Vonovia: Still Bottoming, But May Be Turning Around - I'm Buying More

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Author's Note: This article was published connected iREIT connected Alpha successful precocious January/Early February

Dear subscribers,

It's clip erstwhile again to update my thesis for German Real Estate elephantine Vonovia (OTCPK:VONOY). Vonovia saw a spectacular valuation crash, astir nan aforesaid clip that astir of nan marketplace successful Europe bottomed, but has seen a important short-term reversal successful nan past fewer weeks.

This begs nan mobility if nan driblet mightiness person been completed astatine this time. I'll return a look astatine this and springiness you my sentiment connected nan subject.

Vonovia - updating connected 1 of Europe's largest existent property companies

While nan bearish thesis connected Vonovia has ne'er been difficult to understand, nan grade of undervaluation and "dislike", for deficiency of a amended word, that nan marketplace has applied has been astonishing to maine (and other) analysts. Like agency REITS, nan measurement the marketplace has punished Vonovia would propose that nan institution is suffering from worldly deterioration successful immoderate basal facet - specified arsenic credit, vacancy, dividend safety, aliases nan like.

And indeed, while location is immoderate expected reductions successful net and OCF (or equivalent) coming successful 2023 and 2024, nan company's dividend is expected and communicated to stay unchangeable arsenic nan institution moves done nan existent macro.

The existent value for Vonovia is 1 we person not seen since 2016. Granted, during nan low-interest mania we saw successful Europe for nan past 10 years, nan marketplace assigned a monolithic premium to thing that offered moreover adjacent to acceptable, yearly returns, typically pinch a decent yield. The apartment/real property assemblage was 1 of nan fewer places wherever this was still possible.

We saw nan aforesaid mania successful Northern Europe - that's why I sold retired of 95% of my Castellum (OTCPK:CWQXF) position erstwhile it peaked astatine complete 250 SEK astatine complete 150% profit, only to "BUY" it backmost astatine astir 158 SEK, only to erstwhile again rotate astir of it anterior to nan worst of nan dividend diminution backmost successful precocious 2021.

Valuation matters. And this is besides why Vonovia is truthful absorbing present (and why Castellum is today, but that's a different topic).

Vonovia has 1 of nan largest existent property holdings successful each of Europe. It represents an oligopoly for nan Berlin lodging market. It's a BBB+ rated dividend stalwart pinch a bully payout tradition, and it's highly well-capitalized, pinch a superb plus portfolio stretching not only crossed Germany but including Sweden and different nations arsenic well.

Vonovia IR (Vonovia IR)

The company's mergers and institution play complete nan past fewer years culminated successful a much-discussed woody pinch Deutsche Wohnen, which has near Vonovia somewhat overextended going into an liking complaint crunch, which increases costs of capital, costs of debt, and nan profit nan institution whitethorn beryllium capable to squeeze.

Still, Vonovia remains 1 of nan best-capitalized Real property companies successful nan full German marketplace - and nan latest results, which came successful 9M22 successful November, do not show immoderate basal deterioration of KPIs successful a measurement that would warrant nan caller development.

How so?

• Continued integrated rent maturation supra 2%
• Record-low vacancy rates of 2.1%, meaning 97.9% company-wide occupancy. Try beating that arsenic an flat REIT.
• Peak rent collection.
• 4.2% summation successful YoY Group FFO

Challenges travel successful nan pursuing shape/s.

• Continued inflation
• Energy prices
• Wage inflation

In summation to nan supra positives and challenges, nan Deutsche Wohnen integration is moving well, expected to unrecorded successful very early 2023. The institution expects nary ample worth nonaccomplishment and remains astatine a affirmative 2023E guidance contempt nan challenges.

Currently, nan institution expects a 2023E FCF of €2.8B, and this is before nan proceeds of JV's and nan Deutsche Wohnen nursing business, which nan institution has planned to rotate.

I want to repetition this because it really bears mentioning. The KPIs and results show nary indications of weakness crossed nan halfway institution sectors. In fact, they stay afloat intact pinch expectations.

Vonovia IR (Vonovia IR)

Rent maturation is stable, if not astatine ostentation levels. The institution has managed to support attraction expenses successful line, contempt costs increases, and nan request for institution units remains astatine highest interest.

Remember, dissimilar nan US, living abstraction is not easy to find, almost anyplace successful Europe. Sweden is nan aforesaid way. That is why I'm very "chill" astir nan markets successful these countries because it really doesn't matter wherever prices spell - up aliases down - location will always beryllium group who require and are consenting to salary a premium during an upmarket, aliases put successful a down marketplace because we've seen decades of underbuilding.

In nan Gothenburg Area successful Sweden alone, we request 500,000 caller apartments/living spaces by 2028. How galore are being built? 50,000.

Most of Northern Europe is nan aforesaid way, and for a very elemental reason. Building profitably pinch today's codes and ineligible model is only imaginable if you overcharge rent, build costly condos, aliases build astatine a loss.

This makes immoderate existing assets, moreover those that are somewhat ramshackle, very valuable, because depending connected nan headdress rates, you don't request to overcharge, aliases you tin retrofit astatine charismatic rates/prices.

You request to understand nan challenges of European existent property aliases deficiency of it if you look astatine Vonovia. Once you do, nan occupancy makes sense. The main situation and bearish statement against Vonovia person been nan governmental realities of nan Mietspiegel rent increases, and what will hap there.

However, caller results successful this area stay affirmative arsenic well.

Vonovia IR (Vonovia IR)

Most of nan arguments I person complete Vonovia pinch bearish investors and analysts simply show a deficiency of knowing of nan realities of this market. Granted, we've seen valuation pushed down - but nan specified truth that immoderate are earnestly arguing that Vonovia could "go under", shows a singular deficiency of comprehension of fundamentals.

The institution has nary much than 11% of its indebtedness maturing annually, and each of its financing needs are beautiful overmuch covered. The institution has stellar in installments ratings from each of nan company's agencies and has an mean costs of indebtedness of 1.3%.

1.3% - pinch firm ratings ranging from A- to BBB+/Baa1.

Vonovia IR (Vonovia IR)

Granted, if you look astatine nan halfway definitions of nett debt/EBITDA - that's presently elevated. But LTV is still nary higher than 43.3%, which makes it very debased successful a European context, and those valuations person precocious been updated, pinch an adjusted adjacent worth of astir €100B.

The institution is slowing down investments going into 2023 and this caller liking complaint environment. We besides person afloat first guidance for nan adjacent fiscal.

Vonovia IR (Vonovia IR)

None of those targets are particularly "flighty", arsenic I spot it. The expected €1.66 dividend intends that we're looking astatine a blimpish output of 6.1% here, which is good supra wherever this institution trades historically.

Let's move onto nan crux of nan matter - Valuation

Vonovia's Valuation

In my past article, I made clear what I called nan "mathematics of tears" - tears, successful this case, being circumstantial to nan marketplace valuing Vonovia astatine nether €26/share. We usage NAV comparisons, output comparisons, nationalist comps, maturation estimates, book valuations, and earnings/cash travel multiples. Remember, this is not a REIT, truthful REIT-specific valuation metrics don't really use good here. We're nary longer astatine nether €26 either, which intends astatine slightest portion of my position is successful nan green, moreover if it's not yet much.

For peers, Vonovia presently offers a higher dividend output than nan adjacent group, and astir of its peers travel nan decline. At today's price, nan company's 2022E dividend implies a output of complete 6.1%. This puts it well supra Deutsche Wohnen's bequest output of 3.26%, successful nan scope of Covivio, and supra nan bequest output of Icade which pays complete 6% (but is besides acold little safe).

The fundamentals stay nan superior arguments for investing successful Vonovia. No adjacent has nan size, vertical integration, aliases position that Vonovia has. It trades astatine a P/E of beneath 10x for nan autochthonal to a normalized GAP EPS. I would proceed to use a premium to Vonovia, but I'm lowering it to 5% present to bespeak nan higher liking rates and accrued costs of capital.

A modular presumption is that Vonovia is simply a "bond proxy". This is not really nan case. Given its transportation of an plus and net yield, nan dispersed betwixt existent bonds and Vonovia's net are arsenic precocious arsenic 7-8% historically. The position of nan institution arsenic a benignant of enslaved replacement is besides wholly wrong, erstwhile you see that nan institution had a very affirmative yield, during a clip erstwhile Europe was negative.

Vonovia offers entree to 1 of nan astir conservative, regulated residential markets connected nan planet, and I'm not exaggerating erstwhile I opportunity that this is astir apt 1 of nan champion guidance teams successful this abstraction successful each of Europe. Remember nan guidance they gave half a twelvemonth agone - that guidance is, moreover pinch everything, intact today. And nan company's guidance for 2023E is intact arsenic it stands now - fixed nan Mietspiegel developments, I don't spot reasons for why nan institution shouldn't spot overmuch of its targets materialize arsenic expected - astatine slightest for nan longer term.

This spot is nan backdrop for my applying a premium to nan company's valuation, allowing for a mixed PT of 1.1x (no longer 1.2x) to a conservatively-calculated NAV and a decent P/E premium. On an mean weighted basis, my PT for Vonovia comes to €48/share - and I'm not shifting this a cent for this article.

I've made it very clear that I do not displacement my targets owed to marketplace temperament, and while I do little it immoderate to relationship for aforementioned superior costs increases, I'm unwilling to spell overmuch little than this - because we're already astatine incredibly inexpensive levels for what is simply a superb business.

S&P Global comes to nan value scope of €30 connected nan debased broadside and €70 connected nan precocious side, including nan consolidation pinch Deutsche Wohnen. Out of 17 analysts, 12 person either a "BUY" aliases "Outperformance" standing connected nan institution astatine a value of €37/share.

Due to nan basal value of this business, and nan continued undervaluation, moreover if we're up somewhat since m past piece, I proceed to position Vonovia arsenic a very absorbing finance here. If it does spell supra €60/share aliases so, I evidently wouldn't beryllium buying more, but astatine these multiples and a marketplace capitalization that is fundamentally a 5th of their adjacent plus value, I'm much than happy to put successful what I position arsenic a monolithic valuation discount.

Traditional US REITs person a definite advantage complete Vonovia erstwhile comparing them arsenic investments. However, if you afloat see Deutsche Wohnen's portfolio successful nan company, past nan company's existent NAV comes to 0.4X. There's a massive discount connected Vonovia 2023E here, and fixed that I cognize precisely what benignant of properties we're talking about, I cognize I want to ain them cheap.

I person been building my position successful Vonovia for respective months, and while FX has prevented maine from going each in, I'm now up complete 2% of nan institution successful my portfolio, pinch higher allocation targets successful mind.

Thesis

My position connected Vonovia is arsenic follows:

• The largest, astir important existent property institution successful each of Europe is astatine a awesome discount looking astatine each azygous position you could perchance consider.
• Based connected its fundamentals and valuation, I position Vonovia arsenic 1 of nan astir existent property companies successful each of Europe. Coupled pinch its in installments standing of BBB+, this makes it a "BUY" to me.
• My target PT remains €48/share, and I judge this is 1 of nan much absorbing existent property plays successful Europe successful 2023.

Questions? Let maine know!

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.