Deutsche EuroShop AG (DEQ) Earnings Call Transcript

Good day, everyone, and thank you for joining the Quarterly Statement Nine Month 2024 Conference Call. This is Sergen speaking — I'll be your conference operator today. Please be aware that everyone attending is in listen-only mode, and this call is currently being recorded. After the presentation, we'll move into a Q&A session. If you'd like to ask a question, you can register at any point by pressing star and one on your phone. Should you need operator assistance, just press star and zero. Recording this conference for publication or broadcast is not permitted. At this point, I'm happy to turn things over to Hans-Peter Kneip. Please go ahead.

Thanks, Sergen. Good morning, everyone. Hans-Peter Kneip here. Now that the first nine months of 2024 are behind us, I'm very pleased to be on this conference call with you, sharing the results we recorded as of the 30th of September along with the latest developments at our company, and as usual, I'll gladly take any questions you might have once my brief presentation is finished. On behalf of the Management Board and the whole Deutsche EuroShop team, thank you for making the time and for the ongoing interest you show in Deutsche EuroShop. Before we begin, a quick thank-you for the outstanding work done by my Deutsche EuroShop team. It is thanks to them that, after an absence of two years, we rejoined the SDAX on the 23rd of September and are once again among the largest listed companies on the Frankfurt Stock Exchange. Being re-included will help us spark interest in our share going forward and bring our strategic and operational progress into the spotlight. But let me begin now with an update on our business activities, on Slide two and Slide three. Against the first nine months of 2023, footfall has risen modestly by 0.2%, and our tenants posted a sales increase of 1.9%.

I'll share more specifics with you shortly, including a breakdown by sector. Revenue declined 1.6% to EUR 200 million, and FFO fell 7.7% to EUR 119.7 million, while EBIT rose 4.7% to EUR 162.8 million. As you're aware, last year included significant one-off effects that affected these numbers both positively and negatively. I'm happy to say that the majority of our bigger investment projects across various sites were finished on schedule and within budget, and I'll provide some specifics on those in a bit. On the financing side, we remain in solid shape even following the most recent financing steps and dividend distributions, with an LTV of 39.9% and cash of EUR 198.7 million. As you know, we distributed a dividend of EUR 2.60 per share, totaling EUR 198.8 million, in early September this year. Our funding position is stable, and every financing for this year has been wrapped up. The next loan matures in 2025, and larger financings won't arise until 2026 onward. Our share buyback program is completely on track, and we've repurchased roughly 640,000 shares so far. The program will probably continue through the end of the year.

Turning to Slide 4, let's examine our centers more closely. During Q3, footfall declined 1.6%, while tenant turnover rose 1.9% versus the same period a year earlier. As I noted earlier, across the first nine months of this year, footfall is up 0.2% and turnover up 1.9%. Consumer spending in our main market, Germany, in particular, is still marked by economic uncertainty. The war in Ukraine, the conflict in the Middle East and, naturally, inflation all remain factors here. The U.S. election outcome and the break-up of Germany's governing coalition are certainly influencing how consumers behave at present as well. Early new elections in Germany in February, though, will hopefully bring back stability and lift retail and consumer confidence. Either way, we and our tenants are approaching the Christmas business with optimism. The busiest shopping period gets underway within the next few days. As previously announced, I'd now like to look more closely at the individual retail sectors and how they have developed, on Slide 5. Many of you will recall that we have presented this slide before, and we felt it made sense to expand on it.

What this overview illustrates is how each sector evolved, along with its respective portion of our rental income and floor space, plus the occupancy cost ratio. Against the first nine months of the prior year, tenants in our German portfolio within health and beauty turned in a solid performance, posting a 6.2% sales gain. Drugstores especially are the key engine in this area and keep extending their success story. Shoes and leather goods likewise recorded a decent rise, and so did general retail. That segment covers bookstores, toys, household goods, and jewelry, along with one department store. Fashion textiles, our biggest tenant group, accounting for nearly 55% of retail space, managed an average of plus 2.4%. Electronics retailers fell 3.7%, while services and food catering likewise declined. On the whole, our German tenants lifted like-for-like sales 2.1% during the year's first nine months versus the same stretch a year earlier, whereas sales for our tenants abroad dropped 1.3%. That foreign decline needs to be viewed in context, though, since overseas turnover had grown above average in the prior year. All told, we recorded a 1.3% gain throughout our entire portfolio.

To put that in absolute terms, sales at our tenants came in 1.9% higher. And lastly, this page indicates that the average occupancy cost ratio — known as the OCR, meaning the proportion of rents plus ancillary costs that our tenants have to carry against the revenues they bring in — sits at just 11.4%, a healthy level that lets our tenants succeed in our shopping centers over the long term, and it demonstrates that our portfolio is well balanced and not over-rented. Let's move on now to the financials, looking at revenues on Slide six. Those came in a bit lower, at EUR 200 million, versus EUR 203.2 million during the first nine months of 2023. That works out to a decline of 1.6%, essentially stemming from temporary vacancies caused by current investments in the portfolio, reduced turnover rents and settlement payments, along with a few instances of lower follow-on rents. The split between Germany and abroad has shifted a little toward foreign countries, where our share now stands at 22%. Turning to EBIT, let's take a look at Slide seven. EBIT rose 4.7% to reach EUR 162.8 million. The key factor behind this was the effect on earnings from the 2023 change in the scope of consolidation, showing up in other operating income and other operating expenses.

Also, operating and administrative costs for property went down thanks to higher maintenance expenses in the prior year period and cost optimizations in our shopping center marketing. Write-downs of receivables have fallen further as well. The bridge at the bottom of the page gives you a detailed transition. On Slide eight, you can see that EBT adjusted for the valuation rose from EUR 122.2 million to EUR 125 million, a plus of 2.3%. The EBIT increase just outlined was partly offset by a EUR 4.5 million lower financial result, mainly due to the recent loan increases. Please follow me now to page nine and to the development of the FFO. FFO fell from EUR 129.7 million to now EUR 119.7 million, or on a per-share basis, from 1.74 to 1.57, essentially because of the extraordinary income in 2023 from additional ancillary cost payments and the lower financial result. I'm now coming to the balance sheet on page 10. Total assets amount to EUR 4.32 billion. This is a change of minus EUR 140.8 million compared with the reporting date end of 2023. Our consolidated liquidity as of 30th September 2024 stands at EUR 198.7 million.

That comes to a negative figure of EUR 137.4 million. Do bear in mind that during January and September of this year, we distributed dividends totaling EUR 346.6 million. Equity overall, minorities included, went down by EUR 274.8 million. At 30 September 2024, our current and non-current financial liabilities were EUR 1.81 billion, an increase of EUR 134.9 million compared with the close of 2023, driven mainly by loan increases amounting to EUR 148.3 million. Non-current deferred tax liabilities rose by EUR 10.8 million to EUR 342.8 million. The equity ratio fell to 48.7%, and consolidated LTV is now 39.9%. The EPRA LTV, calculated proportionally based on the group's share in all assets — essentially a look-through basis — comes in at 42%. Turning to page 11, I'll now provide some updated details regarding our financing structure. As the balance sheet just illustrated, total debt is EUR 1.81 billion. As of 30 September, our average interest rate was a low 2.6%, with weighted maturity at a comfortable 5.4 years. Following the recent loan increases and dividend payments, we are still well positioned, with strong investment-grade credit metrics: an LTV of 39.9%, net debt to EBITDA of 7.3 times, and interest coverage of 5.2 times.

Over on the right-hand side, you can see more detail on Deutsche EuroShop's long-term diversified loan maturity profile, and I'm glad to say it again — larger refinancings don't come up until 2026 onwards. Now some portfolio news on Slide 12. Let's begin with good news out of Viernheim, home to the Rhein-Neckar-Zentrum. A new and modern freestanding L'Osteria has been offering visitors a highlight of Italian cuisine since February. Beyond that, three exciting tenants moved in around the middle of the year into the former Bauhaus building, which was completely renovated, delivering plenty of what we call retailtainment. A high-quality trampoline park and a successful cycling store are each an attraction. An interactive indoor entertainment concept featuring a dark light mini-golf course and an escape room experience is set to open in the coming weeks. Just a few meters away, there's an indoor skydiving center that is running very successfully. All of these tenants will positively benefit from each other and give the whole center a further boost. On Slide 13 and Slide 14, we turn to our Stadt-Galerie in Hameln and the A10 Center in Wildau near Berlin. In Hameln, two important tenants opened a few days ago following extensive construction works.

Netto, the discount grocery chain under Edeka Group, is at last restoring food offerings to the Stadt-Galerie. Adjacent to it, Action—a highly profitable non-food discounter—has launched its store. Customers queued in long lines down in the center's lower level, and the debut went well. A Real supermarket had formerly operated in those two units. At the A10 Center, we likewise marked two openings that went successfully. TK Maxx, the familiar off-price brand, launched in September, and MediaMarkt came next in October. Here too, both units had once belonged to a former Real supermarket, which Kaufland had taken over a while back. All 4 tenants report strong satisfaction with footfall and revenue, and we hold a firm belief that the new leasing concepts will deliver strategic, lasting gains to both centers. Moving now to page 15. As you're aware, we released fresh investment plans for the Main-Taunus-Zentrum—one of Germany's biggest shopping centers by both size and sales, and among the prized assets in our portfolio. A new standout feature is presently being introduced at the MTZ, lending it a vibrant, urban character through a diverse, top-quality dining and food lineup. Construction is underway on new standalone restaurant structures, a number of them featuring rooftop terraces, others with open-air terraces, alongside appealing landscaped outdoor spaces and refined architecture.

The new Food Garden is taking shape across roughly 7,000 square meters right in the middle of the shopping center, replacing a former department store building, and it's being built to very high sustainability standards. We're investing around EUR 28 million in it. The Food Garden is fully pre-let with high-quality tenants, and the project is still on schedule for its grand opening, which is planned for spring 2025 — as the pictures probably show you — and we really can't wait for that event. Last, let me turn to Slide 16, the forecast and outlook. Having completed the first nine months, we can now refine our forecast and nudge up the key figures slightly for EBIT, EBT, and FFO. For 2024, we now anticipate revenue of between EUR 268 million and EUR 271 million, versus between EUR 268 million and EUR 274 million before. Earnings before interest and taxes of between EUR 207 million and EUR 211 million, versus between EUR 204 million and EUR 210 million before. Earnings before taxes, excluding measurement gains, come to a loss of between EUR 156 million and EUR 160 million, versus between EUR 149 million and EUR 155 million before. And lastly, funds from operations of between EUR 151 million and EUR 155 million, versus between EUR 146 million and EUR 152 million before.

Ladies and gentlemen, we anticipate another strong showing through the remainder of the year. Although conditions in retail still leave something to be desired given economic uncertainty, we see solid grounds for optimism regarding the rest of 2024 and the year ahead, 2025. In our view, interesting opportunities lie before the retail real estate sector and our shopping centers, fueled by softening inflation and falling interest rate trends. Beyond that, real wages have risen considerably of late, which ought to bolster consumption going forward too. There may additionally be reason to hope for political stabilization and resolutions to geopolitical crises, which would once again improve conditions for consumers and retailers. And lastly, shopping centers have demonstrated their right to exist and their enduring place in a world of online retailing — or maybe precisely because of it. We are not the only ones who view this outlook favorably. First, that positive expectation shows up in the bank and debt capital market, where sizable sums of capital moved into shopping center companies during 2024. Second, the transaction market for shopping centers also appears to be gradually recovering, with a handful of deals concluded over the past few months, among them a benchmark transaction in Munich.

Analyst firms, too, are viewing this sector with growing optimism. So you can count on us to keep putting capital into our shopping centers in a way that is targeted, strategic, and sustainable, so that we generate value for our shareholders going forward. Ladies and gentlemen, given how positively our company has developed, we can reflect on a first nine months of 2024 that were encouraging and came in slightly above what we had expected. We trust that this pleases you as much as it does us, and we look forward to your ongoing involvement and enthusiasm for our company. That brings my presentation to a close. Thank you for listening. I'm happy to take your questions now. Sergen, back to you.

Ladies and gentlemen, the question and answer session is starting now. If you'd like to ask something, just press star followed by one on your phone. A tone will sound to let you know you're in the queue. Should you want to drop out of the question queue, press star and then two. Those of you on the phone, please turn off loudspeaker mode when you ask your question. Anyone with a question can press star and one right now, and our first question is coming from Andreas Pläsier of Warburg Research. Please go ahead.

Good morning, Mr. Kneip, and thank you for the presentation. I have a couple of questions. First, could you go into more detail about your dividend policy? There's a bigger payout in September—what are your plans regarding the payout ratio over the next few years? My second question concerns refinancing. I believe you have a sizable refinancing coming up in 2026, so that's still a ways off, but perhaps you could give some sense of what your financing costs would look like if you had to refinance it at this point—that would be helpful.

Thanks, Andreas, for those questions. First, regarding our dividend policy, you know we haven't published a specific payout ratio. As we've mentioned, our goal is more intermediate — it's more our aim to raise our leverage, or our LTV, toward a level that's more in line with market standards. As you know, and you probably know this better than we do, most companies in the market right now sit at around between 40% and 45%. And now, with the loan increases we've completed, and also the dividend payments that result from this, we're at roughly 40% LTV at present. So therefore, at the moment, we're aiming for a 40%-45% LTV ratio. It's not excluded that this could go higher depending on how the market evolves, but for the moment, that's more the distinctive factor for our dividends up until now. So therefore, until this sustainable LTV ratio is reached, you can expect adequately higher dividend payments. We may think about, when this kind of refinancing measures are complete, more sustainable dividend payments, but for the moment, I think it's too early for that. So therefore, there will not be a formal payout ratio also going forward. Regarding your second question on the refinancing, so indeed, we have kind of a very small refinancing on 2025 ahead.

There's additional debt coming due in 2026. And in fact, we've already kicked off the process for extending both the 2024 loan and the 2026 loan early. So we feel good about our ability to push those out fairly early and to clear those maturities well ahead of time. On top of that, financing costs have dropped quite a bit, particularly when it comes to interest rates — we're now looking at a range of roughly 4 to 4.5%, depending on the quality and the setup of the given shopping center. So because of that, we're optimistic that we'll get those maturities extended ahead of schedule and at sensible financing costs.