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Hazik Siddiqui

Demire, the Germany-based commercial real estate operator, reported FY 22 results today (16 March) which came in largely in line with 9fin’s estimates. Defying the tough real estate environment in Germany, Demire’s operating performance remained solid with both Rental Income and Funds From Operations (FFO) surpassing the upper end of prior guidance.

New leases signed and inflation-linked rent increases have compensated for the rental income lost due to asset disposals in 2022. Headline figures for FY 2022: Rental income €81.1m (-1.5% YoY), P&L from rental of real estate €62.3m (-7.2% YoY). 

On the accompanying conference call, there was an interesting question around the downward revaluation of the property portfolio undertaken in FY 22. For context, the German landlord sold its largest property Leipzig (LogPark) for a consideration of €121m — a 14.5% discount to FY 21 book value (€141.6m). Demire announced today that it sold two more properties in Bremen and Ludwigsburg for €11.7m, a reduction of 12.6% versus FY 21 market values. 

Despite double digit discounts on the recent asset sales, Demire reported a downward revaluation of only 6.1% on the total portfolio (or 4.7% excluding LogPark), casting concern whether the downward adjustment was reflective of the true environment. 

A broader market context for sellers at deep discounts, which may also apply to Demire, is that motivated sellers may accept a lower price provided the buyer is funding largely with equity, thereby giving strong assurance of closing the deal in a timely fashion. Execution risk as to the pace for real estate disposals in the current environment stays high, so high equity funded buyers may be seen more favourably by sellers, albeit at a price.

There were questions on the call today as to whether majority shareholders (Apollo and Wecken Group) would consider upstreaming some cash. Demire currently does not have the capacity (nor adequate cash) to pay out dividends as per German GAAP. The capacity could develop if assets are sold at premium to German GAAP book values, but the shareholders are mindful that this could weaken their negotiation position going into the 2024 refinancing, added management.

Questions around the 2024 SUNs refinancing were confidently fielded. As discussed in Tuesday’s report, Demire is looking to use unencumbered assets to raise more secured debt. Demire has a 49% unencumbered asset ratio, leaving plenty of scope to raise more secured debt. However, the company may not want to pledge its entire portfolio, so this would ideally be done alongside an unsecured bond to repay the remaining 2024s.

“We are certainly actively working on the upcoming refinancing[....]over the coming months, there will also be some news about that”, management said.

Asset-sale driven deleveraging looks on track for the German landlord. Demire reported a 54% LTV, dropping to 49.5% pro-forma the Leipzig and Ludwigsburg sales (close to our estimates of 49.7% at a -6% revaluation). 

CFO Tim Brückner commented "Our target for 2023 is a net LTV of below 45%”.

Demire’s selling approach will remain opportunistic and future asset sales should be deleveraging as long as they are not sold substantially below book value. Moreover, the LTV ratio of individual assets (i.e. whether they are pledged for loans or not) is unlikely to have an impact on the consolidated LTV of Demire.

Demire’s 1.875% SUNs due 2024 fell by half-a—point post earnings release, suggesting that the revaluations were already priced in. The notes are indicated at mid-73.25, a 23.1% YTW

Signs of Green Shoots; close watch on portfolio revaluation — Demire earnings update

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