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Vonovia Q3 Earnings: Unloved Inventory With A Good Dividend

Sean Gallup/Getty Photographs Information

Background

Vonovia SE (OTCPK:VONOY) (OTCPK:VNNVF) is Germany’s main residential actual property firm. Vonovia at present owns and manages ~550K residential items, principally in Germany, however with some residences additionally in Austria and Sweden.

While rental earnings from holding residential residences is its principal enterprise, Vonovia additionally has further segments that embody:

  1. Property growth phase
  2. Recurring gross sales (disposal of non-core residences)
  3. Worth-add companies (eg, craftsmen, media, and so forth.)

I’ve just lately written an article summarizing the important thing catalysts for the inventory which I like to recommend readers evaluation to acquire a fuller context. Since then, the corporate launched its third quarter earnings report which was nicely acquired by the market and the inventory climbed up ~8% on the day.

This text is an replace on my thesis in gentle of the optimistic Q3 earnings report. However earlier than I dive into the third quarter outcomes and what it means, you will need to perceive what has prompted the precipitous share value decline and what Mr. Market is actually involved about with regards to this inventory.

The issue assertion

The inventory has declined (in Euro phrases) ~51% year-to-date. Vonovia is supposedly a defensive, recession-resistant inventory and that is the deepest drawdown it skilled since its IPO in 2013.

NAV share price

Koyfin

The offender is the quickly rising rates of interest within the eurozone which impacted Vonovia straight (by way of value of debt) in addition to not directly (downward strain on the costs of property). Particularly, for the actual property sector in Germany, the bond spreads have widened to 350 foundation factors which within the present yield curve interprets to a ~6% fee for a 10-year mounted borrowing fee within the capital markets.

Given the yield on Vonovia’s underlying property is within the vary of ~3%, that is clearly not sustainable. As such, this renders its earlier enterprise mannequin of debt-funded inorganic M&A not tenable any longer. It’s also not economical for Vonovia to refinance its debt at such prices, and it’s successfully pressured to deleverage. Luckily, financial institution lending is cheaper at present (within the vary of 4% to 4.5% all-in value), in order that’s a a lot better choice in contrast with bond issuance.

So it’s clear to everybody concerned, that Vonovia has to deleverage considerably and that is precisely what the administration group has communicated to the markets within the final 6 months. It has then earmarked a EUR13 billion portfolio that’s marked on the market the place the proceeds are anticipated to be utilized in paying down debt because it turns into due. It’s also exploring promoting a Nursing portfolio (1 to 1.2 billion euros) and a tax-efficient JV partnership with institutional gamers (as capital suppliers), the proceeds must be used for share buybacks and/or further deleveraging.

The Bear Case

The bear case is straightforward, Mr. Market at present doesn’t consider Vonovia goes to have the ability to deleverage with out massively destroying e book worth. The share value at present elements in a value decline of ~35%-40% of German properties which to me appears quite implausible. The truth is that the German property market is at present steady to low single-digit down price-wise, however it is usually close to a stand-still the place transaction volumes are extraordinarily low. So Vonovia needs to be fairly intentionally cautious within the tempo of any sell-downs so it would not flood the market with “on the market” indicators and creates a downward value spiral because of short-term “over-supply”.

Vonovia, on its half, highlights the secular demand-supply power scarcity within the city German markets the place provide for the subsequent few years is 200k items quick of what’s wanted every year. The discharge valve for such a situation in most property markets is larger rental costs however the German residential rental market is highly-regulated and rents are nicely beneath market charges and solely rise progressively with a lag in accordance with the distinctive “mietspiegel” rental index system .

At the moment, Mr. Market is punishing the inventory for the uncertainty and perceived incapability to leverage with out destroying shareholders’ worth. The one manner for the administration group to cope with this uncertainty is to offer to the market that it will probably deleverage with minimal injury to the intrinsic worth of the corporate.

The Q3 earnings launched yesterday have been an excellent first step in the proper course.

Q3 Earnings

Vonovia has began to offer particulars and particular numbers on the deliberate deleverage. Firstly, it clarified the way it will cope with debt maturities that may come due in 2023 and 2024:

Debt maturities 2023-2024

Investor Relations

The administration group has made a dedication to withdraw all of the bonds that come due (EUR5.2 billion) whereas financial institution money owed might be rolled over at an anticipated rate of interest of between 4% and 4.5% (primarily based on present pricing).

Vonovia will fund this from disposals of its EUR13 billion portfolio earmarked on the market. The administration group made it clear within the earnings name that this can be a laborious dedication, as highlighted by the next change:

In order that’s most likely as a result of this query is coming fairly often. So we’re given you slides, the place we’re saying that this administration group is dedicated to having beneath the reason that Philip is doing a free money movement of EUR 2.8 billion after dividend funds. So this was a dedication, like our dedication over rental value like our dedication on provide if all, or usually, that we as a administration group, are usually doing steering, which we are able to fulfill. So and naturally, some gamers really feel that they are taking part in, we are able to do some bit extra this non-core, you are able to do somewhat bit extra multifamily house. So there’s loads of pillars which now we have to play, however in the long run, we’ll really feel very comfy that we are going to ship the EUR 2.8 billion free money movement and assumptions specified by web page 18. So please, we is not going to offer you extra disclosure, and particularly breaking it down as a result of this provides us additionally restricted flexibility to react. As a result of have in mind the concept in a business-to-business relationship, we’re discussing the individuals, which most likely are most likely on this name. So to debate myself technique with the general public will hurt my value. It isn’t a b2c enterprise. It is a b2b enterprise. And that is why please, and I apologize for not being so exact. However this, I believe, is the pursuits of all our shareholders. However there’s a agency dedication of this administration group that we are going to ship EUR 2.8 billion in money movement on the finish of ’23, which might be used for as Philip has stated in early.

The administration group additionally indicated that they’re in superior discussions on the secured lending facility.

Moreover, there are ongoing discussions with JV companions in addition to the sale of the Nursing portfolio. Administration was assured each will occur and it’s only a matter of time. Any capital generated from these incremental disposals is more likely to be utilized towards share buybacks and/or further deleveraging.

Different gadgets to notice

Within the recurring gross sales phase of condos, the amount of gross sales was decrease than anticipated ~1.7k items however items have been bought at a mean premium of 44% to e book worth (which is an excellent signal). Administration reaffirmed that it’ll promote ~3000 items per year-end and the tempo might be elevated in This autumn.

Administration additionally indicated that natural rental progress is about to speed up within the coming durations as rental costs improve in step with the Mietspiegel indexing methodology. As such, regardless of the disposal program, rental EBITDA will proceed to develop in coming years because the rental market fee will increase extra than simply compensating for the discount in portfolio measurement.

closing ideas

Vonovia is each a short-term and a long-term generational purchase in my opinion. You get an 8% yield to attend and a number of other catalysts are more likely to play out within the subsequent 12 months. Long run, the rental value progress will meet up with current years’ inflation fairly mechanically. The German property market is chronically under-supplied and the present valuation of Vonovia’s residences is a fraction (5%) of its substitute value given excessive building prices.

If Vonovia is ready to execute the sale of the Nursing portfolio (excessive likelihood) and/or JV partnerships (medium likelihood), then share buybacks are more likely to be on the desk.

The principle danger is a cataclysmic decline within the German property market (~20%- 40% decline) which I see as a distant risk. On condition that it additionally trades a bond proxy, if longer-term charges proceed to climb quickly, the share value will seemingly endure quickly.

In any other case, at 0.35x internet property worth, Vonovia is a generational discount that I anticipate to carry for a few years to come back.

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