Demire Deutsche Mittelstand Real Estate AG

XETRA:DMRE

Earnings Call Transcript 2021-Q1

[Ingo Hartlief, CEO & Chairman of Executive Board]

Ladies and gentlemen, good morning, everybody, and welcome to our Q1 2021 results presentation. Thank you for dialing in today. I trust you are all well and healthy. With me here, as always, is Tim Bruckner, our CFO; and Michael Tegeder, our Head of Investor Relations. And I'm looking forward to updating you about the DEMIRE's development in the first 3 months of 2021. Like in many other results presentation these days, corona is still part of what has happened in recent times. The good news is that with declining incidences and increasing vaccination rates in Germany, it feels like the light at the end of the tunnel is getting brighter. And whether you agree with me on seeing an upcoming positive trend or not, more and more people and businesses have managed to live and work under the current circumstances. This applies for DEMIRE as well, as we see in our Q1 '21 figures. We remain being affected by the pandemic, and we will provide you with all the details in a minute on a separate slide, but DEMIRE was also able to reach a strong performance for our relevant KPI in a rather normal quarter. In fact, the impact of corona has been and remains limited and is manageable for us. Our realized potential strategy has proven again, being the right approach to the bigger picture at what we do. After being defined and invented back in 2019, it focuses on the main goals of portfolio optimization, financial strength, operational excellence, and increased profitability, and has helped to make DEMIRE more resilient et al, even before the pandemic. All 4 pillars of our realized potential strategy, asset management, acquisition, financials and processes have contributed again to the strong performance in Q1. And not only that, we are also benefiting from this strategic shift, it helps us through the pandemic. That encouraged us even more to keep on going this way. Let's look at it based on our set of results for the first quarter of 2021. Asset Management, we have demonstrated a strong resilience and our Asset Management team delivered again a strong letting performance. 23,000 square meter is a strong result and absolutely in line with the Q1 2020 performance, which was positively affected by a single 20,000 logistics contract with a one single tenant. Hence, EPRA vacancy remains satisfying at 7.8% and WALT remains constant at 4.8 years. Acquisition and Transactions. In the remaining cautious market environment, we were able to sign 2 deals. We have reported the signing of the Cielo office in Frankfurt at our annual results presentation already. And while I would love to tell you even more about this outstanding asset, I leave it with the remarks that we were working steadily on the closing of this transaction. In addition, we were able to sign the disposal of our asset in Ansbach, a former single-tenant Telekom office building. After Telekom left, we were able to successfully reposition the asset, attract new tenants like the local administration and the University of Applied Science, and sell it with a 30% premium to our latest valuation, and even more if we compare it with the beginning of the repositioning process. So the transaction market is not really lively but the dynamics in our segment are fully intact. Last week, we were able to sell another smaller asset in Cologne with a price to valuations of plus 12%. These recent transactions underline the resilience of our portfolio again with stable values in windy times. Financials. With a tailwind from our strong operational performance, the financials look promising as well. I mentioned the top line development already, but also reading between the lines, the earnings quality proves to be good. The profit from the rental improved despite lower income after last year's disposals to EUR 17.7 million. The FFO I increased even stronger to EUR 10.8 million and makes us very confident to reach our full year guidance. Tim will speak about the contribution of the finance team, which was, again, able to further improve financing costs in a minute. Processes. In line with the market environment, we further improved our receivables management. This is driven by upscaling of our IT system, but also goes along with closer contract to our tenants as part of our asset management and our pandemic program. Finally, the corona numbers. Currently, there are 5.5% or EUR 5.6 million of our agreed rent outstanding since the beginning of the pandemic about a year ago. Although this sounds a lot and it is a lot, we are keeping close contact to our tenant, especially those areas that are in trouble. By that, we have already received about EUR 0.6 million of outstanding rents from the last year in 2021 so far. Let's have a more detailed look at our KPIs, and turn over to the Page #6. This slide shows how excitingly powering our first quarter was in a positive sense. As the portfolio is unchanged, the annualized rent remains almost unchanged as well at about EUR 85.4 million. Not so boring by our letting activities. Despite corona influenced market environment, the letting result of 23,000 square meters is strong. Last year's letting performance was pushed by a single 20,000 contract. The letting activities in Q1 secured EUR 2.2 million rental income per year and the awards of almost 5 years. New letting account for roughly 44% of leased space, 56% of the agreed contracts were renewals. Our further leasing pipeline is filled properly, and we expect to report more from this side in the next weeks. Follow me on Slide #7. EPRA vacancy increased slightly, but very much in line with our planning. It is moderately higher due to temporary vacancy in one asset in Regensburg, which is being repositioned after Deutsche Telekom partly left. We have signed new rental contracts already that becomes effective over the course of the year. So we can expect the vacancy to decrease along with that. In line with the already reported strong asset management performance, the WALT remained stable at 4.8 years, which is a good result. Portfolio development reached to gross asset value, in line with the stable and rather silent development of the portfolio, the investment properties have not changed very much. You see the reclassification of the Ansbach asset, which together with minor CapEx spending results in a slightly increased book value of our portfolio as of end of March. So Tim, please go along with the details about the financial performance.

[Tim Brückner, CFO & Member of Executive Board]

Good morning, everybody. I will provide you with some more details on our Q1 financials, as shown on Page 10 and 11. On Page 10, you see our P&L showing lower rental income due to some disposals, offset by reduced leakage and lower maintenance costs. Going down further valuation gains due to the premium to the selling price for the assets in Ansbach. And I guess, even more interesting, very moderate COVID-related impairments, which are even lower in comparison to previous year. But please have in mind that COVID-related effects are not over yet. And even if we are quite positive on the reopening of the economy and the retail sector in Germany, you will see some further effects down the year. As Ingo elaborated on already, we have worked further on our debt book, which now pays off even further in lower financial costs and a better financial result. Overall, this results in a strong FFO, up about 12% versus previous year to now EUR 10.8 million for the first quarter in 2021. But please also have in mind that this cannot be simply quadrupled to derive the full year number. Going to our balance sheet and having a quick look there. Not too much happened in the first quarter. We see a slight balance sheet extension because of the aforementioned Ansbach revaluation and the new EUR 45 million financing via a secured loan. A few words on Cielo, maybe. As Ingo already said, we expect the closing later in Q2 or in Q3. This will not have an effect on investment properties and on rental income, but it will increase other assets due to the before-mentioned JV structure. We require about EUR 77 million in cash for closing, which is already available on our balance sheet even after the dividend payment conducted a week ago. Looking at Page 12, LTV and the cost of debt. We remain in line with our leverage target. At the end of Q1, we were at 49.5%, with our leverage target at 50%. Post-dividends, Cielo and some disposals, we will be temporarily above our target at about 54%. The average cost of debt further improved. We moved it down to 1.69% on a nominal base. There is some more potential to reduce it further. But as you know, we are strongly financed with our bond and the potential is a bit lower in the future. Back to you, Ingo.

[Ingo Hartlief, CEO & Chairman of Executive Board]

Thanks, Tim. We have talked about the effect of the COVID pandemic already, and we highlighted our success of managing it. Here is how we have been affected in detail. Last year's rent suspensions amount in total to about 5% of target rent. In '21, the second lockdown in Germany is still ongoing since last December. Also, we see light at the end of the tunnel with incidences improving and more and more people get vaccinated. Rent collections until end of April shows suspension rates comparable to the second quarter of last year. Until yesterday, the named suspensions amount to circa EUR 2.2 million or 2.8% of the expected annualized rent in '21. Looking at the sector, distribution of the outstanding rents, they are obviously driven by business affected by the lockdown like retail and like hotels. We expect those numbers to improve along the line of the lockdown relief and do not foresee substantial effects on our P&L as we expect to collect the rental backlog with the recovery of the markets.We are in close contact with all our tenants, especially those who have been affected. What we hear often is that the rent is part of the public pandemic subsidiary and will be reimbursed by the federal government together with other fixed costs. The payout process, which has not been very smooth so far, appears to improve slowly. Internally, we remain focused on our costs and believe that the positive Cielo impact and improved financial results will help to limit the negative effect the pandemic might cause and allows us to confirm our targets on rental income and FFO for 2021. Let me end with a summary. Also, the pure numbers do not look utterly exciting. The strong results are driven by a well running team and organization that makes us optimistic for the further development of '21 and beyond. Thank you very much for listening. We are now happy to answer questions you may have.

[Operator]

[Operator Instructions]There are currently no questions in the phone queue. [Operator Instructions]There are no questions in the queue. I would like to hand the call back over to our host for any additional or closing remarks.

[Ingo Hartlief, CEO & Chairman of Executive Board]

So thank you again for dialing in and stay healthy in these times. Take care. Goodbye.