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Fair Value REIT — Update 16 May 2016

Fair Value REIT — Update 16 May 2016

Fair Value REIT

Martyn King

Written by

Martyn King

Director, Financials

Fair Value REIT

Waiting to pounce

Q1 results

Real estate

16 May 2016

Price

€6.92

Market cap

€97m

Net debt (€m) as at 31 March 2016

116.1

Shares in issue

14.0m

Free float

21.72%

Code

FVI

Primary exchange

Frankfurt

Secondary exchange

Stuttgart, Berlin, Munich

Share price performance

%

1m

3m

12m

Abs

(1.2)

5.9

(16.0)

Rel (local)

(0.5)

(4.6)

(4.2)

52-week high/low

€8.52

€6.50

Business description

Fair Value REIT (FVI) is a real estate investment trust managing c.263,000sqm at 38 commercial properties across Germany (as at 31 March 2016). It has a diversified portfolio of office and industrial assets in regional locations.

Next events

AGM

7 April 2016

Analysts

Martyn King

+44 (0)20 3077 5745

Julian Roberts

+44 (0)20 3077 5748

Fair Value REIT AG is a research client of Edison Investment Research Limited

Q116 results are consistent with our full year forecasts, towards the top end of management guidance, and we have made no material changes to our estimates. 2015 saw FVI raising capital and moving into a growth phase after several years of focusing on portfolio optimisation. It acquired a majority holding in a new subsidiary, increased participation in existing subsidiaries and directly acquired properties previously held within subsidiaries. The capital base is sufficient to support further similar significant growth that is not yet reflected in our base case forecasts.

Year
end

Revenue
(€m)

EPRA net profit* (€m)

EPRA EPS*
(€)

DPS
(€)

P/NAV
(x)

Yield
(%)

12/14

30.1

4.4

0.47

0.25

0.82

3.6

12/15

29.8

6.4

0.52

0.25

0.83

3.6

12/16e

27.8

6.4

0.45

0.25

0.82

3.6

12/17e

29.3

7.4

0.53

0.25

0.79

3.6

Note: *Net profit and EPS are on an underlying EPRA basis (also referred to as FFO), excluding valuation movements and exceptional. P/NAV is also on an EPRA basis.

On track for full year

We have made no material changes to our estimates. Q1 earnings and EPS represented c 25% of our full year forecast. Gross rental income was at a similar level to Q1 2015, but additional property-related expenses left net rental income 7% lower. Expense control was good and net interest expense before the c €0.25m convertible bond redemption cost fell. Underlying profit on an EPRA basis (or FFO), which excludes the one-off items and valuation movements, was up 53% at €1.6m or €0.11 per share (similar to Q115 as a result of the increased number of shares resulting from last year’s capital increase). Q1 saw none of the investment activity that we expect (but do not include in our base forecasts), while two non-core property assets held for sale were disposed of.

Solid outlook with accretive investment potential

Management expects further accretive investment in direct property assets and additional acquisition of minority interests in its subsidiaries. The timing and quantum are uncertain and so earnings guidance, like our estimates, has been given on the basis of the existing portfolio and non-controlling interests. The REIT Equity ratio increased to 62.5% as at 31 March 2016. Our analysis suggests that management has the capital flexibility to be able to acquire all of the outstanding non-controlling interests. Our illustrated scenario (assuming acquisition at a 20% discount to NAV) indicates a potential 73% uplift to EPRA earnings and EPS.

Valuation: Accretive investment potential

FVI’s current P/B (c 0.8x FY16e) is broadly in line with peers, although the prospective yield is a little lower. Not included in our forecasts is the potential for significant accretive acquisition growth from gearing up the existing, strong capital base, enhancing NAV through gains on acquisitions below fair value, and significantly lifting earnings/FFO and dividend paying capacity.

Highlights of the Q1 results

As we recently discussed in our note, 2015 saw FVI moving into a growth phase after several years of focusing on portfolio optimisation. New growth capital was raised early in the year with the proceeds directed towards a majority holding in a new subsidiary, increased participation in existing subsidiaries, and the direct acquisition of properties previously held within subsidiaries. The capital base is sufficient to support further significant growth and the REIT Equity ratio increased further in Q1 2016 as a result of the disposal of two properties held for sale. As the year progresses, we expect to see (but have not yet reflected in our central forecasts, given the uncertainty of the timing and quantum) accretive additional investment in direct property assets and additional acquisition of minority interests. Since December 2015, FVI has been a 77% owned subsidiary of DEMIRE Ag, focused on closed end property fund consolidation and optimisation. It retains its separate stock market listing on the Frankfurt Stock Exchange and REIT status.

Exhibit 1: Summary of reported and adjusted profits (Q116 vs Q115)

€m

Q116

Q115

Reported

Adjustments

EPRA

Reported

Adjustments

EPRA

IFRS

basis

IFRS

basis

Rental income

5,571

0

5,571

5,590

0

5,590

Non-apportionable service charge expenses

(939)

0

(939)

(1,060)

0

(1,060)

Other property-related expenses

(982)

489

(493)

(613)

0

(613)

Net rental income

3,650

489

4,139

3,917

0

3,917

General administrative expenses

(600)

0

(600)

(792)

0

(792)

Other operating income and expenses

(187)

179

(8)

1,319

(1,300)

19

Profit/(loss) from disposal

0

0

0

(18)

18

0

Valuation result

(46)

46

0

590

(590)

0

Operating result

2,817

714

3,531

5,016

(1,872)

3,144

Net interest expense

(1,284)

254

(1,030)

(1,114)

57

(1,057)

Profit before non-controlling interests

1,533

968

2,501

3,902

(1,815)

2,087

Non-controlling interests

(646)

(285)

(931)

(1,039)

(24)

(1,063)

Group net profit

887

683

1,570

2,863

(1,839)

1,024

EPS (€)

0.06

0.11

0.31

0.11

Source: Company data

■

Rental income was a similar level to the first quarter of 2015, although net rental income was 7% lower as a result of increased property-related expenses. Property-related expenses during Q116 were directed at maintenance and refitting costs as well as capex in two subsidiary owned properties in Zittau and Eisenhüttenstadt. Weighted average occupancy was slightly lower at 31 March 2015 compared with the 2015 year end (88.5% vs 89.2%) as the two disposed non-core properties were both fully let. We continue to expect occupancy to increase during the year as a result of successful leasing negotiations. Four new tenants have been secured for the Eisenhüttenstadt shopping centre, taking occupancy from 60% to 80% once a refit has been completed, which is expected to be by Q416.

■

General and administrative expenses were lower than in any quarter during 2015. There is an underlying decline at the level of the subsidiaries reflecting lower assets as a result of the direct acquisition of properties. Parent company expenses incurred none of the capital raising and DEMIRE offer expenses that occurred at various times during 2015. We expect that expenses will run at a somewhat higher rate during the balance of the year but will still be significantly lower than in 2015.

■

The balance of other income/expenses, disposal gains/losses and valuation movement was well down on Q1 2015 (a €233k negative vs a €1.9m gain). Q1 2015 benefited from non-cash gains on the acquisition of non-controlling interests in subsidiaries at below net asset value, as well as from positive valuation movements.

■

Net interest expense incurred a c €0.25m charge for the previously reported convertible bond repayment in February at a 3% premium to par value. Average borrowing has continued to decline and the weighted average cost of borrowing (assuming zero LIBOR as the base for the floating rate borrowing) was 2.4% at 31 March vs 2.5% at 31 December 2015.

■

The IFRS net profit after non-controlling interest was €0.9m compared with €2.9m in Q1 2015 but the adjusted profit on and EPRA basis (FFO) was 53% ahead at €1.6m compared with €1.0m. The adjustments are shown in Exhibit 1 and include €489m for value enhancing property related investment that is expensed rather than capitalised in IFRS, and the redemption premium paid on the convertible bond. On an increased number of shares (as a result of the 2015 capital increase) EPRA EPS was flat at €0.11 per share.

No material change in forecasts

We have updated our forecasts for Q1 and have made no material changes to the full year 2016 or 2017 estimates. We continue to look for EPRA net attributable profit of €6.4m in 2016 and €7.4m in 2017. We have slightly adjusted (down) the forecast average number of shares to account for the small treasury holding, but the impact is immaterial; the 2016 EPS estimate is unchanged and 2017 goes from €0.52 to €0.53. Q1 has delivered 25% of our expected 2016 full year EPRA earnings and EPS.

Within our forecasts, an increase in property-related expenses is offset by a reduction in forecast administrative expenses.

We continue to see significant potential upside to our forecasts on the basis that FVI has the financial resources to undertake additional accretive investment. This is likely to involve further direct acquisition of properties held by subsidiaries (effectively eliminating the non-controlling interests in the income with minimal marginal cost), or further investing in the acquisition of NCI. This is not reflected in our base forecasts because of the difficulty in predicting what investment FVI will make and when.

In our previous note we illustrated how FFO estimates would change, on an annualised basis, assuming FVI were to acquire all outstanding non-controlling interests (at a 20% discount to NAV) and liquidate the underlying subsidiaries, thereby removing the subsidiary administration costs. Clearly, this would not happen in one go and it may be difficult to acquire all outstanding NCI. Based on our existing 2016 estimate and on an annualised basis, the illustration shows net attributable income on an EPRA basis (FFO) increasing to €11.1m compared with our existing forecast of €6.4m. We believe that starting from a REIT Equity ratio of 62.5% at 31 March 2016 there is sufficient strength in the balance sheet to achieve this substantial illustrated investment (the acquisition of €61.8m in non-controlling interests for cash/increased debt) without breaching the REIT Equity ratio minimum of 45% or excessively gearing the balance sheet.

Exhibit 2: Financial summary

Year ending December

2013

2014

2015

2016e

2017e

€m

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

36.4

30.1

29.8

27.8

29.3

Net property expenses

(13.3)

(12.5)

(12.1)

(11.1)

(11.1)

Net rental income

 

 

23.1

17.6

17.7

16.7

18.3

Administrative expenses

(3.3)

(2.9)

(5.2)

(2.7)

(2.9)

EBITDA

 

 

19.8

14.7

12.5

14.0

15.4

Revaluation of inv. Property

(14.0)

(7.5)

(2.8)

(0.0)

0.0

Net result from sale of inv. Property

(0.7)

(0.7)

(0.03)

0.0

0.0

Net other income & expenses

(0.0)

(0.6)

2.6

(0.2)

0.0

EBIT

5.0

5.9

12.3

13.8

15.4

Associates

1.5

0.0

0.0

0.0

0.0

Net Interest

(12.7)

(5.0)

(4.2)

(3.6)

(2.9)

Profit Before Tax (IFRS)

 

 

(6.2)

0.8

8.1

10.2

12.5

Minority interests

0.9

(0.9)

(1.5)

(4.0)

(5.1)

Net income (IFRS)

 

 

(5.2)

(0.0)

6.6

6.2

7.4

EPRA adjustments:

Net rental income

0.0

0.0

0.96

0.0

0.0

Admin expenses

0.0

0.0

1.17

0.0

0.0

Other operating income/expenses

0.0

0.6

(2.85)

0.2

0.0

Revaluation of inv. Property

14.0

7.5

2.79

0.0

0.0

Net result from sale of inv. Property

0.7

0.7

0.15

0.0

0.0

Associates

0.1

0.0

0.00

0.0

0.0

Net Interest

3.9

0.0

0.02

0.3

0.0

Minority interests

(7.1)

(4.4)

(2.42)

(0.3)

0.0

EPRA earnings

 

 

6.4

4.4

6.41

6.4

7.4

Average Number of Shares Outstanding (m)

9.3

9.3

12.4

14.0

14.0

EPRA EPS (c)

 

 

68.7

47.2

51.7

45.3

52.6

Dividend per share (€)

0.25

0.25

0.25

0.25

0.25

BALANCE SHEET

Non-current assets

 

 

292.5

277.9

296.9

296.4

296.4

Investment property

292.3

267.7

287.8

287.2

287.2

Other non-current assets

0.2

10.2

9.1

9.1

9.1

Current Assets

 

 

53.4

34.0

33.5

21.6

21.3

Cash & equivalents

17.4

14.6

16.0

16.5

16.2

Assets held as available for sale

19.6

13.2

11.8

0.5

0.5

Other current assets

16.4

6.2

5.7

4.6

4.6

Current Liabilities

 

 

(70.9)

(61.0)

(24.9)

(14.4)

(14.0)

Financial liabilities

(64.6)

(54.2)

(18.1)

(9.5)

(9.2)

Other current liabilities

(6.3)

(6.9)

(6.7)

(4.9)

(4.9)

Non-current liabilities

 

 

(128.7)

(112.5)

(127.1)

(122.0)

(118.1)

Financial liabilities

(126.6)

(110.9)

(126.0)

(121.4)

(117.5)

Other non-current liabilities

(2.1)

(1.6)

(1.1)

(0.6)

(0.6)

Net Assets

 

 

146.3

138.3

178.4

181.7

185.5

Minorities

(65.6)

(60.0)

(61.2)

(61.8)

(61.8)

Shareholders' equity

 

 

80.7

78.3

117.3

119.8

123.7

EPRA adjustments:

Market value of derivative financial instruments (net of minorities)

1.9

0.9

0.0

0.0

0.0

EPRA adjusted NAV

82.6

79.2

117.3

119.8

123.7

Period end number of shares (m)

9.3

9.3

14.0

14.1

14.1

IFRS NAV per share (€)

8.65

8.39

8.36

8.49

8.77

EPRA NAV per share (€)

8.86

8.49

8.36

8.49

8.77

CASH FLOW

Operating Cash Flow

 

 

14.7

10.8

8.0

9.5

10.3

Net Interest

(11.9)

(4.7)

(4.7)

(3.9)

(2.9)

Tax

0.1

0.0

0.0

0.0

0.0

Acquisitions/disposals

29.1

22.4

11.6

11.8

0.0

Financing

0.0

0.0

34.7

0.0

0.0

Dividends

(0.9)

(2.3)

(2.3)

(3.5)

(3.5)

Other

(2.3)

(2.8)

(25.0)

(0.1)

0.0

Net Cash Flow

28.7

23.3

22.4

13.8

3.8

Opening net debt/(cash)

 

 

202.6

173.8

150.5

128.1

114.3

Closing net debt/(cash)

 

 

173.8

150.5

128.1

114.3

110.5

Source: Company data, Edison Investment Research

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Research: Investment Companies

Witan Pacific Investment Trust — Update 16 May 2016

Witan Pacific Investment Trust

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