Earnings call transcript: Deutsche Konsum Q4 2024 sees rental income dip

Deutsche Konsum REIT AG reported a slight decrease in rental income for Q4 2024, dropping to €17.7 million from €18.2 million the previous year, despite an increase in net rental income and funds from operations (FFO). The company also successfully reduced its debt by approximately €57 million. The stock saw a decline of 4.37% in pre-market trading, reflecting investor concerns over the challenging real estate market and rising interest rates. According to InvestingPro data, the company maintains a FAIR financial health score, with revenue reaching €208.4 million in the last twelve months.

Key Takeaways

• Rental income decreased slightly to €17.7 million.
• Debt reduced significantly by €57 million.
• Stock price fell by 4.37% in pre-market trading.
• Majority of rental income derived from food retail sector.
• Ongoing refinancing discussions due to rising interest rates.

Company Performance

Deutsche Konsum's overall performance in Q4 2024 showed resilience despite a slight dip in rental income. The company increased its net rental income and FFO, illustrating operational efficiency. The reduction in debt and a lower loan-to-value (LTV) ratio marked significant financial improvements. InvestingPro analysis indicates the stock is currently undervalued, with a low Price/Book ratio of 0.47 and strong free cash flow yield. Despite these positive strides, the broader real estate market's challenges, including high interest rates, continue to pose risks. For deeper insights into Deutsche Konsum's valuation and 12+ additional ProTips, consider exploring InvestingPro's comprehensive analysis tools.

Financial Highlights

• Rental income: €17.7 million, down from €18.2 million YoY.
• Net rental income: Increased slightly (exact figures not provided).
• FFO: Increased to €15 million.
• Debt reduction: Approximately €57 million.
• LTV ratio: Decreased to 54.7%.

Market Reaction

Deutsche Konsum's stock experienced a 4.37% decline in pre-market trading, closing at €3.66. This movement places the stock closer to its 52-week low of €2.4, indicating investor apprehension amid the challenging real estate environment and rising interest rates. Despite recent volatility, InvestingPro data shows a significant 37.69% price return over the past six months, with analysts expecting net income growth this year. The company's beta of 0.51 suggests lower volatility compared to the broader market.

Outlook & Guidance

The company refrained from providing a specific FFO forecast until the half-year results, signaling potential caution. Deutsche Konsum plans to focus on property sales and refinancing efforts to further reduce its LTV ratio. The company is also exploring variable financing options to manage asset sales effectively.

Executive Commentary

Kyril Troshaninov, CFO, expressed confidence in the company's strategic plans, stating, "We have a plan how to overcome those challenges." Lars Wittan, a Management Board Member, highlighted potential growth opportunities, noting, "We have some chances to increase rents clearly and we have to work also on the vacancy rates."

Risks and Challenges

• Rising interest rates: Impacting refinancing options and increasing costs.
• Market volatility: Real estate sector facing uncertainty.
• Vacancy rates: Affected by property sales, requiring strategic management.
• Refinancing challenges: Ongoing discussions with banks amid a tight credit market.
• Competitive landscape: Need to maintain a strong portfolio value amidst industry pressures.

Q&A

During the earnings call, analysts focused on the refinancing challenges and the company's strategy to navigate rising interest rates. The management discussed potential rent increases and budgeted €5.2 million for property investments and tenant retention, indicating a proactive approach to maintaining and enhancing property value.

Full transcript - Deutsche Konsum REIT AG (DKG) Q1 2025:

Conference Operator: At this time, it's my pleasure to hand over to Kyril Troshaninov, CFO. Please go ahead.

Kyril Troshaninov, CFO, Deutsche Konsum: Hello, everybody. My name is Kyril Gocinov, and I'm the CFO of Deutsche and Sumrith. Before we start to look at the pages and then go to pressure advances, I would like to introduce my colleague, Mr. Lars Wieten, who joined the company as the second or another member of the management board in February. And he will introduce and say a few words about himself.

Lars?

Tobias Rosagato, Analyst, Trading Investment: Yes. Thanks,

Lars Wittan, Management Board Member, Deutsche Konsum: Stuart. Hello, everyone. My name is Lars Wittan, born in 1977. Before I started here in Deutsche Kunzum, I was for twelve years at Deutsche Wohn in several management positions starting as CFO in 2011 and later on as CIO and CEO before I left Deutsche Bohn in 2019. After that, I was responsible for roughly five years for the direct real estate book of Orotricia in Pakistan.

And with the February, the Supervisory Board appointed me as the follower of Alex Port. So that's from my side and I think over to Kurt. Thanks a lot.

Kyril Troshaninov, CFO, Deutsche Konsum: Great. Thank you, Lars. Now we will start the presentation and we'll take a look at Page four, which summarizes the highlights of the first quarter of the financial year twenty twenty four, twenty twenty five. In the first part, we will be looking at the high level numbers compared to the prior quarter, the fourth quarter of the financial year that ended on $39.24. Rental income decreased slightly.

It was EUR 18,200,000.0 in the last quarter of the prior financial year and it is now EUR 17,700,000.0. We had some asset sales that we'll take a look a bit later. Net rental income is slightly up, lower property costs. FFO is slightly increased and is undiluted at $15,000,000 In Q4, it was $11 per share or in absolute numbers was $3,900,000 IFFO is driven or impacted by higher CapEx. CapEx in the prior quarter was $4,100,000 is now allowed to and FFO in prior quarter was negative.

One of the highlights of the quarter is the reduction of debt by roughly $57,000,000 compared to the balance sheet of 2024, which also comes from sales proceeds. And in terms of the sales, we have had the sales closed in the quarter, which was notarized at the May '24, and we have received the purchase price of EUR 4,100,000.0. The additional properties, the four properties notarized in '24 are not entirely closed. The purchase price for those four properties of $10,900,000 is not received completely. We did receive two properties in January and there is still about $7,000,000 and there is still $3,900,000 outstanding.

We are considering further disposal of properties, select properties, which we communicated before that this is an option. This is what we are actually looking at as well. Another major event in the quarter was the repayment of $68,000,000 of loan from Overtice. When we closed the prior financial year in the 03/2024 balance sheet, we already knew that this is going to be happening or actually before we finalized. It did happen in Q4.

The loan balance at the end of the financial year was $53,900,000 and we've also reversed that provision of $28,200,000 which obviously affected the results of the Q4 of the last financial year. There is still outstanding about $60,000,000 of loan two or 3%. Those are deferred until December 25. And as we consider this to be there is some uncertainty to this, especially that we have given up this security once we receive the $228,000,000 or $38,000,000 that outstanding receivable is fully provided for. Another significant event was the conversion of a convertible bond of $20,400,000 in December and sort of looking a bit ahead now in January, another $9,600,000 was converted.

That certainly impacted our numbers and that certainly had a significant impact on our loan to value. Loan to value is now at 54.7% and that conversion was the main driver. We also made some repayments from the property sales proceeds. The FRMCA fully diluted is slightly higher than at September 24 at EUR 7.6 and our average debt cost is €3.95 In terms of the guidance, since we are planning substantial refinancings as well as property sales, we will not be making our forecast in terms of FFO results. We will probably do this when we present the half year results later in the year.

However, our rental income is estimated to be between EUR 66,000,000 and EUR 71,000,000. So FFO is expected to decrease. We can now skip a few pages and take a look at Page seven, which is the detailed summary actually of our property portfolio. We have 165 properties. Two assets were closed in the quarter.

So we ended the year, the calendar year with $165,000,000 The purchase price for those assets was $4,100,000 and of course we did receive the cash. In addition to this, also sort of looking at it ahead in January of twenty twenty five, '2 additional properties were closed. Well, they were almost fully let. However, we obviously received the cash, which we are going to be using to decrease our liabilities as well. Our total fair value compared to 30 or $9.24 is roughly the same.

There were movements up and down. However, we did acquire a leasehold property for $2,350,000 which was closed and paid for in October 2024. Also that now the total fair value includes both EIS 40 and EIFRS five. So obviously the assets held for investments as well as assets held for sale. The two properties which were closed had some impact on our vacancy rate.

Those were two properties as well fully met with a total of 2,600 square meters. Our in place rent per square meter decreased slightly and annualized portfolio rent also decreased slightly, which is quite expected because we are selling some select properties. Now we will now skip and take a look at Page nine, where we have some details of our tenant structure, which didn't really change much since last presentation, which we did in December. So rents as before, the majority are coming from food retail. It is $25,700,000 with a walk of about $3,700,000 4 point 6 million dollars As I mentioned, annualized rent is at $69,000,000 It was $69,700,000 in the prior quarter, 48% of our rental income is coming from leases, which still have five or more years until either expiration or prolongation option.

So that is still a pretty good number and we are happy with that. Now we can skip forward and take a look at Page 12, which outlines the valuation or potential valuation of the portfolio. Now we still believe that the value of the portfolio is not entirely reflected in the current share price. And with about €886,600,000 and almost no change to the prior quarters, our hypothetical EPRA NCA per share is at 7,600,000.0. As I said, slightly higher than the 7,550,000.00 in the prior quarter.

The current trading, which was I think yesterday or the day before, is at per share. Now the assumptions here do include sales notarized, but not yet closed. So those are the sort of theoretical, hypothetical numbers. We can now take a look at Page 14, which is details on our debt structure and financing. Now as I mentioned before, our total debt went down by 10.4%.

We have a few numbers or a few items affecting that. So obviously, a conversion of a convertible bond in the amount of $20,400,000 was a significant event. At the December, '2 real estate backed loans in the amount of $7,200,000 were due. We repaid those and those unencumbered assets were placed for refinancing with other financial institutions. So we also repaid promissory note in the amount of EUR 10,000,000.

We have repaid partially obviously, those are partially repaid the bond in EUR 10,000,000. There were regular amortization, so EUR 4,800,000.0. And that those are the events in the financing or actually debt repayment side of the quarter. Total (EPA:TTEF) debt costs has a very much minor technical movement bonus. However, debt cost obviously remains a concern since as you know, as we know, some of the bonds are going to well, one is already has an increased interest rate and another is going to have an increased interest rate starting March.

So obviously, we are watching that very carefully and making sure that we our debt cover is okay. The loan to value due to the predominantly due to the conversion decreased by 4.4% and it is now below 55,000,000 at $54,700,000 which is a good place to be. We expect that within the next three quarters to the end of the current financial year, the LTV will slightly go down, will decrease obviously depending on the refinancing and how property sales develop, but we do not expect it to go up since we are not doing any new borrowing that do not lead to debt repayment. Scope has reinstated our rating. The issue rating is at C unsecured.

That is at Rambavan C. We did not have that ratio rating when we closed the financial year on thirty-nine-twenty '4. What is important and significant is the chart on the left hand bottom side where we split the liabilities, split our debt by year. And of course, $25,000,000 is now and it went down in terms of the total volume of debt. It was $252,000,000 as of $9,003,000.

And due to the all those repayments, which I mentioned as well as the conversion of the convertible, it is now lower. Now of course, it is still a challenging number. The breakdown here is that we have SEK 93,200,000.0, which is real estate backed loans. SEK 9,300,000.0 is already partially repaid because that is happening now in January and February. We are talking to the banks, we're talking to the Sparkassem.

We are extending in some cases. We are discussing the topping up or refinancing with a higher loan amount and we are planning to use those top up additional funds to repay other liabilities. There are still of course two registered bonds. One is $40,000,000 that is $45,900,000 dollars, which are due in October actually, September '20 '5 million dollars. There are convertible bonds.

And in terms of the convertible, the $9,600,000 which is also listed here as part of the convertible bonds has already been converted in January. So that had a positive impact or will have a positive impact on our second quarter financial results. The $7,000,000 convertible is expected to be converted in the near term and there is another $10,000,000 convertible, which is due in October year, which we also expect to be converted. True, the situation is well, the volume is significant. We are in discussion with the banks.

We are talking to creditors. They are constructive. There is progress. So things are going in the right direction and that's what we are planning for this financial year. With that, I would like to end the presentation part and open the floor for questions please.

Conference Operator: We will now begin the question and answer session. The first question comes from the line of Tobias Rosagato Trading Investment. Please go ahead.

Tobias Rosagato, Analyst, Trading Investment: Hello. First of all, a warm welcome to Mr. Petan and Mr. Tuhanov. I'm really happy you joined.

I have a question for both of you. First, Mr. Tuhanov, as the financing side is obviously the more urgent one as you have already discussed. I'd like to start there. You said everything is on its way.

And I mean, I hope it's going fine. First question would be, where do you see the refinancing costs? What kind of rate are you getting for like five or ten year? How difficult is it? The problem is that your predecessor basically promised us always everything is going to plan as well.

And then nothing went to plan and that's why he basically had to issue those numbers with this exorbitant rates. So if you see problems, would you basically, I mean, you have to do it now. If you want to, would you discuss or consider a capital raise, which you would need approval for, I guess, or I hope, by the shareholder meeting in April, which you would have to plan by now. Yes, let's start there.

Kyril Troshaninov, CFO, Deutsche Konsum: Right. Well, a lot of stuff here, but to answer this as it is a question, Certainly, the volume is substantial. To start with the last part, we haven't yet discussed the issue of additional shares to increase the capital. We are discussing that allowed number of shares can be maintained the way it is now. I think we have that in the bylaws.

But in terms of financing, in terms of talking to the banks, we are always that we have been talking to the banks because the real estate bank loans, which are become due payable is one thing. So obviously, we would like to refinance and top those up. In February, as I mentioned, we have been successful. There are extensions, there are prolongations and there is one top up. Now the loans which have not a maturity, but which have an ending of the fixed interest rate period and they continue well, unless canceled and so far we don't have indications that they are canceled.

They will continue with new terms. The new terms are varied. We as we are also looking at select asset sales, the short term goal is to have perhaps variable financing so that we have time to analyze the exact volume of sales so that we don't have breakage costs if we have maintained to fix the five year term loan and six months later we sell the assets and that doesn't make much sense. In terms of the usage of sales and refinancing proceeds, it is certainly the expensive and that was really shocking that expensive loans that we have that were restructured in June. So we are in discussions with the lenders in terms of the percent.

However, that discussions are ongoing with various lenders. I won't be able to give you any details on that. But as I mentioned, yes, it is a challenging situation. There is no hiding that, that we have a plan. We have a plan how to overcome those challenges.

And the important thing is that we show the stable operational performance and the company is not overvalued. We have always seen a million in equity. The portfolio itself is doing more or less okay. Sure, we would like to have less vacancy, but we are working on lead up. We are working with our tenants to increase the wall.

So all of those things are in progress. But again, the situation is challenging because we all know that the volume of the financing is substantial. And of course, the increasing interest rate is something which we are watching very carefully. True, we're not getting any more 1.6% or 1.7% interest loans. We are looking at 4%, five % plus on discussions we're having today.

I hope that answers your question.

Tobias Rosagato, Analyst, Trading Investment: Yes, very interesting. On the operational side, I have a question to Mr. Vuitton. As you know, by now, the operational performance of Deutsche Consum has been, let's say, suboptimal. Rents hardly rose, especially indexed against inflation and vacancy rate is skyrocketing despite substantial investments in the last couple of years.

With property management in house, do you already have an idea if it will be possible to increase rents substantially looking forward? Or do you have any view on the future vacancy rates? How promising would it be? Or how much do you think when you bring it down?

Kyril Troshaninov, CFO, Deutsche Konsum: I'm sorry, just the correction. You said on the property management in house, property management does not get in house.

Tobias Rosagato, Analyst, Trading Investment: I thought you are starting a project and you want to take it in house, which I think could be a good idea because obviously the external property management was really that successful.

Kyril Troshaninov, CFO, Deutsche Konsum: Of course. So yes, I'm sorry. It's planned that the process is in the works. We're working closely. But in terms of now, just to make sure that we don't have any misunderstanding in the fact, it is going to be we're planning to in source it.

As of now, it is not yet in source.

Lars Wittan, Management Board Member, Deutsche Konsum: And to answer your question, honestly, as you know, I'm for two weeks in a company. And the first week, you have holidays in Berlin, but I have some intensive discussions with our asset and property manager. From my perspective, we have some chances to increase rents clearly and we have to work also on the vacancy rates, which seems very high. On the other side, what I have seen is that some of the properties had this high vacancy rate also at the time of the as they were bought by the company, which is then also reflected in the pricing. But you are right, we have to work on that.

And we need to plan what we can do and perhaps there are some weaker assets we have to decide. Could we do something with investments or not? And if not, can we then have what do we have any chance to say this or whatever? So that is something what we have in our mind for the next couple of weeks.

Tobias Rosagato, Analyst, Trading Investment: Okay. One last question, Mr. Tohanninov. The former CFO issued a convertible bond to a member of the board at basically totally wrong conditions as he apparently I mean, at least that was my understanding at the shareholder meeting was not totally understanding what you actually what a convertible bond is or something. What are your plans to potentially recoup the loss to Deutsche consume and to shareholders?

Have you, for example, already contacted like the insurance of your former CFO yet?

Kyril Troshaninov, CFO, Deutsche Konsum: Well, let me put it this way. I do not see that my job is to take any action against my predecessor. And in terms of the convertible bond, perhaps you're referring to the convertible bond issued in April 24, which is I have been in contact with the bondholders in terms of their plans for converting this bond. So those discussions are ongoing because obviously, if it is converted, we will not have the interest expense. But I can't possibly comment on the prior CFO.

I don't think it will be a profit.

Tobias Rosagato, Analyst, Trading Investment: Yes, I mean, but someone in the company has to take actions, right? Because, I mean, the CFO said in a conference call that he sees the interest rate at like, let's say, 6% and then he turned around and issued a bond at 12% plus he gave a free option as well. So, something isn't really adding up here. And I mean, let's say it's incompetence. And if it was, then there must be a way to recoup the huge loss to the company.

And you are the CFO. I mean, if you say it's not your cup of tea, then you should know who actually has to take care of it. So you should be able to forward it to the, I don't know, yes, I don't know who in the company should take a look at it. But obviously something went really wrong here.

Kyril Troshaninov, CFO, Deutsche Konsum: I will take your question or your comments or your concern and we'll chat.

Tobias Rosagato, Analyst, Trading Investment: Okay. So those were my questions. Thanks a lot for your interesting answers.

Conference Operator: We now have a question from the line of Kai Kdose from Behrendberg. Please go ahead.

Kai Kdose, Analyst, Behrendberg: Yes. Good morning, gentlemen. I've got two questions, I may. The first one, could you indicate about potential disposals, not the volume, of course, but how many assets are potentially for sale? Or are there any assets which, because of the collateral reasons, are not you're not able to sell if you wanted to?

Second question is on the as I mentioned, the project of internalizing functions as in property management. How would the items in the income statement change regarding what kind of cost savings you expect on the operating expenses and in return higher admin costs? And the third question is on the lease expiry this year. Could you indicate then how much do you intend or you need to spend for CapEx or give incentives to keep the tenants on board? Thank you.

Kyril Troshaninov, CFO, Deutsche Konsum: Right. So I guess there are actually three questions. Now in terms of the in sourcing, let's start with that. We have a service provider who provides asset management, property management costs, private management services of course. Now the asset management and property management is planned to be completely in sourced in house.

So that will obviously result that we will have an increased payroll because there will be a number of people that nobody cannot possibly comment on that we will bring in house, they will be account in two weeks of the which you can submit, and we will not be paying any asset or property management fees anymore. So in terms of the P and L, we will have personnel costs and we will have software licensing costs because we are in discussions with the software provider for the property asset management software that we will obviously license in our name and them will be used. So that is what we're planning to do in terms of asset management and partnership. In terms of asset sales, now it is a select asset sales plan. It is not that we sort of mechanically divide the portfolio in three parts and we sell that.

It is a carefully select properties. Some are single asset sales, which I already mentioned at the beginning of our presentation. And we are looking at some smaller portfolio group of sales, goal of assets, in the five, ten number range. So it is not a higher sale for sure. And in terms of restrictions, well, that depends.

In the sense, there are assets which for which we might receive a substantial price and they are financed with fixed term loans. They are depending on the rate and depending on conditions, there might be some breakage costs. However, in the cases which we are looking at right now, those are not exorbitant costs. Those are manageable costs. And in terms of the volume, I cannot comment on that right now since discussions are ongoing.

And I'm terribly sorry, you had three questions, but I just answered two. What was the other one?

Kai Kdose, Analyst, Behrendberg: Third question was on the lease expiry scheduled since this year. How much you expect to spend for CapEx and or to give potential incentives discounts to tenants to facilitate that they stay in the building?

Kyril Troshaninov, CFO, Deutsche Konsum: Understood. So far, our budget for well, actually, I made it for the calendar year, but fine. It's slightly more than EUR 5,000,000, which is probably somewhat lower number. There are plans for specific assets. There are some substantial revitalization projects, which are going to indeed result in value increase for those assets because new additional space becomes lessable, which was not lessable before.

So those are investments which will indeed bring us tenants, bring us bring improvements in the rental income and they require investments. So in terms of the budget, it's $5,200,000 which is somewhat of a low number. I expect that this might be somewhat higher.

Kai Kdose, Analyst, Behrendberg: Thank you very much.

Kyril Troshaninov, CFO, Deutsche Konsum: Sure.

Conference Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Kurek Dosthaninov for any closing remarks.

Kyril Troshaninov, CFO, Deutsche Konsum: Thank you. Well, that pretty much concludes our presentations or presentation of the financial results of the first quarter of the financial year twenty twenty five. Thank you very much everybody for your time and attention and interest during this call.

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