Deutsche Euroshop Ag Akt

Hello and good morning from the team of Deutsche U-Shop in Hamburg. This is Olaf Borker speaking. With me in this call is our investor relations team. Thank you for attending the presentation of our results for the first half of 2002, including an update on the situation in our centers and on the development of Deutsche U-Shop Group. Let's start with our business activities. For an executive summary of 8.1, 2022, please see slides two and three. After two years overshadowed by the pandemic, we are confident that 2022 will be impacted to a much less extent. We expect this year to be a transition year on the way to a new normal, operationally, as well as in terms of how we deal with virtues. Reliable forecasts are hard to make, however, given the uncertainty caused by the war in the Ukraine. What happens in our centers? On slide 4, we have a look on our footfall. After a difficult start into the new year with various restrictions, the footfall numbers have improved sustainably since April. At the end of July, we were able to reach a level of 87%, of the comparable pre-pandemic period in 2019. This means people are enjoying the regained shopping freedom and a certain normality. They are returning to the city centres, shopping malls and shops. As is this so far despite a certain reluctance of consumers in view of rising prices and the war in Ukraine, which is also not favorable for consumption. Coming to the retail turnover on slide five. Looking at our portfolio as a whole, tenant turnover is back on the levels of 2019. In Germany, it's only slightly lower. It's 95.3%. Our overall tenant sales averaged approximately 89% of 2019 levels. These figures also make us optimistic. It is worth mentioning that people are more afraid for their own income perspective since the beginning of the war in the Ukraine than they were at the peak of the pandemic. In addition, the propensity to buy is at a new record low. And the rising prices, especially for energy, leave less room for consumption. On slide six, you can see our collection ratio since the beginning of the pandemic. which initially followed the pattern of the consumer footfall and is strongly correlating with the lockdown periods. The collection ratio represents the ratio of received to invoiced rents, service charges and marketing contributions. For 2021, the number was 95%. From the third quarter of 2021 onwards, the collection ratio improved further and is now close to normality. In H1 2022 the collection ratio was at 98% with only very limited rent concessions granted resulting from some cleanup for 2021. We assume that the value for June will also be corrected slightly upwards. As experience shows that incoming payments can still be expected here so that we would reach a level of almost 100% too. So far the update on the situation in our centers. I'll now come to the financial results of H1 2022 and we'll start with the evaluation of our shopping centers on slide 7. The valuations of our shopping centers were on average almost unchanged, including investment costs The valuation result before taxes was minus 8.2 million euros as of end of the first six months. This corresponds to an average decrease of only 0.2%. The stabilized net initial yield for our portfolio is slightly up and now stands at 5.54%. The sensitivity of the valuation results to changes of the main value drivers is provided in the table in the lower part of the slide. I now come to the revenues on slide 8. These came out nearly unchanged at 105.5 million after 104.9 million in H1 2022. In contrast to the previous year, which was significantly affected by shop closures due to the pandemic, all of our tenants were allowed to open their shops in the first six months of 2022. Looking at the bridge, you see that H121 was influenced by temporary legal rent suspensions in Poland, which was 2.4 million euros. The continuing effects of the corona pandemic, such as defaults of tenants in payment difficulties, lower turnover rents, as well as longer re-letting periods and higher vacancy rates mean that revenues are still below the pre-pandemic level. On page 9, we show you the development of our EBIT, which was increased to now 76.1 million euros, which is a plus of 7.8%. The major financial effect resulting from the pandemic last year was reflected in the allowances for rent receivables. These allowances were made in relation to the realized and or expected losses of rent in connection with tenant support measures, for example, rent concessions, or in relation to the factor respectively likely insolvencies. In H122, these allowances came down to 5.4 million euros compared to 18.1 million in the first half of 2021. I now turn to page 10 and to the financial result. It improved by 3.5 million or 23.4%. Interest savings of 2.4 million due to federal refinancing of our BuildShield Center Hamburg, our City Gallery Wolfsburg and our Altmarktgalerie Dresden and an increased ad equity operating profit of plus 3.3 million euros had a positive impact on the financial result. The minority profit share was 2.2 million higher than in the first half of 2021. On slide 11, you see that the EBT adjusted for the valuation increased from 55.7 million to 64.7 million euros. which is a plus of 16.1% due to the high operating result of plus 6.6 million euros. Another positive impact came from interest savings. These amounted to 2.4 million euros. Let us look at the operating profit, the EPRA earnings, on page 12. EPRA earnings improved by 6.5 million to now 60.8 million. an increase of 12%. On a per share basis, the EPRO earnings increased from 0.88 to 0.98 euros. I now come to the consolidated result of the group on slide 13. The consolidated profit increased from 36.8 million to 46.2 million. The main impact for the change came from a higher result from the standing assets, a plus of 6.6 million euros. Correspondingly, the EPS increased by 25% from 0.60 to 0.75 euros in H1 2022. Please follow me now to page 14 and to the development of the FFO, which excludes the valuation result. The FFO increased strongly from 45.3 million to now 66.7 million or on a per share basis from 0.88 euros to 1.08 euros. In the FFO calculation, we excluded the one of expenses in connection with the takeover offer, an amount of 5.9 million euros. I'm now coming to the balance sheet on page 15. where you will only see small changes compared to the figures of December 2021. Our total assets amounted to 4.3 billion euros. This is just a change of 42.5 million compared with the reporting date end of 2021. Our consolidated liquidity as of the 30th June of 2022 stands at 377.8 million That is a plus of 48.9 million euros in six months. The build-up of cash was influenced by the normalization of the payment behavior of the tenants. Total equity, including minorities, increased by 45.9 million. At the end of the first half year of 2022, current and non-current financial liabilities stood at 1.5 billion euros, which was 6.2 million lower than at the end of 2021, influenced by scheduled exemptions. Non-current deferred tax liabilities increased by 8.8 million to 341.8 million euros. Our equity ratio increased slightly and now stands as a solid 56.3% and the consolidated loan-to-value now stands at a low 29%. On a look-through basis, that is the LTV calculated fully proportionally according to the group share in all assets, the LTV now stands at 31.7%, also a continued very reasonable and low level. While earnings and profits are still below pre-corona levels, our balance sheet today is stronger than before corona. On the pages 16 and 17, we give you some information on our debt. Approximately 17.8 million or only 4.2% of our consolidated bank loans is left to expire this year and will be repaid to the banks. currently our consolidated debt bears an average interest rate of 2.23%. The weighted maturity of our loan portfolio now stands at 5.9 years. Including our non-consolidated loans, the weighted maturity of the portfolio now stands at 6.2 years with an average interest rate of 2.19%. On the right side of page 17, you will see that we have fixed this year three loans with a total of €216 million with an average interest rate of 2.98% compared to former 3.26%. News from the portfolio are shown on slides 18 and 19. We recently published new investment plans for the Maitaunus Zentrum, one of the largest and strongest turnover shopping centers in Germany and a jewel in our portfolio. A new highlight is to be added to the Main-Taunus-Zentrum, giving it a new lively and urban center with the high quality, the right restaurant and food offering. Five new freestanding restaurant buildings are to be built until 2024, some with roofed terraces, some with outdoor terraces, attractive landscaped exterior areas and sophisticated architecture. The new food garden will be built on an area of around 7,000 square meters in the heart of the shopping center in place of a former department store building. The investment volume amounts to approximately 25 million euros. In the meantime, numerous food trucks around the construction site provide a variety offer. The offer is very well welcomed by the visitors. As of now, Another highlight in the My Townish Centrum is the TEO concept. Please see slides 20 and 21. Thanks to digital sales technology, consumers can shop right here around the clock, seven days a week. With the help of installed self-scanning checkouts and a specially developed app, customers can access a well-assorted range of 950 products on a space of only 50 square meters. Finally, I would like to come to slide 22 and a look to the transaction market and financing activities. Financing first. As already mentioned in our last call, we have agreed with banks on a 107.4 million loan with 10 years maturity, the fixed interest rate on 2.5%, to refinance a loan for our Altmarktgalerie Dresden that became due end of March 2022. Meanwhile, we have concluded all our upcoming refinancings for this year. This includes a group-level loan of 52 million, as well as financing for the City Point Castle, which is 55 million euros. a credit charge of 10 million euros for the Allee Center HAM will be repaid at the end of September. The signed contracts mean that in the future we will profit from interest savings of approximately half a million euros per year. The interest expenses for 2002 will be approximately 3.2 million euros less than in the previous year. This is essentially with light of refinance undertakings in 2021 and 2022 totaling around 400 million euros. As mentioned, we do not face any further loan maturities this year. For the only refinancing due in 2023 at 209 million euros for the mine town at Zentrum, the company has already agreed on a term sheet for 221 million loan with a banking consortium. That's for refinancing 209 million and 12 million to finance the food garden investment. The interest rate for the current loan is 2.99%. After this, there is no further refinancing due until September 2025. The latest interest rate increases come as no surprise to us. although we did not expect them quite to this extent. For 2022, we are anticipating interest costs of around 37 million euros in the group. This is comparable with our interest costs in 2006, which were around 39 million euros. However, our sales in 2006 were only around 93 million euros. Whereas for 2022, we are anticipating a revenue of over 200 million euros. The transaction market has been, not surprisingly, in the given situation, rather dry. However, there are signs that the transaction market is slowly coming back, even though it is currently again affected by the terrible Ukrainian war. The shopping center Boulevard Berlin was sold end of 2021 and Gera Arcaden in Gera, Germany in the first quarter 2022 at, as we have heard, fair prices. If the impact of the Ukrainian war on investors and their financing banks stays limited, one may expect to see some further transactions. As we hear from the market, some transactions are currently being prepared. For example, one in Munich. The yield differential between shopping center assets and the other real estate asset classes, for example, office, residential, and logistics, seems to be just too big to be ignored. The spike in interest rates may support the shift of demand among real estate classes. Let's come to the financial outlook outlook on slide 23. We confirm our forecast and expect an FFO of €1.95 to €2.05 per share for the full year. 2022 will be, in our expectation, a transitional year on the way to normality after Corona. Accordingly, we have applied a bit more cautious assumptions on rent write-downs in comparison to pre-corona times. This forecast again assumes that the pandemic situation can be brought under lasting control without further store closures or significant restrictions on center operations. A continued uptick in private consumer spending and an associated further recovery of the tenant turnovers, as well as the preservation of recovered high collection ratios. We are therefore pleased with the German government's recent decisions not to impose lockdowns in the future. The war in Ukraine and its consequences could have a negative impact on consumer behavior, supply chains and ultimately our business. This has not yet been reflected in our forecast as the potential impact cannot be estimated at present. Indexation of our rents is lagging behind inflation. Though indexation at full inflation is agreed, we are in a lot of discussions with our tenants. Ladies and gentlemen, we remain optimistic as before, even though there is still some way ahead of us to come. Our company is very well prepared. Finally, I would like to say a few personal words. In July, Wilhelm Wellner and I reached an agreement with the supervisory board that following the takeover by Oak Tree and Kura, which has now been fully completed, we would no longer be available to Deutsche Euroshop for a long-term continuation of our cooperation as executive board members. After 17 exciting and great years in the service of Deutsche Euroshop, with a small and effective team, I will say goodbye on September the 13th and thank you for your trust. I wish the future executive board every success and you all the best and lots of fun with shopping. So far my presentation. Thank you for listening. I'm happy to take your questions now. I hope you will understand that I cannot respond to questions but to the company's future strategy in connection with the takeover more than we have published in our 60 pages official statement. The new management will be available to you in the near future. Thank you.

Yeah, good morning, Dr. Schott's team and Mr. Bokos. First, I would like to thank you for the work over the last couple of years. I couldn't believe for the 17 years. I really would say I personally very much enjoyed the collaboration with you and I wish you really all the best for any new adventures you maybe step into. Again, thank you. Thank you very much. Welcome. And, uh, nonetheless, some questions, um, maybe on the, on the current situation, not on the futures plan as you described, uh, you are not able to, to answer that, uh, for, uh, good reasons. Well, the first question is, you mentioned in your outlook that 2022 will be a transition year to a new normality. What personally do you see as a new normality, maybe in terms of rent levels or the portfolio vacancy? And finally, probably not given a precise outlook on that, but finally on the FFO1 rate. on the existing portfolio. Any views from your side would be very helpful. That's the first question, please.

Again, thank you very much for your warm words, Mr. Remke. I also enjoyed the long cooperation with you as an analyst, having a very close look on our company. Coming to the normal that is reflected in rent levels, we expect that rents in total can be stabilized, which means we still have lower rent levels in new lease agreements. On the other hand, we have this indexation of our lease agreements, from which we see that indexation is lagging behind inflation, so it's not possible to increase rents by 5% according to CPI. 1.5%, 2% for the individual lease agreements. So the combination of all will mean a stable rent income for the next years. This is also supported by a higher occupancy ratio. Occupancy ratio is roughly at 95%, 96%. And we expect it to increase in the next two years to roughly 98%. That is the main impact on turnover. Financing is, as we have shown, a sign for us for the next three years. We have this financing of Main Taunus Zentrum. The actual indication is slightly lower than 2.99%. We believe that we can keep costs stable after we have seen higher costs for us in the last two years.

Okay, thank you. The second question relates to your mentioned refinancing. Particularly, if I get it right, the missing point is the fixation of the contract for 2023, about the 209 million. Exactly. Does it mean that you already agreed on the maturity, I guess, 10 years and already the margin? And what is your strategy to fix the condition in terms of, let's say, timing or is it a job of your successor?

It is exactly what you said. We have agreed on a term sheet so which means 10 years duration we have agreed on the interest margin a very interesting and a very attractive margin I have to say and I can't I'm very happy to say that a very low margin because it's a very attractive shopping center with a very low LTV and I expect that we can sign the loan agreement within the next two weeks. So that's still a job for me. And immediately after we have signed the loan agreement, we will also fix the interest rate. Current indication is 2.7%. There's no redemption in the first five years. So also very attractive for us from a cash flow perspective.

And the contract will come in place starting when, in 2023?

Good question. End of January 2023.

Okay, perfect. Thank you for these details. A third question is, could you elaborate a bit more on the recent negotiations with the tenants? For example, are you able to turn really the CPI-linked agreements into rents? You mentioned only 1.5 to 2%. Is it the annual run rate, this is the reason, or is it the reason that you agreed on full CPI, but you were simply not able to bring it into a new grant level?

Unfortunately, it is the last. We have agreed with every tenant on indexation, which is adopted every two years on the CPI. And so, starting with this summer, in which indexation would become effective for a lot of tenants, ECE realized that tenants started discussions knowing that we have agreed on this CPI indexation, but they said, listen, only if our turnover is also getting better, we can except to start to pay this indexation. So indeed, ECE is negotiating with a lot of tenants about the fact that they can't bear a full indexation as agreed in standing assets. In parallel to that, we still have new lease agreements, some with the same rent level, but also some with a rent level which is below the old one. Especially bigger tenants are very hard fighters for their own advantage.

May I ask for a level for such tranche of rent agreed below the former levels? The delta to the previous, is it around 10% or what is the magnitude? I know it's a wide range, presumably.

Indeed, it is a very wide range. Sometimes, in individual cases, it's also more than 10%, perhaps by far more than 10%. but also we have some lease agreements which are stable or which the rent is slightly higher than the last one. But yes, individually, we have to give discounts, heavy discounts. The main idea is to keep shopping centers full and at the end is, as you know, it's the optimization of the rental income.

Yeah, understood. Okay, a very last question. You mentioned the 6 million transaction-related costs in the second quarter. Do we have to expect further costs which are not provisioned for the third quarter?

No, the costs which we mentioned that are the costs for our advisors, investment banks, and legal. So we do not expect... all the other costs which occur in the near future that will or will be cost for capital market transactions or real operations transactions. And perhaps, yes, payments to the executive board because of leaving the company. sure okay miss walker that's from my side and again very uh happy to say thank you to you and goodbye hope to see you again thank you very much and also to help i hope to see you again perhaps in another position or another location uh thank you very much for the good operation in the last year all the best for you mr thank you bye-bye

The next question is from Manuel Martin from Odo, VHF. Please go ahead, sir.

Thank you. Well, hello, Mr. Borges and the Doge Euroshop team. Also, all the best from my part, from my side, for the future. We had always a kind of on-off relationship when it came to coverage, but nevertheless, I always enjoyed the time with you. From my side, also kind of one or two questions on operations, if I may, please.

Yes, yes. Thank you very much, Mr. Martin.

So on the behavior of tenants and customers, which you have described in your presentation, have you identified a difference of behavior of clients and tenants between the centers in your German part of the portfolio and the centers in your foreign countries?

Yes, we do. The shopping centers outside of Germany are performing better, sometimes much more better than in Germany, especially Hungary is very strong. It's already at pre-corona levels. And this exactly means that negotiations of rents and new leases are easy done in Hungary. For Poland it's slightly more difficult and also the Czech Republic is doing very well.

Any idea what could be the reason? Are the consumers in a better shape in these countries?

We believe that they are more focusing on going into shopping centers. Their consumer behavior is stronger. That is the reason from which we know that is a fact. Okay.

Okay, I see.

There's no other one. For them, going in a shopping center is real entertainment, perhaps not as much alternatives for entertainment in these countries.

Yeah, good point. Okay. The second question, unfortunately looking a bit into the crystal ball, but if we focus our view to the upcoming winter, do you hear any views or moods amongst your tenants or client behavior? Is there kind of people being very cautious or optimistic? Have you noticed any moods there?

Very good question. I think it's like for private individuals and for ourselves. In today's temperatures with 30 degrees, we can't imagine that our apartments and houses will be cold and that there's no energy. I haven't heard that people buy a lot of candles to be prepared. What we have done is we have for all our gas and electricity deliveries agreed on fixed prices for a medium-term duration and for a volume which is 100% 2022 and 75% to 100% in 2023 and 2024. That's for electricity. And we are fixed for 100% of gas in 2022 and 2024. for hoping that these can be delivered. But we currently do not see concrete reluctant activities of consumers. But I think it's a general mood and general behavior. People will be more hesitant to go shopping, I guess, if it's really cold. And if they get their first... price information about gas and electricity. And that is taking part, that is in October, November, and latest in March and April 2023. And I think there will be a lot of people very surprised, negatively surprised.

I see. And so you have been very looking forward in fixing gas prices for, did I understand it correctly, for 2020?

For our shopping centers, but not individually for the tenants. Every tenant individually for his own shop has to do his agreements for gas and electricity.

Okay, I see.

That's a very important question. Also, some of our tenants will see that they are

costs for electricity and gas will increase enormously at the death much more or higher running costs yeah yeah good point okay but uh but uh for the contracts for your shopping centers for so for for yourself that means that means running the heating for the center or the air conditioning.

It's agreed at fixed prices as I told you 75 to 100 percent for 2023 and 2024 regarding to electricity and 100 percent for the years 2022 to 2024 regarding to gas. So as long as gas is available our shopping centers will be well tempered. Okay.

Good detail. And I agree maybe for some politicians they are happy that it's so hot so it doesn't come to the mind of people that it can be very cold in winter.

Yes. That is what in Germany nobody can has in his mind.

Yes.

However. Yeah. But let me also say something in addition. For a company like us, which was faced with Corona, which means immediately lockdowns, so no turnover, by far lower rents, we will bear this coming situation because it will be a slower process. Perhaps with a negative impact. But it is a slow impact, and that will be much more easier for us to handle, unlike to the corona impact, which we have seen in 2002 and 2001. That was hard.

I understand. Okay. Thank you very much.

Thank you for your time and for your questions. All the best for you.

Okay. Bye.

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star followed by one on your telephone. The next question is from Thomas Neuhold from Kepler. Please go ahead, sir.

Good morning, Mr. Bokas. Also from my side, thanks a lot for the good cooperation. It has been always a great pleasure working with you. And I also wish you all the best for your personal future. And I hope to see you again sometime. The two questions I have is, firstly, on tenants' behavior when they negotiate the new rental contracts. Is putting a CPI link an issue now, given the high inflation rates we have? Are clients trying to discuss that? And secondly, I was wondering, given soaring energy prices, are Are clients asking you about the energy efficiency of your shopping centers and energy and electricity costs? Is this a topic?

Yes, there are a lot of discussions regarding to the CPI linked indexation. As you know, all our lease agreements are linked with CPI in the base rent and ECE told us that Yes, starting in summer times when this CPI link indexation starts for a lot of them, tenants started discussions and said we are not able to pay this increase in rents, though we know that we have agreed on this in our lease agreements. And ECE, we have to find a way to keep these tenants in the shopping centers to make them to pay a higher rent, but it is not 5%. It's more to 1 or 2%. And energy efficiency, that is not a point which they discuss. As I said, we have fixed our gas and electricity prices for the next two years up to 100%. But that is to keep cold and to heat the general rooms in the shopping center. Every tenant for himself has to care about his energy supply and to keep prices fixed. And like private individuals, some of them will realize in these days or in two to three months that energy prices will be much, much, much higher than they have expected. So their running costs, their operational costs will increase.

Okay. And to come back to the first part of my questions, when you negotiate new rental contracts, a client asking to or try to negotiate away the CPI link to put some cap in or something like that or are they happy with signing a contract where in the long run in theory that the rent is linked to the CPI development?

So we haven't heard from ECE that tenants started to discuss this CPI linked indexation. What we have since Three to four years is rent-free periods up to three months. We have upfront payments to the tenants to support investments in the shop. That is also a new normal since three to four years.

Understood. And the second question I have is from your discussion with clients, which client groups do you think will be hit worst by the shrinking purchasing power of the German consumer, given the strong increase in energy costs, electricity costs, etc.?

I feel that the smaller tenants are more hit by that, because if you have a strong group with a lot of shops, There's one responsible person for energy and all this stuff. I guess they are very prepared. They are very professional. But perhaps individual smaller tenants are not as good as prepared as the bigger ones. It's like negotiating rents. The bigger tenants, the biggest ones, are the strongest and most difficult partners to discuss the rents. Though they are not those ones which need rent decreases or something like that.

Thanks a lot. And again, all the best for your future. Thank you, Mr. Naholt. See you.

Thank you, operator. I think we have said everything. Thank you for the warm words of some of you. I also enjoyed the work with you, as I said, 17 years, and perhaps we see us in another location, another function again. It was a pleasure also for me to see you on road shows and in conferences. Unfortunately, we haven't seen you in the last two years, but perhaps times will change also to this. Thank you very much.