In order to understand the value behind FCR’s shares, we consider the capitalisation yield implied by FCR’s current EPRA net asset value (NAV, see Exhibit 6). The analysis requires access to balance sheet data at the date of the NAV figure, with the last available numbers for FCR at end-June 2019. The capitalisation yield is expressed as net operating income generated by the properties divided by their gross market value. FCR’s EPRA NAV at end-June 2019 stood at €92.9m. Based on the share count post the recent share issue in September, this translates into a NAV per share of c €10.16 (compared to the current share price at €10.20). We note that this figure does not account for the 16 property acquisitions completed post reporting date (which in aggregate represent a leasable floorspace at around 40k sqm). It is important to note that this NAV estimate is not based on regular valuations performed by external real estate experts (which is often the case with real estate investment companies). Instead, FCR relies predominantly on received purchase offers, as well as bank valuations on debt refinancing and internal fair market value assessments to calculate the EPRA NAV.
We note that under the German accounting standards, FCR’s property portfolio is recorded at book value on the company’s balance sheet within property, plant and equipment (PP&E) and subsequently depreciated. This means that the balance sheet value does not capture the market value of these properties, which would be the case under IFRS, where these properties would be recognised as investment property and would be subject to regular revaluations (based on valuations of an external appraiser) rather than depreciated over time. Having said that, we understand that the company plans to report its FY19 numbers under IFRS and is currently facilitating external property valuations.
In order to arrive at the gross market value of FCR’s total assets, we have added debt, accounts payable and other liabilities to the EPRA NAV. We then subtracted cash and equivalents, notes/accounts receivable and other assets as at end-June 2019 to arrive at a clean property value. We also deducted the value of development projects (which at present do not generate any rental income). In this context, we have prepared our own assessment of the student apartments project in Bamberg (FCR’s key development project). We understand that the project completion has been postponed until end-2020 (compared to early 2020 assumed previously). We cautiously reflect the remaining three development projects (Frankenberg, Duisburg and Monument) in our valuation at book value. Consequently, we arrive at a conservative aggregate value of FCR’s development projects of €10.5m and a gross value of income-generating properties of c €247.0m.
For the purpose of calculating the implied capitalisation yield, we have relied on FCR’s potential net rental revenue (ie excluding costs, which are charged back to tenants) for the respective properties of €19.0m (as provided by the company). The annualised net rental revenue reported by FCR as at end-June 2019 is closer to €15.9m pa, while an additional c €3m may be achieved upon full occupancy. We believe that c 80% of the rental revenue potential is attributable to seven properties, including the SchlossGalerie in Rastatt. We assume that property expenses that cannot be charged back to tenants represent around 20% of the total net rental revenue.
Consequently, we arrive at a net operating income (NOI) across FCR’s portfolio of €15.1m, which implies a capitalisation yield of 6.1%. We believe this is broadly in line with current market yields, given that the weighted average capitalisation yield across Deutsche Konsum REIT’s portfolio was 6.32% at end-September 2018 (last available data) and subsequently property markets in Germany have seen some minor yield compression. Similarly, we estimate that FCR’s implied net rental yield (ie potential net rental revenue to gross property value) stands at 7.7% at end-June 2019 compared with 7.8% for Deutsche Konsum REIT (at end-September 2019). As a result, we believe that FCR’s net asset value after accounting for the market value of its properties may indeed be slightly above €10.0 per share as at end-June 2019. We would like to reiterate that this has been calculated based on the potential net rental revenue (at full occupancy) for FCR’s portfolio. When applying the current net rental revenue, FCR’s implied capitalisation yield stands at 5.2% and its net rental yield amounts to c 6.4% pa.
Exhibit 6: FCR’s NAV valuation
|
€000s unless otherwise stated |
EPRA NAV (company estimate) at end-June 2019 |
92,900 |
Total debt |
171,040 |
Notes/accounts payable |
1,848 |
Other liabilities |
12,198 |
Market value of assets |
277,986 |
|
|
Total cash and equivalents (including restricted cash) |
11,744 |
Notes/accounts receivable |
882 |
Other assets |
7,918 |
Value of development projects |
10,496 |
|
|
Implied gross property value |
246,947 |
Potential net operating income (NOI) at end-June 2019 |
15,139 |
Implied capitalisation yield |
6.1% |
|
EPRA NAV (company estimate) at end-June 2019 |
Total debt |
Notes/accounts payable |
Other liabilities |
Market value of assets |
|
Total cash and equivalents (including restricted cash) |
Notes/accounts receivable |
Other assets |
Value of development projects |
|
Implied gross property value |
Potential net operating income (NOI) at end-June 2019 |
Implied capitalisation yield |
€000s unless otherwise stated |
92,900 |
171,040 |
1,848 |
12,198 |
277,986 |
|
11,744 |
882 |
7,918 |
10,496 |
|
246,947 |
15,139 |
6.1% |
Source: FCR Immobilien, Edison Investment Research
It is also instructive to review the market multiples at which FCR and its peers are currently trading. Here, we consider Deutsche Konsum REIT and Deutsche Fachmarkt (Defama) as the company’s closest comparators given their primary focus on retail properties (>90% of portfolio) in small and medium-sized cities in Northern Germany with strong anchor tenants. Moreover, both have high exposure to tenants from the food sector (c 45–47% compared to FCR at c 40%). Having said that, we note that both Deutsche Konsum REIT and Defama pursue a buy-and-hold strategy rather than constant portfolio rotation. Moreover, the targeted transaction size is somewhat lower at €1–5m for Defama and €1–25m for Deutsche Konsum REIT. We present selected key characteristics of these companies in Exhibit 7. We note that Deutsche Konsum REIT’s lower LTV and net debt to total assets figures are partially attributable to the fact that it reflects its property portfolio at market value (as per IFRS), whereas both FCR Immobilien and Defama report under German accounting standards (HGB) and thus reflect properties at acquisition cost and subsequently depreciate these.
Exhibit 7: Comparison of FCR versus its closest peers
Data as at end-June 2019 unless otherwise stated |
FCR Immobilien |
Deutsche Konsum REIT |
Defama |
Number of properties |
64 |
113 |
31 |
Leasable floorspace (in ‘000 sqm) |
306 |
638 |
131 |
Occupancy rate |
86% |
91% |
96% |
WAULT (in years) |
5.3 |
5.4 |
4.1 |
Annualized rental revenue (€m) |
15.9 |
42.5 |
10.0 |
Leasable floorspace CAGR (end-2016 to end-June 2019) |
69% |
54% |
32% |
Exposure to tenants from the food sector |
40% |
46% |
45% |
Reporting standard |
HGB |
IFRS |
HGB |
LTV at property level* (excl. holding-level debt) |
65% |
31% |
84%** |
Net debt to total assets |
79% |
49% |
78% |
Source: Company accounts, Edison Investment Research. Note: *Based on property value as presented on the balance sheet and debt excluding holding-level indebtedness. **LTV based on market value of properties as given by Defama stands at 61%.
Moreover, our peer group includes other German real estate investment companies: Deutsche EuroShop, Hamborner REIT, Demire and VIB Vermögen. Deutsche EuroShop also focuses on the German retail market, but is a larger player, acquiring properties with at least 15k sqm of leasable space in locations with a catchment area of at least 300,000 inhabitants. The remaining peers have a more diversified real estate portfolio than FCR, including office and logistics properties.
Based on the company’s EPRA NAV (divided by the share count post recent secondary public offering), FCR is trading at a P/NAV ratio of 0.98x, which represents a 11% discount to the peer group. Based on the FY19e EV/EBITDA ratio, FCR is trading at a 21% discount to the peer average. This may be partially explained by the fact that FCR’s portfolio includes a number of companies where its asset management measures have not been implemented yet. Since FCR recognises its real estate portfolio under property, plant and equipment (which is being depreciated on an ongoing basis), while some of its peers book it under investment property (under IFRS) and revalue it regularly, a comparison based on P/E ratios has limited informational value. FCR’s AGM recently approved a dividend payout of €0.35 per share (calculated excluding the bonus shares), which currently represents a dividend yield of 1.7%.
Exhibit 8: Peer comparison
|
Market cap (€m) |
P/NAV (last reported) |
EV/EBITDA (x) |
P/E (x) |
2019e |
2020e |
2019e |
2020e |
Demire |
550 |
1.00 |
21.3 |
16.2 |
9.3 |
8.9 |
Deutsche Konsum REIT |
503 |
1.53 |
11.0 |
11.0 |
7.5 |
7.7 |
Defama |
68 |
1.23 |
19.0 |
11.5 |
29.2 |
12.7 |
Hamborner REIT |
752 |
0.89 |
20.4 |
19.5 |
43.2 |
38.6 |
VIB Vermogen |
783 |
1.36 |
17.7 |
17.0 |
14.6 |
13.4 |
Deutsche EuroShop |
1,579 |
0.62 |
15.5 |
15.6 |
10.4 |
12.3 |
Peer group average |
- |
1.11 |
17.5 |
15.1 |
19.0 |
15.6 |
FCR Immobilien |
91 |
0.98 |
13.8 |
10.9 |
24.3 |
16.3 |
Premium/(discount) |
- |
(11%) |
(21%) |
(28%) |
28% |
5% |
Source: FCR Immobilien, Edison Investment Research, Refinitiv consensus as at 21 November 2019
Total return play with limited FFO1 yield
We note that FCR is a total return rather than a pure income play, as the company’s strategy is based on ongoing portfolio rotation aimed at opportunistic purchases followed by measures to enhance rental income and subsequent disposals to realise the added value. Consequently, we forecast that the net operating income (NOI) generated by its properties will represent only c 50% of its gross profit and that in the near term, FCR’s shares will offer a minor FFO1 yield (defined as net profit before D&A and excluding disposal gains divided by current share price). We expect the FY19e yield to be close to 0% and subsequently improve to 1% in FY20e and 3% in FY21e. We understand however that this is due to the fact that the best performing properties are normally sold with the proceeds being recycled into lower-yielding properties. We also acknowledge that part of the corporate overheads may be closely linked to FCR’s activities aimed at profitable property disposals.
Hence, we have also calculated the potential NAV total return (TR) after accounting for the portfolio rotation and disposal gains that we have included in our forecasts. For the purpose of preparing these, we have made assumptions as presented in Exhibit 9 below. We have assumed that FCR will continue its portfolio expansion (acquiring 20+ properties per annum) while also realising the hidden reserves through disposals of properties following successful asset management measures. Here, we have pencilled in a portfolio rotation at c 10–15% pa. Moreover, we have factored in a broadly stable occupancy rate across the portfolio, as disposals of fully let properties and acquisition of projects with occupancy potential should be offset by rental successes for retained investments.
We estimate that the company still has more than 20 properties acquired before 2018 that are most likely characterised by high current net rental yields (based on book value recognised on the balance sheet) of 15% pa or more. We expect these to be an important contributor to disposal gains over the next two to three years. Meanwhile, we assume gross rental revenue will grow at around 22% pa on the back of portfolio expansion and a minor increase in rent per square metre across the portfolio of 1.0% pa.
Having said that, we would like to stress that the scenario we have outlined here is subject to a number of parameters that are difficult to predict. These include the number, size, as well as rental and vacancy rates of properties acquired and sold per annum, the rental revenue generation improvement achieved by FCR, as well as the yields at which the company will be able to acquire properties and subsequently sell them. These in turn are dependent on the conditions prevailing in the German property markets, which are uncertain given the unfolding economic slowdown.
Exhibit 9: FCR Immobilien KPI forecasts
|
2018 |
2019e |
2020e |
2021e |
Number of properties (end of period) |
58 |
80 |
96 |
113 |
Properties acquired |
26 |
26 |
24 |
27 |
Properties sold |
9 |
4 |
8 |
10 |
Net rental revenue pa (€m) |
14.8 |
19.1 |
22.8 |
26.5 |
Occupancy rate |
85% |
89% |
89% |
89% |
Net rental yield pa |
9.7% |
9.4% |
9.3% |
9.4% |
Source: Edison Investment Research
Based on the above assumptions, FCR provides a potential NAV TR at around 13% pa over the next three years (see Exhibit 10 below).
Exhibit 10: FCR NAV total return potential
|
2018 |
2019e |
2020e |
2021e |
EPRA NAV (€m) |
85.3 |
101.5 |
113.6 |
124.2 |
NAV/share (€) |
10.11* |
11.10 |
12.42 |
13.58 |
DPS paid in the period (€) |
0.12* |
0.17 |
0.27 |
0.56 |
NAV TR |
|
11% |
14% |
14% |
Source: FCR Immobilien ,Edison Investment Research. Note: *Adjusted for the issue of bonus shares in 2019.