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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to the Deutsche Konsum REIT First Quarter 2023/2024 Financial Results Call. I am Jota, the Chorus Call operator. [Operator Instructions]At this time, it is my pleasure to hand over to Christian Hellmuth, CFO; and Alexander Kroth, CIO. Please go ahead.
Good morning, everyone. This is Christian and Alexander from Deutsche Konsum. Thanks for the time and interest this morning in DKR's Q1 financial results figures of the financial year '23/'24. This morning, we have uploaded the presentation to our website. So for those of you who are not able to follow our webcast, please go to our website, open the presentation, click through it, and we will also refer to page numbers that you are able to follow us. As per usual, we will give a very quick overview of what has happened in the Q1 about the main issues, the main KPIs. And afterwards, we'll have time to answer your questions in the Q&A session.Then I would like to start on Page 4, which shows you what happened at a glance. So overall, we can say that the first quarter was very stable, very strong from an operative point of view. And the main focus, of course, was also at refinancing of the maturing corporate bonds where I come to a little few or in a little while. But starting with the operational business, we can say it was strong and steady. Rental income has increased by almost 70% year-on-year to almost EUR 20 million. This was mainly due to a larger portfolio size compared to the first quarter of the prior financial year and the last acquisition took place in Q1 of the prior year. And therefore, now it has contributed fully in the quarter to rental income. And also in the meantime, we had some rental increases about -- because of the CPI linkages we have and the various rental contracts. You know that's what we do for many quarters now. We also had that in the last quarters.However, the net rental income has decreased by 2% to EUR 12.7 million. This was mainly due to higher non-recs and higher AM and PM fees, which jumped up a little bit due to a few extra things we had to solve here. But also, we had a slight change in the accounting of running costs, which are built to the tenants. So we have decided to have a more defensive approach regarding the estimation of running costs, which could be built to the tenants. We have to make an estimation every balance sheet date. And we have decided in last year -- end of last year that we follow more defensive approach. So there is no additional income out of running cost billings anymore. So this is a very defensive approach and that explains why we had a drop here.Overall, the FFO was EUR 8 million, came down by 21%, which mainly was due to the effect I just mentioned. But also the financial results have decreased because of higher interest rates we have to pay. Of course, on a per share basis, that means we have an FFO of EUR 0.23 per share on an undiluted basis or EUR 0.16 per share on a fully diluted basis.However, the AFFO has tripled because compared to the prior year Q1, we had much less CapEx investments we made and you remember, 1 year before, we were in extensive revitalizations of 2 centers, Stralsund and Ueckermunde where we had to invest extensive amount. You can see, by the way, the outcome on the cover of this presentation, that was the revitalized market in Stralsund.Regarding KPIs, it remained basically solid. Of course, the LTV is at 60%. That's way too high, given our actual target of around 50%, but this was impacted by the devaluation of the property portfolio last September. In the meantime, it came down by 1 percentage point quarter-on-quarter due to regular amortizations of debt we do.The EPRA NTA on a fully diluted basis is EUR 7.78 per share, slightly increased due to the positive period result of the Q1. And of course, as you may have noticed, this is the intrinsic value per share is much higher than the current share price. Of course, that has other reasons, maybe we are coming to that later, but the intrinsic value of the portfolio is much higher from our point of view.The ICR is still comfortable at around 2.7x the cash-based EBITDA, which is, I guess, very solid. And the average weighted debt cost has slightly increased to 2.92%, including secured and unsecured debt, which is, I guess, still below current market conditions. And therefore, it's okay, I would say.Regarding our main focus we had in the last couple of months, this is the refinancing of the maturing bonds. There is one unsecured bond of EUR 70 million, which is maturing in April and also another one, a secured bond of around EUR 36 million, which matures in May. Here, we are in final discussions, very constructive discussions with bondholder. And in the meantime, we have defined some terms on which conditions the potential prolongation could be done at the moment, we are working on that to meet all those requirements and also lawyers are working at this and do homework, which has to be made to be able to make prolongation. So that's where we stand at the moment. Overall, I can emphasize again that it's very constructive and that's why we are very confident that we will be able to present a solution in a couple of weeks.On the portfolio side, there were no acquisitions, of course, but we have closed the sale of the vacant former REAL hypermarket in Trier at the end of December. So we have received the purchase price. And therefore, transfer of title occurred at the beginning of Jan '24. Currently, we are also in negotiations or discussions about selective property disposals. We're talking here about sales at around book value. So we don't want to promise anything here, but it's possible that we will do some disposals -- selective disposals in a certain extent in the near future. So we'll see. But potential proceeds coming out of that would increase our financial flexibility, and we would also help to repay debt instruments gradually.So given that, and due to the fact that we don't have 100% clarity on bond refinancing and potential property disposals yet, we have decided not to give a FFO guidance yet. But I guess we will present the half year figures in May. All of those issues should have been solved. And I guess then we will be able to give a firm FFO guidance for the whole financial year.Then just jump to Page 7 to the property portfolio. Here, you can see that nothing much has changed. No acquisitions, no sales accepting the mentioned Trier sale closing. What has that changed? When you look at the table on the left-hand side in the right column, you can see that the vacancy rate has dropped by almost 1 percentage point from 11.6% to 10.7% just by the Trier sale. But which is more important is that the WALT oscillates around 5 years as always, and that shows you that quality of the properties as well. And the tenants prolong their leases again and again, take their options. And yes, so on the property portfolio side, I think everything is in a good order.Turning to Page 9, which shows the tenant structure on the rent collection. I don't want to bore you at every presentation with discharge, but also here, the message is that everything is stable and nothing much has changed. 2/3 of rent collections is from noncyclical rents. When you take into account DIY stores, [ tenants ] even 81%. And our biggest tenants or the most rent contribution comes from Schwarz, Edeka and so on, which are the most popular and creditworthy food retailers in Germany. So I think also here, everything is finally stable. And the property portfolio runs well.Quickly jump into Page 12, which shows you how the market is valuing the property portfolio. When you start here at the right-hand side, at the current share price level of around [ EUR 3.30 ], then on a fully diluted basis, that's a market cap of around [ EUR 165 million ]. So when you add up the net debt outstanding, then you a total portfolio value of around EUR 770 million. And this is an intrinsic gross rental yield of around 11%, given the low-risk profile of the property portfolio, I guess, that's very poor valuation. But of course, we have to do some homework on the bond side before. But afterwards, once we have found a solution, yes, I guess the low-risk profile should be recognized also in this valuation of the property portfolio then again.Finally, I would like to jump to Page 14, which shows the financing structure, as always, of the portfolio. Also here, the message is nothing much has changed yet. The total financial debt, when you look at the left-hand side, at the top of the table, total financial debt has decreased a little bit by regular debt amortization by around EUR 5 million. Total debt costs have slightly increased. As I mentioned, LTV is around 60%. And what happened was end of January that we have -- that we were facing downgrading by Scope ratings, the senior secured debt from BB to B and on a senior unsecured debt from BB minus to CC. This is a logical consequence that -- logical consequence of the fact that the maturing of the bonds is coming closer. We did have presented a solution here. But as you can read in the last Scope rating report once we have addressed the bond refinancing, the rating should be upgraded quickly again.I think that's it what I can tell you here, I think we are now open to take your questions in the Q&A session.
[Operator Instructions] The first question comes from the line of Kai Klose with Berenberg.
I've got few questions, if I may. The first one, you mentioned that you had in the rental income, some contribution from CPI adjustments. Could you specify what was the amount in percentage -- percentage terms?Second question is on the sale of -- potential sale of selective assets. Could you quantify a little bit what kind of volume we are talking about or you're considering to sell?And last question would be on the debt expiry in this year, the EUR 10 million promissory notes and the EUR 33 million bank loans, what are your plans here regarding the extension?
Good morning, Kai. Regarding the CPI increases, I assume I cannot give you a firm number, but it's always in the range of around 1.5%, 2% year-on-year, because in the last quarters we have already did a lot of rental increase by CPIs. And I guess we are now -- we have run through the portfolio at a high extent. So the potential is coming down to do more capital -- more rental increases in the next quarters. So that's why, I guess, this number comes down a little bit.Regarding sales volume, I would like to hand over to Alex then, but I guess we are very open mind. So we don't want to do any fire sales or don't want to sell high amount of properties. But of course, we -- I hand over to Alex, then.
Good morning, everybody. Thank you for the question. Well, so we receive a lot of inquiries regarding our portfolio and our assets, and that varies from single assets to small packages to larger portfolios or share of the portfolio. But however, we are very selective and we only want to sell whenever it's really accretive to us and whenever it helps our calls. So that's why it's hard to say right now as the market is still very cautious and very slow going regarding transactions. So it's hard to say the exact volume that we are actually talking about at this point, we can't really define which transactions are really worth mentioning or really worth considering as there's still a lot of factors that can impact the transaction proceedings.So also for us, of course, we will always look at the restructuring of the bond, which is right now, our main concern and only transactions, which really help our costs also in maybe restructuring the bond of some sorts are currently considered or really taken into focus. So unfortunately, also, at this point, I can't really say something about the exact volume of the sales proceedings.
Excellent. Regarding your third question, Kai, about the debt expiries. I guess, first of all, we have to find a solution about the maturing bonds we have mentioned. And afterwards, I guess, all the other -- all the other loans will be refinanced and afterwards I think a part of that has to be repaid. But another bigger part or larger part can be refinanced or prolonged with banks because we are talking here about secured classic mortgage loans. And I guess once we have found a solution here with the bondholder, then the normal refinancing processes will restart again. And that's why we are also confident to refinance it then in a normal way.
Maybe just a very quick one, and a quick follow-up regarding sales, of course, can understand that you're currently in negotiations, but could you indicate to which extent disposals are kind of imperative to get the bond extension negotiated?
Well, the sales are not really necessary for the -- for our discussions with the bond. Of course, it would help of some sort, if we would sell specific assets, which we could use. However, it doesn't -- not a necessity and it's not part of our negotiations with the bondholder. So those are different processes. And also, that's why it's for us, of course, not the situation that we have to sell any assets. And that's why we are very cautious or we are in discussions. However, we are not letting ourselves be pressurized into sales, of course, because we know that our portfolio is very stable. We have a very, very good operating portfolio. And that's why we will only sell assets whenever -- as I said, whenever it's really accretive for us and whenever it helps our costs.
The next question comes from the line of [ Manfred Griddle with Griddle Asset Management ].
Can you hear me?
Yes, please.
So it's a little bit regarding the similar topic you just discussed. Now the 2 loans that you are renegotiating right now, you are currently paying approximately 2.1% on average for these loans. It's EUR 106 million. So I would say the market price for a loan like this is minimum 8% right now, interest rate. So that would mean you would need to pay an additional EUR 6 million minimum in interest rate. And then you have the other EUR 40 million or EUR 43 million you need to refinance as well, which probably are also at a much lower rate than what the market price is today. So when you manage to refinance everything successfully, the additional debt cost would probably be anywhere between EUR 7 million to EUR 8 million, which is about the FFO, right? And then next year comes another EUR 150 million, excluding the convertible. So I don't really see how this is going to add up in a positive way for the shareholders.
Okay. Thanks, Mr. [ Griddle ]. Let me answer this way. Of course, we want to use our debt and what we are talking about is to prolong for a certain amount of time, which is short term and we will be able to do that. And of course, I could have -- I wouldn't -- I would doubt that it's 8% at the moment and 8% -- sorry, here in echo. Maybe you go on mute. Yes. I would say it's around 6%. And this is on a yearly basis, the FFO EUR 8 million was just for the first quarter. And then we want to do is to reduce that refinancing unencumbered properties we have with normal mortgage loans we take. And these mortgage loans are much cheaper than unsecured debt, of course. Maybe that will have a jump in the average interest costs in the meantime. But once we have refinanced unencumbered properties, then we can gradually repay unsecured bonds. And overall, we can then get into the average market conditions for secured debt then again.
Is there also a negotiation that the lender might swap from a loan into stocks that they say, well, we would rather like to get equity because the upside is much higher than when we take another loan. Is that discussed as well?
No.
The next question comes from the line of Manuel Martin with ODDO.
Two questions from my side. One question on the P&L on your rental revenues. First quarter rental revenues have been EUR 19.9 million. That's EUR 1 million less than in the fourth quarter. Maybe you can elaborate a bit on that, how the retreat in rental revenue comes?
Yes. Good morning, Mr. Martin. Thanks for your question. Of course, there were 2 main reasons for that because one reason is that we have 2 locations where the anchor tenant is real, which has gone insolvent, and they have not paid rent anymore from November and this had an effect here. So we haven't taken that out of the rental income. And another reason was also that we had some turnover-based rents in the prior quarter, where we have -- we have built to the tenants some more turnover-based rents. Additionally, when we have received their turnover figures, and therefore, Q1 is -- Q4 is also a little bit higher than the others. So these are the main reasons.
Okay. Understood. My second question would be a bit on the market, on your assets, mainly supermarkets, plus also DIY. Maybe you can share your observations of the market with us. So what's your impression on the demand-supply situation in your markets? What does that mean for prices and yields and rents in the assets that you have in your portfolio?
So maybe I take over there. Also, thank you for the question. Well, in general, we are seeing that the market for our asset class is very stable. Also coming from the corona times where the whole market in general was under pressure. We right now see a lot of -- or we have a lot of discussions with tenants who want to extend again who want to also relapse and also lease new vacant spaces. So we're always -- we are, in general, in very good discussions with our tenants. So this is rather positive for us.As you mentioned, the DIY sector there, we are seeing a little bit of -- yes, I wouldn't say pressure, but they had -- in general, they had not such a good year in 2023, which is rather -- which is not related to corona or any market specifics is rather because of the weather conditions, which have been very, very wet in the last season as far as we were told. So that's why, in general, the DIY market was not performing as well as it was supposed to be or as DIY sector as such estimated. However, yes, this is rather a weather situation which didn't have really something to do with the market conditions or the market developments. So we are hoping for them, we're hoping for a better or a nice spring time that they will have their turnovers what or their sales back to normal. But in general, also there, we are rather stable, and we are also there in good discussions regarding extensions of leases and so forth. So it's a rather positive situation that we are seeing.
Okay. I see. So then maybe you're in a better position than, for example, your colleagues in residential, because the other transaction market is really dried up. Do you think the market in your assets is a bit more easy or more liquid, let me put it like that.
Well, definitely, because that was the -- our idea of why we wanted to establish the company and why we wanted to focus our portfolio on this kind of retail on retail for everyday use. So yes, there, we like as we're always saying, it's anti-cyclical. And also during corona, it was performing very well. So yes, we can't see any distress at this or facing this sector of the real estate market, which is quite positive.Also, what we have to mention at this point, also our cyclical tenants that we have are rather not really found in the cyclical segment as we want to put it because as we have seen, for example, also for textile tenants that we have in our portfolio, they are rather -- they have rather better revenues, which has caused because they're rather textile discounters and not so much in the normal retail sector. So also there we are actually in rather positive discussions with the tenants. But that's just a side note.
[Operator Instructions] Ladies and gentlemen, there are no further questions. I would now like to turn the conference back over to Christian Hellmuth for any closing remarks.
Thank you, everybody, for your time and interest. So if you have further questions, just write us an e-mail or give us a call, we are around. And yes, wish you a good day. See you all.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.