DEMIRE Deutsche Mittelstand Real Estate AG (DMRE) Earnings Call Transcript

Good morning, everyone, and welcome to the DEMIRE AG's H1 2026 Earnings Call. My name is Maxi Goodman from NuWays, and I'll be moderating today's call. We will begin with a presentation by the management, followed by a Q&A session. [Operator Instructions] And with that, let's get started. Mr. Ruffel, the floor is yours.

Ladies and gentlemen, good morning, everyone. Welcome to our results presentation for the first half of 2026. Thank you for dialing in. Trust you're all well. With me here is Tim Bruckner, DEMIRE's CFO; and Julius Stinauer, our Head of Investor Relations. Before we jump into the presentation and the details, let me start with a few general comments. Overall, the first 6 months were marked by the consistent execution of our strategic priorities, which are namely actively managing our portfolio, preserving operational stability and further strengthening our financial position. This, as we all know, against a still very challenging economic background. Against this backdrop, we achieved important milestones during the first half of the year and continue to make solid progress in executing our strategy. Our results reflect both the ongoing transformation of the portfolio and the disciplined approach we have taken to capital allocation and asset management. With that, let's jump straight into the key highlights and go to the executive summary. Top left-hand side, operational performance basically reflects 2 opposing effects. Rental income declined compared to the previous year, amounted to EUR 23 million, representing a decrease of around 17% year-on-year. However, this is, of course, a logical consequence of our asset disposal strategy to strengthen our balance sheet. As a result of the lower rental income, you see on the right top hand side, FFO I amounted to EUR 2 million compared to EUR 5 million in the prior year period. Looking at the transactions, that's the middle section. We successfully completed the sale of 1 asset in Flensburg and a small building on our bond property, generating total proceeds of around about EUR 17.5 million. In addition, we signed further transactions in June and July with expected proceeds of approximately EUR 40 million. Closing for these 2 assets, I think it was, is expected to happen in the third quarter of this year. Then on the right-hand side, in terms of processes, beyond our operational activities, we also continue to advance important strategic initiatives. We are supporting the process initiated by our main shareholders regarding the potential sale of their shareholdings. At the same time, we further strengthened our ESG reporting by publishing our fifth EPRA sustainability report. And then finally, if you look at the updated guidance, bottom of the page, given the visibility we have gained over the remainder of the year, we are updating the full year guidance. We now expect rental income to be between EUR 42.5 million and EUR 44.5 million compared with the previous guidance of EUR 41.5 million to EUR 43.5 million. At the same time, we are raising our FFO I guidance to a range of EUR 0.5 million to EUR 2.5 million compared with the previous expectation of around minus EUR 1 million to plus EUR 1 million. I think that was the executive summary, and let's now talk about the portfolio performance. Page 7. As you can see on the left-hand side, annualized contractual rent stood at EUR 46 million at the end of the first half compared to EUR 56.4 million a year earlier. As explained before, this is mainly the result of the smaller asset base following the disposals over the last 12 months. In addition, the somewhat higher vacancy level also contributed to the decline. And on the right-hand side, if you look at the letting performance, the same dynamic is visible. During the first half of the year, we signed leases covering around 18,000 square meters compared with approximately 40,000 square meters in the prior year period. Again, this reduction, I think, has to be viewed in the context of our smaller portfolio with fewer assets under management, potential for new lettings and lease prolongations is naturally declining. Also, if you look at the 40,000 square meters in the previous year, this had a special effect of the conversion of the [ North ] lease included. So I think on a like-for-like basis, the gap would definitely look smaller if you take that into consideration. And if you jump to the next one, Julius. Key portfolio metrics, occupancy and lease maturity, I would say, developed in line with the underlying changes in the portfolio. Left-hand side, the EPRA vacancy rate increased from 16.4% at year-end to 21.5% at the end of the first half. This is largely caused by 2 effects. First, 2 properties became fully vacant at the beginning of the year, which was the properties in Schwerin and Neumunster. Second, we completed the disposal of the asset in Flensburg and that asset has been, I think, almost fully let. Of course, the main priority, what I was just describing in terms of the 2 vacant properties, Schwerin and Neumunster, is to relet these 2 vacant assets. And I would say we have already some promising leads in this respect. And then on the right-hand side, at the same time, the weighted average lease have remained at a solid level and even improved slightly from 4.7 to 5 years. So overall, I would say, while the vacancy increased due to the points I just mentioned before, our lease maturity profile remains stable and appropriate for a portfolio with a significant office rating. And on that note, Tim, if we jump to the financial highlights.

Thank you, Dirk. I think we show in the first half of 2026, a pretty clean P&L in the first half of 2025. If you look at it, we had significant valuation effects and impairment effects mainly because of the -- at the timeline situation that is now all gone. So we, as Dirk said, we show some declining rental income because of the before mentioned disposals, but at the same time, we do show now and that I think was suggested in the previous calls, a slight improvement of our operating margin as seen in the profit loss from the rental of real estate. At least we moved up from about 67% to now 68%. There is still a long way to go, but I think the stabilization is good. And as Dirk said, there is some potential in the leasing pipeline, and we are pretty positive that we are performing in line with our own expectations here. We had no relevant valuation effects. We have now relevant impairment effects in the first half of this year and also due to the extension of the [ CLO ] structure until the end of 2027. We show a pretty clean P&L with an EBIT -- positive EBIT of EUR 8 million. The financial expenses slightly increased because of the interest on the shareholder loan, and that in total then translates to the before mentioned funds from operations of EUR 2 million, which is slightly ahead of our planning, and that also caused the slight upward lift of the guidance. Let us have a brief look on the balance sheet. Obviously, there's also not much happening here. There's a small balance sheet contradiction due to the asset sales and the small negative result of the period. As Dirk already said, we expect some closings of 2 transactions in the third quarter of this year, and this will then have a bit of an effect on the balance sheet, of course, as well as there's some mortgage loans associated with them that will then be repaid. We are in line with the disposals in our business plan, and that will also help to cover our liquidity needs going forward for the next 5 months of this year and also 2027. And it will, of course, also help to reach our repayment targets and refinancing targets going forward. One last slide on the financials. We saw a slight increase of the net LTV. We expect that to stabilize or be slightly reduced in the third quarter of the year and we were also able to show a slight decrease on the average cost of debt as we renegotiated along with one bank that we partially repaid before, and we're able to reach lower interest expense here. I think in total, we show a very stable first half. There is some upward potential in line of lettings, and we are quite well on track with disposals, I think is a pretty good result in the difficult current commercial real estate market.

Thanks, Tim. I think we can open the call for questions. I think Tim already summarized what the overall message is. I think one of the most important things is that we successfully executed the disposal strategy this year with the expected closings in the third quarter for 2 remaining deals. And that obviously helps our balance sheet. I think that's the main message. And going forward, I would say the main focus is obviously on improving the occupancy level. The vacancy in the 2 assets obviously hurt us. But as I mentioned before, we have some, I would say, very promising needs, especially for one of the assets. So let's see how that turns out until the end of the year.

[Operator Instructions] Let's start with the first question from Philipp Sennewald.

First question is on the new guidance, the EUR 40 million proceeds you mentioned. Is this all that is embedded there? Or is there further disposals embedded in the guidance? And also which vacancy level do you see towards year end that brought you to this new guidance?

Tim, do you want to cover the first one?

Yes. We have one further relevant disposal in our planning for the second half of this year, but we are currently evaluating the options, whether we refinance the asset or we sell it, and we don't major impact on this disposal anyhow at least not until year-end. And in terms of vacancy level, maybe back to you, Dirk.

Yes. I think, I mean, looking at the upcoming renewals, I would say there is nothing major in terms of better prices to be expected until the end of the year. We have a healthy lease pipeline. So I would not expect any bad surprises in the next 6 months.

But also no improvement. I'm hearing out of that.

Well, no, I mentioned -- I mean, as I said, we have a healthy leasing pipeline, I would say, right, with realistic, I would say, leases there. Yes, I would call it at an advanced stage. There are also some bigger leases there. Obviously, I can't talk about it before they are signed, and we have to see whether the economics of those leases work. But the pipeline looks actually quite promising. So there might be an improvement until the end of the year.