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Edited Transcript of DMRE.DE earnings conference call or presentation 14-Aug-19 8:00am GMT

Half Year 2019 Demire Deutsche Mittelstand Real Estate AG Earnings Call

FRANKFURT AM MAIN Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Demire Deutsche Mittelstand Real Estate AG earnings conference call or presentation Wednesday, August 14, 2019 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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* Christine Reitsamer

Baader-Helvea Equity Research - Analyst

* Ralf Bake

* 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. It's a pleasure to provide you with the DEMIRE results for the first half year 2019. With me here today is Tim Brückner, our CFO; and Michael Tegeder, our IR Head.

As always, we start with the company presentation, and then we move over to the Q&A part. Let me start with the company presentation and the highlight of the recent developments. Tim will discuss our financial thereafter.

So far, the first half year, DEMIRE had an excellent development of the KPIs. The headline of all this is the execution of our REALize Potential program with its 4 major pillars.

First, acquisitions. DEMIRE is aiming to grow its portfolio to exceeding EUR 2 billion by the ongoing purchase of real estate in ABBA locations.

Second, asset management. DEMIRE has optimized and focused its real estate management and increased lettings, identified potentials and increased rental income.

Third, financing. DEMIRE focuses on the further optimization of its financing structure with the goal to reduce costs further.

Processes, this is the fourth. Continuous improvement of existing processes, procedures and structures are a part of DEMIRE's culture. As an example, the outsourcing of the property management has been completed in the first half year 2019.

Having that said, what does that mean for DEMIRE's KPIs? First and foremost, we were able to increase funds from operations after tax and before minorities from EUR 11.4 million in the first half year 2018 to EUR 15.9 million in 2019. This corresponds to a growth of 40%. The EPRA-NAV per share is up to EUR 5.85, coming from EUR 5.56 in the last quarter.

Looking on the portfolio side. The portfolio was increased by EUR 0.3 billion to overall EUR 1.4 billion during the current year based on 2 acquisitions with, in total, 9 assets: 4 offices already announced and 5 department stores. This and the strong letting performance, with letting activities of more than 126,000 square meters in half year 1 2019, this is more than the full previous year, by the way, leads to increased rental income of EUR 38.2 million. The WALT across the portfolio is at 4.8 years, including the recently acquired Karstadt portfolio with a WALT of 14 years in average. The external portfolio valuation leads to revaluation gains of EUR 29.1 million.

Our numbers. The EPRA vacancy is at 10.3%, including Karstadt. Without Karstadt, 11.1%. Our income from rental is up 13.9% to EUR 32 million due to meaningful operational improvements.

Looking on the financial side. The capital increase in November 2018 with gross proceeds of EUR 150 million gives us headroom for further acquisitions. The net LTV after refinancing our recent acquisitions is still comfortably low at 44% and leaves leeway. The average cost of debt was lowered to 2.78% per year.

Looking on the guidance. The 2019 guidance raised as a result of a strong first half year. Rental income is now expected to be EUR 80.5 million to EUR 82.5 million based on the current portfolio and including the Karstadt portfolio. The FFO I is EUR 30 million to EUR 32 million, huge improvement.

Let's go into the details. Some more details on the leasing performance in the half year 1 2019, Slide #7. Compared to June 2018, like-for-like rental growth is 1.3%. This growth is primarily driven by indexations, step-up rent and extended and new leases. After the closing of the Karstadt portfolio, annualized rental income is up to EUR 87.4 million. The EPRA vacancy rate is up by 280 bps to 11.1%, mainly due recent -- due to recently acquired value-add office portfolio with already signed rental contracts improving vacancy in the further course of the year. On a pro forma basis, with the Karstadt properties, EPRA vacancy is lower at 10.3%. The low level of upcoming lease maturities in the rest of 2019, you see it on the bottom right, will stabilize the vacancy rate further.

Follow me on the next slide. The portfolio breakdown is very stable, with 68% of the GAV contributed in offices. This asset class remains overweighted focus of DEMIRE even after the recent acquisition. Compared to December 2018, the value of investment properties increased by 22.6% to almost EUR 1.4 billion due to the acquisition and due to revaluation gains. The cause of the revaluation compared with the last year is more based on our operational performance than on the market development. The average asset value is slightly increasing to EUR 15.2 million. The GRI yield of 6.3% across the portfolio is solid.

Now I give you some more details about our recently acquired portfolio. In our last call, I gave you some insights in the acquisition of the 4 office buildings in Essen, Bad Vilbel, Aschheim and Cologne. And today, I can add another 5 properties to the closed acquisition list. We acquired 5 department stores with a strong cash flow and a really long WALT. The closing was effective as of early July 2019. The properties are located in Celle, in Goslar, in Memmingen, in Offenburg and finally, in Trier. Following our ABBA strategy, this is perfect.

Some more figures on that. Property value is EUR 71 million. The total lettable area is 71,000 square meter. The WALT is more than 14 years. The GRI is EUR 5.3 million, above EUR 5 million. And the EPRA vacancy, of course, 0.

On the acquisition side, our pipeline is filled so we are confident to sign further acquisition contract in the next few months. You see our REALize Potential strategy works.

Now Tim is going to give you more details on our financials to further underpin that. Let me hand over to Tim.

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

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Welcome, everybody. On Page 11, we show an overview of our key P&L positions. And as you can see, we have not only raised rental income by close to 5%, the profit from rental of real estate by roughly 14% and the funds from operation by 40%. This demonstrates not only the ability to manage our real estate portfolio properly and to grow it but also to increase our operational efficiency for the benefit of our company and the shareholders, especially shown in our increase in funds from operations.

On the following slide, we show our key balance sheet positions. As you know, our investment properties position has been mostly affected by the acquisition of an office portfolio and the revaluation effect. And after the last day of this quarter, so the 30th of June, we have then closed the Karstadt portfolio, increasing our investment properties balance sheet position further to roughly EUR 1.4 billion.

We have also worked on our financial debt book. We have refinanced the acquired office portfolio with a bank loan of close to EUR 100 million so that our financial debt position has increased by 13% to now roughly EUR 720 million. Driven by the revaluation of our portfolio and the strong operational performance, we managed to increase our EPRA-NAV by roughly 6% or EUR 0.35 to now EUR 5.85 per share on a fully diluted basis.

Some more details on our financing story. As you know, we managed to maintain our rating and we managed to remain below our 50% LTV threshold, and we have also executed that into the second quarter of this year. We have now a solid leverage level of 44%. We have lowered our nominal interest expense from 3% to below 2.8%. Over the next coming months, we expect DEMIRE to benefit from the solid capital market environment, but that you can expect further development on the financing side. We want to also make sure that our investors on the debt and equity side understand that we will continue to execute our solid financing strategy over the coming months and that we are not aiming to change that going forward.

Having a few more words on the outlook of our firm. As Ingo already elaborated and as you have also read last week, we have increased our guidance on rental income and funds from operations. Rental income numbers have been increased to EUR 80.5 million to EUR 82.5 million for the full year 2019. And as you understand, the main factors are the acquisition of the Karstadt portfolio, catch up of indexations that we executed driven by our outsourced property management provider and our strong letting performance in the first half of this year.

We also expect our funds from operations to increase. We have increased the guidance to EUR 30 million to EUR 32 million. And the main drivers are the higher rental income and improved utility costs and service charges management and lower interest expenses than envisaged in our model.

What are the drivers to the upside? We may have lower cost on the management of our real estate portfolio that could help us further in the FFO evolution. And we currently see limited operational downside in the portfolio for the coming 6 months.

Thanks for listening, and we are now open for questions.

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Questions and Answers

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Operator [1]

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We will take our first question from Stefan Scharff from SRC Research.

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Stefan Scharff, SRC-Scharff Research und Consulting GmbH - MD & Managing Partner [2]

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Stefan from SRC Research. So I have 2 questions -- oh, I would say I have 3 questions. The first question is about the growth of the portfolio. Can you provide us with some more information, what you plan or which size is realistic to grow the portfolio, let's say, until the end of the year?

The second question I have is about the vacancy. It's a bit higher now, including the new portfolio. Perhaps you can give us a number for the vacancy on a like-for-like basis if we exclude the new portfolio which you took over.

And the last question is Slide 16, you mentioned some investment conferences here, the Baader conference, the Berenberg conference, but you forgot our SRC Forum Financials & Real Estate in Frankfurt, where you have a marvelous schedule to meet many investors. So I'm a bit angry, Michael, that you forgot to put us here on this slide. So I hope you make it better next time.

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

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Thank you very much, Stefan, for this comment and 2 questions. Of course, we will add this conference on our slides. Sorry for that.

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Stefan Scharff, SRC-Scharff Research und Consulting GmbH - MD & Managing Partner [4]

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Yes. It's not very polite. You know, we spent all the last weeks to call to so many investors regarding the Forum Financials & Real Estate to present your company. So you should think about us and not only about Berenberg and Baader. And as you know, we won the Thomson Reuters Analyst Award for European Real Estate. And I cannot remember that there was another German guy, except for Thomas Rothäusler from Jefferies winning this award. So it's a bit more respectful to mention us here just to ask you why you did not, so. But let's go back to the questions regarding your portfolio and regarding the growth.

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [5]

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Okay. Let's go to the first question, growth of the portfolio. The firepower after the capital increase last year is still there. We have EUR 50 million more to go. So we look on specific assets today, and when they are getting more concrete, we will execute this EUR 50 million. After this, of course, we have to think about new finance. This is driven by opportunities. And maybe huge portfolio, it is hard to get a figure for the year-end 2019. As we see today, we have -- not portfolios so much in the pipeline, we have more single assets in the pipeline.

Second question is on the vacancy rate. Of course, you saw it absolutely right. The vacancy went up 11.1% without Karstadt and direct to 10% including Karstadt. If you look at the EPRA vacancy rate, like-for-like, we are with 8.6%, nearly in the range of the last quarter. So I think this gives you at least more confidence on that, and we are very confident that we have a strong, leading pipeline that we can bring in some new contracts in the next few months.

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Operator [6]

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(Operator Instructions) We will take our next question from Christine Reitsamer from Baader Bank.

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Christine Reitsamer, Baader-Helvea Equity Research - Analyst [7]

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Christine speaking from Baader Bank, colleague of Andre. I've 2 questions actually, one relating to acquisitions and one to the letting. The Karstadt portfolio, the department store, I mean, I know it has quite long WALT. But you also know that retail, the retail environment, I don't know who would not say it's difficult, but with all the online developments and so on may become more and more difficult over the next years. I was just wondering, I mean, I know it's a WALT of 14 years so that's a long way to go. But when you buy such a portfolio, do you then also make plans of, okay, what do we do in case the WALT -- the lettings come to an end and we would like to -- we would need to have to reposition these assets? Do we have already plans for that when you buy such a portfolio? That's the first question.

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [8]

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Okay. Of course, Karstadt portfolio has 1 tenant. We investigated the tenant very closely, you can imagine, before we acquired the portfolio. And the rating of the tenant from the leasing side was good. This was one point of our investigation. The other point was what can we do with the properties when the tenant -- we hope he don't, but what can we do if he moves out. And all these properties are located in, really, town centers and perfect locations. And we acquired, as you know, to a attractive multiplier, and we are sure that we can use the properties with another tenant. Maybe in a better way, we can enlarge our rent with new tenants. Of course, we have to rebuild it, but this calculation has to be -- was executed as we acquired it. So we are confident that we have made a good investment.

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Christine Reitsamer, Baader-Helvea Equity Research - Analyst [9]

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Okay. And in general, acquisitions, what's the competition there at the moment? Is it still as high as it is in the past? Or is it even increasing when you bid for -- you said you have a pipeline of rather single assets. How is the environment there for you at the moment?

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [10]

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The environment is changing since the last year. You don't see so much portfolios around. It's more single assets now. The price has stabilized more as we see it. And you see a bigger portion of opportunistic properties than in the last year. So it's slightly changing, but I think the price step up we saw in the last year, this is history. We are on a high plateau, and that's what we see in the year, too. If you look at the investment that has been executed in the first half year, you see a volume that is comparable to the last year. I think last year was EUR 36 billion and this year is EUR 32 billion. There is a lot of transaction around that.

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Christine Reitsamer, Baader-Helvea Equity Research - Analyst [11]

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Okay. And then my last question relates to letting. You say you have -- the pipeline is full. So just have a question because we're all reading up the headlines of economic downturn and so on. So as far I heard it, you don't feel anything so far. Do you already talk about re-lettings for 2020 or is that too early to talk with your tenants about that? And then how do they react or behave?

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [12]

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So far, this is not reflected in the reaction of our tenants. We renew very early contracts if we can. This is our reaction on that. For example, in the logistic park in Leipzig, we renewed very early contract and prorogated it and extended it also. And this is the kind of strategy we make. And the pipeline, I said, is full even in the opportunistic portfolio or the opportunistic part of the portfolio recently acquired. But further in essence, our pipeline is really strong and we are very confident that we can reduce the vacancy in the next months further. And you will read from us in 2 months, I guess.

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Operator [13]

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(Operator Instructions) We will take our next question from Ralf Bake from MAV.

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Ralf Bake, [14]

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Ralf Bake, MAV Vermögensverwaltung. I understood sometime last year that retail has been just in the Fair Value segment and that you plan to move out of these retail investments. And now we have the purchase of the Karstadt portfolio. Is this a shift of strategy regarding retail assets? And does this mean a shift of strategy for Fair Value as well? This is my question.

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

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Yes. Ralf, it's Tim. I guess I'm not sure whether it's really a change in strategy. I think there's a continuous part of our strategy that we want to increase the quality of our portfolio, and it's still the plan to divest from properties that do not fit the portfolio and where we don't see a good future evolution of such real estate. And that is obviously also true for some of our retail assets and therefore, we are going to divest some of those assets. But at the same time, we believe that we should build our portfolio further and that retail is a relevant element of it. So yes, you can expect us to divest further retail properties, but you should not expect us to reduce our retail share to 0.

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Ralf Bake, [16]

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Yes. Okay. But has this been different in the past, the idea of going to 0 in the retail segment? I remember that.

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [17]

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I don't remember a strategy that said that we are going to 0 in the retail segment. I think we have a stable portfolio with nearly 70% contribution in offices. This is absolutely our focus. Retail is more for security reasons mixed into the portfolio so that we're not just long to the development on the office side.

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Ralf Bake, [18]

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Okay. Could the reason for this been the change in management? So that was the -- perhaps it was the former management, I mean, I think...

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [19]

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I'm not sure.

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Ralf Bake, [20]

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And also that...

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [21]

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I follow all the strategy papers and I haven't seen that.

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Tim Brückner, DEMIRE Deutsche Mittelstand Real Estate AG - CFO & Member of Executive Board [22]

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But it's true that Fair Value REIT has divested from various retail locations, for example, bank branches. And yes, we are going to continue to divest such real estate, but that does not mean that we divest our full retail portfolio.

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Ingo Hartlief, DEMIRE Deutsche Mittelstand Real Estate AG - CEO & Chairman of Executive Board [23]

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No. And we are in a phase of dynamization of our portfolio at the moment so we will sell retail, but as well office, especially the smaller properties.

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Operator [24]

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It appears there are no further questions at this time. I would like to turn the conference back over to Ingo Hartlief for any additional or closing remarks.

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

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Thank you very much for listening to the call. If there are questions afterwards, please don't hesitate to contact us. Looking forward to see you or hear you for the next contact, maybe in one of the mentioned conferences. Goodbye.