Based on 9fin’sestimates (our workings are shown below), the asset could be sold at a discount of 11.7% to FY 22 book value of €87m. Assets held for sale as of Q1 23 excluding Leipzig (yet to close) of €193.2m were marked down by €25.5m from FY 22 for fair value adjustments, equating to an 11.7% discount. Were this discount to apply broadly to all assets held for sale (ex. Leipzig), gross proceeds for Ulm could be ~€77m. Management were tight lipped when pressed by analysts on the exact valuation, saying “as per the sale purchase agreement, we can’t disclose the purchase price here”.

Demire’s portfolio was last evaluated in December 2022, when the Ulm asset was valued at €87m. A possible ~11% devaluation over the last four-months is reflective of low transaction volumes and the consequent widening of bid-ask spreads that have reduced real estate valuations.

Management on yesterday’s conference call (11 May) mentioned that they received the Ulm sale proceeds two days ago, so the cash proceeds will be reflected in the Q2 23 accounts.

Deleveraging on the horizon

Demire communicated a net LTV target of below 45% during Q4 22 earnings. The German landlord seems to be on track to achieve this target during 2023, given multiple asset disposals and bond buy-backs at discounted values leading to principal savings on the bond (€30m of savings so far).

Q1 23 net LTV of 54% drops to ~47% pro-forma the Ulm disposal, per management. We estimate pro-forma net LTV inclusive of the April 2023 bond buy-back also drops further to 45.5% — 46.5%. Demire’s assets held for sale balance indicate another ~€116m of asset sales are planned after Ulm. In our view, this should be more than sufficient to achieve the desired LTV target.

As 9fin reported, Leipzig (Logpark) and Bremen and Ludwigsburg were sold last year for a total consideration of €132.7m, double digit discounts to FY 21 book values. Last month, Demire repurchased €51m notional value of the €600m 1.875% 2024 SUNs. This comes after the company has already bought back €50m nominal in November 2022, leaving the outstanding principal at €499m.

Q1 earnings stayed stable

Strong letting performance and indexation adjustments led to an 8.8% like-for-like growth of contractual rent in Q1 23. On an annualised basis, Q1 23 contractual rent stood at €84.1m, just €1m below FY 22 levels. This is due to higher vacancy in a Düsseldorf property, which management said they are addressing with ongoing discussions with several new prospective tenants.

EPRA-vacancy rates, however, dropped to 9.2% from 9.5% in FY 22. Vacancy rates should be stable in 2023 — as only a small portion of rental contracts expire in 2023, management added.

Average lease tenure fell marginally to 4.6-years from 4.8-years in FY 22 and management reckons this is still strong considering Demire’s office-heavy exposure (62% of the total portfolio as of FY 22). Typically, office lease lengths are lower than retail and industrial properties.

Funds from operations (FFO) in Q1 23 declined 12.5% to €9.2m. This is mainly due to one of its tenants, the German supermarket, Galeria Karstadt Kaufhof (owned by SIGNA Holding) filing for bankruptcy. Demire booked a loss of €2.3m in Q1 to account for the lost rental income and related expenses.

Addressing the maturity

Recall, Demire is likely to use a mixture of various funding tools to address the remaining €499m of the bond principal due in October 2024, as discussed below:

• Secured debt – As of Q4 22, Demire had a 48% unencumbered asset ratio, leaving plenty of scope to raise more secured debt. Management guided they were in advanced talks with banks and received terms sheets for fixed terms loans with 3-5 year tenors and a margin of 4-5% (vs 1.67% current cost of capital!)
• Further asset sales and bond buy-backs – With a healthy pro-forma cash balance, and the likelihood of further asset sales, the company could explore more bond buybacks (limited under the docs to 10% before having to launch tender) to ease the way into the refinancing. “Further bond buybacks might be an option”, said management yesterday when pressed on refinancing options. The company has already repurchased €101m of the principal value as disucussed in the previous section
• Shareholder support – There is little clarity on the plans of its key shareholders, Apollo (58.6%) and Wecken Group (32.1%). In November 2021, the shareholders announced their intention to sell their stakes to ‘strategic or financial investor’, which was unsuccessful for reasons of which we are unaware. If Demire is unable to secure a deal at an affordable coupon, shareholders may have to inject some equity to sweeten the deal

Watch out for ESG!

Separate to credit metrics, Demire’s weak ESG profile and lower-quality portfolio could lead to increased funding needs for refurbishments and pose hurdles to operational performance in the mid-term. Per Moody’s, Demire's properties have low environmental credentials, creating ‘investment needs’ to adhere to strict regulations in Germany. CBRE reports that demand for non-ESG-certified properties is decreasing, leading to higher vacancy rates and stalled rental growth in Germany.

According to ERPA’s ESG survey, Demire doesn't have an impressive ESG record and only received its inaugural Silver award in 2022.

Pricing

Pricing on Demire’s 1.875% SUNs due 2024 dropped significantly from low-70s to low-60s when Moody’s downgraded the CFR and debt ratings to B3 and Caa1, respectively at the end March. Prices have partly retraced since then and were largely unmoved post earnings, indicated at 68-mid for a 31.6% YTW at the time of publication.