Vonovia (VNNVF): The Go-To Stock If The ECB Goes In Reverse

All figures under in EUR until in any other case acknowledged.

Firm Overview

The Q1 2023 earnings report of Vonovia (OTCPK:VNNVF) is offered here.

Vonovia derives a good portion of its income from non-rental earnings sources, with rental earnings various between 56% of phase income in Q1 2023 to only 50.6% of phase income in 2022:

Thus valuing the corporate merely from a cap charge perspective, making an allowance for the hire obtained versus the worth of its properties, omits a good portion of the worth generated by Vonovia.

Operational Overview

Regardless of robust Adjusted EBITDA from the principle Rental enterprise (+5.2% Y/Y), complete adjusted EBITDA was down 9.8% Y/Y because of broad-based weak spot amongst different segments:

Increased curiosity expense additionally lower into Group FFO, which dropped 20% Y/Y to 0.56/share.

Outlook Confirmed

Regardless of the weak begin to Q1, Vonovia confirmed its 2023 outlook, with Group FFO seen down 9.1% Y/Y on the midpoint of steering:

Latest Disposals

Vonovia just lately introduced two main transactions, totaling 1.56 billion in proceeds, or 1.7% of complete actual property belongings as measured by honest worth.

CBRE Administration

The latest transaction for 0.56 billion is to CBRE Administration. As highlighted within the press launch, the disposed belongings comprise the excessive finish of Vonovia’s portfolio:

At ca. EUR 6,000 per sqm the typical honest worth is greater than twice as excessive because the Vonovia common, and the hire degree of ca. EUR 19.50 per sqm compares to ca. EUR 7.50 for Vonovia’s portfolio. Each numbers underline the extraordinary high quality of the disposal belongings. The gross yield on the bought portfolio is slightly below 4% and carefully in step with Vonovia’s common.

The low cost to year-end 2022 valuation is 6.7%.

Südewo

Previous to the CBRE Transaction, Vonovia executed a bigger deal for 1 billion in proceeds to Südewo. As introduced within the press release, the transaction included a buy-back possibility:

Vonovia retains a long-term call-option to repurchase the participation at an IRR of 6.95%-8.30% (together with dividends obtained), and therefore retains 100% of the upside of any outperformance of the portfolio. There is no such thing as a obligation for Vonovia to train the call-option. The minority participation features a higher-than pro-rata share of the dividend distribution by Südewo, and can have customary minority investor safety rights.

The low cost to year-end 2022 valuation is 5%.

EPRA NTA and Deferred tax

EPRA Web tangible belongings (NTA) is utilized by Vonovia as a proxy for its internet asset worth:

In Q1 EPRA NTA decreased by 6.5% to 53.75/share, primarily because of the lower within the honest worth of funding property by 3.6% Q/Q. Probably the most important driver was a 3.4 billion valuation markdown (-4.4% life-for-like) within the German portfolio.

Total, the portfolio is now valued at 26.9x in-place hire and €2,422 per sqm.

The primary adjustment Vonovia makes to NTA is so as to add again deferred tax in relation to honest worth features of funding properties. The concept is that if Vonovia truly bought all its properties, it must pay some 15.3 billion in tax because of the properties appreciating in value since they had been initially bought.

If we wish to modify the 53.75/share for the deferred taxes, the per share pro-forma NAV could be 34.58/share, or some 35.7% decrease. The excellent news is that Vonovia won’t must promote a lot of its actual property. The opposite silver lining is that as property costs decline, the deferred tax declines in tandem. Thus internet proceeds to shareholders in a sell-off situation are cushioned so far as value declines solely reverse prior appreciation.

Capital Construction

On the finish of Q1, the online debt place stood at round 43.3 billion which is a few 2.9 occasions greater than its market capitalization of 14.8 billion. To me that is unsustainable and the corporate will proceed to retain money to pay down debt, in addition to pursue opportunistic asset gross sales.

2021 Déjà vu

I first wrote about Vonovia again in August 2021. There are quite a lot of parallels between the 2021 market and the developments in 2023. In my authentic article, I seen Vonovia as one of many lagging defensive shares which may benefit if the financial restoration of 2021 sputtered.

Issues are very a lot the identical in 2023. Vonovia is down round 17% year-to-date whereas the DAX index has moved roughly the identical quantity however within the inexperienced:

Financial information has are available higher than anticipated and Germany might avoid a recession in 2023. The opposite major wrongdoer behind Vonovia’s underperformance is the speedy improve in charges by the ECB:

As is seen from the chart above, from a low level of -0.5% the speed on the deposit facility reached 3% and is predicted to extend additional.

The impact of upper charges is clearly seen on a two-year horizon, with each the DAX and Vonovia down over the interval, whereas some rate of interest delicate shares reminiscent of Commerzbank (OTCPK:CRZBF) truly appreciating:

Again in my 2021 article, I argued it could be a good suggestion to couple lengthy Vonovia publicity with lengthy financial institution share publicity (reminiscent of Deutsche Financial institution (DB) and Commerzbank) to mitigate the chance of the ECB shifting on charges.

Standing in 2023, the reverse could be the case. It might be smart to enhance the lengthy publicity one has in banks, a few of which have appreciated because of greater charges, with lengthy Vonovia publicity.

The issue with such a commerce is that simply as hardly anybody (together with myself) anticipated the ECB to maneuver on charges as rapidly because it did again in 2021, no one presently expects the ECB to chop charges swiftly.

Total, I reckon that it’s going to take a while earlier than the ECB cuts charges however the overwhelming majority of charge hikes are most likely behind us.

Conclusion

Vonovia has manner an excessive amount of debt which must be rolled at ever greater rates of interest. Nonetheless, ought to the ECB pause and ultimately lower rates of interest the corporate will probably be one of many major beneficiaries. This can occur on a number of fronts:

• Mortgage charges will lower, pushing up home costs
• Good fixed-income options will turn out to be scarce, boosting curiosity in protected residential actual property
• Refinancing will cease consuming into Vonovia’s FFO

Thus I believe Vonovia is price an funding on the present value, with the caveat that you’re comfortable for the corporate to prioritize debt repayments. Nonetheless, I see no substantial uptick within the share value till the ECB reverses course.

Thanks for studying.

Editor’s Word: This text discusses a number of securities that don’t commerce on a serious U.S. change. Please concentrate on the dangers related to these shares.