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Edited Transcript of DMRE.DE earnings conference call or presentation 19-May-20 8:00am GMT

Q1 2020 Demire Deutsche Mittelstand Real Estate AG Earnings Call

FRANKFURT AM MAIN May 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Demire Deutsche Mittelstand Real Estate AG earnings conference call or presentation Tuesday, May 19, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ingo Hartlief

DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board

* Tim Brückner

DEMIRE Deutsche Mittelstand Real Estate AG - CFO & Member of Executive Board

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Conference Call Participants

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* Andre Remke

Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst

* Philipp Häßler

Pareto Securities, Research Division - Analyst

* Stefan Scharff

SRC-Scharff Research und Consulting GmbH - MD & Managing Partner

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Presentation

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [1]

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Good morning, everybody, to our Q1 2020 Results Call. And thank you for dialing in today. I trust, you are all well and healthy.

With me is Tim Brückner , CFO; and Michael Tegeder, Head of Investor Relations. I will start the company presentation with the highlights of the DEMIRE's strategy and portfolio achievement and give you some insight on the COVID-19 impact on the company.

Tim will elaborate on the financials, thereafter. Finally, we are happy to answer questions you might have, as always. I do understand that you might be interested in our Q1 results, but also keen to learn on the impact of COVID-19 on DEMIRE. Both topics will, of course, be covered in our presentation. But let me shortly summarize it with one sentence, each.

Q1 2020 has operationally been a very strong first quarter. The COVID-19 impact for DEMIRE, as of today has been very limited so far, and we see first signs of further improvement and recovery. You will remember that after we implemented our REALize Potential strategy in early last year, 2019 has been an extremely positive year for DEMIRE, and hence, a good starting point for 2020.

We continue to focus on the consequent execution of this program and to stretch further our main goals. Portfolio optimization and growth, up to EUR 2 billion in size, financial strength and an increased profitability. In all 4 pillars of our REALize Potential strategy, asset management, acquisition, financial processes, we keep on going and consider these exciting times, a chance to accelerate the development of DEMIRE.

First, in the asset management field, we were able to let nearly 50,000 square meter in the third month. And we see a strong demand and a well filled pipeline for further lettings. Please remember that average performance for DEMIRE in prior years was about 80,000 square meters, but in the full year. The EPRA vacancy rate improved to 8.9% and the WALT of our portfolio remained stable at 4.8 years as well as the annualized rent, which amounts to EUR 89.9 million now.

Acquisition wise, we worked actively on improving our overall portfolio structure. We closed the acquisition of a bigger asset in Frankfurt, which helps to increase WALT and rental cash flow, while we sold 4 smaller assets and nonstrategic assets of EUR 5.2 million, which implies the 40% premium to latest market values. The average size of our asset increased to EUR 17.6 million from EUR 16.5 million at the end of 2019.

Considering the COVID-19 situation, let me stress that there are currently no further acquisitions signed yet. Our current acquisition pipeline is more than EUR 0.5 billion strong, some active transaction had to be postponed, but will be reactivated after more market certainty.

If we look at the sales side, we are keeping on negotiation further disposals to optimize our portfolio. And we see an unchanged strong demand for the assets and at least stable prices above our market value from potential buyers. In terms of financials, let me first mention our liquidity position. Free cash flow end of March was EUR 85.5 million and end of March, EUR 81.9 million. And there are no material maturities in 2020 and 2021. Operations wise, the financial performance in Q1 2020 was as strong as the asset management, presenting the successful integration of our 2019 acquisitions, and the implementation of our REALize Potential strategy.

Rental income is up to EUR 18.2 million to EUR 22 million. And the FFO I, this means after taxes and before minorities, improved strongly by about 9% to EUR 9.6 million.

Both LTV and cost of debt improved on a decent level as well. The LTV is down to 45.4%, and the cost of debt reduced to 1.80%.

In the fourth pillar of our REALize Potential strategy , processes, operational improvements are taking effect in DEMIRE's organization. In Q1 2020, we implemented a state-of-the-art treasury system. This is in order to considerably simplify and improve workflow. Along with that, administration costs came down by 12.6% to EUR 2.8 million. All that is an operational strong performance and definitely, a good start into the year. But now we have to deal with COVID-19. As of today, most of our tenants keep paying their rents. In April, about EUR 1.1 million of rents are overdue, and in May, about EUR 1.2 million. This totaled EUR 2.3 million in total, and represents 2.6% of our annual target rent.

We see a recovery ahead, and I hope that finish in June. Given DEMIRE's strong liquidity situation and no larger upcoming cash outflow, the company is well prepared for the rest of the fiscal-year 2020 and beyond. And due to our improved asset management capacities, we are able to deal with our tenants to solve the issues they might have. More on the COVID-19 impact to come, but let's look back to Q1 first, and let me say that new lettings drive this result, and we talk about additions of EUR 3.1 million in rental income and 7.4 years in WALT on a stand-alone basis. Some of the new contracts have started already, other will start later in the year. So a further decrease in vacancy can be expected. In addition, our letting pipeline is well filled, and we see another operationally strong year ahead.

Let us have a look on vacancy and WALT of our portfolio on Page 7. As I mentioned, in our full-year report, 2 months ago, the vacancy development was stronger than it appeared at that time, with 9.4% vacancy at year-end 2019. We are not surprised to see the EPRA vacancy rate improving by about 50 bps to 8.9% in Q1 2020. In addition to the strong asset management and letting performance, transaction activities contributes as well. The disposed assets were sold with higher vacancy, while the asset acquired in Frankfurt is fully let. But as I mentioned, we already signed new rental contracts, will improve this ratio, of course, in the course of 2020.

Another key performance indicator is the development of the WALT, the wide average lease term. It remained stable at 4.8 years in Q1 2020 compared to year-end 2019 as time goes by. The result demonstrates, again, our very strong letting performance, enhanced by the accretive transactions we executed. Would you consider all lease contracts that have been signed already, the WALT would exceed 5 years. Many words describing the strong execution of our REALize Potential approach.

Dear ladies and gentlemen, please turn over to Page 8 for the development of our portfolio size. Our portfolio is not totally unchanged, but there were no bigger effects happening in Q1 2020. The net effect from acquisitions of EUR 43 million and disposals of EUR 28 million is about EUR 15 million, and the CapEx contribution is about EUR 1 million. That amounts to an increase of the investment properties to well above EUR 1.5 billion. Assets held for sale of EUR 38 million, include an asset in Eisenhttenstadt which has been disposed in April already. We did not conduct a valuation in the first quarter, which is coming to market standards. Overall, Q1 2020 has been a strong and satisfying quarter for DEMIRE and would have been a decent start into another robust year. The REALize Potential strategy is implemented and starts more and more to pay off, even with the COVID-19 impact, on which I will proceed after Tim's elaboration on financials. DEMIRE is in a good shape and strongly positioned to benefit from these different times.

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Tim Brückner, DEMIRE Deutsche Mittelstand Real Estate AG - CFO & Member of Executive Board [2]

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Good morning, everyone. This is Tim. Before I go through the financials, I'd like to apologize for the technical glitch we had a few minutes ago. Unfortunately, we pressed the mute button, apologies. Before I go through the financials, as well, I want to quickly highlight, the good shape of the company in general. We demonstrated in very difficult times that the company is fully operational. We have protective measures in place for our employees and for other stakeholders that we work with. And so far, this worked very well, and our technical infrastructure is in very good shape to work remotely and also to work for all the company's goal in the near future. So we are there, and we will make our business, as we planned, and we demonstrated that in Q1 with the beforementioned improve in rental income, up more than 20% to the EUR 22 million, mainly driven by the acquisitions we have closed in 2019 and 2020. Also up by nearly 8%, our funds from operations to now more than EUR 9 million, which -- and that is, I guess, very important to highlight, which is completely in line with our 2020 business plan.

So as Ingo already said, we are in very good shape. And we, in the first quarter, were able to demonstrate, to deliver on our plans and to deliver on our promises for our all stakeholders. In 2020 and -- we will benefit from the acquisitions that we've done in 2019, and 2020, we will benefit from the improved operating and improved cost profile of the company, and we will benefit from the lower financing expenses.

Going to the next page. Financial debt, slightly down to EUR 790 million, driven by some repayments because of the disposal of 1 asset, as Ingo said in Eisenhuttenstadt, our leverage profile is very conservative, and our NAV in the quarter improved by about 1% to -- on a fully diluted basis to EUR 6.38 because of the quarterly profit.

Slide 12, and I guess that is very important in difficult times is our leverage. We are well below our leverage target at roughly 45% now, which -- the target level, as you know, is 50%. Our bond covenants are easily maintained and driven by the measures we conducted in 2019, our average cost of debt remains low at roughly 1.8%, which I guess is a very strong and solid backing for our financial profile, and it helped us to deliver on the increased FFO this year. Also important is that we have no relevant debt maturities in 2020, and our average maturity of outstanding debt is currently at 4.1 years. But maybe even more interesting than looking back to what happened in Q1 is looking forward. And I will hand back to Ingo, who gives you another update on the corona impact.

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [3]

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Thanks, Tim. So let me provide you now with an outlook. You know that we have withdrawn our official guidance on rental income and FFO in April. As you could not foresee and still cannot, the full COVID-19 impact on our business in relevant details. But what we see, the direct impact of rental income is very moderate. And the strength of DEMIRE that we have underlined in the last year with strong performance, helps us to deal with and maybe profit from the situation. It does not make us fully resilient, but helps us to manage the situation. In more detail, as of today, Brent rent suspensions from DEMIRE's tenants in contact with the corona crisis amount to EUR 2.3 million for April and for May 2020, together.

On the basis, on annual rental income of EUR 89.9 million, this equals to 2.6%. Just to be clear, these suspensions do not translate in a loss, as the tenants have to repay the rent later, but into increased receivables.

In total, 68 tenants reached initially out to DEMIRE, with request to suspend their rent, amounting EUR 2 million per month from April until June. You see we received letters from tenants in high uncertainty, but most tenants were able to pay the rents more or less in time. In April and March, only EUR 2.3 million has been suspended, quite below the mentioned request. The majority among these tenants belong to the asset class retail and hotel.

DEMIRE stays in contact with each tenant in order to find an individualized solution. Given that first sights of a normalization of the situation becomes visible, request for rent suspensions are expected to diminish over the upcoming months. With EUR 82 million cash on the balance sheet, DEMIRE has ample liquidity available and no major upcoming refinancing needs or larger committed cash outflows.

To summarize, we are still not able to address all aspects and impacts of the situation. But we are working intensively with our tenants on it. The structural and operating improvement of our REALize Potential gives us trends and do pay off. As soon as we can, we will provide you with the new guidance. As of today, we are optimistic to go with minor wounds through this crisis and participate from the recovery. Thank you very much. We are happy to answer questions you might have now.

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Questions and Answers

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Operator [1]

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We take our first question today.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [2]

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It's Andre Remke from Baader Bank. A couple of questions, probably starting with your portfolio strategy. What could you probably describe, a bit your observation in the transaction market currently? And what does it mean for your acquisition strategy, but also for potential disposals? You did not mention your own medium-term target to build up a EUR 2 billion in -- at least in the report and the presentation, do you stick, in general, to the this target? And -- or do you say, at the moment, well, we will keep our liquidity for the time being at least and withdraw also further intended acquisitions? So this is first round of questions.

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [3]

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Okay. Thank you for this question, Andre. Looking at our strategy, we came through with it over and over. So we didn't announce this EUR 2 billion, again, but growth is still a central point in our strategy. So we follow on this strategy. In the medium term, EUR 2 billion should be reachable. The second part of your question is what is going on in the transaction markets? We are looking actively on opportunities. But we started with some negotiations in the first few months. And we had to prolongate some of them because the situation, within the portfolios changed and we are active working on it. And as we see more stability on the tenant side in the next weeks or months then we go on and move forward with the acquisition.

We have several opportunities in mind and under negotiations, totaling EUR 750 million at the moment. But as said, it is time for postponing these. We see on the transaction side, the time frames that we expected are getting longer, and this is not just our view. This is the view of our colleagues, too. So I think this is a market environment that we face, that is -- that takes a little bit more time than it took before. I hope, I answered your question.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [4]

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Yes. And is it also fair to assume that you said in this market environment, you have a stronger focus on your own liquidity to keep the liquidity? Or is this not an issue for you?

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Tim Brückner, DEMIRE Deutsche Mittelstand Real Estate AG - CFO & Member of Executive Board [5]

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Well, obviously, as we are a rated company, we want to make sure that we protect and maintain our rating in difficult times. And when we do everything to do that. As we stated in our accounts, we have a solid cash position, and we are obviously, also making sure that there is enough cash also for more difficult times than maybe today. But you see with our LTV of roughly 45%, we have significant headroom in terms of our covenants, and we have also headroom, when it comes to debt capacity. So yes, we are careful, and it takes courage to make decisions in tough times. But if there are the right opportunities, we will follow these opportunities.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [6]

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Okay. And then next question on your portfolio valuation, when will you run the next one? And what are your expectation here, at least, your current view on once the situation would be helpful.

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [7]

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As you know, we need just 1 portfolio valuation in a year. At the moment, we see the environment is uncertain. So we think about doing it in the third quarter or in the fourth quarter.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [8]

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Okay. And you've mentioned your letting pipeline as well sold, but is here the situation similar to the transaction market situation, i.e., some postponements, wait-and-see attention from the tenant side or from the demand side? Or do you observe also request for low rents already?

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [9]

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No. We see on the letting side and likely action at the moment. Coming from different sides, of course, we see demand from technical side, from logistics side, from authorities, we letted 20,000 square meter to Amazon, just likely implemented in the numbers you see already, and in the pipeline, we see more of this.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [10]

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Okay. Excellent. Well...

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [11]

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And just to underline this, the pipeline today is 66,000 square meters huge, what we have under negotiation. So even more than we letted in the first quarter.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [12]

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All right. But this -- to have an understanding on that, well, the pipeline is a pipeline, but are the other side of the table is also working on this pipeline, i.e., are there postponements also in recent negotiations?

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Tim Brückner, DEMIRE Deutsche Mittelstand Real Estate AG - CFO & Member of Executive Board [13]

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Andre, yes, you're absolutely right. I mean there are certain types of tenants who have really difficulties to make decisions today. But we have, in our pipeline, leases to governmental agencies, and we don't see any disruption there. We even have some hotels in our pipeline, and we see, depending on the site, obviously, but we see interest from hotel operators to look at hotel leases at least in these difficult times. But obviously, when you come to smaller, high-street retail premises, smaller tenants out of the fashion industry or adjacent industries, then it is more difficult. But when we look at our business plan and we look at our pipeline, even now in mid-May, in the middle of the crisis, the pipeline feels relatively solid.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [14]

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Okay. Excellent. So -- because these are the questions, I do not want to bore you, but these are the questions, I'm asking myself. So a very last question on your guidance. It sounds that you are really -- not really negatively affected by the crisis and all effects are so far moderate. What is then the reason not being able to provide a guidance at least, let's say, with a wider range or with the kind of disclaimer?

So we have to accept this decision, that's for sure, but to figure out a bit where are the key risk factors on your P&L to deliver on the previously guided FFO?

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Tim Brückner, DEMIRE Deutsche Mittelstand Real Estate AG - CFO & Member of Executive Board [15]

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Yes. As Ingo pointed out, our receivables position has increased, and we would expect that to -- at least in June to further increase because of tenants not paying their rents. And it is very difficult in these times to -- got -- whether we get or whether we are able to collect these receivables.

Obviously, there are tenants involved like some DIY stores, where I'm pretty certain that we get the rent. Or some office tenants who would just took a chance, in not paying their rents, and you can be sure that we are at them to collect our rent, and I'm sure we get it. On the other part, that we have some retailers that struggle. We have maybe some hotel operators that struggle for the time of April and May. And we need to see whether we can collect this rent. And also, as we pointed out in our accounts, we have 2 insolvency proceedings in our portfolio. And because of those, it's very difficult to come up with the guidance that we can actively manage. And that is the key risk factor. When you go through the line items of our P&L, we have a solid cost base that we have reduced over the last few years, and we are very confident that we deliver on our cost assumptions this year.

We are also absolutely certain that we deliver on the promise to lower financing expenses. these days because we have locked those expenses in 2019.

So the key risk factor, again, is, tenants not able to pay their rents. And as soon as we have more clarity on the larger tickets in our list, we will update you with the new guidance. Because it's absolutely clear that the capital markets, you and all other stakeholders expect us to be clear on what we can achieve in 2020. But so far, it looks relatively strong.

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Operator [16]

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We now move on to our next questioner.

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Stefan Scharff, SRC-Scharff Research und Consulting GmbH - MD & Managing Partner [17]

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Stefan here from SRC Research. So I would like to know you have some rent suspensions about EUR 2 million or EUR 2.3 million until now. So what is a fair estimate? Or can you say something that you might get most of it? Or is it more fair to expect a 50-50 approach here? And can you say something what you expect for June after, let's say, almost all shops are reopened? And let's say, also the hotels we reopened again or will reopen this week or next week?

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Tim Brückner, DEMIRE Deutsche Mittelstand Real Estate AG - CFO & Member of Executive Board [18]

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Yes. Thank you, Stefan. It's a bit of a follow-up to Andre's question. If I could give you the exact number, I could also give you the guidance because then I can calculate my results. And then I would obviously also publish what we believe is realistic.

We are now in negotiations with every single relevant tenant from the nonpayment list. And we try to come to solutions wherever possible. I mean, there are, for example, situations like, there is a tenant who can probably or have difficulties to pay the rent for April and May this year. But we have only 2, 3 years of remaining lease term, and we come to an agreement with them to extend the lease by a few years because in the medium and long term, we believe, in the business model of the tenant and the creditworthiness of the tenant. But we need some time to come to solutions and get clarity on the receivables. And I, at this stage, think that in 2 months' time, we should have the clarity for the majority of the tenants on the nonpayment list. And as soon as possible, we will come back with the guidance. But today, I'm not able to give you a percentage figure because if -- I mean, I would like to have the percentage figure, but I don't have it.

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Stefan Scharff, SRC-Scharff Research und Consulting GmbH - MD & Managing Partner [19]

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Okay. Thank you for the honest answer. So you did a good job with your letting performance in the last year and also in the -- the first quarter was good. So is there some -- you have some impression from April and May what means the square meter prices and the reluctance to sign new rental contracts or to, at least, make a prolongation?

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [20]

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There's one word to answer both of your questions. The word is stable. The rents seems to be stable at the moment, and demand is also stable that we see.

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Tim Brückner, DEMIRE Deutsche Mittelstand Real Estate AG - CFO & Member of Executive Board [21]

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And when you go through our numbers, you see that our average rent is at roughly EUR 8. So we are not talking about the EUR 200 per square meter high-leased space and this may be the difference to other portfolios. And in good times, we were not able to collect all the rental uplift that the top 7 cities saw. But in more difficult times, we -- at least by now, we see not so much negative effect that you might see in the locations where you have the higher increases over the last few years. It's more resilient so far.

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [22]

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And if cost-cutting measures come through in the tenancy, maybe our portfolio is very good positioned to even profit from the situation we have right now.

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Operator [23]

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(Operator Instructions)

We now move on to our next questioner.

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Philipp Häßler, Pareto Securities, Research Division - Analyst [24]

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Philipp Häßler from Pareto Securities. I have one general question, regarding the market development. As you -- as office plays an important role for -- in your portfolio, I would like to know how you see the future development? There's a lot of talk now of home office becoming much more popular and lower demand for office space in the future. Maybe you could share your thoughts on this, what do you think, what the development will be, or whether you've already made some experience with this?

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [25]

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This is really a tough question. In general, we think, that the demand for office space in our portfolio target will be stable due to cost reduction. As said in the tenancy, we are good positioned to fill with maybe new tenants that make cost measurements. If you have in mind that you need per person more space on the office side in corona times or even after, then in former times, it seems to be that you can even enlarge year demand for space on the tenant side.

On the other hand, of course, you are right, home office worked very well. We executed in our own company, and it -- yes, it's good to work with it, but I don't know if you hear it on the market around, but we can feed it in our own company as well. The people are happy to come back to the office, a medium person and I think, this trend goes against the absolutely decision for more home office. So in my perspective, in our portfolio regards, it seems to be stable in the future.

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Operator [26]

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We take our next question now.

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Unidentified Analyst, [27]

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Just a quick one. Could you remind me how much of your annual rental income comes from the retail and hotel sectors? And that's it.

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [28]

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Okay. Thank you for the question. If you look at the retail sector, we collect per month EUR 1.9 million in rent. So this is roughly 26% of DEMIRE's total rent. But I think, it's better to be more precise on that. If you take out of this proportion, the food retailers, the drug stores, the pharmacies and the wholesale distribution, then it's 10% less.

So 16% from retail that could be affected from corona and the rest, not from the retail side. And you asked for the hotels, we have 6 hotels in our portfolio, outstanding for EUR 0.5 million per month. This is 6.5% of DEMIRE's rent. Hope these numbers help you.

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Operator [29]

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(Operator Instructions)

It appears to be no further questions at this time, gentlemen.

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [30]

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So thank you very much for dialing in today and hope to get in touch, please stay in good health, and goodbye.