Adjusted NAV, Austria, Berlin, catalyst, Colonia, commercial property, Conwert, Deutsche Wohnen, distressed assets, diversification, Estavis, Fortress Investment Group, Gagfah, German property, Germany, goodwill, Google Translate, Grand City Properties, GSW Immobilien, JK Wohnbau, MPC Capital, NAV discount, Net LTV, Patrizia, Peach Property Group, Petrus Advisers, Pretty Woman, residential property, risk management, Rolf Elgeti, Sirius Real Estate, Speymill, Strabag, student housing, TAG Immobilien, Taliesin, Unite Group, Youniq
Continued from here.
[btw The residential focus here doesn’t imply a commercial property aversion. Sure, it may be more economically sensitive than residential, but many of the positive factors I’ve highlighted equally apply. In fact, I’ve only one complaint about German commercial property – my exposure to it unfortunately limits my exposure to residential property!
I track listed commercial property companies also – but not as closely, and I’ve no plans to write a similar series. For me, Sirius Real Estate (SRE:LN) (a 3.3% portfolio holding) stands head & shoulders above its peers in terms of its risk vs. reward proposition. Its current property valuation & yield, occupancy rate, colossal 66% discount to NAV, plus the presence of multiple activist investors on its board/register, all offer significant operational & share price upside potential. SRE does have significant debt maturing in the next year, but its latest Net LTV of 61.3% equals the peer average & doesn’t appear to present any real re-financing (or other) threat to shareholders. Fresh news of property sales would quickly push Net LTV to sub-60%, highlight the current NAV discount & attract new investor attention.]
OK, first, it’s goes without saying: Keep an eye on the headlines! As the German land grab continues, and rising property share prices attract increased investor & media attention, you’ll see more companies keen to list. Peach Property Group (Deutschland) AG is currently pricing up its IPO. This is a spin-out from Peach Property Group (PEAN:SW) – Immofinanz (IIA:AV) has talked about something similar. Other stand-alone IPOs (mostly from financial sponsors) are rumoured also – such as Deutsche Annington & LEG.
Next, we’ve a bunch of German property companies with patchy/non-existent English news/reporting. Sigh, I don’t fancy wading through German (& Danish!) language sites. Yes, I’m biased, but it’s a valid complaint. English is the international language of business, and the potential cost of timely/precise translation would likely be dwarfed by the impact of some new foreign investor buying.
I’m intrigued, but puzzled, by investors who relish decoding foreign language reports/websites. I salute them, but personally I consider foreign language stocks – how shall I put this – the ‘homely’ girls of the market, at best! Yes, those girls have their defenders…we know, they’ve all got wonderful personalities! But have you the time & gumption to find out? And isn’t this an appalling slur on pretty girls – what the hell’s wrong with their personalities?! Are you really falling for such bunk?! [OK, it’s far less ridiculous than the proverbial ‘hooker with a heart of gold‘. I reckon ‘Pretty Woman’ was probably the most offensive movie ever! Sure, there are worse movies, but they never
tried to succeeded in selling such a putrid message in the guise of a rom-com. Lord, it’s even offensive to men! That ghastly Roy Orbison song doesn’t help either… ;-)]
I’ll stick to the pretty girls, myself…
But seriously, there’s easier ways to diversify. I save much time & grief by sticking to English language stocks – and if I exhaust suitable candidates, then I can think about diving into foreign language stocks. Consider the potential consequences, anyway: News on most of your holdings tends to just ping on your radar as you surf the news/web each day. That’s unlikely with a more obscure foreign stock. Almost inevitably, you’ll be left scrambling on their website some day, wondering why the price has dumped 20%… And when cracks/bad news starts to appear, ever notice how damn opaque management commentary can become? That’s hard enough to decipher in English, let alone via the sometimes horrible ambiguity of Google Translate…
But granted, there might be a bargain hiding away here, so let’s at least list ’em out. Note: a) The companies (below) all appear to have German residential exposure – which might range anywhere from 100% to 1%, or I could be totally mistaken, and b) unless I’m already familiar with a company, I’ve omitted sub-10 mio market caps from my database/post (no point wasting time on the dregs):
|Adler Real Estate||ADL||GR|
|Bau-Verein zu Hamburg*||BVH||GR|
|Griffin IV Berlin||GRIFIVB||DC|
|Informica Real Invest||IDE||GR|
* These 2 companies (from my prior analysis, Colonia looks cheap & interesting) had good websites…until TAG Immobilien gained majority control & discontinued their English translation! Of course, if any intrepid/German/Danish readers knows of/finds a real gem amongst these companies, I’d love to hear about it! Just email me at firstname.lastname@example.org, or leave a comment. 🙂 I’m also going to set aside the following companies (all with English websites):
The first 3 have relatively minor exposure to German residential, while JK Wohnbau‘s a mess. It has an horrific liability structure, atrocious reporting & governance since its IPO, and now it has negative consolidated equity! Interestingly, Laxey Partners & RIT Capital were each listed as 7-8% shareholders, and Grand City Properties made a tentative bid, but that’s well over a year ago now.
[Note: a) My prior comments re Net LTV,
b) Be careful of Net Asset Value (NAV) inconsistencies between companies. Some quote actual NAV (Net Equity exc. NCI / Outstanding Shares), others quote EPRA NAV excluding the net impact of deferred tax & financial derivatives, while others quote an ‘EPRA NAV’ which (for some reason) only excludes deferred tax. Normally, I’d agree there are reasonable arguments for using any/all of these NAV approaches. Goodwill occasionally pops up also, reflecting legacy assets or third party real-estate activities. I haven’t really noticed much benefit from these activities (maybe P&L would suffer without them?), so I’m dubious of goodwill. Bearing all this in mind, I generally define NAV for a company as the average of NAV less Goodwill & (true) EPRA NAV.
c) All figures (and/or errors) are my own – they generally reflect the latest balance sheet & an (estimated) adjustment for subsequent news, or transactions. I may make certain other adjustments as I see fit. Please calculate/confirm all figures & reach conclusions with your own research. Feel free to email me if you’ve any specific queries/discussion points.]
OK, now for the meat & veg:
Cheap & Kinda Nasty:
Speymill (SYG:LN): GBP 0.75p
Mkt Cap: EUR 0.5 mio equiv.
Property Yield: 7.2%
Net LTV: 77.3%
Estavis (E7S:GR): EUR 1.762
Mkt Cap: 26 mio
Valuation per sqm: 591
Prop Yield: 8.3%
Net LTV: 75.9%
Patrizia (P1Z:GR): EUR 5.553
Mkt Cap: 318 mio
Val per sqm: 1,751
Prop Yield: 5.2%
Net LTV: 71.3%
Speymill‘s another company with Jim Mellon‘s fingers in the pie. I’ve been a Mellon fan, but these days he really needs to pull his socks up & prove he’s not just a bubble boy! SYG has an awful construction business attached, and is propped up with shareholder (Mellon, again) loans – really, a bit of a no-hoper… Not much to like about Patrizia either: I could stomach the higher portfolio valuation per sqm, but the yield offers precious little justification?! A high Net LTV doesn’t help – a sale of their significant third-party management business might reduce this. P1Z‘s current P/B looks absurdly high in light of these risks & a revaluation of assets (on-balance sheet, or simply imposed by investors) could be devastating to NAV.
On the face of it, Estavis doesn’t look much better. However, it’s the best of this bunch – its property valuation & yield look pretty undervalued. A revaluation would bring leverage down to a (somewhat) more reasonable level, might imply some decent share price upside, and the small market-cap might tempt the likes of TAG Immobilien to conduct a mopping-up exercise…
Taliesin (TPF:LN): GBP 10.70
Mkt Cap: EUR 52 mio equiv.
Val per sqm: EUR 1,275
Prop Yield: 7.3%
Net LTV: 58.4%
In terms of size & metrics, Taliesin is priced just about right. NAV growth to date & exposure to higher-quality Berlin property confirms a decent operational strategy. But current scale will continue to leave TPF pretty neglected. The board’s remedy is to triple balance sheet size in the medium/long term. This is probably the correct strategy – but unfortunately the current P/B & serial share issuance/dilution to come promises limited upside.
The Big Boys:
Deutsche Wohnen (DWNI:GR): EUR 14.46
Mkt Cap: EUR 2,113 mio
Val per sqm: EUR 915
Prop Yield: 7.2%
Net LTV: 59.6%
Gagfah (GFJ:GR): EUR 8.891
Mkt Cap: 1,736 mio
Val per sqm: 847
Prop Yield: 7.3%
Net LTV: 66.7%
GSW Immobilien (GIB:GR): EUR 32.00
Mkt Cap: 1,617 mio
Val per sqm: 873
Prop Yield: 7.1%
Net LTV: 54.1%
TAG Immobilien (TEG:GR): EUR 8.933
Mkt Cap: 900 mio
Val per sqm: 800
Prop Yield: 7.7%
Net LTV: 66.9%
Market leaders, Deutsche Wohnen & GSW, now sport significant NAV premiums. I’ve anticipated this since last year (yes, surprising for me!). I expected interested investors to mostly pile into the leaders, and premiums ultimately seemed justified in light of prospects (and noting ridiculous US valuations!). DWNI‘s market cap should pull further ahead (they’re prepping for a new fund-raising), and GIB‘s assets will grow as it stretches its Net LTV). I expect continuing growth in underlying NAV, but it’s difficult to see P/Bs expanding from a current 1.26 average. But that’s probably just the value investor in me coming out… 😉
TAG Immobilien’s been v acquisitive, and has proved adept at expanding its balance sheet, market cap & NAV. Thanks to Germany’s property wunderkind, Rolf Elgeti – who’s (naturally) on the Colonia & Bau-Verein zu Hamburg boards, but is also (more surprisingly) on the boards of Sirius Real Estate & Estavis (and Treveria (TRV:LN), up ’til Apr-12)! I was encouraged to see Ruffer as a major shareholder, but TEG‘s higher Net LTV should restrain further P/B appreciation for the moment. The same goes for Gagfah, which is penalized by an upcoming wall of debt maturities, and a well-publicized (& now resolved) legal spat with the city of Dresden (the subject of a recent Catalyst article). In light of GFJ‘s market cap & the backing/management of Fortress Investment Group (FIG:US) (a 4.6% portfolio holding), a successful re-financing would merit a significant re-rating. A decent equity raise might achieve the same result, but that would probably dilute NAV to some extent.
Cheap & Quite Possibly Interesting:
Youniq (YOU:GR): EUR 5.013
Mkt Cap: 52 mio
Net LTV: 36.6%
Grand City Properties (GYC:GR): EUR 4.25
Mkt Cap: 236 mio
Val per sqm: 500
Prop Yield: 11.0%
Net LTV: 37.0%
Conwert (CWI:AV): EUR 8.94
Mkt Cap: 729 mio
Val per sqm: 1,329
Prop Yield: 7.0%
Net LTV: 59.8%
Youniq’s an interesting proposition – its main focus is on student housing, of which I’m a huge fan! Many still imagine lice (& student) infested hovels… Er no, not when they’re custom-built & supervised multi-unit properties, and especially when Mummy & Daddy are guaranteeing/paying the rent. And Western unemployment & governments are sure to provide increased demand! But…for the life of me, I can’t figure out YOU‘s property valuation/yield?! Their development returns aren’t v clear either. Further research might yield better answers, but I expect some near term uncertainty/write-downs from the ongoing disposal of a legacy portfolio. Longer term, their hook-up with MPC Capital (MPC:GR) may prove exciting & offer a conduit for reducing leverage & recycling capital, plus a potential stock re-rating. Youniq also offers a company like Unite Group (UTG:LN), which is 10 times larger, a marvelous German entree. The share deserves close monitoring.
Grand City Properties‘ P/B certainly doesn’t suggest a bargain?! But perhaps it is… The team here has managed a spectacular ramp-up (79%+ pa in terms of units/space/total rental income growth) since 2008. Their deal approach has been to target opportunistic purchases of (semi) distressed property portfolios (note their current 81% occupancy rate). This now leaves them with a portfolio valuation & yield that looks wildly out of line with their peers. A recent/successful convertible issue has also produced a highly attractive Net LTV. Market recognition of these positives is clearly evident from their premium P/B ratio (the highest observed). However, if we presume an ultimate revaluation closer to its peers, plus continued rapid operational progress, GYC may still offer reasonable upside from current levels.
Conwert’s the forgotten large-cap..! Two fairly obvious reasons why: First, CWI‘s a pretty mixed bag – not necessarily a bad thing, but it’s probably escaped the attention of investors looking for pure plays. Its portfolio is split 47% each between Germany & Austria, and there’s a 43% allocation to commercial/retail property – the general objective is to increase residential/German exposure. Property valuation’s also high, reflecting much higher Austrian valuations – but is well-supported by yield. Second, in the past few years, there’s been constant on-off restructuring of their business & portfolio, turnover of management/board, and turnover in their shareholder structure. This has been unsettling/distracting for both new & existing investors.
Interestingly, the arrival of Petrus Advisers (a hedge fund/PE manager) as a core shareholder in 2010-11 (reaching a 20.1% stake in May-11) was hailed as providing fresh stability, and caused the share price to rally over EUR 12. This hope was dashed by the unexpected & abrupt departure of Petrus earlier this year, apparently at a loss. Hans Peter Haselsteiner, CEO of Strabag (STR:AV), is firmly in the driving seat since. Continued/further clarity re strategy is crucial here, but the size of Conwert’s balance sheet & market cap, its reasonable leverage, a continued re-orientation of its portfolio, and a strong awareness of its large NAV discount, all seem to suggest significant upside potential for the share price.
To be continued. Nearly finished now… 😉
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I think you missed one – KWG Kommunale Wohnen – currently trading at a market cap of EUR 80 m providing a 45% discount to NAV with a LTV of 51%. They seem to present good value as they have acquired substantial portfolios in German tier 2 cities and are quite successful in reducing vacancies. FFO is increasing and they are targeting to start payouts in 2013/2014. Their webpage is also in English and here is a link to their latest presentation:
Click to access 20121005_KWG_AG_EN.pdf
Top marks, Ben, I was wondering if a reader would spot that..! Think you will like my latest post 😉
John Aitken said:
Interesting and very detailed article, the overall German rental market is well managed so the reports the companies produce allow some degree of cross checking yields etc as detailed in the reply above.
Also severs as a good lesson to potential building purchasers..get the facts from the rent list and treat it like a balance sheet, agents may not rent the property but it will be rented and managed by a professional property manager and each month they will produce a spreadsheet of income and expenditure for the owner..the agent of course may not be too keen for you to see that..but push and you will get the information.
Then find out what the information means to you as an owner, buying shares is very different in companies that own or manage property that’s very hands off where as owning gives you the opportunity to greatly increase yields but also means you have to keep an eye on maintenance costs etc as well.
Anyone got questions on buying or funding property purchase in Germany happy to reply, but if you want hands off investment in the same market the article is really spot on in terms of the detail also excellent..
Joe's Sustainable Portfolio said:
Interesting article. I do particularly like your paragraph on the sheer difficulty in gathering news on the foreign companies. There are many companies on the AIM for example that only pay lip service to their English website page. As the matter of fact, a company in my portfolio is Chinese and the attention they paid to the English site is very uncaring. On the other hand, the Chinese website shown many announcements and news that is quite useful to read, but the vague translation by machine make it surprisingly difficult to understand the news themselves or rather the more subtle meaning behind it. In this case, I usually send an email to the company asking several questions to clear up some vague meanings and it is usually cleared up.
To be honest, if you tend to invest in small or micro cap companies, the news about them do not just ping on my radar. They tend to be deathly quiet, only evidences of their stirrings can be found in their financial reports and RNS. Still, they are fun to hold and surely a part of holding foreign companies is that it is also challenging and who does not like a challenge?!
Thanks, Joe! Yeah, I’ve seen plenty of foreign situations where the English site news doesn’t match the local language site news which doesn’t match the stock exchange/regulatory site news! Difficult… Yes, you can usually clarify language or communication issues (in a number of ways), and of course I’ll do that for a portfolio holding if necessary. My real issue’s time – I monitor huge scads of companies and/or potential buys, and am always finding/considering more, so that level of drill-down is the last thing I want to be doing for non-portfolio holdings.
I agree news out of small-caps is rare, but it still pops within my normal news-beat covering larger companies. For many foreign stocks, you may be forced to visit their actual website every single day if you want to be timely, and even that’s not reliable!
Could you elaborate how you caculated the property yield of gagfah? I get a yield of 7,5%, using the H1/2012 report.
If you just want to check the balance sheets you could use the website of Frankfurt Stock Exchange. E.g. for GAG Immobilien AG :
But I prefer to look into the company reports directly, because I don’t know how accurate this data is for such small companies.
Well, we’re close! The whole rent/yield end of things can be a bit inconsistent. And there’s generally a few different ways to calculate figures. Most companies now provide a headline rent per sqm figure – I like to use this & tie it back to valuation per sqm. For Gagfah, we have (EUR 5.13 * 12) / EUR 847 = 7.3%.
Consistency certainly won’t be 100% with this method, but every other method presents the same problem… But it’s perfectly sufficient for comparative analysis, and for identifying the best investment candidate(s). At that point, it’s possible (& prudent) to drill much deeper into the figures of any potential buy(s).