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Sector Special
The German Real Estate Industry
Berenberg Fixed Income Research
27th November 2014
Authors
Patrick Weber
Analyst
+49 69 9130 594
[email protected]
Companies covered in this study include:
Dwight Bolden
Research support
+49 69 9130 597
[email protected]
•
•
•
•
Adler Real Estate AG
Deutsche Annington AG
Deutsche Wohnen AG
DIC Asset AG
•
•
•
•
GAGFAH AG
Grand City Properties SA
LEG Immobilien AG
TAG Immobilien AG
All recommendations in a snapshot
DIC Asset Management AG
LEG Immobilien AG
Business profile: Aggressive
Business profile: Aggressive to Balanced
Business profile: Excellent
Financial profile: Aggressive
Financial profile: Excellent
Spread levels: fairly valued, remain on hold
Spread levels: too tight given the leverage profile
Spread levels: Convertible is undervalued
Summary: Adler has the potential to become the next
GCP. The key question is whether it can reach the
targeted portfolio size of 47k units (at a fair value) and
reduce its leverage to more sustainable levels after 2017
Summary: DIC is highly leveraged and in the near term,
the company may suffer from lower economic growth,
leading to potentially higher vacancy rates. Leverage is
too high.
Summary: LEG is the largest residential real estate
company operating in the state of NRW. It has delivered strong internal like-for-like rental growth
and there is potential for further growth.
GAGFAH S.A.
TAG Immobilien AG
Business profile: Balanced
Financial profile: Balanced
Spread levels: fairly priced
Spread levels: Convertible fairly valued
Spread levels: fairly valued, remain on hold
Summary: ANNGR offers investors the most
diversified investment in the German real estate sector.
Just the scale and the excellent performance of the
company clearly indicate an investment grade score.
Summary: GAGFAH will deliver a steady and above
market average growth, just by means of internal
improvements and rent increases. However, despite
low interest costs, the credit profile is aggressive.
Summary: TAG has a critical size and benefits
from a low cost base. However, our positive
perception is tempered by a very high vacancy
rate in the Salzgitter region (key region for TAG).
Deutsche Wohnen AG
Grand City Properties S.A.
Switch: TAG vs. DIC
Recommendation: Sell DIC and buy TAG
Business profile: Balanced vs. Aggressive/Balanced
Spread levels: Convertibles are undervalued
Spread levels: Convertibles are undervalued
Financial profile: Balanced vs. Aggressive
Summary: DeuWo’s occupancy rate is best in class and
the company has a very solid business profile with
excellent internal FFO growth prospects. We
particularly like the strong Berlin exposure (72%).
Summary: GCP is the only residential real estate
company with an excellent scoring with regard to both
the financial and the business profile. Clearly, LTV
and the debt profile are best in class.
Summary: The bonds of both companies trade at a
similar level, although DIC has a weaker credit profile
and a more risky business model. Berenberg
recommends to sell DIC and invest in TAG bonds.
Overweight
Marketweight
Underweight
Switch idea
2
The good and the bad you need to know about German real estate
Rising rents across all segments of the real estate market
Commercial and residential real estate prices increased by around 11% last year
Favorable financing conditions
Low financing costs due to expansive monetary policy and comeback of CMBS
Sound medium-term economic profile
Solid economic growth and moderate unemployment in the medium-term
Mega-trends in favor of real estate investment companies
Population growth (migration), urbanization, and trend to 1/2 person households
Strong structural factors and sound cash flow prospects
Favorable demand and supply dynamics, high structural degree of renting in Germany
Market is starting to overheat, leading already to lower rental yields
Investment volumes hit record high, transactions seem to start to look overvalued
Temporary economic downturn in 2014/15
Likely to impact commercial real estate companies in the short-run
Regulation: Introduction of a rental cap (starts in 2015)
Berenberg expects a low impact for most residential real estate companies
28/11/2014
Source: Berenberg Fixed Income Research.
3
Real Estate one of the best performing sectors year-to-date
Berenberg expects the strong
momentum for the real estate
industry to continue
BofA ML Technology
BofA ML Utilities
BofA ML Real Estate
BofA ML Non-Financials
BofA ML Media
BofA ML Basic Industry
BofA ML Energy
BofA ML Automotive
BofA ML Capital Goods
BofA ML Healthcare
0%
2%
4%
6%
ytd
28/11/2014
6M
8%
10%
12%
14%
3M
Source: Bloomberg, Berenberg Fixed Income Research.
4
Structure
1.
Macro environment in Germany
6
2.
Credit drivers and peer valuation analysis
11
3.
Company profiles
17
19
23
Deutsche Wohnen AG
27
31
GAGFAH S.A.
35
39
LEG Immobilien AG
43
TAG Immobilien AG
47
4.
Disclaimer
51
5.
Contacts
61
5
Section 1
The macro environment in Germany
6
Stylized facts…
… about the structure of the German real estate market
Structural factors are favorable for both residential as well as commercial real estate
investment companies
Residential
Commercial
Supply:
Supply:
• Supply: 41m residential housing units in total (Zensus 2011)
• Due to lower supply, vacancy rates declined across the board
and even for second and third tier cities
• New construction of residential units remain at a historic all-time
low (around 200k new residential units were built this year)
Demand:
• Demand: increasing number of single households (number of 1 to
2 person households expected to increase by 12% to 33m until
2025); in total, growth of households expected at 1.8% until 2020
• However, positive demand effects mainly for metropolitan areas
and cities with universities (e.g. Jena, Munster,…)
• Higher demand for appropriate housing units for elderly people
(market size est. at 10% of population); Deutsche Wohnen is so
far the only company which explicitly tackled this market
Further information:
• Germans spend around 23% of their disposable income on rents
• Ownership split: Only c.10% of residential units belong to
institutional investors and c.33% are let by private persons. 40%
are privately owned flats, used for own purposes
• Rental cap may restrict in-place rent growth
28/11/2014
Demand:
• Demand for Offices: accounts for c.50% of total commercial
investments (Source: CBRE, 2014); Metropolitan areas currently
suffer from excess demand; Even demand for second tier
locations is starting to increase; Overall rental yields expected to
fall as demand from foreign investors is expected to increase
further (currently rental yield across the top 8 regions is c.4.5%)
• Demand for retail properties: demand for prime spots and main
street properties increased recently, compared to demand for
shopping centers (+37% in H1 2014 according to CBRE); Due to
an increased focus on second and third tier cities, there is also an
increased demand for prime retail location across Germany; Key
demand in H1 2014 comes from fashion retailers (c.25%) and
food retailers (c.20%) (Source: CBRE)
Further information:
• The city with the highest EUR/sqm prices are Frankfurt/Main (>35
EUR/sqm), followed by Munich and Dusseldorf
Source: Destatis 2014 (new construction numbers), Berenberg Fixed Income Research.
7
Macro Environment in Germany I
Long-term dynamics vary significantly on a regional level
Population development until 2020*
Vacancy rates (May 2014)*
Change in population
Vacancy rates in %
of the housing stock
Below -6%
Below 3%
-6% to -3%
3 to 5%
-3% to +0%
5 to 7%
+0% to +3%
+3% to +6%
Above +6%
Above 7%
• Metropolitan areas benefit from urbanization trends
• Average vacancy rates at around 3% – 5%
• Eastern Germany likely to be negatively impacted by
demographic developments
• High structural vacancy in East Germany with the
exception of the metropolitan areas of Dresden & Berlin
Pricing and rental yield pressures very likely in some Eastern German cities with “bad” demand and supply dynamics
Metropolitan areas will benefit most because of (i) rising income, (ii) low unemployment, and (iii) favorable demand/supply
28/11/2014
Source: * Bulwiengesa Research (House price index, March 2014) Berenberg Fixed Income Research.
8
Macro Environment in Germany II
Short-term price dynamics positive for residential, stable for commercial
Residential property prices in Germany move with
interest rates and the unemployment rate
Commercial property prices in Germany mainly
follow the economic growth pattern
120
12%
125
14%
110
8%
110
8%
100
4%
95
2%
90
0%
80
-4%
Residential
Unemployment Rate
Long Term Interest Rates
Commercial
GDP Growth Rate
Residential and commercial property prices increased by around 11% between 2010 and 2013
• This development has been promoted by a recovering economy and favorable financing conditions
• Berenberg expects this trend to continue in the medium-term
… Residential Real Estate prices are expected to increase further due to the low interest rate environment, the
demand from foreign investors, and the low level of unemployment
… Commercial Real Estate prices are expected to remain broadly flat and may even decline in some economically
weaker regions of Germany in the short run
28/11/2014
Source: Bloomberg, Real estate price indices from vdp Research (09/2014), Berenberg Fixed Income Research.
9
Key takeaways for investors…
Germany – on a macro level – is an attractive market for real estate investors
Country considerations…
•
Eight key metropolitan
areas across Germany
Germany has not just one metropolitan area but - due to its
federal structure - consists of at least eight key metropolitan
regions, offering investors the potential to profit from economic
developments in different regions as well as to diversify their risk
Hamburg
Structural considerations…
•
Germany is still a country where most people are renting out real
estate (c.50% vs. Europe ≈ 30%), making the business model of
real estate companies relatively safe and stable
•
Trend to urbanization (c. 2/3 of Germans in villages wish to
move to metropolitan areas), increase in single households
(c.44% until 2013) and net migration are further positives
•
•
Supply of new housing, particularly in metropolitan areas, is still
growing less than demand, leaving further room for rent growth
and thus offering stable cash flows to those companies which
focus on metropolitan regions
For Eastern Germany, Berenberg expects a lower population
growth and higher vacancy rates, which is likely to negatively
impact companies focusing solely on this part of Germany
28/11/2014
Berlin
Dusseldorf
Cologne
Frankfurt/Main
Nuernberg
Stuttgart
Munich
10
Section 2
11
Overview
Macro landscape
Business model
Financial risk
Berenberg’s approach to real estate credit scoring
Berenberg’s approach to real estate credit scoring
28/11/2014
Credit driver
Factors
Takeaways
Country considerations
GDP growth, unemployment rate,
long-term interest rate
Low unemployment rate, solid
medium-term economic growth
Structural considerations
New housing starts, Growth of
households, Lifestyle changes
Demand and supply dynamics in
favor of most real estate
investment companies
Mega trends
Demographic trends, Urbanization,
Elderly Living
Demographic trends in favor of
most real estate investment
companies
Exposure and business model
Commercial (Office, Retail),
Residential, Development,
Services
Residential less dependent on the
business cycle when compared to
commercial
Size of operations
Portfolio size, company size,
economies of scale,…
A larger portfolio size (# units) are
usually credit positive
Portfolio diversification & quality
Regional and customer
diversification, Quality of assets,…
Quality of region in terms of
economic prospects is the main
driver
Leverage
Loan-to-Value, Net debt/adj.
EBITDA
LTV below 50-55% are considered
in line with an IG score
Profitability
Adj. EBITDA (margin), interest
coverage, FFO I yield
Adj. EBITDA profitability of above
65% is considered in line with an
IG score
Cash flows and liquidity
FFO I/II
We mainly look at FFO I, in
particular its recurring (growth)
component
Done in
the prev.
section
Goal of
the
analysis
in this
section
12
Business risk profile – how Berenberg assesses the credit drivers
Credit driver: Business risk
End market exposure
Residential
Commercial
Business model set-up
Mixed
In general, Berenberg scores companies
with a lower dependence on business
cycles, and thus more stable cash flow
streams, higher. In this context, we
generally prefer residential over commercial
real estate. For residential real estate
companies, (structural) growth due to rent
increases is rather independent of
economic cycle, whereas commercial real
estate companies are affected to a larger
extend by business cycle fluctuations (via
vacancy rates).
Size
Portfolio strucutre / diversification
Quality of assets
We generally regard a
larger size as credit
positive if the company
can demonstrate to
benefit from economies
of scale with regards to
its asset management
line and if there is proof
that it benefits from
cost
advantages
related to size.
Berenberg regards this factor as
the most important scoring driver.
In particular, we consider factors
related to:
Location and the quality
of the infrastructure
plays a significant role
for our assessment of
properties
in
the
portfolio. Ideally, the
housing units should
only
require
maintenance CAPEX.
Berenberg considers
that
economies
of
scale should exist for
residential
portfolios
with more than 40,000
real estate units.
28/11/2014
• Regional diversification (a
clustering in a certain region
may still not hurt our scoring if
the respective region has solid
economic prospects)
• Tenant diversification (a larger
number
of
independent
tenants is usually credit
positive,
particularly
for
commercial real estate)
• (Structural) vacancy rates
(usually considered good if
below 4%)
13
Financial risk profile – how Berenberg assesses the credit drivers
Credit driver: Financial risk
Leverage
Berenberg uses the Loan-to-Value (LTV)
ratio as the key leverage metric. We
consider LTV of below 50-55% as indicative
of a conservative financial profile and in
accordance with an investment grade
score. Broadly speaking, the LTV is derived
by taking all financial debt, deducting cash
& cash equivalents and dividing it by the
size of the investment properties on the
balance sheet.
Profitability
Cash flows and liquidity
Berenberg uses EBITDA, adjusted for gains
due to the disposal of assets, as the key
figure in assessing profitability. We exclude
fair value adjustments in our analysis of
sustainable income generation. In principle,
a larger portfolio size leads to higher
profitability ratios. Generally, an adjusted
EBITDA margin of above 65% is indicative
of an investment grade score.
Berenberg uses FFO I to assess the quality
of cash flows. We only consider the portion
of cash flows which we think is sustainable
in the long-run.
Note however, that typically, cash flows are
not sufficient to repay debt and hence,
Berenberg analyzes the liquidity position
and refinancing prospects of the company
in conjunction with cash flows metrics.
Rent Income
Acquisitions
Cost base
Interest cost
FFO I
Measures the income which has
been directly generated from renting;
This measure excludes one-time
effects and gains on asset disposals
28/11/2014
Dividend payments
(usually between 50-70%)
• Debt repayment
• CAPEX
• Acquisitions
14
Peer analysis and comparison – fundamental data
FY 2013
Portfolio value in € m
Total real estate units
Total sqm (‘000)
Occupancy rate
Average size per unit
Rent restrictions
NRI multiple
NRI yield
WACD
Avg. debt maturity in yrs
Corporate LTV
ADLER
418
7,797
493
90.7%
63sqm
13%
13.7x
7.3%
4.7%
7.0
70.2%
DAIG
10,375
178,565
11,396
96.1%
64sqm
16%
14.1x
7.1%
3.3%
8.8
50.9%
DW
8,469
140,780
8,972
97.0%
61sqm
21%
14.2x
7.1%
3.5%
8.2
56.3%
DIC
2,256
251
1,900
89.3%
n.a.
n.a.
n.a.
n.a.
n.a.
4.5
66.4
Rental income growth rate
LEG
4,949
90,894
5,844
97.0%
64sqm
40%
13.9x
7.2%
3.3%
11.5
48.8%
Large
DAIG
TAG
DW
ADL
LEG
TAG
Size
DIC
Low
DW
GAGFAH
LEG
TAG
3,563
68,123
4,443
91.0%
61sqm
0%
14.0x
7.1%
4.1%
8.7
64.0%
Portfolio diversification
High
GCP
GCP
1,011
22,000
1,800
87.3%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
45.8%
Size and Diversification (as of H1 2014)
Business model growth prospects (as of H1 2014)
Asset value growth rate
GAGFAH
7,712
143,919
9,142
95.2%
61sqm
15%
14.0x
7.1%
3.1%
6.2
62.1%
GCP
DIC
GAGFAH
DAIG
Small
ADL
28/11/2014
Source: Company data (FY 2013 numbers), Berenberg Fixed Income Research.
15
Peer analysis and comparison – market data
Maturity
Volume
Price
YTW
OAS
Callable
Rating
Equity TP*
Comment
Cash bonds:
ADLERR 6 04/19
01.04.2019 100,000,000
101.14
5.53
534
Y
--
N/A
Credit spread fairly valued
ANNGR 2.125 07/16
25.07.2016 700,000,000
102.74
0.40
34.9
N
BBB
N/A
ANNGR 3.125 07/19
25.07.2019 600,000,000
109.45
0.99
82.7
N
BBB
N/A
ANNGR 3.625 10/21
08.10.2021 500,000,000
114.85
1.31
90.8
N
BBB
N/A
ANNGR 2.125 07/22
09.07.2022 500,000,000
104.86
1.41
91.2
N
BBB
N/A
DICGR 5.75 07/18
09.07.2018 100,000,000
107.75
3.25
312
N
--
N/A
Spread too tight given leverage metrics
DICGR 4.625 09/19
08.09.2019 125,000,000
105.70
3.21
301
N
--
N/A
Spread too tight given leverage metrics
TEGGR 5.125 08/18
07.08.2018 310,000,000
108.39
2.61
250
N
--
N/A
TEGGR 3.75 06/20
25.06.2020 125,000,000
102.78
3.16
288
N
--
N/A
DWNIGY 0.5 11/20
22.11.2020 250,000,000
115.05
-3.11
--
Y, Softcall
Baa1
€21
Further upside potential given share price target
DWNIGY 0.875 09/21
08.09.2021 400,000,000
107.62
-0.24
--
Y, Softcall
Baa1
€21
GYCGR 1.5 02/19
24.02.2019 275,000,000
123.70
-2.27
--
N
BBB-
€12.5
LEGGR 0.5 07/21
01.07.2021 300,000,000
112.74
-1.35
--
Y, Softcall
--
€64
GFJGY 1.5 05/19
20.05.2019 375,000,000
112.52
-1.30
--
Y, Softcall
--
€17
Fairly valued
Convertible bonds:
28/11/2014
Source: Bloomberg, * based on our Equity Research, Berenberg Fixed Income Research.
16
Section 3
Company profiles
17
Corporate profiles
3.1
19
3.2
23
3.3
Deutsche Wohnen AG
27
3.4
31
3.5
GAGFAH SA
35
3.6
Grand City Properties SA
39
3.7
LEG Immobilien AG
43
3.8
TAG Immobilien AG
47
18
Credit profile
19
Credit profiles – Adler Real Estate AG
Credit metrics strongly improved in H1 ‘14, but company remains HY
Bloomberg Ticker
ADLERR <Corp>
Company profile and strategy
In 2012, the Adler Real Estate AG has changed its strategic
alignment and repositioned itself from being a real estate
developer to a residential investment company (targeted share
of residential real estate in the portfolio: c.97%). Adler is
currently in the process of selling commercial real estate units
and legacy assets. As of H1 2014, the company has 25,000
real estate units. Its strategy rests on four pillars:
Company data
(i)
(ii)
Mezzanine IX Investors 37.17 %
Wecken & Cie. 9.73 %
Uhlandstraße Investments 9.49 %
Free Float: 43.61 %
(iii)
(iv)
Headquarter:
Hamburg, Germany
Market cap/Employees:
€ 240.9m / 83 (Sep. 2014)
Major shareholders:
Clear country focus on Germany
Sole focus on good-quality residential real estate and
non-city-center locations (B locations)
Financial goal is to reach an LTV of 55% in the medium
term (currently: c.64%)
Benefit from economies of scale in asset management,
building up a critical size of at least 47,000 units by 2017
Berenberg believes that Adler has the potential to significantly
grow in terms of net asset value and rental income within the
management’s scheduled timeframe (until 2017). Moreover,
based on our macro outlook, the company’s regional exposure
in Germany looks promising (expectations about population
growth and vacancy rates in its core markets) in many of its
regions but we also note some company’s exposure to weak
regions in Eastern Germany.
Management:
Rental units
Axel Harloff (CEO)
Webpage:
www.adler.com
Source: Company presentation
Strengths
Weaknesses
• Strategy shift ensures stable cash flows going forward
• Larger competitors operating in the same region(s)
• Lean company structure supports a low cost structure
• High vacancy rates & some exposure to weak regions
• Network of the management in the real estate industry
• High financial leverage
20
Portfolio size to double in the next 24 months
Credit profile
Investment thesis
Business profile: Aggressive (at least until 2017)
Solid diversification, but critical firm size not yet reached
Adler has the potential to become the next rising star in
the German residential market. Management
commitment is high and we believe the targeted
portfolio size of 47k units is realistic given the network
of the company. However, although the maturity profile
is balanced, the company is nevertheless highly
leveraged and we expect that this will not chnage for
the next two years until a critical portfolio size is
reached. Due to size considerations, we only give a
recommendation on the ADLERR 6 04/2019 bond.
•
•
•
•
•
•
Adler repositioned itself in 2012; Berenberg expects that
Adler will make significant acquisitions in the next two
years. The company targets a portfolio size of around
47,000 units. After reaching its target size by 2017, Adler is
likely to begin with its debt deleveraging process.
Targeted portfolio diversification to economically good
regions with a clear investment philosophy from the
management is positive: Currently the portfolio is mainly
split amongst North Rhine-Westphalia (40%), Saxony
(20%), and Lower Saxony (15%).
Current portfolio size of c.25,000 units is too small to profit
from economies of scale. Key question for us: can Adler
grow its portfolio size fast enough in target regions before
the market dries out.
Portfolio quality is medium, with rather small required
CAPEX spending.
Potential for rental income growth by vacancy rate
reduction (Berenberg regards a 5 percentage point
reduction as possible).
We note that the exposure in Eastern Germany is rather in
the economically weak areas.
Financial profile: Aggressive for the foreseeable future
Higher leverage than most of its peers
•
•
•
•
Increase in profits currently mainly driven by fair value
adjustments.
Current LTV at around 64% (H1 2014).
Excellent maturity profile with no major debt maturities
before 2023.
We do not expect any dividends payments in the near
future.
Recommendations
ADLERR 6 06/2017
(no recommendation)
Price:
--
Vol:
10m
YTW:
--
OAS:
--
Covenants: --
ADLERR 8.75 04/2018
(no recommendation)
We would get a more positive view if…
Price:
--
Vol:
35m
•
•
YTW:
--
OAS:
--
•
Sustainable reduction of LTV to below 60%
Sustainable increase in the occupancy rates of
the residential share of the portfolio to 95%
Successful monetization strategy, selling approx.
€75m in non-core assets over the next 24 months
Covenants: --
ADLERR 6 12/2018
(no recommendation)
Price:
--
Vol:
3m
YTW:
--
OAS:
--
Covenants: --
We would get a more negative view if…
•
•
•
•
Failure to build up a critical size for the portfolio of
at least 40,000 in the next two years
Failure to increase occupancy rates to c.95%
(currently slightly below 90%)
Transaction prices for portfolio acquisitions
become overly expansive
Failure to monetize the €75m of non-core assets
ADLERR 6 04/2019
(Marketweight)
Price:
101.1
Vol:
100m
YTW:
5.53
OAS:
534
Structure: Callable 04/16 @ 103.5
Major covenants: Neg. pledge, CoC,
Cross Default, Restriction on Activities
(Pricing: 26.11.2014 BGN Close)
Screening Coverage
21
Selected financials and market development over the last year
Selected financials (Source: Berenberg Equity Research)
2,400
150
80%
360
21%
77%
800
74%
0
Net debt
7%
0%
2013
2014e 2015e 2016e 2017e
Properties
50
0
71%
2013
14%
2014e
Net rents
LTV in % (rhs.)
2016e
FFO
Selected profit & loss and cash flow items (EURm; Source: Berenberg Equity Research)
2013
2014e
2015e
2016e
2017e
Total revenues
19
123
170
197
221
Net rents
11
56
103
122
143
EBIT (excl revaluation)
6
75
99
114
125
Fund from operations (FFO)
0
10
28
31
47
0.4%
4.5%
12.1%
13.6%
20.2%
FFO yield
2015e
in EUR mio.
1,600
in EUR mio.
in EUR mio.
Maturity profile
100
240
120
0
2017e
FFO yield (rhs.)
Option adjusted spread development in bps since March 2014 (Source: Bloomberg)
700
600
Selected balance sheet items & ratios (EURm; Source: Berenberg Equity Research)
2013
2014e
2015e
2016e
2017e
Total assets
461
1,410
1,672
2,007
2,163
Investment properties
418
1,176
1,486
1,831
2,014
Net debt
324
1,002
1,260
1,518
1,591
Interest cover
0.7
2.7
2.2
2.0
2.2
Dividend payout ratio
0
0
0
0
0
Loan-to-Value (LTV)
73%
77%
79%
79%
76%
500
400
31.03.2014
31.05.2014
31.07.2014
ADLERR 6 04/19
22
Credit profile
23
Credit profiles – Deutsche Annington AG
The largest residential real estate company in Germany
Bloomberg Ticker
ANNGR <Corp>
Company data
Deutsche Annington AG (ANNGR), founded in 2001, is the
largest German residential property company with more than
185,000 real estate units (+3% H1 yoy growth) in over 550
locations across all 16 federal states of Germany. Around 97%
of the company’s portfolio is located in Berlin and Western
Germany. By market capitalization, Deutsche Annington AG
scores clearly in the top 10 of all listed real estate companies in
Europe and allows investors to participate in the general real
estate market development in Germany. The company is rated
BBB by S&P with a stable outlook.
Headquarter:
Bochum, Germany
€ 7,009m / 3,283 (June 2014)
Major shareholders:
ADIA: 13%
Norges Bank: 9%
Wellcome Trust: 8%
The main part of Deutsche Annington’s portfolio is located in
states with sound economic fundamentals, e.g. North RhineWestphalia, Hesse, and Bavaria (see table to the right provided
by Deutsche Annington). The company’s vacancy rate in H1
2014 was 3.8% (vs. 3.9% in H1 2013) and the portfolio was
valued at around €11.4bn (+10% H1 yoy growth) which makes
Deutsche Annington the largest private real estate company in
Germany by portfolio size.
Management:
Rolf Buch (CEO)
Stefan Kirsten (CFO)
Klaus Freiberg (COO)
Webpage:
www.deutsche-annington.com
Strengths
Weaknesses
• Largest residential real estate player in Germany
• Maturity profile is less balanced than that of key peers
• Good financial profile (further strengthened by a €450m
• Some parts of the portfolio in economically weak regions
capital increase in November this year)
and with significant CAPEX requirements
• No reliance on external growth necessary
• High dividend payout policy (>70% of FFO)
Click here for the latest report
from our equity research
24
Excellent business profile and moderate financial risk profile
Credit profile
Investment thesis
Best in class competitive position and high diversification
An investment in ANNGR allows investors to take the
most diversified investment in the German real estate
sector. Just the scale and the excellent performance of
the company clearly indicate an investment grade
score. Both the business and the credit profile are
sound. However, market spreads are already trading
quite tight and compared to key peers do not justify an
overweight recommendation. Therefore, on valuation
grounds, we recommend to marketweight ANNGR’s
bonds.
•
•
•
•
•
•
Competitive position of ANNGR is very strong.
The competitive position is even further enhanced by very
lengthily rental periods of tenants and occupancy rates
which belong to the best in the German industry.
Highly efficient in terms of costs per unit due to significant
economies of scale (in-house repair, integration, state-ofthe-art IT technology) which is unique in its industry.
Very strong diversification with respect to regions and
tenants, with no clustering.
Asset quality is medium. However, the company plans to
invest €150m annually in modernization measures which
would push the average quality above that of its peers.
ANNGR has one of the lowest rent restrictions across all
German residential real estate companies (c.16%).
Annually, on average 3-4% of the rent restrictions expire.
•
•
ANNGR generates a higher rental income without
increases in the cost base - as the company did
in the first half of 2014 - on a sustainable basis
Repayment of a larger portion of debt from
internally generated cash flows
•
•
•
•
•
Best in class refinancing costs and capital structure
LTV at c.50% (strategic target: 50%).
Excellent profitability due to scale, with an adj. EBITDA
margin above 65% (expected to be c.68% by 2016).
In H1, Deutsche Annington generated an FFO I of €130.3m
(+26% yoy) which was mainly driven by lower interest
expenses and new acquisitions.
For 2015, the company predicts an FFO I between €275 to
€285m.
We regard a dividend payout ratio of 70% as too high.
Capital structure strengthened with the issuance of a
€700m hybrid bond with a duration of 60 years.
Management committed to maintain an IG rating when
considering new portfolio acquisitions.
ANNGR 2.125 07/2016
(Marketweight)
Price:
102.7
Vol:
700m
YTW:
0.40
OAS:
34.9
Cross Default, Restriction on Activities,
Limitation on subsidiary debt
ANNGR 3.625 07/2019
(Marketweight)
Price:
109.5
Vol:
600m
YTW:
0.90
OAS:
82.7
Covenant: CoC
ANNGR 2.125 10/2021
(Marketweight)
Best in class capital structure
•
•
•
Recommendations
•
•
•
•
Sustained decrease of occupancy rates
A decrease in like-for-like rental growth
Large and highly leveraged transactions in the
secondary market
Departure from the strong investment philosophy
Price:
114.9
Vol:
500m
YTW:
1.31
OAS:
90.8
Cross Default, Restriction on Activities,
Lim. on subsidiary debt, Limitation on
indebtedness, Coll. action clause
ANNGR 2.125 07/2022
(Marketweight)
Price:
104.9
Vol:
500m
YTW:
1.41
OAS:
91.2
Major covenants: same as ANNGR
2.125 10/2021
Screening Coverage
25
70%
10,000
45%
5,000
20%
0
2013
Properties
9%
225
7%
150
5%
75
2%
0
-5%
2012
300
2013
Net rents
LTV in % (rhs.)
2014e
2015e
FFO
2012
2013
2014e
2015e
2016e
1,161
1,165
1,202
1,375
1,398
Net rents
544
550
565
663
679
Adj. EBITDA
438
386
398
517
533
171
224
259
343
355
FFO yield
0.0
5.5%
4.1%
5.2%
5.4%
Total revenues
Maturity profile
1,000
500
0%
2012
2014e 2015e 2016e
Net debt
1,500
in EUR mio.
15,000
in EUR mio.
in EUR mio.
0
2016e
FFO yield (rhs.)
Option adjusted spread development in bps since January 2014 (Source: Bloomberg)
165
110
2012
2013
2014e
2015e
2016e
Total assets
10,607
11,093
13,362
13,981
14,537
9,844
10,266
12,449
12,461
12,692
Net debt
5,981
5,217
6,830
6,281
6,004
Interest cover
1.0
1.4
1.8
2.6
2.7
0.0
0.7
0.8
0.7
0.7
Loan-to-Value (LTV)
59%
51%
52%
49%
47%
55
0
01.01.2014
01.04.2014
ANNGR 2.125 07/16
ANNGR 3.625 10/21
01.07.2014
01.10.2014
ANNGR 3.125 07/19
ANNGR 2.125 07/22
26
Credit profile
Deutsche Wohnen AG
27
Credit profiles – Deutsche Wohnen AG
The largest private landlord in Berlin
Bloomberg Ticker
DWNIGY <Corp>
Deutsche Wohnen AG
Deutsche Wohnen AG (DeuWo) is one of the largest
residential property companies, holding around 150,000
residential units in key metropolitan areas across Germany.
With regards to the portfolio of Deutsche Wohnen AG, around
92% of the company’s residential units stem from strategic
core+ and growth regions, such as Berlin. In fact, c.72% of
DeuWo’s property units are located in Berlin. In 2013, the
company generated revenues of €409m and employed
approximately 2,400 people. Deutsche Wohnen is rated Baa1
with a stable outlook by Moody’s.
Company data
Equity story (convertible bond)
Management:
Focus on metropolitan areas with strong macro fundamentals:
Berenberg’s equity research expects that this will translate into
above-industry rental growth.
Michael Zahn (CEO)
Headquarter:
Frankfurt/Main, Germany
€ 5,345m / 2,422 (FY 2013)
Major shareholders:
MFS 8%
BlackRock 5%
Norges 5%
Andreas Segal (CFO)
Webpage:
Operational efficiency and earnings quality:
The rent potential on newly let apartments in the strategically
important core+ portfolio is estimated at c.25%.
www.deutsche-wohnen.de
Exposure to Berlin (72%) ensures significant earnings growth:
DeuWo is likely to profit from rising rents in the coming years.
Strengths
Weaknesses
• Focus is exclusively on metropolitan regions in Germany
• Low vacancy rate restricts upside for internal growth
• Strong potential for increases in cash flows due to
• Effective leverage points towards upper high yield
DeuWo’s Berlin exposure
• Strong maturity profile
• LTV not yet in line with an IG score (56.2% H1’14)
28
Excellent business profile but only balanced financial risk profile
Credit profile
Investment thesis
Excellent brand name and best in class occupancy rate
DeuWo’s occupancy rate is best in class and the
company has a very solid business profile. We
particularly like the Berlin exposure, where we expect
the company to generate a significant proportion of
rental income growth going forward, without having to
rely on external growth. The convertibles look cheap
and the equity share has further upside potential.
Berenberg thus recommends investors to overweight
both bonds.
•
•
•
•
•
•
•
•
Strong market position due to the company’s size, its
diversification in terms of tenants, and the brand name.
Largest private landlord in Berlin which has excellent
economic growth prospects and excellent rental
developments.
Excellent profitability (adj. EBITDA margin of c.68% for FY
2013) due to a strong commitment of the company for
keeping the cost ratio low.
Around 80% of its portfolio are unrestricted in terms of rent
adjustments.
One of the highest l-f-l rental growth (H1 2014: 3.4%; longterm goal set at 3%) and low tenant turnover (approx. 7%).
DeuWo has a good track record of integrating portfolios and
realizing economies of scale.
The current average in-place rent is 5.73 EUR/sqm which
provides a rent potential (i.e. newly renting) of c.24% =>
capability for increasing FFO from pure internal growth.
Very low vacancy rates: As of H1 2014: 2.5%.
•
•
A sustainable decrease of LTV to 50%
An adjusted EBITDA margin of above 70%
•
•
•
•
•
LTV as of Q3 2014: 55.8% (target: c.50% by end of 2015).
Average weighted debt maturity of 7.9 years. The company
pays an average rate of interest of 3.36%.
Berenberg regards the maturity profile as excellent with
55% of the company’s long-term debt maturing after 2019.
Strong interest coverage ratio, leaving plenty of headroom if
interest rates would rise.
Rental cap may lead to a €3.5m loss of in-place rents p.a.
Good profitability based on the realization of scale
economics (adj. EBITDA margin of 69.4% in Q3 2014).
Targeted dividend payout ratio of 60% in line with IG score.
DWNIGY 0.5 11/2020
(Overweight)
Price:
115.1
Vol:
250m
Delta*:
68%
YTW:
-3.11
Modeling assumptions:
Berenberg equity PT/Upside: € 21/8.6%
Credit spread: 85bps
Implied CB Volatility/
Hist. 90D Volatility*:
16 /
17
Borrowing costs: 0.75%
Structure: Softcall/Put/Call 11/18 @ 100
Major covenants: Neg. pledge, CoC
DWNIGY 0.875 09/2021
(Overweight)
Price:
107.6
Vol:
400m
Delta*:
55
YTW:
-0.24
Good profitability but LTV too high for an IG score
•
•
Recommendations
Berenberg equity price target: € 21/8.6%
•
•
•
•
•
•
An increase in vacancy rates above 3%
A worsening of the LTV to above 60%
Lower cost efficiency, leading to a deterioration of
the adjusted EBITDA margin
A significantly higher dividend payout ratio
A sustained decrease of l-f-l rental growth to
below 3%
Significant adverse economic developments in
the Berlin region
Credit spread: 85
Implied CB Volatility/
Hist. 90D Volatility*:
14 /
17
Structure: Softcall/Put 09/19 @ 100
Major covenants: Neg. pledge, CoC
Screening Coverage
* Based on modeling assumptions
29
12,000
70%
8,000
45%
4,000
20%
540
9%
360
6%
180
3%
1,500
0
0
-5%
2012
2013
Properties
Net debt
2013
Net rents
LTV in % (rhs.)
500
0%
2012
2014e 2015e 2016e
in EUR mio.
in EUR mio.
in EUR mio.
Maturity profile
1,000
2014e
2015e
FFO
2012
2013
2014e
2015e
2016e
Total revenues
270
409
667
688
700
Net rents
194
292
500
513
526
Adj. EBITDA
196
253
432
470
468
68
115
220
286
294
3.9%
4.7%
4.3%
5.6%
5.8%
0
2016e
FFO yield (rhs.)
Bond price development since February 2014 (Source: Bloomberg)
115
FFO yield
109
2012
2013
2014e
2015e
2016e
Total assets
4,908
10,173
10,442
10,934
11,508
4,615
8,937
8,862
9,407
9,681
Net debt
2,717
5,243
4,802
4,770
4,460
Interest cover
1.9
1.8
2.2
3.1
3.1
0.4
0.5
0.6
0.7
0.7
Loan-to-Value (LTV)
59%
57%
56%
53%
51%
103
97
02.01.2014
02.04.2014
DWNIGY 0.875 09/21
02.07.2014
02.10.2014
DWNIGY 0.5 11/20
30
Credit profile
31
Credit profiles – DIC Asset Management AG
The commercial real estate specialist
Bloomberg Ticker
DICGR <Corp>
Company profile
Founded in 2002, DIC Asset Management AG is
headquartered in Frankfurt, Germany, and focuses exclusively
on commercial real estate. In total, DIC has around 250
properties in its portfolio with a estimated value of €3.4bn (71%
of this value is accounted for by office space). The figure to the
right gives an overview of DIC Asset Management AG’s
portfolio distribution across Germany.
Company data
The strategy of DIC Asset Management rests on two business
pillars:
Deutsche Immobilien Chancen
33.2%
Solvia Vermögensverwaltung
5.1%
RAG Foundation 4.8%
APG Asset Management 3.2%
(i)
(ii)
Headquarter:
Frankfurt/Main, Germany
Market cap/Employees (FY ’13):
€ 478m / 132 (Sep. 2014)
Major shareholders:
Commercial portfolio with profits coming from asset
management (via long-term leases), accounting for 92%
of the total portfolio value (197 units). This represents the
core business of DIC and the key strategic focus of the
management team.
Co-investments
(funds
developments;
minority
investments usually ranging between 10-40% in size):
This business line had been significantly downsized and
Berenberg expects that it will be even further downsized
(currently 8% of total portfolio value).
Management:
Ulrich Höller (CEO)
Sonja Warntges (CFO)
Rainer Pillmayer (COO)
Webpage:
www.dic-asset.de
Strengths
Weaknesses
• Portfolio focus is on regions with solid economic
• High leverage ratios, in particular LTV (c.67%)
fundamentals
• The development business will be further downsized
• The rental agreements are generally long-term
• Refinancing risks in the medium term if leverage profile
does not improve
• Structural vacancy rates above 10%
32
Company expect to de-lever significantly until the end of 2016
Credit profile
Investment thesis
Business profile: Aggressive to Balanced
Diversified tenant structure but high vacancy rates
Over the past years, DIC benefited from solid economic
conditions in Germany. At least in the near term, DIC
may suffer from lower economic growth, leading to
potentially higher vacancy rates. The current market
pricing of the bonds of DIC does not reflect the higher
macro risks and hence, Berenberg recommends to
underweight the bonds. We are also a bit skeptical
about DIC’s target to bring its LTV sustainably down to
below 60% until YE 2016.
•
•
•
•
Diversified, good quality tenant structure in different end
markets: Small/Medium-sized businesses (30%), Public
sector (27%), Retail (22%), Telco/IT/Multimedia (9%),
Industry (8%); The 10 largest tenants account for 35% of
revenues, adding further to our positive view.
Office locations are in sound economic hubs across
Germany: Frankfurt/Main, Hamburg, Berlin, Dusseldorf,
Cologne, and Munich.
In total, 1,400 commercial tenants (typical asset has 4 to 5
tenants and an average value of €50m).
Vacancy rates have been persistently above 10% over the
past five years (as of H1 2014: 11.5%).
Planned deleveraging is credit positive - in the medium-term
•
•
•
•
•
•
For FY 2013, LTV was c.66.9%, however for the first 9M of
2014, this number worsened to 67.6% (+ 0.7pp).
The equity ratio was 32.4% (down by 0.2pp yoy).
With planned disposals of investment properties of around
€450m, the strategic target of the company is to reduce its
LTV to below 60%. The timeline for this goal is scheduled
for the end of 2016 and depends mainly on the successful
disposal of assets and the realization of the project
development “Main Tor” in Frankfurt (40% stake of €750m).
In our view, the current market conditions would provide
DIC with the possibility for opportunistic selling.
Average debt maturity is c.4 years (as of H1 2014), which is
below that of most peers.
Refinancing and interest rate rises can pose a major risk to
the company’s FFO in the medium run.
FFO growth is low when compared to peers. For 9M 2014,
FFO I increased to €35.4m (+3% yoy).
Recommendations
DICGR 5.75 07/2018
(Underweight)
Price:
107.8
Vol:
100m
YTW:
3.25
OAS:
312
Cross Default, Restrictions on activities
DICGR 4.625 09/2019
•
•
•
•
A sustainable LTV of below 60%
A more balanced debt structure
A longer average debt duration
An increase in rental income while holding the
cost base stable
(Underweight)
Price:
105.7
Vol:
125m
YTW:
3.21
OAS:
301
Cross Default, Restrictions on activities,
Collective action clause
•
•
•
LTV rises above 70%
A strong decline in economic activity in Germany
which would likely lead to an increase in vacancy
rates and loss of rental income
Tenant losses across the board due to larger
competition or a large supply of office spaces
(which is outside the control of DIC)
Screening Coverage
33
2,400
150
71%
39
18%
69%
800
67%
0
2012
Properties
2013
100
12%
50
6%
0
64%
2014e 2015e 2016e
Net debt
LTV in % (rhs.)
2012
2013
Net rents
2012
2013
2014e
2015e
2016e
Total revenues
133
138
152
154
157
Net rents
113
112
129
131
133
Adj. EBITDA
102
105
116
118
122
45
46
47
48
50
14.3%
10.0%
10.1%
10.3%
10.6%
2014e
FFO
in EUR mio.
1,600
in EUR mio.
in EUR mio.
Maturity profile
26
13
0%
2015e 2016e
FFO yield (rhs.)
0
<1y
1-2y
2-3y
3-4y
4-5y
>5y
500
FFO yield
400
2012
2013
2014e
2015e
2016e
Total assets
2,210
2,596
2,535
2,500
2,469
1,847
2,256
2,224
2,187
2,143
Net debt
1,406
1,667
1,653
1,630
1,594
Interest cover
1.0
1.1
1.0
1.0
1.1
0.4
0.5
0.5
0.5
0.5
Loan-to-Value (LTV)
71%
69%
68%
68%
68%
300
200
02.01.2014
02.04.2014
DICGR 5.75 07/18
02.07.2014
02.10.2014
DICGR 4.625 09/19
34
Credit profile
GAGFAH S.A.
35
Credit profiles – GAGFAH S.A.
Good times for the convertible – strong growth ahead
Bloomberg Ticker
GFJGY <Corp>
GAGFAH S.A.
Company data
Company profile
GAGFAH S.A. is one of the largest residential real estate
companies in Germany. Its portfolio consists of around 141,000
real estate units with an estimated gross asset value of €7.6bn.
The most important locations in GAGFAH’s portfolio are:
Hamburg, Hannover, Berlin, Dresden, and Heidenheim (see
underlined segments in the chart to the right).
Headquarter:
Luxembourg
€ 3,329m/ 1,813 (FY 2013)
Major shareholders:
•
Strong outlook for 2015: Further reduction of its vacancy
rate to 3% (vs. 3.5% in 2014e) and an expected FFO I of
€205m to €215m (vs. €185m to €189m in 2014)
•
Outlook beyond 2015: target vacancy rate of 2.5% (end of
2017), rental income growth of 2% to 3% p.a., increase in
FFO I by 10% to 15% p.a., and like-for-like rental growth of
c.2.5% p.a.
Overall GAGFAH established a strong track record of
operational improvements, thereby raising the earnings
guidance several times over the recent past. The management
expects that further improvements are possible, aiming to
reduce R&M (due to CAPEX increases) from 10.5 EUR/sqm to
8.5 EUR/sqm and G&A savings of €4-6m by 2017.
Lansdowne Partners 8.5%
Sun Life Financial Inc. 7.2%
DWS Investments 5.6%
Management:
Thomas Zinnöcker (CEO)
Gerald Klinck (CFO)
Nicolai Kuss (COO)
Webpage:
www.gagfah.com
Strengths
Weaknesses
• Excellent interest cost base
• LTV too high for an IG score
• Significant size and economies of scale
• A weaker balanced debt maturity profile when compared
• Excellent geographical diversification across Germany,
with a focus on economically strong areas
to key peers
36
Excellent operational momentum tempered by a high LTV level
Credit profile
Investment thesis
Excellent operational momentum, strong growth prospects
Berenberg expects that GAGFAH will deliver a steady
and above market average growth, just by means of
internal improvements and due to rent increases. This
should provide convertible investors with a good
underlying momentum. However, in our view, the credit
profile is only balanced since leverage metrics are
rather pointing to a high yield score. Despite the equity
share upside potential, we only recommend to
marketweight the bond until improvements in the
leverage metrics become evident.
•
•
•
Strong track record of operational improvements (3.7%
vacancy rate in H1 2014 versus 5.3% in Q1 2013; Target
for FY 2015: 3%)
Strong 2.1% like-for-like rental growth in H1 2014 (Target
for 2015 is above 2%)
Focus on core regions: Hamburg, Hannover, Berlin,
Dresden and Heidenheim account for 50% of the asset
base. Around 91% of GAGFAH’s properties are located in
Germany’s top 30 locations and around 9% of the asset
base is located in non-core regions which are likely to be
disposed in the medium term.
Low interest cost base, LTV above IG score level
•
•
•
•
•
•
LTV as of H1 2014: 60.5% (vs. 61.9% in H1 2013). The
management states an LTV target between 50-55%.
Low interest rate cost base: 2.7% (H1 2014).
Clear financial policy: Around 30% of the recurring FFO will
be used for acquisitions, 35% for dividend payments, and
10% for amortization.
Strong pipeline for non-core sales (4,812 units). In 2015,
the management expects to generate free cash of €30m40m from asset disposals.
Average debt maturity is 5.6 years which is adequate but
not best in class. In total, the maturity profile is less
balanced compared to key peers with a significant portion
of debt falling due in 2017-2019. Berenberg expects that
GAGFAH will use refinancing in the capital market for its
maturing debt.
Decline in total portfolio value (-€87m yoy as of H1 2014)
was overcompensated through rent growth and vacancy
reduction (around +€3m in rental income growth yoy).
Recommendations
GFJGY 1.5 05/2019
(Marketweight)
Price:
123.7
Vol:
375m
Delta*:
74%
YTW:
-2.27
Berenberg equity PT/Upside: € 17/8.9%
Implied 90D Volatility: 23.38
•
•
Structure: Softcall
•
•
Vacancy rate falling sustainably to below 3%
A strengthening of the maturity profile, in
particular a longer average maturity of debt
A decrease of the LTV to below 55%
An interest coverage ratio rising sustainably
above 2.5x
Major covenants: CoC
•
•
•
An increase of the LTV to above 65%
An interest coverage ratio falling sustainably to
below 1.5x
Decrease of like-for-like rental growth to below
2%
Screening Coverage
37
9,000
75%
6,000
50%
3,000
25%
600
9%
400
6%
200
3%
2,100
0
0
0%
2012
2013
Properties
0%
2012
2014e 2015e 2016e
Net debt
2013
Net rents
LTV in % (rhs.)
2014e
2015e
FFO
2012
2013
2014e
2015e
2016e
Total revenues
601
581
596
614
636
Net rents
509
502
504
519
538
Adj. EBITDA
355
339
382
399
425
109
124
190
216
233
6.3%
5.6%
5.8%
6.6%
7.1%
in EUR mio.
in EUR mio.
in EUR mio.
Maturity profile
1,400
700
0
2016e
FFO yield (rhs.)
Bond price development since May 2014 (Source: Bloomberg)
119
FFO yield
111
2012
2013
2014e
2015e
2016e
Total assets
8,111
7,960
7,922
8,278
8,510
7,742
7,634
7,600
8,093
8,302
Net debt
5,153
4,863
4,587
4,717
4,568
1.4
1.2
2.2
2.5
3
0
0
0.4
0.6
0.6
Loan-to-Value (LTV)
65%
62%
59%
57%
54%
Interest cover
103
95
15.05.2014
15.08.2014
15.11.2014
GFJGY 1.5 05/19
38
Credit profile
39
Credit profiles – Grand City Properties S.A.
The turn around specialist for residential properties
Bloomberg Ticker
GYCGR <Corp>
Company data
Company profile
Grand City Properties (GCP) is a turnaround manager for
distressed and underperforming residential real estate
portfolios ranging in size from €5m to €50m. GCP is active in
Germany with a focus on the states of North Rhine-Westphalia
(c.45% of GCP’s assets) and Berlin (c.23% of GCP’s assets).
Headquarter:
Luxembourg
€ 1,300m/ 350 (June 2014)
Once GCP acquired a property and refurnished it, it aims to relet flats at a higher rent and/or tries to increase occupancy
rates. As of November 2014, the company had c.42,000 units
in its portfolio. Around 90% of those units are buy and hold
properties – around 10% of GCP’s assets are for sale each
year. Due to the business model of the company, vacancy
rates are above industry average (November 2014: c.13%)
Major shareholders:
Edolaxia Limited 33.7%
Merrill Lynch International 3.4%
Odey Asset Management 3.02%
Zanelo Trading Limited 1.3%
Management:
The company is rated BBB- by S&P with a stable outlook.
Christian Windfuhr (CEO)
Refael Zamir (CFO)
•
Webpage:
•
Strong external growth via further acquisitions (just in 2014,
GCP acquired 17,000 real estate units)
Good internal growth story: like-for-like rental growth has
been 2.5% p.a., with like-for-like occupancy being 2.8%.
Further significant internal growth is expected from a
reduction of the vacancy rate over time.
www.grandcityproperties.com
Strengths
Weaknesses
• Strong track record of turnaround management (10 years)
• High CAPEX outlays required
• Clear investment philosophy and strong management
• Image/Reputation among tenants of a turnaround assets
commitment to hold an investment grade rating
• Strong prospects for internal FFO growth
manager
40
The only company with an excellent score in business and financial profile
Credit profile
Investment thesis
Strong track record of turnaround management, strong growth
GCP is the only residential real estate company with an
excellent scoring in both the financial and the business
profile. Clearly, its LTV and debt profile are best in
class. In addition, Berenberg believes that there is
strong potential for internal FFO growth, which is most
likely to come from the reduction of vacancy rates as
real estate units move from the turnaround phase to the
stabilization phase. The convertible is attractively
priced, has still upside potential for the stock price (see
our Equity Research), but is not balanced anymore.
•
•
•
•
•
GCP’s key strength is the identification of undervalued real
estate assets and the turnaround of these assets. The
portion of the portfolio which has been turned around
(“stabilized portfolio”) increased to 40% in Q3 2014 (versus
33% in FY 2014). Berenberg assesses the mix between
real estate units in the turnaround and the stabilization
phase as good.
Portfolio exposure to regions with the significant rent growth
potential: particularly Bremen (4%), Berlin (21%), North
Rhine-Westphalia (36%) and Hessen (3%).
Vacancy rate for the total portfolio at 13.3% (Q3 2014)
Excellent external growth story, with GCP reaching a critical
portfolio size in 2014: 43,000 real estate units in Q3 2014
versus 26,000 real estate units as of FY 2014.
Good internal growth story: like-for-like rental growth has
been 2.5% and like-for-like occupancy of 2.8% p.a.
Recommendations
GYCGR 1.5 02/2019
(Overweight)
Price:
123.7
Vol:
275m
Delta*:
87%
YTW:
-2.27
Berenberg equity price target: € 12.5
Implied 90D Volatility: 16
Borrowing costs: 2%
•
Structure: Softcall @ 106.65
Reduction of the vacancy rate of the total portfolio
to below 10% (would also indicate a more mature
stage of the company)
Major covenants: CoC, Limit on
indebtedness
Best in class LTV, cost of debt and debt profile
•
•
•
•
•
•
As of Q3 2014, GCP’s LTV was 40%, and would be 26%
assuming conversion of the convertible bond (management
target: 50%).
Large 50% unencumbered assets base (€950m).
Excellent interest rate cost base: cost of debt decreased to
2% after refinancing operations in 2014.
Good liquidity position (€313m in Q3 2014 versus €166m in
FY 2014).
One of the highest interest coverage ratios across the
industry (4.5x in Q3 2014).
No material debt maturities before 2017, allowing GCP to
finish the current turnaround cycle.
•
•
Decrease in like-for-like rental growth to below
2% p.a.
Decrease of like-for-like occupancy rates to below
95%
Screening Coverage
41
2,400
60%
1,600
40%
800
in EUR mio.
in EUR mio.
20%
0
2013
Properties
9%
100
6%
Not provided
50
0%
2012
2014e 2015e 2016e
Net debt
2013
Net rents
LTV in % (rhs.)
(GYCGR 1.50 02/19, volume €275m)
(GYCGR 6.25 06/20, volume €18.17m)
(GYCGR 2.0 10/21, volume €500m)
3%
0
0%
2012
150
2014e
2015e
FFO
2012
2013
2014e
2015e
2016e
Total revenues
39
96
139
152
179
Net rents
24
66
117
128
152
Adj. EBITDA
29
84
121
135
165
11
38
65
72
92
8.1%
7.5%
5.3%
5.9%
7.5%
2016e
FFO yield (rhs.)
Bond price development since February 2014 (Source: Bloomberg)
130
FFO yield
120
2012
2013
2014e
2015e
2016e
Total assets
555
1,651
2,349
2,592
2,816
407
1,368
1,906
2,051
2,344
Net debt
193
535
958
993
1,163
Interest cover
2.7
6.1
3.8
3.8
4.3
0.0
0.0
0.3
0.4
0.4
Loan-to-Value (LTV)
23%
39%
50%
48%
49%
110
100
18.02.2014
18.05.2014
18.08.2014
18.11.2014
GYCGR 1.5 02/19
42
Credit profile
LEG Immobilien AG
43
Credit profiles – LEG Immobilien AG
The key player in the North Rhine-Westphalian residential market
Bloomberg Ticker
LEGGR <Corp>
LEG Immobilien AG
Company profile
LEG Immobilien was founded as a public housing company in
1970 and was privatised in 2008. The real estate company
operates exclusively in the state of North Rhine-Westphalia
(NRW). LEG has c.110,000 apartments and caters more than
260,000 tenants. The company profits from the growing
demand for single tenant flats in the NRW region. The fair
value of the portfolio is estimated at € 4.9bn (as of September
2012). Around 35% of LEG’s portfolio is located in the cities of
Mettmann, Dortmund and Münster which belong to NRW’s hot
spots.
State of North Rhine-Westphalia
Headquarter:
Dusseldorf, Germany
€ 3,411m/ 915 (FY 2013)
Major shareholders:
Blackrock 15%
Perry Capital 8%
MFS 5%
CBRE 5%
Ruffer 4%
•
•
•
Company data
High profitability driven by economies of scale effects in
LEG’s core markets.
Management:
Thomas Hegel (CEO)
Exposure to attractive growth markets in NRW with rent
growth above inflation.
Eckhard Schultz (CFO)
Holger Hentschel (COO)
Possibility for external growth at low incremental costs
(currently LEG is in talks to acquire an additional 10,000
real estate units towards the end of 2014).
Webpage:
www.leg-nrw.de
Strengths
Weaknesses
• Economies of scale due to regional focus on NRW
• Economic decline in North Rhine-Westphalia (NRW)
• Low dividend payout from FFO (65% payout)
• Rent restrictions
• Strong maturity profile and low gearing levels
• Cluster risk within NRW (3 key cities)
• Strong reputation in NRW
44
An excellent score in the business and credit profile
Credit profile
Investment thesis
Strong organic rent growth
LEG is the largest residential real estate company
operating in the state of NRW. It has delivered strong
internal like-for-like rental growth. Berenberg assesses
the potential for further growth, via smaller-sized
portfolio transactions, as good.
•
•
•
•
•
•
Organic rent growth above inflation (+3.4% like-for-like)
across the entire portfolio of LEG.
Very high occupancy at 96.8%, with further improvements
expected towards the end of FY 2014.
Exposure to NRW overall positive: The state accounts for
more than one-fifth of Germany’s GDP, experiences net
migration to NRW, and exhibits improved levels of
unemployment (12% in 2005 vs. 8.1% in 2012).
Critical size and economies of scale which belong to one of
the best across all residential peers.
Management predicts further acquisitions of at least 5,000
units (mid term target).
LEG has significant rent restrictions for its portfolio (for
around 1/3 of its real estate units). In the next ten years,
rent restrictions on around 10,100 units will expire. The
company expects to realize an additional €4.5m rent
income p.a. for rent restrictions running out within the next 5
years, and an additional €3.4m for restrictions expiring
within a 5 to 10 year horizon.
Low degree of leverage, strong profitability and long debt MAT
•
•
•
•
•
Strong Balance Sheet (LTV 48.7% in Q3 2014 vs. 47.7% in
FY 2013).
Average maturity approximately ten years and low cost of
debt (2.93%, incl. convertible bond)
Strong liquidity base (€304 in cash assets as of Q3 2014,
versus €111m for FY 2013).
Good operational performance: Adj. EBITDA margin is at
66.2% as of Q3 2014 (+300bps yoy)
Guidance for 2015: FFO between €188m to €193m
(excluding any further acquisitions)
The CB is fairly valued. The equity share has further
upside potential and given the good financial profile
and the attractive upside potential, we recommend to
overweight the convertible bond of LEG.
•
•
Vacancy rate reduction to below 2%
A sustainable increase of the adjusted EBITDA
margin to 67%
Recommendations
LEGGR 0.5 07/2021
(Overweight, prev.
Marketweight)
Price:
112.7
Vol:
300m
Delta*:
66%
YTW:
-1.35
Berenberg equity price target: € 64
Equity upside: 7.8%
Credit spread: 100
Implied CB Volatility*: 17
Implied Volatility (90D): 17
Structure: Softcall/Put 07/19 @ 100
Covenant: CoC
•
•
•
LTV above 55%
A significant economic decline in the state of
North Rhine-Westphalia
A sustainable decline in the adjusted EBITDA
margin to below 60%
Screening Coverage
45
9,000
52%
6,000
50%
3,000
48%
660
9%
440
6%
220
3%
1,200
0
0
46%
2012
2013
Properties
0%
2012
2014e 2015e 2016e
Net debt
2013
Net rents
LTV in % (rhs.)
2014e
2015e
FFO
2012
2013
2014e
2015e
2016e
Total revenues
500
530
581
634
663
Net rents
500
532
580
632
661
Adj. EBITDA
192
206
250
287
312
137
141
161
193
210
0.0%
6.2%
5.0%
6.0%
6.6%
in EUR mio.
in EUR mio.
in EUR mio.
Maturity profile
800
400
0
2016e
FFO yield (rhs.)
Bond price development since April 2014 (Source: Bloomberg)
119
FFO yield
111
2012
2013
2014e
2015e
2016e
Total assets
5,238
5,423
6,603
7,102
7,673
4,937
5,163
6,072
6,593
7,193
Net debt
2,366
2,473
2,913
3,254
3,642
Interest cover
2.5
2.5
2.6
2.9
2.9
0.2
0.7
0.7
0.6
0.7
Loan-to-Value (LTV)
48%
48%
48%
49%
51%
103
95
11.04.2014
11.07.2014
11.10.2014
LEGGR 0.5 07/21
46
Credit profile
TAG Immobilien AG
47
Credit profiles – TAG Immobilien AG
The residential real estate specialist for the North of Germany
Bloomberg Ticker
TEGGR <Corp>
TAG Immobilien AG
Company data
Company profile
TAG Immobilien AG is a residential real estate company with
74,318 real estate units (as of Q3 2014), focusing on five key
regions in Germany. The company significantly grew its
portfolio by +23,247 (2011), +38,703 (2012), and +926 (2013)
real estate units.
Headquarter:
Hamburg, Germany
€ 1,183m/ 534 (Sep. 2014)
TAG’s portfolio is valued at €3.53bn (as of Q3 2014). The
company completely sold its commercial portfolio in 2014. The
company operates exclusively in the North of Germany, where
most of TAG Immobilien’s real estate units are located in
Salzgitter (8,741 units) which also accounts for the largest
value (€315m).
Major shareholders:
Ruffer 15%
Flossbach von Storch Invest 12%
Sun Life 10%
Management:
The strategy of the company rests on two business pillars:
Martin Thiel (CFO)
(i)
(ii)
Claudia Hoyer (CLO)
Market leader in niche regions
First residential real estate company which focuses on
implementation of the “ABBA” concept: “A locations in B
cities, B locations in A cities”
Webpage:
www.tag-ag.com
Strengths
Weaknesses
• One of the lowest administrative costs per unit across the
• High dividend payout ratio (target payout is 75% of FFO)
industry (€295 in 2013 vs. €3,686 in 2009 per unit)
• Disposals of assets significantly above book value (e.g. in
November 2014: €35m gain from asset sales)
• Large exposure to the Salzgitter region with a vacancy
rate in TAG’s portfolio of 17% (H1 2014); Salzgitter is
highly dependent on developments of Volkswagen AG
48
A niche player and market leader in its core regions
Credit profile
Investment thesis
Business profile: Balanced
Critical size, low cost base, and market leader in niche regions
TAG has the critical size and profits from a low cost
base (reflected by a strong adj. EBITDA margin).
However, our positive perception is tempered by a very
high vacancy rate in the Salzgitter region, TAG’s
largest portfolio position, which in addition is highly
dependent on the business prospects of Volkswagen
AG.
•
•
•
•
•
Overall vacancy rate 9.3% in Q3 2014, whereby the
Salzgitter region has a vacancy rate of 16.6% (was 21.5%
in 01/2013).
TAG has reached a critical size in 2012 and can now profit
from a lower cost base per unit (€295 per unit in
administrative spending vs. €3,686 in 2010), a higher
EBITDA margin (66% in 2014e vs. 44.7% in 2010), and a
higher FFO margin (32.5% in 2014e vs. -11.2% in 2010).
Moreover, TAG is a key player in its regions, operating as a
niche player with a strong, local, competitive advantage.
Overall, good exposure to regions with solid economic
prospects: Berlin (20% of total assets).
Solid, internally generated, FFO growth (€90m); For 2014,
Berenberg expects FFO increases of around €10m and
refinancing savings of €10m.
Leverage metrics high, liquidity adequate
•
•
•
•
•
•
LTV is 61.6% (Q3 2014).
Debt profile strengthened in 2014: 10 year average maturity
(2013: 9.4 years) and relatively cheap interest costs of
3.61% (2013: 3.7%). Recently, TAG financed €80m at
1.78% with a 7 year maturity. 77% of the debt consist of
bank loans with an average interest rate of 3.58%.
Within the next 3 years, €483m of debt will mature.
Berenberg expects that the main portion will be refinanced.
Moderate CAPEX spending (est. at around €20m p.a.).
Debt/Equity (221%in FY 2013 and 201% FY 2015e) and
Net gearing (213% in FY 2013 and 168% FY 2015e) still
very high.
Adequate liquidity (€250m in Q3 2014, thereof €146 in
undrawn credit lines).
Recommendations
TEGGR 5.125 08/2018
(Marketweight)
Price:
108.4
Vol:
310m
YTW:
2.61
OAS:
250
Covenant: CoC
TEGGR 3.75 06/2020
(Marketweight)
Price:
102.8
Vol:
125m
•
YTW:
3.16
OAS:
288
•
•
Decrease of the overall vacancy rate to 5%
(structural vacancy rate estimated at around 4%)
Sustainable reduction in the vacancy rate in the
Salzgitter region, or the sale of assets in the
Salzgitter region
Debt retirement from FFO
Covenant: CoC
•
•
Failure to reduce vacancy rates, in particular in
the Salzgitter region
Higher dividend payout rate (relative to FFO)
Screening Coverage
49
Selected financials (Source: Berenberg Equity Research. Company data)
300
9%
4,000
68%
800
225
7%
3,000
66%
600
150
5%
2,000
64%
75
2%
1,000
62%
0
0%
2012
2013
Net rents
2014e
2015e
FFO
0
2016e
60%
2012
FFO yield (rhs.)
2013
Properties
2012
2013
2014e
2015e
2016e
Total revenues
366
265
265
263
543
Net rents
192
251
257
254
262
Adj. EBITDA
275
163
168
173
470
40
68
90
93
98
3.2%
5.9%
7.4%
7.7%
8.1%
FFO yield
400
200
0
2014e 2015e 2016e
Net debt
in EUR mio.
in EUR mio.
in EUR mio.
Maturity profile
LTV in % (rhs.)
400.00
300.00
2012
2013
2014e
2015e
2016e
Total assets
3,800
3,763
3,778
3,866
3,966
3,456
3,544
3,226
3,285
3,343
Net debt
2,361
2,362
1,993
1,939
1,872
Interest cover
3.1
1.5
1.7
2
5.4
0.8
0.7
0.7
0.8
0.8
Loan-to-Value (LTV)
64%
67%
66%
63%
67%
200.00
100.00
02.01.2014
02.04.2014
TEGGR 3.75 06/20
02.07.2014
02.10.2014
TEGGR 5.125 08/18
50
Disclaimer
51
Disclaimer
Please note that the use of this research report is subject to the conditions and
restrictions set forth in the “General investment-related disclosures” and the “Legal
disclaimer” at the end of this document.
For analyst certification and remarks regarding foreign investors and country-specific
disclosures, please refer to the respective paragraph at the end of this document.
Disclosures in respect of section 34b of the German Securities Trading Act
(Wertpapierhandelsgesetz – WpHG)
Company
Deutsche Wohnen AG
DIC Asset Management
GAGFAH S.A.
LEG Immobilien AG
TAG Immobilien AG
(1)
(2)
(3)
(4)
(5)
Disclosures
1, 3
no disclosures
no disclosures
no disclosures
no disclosures
1, 3
no disclosures
no disclosures
Initiation of coverage
27 November 2014
27 November 2014
11 June 2014
27 November 2014
27 November 2014
11 June 2014
11 June 2014
27 November 2014
Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) or its affiliate(s)
was Lead Manager or Co-Lead Manager over the previous 12 months of a public offering
of this company.
The Bank acts as Designated Sponsor for this company.
Over the previous 12 months, the Bank and/or its affiliate(s) has effected an agreement
with this company for investment banking services or received compensation or a promise
to pay from this company for investment banking services.
The Bank and/or its affiliate(s) holds 5 % or more of the share capital of this company.
The Bank holds a trading position in shares of this company.
52
Disclaimer
Historical recommendation changes for ADLERR 6 04/2019 in the last 12 months
Date
27 November 2014
Recommendation
Marketweight
Historical recommendation changes for ANNGR 2.125 10/2021 in the last 12 months
Date
27 November 2014
Recommendation
Marketweight
Date
27 November 2014
Recommendation
Marketweight
Date
27 November 2014
Recommendation
Marketweight
Date
27 November 2014
Recommendation
Marketweight
Historical recommendation changes for DWNIGY 0.875 09/2021 in the last 12 months
Date
27 November 2014
Recommendation
Marketweight
53
Disclaimer
Historical recommendation changes for DWNIGY 1/2 11/22/20 in the last 12 months
Date
27 November 2014
Recommendation
Overweight
Historical recommendation changes for DICGR 4.625 09/2019 in the last 12 months
Date
27 November 2014
Recommendation
Underweight
Historical recommendation changes for DICGR 5.75 07/2018 in the last 12 months
Date
27 November 2014
Recommendation
Underweight
Historical recommendation changes for GFJGY 1.5 05/2019 in the last 12 months
Date
27 November 2014
Recommendation
Marketweight
Historical recommendation changes for GYCGR 2.0 10/2021 in the last 12 months
Date
27 November 2014
Recommendation
Overweight
Historical recommendation changes for GYCGR 1 1/2 02/24/19 in the last 12 months
Date
11 June2014
Recommendation
Overweight
54
Disclaimer
Historical recommendation changes for LEGGR 1/2 07/01/21 in the last 12 months
Date
11 June 2014
29 August 2014
27 November 2014
Recommendation
Overweight
Marketweight
Overweight
HiHistorical recommendation changes for TEGGR 5.125 08/2018 in the last 12 months
Date
27 November 2014
Recommendation
Underweight
Historical recommendation changes for TEGGR 3.75 06/2020 in the last 12 months
Date
27 November 2014
Recommendation
Marketweight
Disclaimer
Berenberg distribution of recommendations and in proportion to investment banking services
Overweight
Underweight
Marketweight
27,03 %
27,03 %
45,95 %
36,36 %
9,09 %
54,55 %
Valuation basis / recommendation key
Overweight:
Underweight:
Marketweight:
Sustainable spread tightening potential higher 10% within 3-6 months.
Sustainable spread widening potential lower 10% within 3-6 months.
Limited spread movement potential. No immediate catalyst visible.
NB The Bank’s Fixed Income Research Department does not make recommendations on the
basis of absolute performance, but on performance expected relative to the market or peer
group as spreads move with markets and sectors as well as with the issuer itself.
Competent supervisory authority
Bundesanstalt für Finanzdienstleistungsaufsicht -BaFin- (Federal Financial Supervisory
Authority),
Graurheindorfer Straße 108, 53117 Bonn and Lurgiallee 12, 60439 Frankfurt am Main
56
Disclaimer
General investment-related disclosures
Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as „the Bank“) has made every
effort to carefully research all information contained in this financial analysis. The information
on which the financial analysis is based has been obtained from sources which we believe to
be reliable such as, for example, Thomson Reuters, Bloomberg and the relevant specialised
press as well as the company which is the subject of this financial analysis.
Only that part of the research note is made available to the issuer (who is the subject of this
analysis) which is necessary to properly reconcile with the facts. Should this result in
considerable changes a reference is made in the research note.
Opinions expressed in this financial analysis are our current opinions as of the issuing date
indicated on this document. We do not commit ourselves in advance to whether and in which
intervals an update is made. The companies analysed by the Bank are divided into two
groups: “full coverage“ - continued updates - and “screening coverage“ - updates as and
when required in irregular intervals.
The functional job title of the person/s responsible for the recommendations contained in this
report is “Fixed-Income Research Analyst” unless otherwise stated on the cover.
The following internet link provides further remarks on our financial analyses:
https://www.berenberg.de/en/fir_en.html
57
Disclaimer
Legal disclaimer
This document has been prepared by Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as
„the Bank“). This document does not claim completeness regarding all the information on the stocks,
stock markets or developments referred to in it.
On no account should the document be regarded as a substitute for the recipient procuring
information for himself/herself or exercising his/her own judgements.
The document has been produced for information purposes for institutional clients or market
professionals.
Private customers, into whose possession this document comes, should discuss possible investment
decisions with their customer service officer as differing views and opinions may exist with regard to
the stocks referred to in this document.
This document is not a solicitation or an offer to buy or sell the mentioned stock.
The document may include certain descriptions, statements, estimates, and conclusions underlining
potential market and company development. These reflect assumptions, which may turn out to be
incorrect. The Bank and/or its employees accept no liability whatsoever for any direct or consequential
loss or damages of any kind arising out of the use of this document or any part of its content.
The Bank and/or its employees may hold, buy or sell positions in any securities mentioned in this
document, derivatives thereon or related financial products. The Bank and/or its employees may
underwrite issues for any securities mentioned in this document, derivatives thereon or related
financial products or seek to perform capital market or underwriting services.
Analyst certification
I, Patrick Weber, hereby certify that all of the views expressed in this report accurately reflect my
personal views about any and all of the subject securities or issuers discussed herein.
In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly
related to the specific recommendations or views expressed in this research report, nor is it tied to any
specific investment banking transaction performed by the Bank or its affiliates.
58
Disclaimer
Remarks regarding foreign investors
The preparation of this document is subject to regulation by German law. The distribution of
this document in other jurisdictions may be restricted by law, and persons into whose
possession this document comes should inform themselves about, and observe, any such
restrictions.
United Kingdom
This document is meant exclusively for institutional investors and market professionals but
not for private customers. It is not for distribution to or the use of private investors or private
customers.
United States of America
This document has been prepared exclusively by the Bank. Although Berenberg Capital
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Disclaimer
Third-party research disclosures
Company
Deutsche Wohnen AG
DIC Asset Management
GAGFAH S.A.
LEG Immobilien AG
TAG Immobilien AG
(1)
(2)
(3)
(4)
(5)
Disclosures
no disclosures
no disclosures
no disclosures
no disclosures
no disclosures
no disclosures
no disclosures
no disclosures
Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of
any class of the subject company by the end of the prior month.*
Over the previous 12 months, Berenberg Capital Markets LLC has managed or comanaged any public offering for the subject company.*
Berenberg Capital Markets LLC is making a market in the subject securities at the
time of the report.
Berenberg Capital Markets LLC received compensation for investment banking
services in the past 12 months, or expects to receive such compensation in the
next 3 months.*
There is another potential conflict of interest of the analyst or Berenberg Capital
Markets LLC, of which the analyst knows or has reason to know at the time of
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*For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the
‘Disclosures in respect of section 34b of the German Securities Trading Act
(Wertpapierhandelsgesetz – WpHG)’ section above.
Copyright
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© June 2014 Joh. Berenberg, Gossler & Co. KG
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