Vonovia SE: Undervalued And Possible Upside If Rates Drop

Teka77

Thesis

Vonovia SE (OTC:VNARF), (OTCPK:VNNVF), (OTCPK:VONOY) is Europe's largest existent property company, owning much than 550,000 residential units successful Germany, Austria, and Sweden. Even though it doesn't person a REIT status, it is to beryllium seen and analyzed as such. In nan past fewer years, Vonovia laid its attraction connected debt-driven mergers & acquisitions (M&A), meaning they heavy bought and built units and acquired different existent property companies for illustration nan Deutsche Wohnen SE successful 2021, which they purchased for 19B EUR. This strategy has helped them to make peer-beating maturation and returns for its shareholders. As a broadside effect, indebtedness roseate significantly, leaving them heavy indebted. This was good successful times of 0% rates arsenic nan indebtedness was very cheap, and much rate was easy to get. Since nan commencement of nan year, this has dramatically changed, pinch rates successful nan Eurozone changing from 0% to 3%. The marketplace feared that the rising costs of its indebtedness would crush nan earnings, perchance threatening nan dividend for which Vonovia is known. Additionally, nan expanding costs of power successful European countries and nan consequence of a recession besides weighed connected nan banal price. The marketplace did excessively much, and portion of nan sell-off is unjustified, generating a buying opportunity. In this article, I want to explicate really these risks could create successful nan coming months and years and why I spot nan sell-off arsenic unjustified to this extent. To measure this, I said to Oliver Larmann, Vonovia's elder investor relations manager, to spot if they scheme to set their business exemplary to nan caller marketplace situation aliases want to beryllium this retired until we spot little rates again.

Short institution overview

With much than 550K units, worthy complete $99B, dispersed complete Germany, Sweden, and Austria, Vonovia is Germany's largest existent property company. I person searched for different residential REITs pinch nan Seeking Alpha Stock Screener to understand really large Vonovia is compared to akin REITs. If you scan for "Residential REITs," you get 18 results. I sorted them for nan marketplace headdress to spot nan biggest astatine first.

Result Seeking Alpha Stock Screener "Residential REITs" (seekingalpha.com)

If you comparison Vonovia pinch them, you get a image of really large Vonovia is. Vonovia has astir arsenic galore units, and portfolio worthy arsenic nan six biggest residential REITs sorted for marketplace cap. All nan six REITS harvester 565K units pinch a full worth of $100.2B against Vonovia's 550K units worthy $99B.

Vonovia compared to nan six biggest residential REITs (Author)

Contrary to this is nan quality successful marketplace cap. Vonovia is worthy $19.4B, while these 6 harvester a $115.75B marketplace cap. Seeing really large Vonovia is made overmuch quality to maine erstwhile first analyzing nan stock. A marketplace headdress of $19.4B while holding assets worthy $99B intends you tin bargain a portion of Vonovia's assets by paying 19.6% for it. In different words, Vonovia's existent stock value offers you a discount of 80.4% connected existent estate.

Furthermore, residential units are not nan only point Vonovia uses to make revenue. It besides manages complete 72K units for different companies and owns almost 9K commercialized units and complete 160K garages and parking spaces. Beneath managing and renting these units, Vonovia has 3 much segments, including:

• Property development: building units to clasp aliases to sell.
• recurring sales: regular and sustainable disposals of individual units and single-family houses
• Value-add services: housing-related services they connection their tenants, for illustration multimedia, energy, and soul costs savings (from craftsmanship, for example)

These further segments make astir 49% of Vonovia's revenue, while renting generates 51%. I for illustration that gross building because it diversifies and intends little consequence owed to rent-specific factors. Geographically, Vonovia is little diversified, pinch 80% of its gross from properties successful Germany and nan different 20% from Sweden and Austria. Considering nan beardown lodging marketplace successful Germany, I americium good pinch relying connected Germany.

The debt-driven maturation business exemplary has helped Vonovia go nan large subordinate they are now. In 2013, erstwhile Vonovia came public, they had 175K ain units and 26K, which they managed for others. Since then, they person grown their rental units by 24% CAGR to 550K units today. Including each nan different properties, for illustration garages and parking spaces, we get a CAGR of 32.6% since 2013. This monolithic accumulation and building of properties resulted successful sizeable cost-efficiency savings, arsenic they represent for nan German assemblage successful their latest net presentation.

Scale and ratio gains successful Germany (vonovia.com)

In general, Vonovia is moving rather efficiently, generating fantabulous profitability metrics, for illustration nan following:

• EBITDA margin: 46%
• FFO margin: 34%

Especially nan FFO separator is applicable since Vonovia should beryllium analyzed arsenic a REIT, and nan Funds From Operation (FFO) springiness nan champion image of their earnings.

A large portion of Vonovia's FFO is fixed backmost to shareholders arsenic a dividend, for which Vonovia is well-known. It is precocious currently, yielding 7.2% arsenic of nan clip of writing. As you tin spot beneath (for nan ADR VONOY), Vonovia ne'er missed a dividend and raised it yearly pinch a way grounds backmost to 2013 for nan German-based ticker VNA.

Vonovia dividend history (seekingalpha.com)

Vonovia pays retired 70% of its Group FFO, which is why nan dividend projection for 2022 is beneath nan 1 for 2021. As soon arsenic nan twelvemonth has ended and nan nonstop Group FFO is known, this will beryllium updated and should beryllium higher.

Besides nan above-mentioned soul maturation of Vonovia, they besides managed to make market-beating returns for shareholders until nan banal dropped 60% this year, down complete 70% from its all-time high.

Data by YCharts

The reasons for nan sell-off align pinch nan wide risks, particularly for nan European market. Rising rates are nan biggest threat that is waying nan astir connected nan stock price. Furthermore, nan marketplace doesn't for illustration nan risks presented by nan European power situation and a declining lodging market. I will explicate nan market's guidance successful much item successful nan following.

Rising rates

For nan first clip since 2016, nan European Central Bank (ECB) raised rates owed to 40-year precocious inflation. In doing so, nan complaint has reached 3%, a level nan Eurozone hasn't seen since 2009.

Euro area liking complaint (koyfin.com)

The fearfulness is that higher indebtedness refinancing costs will effect Vonovia's net and threat nan dividend. Considering nan business model, nan fearfulness is understandable. Recently, Vonovia utilized inexpensive money to accumulate galore units aliases full companies for illustration nan Deutsche Wohnen SE successful 2021. The consequence is obvious: Vonovia has a batch of debt. €43.6B to beryllium exact.

What could rates do?

Rate hikes could highest arsenic early arsenic this year. Maybe moreover successful nan first half. Data connected nan past 20 years of Eurozone ostentation and liking rates uncover that nan liking rates peaked soon earlier aliases aft nan ostentation rate.

Eurozone ostentation and liking complaint (koyfin.com)

Assuming nan past will repetition itself, and nan projections for nan ostentation highest astatine nan extremity of nan twelvemonth are correct, nan complaint should highest either astatine nan opening of 2023. Considering that nan ECB has to set nan complaint to beryllium bearable for 19 countries alternatively of conscionable 1 state for illustration nan FED, it convinces maine much that nan complaint will drop, aliases astatine slightest extremity rising, arsenic soon arsenic ostentation is tamed. The Eurozone has countries for illustration Spain, Italy, Greece, and now Ukraine, who are truthful indebted that they can't grip thing supra 0% for a very agelong time. That is nan main logic why nan ECB was truthful hesitant to raise nan complaint astatine first. The first complaint hike occurred erstwhile ostentation was already astatine 9%. Through my occupation astatine a bank, I person entree to investigation worldly from nan 2nd biggest slope successful Germany and 1 of Europeans astir salient plus managers. In summation to nan wide public, these expect rates to extremity rising and quickly autumn again arsenic soon arsenic ostentation seems to beryllium nether control. As you tin spot successful nan chart, ostentation has already dropped sharply and is projected to proceed declining. The Deutsche Bank (DB), Germany's biggest bank, expects rates to climb to 3.75% astatine max and enactment location until mid-2024.

Debt Maturity

Debt maturity for 2023 and 2024 (vonovia.de)

In nan adjacent 2 years, €7.8B of indebtedness will mature, creating nan refinancing consequence nan marketplace fears. To measure really overmuch nan refinancing costs could change, I looked up rates of bonds Vonovia emitted successful nan past successful relationship to nan past and existent market. Considering we presently person a 3% liking rate, my calculations consequence successful a 4-5% refinancing rate. This is importantly much than nan mean costs of superior of 1.3% arsenic of 09/30. The superior costs for nan adjacent 2 years could alteration from €101.4M (1.3% costs of capital) to €351M (4.5% costs of capital). Theoretically, we could use this calculation to nan full indebtedness of complete €43B and would get an earnings-crushing result. Practically, nan full image looks a batch better.

Vonovia indebtedness maturity (vonovia.de)

Vonovia has a very balanced maturity of its debt, pinch a 4th of each indebtedness maturing aft 2031.

Changes successful nan business model

When I first analyzed Vonovia's business and nan complaint hikes successful mid-2022, I thought they would person to alteration their business exemplary from a debt-fueled maturation institution to a low-debt plus manager. After talking to Oliver Larmann, Vonovia's elder investor relations manager, he told maine Vonovia isn't readying to alteration its business exemplary yet. Instead, they want to beryllium retired nan clip of elevated rates, usage income proceeds to screen nan debt, and proceed pinch its original growth-focused business exemplary arsenic soon arsenic rates diminution again. Considering nan precocious probability that rates will driblet quickly, this is nan correct plan. Growth prospects are still excellent, considering nan existent property marketplace Vonovia useful with. Especially successful Germany, it sewage substantially harder for mean citizens to bargain existent estate, which makes it much accessible for companies for illustration Vonovia.

Furthermore, Oliver Larmann told maine they cipher pinch nan existent elevated complaint for early refinancing. If I americium correct and nan liking complaint drops successful nan pursuing months/years, that could mean that Vonovia will either raise its guidance aliases hit it.

Conclusion

Vonovia made nan correct choices and pursued nan correct way successful managing nan liking complaint risk. I expect them to regain maturation arsenic soon arsenic nan clip of elevated liking rates is over. The valuation gives you a important discount connected existent property assets and compensates for nan consequence of much prolonged and higher-than-expected liking complaint levels. Compared to nan six biggest US residential REITs, Vonovia is simply a bully addition, particularly if you activity immoderate vulnerability to European stocks. As agelong arsenic rates enactment high, nan stock value will apt tally sideways, but arsenic soon arsenic rates drop, I expect nan stock value to summation appropriately. Until then, you get rewarded pinch a dividend output of complete 7%.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

I americium a 23 years aged financial advisor/wealth head astatine a section slope and a long-time investor from Germany. I person learned to analyse stocks owed to my investigation and done my respective degrees, which I can't sanction present because they can´t beryllium translated into English.I attraction connected generating income pinch my invested money, chiefly analyzing stocks that salary dividends. Either precocious yielders aliases stocks pinch awesome dividend growth. Contrary to this, I put successful small, highly disruptive companies pinch a insignificant portion of my portfolio to boost wide performance.