German Residential Property – An Update

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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:

Adler Real Estate (ADL:GR)

Conwert Immobilien Invest (CWI:AV)

Deutsche Annington Immobilien (ANN:GR)

Deutsche Wohnen (DWNI:GR)

Estavis (E7S:GR)

Gagfah (GFJ:GR)

Grand City Properties (GYC:GR)

GSW Immobilien (GIB:GR)

KWG Kommunale Wohnen (BIW:GR)

LEG Immobilien (LEG:GR)

Patrizia Immobilien (P1Z:GR)

TAG Immobilien (TEG:GR)

Taliesin Property Fund (TPF:LN)

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Fortress – On the Ramparts

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% of AUM, alternative assets, asset managers, Blackstone, FIG, Fortress Investment Group, Gagfah, hedge funds, KKR, Logan Circle Partners, Newcastle Investment Corp, private equity funds, Springleaf Holdings

When I posted my first writeup on Fortress Investment Group (FIG:US), it was May-2012 & the share price was only $3.11. Buying the shares (& writing about them), I felt like I was in the thick of battle – trying to defend a breached portcullis in a last-ditch & perhaps doomed effort! [In hindsight, the more revulsion I hear about a post/company, the more promising the investment opportunity might actually be…] But the situation certainly looked much safer by December (with the share price at $4.38), when I posted a follow-up piece: Another Assault on Fortress. And now here we are, standing proud & tall on the ramparts, masters of all before us – the share price is $8.17, and even traded up to $9.00+ recently!

But ramparts aren’t about the view, they’re designed for spotting danger. My last fair value price target was $8.84 per share – we need to do a fresh survey. How much upside potential is now on offer? And more importantly, has our margin of safety been eroded to unacceptable levels?

OK, let’s do a quick wrap-up of 2012, and then take a closer look at progress YTD-2013. I plan to stick with roughly the same valuation methodology, so I definitely recommend you revisit my last two posts (linked above). However, it would be handy to reproduce this table here:

German Residential Property (IV)

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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.

How About Another Catalyst? (Part X)

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Adrian Williams, Alphameric, alternative assets, Argo Group, asset managers, Avangardco, Bear Stearns, binary outcomes, capital expenditure, catalyst, delisting risk, DM plc, Dresden, emerging markets, Expected Value, Fair Value, Fortress Investment Group, Gagfah, government regulation, intrinsic value, IRR, Joe Lewis, litigation, major sale, Net LTV, P/E ratio, P/S Ratio, risk aversion, risk management, share buyback, share repurchase, takeover offers, Timeweave

Continued from here, & here’s the first post in the series.

vi) Litigation/Regulation is the final catalyst on my list. It’s also, without a doubt, the most difficult to exploit & to write about (note I’ve tackled this series in reverse order)! In fact, if it doesn’t (immediately) appeal to you, I might perhaps discourage you from ever bothering with this catalyst? To some extent it suffers from the same issues/perceptions I highlighted with v) the Major Sale catalyst.

First, most litigation/regulation risk/events are simply part & parcel of normal corporate operating activity. For example, certain sectors are almost permanently marked down due to their increased risk level (perhaps something politicians like to mouth off about?!). These risks usually aren’t of any fresh/major significance to a company’s business model or valuation, and/or they’re routinely priced in anyway – they are not catalysts.

But occasionally a real game changer comes along… A lawsuit, or a regulatory change/threat/action/approval, that could prompt a major change in a company’s future intrinsic value. It may also cause a rapid/significant adjustment in the company’s current market cap. So how exactly do we separate out & identify such a catalyst vs. the merely hum-drum? A similar approach, like v), seems sensible – something like: