doesn't make any sense to go and talk to the banks or ask for tentative opinions until this is actually formally done.

Okay. Understood. But you're planning to speak with the banks and ask them whether they would be willing to accept a certain level of LTV at your company?

What we are planning is to make absolutely sure that all the formal steps of the debt-to-equity swap has taken place. That is the plan. What is going to happen also as envisaged and actually agreed in the restructuring opinion is that we will continue to provide reports to the banks on our financials. So let's see what the banks say once we provide our next financials reflecting such an LTV.

We have a follow-up question from the line of Andreas Plasier from Warburg Research.

Yes. Two follow-ups. Firstly, you have a write-down of EUR 2.5 million in the first quarter. What was the reason for the write-down? And the second one is you are very active in selling properties. Are your prices in the negotiation, do you have some positive news? Are the prices realistic? Or should we expect here some further valuation changes in the coming quarters?

Understood. First part of your question, write-down is actually formally in accounting terms called bad debt accrual or bad debt provision, which we regularly make on outstanding receivables to tenants because of the aging principles. So 100%, 360 days; 75%, 300 days; and so on. So since the outstanding receivables were substantial at this stage, we have made such a provision. In addition, unfortunately, one of the tenants, and that's Hammer Fachmarkte in German, declared bankruptcy. And we did have an outstanding receivables, well, actually a substantial one against the supermarket. And as a rule, once that happens, we 100% bad debt accrual. So that takes care of the first part of your question. And in terms of the second part, I'm sorry. Can you please recap what it is, what it was?

Yes. What's your view on the prices on your...

Yes, got it. Thank you. Now obviously, it is known that we are selling assets in the market. So we received quite a substantial number of rather unrealistic offers to acquire our assets. We are working with our new property asset and transaction manager, GPAP, to actually shift through those things, but also proactively approach specific players in the market who might be interested. Yes, there will be sales below the current market value, which is to be expected and, by the way, also reflected in the restructuring plan. What we have seen, however, in really practical terms, it is very asset specific. So individual assets can have, well, quite actually almost book value sale. So we have seen an asset where the value of the asset was, let's say, EUR 9 million, and we sold it for slightly more than EUR 9 million. However, on the other hand, we also see cases where assets in the portfolio do have some discount. And that discount can be between 5%, 10% and maybe more. We don't know that yet. That depends. So in that respect, yes, we are actively marketing certain assets with the help of external professionals. And in that case, sometimes sales prices are lower than the existing book value. As to the valuation of the portfolio, last year, we actually had 2. One happened for our third quarter close, which was 30/06/25 and the second one, which happened to the 30/09. Both were done as usual by CBRE, and they resulted in a total devaluation of roughly EUR 70 million for the financial -- for the prior financial year, which we obviously reported as well. I cannot possibly forecast what the valuation of the portfolio will look like at the 30/09/26.

The next question comes from the line of [ Orlu Praise ] from OK Consult.

Thanks a lot for being able to ask a question, or rather 2 actually. First, have I understood your latest press releases correctly that VBL took all the shares they had to according to the agreement, not as many as they could have gotten because it's now 60 million instead of 75 million shares that are being placed altogether? And secondly, the funds from operation reported for the quarter refer to the old number of shares. So basically, you have to divided by 2 per share due to the dilution for the future now?

Well, actually, Faber L was never expected to take 75 million shares. It was a total amount of shares authorized. However, Faber L is converting its debt instruments, which are the registered bond, bonds in the full amount. So those borrowings, which we had from Faber Land obviously carried them will fully take place -- will fully be converted into equity. And this is the EUR 59-something million, which we just -- which I presented was on the second page, I think. So in that respect, everything went exactly as planned. What we didn't know, obviously, at the time of the offer is how much will be exercised against cash contribution. How much of the rights will be exercised. And we didn't know. It could have been 10,000, it would have been 1 million. So there was a room in terms of the number of shares authorized to accommodate potential exercise of cash rights. 166,000 or about were exercised. So obviously, that is not such a huge number, and that allowed the debt holders to fully convert. In terms of FFO per share, I understand your question. Well, yes, it will be obviously reflected using the new number of shares once they are actually issued. And as I mentioned before, that didn't happen yet as the formalities need to happen and the commercial register needs to make a entry. And then we will exchange that instruments for the shares. And then we will obviously have the new shares and the new FFO numbers.

A follow-up, if I may. Do you have some rough ballpark figure or maybe a range for the net asset value per share after the dilution and after the write-downs, which are visible on the sales, not the pipeline, but the existing sales?

I'm not sure what you mean by the write-down. We just with Andreas asked about that, that was a bad debt accrual. But if you're asking about the pro forma, meaning if we take the balance sheet as of 31/12 and just adjust it for the implementation of the capital increase, the net asset value per share would be in theory for euros.

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.

Well, I would like to thank everyone for your time and attention during our call and the insightful questions, which we hope we pretty much answered to your satisfaction. And I do remember there's one follow-up. Once again, thank you, and that concludes the call. Goodbye.

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