The Investment Case for German Residential Property (part IV)

Saturday, Nov 03 2012 by
3

Continued from here.

No commercial propery aversion...

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.

Keep an eye on the headlines!

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? 

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
Bastfaserkontor BFK GR
Bau-Verein zu Hamburg* BVH GR
Colonia* KBU GR
Design Bau D2B GR
Deutsche Immobilien DEG1 GR
Dinkelacker DWB GR
Franconofurt FFM GR
GAG Immobilien GWK3 GR
GBW GWB GR
Griffin IV Berlin GRIFIVB DC
Hasen-Immobilien ABH GR
HELMA Eigenheimbau H5E GR
IMW Immobilien GARY GR
InCity Immobilien IC8 GR
Informica Real Invest IDE GR
OperaOne OOW GR
Primag P9R GR
RCM Beteiligungs RCM GR
Sedlmayer Grund SPB GR
SM Wirtschaftsberatung SMW GR
Sparkassen Immo SIIG/SPIG AV
Victoria Properties VIPRO DC
Vivacon VIA GR
Westgrund WEG1 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 wexboymail@yahoo.com, or leave a comment. I’m also going to set aside the following companies (all with English websites):

Grainger (GRI:LN)

Immofinanz (IIA:AV)

S Immo (SPI:AV)

JK Wohnbau (JWB:GR)

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%

Price/Book:   0.30

Estavis (E7S:GR):   EUR 1.762

Mkt Cap:   26 mio

Valuation per sqm:   591

Prop Yield:   8.3%

Net LTV:   75.9%

P/B:   0.52

Patrizia (P1Z:GR):   EUR 5.553

Mkt Cap:   318 mio

Val per sqm:   1,751

Prop Yield:   5.2%

Net LTV:   71.3%

P/B:   0.93

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…

Ho Hum

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%

P/B:   0.96

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

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Val per sqm:   EUR 915

Prop Yield:   7.2%

Net LTV:   59.6%

P/B:   1.32

Gagfah (GFJ:GR):   EUR 8.891

Mkt Cap:   1,736 mio

Val per sqm:   847

Prop Yield:   7.3%

Net LTV:   66.7%

P/B:   0.75

GSW Immobilien (GIB:GR):   EUR 32.00

Mkt Cap:   1,617 mio

Val per sqm:   873

Prop Yield:   7.1%

Net LTV:   54.1%

P/B:   1.19

TAG Immobilien (TEG:GR):   EUR 8.933

Mkt Cap:   900 mio

Val per sqm:   800

Prop Yield:   7.7%

Net LTV:   66.9%

P/B:   1.02

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%

P/B:   0.62

Grand City Properties (GYC:GR):   EUR 4.25

Mkt Cap:   236 mio

Val per sqm:   500

Prop Yield:   11.0%

Net LTV:   37.0%

P/B:   1.56

Conwert (CWI:AV):   EUR 8.94

Mkt Cap:   729 mio

Val per sqm:   1,329

Prop Yield:   7.0%

Net LTV:   59.8%

P/B:   0.56

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… 


Filed Under: Property, Germany, Value Investing,

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Wexboy Value

A blog about value investing, mostly in UK, Irish and US listed stocks. Interested in individual company stocks, investment funds, risk arbitrage, event driven/special situations, fixed income and even some natural resource stocks. ...read more or visit website »


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About Wexboy

My personal investing career began with an emerging markets obsession. Investing in individual emerging market stocks was a much taller order then than today, so I gravitated towards investment fund shares and warrants. Little did I know that (despite the volatility involved) this would turn out to be a very fortunate approach – it pretty much saved me from the consequences of poor/misguided stock analysis, chasing stock tips and investing in garbage stocks all the way down to zero.... Only when I learned of value investing did I finally discover a quantitative approach, plus a set of tools, that appealed to me and equipped me better for investing. And I guess it appealed to my mathematical background and perhaps my natural scepticism. It also tempered my lust to dive into investment trends – in fact, I’ve come to realize that any decent secular trend will take many many years to play out and there will be cycles of booms and busts in any related stocks to exploit, so hold your horses, stick to value investing and your chance will come…!  more »


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