Retained Quality Assets And Improving Financing Conditions Will Support Future Cash Flow Stability

Catalysts

About DEMIRE Deutsche Mittelstand Real Estate

DEMIRE Deutsche Mittelstand Real Estate is a Germany focused commercial real estate company that manages and optimizes a portfolio of office and retail properties for stable cash flow and value growth.

What are the underlying business or industry changes driving this perspective?

• The decision to pause selected disposals and retain higher quality assets in a recovering transaction market creates upside from potential yield compression and value appreciation, which would support net asset value and future earnings.
• Stabilizing and gradually improving financing conditions, alongside EUR 75 million of newly secured bank loans and extended 2025 mortgage maturities, reduce refinancing risk and interest volatility, providing a clearer path to restoring FFO growth and protecting net margins.
• Direct control over leases at the IMOTEX asset from early 2026 and the appointment of a new center manager are likely to enhance occupancy, rent levels and ancillary income, driving higher rental revenue and operating margins at the largest single property.
• Ongoing portfolio streamlining through disposals of smaller, nonstrategic and mature assets should lower structural vacancy, maintenance and G&A load, improving capital efficiency and supporting sustainable expansion of net margins and earnings.
• Proven letting momentum with solid WALT and resilient rent levels in a weak macro environment positions DEMIRE to benefit disproportionately when occupier demand normalizes, which would translate into higher rental income, stronger cash conversion and improved FFO.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming DEMIRE Deutsche Mittelstand Real Estate's revenue will decrease by 12.3% annually over the next 3 years.
• Analysts are not forecasting that DEMIRE Deutsche Mittelstand Real Estate will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate DEMIRE Deutsche Mittelstand Real Estate's profit margin will increase from -186.5% to the average GB Real Estate industry of 47.0% in 3 years.
• If DEMIRE Deutsche Mittelstand Real Estate's profit margin were to converge on the industry average, you could expect earnings to reach €21.2 million (and earnings per share of €0.2) by about December 2028, up from €-124.6 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 6.6x on those 2028 earnings, up from -0.4x today. This future PE is lower than the current PE for the GB Real Estate industry at 10.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.98%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The structurally weak German office and retail real estate market, with already elevated EPRA vacancy of 17.4 percent and office overweight, could face further secular demand decline from hybrid work and changing retail habits. This would put sustained pressure on occupancy and rental income.
• Rising or persistently high financing costs in the medium term, combined with an already increasing average cost of debt and a net LTV of 43 percent, could erode the benefit of newly secured bank loans and refinancing. This would weigh on earnings and net margins.
• If transaction markets remain illiquid for longer than expected, DEMIRE may be forced to continue holding assets it intended to dispose of or to sell at discounts once liquidity returns. This would limit deleveraging, depress disposal proceeds and increase the risk of further negative fair value adjustments to earnings.
• Execution risk around reducing vacancy, especially at large assets such as Bonn and IMOTEX, could persist despite new center management. This could result in structurally lower utilization of space, which would constrain rental income growth and keep FFO under pressure.
• Higher than anticipated maintenance and operating costs, as indicated by the expected step up in maintenance in the fourth quarter and by cost inflation trends in the sector, could offset gains from disposals and asset optimization. This could lead to weaker operating leverage and lower net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €1.0 for DEMIRE Deutsche Mittelstand Real Estate based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €45.1 million, earnings will come to €21.2 million, and it would be trading on a PE ratio of 6.6x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of €0.44, the analyst price target of €1.0 is 55.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.