Good day and welcome to the Deutsche Konsum REIT-AG H1 Results 2021, 2022 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Rolf Elgeti. Please go ahead, sir.
Yes, thank you. Thank you, and good morning, everyone. Thank you for your time and interest in Deutsche Konsum for the half year figures of the year 2021, 2022. You have probably already seen the results as a presentation on our website. I will refer to a few slides here and there, and there's also been a press release. What I suggest is, as per usual, I just run through some of the key highlights in my opinion, and then there's plenty of time to ask any questions and provide comments. I'll be starting on page four of the presentation. Just going through the key highlights of the numbers first. Let's start with the operational business.
The operational business was strong as per usual. I mean, that's one of the characteristics of our businesses that's reasonably predictable, non-cyclical, et cetera. The rental income was up 10% year-on-year. It's noteworthy that the net rental income was up 13% year-on-year, which of course is a margin expansion again, which is somewhat helpful. The FFO was also up 4%. I mean, only 4% one could say, but that's of course due to the higher financing costs as we've grown the portfolio. As you know, we have not increased the number of shares for now almost exactly 24 months in spite of the growth. The AFFO per share was stronger, has been growing stronger.
That's mainly due because we finished many of the CapEx projects last year. That's something that we flagged in previous calls that the delta between FFO and AFFO will come down. As of today, we haven't really any big significant redevelopment projects so that that should stay for the time being. Like for like rental growth at 1.4%. Again, positive, meaningful, but not huge as again you would expect. I will refer later on to the very important point that we increase the proportion of index-linked or inflation-linked contracts, and that many of these contracts have hit or are about to hit the various thresholds so that one should really expect higher like for like rental growth in the future.
That's for the operational business to start. Second point, our acquisitions, the key message here is that firstly, we keep acquiring. We still find good things at good yields. The average yield on acquisition has been 8.4%. We've acquired almost EUR 50 million worth of assets, and that's interesting because the assets we sold have had lower rents. Already the capital recycling that we started end of last year has actually still led to an increase of the rent level because the assets we've acquired since then are producing more rent than what we've lost from the assets that we have sold. The acquisition pipeline is still strong. We are working.
We're very close on approximately EUR 100 million of further acquisitions, and hopefully can do more transactions shortly. Thirdly, our sales pipeline looks good. I mean, we've had two major, well, major by our standards, sort of, disposals, approximately at yields of 5.5%, which we've notarized. One of those transactions has closed, the other one has not closed yet, so we still keep the rents for that. We are also opportunistically looking for more disposals. Not too many, of course, we don't want to shrink the company, but we want to make really the odd disposal at the right value if and when those opportunities arise. If you look at it, we're buying at yields of north of 8%.
So far, we bought at over 10% yields since we started the business. We're selling at yields of 5.5 and less. That's not our main business to do this yield arbitrage, but it's just worth mentioning that this is working, this is happening, and sort of these values are being justified in the market. Fourth point, our balance sheet remains strong. Interest cover ratio 5.5x EBITDA. LTV just over 50%, which is where we want to be. Average cost of debt is still below 2% and is likely to fall further.
I will stress this, that in spite of the macro backdrop as far as interest rates are concerned has been changing, our interest costs will very likely decrease from here because we will refinance debt that has historically higher coupons. Therefore, we will likely to reduce our cost of debt further from here in spite of the different interest rate environment. We are confirming our guidance, and we are also confirming our dividend guidance forward as well. That sort of in telegram style is sort of what is new in terms of the numbers.
If we move to page number five, we've inserted a page into this presentation, which my colleagues have very kindly prepared, which really summarizes sort of the various value creation drivers for the business. I find this very interesting, and maybe helpful and illustrative because, you know, when we get asked like, "Are you about rental growth? Are you about safe cash flows? Are you about recycling? Are you about growing?" The answer is, well, we are about all of those, and therefore it's maybe worth sort of detecting the various value creation drivers. Firstly, what do we do just to remind ourselves, were we acquiring at a high yield? These cash flows, they are stable. They're very stable.
They're economically stable, as in defensive, non-cyclical. They're very strong micro locations. They're grocery-anchored. They're inflation-linked with more than three quarters. In fact, we're at 79%. I'll come to that in a second, of index-linked. Of course the capital discipline is key to that. The first building block is an attractive and safe cash flow yield. The second is of course we do try to create asset management alpha. We extend the leases, we reduce vacancies, et cetera. We occasionally invest CapEx where we can have stronger returns from that. Thirdly, all this is sort of accompanied by a very strong balance sheet with all the governance, sort of protection of the REIT regime that should lead to low cost of capital.
I mean, it doesn't at the moment as far as equity is concerned, but certainly in the course of that's working. We should therefore be a company that provides reasonably reliable, stable dividends. Of course, the fourth is just the icing on the cake, as I mentioned, is this capital recycling, which you know is not the reason we set up the business, but it's sort of a very helpful extra return driver. Of course, if we do this, then of course the proceeds from the sales then feed into higher, sort of more acquisitions at good yields, which of course mean that we can keep growing without issuing shares, which is of course super helpful. That's just what I wanted to add.
I do sort of a very quick page turner on some of the other pages here. Forget page six, because just summarizing what I just said, on page seven, you find more details on the last acquisitions. I don't want to go through them. The point is just to say, you know, it's good micro locations. It's everywhere in Germany. It's grocery-anchored, and the yield is between 8%-9%. So that's more of the same. You see the pictures on page eight. Again, more of the same. Here, we look at sort of some of the key metrics.
I just want to highlight that sort of the value of our properties in our books, that's the fourth line here, is still sort of way below 1,000 EUR per square meter with 960. That has gone down not because we had devaluations, but it has gone down because we sold some more expensive things and bought more cheap things, which also in turn explains why the kind of the rent per square meter is a little bit less. As I said, like for like, it's 1.4% up, but of course in the pro forma portfolio, we bought cheaper stuff. We also bought more vacancy. The vacancy going up is not because we sort of lost space, it's because we bought things with higher vacancy.
You can see that the WALT in place has been more or less constant as in prior years. As I always stress in these presentations, that's the key thing is that as long as the WALT remains reasonably stable, then you know that our thesis works. Our thesis, just to remind ourselves, is that we're getting too well compensated for taking lease extension risk, which of course is a brilliant idea only if we manage to extend the leases. Here you can see the clear evidence that we do, and that's reassuring. Moving on to page 12, if I may. Here you can see the usual sort of summary of who are our tenants that they're non-cyclical, grocery-anchored, et cetera. You know all that, so I don't want to repeat that.
Actually, I don't. On the next page. I apologize. I want to make a point on page 13, which is the key point I want to make here, is the share of the CPI-linked rents, which has been going up significantly from the last quarter, where it was at 74%. Now it's actually 83% of our leases are now CPI-linked.
As I said, this is, I mean, not just helpful, but of course is now, extra helpful, and extra relevant, as we start to hit, these key kind of, CPI thresholds, and therefore, do expect the sort of good news on the rental growth front, maybe not in the next quarter, but in the quarter after next, in particular, as we're hitting the numbers in, the quarter now as we speak, that will be visible in the quarter thereafter, of course. That's something I want to stress because that's new and that's extremely relevant and a key sort of characteristics of our asset class. Page 14, my favorite chart, on the left, just showing how often we have the same tenant again and again across the portfolio.
That's not a change in principle, but it's always good to see and remind ourselves that this is what we are about, is that we have the same tenant again and again across the portfolio. That this is one of the reasons. Next to our sort of hard work, of course, but this is one of the reasons why we can take these lease extension risks and why we are building a better relationship with the tenant and therefore actually get a better risk reward on the assets. On page 15, you can tell how embarrassingly cheap the stock is in terms of the implied yield it does. And finally on page 17, you see our refinancing structure. Again, nothing has drastically changed here. We're still as diversified as we were before.
I did want to make the point that the debt that expires in this year, in 2022, that this is actually a sort of higher yielding debt than where we can refinance. We will likely be able to reduce the cost of debt further. This is where I wanted to stop. There's lots of numbers, lots of things we can answer. This is where I say thank you for now, and please do pose any questions that you may have.
Thank you. If you wish to ask a question at this time, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will now take our first question from Stefan Bönartz from Metzler Capital Markets. Please go ahead. Stefan, please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment.
Can you hear me? Can you hear me?
Yes, now we can, yeah.
We can now.
Okay, great.
Yeah.
The first question.
We can hear you now.
Would be, yeah, on the acquisition volume for this year. I mean, we are now in the second half of your fiscal year, and I would assume that you already have some kind of visibility regarding the acquisition pipeline for the remaining year. In the previous fiscal years, you were able to acquire triple digits million amounts of properties. Would you say that a triple digit amount, million amount of properties would be also able for this year with regard to the acquisition volume? My second question would be on the like-for-like rental growth in the coming quarters. The inflation rate in Germany is currently at roughly about 7%.
Could we assume, or can you give a rough indication, regarding the like-for-like rental growth CPI at 6%? Is this realistic?
On your first question, yes, we are optimistic to be in the triple digits again. We're currently working on approximately EUR 100 million of very concrete acquisitions. Of course, the issue is as per usual, you know, it's only when you've been in front of the notary. In fact, these days, maybe not even then that you can be really sure that it will happen. The likelihood is high already with the transactions that we know about now to get there. Of course, it's uncertain and binary every single time. We certainly don't wanna promise that, but we think it's extremely likely and we've so far in every year since inception have delivered that.
We do believe that this year will be no different. On your second question on the like-for-like, it's unfortunately much more complicated because the way it works, as I'm sure you know, is that we have to hit the various sort of 105% or 110% sort of levels of the CPI, and then you get the full 5% or 10% sort of increase on the rents. As many of our leases have been sort of recently sort of extended, you know, you need this 5% or 10% push before you have the next sort of hike. Therefore, it will almost certainly not be 5% or 6%, sort of in the next quarter.
Sort of if you take a view sort of twelve months forward, then it's actually much more likely because we just need to get over the next couple of quarters, you know, to all these thresholds to call. The truth is that we're not able to guide for this very precisely. I mean, in theory and intellectually, we should be. I apologize that we're not because, I mean, we have all the data. It is just sort of it's not even complicated, there's lots of data, lots of work. We haven't actually precisely calculated sort of when which sort of CPI level will trigger rent increases in which contract precisely.
Of course, we do monitor this on a monthly basis, and the rents are adjusted on a monthly basis. It's reasonably in real time, but it's contract by contract with different thresholds. That's why it'll be a messy picture, I think, for the next 4 quarters, I would guess. Because you know, these thresholds, they're sometimes 5%, they're sometimes 10%. Of course, with inflation at over 7%, you know, it's only a question of time till every threshold is being kicked. Then we'll have a clearer view, but not precisely for the next quarter or two, I'm afraid.
Okay. I understand. Thank you.
As a reminder, to ask a question, please press star one. We will now take the next question from Manuel Martin from ODDO BHF. Please go ahead.
Yes, thank you. Hello, Rolf. Good morning.
Hi.
Two questions. Hi. Two questions from my side, please. One question is regarding the cash management that you have within your company. Can you give us an update on the loans that you are giving within your cash management for kind of in terms of potential default risks? I mean, we are now in an interest environment which becomes a bit unfriendly, cost inflation, et cetera. Maybe you can tell us something about that, please.
Any either.
Okay. Thanks. The second question would be on the overall environment. What could be the potential effect on your portfolio in your company when it comes to rising interest rates, supply chain disruptions and the cost inflation? I mean, of course, in terms of inflation-linked rental contracts, that's favorable. Are you going to see some side effects on your portfolio, on your business or refinancing situation in general?
Yeah, I guess there's three aspects to look at. First, sort of our business itself, I mean, no real impact. I mean, the rents are CPI-linked. Our costs are low, so the effect of cost base is minimal. We don't have any sort of supply disruptions really in grocery retail. If there were, I mean, we're the landlord not the operator. I mean, we're quite well protected from that within WAULT, of course. Operationally, that's not an issue.
Secondly, as far as interest rates are concerned and our cost of debt, I think we are in good shape there, because, you know, we have this very granular refinancing strategy where we reach out to the various sort of savings and loans and cooperative banks across Germany. There the accessibility and also the pricing of senior secured debts goes very, very strong. Because we still have some historic debt at higher interest rates, we are in a good position to refinance at lower cost. That all looks not challenging. If anything, that's probably becoming a competitive advantage for us, that we are in a stronger position there than maybe some of the peers.
The third is like, what will high inflation, high interest rates do to property valuations and to stock market ratings? I think that's up to anybody's guess. I mean, that's you can make the arguments in various directions. I mean, clearly as of now, the real estate sector has suffered in the listed space. I mean, in the non-listed space, not at all. If anything, prices keep rising in the physical markets, while the stock prices are sliding, which is why, you know, you see more and more sort of public to private transactions in, I guess, in real estate in general. The valuation gap clearly supports that of course. Yeah, those would be the three things I'd be looking at.
I see the main impact on sort of investor sentiment valuation, but neither on the debt side and certainly not on the operational side.
Okay. That's clear. Thanks. My last question might be actually related to your responses when it comes to property valuations. Could you give us a couple of words on how you see the transaction market right now? Are buyers a bit more reluctant, due diligence becoming longer? Are sellers not really willing to sell, or what do you see there in the market?
Change in recent months. I mean, prices are generally still rising. Buyers are very keen to get hands on good product, which is why we've been selling opportunistically. But there's also a pipeline available for acquisitions for us. I think the asset class is now more popular and more sought after, and people understand the kind of the low risk nature. And also the index-linked, I think, is better understood than six months ago. And so all that together means that the prices are rising slightly, probably.
Okay. Thank you.
We will now take our next question from Andre Remke from Baader Bank. Please go ahead.
Yeah, good morning, Rolf. Basically two questions. First starting on the CPI-linked rents. How did you manage to increase the share? If I get it correct, it's up within one quarter from 75%- 83% for your total contracts. Was it a function of acquisition and disposals or via renewals? So I'm a bit surprised by such a huge step. I assume that existing tenants not really willing to accept the change in the new contract towards CPI-linked rents.
Well, it's a little bit due to acquisitions, and sales to a small degree. To a larger degree, we did actually renegotiate that. Of course, not for existing contracts, but whenever we extended leases. I mean, we have a sort of a zero tolerance policy for no inflation link. We will not extend a single contract without introducing an inflation link. They're completely non-negotiable. I think it's very reasonable to have a position like ours on this. It's a little bit like service charges, like, you know, why is our margin expanding, like that. That's both have the same reason, that when we buy assets, we often buy from non-professional landlords, and then it takes some.
For service charges, it takes two, sometimes three years to fix sort of inefficiencies. Of course, for important clauses like this one, like the index-linked, we'll just do it whenever we extend the leases. Therefore, we've been increasing the proportion here. A third element to that is that we also for the very small contracts that we have. Not just for the big grocery anchors, but also the smaller tenants. We've increased the proportion here and most of these contracts are typically shorter term contracts anyway. Therefore, sort of, it's easier to get this done. I mean, obviously don't expect such a jump again, but that's just what has happened in the last quarter.
Excellent. Would you assume that or what could be your roughly a ratio which you are targeting for? Probably not reaching 100%, as you acquired also non-CPI-linked contracts, but is it 85% and stop there or 90%? Just to give a rough indication on that.
No, look. I think it should be getting closer to 100%. It will take six or seven years to get there, because you know, we will for every single extension that comes up, we will push for the CPI link in the rent. Of course, some rents are 10 years long. Of course, we can only fix them when they come up for renewal. This ratio should increase further, but it will be much slower going forward.
Okay. The second question on financing costs. Could you provide any indication from current point of view, especially when it comes to the maturities in this year? I would guess on new financing, you would focus on bank financing again, or is also other type of-
Yes.
refinancing, promissory notes, et cetera, or is this market completely closed at the moment?
No, it's the market isn't completely closed. I mean, we've done a small transaction there recently, but we will indeed, as you say, we will focus on classic bank financing. That share will increase going forward through the end.
Could you give a margin or overall financing costs for current contracts?
Well, the current contracts are between sort of 1.3%-1.8%, depending on the maturity. When we refinance sort of senior secured debt with typical banks. The promissory notes would be between 2% and 2.5%, probably.
The 1.3%-1.8%, this is on a five- or six-year term, or?
Yeah, this is sort of 1.3% is more like five and the 1.8% more like 10 years. I mean
Well, way bigger because I'm asking because the 10-year Euro is currently at 1.7%, so there's virtually no margin for the bank. I'm a bit surprised.
Yeah.
that you are telling us.
I'm not saying that I will provide such a loan at that rate. You know, there are players in Germany who sort of look at, you know, have their-
Mark Attack from Polante. Please go ahead.
Yes. Hello. Can you hear me?
Yeah.
Okay. Good morning. Thank you for the presentation. At this moment, the LTV level is quite high. How comfortable are you with that? Will you stick to it, or is there maybe a target to bring it down?
Yes. Our target is 50%, so there is a target to bring it from 53%- 50%. We are not concerned about this because, I mean, really, you know, in theory, the cash flows of the portfolio would be able to carry much higher debt. To be clear, we do want to reduce it from here. How is that going to happen? Well, mainly via the sales, because we've had sales that we've notarized last year, most of them have not closed yet, and therefore on our balance sheet, we still have the properties and the debt. Once this transaction closes, the LTV will fall significantly.
Okay. Thank you.
The pro forma LTV is already lower, basically.
Okay. Thank you. A few months ago, you told me that German authorities were working quite slow because of COVID problems, et cetera. Are they now working again on normal speed? Will that say that your investment and your sales will now be finalized quicker?
A bit better, but not significantly. I mean, the processes are still reasonably slow, but not as slow anymore as they were. Like, for instance, the sales that we notarized in September last year, they have still not closed, and we are May next year. However, what we notarized in November last year has closed in February this year. It depends a little bit and of course, the more parties that are involved in a transaction, kind of, the longer it takes, but it is getting a little.
Thank you. Then a last question. The stock price, like, a lot of other stocks also was under pressure. Was this more under pressure in South Africa than in Germany or not?
No, I think the reality is that, you know, because the shares are interchangeable between South Africa and Europe, you know, if there's a divergence in stock price, it will be very short-lived. But we certainly haven't seen any specific sales pressure out of South Africa, if that's your question.
Okay. Thank you.
As there are no further questions in the queue at this time, I would like to turn the call back for any additional closing remarks.
Thank you. Well, all I have to say is thanks for your time and interest. If there's any more questions, do let us know. We're around and happy to help. If not, we'll speak in three months time. Thanks a lot for your time.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.