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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Dear ladies and gentlemen, welcome to the conference call of Deutsche Konsum REIT AG. At our customers' request, this conference will be recorded. [Operator Instructions] on telephone for -- operator Systems. -- may now hand you over to Rolf Elgeti, CEO, who will lead you through this conference. Please go ahead.
Thank you. Good morning, everyone, and thank you for your time and interest. As per usual, we will just very briefly run through the presentation, which you can also see online, and then there will be room to ask questions. So our Q1 numbers, our Q1 numbers, of course, are the calendar Q4 numbers. So a quick overview where we stand. Firstly, our rental income was up by 13% year-on-year, of course, largely helped by the acquisitions. Quite interestingly and nicely, our net rental income is up 20%. So we experienced a margin expansion in the last quarter of quite significant nature. The main reason for that is effectively kind of service charge issues. We sort of got under control post the acquisition and initial management. As a result, of course, the FFO was up. The FFO was up slightly less because, of course, the new acquisitions needed new debt. So the FFO was up 6% year-on-year. The FFO per share, also up 6% to EUR 0.30 of course, because we didn't issue any new shares. Our like-for-like rental growth remained at 1.7% which is 10 basis points higher than previous year, if you remember. And that, to a degree, is a function, of course, of the inflation link of our rental contracts. As a way of reminder, about 75% of our contracts are inflation-linked, and to a smaller degree, it is also a function of higher rents when we extend the leases approximately equal weight when we extend leases, we, on average, increased rents by 1.6%. We have continued to acquire at reasonably attractive yields. That's important to note -- I mean it's always important to note, but in this quarter in particular, it's important to note, because in the last quarter, we sold some properties. And you can see that in the last quarter, we also acquired 10 new property at an average yield of 8.4%. So the key message here is that our business model of acquiring sort of assets at the usual acquisition yields still very much hold, and our hold and our acquisition pipeline is still very strong. The capital recycling continued. Also in our fiscal year Q1, we sold more properties for EUR 27 million. We sold those at a yield of 5.5%. Sold at 5.5% and kept acquiring at 8.4%. If you compare those maths and you can see that we managed sort of to sort of acquire for EUR 38 million and sold for EUR 27 million. So in spite of the capital recycling, we're still a net growing company. All the same, our balance sheet remains very solid. Interest cover ratio stands at almost 6x EBITDA. Our LTV is at 52%, target of 50%. But of course, the next valuation is coming up so we would like to be on that target soon. And also important to note that none of our sales have closed yet. And of course, once they've closed, the LTV will be reduced. So for once, we are benefiting from the slow speed of closings in Germany as we keep collecting the rents in the meantime. We continue to borrow at low interest rates, as you can see here, we're confirming our FFO guidance for the year as before. If we're looking at the key figures by chart, here you see the same what I just mentioned earlier, no surprise. There are just 2 things I'd like to highlight. First is the AFFO per share. We said in previous calls that we, in the last 12 months, had some extra intensive sort of CapEx time where we repositioned a few assets. And we indicated that this will be less going forward. And you can see the result of that here that the AFFO, so the FFO post-CapEx jumps by more than 50%. And the NTA per share growth that you can see on the bottom right, I think, also speaks for itself. Then we'll just do some sort of [ fund ] cinema very quickly going through the acquisitions that we've done. I don't want to highlight anything in particular. I just -- if you flick through, you can see that it's more of the same food anchored, almost 10% yield and the WALT, the weighted average lease term, remains sort of in the around sort of 5-year terms. Which leads me to the property portfolio on Page #9, where as you know, the key line to watch here is, of course, the last line where we're looking at the weighted average lease term. And why is that important? It's important because, as you know, that at the heart of our strategy is to basically buy very high-quality assets with high-quality tenants with lots of care that we take when we select them. But you know that we take one risk, which is the lease extension risk. And for that, we get very handsomely rewarded, and therefore, it's very crucial to watch the weighted average lease term, how it develops over time. And you can see here that it keeps sort of keeps remaining constant at the level of around 5.5.So again, also in the last quarter, as in all the quarters before, we managed to hold the lease term at sensible and almost constant levels, which means we keep managing to extend the contracts all the time and thereby hold the cash flow together, in fact, cash flow growth. As I mentioned, our like-for-like rental growth is approximately 1.7%. You also see the pro forma, the pro forma being sort of 0.2 years shorter in the weighted average lease term. That's, of course, because we keep selling slightly more longer leases naturally because they attract a lower yield, and we keep buying at slightly shorter leases because we attract the higher yield and then try to manage this to the 5- to 6-year level. So that's all very much the same as before, but I wanted to highlight that sort of in spite of the more challenging environment and in spite of the capital recycling we're doing, and in spite of COVID and in spite of everything else that you may think of what may follow in spite of these days, that we're managing to keep the WALT stable. Moving on, giving you a few charts, I just like on Page 12, I just like to show you here what the current rent collection rate is. The rent collection rate is almost 100%. Maybe not too surprisingly, but I think it's worth mentioning. And also just worth mentioning that approximately 3/4 of our leases are inflation-linked as we highlighted in the calls before. And as we keep growing, you can also see that kind of the number of tenants that we have in the same sort of across the country with the same tenants, that's been increasing. So all in all, the company develops very nicely and in line with previous quarters and in line with our guidance and in line with our strategy. So it's all rather boring, but I think I guess reassuringly boring, probably. Which is also where I want to stop and allow you to ask any questions on the numbers, strategy, anything that you're interested in. Thank you.
[Operator Instructions] The first question is from Kai Klose of Berenberg.
Can I ask a question on the letting volumes? You mentioned that letting margin has improved and also that the like-for-like was pretty stable. Could we get some more details how much you rented or extended in Q4 -- sorry, in Q1 compared to Q1 last year or Q4?
Yes, well, basically, it's -- the portfolio is now so granular that this number is almost constant. And if you can calculate it backwards from the WALT. And as the WALT is stable, literally, not just year-on-year but also quarter-on-quarter, it's sort of -- I mean that's the answer. So there's -- it's a very smooth process, basically.
And do you have a split between extensions and new lettings?
We don't have the time, but we can deliver to you after the call. But the very, very vast majority of our new lettings is sort of extensions, i.e., not new lettings. I mean, we have hardly any tenant turnover other than for the properties where we do repositioning, which is also very logical because I mean in a way -- and that's actually a very important point. I mean the reason our business model is so safe and so low risk is because it -- we work on the assumption, which is now an imperially proven assumption, that if we do our analysis right on a given location, and a given location works for supermarket A, or for discounter A, then it will also work for supermarket B and for discounter B, et cetera. And therefore, if the location works, the existing tenant will want to extend. And if the location doesn't work, then he will not want to extend. I mean, fortunately, that has hardly ever happened, in fact, has not happened at all so far for the anchor talent, at least. And therefore, there is, I think, other than for repositioning, I'm just thinking -- I don't think we've ever had tenant turnover other than where we actively sort of upgraded something. So where we sort of kicked out some sort of GBP 1 store and put in a new sort of organic food supermarket, that happens, of course. But we don't -- and I think I can say this with that strictness. I think we've never had an actual sort of intra-segment tenant turnover. And I don't think we ever will because it would be very odd for Lidl to pay a higher end where Aldi just been and Aldi not wanting to extend. I mean that's just not possible to conceive.
The second question, if I may. You had a couple of acquisitions and disposals, which are still to be closed, if I understood that correctly. Do you have any indications from local authorities that these transactions will be closed or that they might use their preemption with?
Well, we -- no, I mean, we have no reason to believe that any of our sales or any of our acquisitions will be blocked by the local authorities. But I mean, we have not experienced this ever in this market segment of Deutsche Konsum and there's currently no indication for it. It just takes time, as we discussed in previous calls, in both directions. And -- this time, we are benefiting from it partly as far as the sales are concerned because we keep clipping the rent. But no, we have no indication that, that's something will actually fail.
And the very last question would be on the refinancing or let's say, on the new loans which you have taken out. Could you give us maybe an impression if you want to increase the portion of unsecured debt compared to mortgage-based debt? Or is it just random optimistically?
It's not random, Kai. No, we are indeed currently in the process of marketing or running a book for more unsecured funding. So we're in the market where they [indiscernible] dial in. That's a small one, though, and it will be used to refinance different unsecured financing. So in terms of our balance sheet, the proportion of unsecured funding will likely remain constant. But if your question is like is that market available, then yes, this market is available at seemingly very attractive conditions to us and also than before. And I presume you're asking this also in line of the uncertain timing of closings of acquisitions and disposals and suggesting that it may make sense to have a certain proportion of unsecured funding to buffer these very discrete sort of cash flow events, and the answer is yes, that's precisely our thinking, is that if we sell for 50, 60 million, and if we acquire for 30 million a quarter and we can't predict when exactly either will close, then, of course, there is a [indiscernible] for a certain proportion of unsecured funding. And therefore, we will keep using unsecured funding within reason. And the good news is that this market is wide open to us.
The next question is from Manuel Martin, ODDO BHF.
2 or 3 questions from my please. The first question, it's a follow-up question on the refinancing activities. I think, in 2022, there is some -- there must be some debt to refinance the Deutsche Konsum. Could you shed some light on there, what could be the impact on your FFO and maybe some details on how you're going to construct that?
Yes, that's easy. It's just over EUR 100 million. The coupon in place is 275 and we will likely refinance at least 100 bps lower. So the FFO impact of that is just north of EUR 1 million positive.
Okay. That's clear. The second question would be on interest rates. That's been a topic for the last couple of weeks or months in the market. Any signals from your process, whether potentially rising interest rates might have an impact on the valuation of your properties?
The direct answer is no, and I wouldn't expect that to be any, by the way, because ultimately, I mean, if I may give a slightly longer answer, I mean, what are we talking about? We're talking about sort of rising interest rates being negative for the valuation of real estate. But equally, we're talking about inflation being very positive for real estate. So it boils down to the question like which of the 2 effects will be bigger. And that ultimately is a question of pricing power. And so for any real estate investor there's always a company. The question is like to which degree are we able to pass on higher inflation to our tenants in terms of higher rents? And for us, it's very easy because our leases are inflation-linked, so we can pass on -- I mean, the inflation -- I mean, we can't pass on more than inflation or not much more than inflation. I mean, the tiny bit more. But by and large, our rental cash flow is inflation-linked. And if you look at our P&L and if you look at the small proportion of maintenance CapEx sort of cost in there, then we also would have cost inflation, of course, by the same degree. But given how small that is relative to the rental proportion and given that the rents are inflation linked, I think it is a near certainty that our net rental income will be very positively linked to inflation. In fact, will be positively unlevered sort of linked to inflation, obviously, because of the cost leverage there. And therefore, I think compared to other parts of the market, think about residential real estate, where the regulation makes sure that it's not so easy and not so obvious to pass on inflation to higher rental cash flow streams. I think we are in the market segment where our cash flows will mirror, in fact, were more than mirror rising inflation. So that positive very much holds. And against that, yes, there is the higher discount factor. But I mean, have our appraisers and has the equity market fully priced in the effect of falling interest rates into our stock price or our valuations as far as the appraisers are concerned? I think the answer is clearly no. I mean if you look at where we stand with our places. They currently value us with a yield of 7.1%. Is that true? No, that's not true. They value at 7.2%; equity market implies 7.1% whilst we're borrowing money at below 2%. So that's a very healthy and actually in historical context, an extremely high positive carry of yield versus our cost of debt. So I'm -- it's a very long-winded way of saying I'm extremely relaxed about that.
Okay. My last question would be a follow-up question on transfer of ownership. Has there been any change in speed in German authorities because of the pandemic slowdown in [indiscernible]?
We -- for the background of those on the call who don't know what we're talking about, just the background is that in Germany, you do -- you notarize a sale purchase agreement in front of notary. And then there's various conditions precedence, some of which are within sort of the responsibility of the seller and the purchaser to get this done, which typically takes a few days or weeks. And then there's a handful of conditions precedent that the state, the local authorities, et cetera, need to do. And once the last of this is in place, the transaction will close. And in normal times, this is typically 2 months, sometimes 3 months between notarization and actually closing which is then also the economic change of ownership. And over -- since the pandemic and since more and more authorities work in home office, and some emphasize home more than work and office in that, that leads to a point where we've had delayed closings for the last 24 months basically. And so I would guess that our average closing time is not 2 to 3 months, but more like 6 months. And now to answer your question, has this changed, no. I mean, we've notarized the sales in September last year, and none of them have closed yet. So we're now in the fifth month since. And I'm looking at my colleague with various degrees of optimism on this or pessimism, depending on how you see it, whether we -- of course, later we close for more rent, we collect and still get the same price. So I think our forecast is that none of this would close in February. Maybe it will. So we're talking about 6 months again, in this case, benefiting from it in the case of acquisitions. I think most of the acquisitions we reported have also not closed, although 1 has actually closed. So it's still very much the same. I mean in the grand scheme of things, I deem it's completely irrelevant. It makes our lives slightly more complicated. It makes forecasting numbers more complicated. But in terms of actual value creation, it's probably not very relevant, but it hasn't changed.
The next question is from Stefan Bonhage, Metzler.
I have 2, 3 questions. The first one is on the current inflationary environment. Do you see that this current inflationary environment is putting the business model of certain of your tenants at risk? Or do you see effects on your rents, respectively, rent negotiations? The second question would be on the current market environment for acquisitions. It seems like you are increasingly buying assets for rental yield of 7% to 8%. Do you think this is the new normal with regard to acquisitions. So you need to take lower rental yields. And the last question would be on financing costs. Do you see here a certain upswing with regard to the financing costs when considering the inflationary and changing interest rate environment?
Firstly, on inflation. The short answer is we're not seeing -- we're not receiving any headwinds here at all, we're negotiating with our tenants on this. So as I said, about 3/4 of the leases are inflation-linked. We don't get any pushback or attempts to renegotiate that. And that is because I think 2 main reasons. I think first, the supply and demand for functioning basic retail space is very much in our favor. I mean there's lots of stuff around, but there's a very finite number of good stuff around. And therefore, we are in a very reasonable position here. I mean we can't, of course, overplay our hand, but there's no way we will not pass on the inflation as contractually agreed. And the tenants are fine with that because most of them have had a record year last year after a record year the year before. In spite of or due to COVID you could argue because as you will have noticed, when you go shopping at the nonfood part of the products for all the supermarkets has increased significantly because they've been open all along. So they've had a good time. And I mean, can they pass on inflation? I mean the answer is yes. I mean that's why we have inflation because those prices are rising. I mean it's called consumer product inflation for a reason. So they are in a perfect situation, our tenants and we are sort of partly benefiting from that, too. So I think the whole inflation side of things is a very big green tick mark for our business and also the business of our core tenants. Your second question, when it comes to acquisitions, I think you're right, but you're being a bit harsh. When you say 7% to 8%, I mean the weighted average yield when we acquired was 8.4% in the last quarter. And yes, it has been 9 point x in the year before. So yes, we are prepared to accept slightly lower yields when we acquire, although I think most property companies in the world would be very happy if we could acquire with sort of yields north of 8%. But yes, we are accepting a slightly lower yield. And that's because we see stronger rental growth than before. We see our situation is even stronger than before. We now have a track record of reducing vacancy. So I think we can live with 100 basis points less -- I mean, to be clear, we could live with 200 basis points less given our cost of debt. But we have decided that for good properties with decent potential, we're happy to accept sort of 8 point x as an initial yield. This will lead me to your last question on the financing side, and the simple answer is no, we haven't experienced any trouble here; neither in terms of getting financing at all nor in terms of rising interest rates. I mean the yield curve is what it is and the banks pass it on. This for us is slightly overcompensated by the fact that, of course, in this environment and then with our track record with sort of the company risk premium that our bank perceived is going down. And therefore, the total all-in cost of debt is actually falling slightly for us and will almost certainly keep falling because, as I mentioned earlier, the loans that are expiring in the next 12 months, they have an average coupon of 2.75. And we are borrowing at secured, at least 100 basis points lower than that. So that's not a concern for us.
At the moment, there are no further questions. [Operator Instructions] We received no further questions. I hand back to you.
Great. Thank you, and thanks, everyone, for your time and interest. If there are any further questions, please let us know. We're around and very happy to answer them as best as we can. Thank you again, and have a great day. Thank you.
Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.