Earnings call transcript: Deutsche Konsum REIT faces challenges in Q1 2025

Deutsche Konsum REIT AG reported a challenging first quarter of 2025, marked by a decline in rental income and significant debt reduction efforts. The company’s stock price saw a decline of 2.36% to €2.90, reflecting investor concerns about its financial performance and future prospects. According to InvestingPro analysis, the company appears undervalued at current levels, with a market capitalization of €140.72 million and trading at a notably low Price/Book multiple of 0.38.

Key Takeaways

• Rental income decreased by 11% to €35.4 million.
• Total financial debt was reduced by €79 million.
• The company faces refinancing challenges and potential asset dispositions.

Company Performance

Deutsche Konsum REIT’s performance in the first quarter was characterized by a decrease in rental income and a concerted effort to reduce financial debt. The company managed to lower its Loan to Value (LTV) ratio to 52.5% by reducing its financial obligations. InvestingPro data reveals concerning liquidity metrics, with a current ratio of 0.17 indicating significant short-term obligations. The increase in average weighted debt cost to 4.1% presents an ongoing challenge, though the company maintains a strong free cash flow yield of 16%.

Financial Highlights

• Rental Income: €35.4 million, down from €39.8 million YoY.
• Funds from Operations (FFO): Decreased by €8.4 million.
• Debt Reduction: €79 million, a 14% decrease.

Market Reaction

Following the earnings release, Deutsche Konsum REIT’s stock fell by 2.36%, closing at €2.90. This decline places the stock closer to its 52-week low of €2.40, indicating investor concerns over the company’s ability to navigate its current challenges.

Outlook & Guidance

The company did not provide specific financial guidance for the upcoming quarters. However, it expects rental income to range between €66 million and €71 million. Deutsche Konsum REIT is also considering potential property dispositions valued at €350 million to €450 million by the end of 2027 as part of its restructuring efforts. InvestingPro subscribers have access to 12 additional key insights about Deutsche Konsum REIT, including detailed analysis of its financial health score and comprehensive valuation metrics. The company’s last twelve months EBITDA stands at €40.57 million, with analysts maintaining a Hold consensus on the stock.

Executive Commentary

Karel Thru Chang Liu, CFO, emphasized that "the company is not over-indebted" and highlighted ongoing "constructive discussions" with lenders. Liu assured that management is focused on "bringing stability to the company."

Risks and Challenges

• Debt Refinancing: The company faces significant challenges in refinancing its debt, which could impact its financial flexibility.
• Market Conditions: An increase in average weighted debt cost to 4.1% may affect profitability.
• Asset Dispositions: Potential property sales may be necessary to manage debt, impacting long-term revenue streams.

Q&A

During the earnings call, analysts raised concerns about the company’s shrinking business and the costs associated with hiring external restructuring consultants. The CFO addressed these issues by outlining the restructuring process and ongoing negotiations with lenders.

Full transcript - Deutsche Konsum REIT AG (DKG) Q2 2025:

Sergeyin, Conference Call Operator: Ladies and gentlemen, welcome to the financial results of the first half year twenty twenty four-twenty twenty five conference call. I am Sergeyin, the chorus call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a question and answer session. The conference must not be recorded for publication or broadcast.

At this time, it’s my pleasure to hand over to Karel Thru Chang Liu, CFO. Please go ahead.

Karel Thru Chang Liu, CFO, Deutsche Bank and Zumritt: Hello, everybody, and welcome to the presentation of the financial results of Deutsche Bank and Zumritt for the first half of the financial year twenty twenty four-twenty twenty five. We will be covering the events of the six months, but we’ll also take a look at some items which happened after the closing date March. And then we will open up at the end for questions and answers. So let’s jump right in and take a look at Page four. In the six months, we had stable rents on the existing portfolio.

Compared to the first six months of the prior financial year, where the rental income was about €39,800,000 we had a decrease by €4,400,000 so it is currently at 35,400,000.0 down 11%. This is driven by asset sales which took place as we already reported in the past calls. That reduction of 4,400,000 had a significant impact on our FFO, which decreased by £8,400,000 So £4,400,000 is driven by the lower end. However, rates has impacted that as well, which contributed another €1,500,000 to the difference. I’m sorry, the interest rate contributed €2,100,000 to the difference.

And also €1,500,000 came from the lack of interest income in the current financial year, which was present in the prior financial year. We have continued to reduce our liabilities to reduce our debt. And in six months, we have reduced by €79,000,000 which corresponds roughly to 14%. A few events contributed to that. The conversion took place, which was €30,000,000 as well as we repaid €10,000,000 of registered bonds.

We have repaid CHF 10,000,000 of unsecured note and we have also repaid about CHF 7,200,000.0 of liability secured by assets which became due. So overall, we continued on our course of reducing the debt. We had sales of four assets of four properties, which were actually closed and the purchase price of CHF 11,000,000 was received in the reporting period. We also signed sale of 11 properties portfolio with annualized rent with an annual rent of €1,500,000 However, this is not yet closed. It is expected to take place later in the financial year and the purchase price is CHF 19,400,000.0.

There was a small decrease, small loss in terms of our fair book fair market value of this portfolio of close around 7%. We have received €38,000,000 from Obatria. Most of those funds were used to reduce our liabilities. The outstanding receivable against Obatria is around €16,000,000 It is deferred payment of this deferred until the December ’25 and we have made a provision against it. So just in case, however, there is currently no indication that this amount will not be repaid.

Due to the debt reduction and conversion, mostly conversion of bonds, our loan to value, LTV decreased and it is now at 52.5%. ARPA MTH is more or less the same as it was at the December ’24, so end of last quarter at seven point six percent. Average weighted debt cost has continued to increase as expected and is now at 4.1%. We do not provide any guidance right now for the financial year. We are in the middle of creating a restructuring plan, which I will cover on the next page, which makes providing any guidance rather difficult.

However, rental income is expected between 66,000,000 and €71 On the next page, Page five, we have some details on our restructuring plan, which we communicated in some releases which were made earlier this year. The share volume of liabilities, the share volume of maturities, which we are looking at in ’25, is significant. We started discussions with the lenders relatively early on, It was clear that in order to have clear restructuring process, we need a restructuring opinion, which is a common practice in Germany created under IDE, the vessel called S6 standard. And for that purpose, we engaged FTI under to prepares. FTI was engaged at the February.

And on the March 13, we have released an ad hoc communication detailing that we have started the process, but also secured a bridge financing of €14,000,000 at 5.5% interest, which is currently running out at the May. We have obviously contacted all the lenders with maturities in predominantly February and March year and extended those and then into sensitive agreements with those lenders also until March end of May this year. We are currently in discussions and constructive discussions. They are progressing to extend those standstills further until the end of twenty five. We have also together with FTI Anders contacted pretty much all the major lenders with maturities not only in 2025 but also in the later years because it is important that all the lenders understand the process, understand what we are doing and understand the plans that we are putting together with FTI Andersch.

Current version or current draft of the plan, the restructuring plan envisages significant dispositions of the properties in the amount of €350,000,000 to €450,000,000 which might be necessary to dispose of until the end However, this is not yet in the final restructuring opinion, which is expected at the August. Those talks with the lenders have been progressing and we have contacted, as we mentioned, most of those lenders because it is important that they understand that the company is going to be in a position that all those obligations, all those liabilities will be met. However, we do require time. So the maturities of ’25, we are discussing in extending those maturities or prolonging them so that we have time to cover all those obligations.

The company is not over indebted. So if you look obviously on our balance sheet, you will see that we have significant positive net asset value. Our loan to value has been continuing to reduce. From that point of view, there is obviously not such a problem. In terms of liquidity, as mentioned, we have secured the €14,000,000 bridge financing, which is there to ensure that liquidity is available.

However, liquidity is available not only until May. As mentioned, we are discussing to extend the facility to the August. The finalization of the plan of the restructuring concept is going to be a so called restructuring opinion, which will detail more specifically and precisely all the measures which are necessary to to, obviously, to cover all the liabilities in the next years. And the lenders, we all have to agree to this. And so it is a process which is ongoing.

We’re working on this together and we expect that there will be positive. We can now move on and take a look at the portfolio details, which is on Page eight. We currently have 163 properties, which is a reduction versus the end of the prior financial year as mentioned before by four. The total fair market value has obviously moved due to the asset sales. However, there was a CapEx included there of about €2,800,000 as well as an acquisition of a land for €2,400,000 earlier in this financial year.

The total annualized rent has increased slightly by about €700,000 and there are a few factors in that. Obviously, we had asset sales. However, on a number of assets, on a number of tenants, there was an end of free rent periods, which were previously contractually agreed upon. Those contributed to the increase in our annualized trend as well as a number of smaller lease ups. The vacancy rate has gone slightly up.

However, this is mostly a technical increase since the assets which we have sold were 100% flat. So in terms of new vacancy due to end of tenant leases, there isn’t really that much movement. And the world is now slightly lower than in the prior period with 4.3. We can now take a quick look at Page 10 where we have some details on our tenant structure, which since last time didn’t really move that much. The 66% or forty six point five million of rands are coming from noncyclical tenant, including the do it yourself stores that would be 78,000,000 or 55,000,000.

The €46,000,000 of noncyclical tenants, as I mentioned, about 46,000,000 which the 84% of rents which we have are linked to CPI, which obviously helps us to preserve the value of the future M cash flows should there be inflation. 47% of rental contracts are over five years and that gives us some security. Now we can move on to page 13, which details our debt structure and the financial KPIs. As mentioned previously, total financial debt was reduced by about €9,000,000 That total cost of debt on average is keeps rising. However, the emerging impact in terms of the total cost of debt was the increase in interest rate on the bonds, which we have in the amount of €85,900,000 maturing in September year.

And overall, the structure of our maturing or the end of fixed interest rate liabilities is detailed here in the graph. It is now at about €196,000,000 of maturities or end of fixed term loans in 2025, which is a reduction from the point we had on 03/2004 of about €250,000,000 The major effect are conversions, euros 30,000,000 of conversions already done and €7,000,000 is still in progress. Some loans were repaid at the December and we continue on this direction. So to sum it all up, the most significant event is, of course, the restructuring process. Certainly, all the lenders we have contacted need to contribute in terms of timing to our efforts and the volume of the which we have provided in the range of $350,000,000 to €450,000,000 is in a draft form.

However, it is expected that until the end of twenty twenty seven there will be significant sales. Now that concludes our presentation for part of this call and we would like to open this for question and answers. Operator, please.

Sergeyin, Conference Call Operator: Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. You may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time.

We’re waiting for our first questioner. And we have the first question coming from the line of Ulfman, comes from DT Consume. Please go ahead.

Ulfman, Analyst, DT Consume: Thanks a lot for the call. Thanks a lot for the presentation. But once again, this is more depressing than every other presentation I’ve seen, especially if you compare it with the peer group. I had the possibility to meet mister from department. He what he’s telling is that he’s rapidly expanding his business.

He’s buying 10 time objects at below 10 times cold rent, and that the market is full of possibilities and objections. And I hardly can find only any reason why to invest in Georgia Consumer REIT, which is a shrinking share and a shrinking company in a growing business in a spaces where the major competitor, despite the fact that Deutsche Detective Karma is, let’s say, 50% below them, that one is expanding and Deutsche consumer rate is really getting worse and worse. Additionally, I can hardly understand why you spend money or, let me say, waste money for asking people for the restructuring of the company. You have to find people from outside the company despite the fact that you obviously have very skilled people, the CEO, the CFO, the people in the management board, but you spend and in my example, this is a task from you, the people running the company, but you’re still spending money and wasting money and this is also of course not acceptable for the shareholders And I’m deeply convinced what the future of the company is. Last item is what is maybe I missed this, what is the current situation with the missing payment from Overtrizia from former CEO or member of the Board Mr.

Algegi? Thanks a lot.

Karel Thru Chang Liu, CFO, Deutsche Bank and Zumritt: Right. Now I understand there are two parts to your question. And obviously the easier the quicker one to answer is the Obotrizia. There is still about €16,000,000 of outstanding receivable against Obotrizia. Obotrizia repaid the majority of what they owed to the company mostly in the last year, in the last calendar year.

And the last payment was €38,000,000 So the €16,000,000 which is still outstanding is fully provided for, which means a bad debt accrual and is expected to be paid back by the end of twenty twenty one. And so the first part of your question, the problem is the sheer volume of maturities coming due. So if the lenders insist that funds, the loans be repaid. So for example in March 25 alone there was 67 due and payable. Now obviously, those lenders are not willing to extend, then we have to go into negotiations and understand how can we repay that.

If those lenders are not willing to prolong or top up or definitely not top up the loans, and we have to go into discussions. Also a major liability is coming up due in September. So this is a major lender with whom we also went into discussions. And as a normal market practice in Germany, a so called restructuring opinion which I mentioned the called EDAVI S6 is a standard practice for an independent adviser FTI Anders to get all the lenders on board to make sure that all the lenders are treated equally. Obviously the lenders with the same ranking of their liabilities.

As I mentioned before, the company is not over indebted in terms of its loan to value. It is just the volume, which is not possible to repay from the current operational funds. To do that, the adviser which provides this opinion, the restructuring expert comes up with his work working closely with us, obviously with the management of the company, as well as with the lenders to ensure that there is sufficient time to pay the lenders who want to obviously end the engagement. Yes, we have been talking to other banks. Yes, we have been talking to other potential lenders.

But again, they all say that the volume of liabilities for ’25 needs to be somehow resolved since, again, there is not enough operational funds. And one of the ways to resolve this is obviously to dispose of the assets. And that is the current situation and this is what we are doing In terms of what is acceptable, what is not acceptable to the shareholders, obviously this is our key priority. But if the company cannot pay back a significant loan and the lender declares default, I’m not certain that shareholders will be better off in that case.

Ulfman, Analyst, DT Consume: Yes. But don’t you think that there’s a possibility to speak with the lenders in advance? Are you in a regularly speak to big contract? And I hardly understand why it is once again mentioning here Deutsche the pharma Deutsche Fartmark that they are able to get a financing facilities of nearly every object they want without increasing the share capital and that you are not is it’s that you have, let me say, still a small of on your head that on your heads because of the past decisions or or failures from the former chairman? Or or is it something else?

Or is it as simple as you mentioned that it’s a bulk loan of 48,000,000 coming to a queue and that this is the only and the major thing Well, the g to repay it.

Karel Thru Chang Liu, CFO, Deutsche Bank and Zumritt: Okay. There there is a simple answer. If a lender tells us that to extend, he needs to have the s six, Then pretty much we don’t have many options. So if the lender says, okay, yes, we can try to restructure, yes, we can see what we can do. However, in order to do that, we need to understand what other lenders are willing or able to do and we need an independent opinion that the company can repay this in the future.

So in that particular case, when there is a significant liability coming up for repayment and that lender obviously tells us what needs to be done, that’s what we need to be doing. Now the first part of your question is, you probably know, Deutsche Bank has some history which dates back you know, some some goes back some time, and that did not make the discussions with the lenders easier.

Ulfman, Analyst, DT Consume: Okay. Got it. Thanks.

Karel Thru Chang Liu, CFO, Deutsche Bank and Zumritt: Mhmm. Sure.

Sergeyin, Conference Call Operator: There are no questions at this time. I would now like to turn the conference back over to Kirill Tuchaninov for any closing remarks.

Karel Thru Chang Liu, CFO, Deutsche Bank and Zumritt: Well, as we mentioned also in our report on the first six months of the financial year, the management is really focused on bringing stability to the company. Under the circumstances, we do believe this is the best course of action, which we described in the call right now. So we appreciate your patience and understanding and support in those times. Thank you for your attention. I would like to close the call now.

Thank you.

Ulfman, Analyst, DT Consume: Bye bye.

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