Deutsche EuroShop AG (DEQ) Earnings Call Transcript

Good day, everyone, and thank you for joining the conference call on full year 2024 financial results. This is Sergen speaking, your Chorus Call operator. <<operator_script>> Please note that this call is being recorded. <<operator_script>> Recording this conference for publication or broadcast is not permitted. At this point, I'm pleased to introduce Hans-Peter Kneip. You may begin.

Thanks, Sergen. Good morning, everyone — and good morning from Hamburg. Hans-Peter Kneip here. It's a pleasure to have you join today's conference call, where I'll walk you through our financial results for the 2024 fiscal year and bring you up to date on what's been happening at the company recently. As you've probably noticed, we've changed our financial calendar for this year. What we wanted was to deliver audited figures, together with a full financial report, at an earlier point in time. In past years, we've usually released preliminary figures around this point in the year. Under the revised schedule for this year, we're dropping the sole exception we make under the German Corporate Governance Code — namely, reporting our results within 90 days of the financial year-end rather than 120 days. Given the particular structure of our company, the fairly small size of our team, and possible extra reporting obligations down the road, that's an ambitious goal, but it's one we're confident we can meet. Thanks for spending time with us this morning and for your ongoing interest in Deutsche EuroShop. The title of our presentation and financial report already includes some images from our award-winning annual report, which comes out in one month — on 29th of April, to be exact.

With that motto—"the small life"—it will take you on an engaging journey through the everyday world of our 21 shopping centers. Let me use this moment to repeat that our complete financial report has been accessible on our website since today. Above all, I want to recognize the exceptional work done by the Deutsche EuroShop team along with our asset manager and partner, ECE. Delivering these results in a challenging market is far from guaranteed. They stem from the dedicated efforts of very strong teams, both here in Hamburg and locally across our 21 shopping centers. Now let's continue and go straight into our financial results. Once my presentation is finished, I'll gladly take any questions you might have. We'll begin with an update on our business activities, found on Slides 2 and 3. On the whole, we once more recorded a favorable trend in operational business, with results a touch above the full-year forecast, which had already been lifted thanks to the 9-month figures. Relative to 2023, footfall and our tenants' retail sales rose by 0.6% and 2.5%, respectively. Revenue declined slightly, by 0.7%, to EUR 271.4 million, while EBIT grew by 1.7% to EUR 216.3 million, and FFO fell by 8.3%, now amounting to EUR 157.1 million.

As you're aware from presentations we've given before, temporary vacancies stemming from investment measures have affected these figures, along with one-off effects from the prior year — in particular, the acquisition of additional shopping center shares and the recovery of ancillary cost receivables dating back to the coronavirus period. Once again, the value of our real estate portfolio has stayed broadly stable, at roughly EUR 4.1 billion, matching the level seen at the most recent external valuation. I'm also glad to say portfolio occupancy has risen further, now reaching 95.4%, since most of our bigger investment projects across various locations came in on schedule and within budget. I'll go into some specifics on those a bit later. As Slide 3 shows, for financial year 2024 we will put forward a dividend of EUR 1 per share at the AGM, which is scheduled for the 27th of June. On the financing side, we sit in a very strong position even following the most recent financing measures and dividend payments, with an LTV of 39.2% and cash of EUR 212.4 million. As you know, we paid out dividends totaling EUR 346.6 million across January and September 2024. Our funding position is still solid, and every financing needed for this year has already been successfully arranged.

Looking ahead, the only refinancing needs that will come up are those from June 2026 onward. Also, we finished our share buyback program by the close of 2024. All told, roughly 720,000 shares were bought back, which came to a volume of EUR 15 million. Turning to Slide 4, we examine how our shopping centers performed in more detail. Across the past 3 years, retail turnover and footfall have kept developing positively. During Q4 2024, footfall went up 1.7% year-on-year, and our tenants' turnover climbed 3.9% versus the same quarter a year earlier. As I noted earlier, for the whole of 2024 we recorded a gain of 0.6% in footfall and 2.5% in retail sales. Inflation cooled considerably relative to prior years and came nearer to the 2% target in 2024. Interest rates fell in 2024, and in spite of continuing geopolitical conflicts and persistent uncertainty, private consumption in Germany rose slightly. Right now, it remains hard to predict how the latest political developments in the United States will shape consumer behavior over here. In Germany, we are watching the new government's formation closely and, naturally, are hopeful for consumer-friendly policy measures that bolster economic stability and growth.

Now I'd like to examine the retail sectors one by one and how they developed in Germany during 2024, which is on Slide 5. This overview presents turnover trends per sector alongside each one's share of total tenant turnover, its share of floor space, and the occupancy cost ratio. Our tenants in the German portfolio's health and beauty segment did well relative to 2023, posting a sales gain of 6.1%. Drugstores such as dm, Drogerie Markt, are the key drivers in this area and are continuing their success story. Shoes and leather goods likewise delivered a solid rise, and so did general retail. That segment covers bookstores, toys, household goods and jewelry, plus one department store. Fashion textiles, our biggest tenant group in Germany at roughly 30% of sales and 45% of retail space, managed an average increase of 2.3%. Electronics retailers declined 0.5%, and food catering fell by a similar 0.4%. All in all, our tenants in Germany raised like-for-like sales by 2.3% last year, whereas those abroad came in slightly negative at minus 1%. The drop abroad reflects negative currency effects, and on top of that, foreign sales had grown at a significantly above-average rate in 2023.

Overall, across the whole portfolio we recorded a 1.6% rise. Put into absolute figures, sales at our tenants came in 2.5% higher, as was already described earlier. Lastly, this page illustrates that the average occupancy cost ratio — known as the OCR, meaning the proportion of rent plus ancillary costs that tenants must carry against the revenues they bring in — comes to just 11.3%, a healthy level that lets our tenants thrive in our shopping centers over the long term and demonstrates that the portfolio is nicely balanced and not overrented. Kindly turn with me to Slide 6, where we look at how our rental contracts are distributed by maturity. The portfolio's weighted maturity is unchanged, at 4.7 years. A full 40% of our rental contracts do not mature until 2030 or later. Our occupancy rate climbed sharply, by 2.4 percentage points, reaching 95.4%, after major investment projects were completed, and it now sits at a high level. During the 2024 financial year we invested heavily in modernizing several centers and boosting their appeal. New shops opening at the A10 Center, Rhein-Neckar-Zentrum, Stadt-Galerie Hameln and the City-Galerie Wolfsburg, among other locations, made a substantial contribution to the rise in occupancy.

At the Main-Taunus-Zentrum, work on the new Food Garden is almost finished, and it opens to visitors on 10 April. And naturally, I'll share a few more specifics on the Food Garden with you afterward. Turning to Slide 7, you'll see our top 10 tenants, with just small changes. H&M, our largest tenant, accounts for 2.7%, while Deichmann and New Yorker each hold 2.4%. The 10 biggest tenants represent just 20% -- roughly 21% of rental income. Our sector mix, shown on Slide 8, bears out a balanced diversification across sectors. Fashion stays a central element of our shopping centers, drawing just as many customers as before. Past fashion, the portfolio delivers a retailing mix with a substantial share of groceries, everyday necessities and certain nondiscretionary retail spending. That's a real strength, and visitors value our well-balanced tenant lineup even, or particularly, as online retail keeps growing. Despite what many assume, a carefully curated fashion offer still pulls visitors strongly, generating positive knock-on effects for the other retail segments in our centers. Meanwhile, we are actively working to diversify the sector mix further by growing gastronomy and entertainment options, which are equally popular and help visitors stay longer.

That wraps up what I had to share regarding the present state of affairs at our shopping centers. Now I'd like to walk you through the financial slides for 2024, beginning with the valuation of our investment properties on Slide 9. Values of our properties were mostly steady, with the valuation result for our shopping centers coming in slightly negative. Interest rates stabilizing at elevated levels, together with only a gradual rebound of the real estate investment market in 2024, had a limited effect on the valuation, producing a valuation loss of EUR 14.6 million. That is a favorable comparison to the prior year, when a substantial loss of EUR 209.1 million was still booked. Real estate assets rose in value by 0.7% during the financial year, following a decrease of 4.2% in 2023, driven mainly by ongoing investments on the one hand and small losses from changes in market value on the other. An extension plot in Gdansk in Poland was sold successfully in 2024 at around 10% above book value. The net initial yield for our portfolio comes in at 6.24%, virtually unchanged versus the previous year. The EPRA net initial yield comes in at 5.84%, down from 5.91% in 2023. How sensitive the valuation results are to movements in the main value drivers is illustrated in the table in the lower right part of the slide.

Now let's turn to Slide 10 for revenue. It came in a bit lower, at EUR 271.4 million, versus EUR 273.3 million in 2023. That's a decline of 0.7%, essentially driven by temporary vacancies stemming from ongoing portfolio investments, along with settlement payments made in the prior year. Turnover rents rose year on year, which is a positive signal regarding the health of our tenants and aligns with the tenant turnover increase I showed you earlier in my presentation. The split between Germany and abroad has moved slightly toward the international portfolio, which now accounts for a 21% share. Moving to EBIT, please look at Slide 11. EBIT rose 1.7% to EUR 216.3 million. The bridge in the bottom-left corner of the page walks through the details. The primary factor was higher NOI driven by reduced operating center expenses, which more than offset the year-on-year revenue decline. Financial result on Slide 12 fell by EUR 7.9 million, or 18.3%, to minus EUR 51.1 million. Interest expenses increased by EUR 5.8 million, reflecting additional loan drawdowns and higher rates on follow-up loans.

Operating profit from at-equity investments rose by EUR 0.3 million, while other financial results fell by EUR 1.9 million, largely because of a swap termination tied to the long-term refinancing and the loan increase for Allee-Center Hamm. Turning to Slide 13, you'll see that EBT adjusted for valuation dropped to EUR 165.2 million from EUR 169.5 million — a decline of 2.5%. The cause is the slump in financial results, which, as I just described, came mainly from higher interest expenses and other financial expenses. Interest income on bank deposits was pretty much on par with 2023, at EUR 5.4 million. Slide 14 shows our consolidated results, which rose by EUR 161.8 million, landing at EUR 123.5 million after a minus of EUR 38.3 million in 2023. That substantial gain comes from the improved valuation result of plus EUR 194.5 million. The higher taxes are chiefly connected to increased deferred taxes. Now please come with me to Slide 15, on the development of funds from operations. FFO served as the basis for dividend distributions, regular loan amortization and ongoing investments in our portfolio. FFO declined by 8.3%, from EUR 171.3 million to EUR 157.1 million as it stands now, or per share from EUR 2.28 to EUR 2.06, essentially because of the extraordinary income in 2023 from additional ancillary cost payments and the weaker financial result.

So with FFO of EUR 157.1 million, we came in above the forecast we had already raised, which was EUR 151 million to EUR 155 million. Now let's move to the balance sheet, Page 16. Total assets come to EUR 4.36 billion. That represents a change of minus EUR 95.8 million versus the reporting date at the end of 2023. Consolidated liquidity as of 31st December 2024 is EUR 212.4 million, a minus of EUR 123.6 million. Please bear in mind that we paid out EUR 346.6 million in dividends in total in January and September last year. Total equity, including minorities, went down by EUR 233.4 million. As of 31st December 2024, current and noncurrent financial liabilities were EUR 1.81 billion, EUR 130.8 million above the level at the end of 2023, mainly because of further net loan increases. Noncurrent deferred tax liabilities rose by EUR 19 million to EUR 350.9 million. Our equity ratio fell to 49.2%, and the consolidated LTV is now 39.2%. The EPRA LTV, calculated proportionally according to the group share in all assets — so to say, on a look-through basis — is 41.1%. On Slide 17, we show our EPRA NTA, which due to dividend payments has decreased to now EUR 29.02 per share.

That represents a decline of 8.1% versus the prior year, and it translates into a roughly 31% discount on the Deutsche EuroShop share price. Turning to Page 18, I'd like to share some refreshed details about how our financing is structured. As the balance sheet we just reviewed indicates, total debt comes to EUR 1.81 billion. As of 31st December, the average interest rate we were paying was a low 2.76%, while weighted maturity sat comfortably at 5.5 years. Following the most recent loan increases and dividend payments, we are still well positioned, with strong investment-grade credit metrics — among them an LTV of 39.2%, net debt-to-EBITDA of 7.4x and interest coverage of 4.4x. Over on the right-hand side, Deutsche EuroShop's diversified, long-term loan maturity profile is laid out in greater detail. I'm glad to say it again: refinancings will only come up starting in 2026. Now for a few portfolio updates, beginning on Slide 19. We'll start with Viernheim, home to the Rhein-Neckar-Zentrum. A modern new freestanding restaurant opened its doors in 2024, serving our visitors tasty dishes from the Italian kitchen. Beyond that, three exciting new tenants have moved into the former Bauhaus building, which was fully renovated, adding to the entertainment choices available to our customers. A top-quality trampolinpark and a thriving cycling store each serve as an attraction.

A dark-light mini golf course and an escape room experience — an interactive indoor entertainment concept — will be opening very soon. Just a few meters from there, the indoor skydiving center is operating with a lot of success. Each of these tenants gains from the others, and together they give the whole shopping center an extra lift. Turning to Slides 20 and 21, we examine our Stadt-Galerie in Hameln along with the A10 Center in Wildau, near Berlin. At Hameln, two anchor tenants launched in fall 2024 following extensive construction work. Netto, the discount supermarket belonging to the Itika Group, at last restores food competence to the Stadt-Galerie. Directly beside it, Action — the highly successful nonfood discounter — opened its doors, and as you can see, queues stretched in front of the store through the whole first week. Those two units had formerly been occupied by a Real hypermarket. At the A10 Center, we can likewise mark two openings that went well. September brought the well-known off-price retailer TK Maxx, and MediaMarkt followed in October. In both cases, the space had likewise belonged to a former Real supermarket, which Kaufland had already partly taken over some time before. All four tenants are highly satisfied with visitor numbers, merchant sales, and we see both centers gaining strategically from the new rental concept, exactly as we planned.

Moving to Page 22 now. I'd said I would share a bit more information on the Food Garden. It's the new standout feature at the Main-Taunus-Zentrum, lending the place a vibrant, urban feel. This high-quality, diverse dining and food zone opens to the public starting 10 April, and it's completely on schedule as we planned. We put up new standalone restaurant buildings, a number of them featuring rooftop terraces, others with outdoor terraces, along with appealing landscaped outdoor spaces and refined architecture. The Food Garden occupies roughly 7,000 square meters right in the middle of the shopping center, on the site of a former department store building, and it was constructed to very high sustainability standards. The investment volume tied to it comes to approximately EUR 28 million. The Food Garden was entirely pre-let to top-quality tenants in a very brief span of time. On the evening of 9 April we'll hold a big grand opening celebration, and we hope you'll be there. Anyone who hasn't confirmed attendance yet is welcome to get in touch with us on short notice. Moving on from Slide 23, I'd like to go into more detail on our ESG initiatives. Climate protection continues to be a leading priority for Deutsche EuroShop.

We strongly believe sustainability and profitability don't have to be mutually exclusive — in the same way, a great shopping experience and environmental responsibility can go hand in hand. We keep a close watch on our CO2 emissions and our electricity usage, and we take steps to bring these down going forward. And as you're aware, we actively back a broad variety of local and regional initiatives spanning environmental, social and economic areas. On Slide 24, you'll see that 20 of our 21 properties presently hold the prestigious Gold certificate from the German Sustainable Building Council, DGNB, while one has received Platinum. TÜV Süd has certified the power we consume across all our German properties with the Eco Power green electricity label. And EPRA has given us its Sustainability Best Practice Recommendation Gold Award for the eighth consecutive time. On Slide 25, you'll find just one illustration of our environmental commitment: a photovoltaic system we installed last year on the roof of the Rhein-Neckar-Zentrum. We put EUR 1.1 million into it, and that will deliver savings of EUR 139,000 in electricity costs annually. Moving to Slide 26 now. I'm pleased to report that this morning we published a Green Finance Framework for the first time.

This framework brings together our sustainability strategy and our financing strategy, and it highlights Deutsche EuroShop's contribution to broader sustainability objectives, including the EU's Environmental Goals and the UN Sustainable Development Goals. Through the Green Finance Framework, we are laying the groundwork for potentially using green financing instruments down the road. The framework covers, among other things, details on our sustainability strategy, how financing proceeds might be used, and the process for evaluating and selecting projects. This document, along with a second-party opinion from Sustainable Fitch, is available on our website. Fitch has rated the framework excellent, which is the highest rating achievable. Lastly, let me turn to Slide 27 and the outlook. For the 2025 financial year, we are again issuing guidance for our four most important key figures: revenue, EBIT, EBT and FFO. Overall, we are positive on how the 2025 financial year will develop and expect a stable to slightly upward trend in revenue and EBIT. For EBT, excluding measurement gains or losses, and for FFO, we anticipate a slight decline versus the 2024 financial year, driven by a planned lower financial result. To be more specific, we forecast funds from operations, FFO, of EUR 1.91 to EUR 2.02 per share, or between EUR 145 million and EUR 153 million in total.

Our guidance assumes revenue of EUR 268 million to EUR 276 million, EBIT of EUR 209 million to EUR 217 million, and EBT excluding valuation of EUR 150 million to EUR 158 million. Ladies and gentlemen, consistent with our strategy, we're constantly striving to develop our portfolio through new tenants, fresh ideas and additional investments. That's how shopping centers genuinely come alive with a vibrant small life. Those of you who are shopping center enthusiasts can look forward to our complete annual report, titled The Small Life, which will include far more information along with stories and impressions from the portfolio, to be published on 29th of April. Ladies and gentlemen, it's a pleasure to reflect on a successful year 2024. On that foundation, we can confidently confront the challenges and opportunities that 2025 will present for Deutsche EuroShop. That brings my presentation to a close. Many thanks for your attention. I'm now glad to take your questions. Sergen, back to you.

<<operator_script>> Our first question is coming from Kai Klose, who is on the line from Berenberg.