Adler Real Estate, BIW, Conwert Immobilien Invest, Deutsche Annington Immobilien, Deutsche Wohnen, Estavis, Gagfah, German property, Grand City Properties, GSW Immobilien, KWG Kommunale Wohnen, LEG Immobilien, NAV discount, Patrizia Immobilien, REIT, residential property, Stavros Efremidis, TAG Immobilien, Taliesin Property Fund, Youniq
It’s a year now since I completed my German residential property series (Parts I, II, III, IV & V, and the first part of this post offers a brief recap) so it’s a good time to take another look. With winter drawing in fast, why not whip up a plate of sauerbraten & pour a (very) large stein of beer, and we’ll begin:
I’m ignoring companies with non-English IR websites. This may be a personal prejudice, but sometimes it can be hard enough to decipher a company’s communications & (underlying) performance without suffering a language barrier too! For practical reasons, I’m also ignoring sub-10 million market caps, plus companies with a relatively minor German property allocation. [But here’s a fairly comprehensive list of these companies]. I’m kicking out Youniq (YOU:GR) (see comments below), plus Speymill (SYG:LN) which has disposed of its German property to Jim Mellon. However, I’ve added two big IPOs from earlier this year (Deutsche Annington & LEG), plus Adler who ramped up its residential portfolio this year (& added an English IR website). Finally, I’ll still treat Deutsche Wohnen & GSW as separate companies, even though the takeover of GSW’s now a done deal. [GSW may well remain a separately listed company]. This leaves us with 13 companies, a baker’s dozen – the vast majority of which are residential pure plays. They should serve as a good proxy for the entire sector:
[Note Conwert & Estavis have nearly a third of their portfolios invested in commercial property – this allocation will likely continue to decrease. Note also, nearly a quarter of Conwert’s portfolio is invested in Austria].
[NB: If you’re seeking (greater) exposure to Berlin/E German property, these are probably the best companies to focus on: Conwert, Taliesin, GSW, Deutsche Wohnen, Estavis & TAG Immobilien].
The specific focus on residential property is no accident – it’s increasingly common in the past number of years, as companies bid on large municipal portfolios & bulked up to achieve increasing economies of scale. This trend’s acquired additional momentum in the past year or two, as large-cap/pure play residential companies have increasingly traded at a premium to NAV. And judging by far higher US REIT valuations (on average, despite recent setbacks), there could be a lot more mileage to be enjoyed by investors. Meanwhile, German companies remain (understandably) focused on a continued land grab for cheap property – but when they eventually re-focus on FFO, tax efficiency & dividends, it may well usher in a fresh revaluation phase.
Of course, when it comes to property everybody’s looking for something different… It’s far better for me to come up with a selection of rankings, which should provide a good feel for the sector & perhaps suggest a few research candidates. [NB: All ratios are based on Nov-20th eod share prices. I’ve confirmed/calculated & double-checked all figures, but please do your own research & confirmation if you’re considering a particular company. I’ve also derived certain figures, and/or made adjustments, as appropriate – email me if you wish to clarify any details]. To change it up a bit, in each category I’ll generally provide a Top 5 plus some sector stats – let’s start with:
EUR Value per Sqm:
Values are cheapest in E Germany, begin to increase as you head West, and then jump substantially as you go down South. Surveying the table, value’s actually less about location & more about access to large-scale/cheap portfolio purchases – North Rhine-Westphalia (NRW) has provided the best opportunities to date. [Though I suspect we’ll see increasing activity & focus on Berlin/E Germany going forward]. The sector average is EUR 959 per sqm, while a EUR 900 per sqm market cap weighted average reflects the purchase discounts & economies of scale larger companies can achieve. On a relative or even absolute basis, I hardly need to remind you how cheap these values are..!
Of course, ultimately one might argue price equates to location, but I probably stopped listening… Yes, there’s some truth to the equation, but it’s mostly a crock – dreamed up by real estate agents wanting you to pay up & fatten their commissions. [Don’t get me wrong – I’m certainly not implying every word out of their mouths is a lie…I mean, they have to sleep occasionally, don’t they?!] Trouble is, people are tremendously insecure about property, which means they’re suckers for this kind of shite – so it tends to become a self-fulfilling prophecy. Personally, I believe the cheaper a property, the safer it is & the more upside potential it presents – particularly true of German residential property, I believe, especially at this point in the cycle. Anyway, yield is the great equalizer – one property might be a multiple of another in terms of value, but I’ll happily bet their yields are pretty similar. Let’s take another look:
Again, we’re looking at a real bargain here – the sector enjoys a 6.8% portfolio yield, while the weighted average yield edges up to 7.0% – presumably assisted by the purchase discounts larger companies manage to capture. Hmmm, now which would you prefer: Managing large blocks of German apartments, or the latest US property craze – i.e. trying to assemble & manage thousands of individual rental homes?! [Then again, I’m asking the wrong question – US REIT investors will pretty much buy anything you shove down their throats. But God forbid you offer them German property… ;-)] Of course, these portfolio values & yields aren’t necessarily what an investor gets – it all depends on what they pay:
[NB: I prefer to calculate NAV based on an average of IFRS & EPRA NAVs].
I’ve included a Top 6 here, as KWG & Conwert essentially overlap. [Note also: Two companies end up unfairly ranked from a P/B perspective: i) Patrizia has an external EUR 10 billion of Assets under Management (AUM), which isn’t reflected in its NAV, and ii) Grand City has an 8.4% yield – presuming convergence with the sector average, it would be much more reasonably priced]. The sector itself continues to trade ’round book value, with the large-caps mostly priced between 1.0-1.2 times book. Considering large-cap property company valuations in other developed markets, plus the relative gap in property yields & (particularly) valuations, an increased premium to NAV (say, of 20-30%) would appear to be warranted (& sustainable) for the market leaders. Of course, no property company’s cheap if it’s over-leveraged:
(Borrowings + Financial Derivative Liabilities + (Convertible/Preference Liabilities + Pension/Employee Liabilities + Government Loans/Repayable Grants etc.) * 50% – Cash/Marketable Securities – Derivative Financial Assets) / (Current/Non-Current/Held-for-Sale Property)]
Clearly it’s good news across the board (in fact, only Adler has a Net LTV in excess of 65%). Equity issuance, debt amortization, re-financing & property revaluations have left the sector in an enviable position – with a cap weighted average of only 55%. Admittedly, the average is flattered by Deutsche Annington & LEG, which IPOed with surprisingly low leverage. Noting the banks are clearly comfortable financing 60-65% LTVs, I’d expect the sector average to creep back up over time. Considering current German residential property valuations, and its price history, I’m pretty confident that kind of leverage doesn’t present a significant financial risk for investors.
So, what’s worth buying?! Well, some like to focus on the market leaders:
The Top 5 might all be outliers here – benefiting from positive deal & news flow, and/or a revaluation from undeserved valuations. What’s more revealing is the 11% cap weighted average gain – wow, the sector’s actually been a global laggard this year! Now, I don’t think for a second that this undermines my investment thesis – it simply reflects the return of risk-on in the markets. Too many investors have short memories & even shorter attention spans, plus there’s a multitude of far sexier investments beckoning right now… Personally, I’m perfectly happy to keep/add to my German property exposure as a core low-risk (& potential high-reward) portfolio holding. After all, we could wake up any day to a fresh wave of revulsion, risk-off, European sovereign debt crisis, bank asset write-downs, call it what you will…German residential property’s still a great place to hide.
And speaking of, others (inc. myself, perhaps) are always tempted by the laggards:
Or one might argue sticking with the large-caps makes the most sense:
These obviously possess some natural advantages, and brokers, investors & the media will mostly focus on the well-known names. More importantly, the large-caps may be the only practical (listed) investment option for institutions who want to increase sector exposure. [Damn, I really should listen to myself more…especially about simple market realities like this!] Bearing that in mind, let me highlight the companies I find most interesting now. First, we should look back – I was particularly keen on:
Youniq (YOU:GR): Yes, I was intrigued by student housing, but certainly didn’t suggest buying this loser (down 66% YTD!). I can’t determine the underlying portfolio metrics, the past year’s news flow & write-downs inspire no confidence, cash flow’s problematic & now leverage is threatening to hit dangerous levels. I don’t care how cheap it is (a 0.36 P/B!) – unless there’s a radical change/turn-around here, Youniq’s now off my radar.
Grand City Properties (GYC:GR): A great pick, up 52% YTD…except I didn’t buy it! Judging by their recent (deal) history, I suspect management will continue to rack up superior NAV performance here – but at this point in time, GYC looks rich enough to me.
Conwert Immobilien Invest (CWI:AV): What can I say… Despite the poor performance YTD, and its perplexing NAV discount, I continue to see attractive upside potential here – I mean, it’s on a bloody 0.63 P/B!
AT this point, I also potentially like:
LEG Immobilien (LEG:GR): LEG’s down 3% YTD – while its fellow IPO, Deutsche Annington, is up 18%. This divergence in performance looks unwarranted, particularly as LEG’s metrics are (a little) better ‘cross the board.
Gagfah (GFJ:GR): The WOBA-Dresden lawsuit is now a distant memory, and the company’s completed a very successful re-financing of its 2013 & 2014 debt cliff. Despite this, it trades on a 0.89 P/B which looks like an undeserved discount to its large-cap peers.
TAG Immobilien (TEG:GR): The TEG share price continues to suffer some after-effects from the recent Rolf Elgeti revelations. Whether these allegations are (finally) determined to be true or false, or simply lax governance, I suspect it’s ultimately irrelevant to the company’s current/future intrinsic value. The impact on NAV should be relatively immaterial, and it obviously won’t be a risk/issue going forward (whether Elgeti stays or goes).
And of course, that just leaves…
KWG Kommunale Wohnen (BIW:GR): Yes, it’s still nearest & dearest to my heart – and a 5.6% portfolio holding. Its poor (7)% YTD performance is really just a calendar phenomenon, as I’ve enjoyed a 19% gain versus my write-up price a year ago. Let’s first review their progress in the past year.
Actually, I posted a follow-up piece in May, so we only need to focus on their interim report & their recent Q3 release. As you’ll note, the company continues to report steady operational progress & to re-affirm FY-2013 guidance. However, the company will probably remain in digestion mode ’til 2014, as it continues to absorb & renovate its more recent acquisitions. A lot of investors seem to focus & thrive on deal news in the sector, which probably explains some of the waning enthusiasm for KWG this year. Of course, this ignores the progress & potential that’s going on below the surface – in the past year, the vacancy rate on KWG’s Investment portfolio has declined from 33% to 22%. With a Core portfolio vacancy rate of just 2.8%, this puts overall vacancies at close to 13% – which presents another significant opportunity.
Cash flow’s positive, and their current Net LTV’s around 54%. Their portfolio continues to be one of the cheapest in the entire sector, with a value of EUR 726 per sqm & a 7.3% yield. Net equity also continues to advance, with EUR 10.63 IFRS & EUR 11.56 EPRA NAVs as of end-June. Averaging these, and tweaking for Q3’s EUR 1.2 million net profit, I arrive at a EUR 11.17 (average) NAV – which makes it the cheapest stock in the sector, trading on a 0.55 Price/Book. Of course, the obvious cloud here is Conwert’s 75.7% majority stake in KWG. Predictably, this has prompted a rash of conspiracy theories amongst the company’s private investors… But I think there’s a different & bigger picture to consider here:
Screwing over KWG’s minority shareholders in a takeover, or some other form of market exit, would be a pointless exercise for Conwert. Its current (IFRS) net equity’s almost EUR 1.1 billion, while the value of KWG’s minority interest is a mere EUR 42 million – in fact, the market value of that interest is a tiny EUR 24 million. So any potential gain for Conwert would be immaterial…
What really interests & excites Conwert is the ridiculous 37% discount its share price still suffers. This is somewhat mystifying – I have to wonder if investors still think Conwert’s some kind of pre-crisis Austrian company, up to its tits in E European property & too much debt. Which couldn’t be further from the truth – only 3% of its portfolio is now outside Austria & Germany, and its latest Net LTV is just 58% (plus management continues to cut expenses & improve cash flow). In fact, it’s really not even an Austrian property company any more – how many investors realize 74% of Conwert’s portfolio is now in Germany? And a majority of this allocation’s invested in cheaper E German property? And its higher EUR 1,099 per sqm valuation & lower 6.2% yield (vs. its German peers) simply reflects the more expensive valuation of its 23% Austrian portfolio allocation? [Note a fairly similar differential exists between Berlin & Munich property, for example].
Essentially, Conwert management’s recognized the most promising route to a premium valuation is (ideally) a German-listed/large-cap German residential property portfolio. With that in mind, they’re still targeting an increase in their German property exposure (to at least 80%) in the next two years. They also plan to decrease their commercial exposure from 30% today (to a target of 20%, which I suspect they’ll easily surpass). Their majority stake in KWG’s obviously integral to this whole strategy. And it presented them with an opportunity to bring Stavros Efremidis (KWG’s former CEO) in-house & place him in charge of their German business.
I expect they’ll continue to take a ‘build & wait’ approach in the near-term. But if KWG and/or Conwert continue to be neglected by investors, I’m sure they’ll consider more aggressive measures to close the current valuation gap. Reasonable leverage allows them to consider share repurchases, or a tender – but other strategies might include bulking up KWG, spinning-out Conwert’s German portfolio, reversing some/all of it into KWG, etc. Again, any advantage gained from shafting minorities – for example, by inflating the value of properties sold to KWG – would prove fairly immaterial. And it could easily provoke wider NAV discount(s), which would entirely defeat the purpose! Anyway, I hardly need go on – if a KWG shareholder can’t see past this (real or imagined) risk, there’s a simple solution:
Just switch into Conwert shares!
Frankly, that’s probably the ‘worst-case’ scenario I foresee for KWG shareholders anyway – i.e. they might end up owning Conwert shares. As I’ve outlined, I see no reason to consider that a potentially alarming prospect. Meanwhile, I note KWG’s cheaper P/B ratio, its near 30% divergence in share price performance (vs. Conwert) since the end of June, and most importantly its record of value creation in the past six years:
Dec-07: EUR 6.47
Dec-08: EUR 6.53
Dec-09: EUR 6.59
Dec-10: EUR 7.23
Dec-11: EUR 8.41 (EPRA NAV)
Dec-12: EUR 11.19 (EPRA NAV)
End Q3-13: EUR 11.64 (EPRA NAV, estimated)
Yup, I’ll happily stick with KWG. 🙂 And I think it deserves a 1.04 P/B valuation (i.e. the sector’s cap weighted average) in the fullness of time – which implies a EUR 11.66 Fair Value per share, for an Upside Potential of 90%. Of course, a potential convergence in KWG’s portfolio yield (to 7.0%) would also offer some incremental upside. Now, all that’s left is for me to repeat this observation – German residential property is (still):
‘Perhaps one of the safest & most attractive asset classes in Europe, or even the world‘.
- KWG Kommunale Wohnen AG (BIW:GR): EUR 6.14
- Market Cap: EUR 97.5 million
- Net LTV: 54.0%
- Price/Book: 0.55
- Tgt P/B: 1.04
- Tgt Mkt Cap: EUR 188.9 million
- Fair Value: EUR 11.66
- Upside Potential: 90%