Deutsche EuroShop AG (DEQ) Earnings Call Transcript

Appreciating that, Valentina. Hello everybody, and welcome from Hamburg. This is Hans-Peter Kneip speaking. Glad to have you on today's conference call. I'll take you through how Deutsche EuroShop performed across the opening nine months of 2026, along with the latest news. After this brief presentation, I'll be happy to answer your questions; the entire team thanks you for dialing in and for the continued interest you show in our company. Let me begin with the main developments covered on slide two. During the first three quarters of 2026, visitor numbers ran 1.5% below the equivalent period a year earlier, whereas sales recorded by our tenants rose 1.9%. I'll return to those numbers when I go through them sector by sector. Demand from tenants remains quite strong across our portfolio, which stood at 95.6% occupancy. Those healthy occupancy levels are also a reflection of the upgrades and investments we keep making in our shopping centers. Revenue rose 2.5% to EUR 202.5 million, supported by increased rents and larger settlement payments from tenants. EBIT climbed 4.3% to EUR 162.1 million, helped by higher revenues along with a one-off release of provisions for real estate transfer tax. FFO declined 4.6% to EUR 103.8 million, driven by greater financing costs and by the fact that the one-off item I just referred to is not included in FFO. Because our results matched what we had anticipated, helped by favorable one-off effects, we increased our guidance for fiscal 2026 last week. I'll cover that in greater depth when I wrap up my remarks. Turning to slide three, our funding situation is still solid following the most recent financing steps and the dividend distribution. Our LTV stands at 40.9%, and we have EUR 399.3 million in cash on hand, giving us room for additional investments; in June, we distributed a dividend of EUR 1 per share, amounting to EUR 75.7 million overall. Every financing action planned for 2026 has now been finished, and nothing sizable comes due until 2028; turning to slide four, we examine our centers more closely. Over recent years, both retail turnover and footfall have on average gone up. Although shoppers are presently holding back on spending, retail turnover has moved in a positive direction across recent quarters, while footfall has been flat or edged slightly lower. Across the opening nine months of 2026 combined, footfall came in at minus 1.5% and retail sales at plus 1.9%. The consumer backdrop stays difficult given political uncertainty and geopolitical tensions. Meanwhile, consumer sentiment is improving moderately and tenant sales are higher, especially in our international markets. German shoppers are still holding back, and retail sales there keep trailing a number of other European markets. So if sentiment in Germany picks up, there may be room for a catch-up effect. Still, it is hard to gauge what today's geopolitical events will mean for inflation and interest rates. Given that backdrop, we and our tenants are heading into the crucial Christmas trading season with cautious optimism. The peak shopping days begin in the next few days; on slide five, we can look more closely at how each retail category did across our German centers. That chart lays out every sector, how sales developed, what portion of total tenant sales and retail space it represents, and its occupancy cost ratio; on a like-for-like basis, sales across our German centers rose 0.5% during the first nine months of 2026. Electronics posted the strongest growth, with sales climbing 8.6%. Food catering came next, up 3.3%, while food supermarkets and discounters advanced 1.8%, and health and beauty gained 1.4%. In contrast, sales in the sports sector fell 6.3%, and services dropped 6.2%. The services category covers things such as travel agencies, dry cleaners, and hairdressers. Shoes and leather goods were down 4.1%, general retail declined 2%, and fashion textiles slipped 1.4%. Fashion textiles are still our biggest retail sector, representing roughly 26% of tenant sales and 40% of retail space in our German centers. Beyond Germany, like-for-like sales rose 1.4%. That produced like-for-like growth of 0.7% over the whole portfolio. In absolute terms, tenant sales across the portfolio were up 1.9%, as I mentioned earlier. The average occupancy cost ratio in our German centers came in at 10.8%, a level we still consider healthy and sustainable for our tenants. Let us move to slide six now and go through our financial results for the first nine months of 2026. Revenues grew 2.5% year-on-year, from EUR 197.4 million to EUR 202.5 million. The improvement was driven primarily by rental growth of 1.7%, along with increased settlement payments from tenants, which came in EUR 1.9 million above the same period last year. On a look-through basis across our portfolio, 78% of revenues were generated by our domestic portfolio, while 22% came from international properties. Moving to slide seven and EBIT, we saw a 4.3% increase, taking it from EUR 155.4 million to EUR 162.1 million. Revenue growth added a positive contribution of approximately EUR 5.1 million. Meanwhile, property operating and administrative costs increased by roughly EUR 1.1 million, mainly reflecting higher non-recoverable costs related to replacing technical equipment. In addition, allowances and write-offs of receivables were up by about EUR 1.1 million. Other operating income and expenses contributed significantly on the positive side, mainly reflecting a one-off gain of EUR 4.1 million from the release of provisions for real estate transfer tax. All in all, that produced an EBIT increase of approximately EUR 6.7 million versus the prior year period. Let us carry on to slide eight with the financial result excluding valuation effects. The financial result declined by EUR 5.3 million, from -EUR 47.9 million to -EUR 53.2 million. The biggest factor was a EUR 9.7 million rise in interest expenses, which came from interest expense on our inaugural green bond plus higher rates on follow-on financing. Higher rates on our cash and cash equivalents drove interest income up to EUR 4.5 million from EUR 3.3 million a year earlier, which partly offset that negative effect. In addition, the prior year period contained EUR 2.7 million of other financial expenses related to terminating interest rate swaps early as part of realigning our financing structure. No such expenses arose in the current period. Our operating at-equity result was broadly stable at approximately EUR 6.6 million. Turning to slide nine, EBT excluding valuation came in slightly above the previous year. EBT increased 1.3%, moving from EUR 107.5 million to EUR 108.9 million. A gain of roughly EUR 1.4 million came from other operating income, mainly through reversing provisions tied to real estate transfer tax, and that gain outweighed the weaker financial result. EBIT, as I noted before, got a boost from a one-time release of EUR 4.1 million in provisions for real estate transfer tax. Meanwhile, EBT was pressured by increased interest expenses, though interest earned on short-term bank deposits offered partial offset. As a result, our EBT excluding valuation finished a bit higher than the prior year's figure.

Moving on to slide 10 now, where we look at the consolidated result. That consolidated result went up by EUR 5.3 million, which is 5.6%, climbing from EUR 93.5 million to EUR 98.8 million. This development came about through three main factors. First, EBT excluding valuation rose by roughly EUR 1.4 million, and that includes the one-off effects I referred to earlier. Second, the valuation result showed an improvement of about EUR 1.7 million, going from EUR 4.5 million to EUR 6.2 million. Third, taxes fell by roughly EUR 2.2 million, largely a reflection of lower deferred tax expenses. Consequently, earnings per share rose from EUR 1.23 to EUR 1.30. Now let's look at funds from operations on slide 11. FFO came in at EUR 103.8 million, down 4.6% from EUR 108.8 million, mainly due to increased financing costs. FFO per share decreased to EUR 1.37 from EUR 1.44. At first glance, that decline may seem counterintuitive, given that both EBIT and EBT rose. Since FFO excludes one-time effects, among other things, the EUR 4.1 million release of real estate transfer tax provisions doesn't provide the same lift to FFO. As a result, the gain in reported earnings doesn't flow straight through into higher funds from operations. Turning to slide 12 for the balance sheet: our financial footing remains strong and robust. At the end of September, total assets stood at approximately EUR 4.6 billion, slightly higher than where they were at year-end 2025. The increase in non-current assets is largely attributable to recognized construction measures amounting to EUR 15.4 million, along with unrealized fair value movements on the investment properties. Our equity ratio rose modestly, from 47.1% at year-end to 47.4% by the close of September. At the same time, our loan-to-value ratio showed improvement, going from 41.3% to 40.9%, while EPRA LTV declined from 43.4% to 43%. Finally, we continue to hold a strong liquidity position. As of September 30, 2026, cash and cash equivalents totaled EUR 399.3 million. Turning to slide 13, we'll take a closer look at the makeup of our financing. Our funding continues to be diversified and weighted toward longer maturities. At September's close, financial liabilities carried an average interest rate of 3.4%, and weighted average maturity stood at 4.5 years. Across the years ahead, our maturity schedule is evenly balanced and rests on a wide financing base. Today we work with 18 long-term financing partners, and we have well-established access to capital markets. Our main credit metrics remain at a healthy investment-grade level: secured LTV of 28%, an interest coverage ratio of 3.7x, and net debt to EBITDA of 7.6x. Overall, these numbers demonstrate how solid our funding position is and how diversified our financing structure has become. Last, turning to slide 14, I want to cover our forecast and outlook for the whole of 2026. Since the business is progressing as we anticipated and is gaining from favorable extraordinary effects, we are revising our guidance for the present financial year. Higher rents and settlement payments received from tenants are giving our operating results a boost. We further expect that operating costs across the full year will land slightly under our earlier assumption. Beyond that, higher interest income plus the reversal of provisions tied to the real estate transfer tax have also helped. Against that background, we're narrowing revenue guidance toward the top of the range while raising our outlook for EBIT, EBT excluding valuation, and FFO. Revenue should now come in at EUR 272 million to EUR 277 million, compared with the previous EUR 269 million-EUR 277 million range. On EBIT, we now expect EUR 220 million to EUR 225 million, up from the earlier EUR 211 million-EUR 219 million range. For EBT, leaving out measurement gains and losses, our guidance now sits at EUR 149 million to EUR 154 million, up from the prior EUR 134 million-EUR 142 million. Turning to FFO, the forecast is now EUR 144 million to EUR 149 million, an increase over the previous EUR 134 million-EUR 142 million range. Using the current share count, that works out to expected FFO per share of EUR 1.91 to EUR 1.97. Worth noting is that the majority of this guidance raise comes from favorable extraordinary effects. In total, we expect those to contribute additional earnings of about EUR 10 million. So this updated guidance really shouldn't be treated as a fresh baseline for the coming financial years. Even so, we believe Deutsche EuroShop is in a strong position for the rest of this year and for the years ahead. Our shopping center portfolio is leading, well-maintained, and built to last, and it's backed by a solid capital structure and financing position — so we're ready to seize the opportunities in a changing market and to deliver sustainable value for our shareholders. That concludes my presentation. Ladies and gentlemen, thank you for your continued trust in Deutsche EuroShop, and thanks for listening. I'm now glad to take your questions. Valentina, back to you. Thank you all for being here and for your interest, ladies and gentlemen. Should any questions come up, our IR team is always available to help. Everyone at Deutsche EuroShop sends their wishes for a joyful and calm close to the year. We look forward to welcoming you back before long—whether at an investor industry event or in one of our shopping centers. Warm regards and best wishes from Hamburg.

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