Topic:  DEMIRE released its FY ’23 as well as Q1 and Q2 ’24 reports. While the FY ’23 figures were exactly in line with the prelims published in April (click here for detail), the figures for Q1 and Q2 reflect the reduced portfolio following the disposals of several properties. The clear highlight however is, that DEMIRE recently reached approval for the prolongation of its corporate bond, which would have expired in 10/24. Against this backdrop, the current valuation gap no longer appears justified, which is why we upgrade the stock to BUY. In detail:

H1 ’24 rental income declined 13.1% yoy to € 35.5m (eNuW: € 32.9m). The decline was driven by several property disposals, mainly in Ulm and Leipzig (LogPark, closed in Q1), as well as a higher vacancy rate of 15.5% (vs 9.6% at H1 ’23), which was only partly offset by index related rent increases. In fact, the annualized contractual rents decreased to € 66.9m, down from € 85.1m at FY ’22. Profit from rental activities in H1 amounted to € 23.5m, also driven by the disposals but as well negatively affected by higher management expenses and impairments on receivables.

Based on this, FFO in H1 also came in softer at € 15.5m (eNuW: € 14.9m), down 19.7% yoy. Diluted FFO per share amounted to € 0.15, which compares to € 0.18 in the same period of the previous year.

Against this backdrop, management is guiding for rental income of € 64-66m as well as a significantly lower FFO compared to FY ’23 (€ 36.7m). The guidance is based on the current annualized contractual rent as well as further opportunistic disposals of smaller non-strategic and mature assets.

Limes insolvency. In July, DEMIRE announced that it has not reached an agreemend with DZ HYP regarding the € 82m refinancing of the so called Limes portfolio, which resulted in an insolvency application for the four property companies affected. According to our estimates, the Limes porfolio has a remaining BV of € 140 and a 6% rental yield (eNuW: € 8.4m rental income). The conclusion of the insolvency process is planned for the coming weeks. Until then, we conservatively estimate a total loss for the company, resulting in a valuation loss of € 58m, thus leaving some upside to our estimates.

Most importantly however, DEMIRE finally reached formal approval for the prolongation of the € 499m corporate bond until FY ‘27e. -continued-

The process is to be completed and the structure to be implemented in the coming weeks. In addition to the initial agreement with a smaller group of bondholders (click here for update), there have been only minor changes to the final agreement:

• PIK interest, starting on 1^st January 2027, was increased from 1% to 3%
• Further 2% penalty to be paid at maturity if bond volume has not been reduced by another € 50m until YE ‘26e

Moreover, it was decided to implement a double LuxCo structure as a single point of enforcement, to provide greater protection and ease of execution for the bondholders.

In order to perform the communicated € 49.9m redemption at par, the tender offer (max. price of 76.25%, for which DEMIRE received backstop agreements totaling € 194m), as well as the € 50m reductions in FY ‘25e and FY ‘26e, the company will not only receive a shareholder loan from Apollo for up to € 100m, but also sell further assets going forward.

In fact, the company presented a disposal program with their Market Update Presentation in June, including assets worth € 297m. Yet, this did also include the LogPark, which was sold at BV for about € 103m in Q1. Hence, the company’s remaining disposal pipeline should amount to c. € 194m and is planned to be executed by FY ‘26e. Assuming an LTV of 20% and a 10% average discount to BV, this will result in net proceeds of € 140m. Along with the current cash pile of € 167m, the Apollo loan as well as the cash flows from operations, this should enable the company to reduce the outstanding amount of the bond to c. € 100m by FY ‘26e (eNuW).

While this will certainly burden the company’s operating performance over the coming 3 years (eNuW: rental income -33% until FY ‘26e), the focus should be on the positive news, as the going concern is no longer at risk, in our view. More so, it gives the company a stable basis to focus on its operating success and the strategic alignment of the portfolio. 

This alo gives us the opportunity to reevaluate the case. Even with declining rental income and FFO, the company's NAV is seen to remain stable, or even slightly increase going forward given the operating profitability of DEMIRE. Looking at the current NAV discount of 65%, we observe a significant valuation gap compared to the peer group (LEG, VNA, AT1, GCP, TEG, HABA), which stands at a discount of only 34%.

Amid the absence of the refinancing risk, we hence upgrade the stock to BUY with a new PT of € 1.50 (old: € 1.20) based on a 40% discount to our NAV FY ‘24e.