Consus Real Estate |
Deleveraging as COVID-19 delays expansion
Real estate |
Scale research report - Update
13 May 2020 |
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Consus Real Estate’s investment portfolio has more than doubled over the last two years, to a €12.3bn gross development value (GDV) at the end of FY19. This period included the end-2018 acquisition of SSN, contributing to the high end 2019 net debt of €2.7bn. While management states in its annual report that the coronavirus outbreak may not have a material impact on its business, it is, nonetheless, focusing efforts on deleveraging and restructuring the relatively expensive debt. Consequently, Consus has delayed all further purchases for the year and agreed to sell 17 projects with a GDV amounting to €2.3bn, for €690m, representing a double-digit premium to market values as at end-December 2019.
Financials: Overall performance improved by 80%
FY19 includes the first full year consolidation of the SSN Group, which almost doubled the size of the company’s business. On the back of successful development activity, and a significant positive change in project related inventory, Consus improved overall performance by over 80% y-o-y. Operating and financing costs increased proportionately to the income; nonetheless profit before tax swung to a positive €11.5m in FY19 from a loss of €14.8m in FY18.
ADO has an option to buy a majority stake
In December 2019, ADO Properties (ADO) acquired a c 22% stake in Consus, which together with shares held by Adler Real Estate (also recently merged with ADO) represents a 25% stake in the company. As part of the deal, ADO received a call option for the purchase of an additional 51% stake in Consus from Aggregate Holdings until mid-2021, which ADO intends to exercise, according to its annual report. We note that the share price parity of Consus vs ADO currently stands at 0.19 (at close on 12 May), compared to contractually agreed parity of 0.2390.
Valuation: Trading at a discount to peers
Consus, which used to trade at a diminishing premium to peers, now (according to Refinitiv consensus figures) trades at a c 32% discount based on P/E multiples for 2020e, which slightly expands to 37% on 2021e earnings. Based on the EV/EBITDA multiple for 2020e (calculated on consensus EBITDA of €344m vs €450m management guidance), Consus trades at only a slight discount to peers, which turns into a premium for 2021e figures. However, the valuation will currently be skewed by the possibility of Consus being absorbed into ADO.
Consensus estimates
Source: Consus accounts, Refinitiv consensus as at 12 May 2020. |
Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.
Financials: Revenue expansion offset by financing cost
FY19 was the first full year of consolidation of the SSN Group, acquired at end 2018 resulting in a significant shift in the scale of business activity. The company reported over 38% y-o-y improvement in total income (see Exhibit 1), reaching €671m, with Consus RE Group (former CG Group) contributing €600.1m (89.4%) and Consus Swiss Finance Group (former SSN Group) adding €71.0m (10.6%) to the 2019 total income. The increase was mainly driven by successful property development activity, contributing €402m against €279m in 2018, and disposals of real estate inventory – €205m against €164m in 2018. It is worth noting, however, that in FY19 Consus amended its accounting policy for forward sales of development projects, separating it into sale of land and work performed on the development of property. Consequently, prior year income from property development has been reduced, boosting the reported change in project related inventory. Out of 65 projects held as at end-2019, 33 realisations in the development phase were already contributing to the former revenue stream. Overall performance improved even more, reaching €864m in FY19 against €466m in FY18, driven by the €193m increase in project related inventory. This figure includes both project acquisitions and developments as well as capitalisation of interest expenses for projects that are not yet sold under forward sales agreements.
As the SSN integration process is still underway, the economies of scale have not yet been fully reflected, resulting in a proportionate increase in operating costs. The 85% sales improvement generated similar growth in cost of materials (84%) and personnel expenses (82%), with the group headcount growing from 782 at year end 2018 to 975 at end 2019. An almost 54% y-o-y increase in other operating income was driven by €3.3m reversal of allowances and €2.1m negative difference from purchase price allocation (PPA). Consus continued to bear significant consulting and audit fees of €17.1m (€17.8m in FY18), mainly due to portfolio transactions, capital market activities and other project related work. Total other operating expenses reached €78.5m in FY19 (€65.3m in prior year), driven by a c €13m increase in other taxes, mainly non-deductible VAT.
The increased business activity volume, combined with project realisations entering the earning generating phase, resulted in Consus more than doubling EBITDA and EBIT in FY19, to €236m and €228m, respectively. The positive operating result, however, was fully offset by an almost doubling of debt financing costs and a swing to income tax expenses after a credit in FY18, which led to a reported net loss for the period amounting to €5.0m in FY19 against €2.6m in FY18.
Exhibit 1: Financial highlights
€000s, unless otherwise stated |
FY19 |
FY18 |
y-o-y |
Income from letting activities |
21,340 |
32,796 |
-34.9% |
Income from real estate inventory disposed of |
204,541 |
163,515 |
25.1% |
Income from property development |
401,621 |
278,992 |
44.0% |
Income from service, maintenance and management activities |
43,613 |
10,199 |
327.6% |
Total income |
671,115 |
485,502 |
38.2% |
Change in project related inventory |
192,700 |
(19,003) |
NM |
Overall performance |
863,815 |
466,499 |
85.2% |
Expenses from letting activities |
(8,894) |
(16,083) |
-44.7% |
Cost of materials |
(525,215) |
(285,600) |
83.9% |
Net income from the remeasurement of investment properties |
31,943 |
25,631 |
24.6% |
Other operating income |
20,360 |
13,241 |
53.8% |
Personnel expenses |
(67,024) |
(36,911) |
81.6% |
Other operating expenses |
(78,551) |
(65,338) |
20.2% |
EBITDA |
236,434 |
101,439 |
133.1% |
Depreciation and amortization |
(8,443) |
(2,175) |
288.2% |
EBIT |
227,991 |
99,264 |
129.7% |
Financial income |
28,160 |
9,001 |
212.9% |
Financial expenses |
(244,666) |
(123,090) |
98.8% |
EBT |
11,485 |
(14,825) |
NM |
Income tax expenses |
(16,521) |
12,198 |
NM |
Net income from continued operations |
(5,036) |
(2,627) |
91.7% |
Source: Consus Real Estate accounts, Edison Investment Research
As the residential real estate segment seems quite resilient to the impact of the coronavirus outbreak, management has not significantly revised the guidance it has held since the SSN Group acquisition. We note, however, that Consus, operating as a developer rather than investor, is bearing more risk, due to high leverage and a project intensive business model. The company still targets 2020 EBITDA adjusted for PPA and one-off expenses to reach €450m (€344m in FY19) on c 20% margin. Even though currently the ratio of net debt to adjusted EBITDA sits at c 7.8x, management aims to cut it to just 3.0x in the medium term. This would be achieved through both debt reduction and improvement of operating earnings, driven by a high forward sales level.
ADO Properties acquires a c 25% stake in Consus
In December 2019 ADO Properties, a Berlin-focused residential real estate company, acquired a c 22% stake in Consus for €294m in cash (€9.72 per share), which together with shares held by its recently acquired subsidiary Adler Real Estate totals to a 25% stake in the company. As part of the deal, ADO received an option for the purchase of an additional 51% stake in Consus from Aggregate Holdings until mid-2021, which would be settled in new ADO shares (0.2390 per Consus share). According to ADO’s annual report published on 31 March 2020, it intends to execute the option. We note, however, that at the day of the annual report publication, the ratio of the Consus share price to ADO stood at c 0.25, while it fell to 0.19 at close on 12 May.
Net debt to GAV ratio at 75%
Over the last two years Consus continued to expand its portfolio through both organic growth and intense acquisition activity, taking total GDV to €12.3bn as at end-December 2019 against just €4.6bn at end-2017. Along with new projects, the company assumed new debt, lifting end FY19 net debt to c €2.7bn, including over €350m increase related to eight purchases completed over the year. Consequently, even though the market gross asset value (GAV) improved from c €3.0bn in 2018 to over €3.6bn as at end-2019, leverage remained relatively high with a net debt to GAV ratio of 75%. In the same period, the net debt multiple against EBITDA adjusted for purchase price allocation and one-off expenses fell from 8.7x to 7.8x. This figure is especially important, bearing in mind the fact, that c €1.2bn (44% of net debt) is repayable within 12 months.
As we have already stressed in our previous notes, the company’s indebtedness is not only high, but also relatively expensive, with the average interest rate at the end of 2019 amounting to 7.8%. This mainly reflects the SSN acquisition in late 2018, which added c €685m liabilities with an average interest rate of 11.3%. Consequently, financial expenses in FY19 increased by c €121.5m (99% y-o-y), with €84.5m attributable to SSN’s debt. Consus continues to improve its debt structure and consequently lower the average interest rate level, targeting 6.0% in the medium term. However, this may take time; its average interest rate at the end of 2018 was 8.1% and in 2020 it should fall to c 7.5% based on management estimations. The first step in the deleveraging process taken in FY20 was the aforementioned divestment of 17 projects. Consus will reduce its project finance debt by around €475m on the back of this transaction and receive a material cash payment.
Valuation
Consus used to trade at a premium to peers due to superior earnings growth consensus forecast. The recent decision to suspend further portfolio expansion and to sell projects with c 16% of GDV, in order to improve its debt structure, resulted in the revision of consensus forecasts. Between September 2019 and May 2020, the consensus EPS for 2020e and 2021e fell by c 19% and 5%, respectively. The company’s peers are expected to rebound earlier and stronger, which may explain why Consus, based on P/E multiples for 2020e and 2021e figures, trades at more than a 30% discount to peers. On an EV/EBITDA 2020e basis, the company trades at only an 8.6% discount. However, it is worth noting that consensus data forecasts FY20 EBITDA to remain broadly flat vs the FY19 reported figure of €344m, while management guides to €450m. If guidance is met, the EV/EBITDA multiple would sit at 7.5x against current 9.8x. In any case, the valuation perception may be distorted by the possibility of Consus being absorbed into ADO.
Exhibit 2: Peer group comparison
Company |
Market cap |
P/E (x) |
EV/EBITDA (x) |
||
2020e |
2021e |
2020e |
2021e |
||
Instone Real Estate |
694 |
16.3 |
6.3 |
12.6 |
6.8 |
Helma Eigenheimbau |
128 |
17.3 |
9.3 |
15.9 |
10.9 |
UBM Development |
280 |
6.7 |
5.4 |
10.1 |
8.6 |
Barrat Development* |
5,224 |
10.7 |
10.2 |
7.2 |
7.2 |
Taylor Wimpey |
4,976 |
9.8 |
8.8 |
6.8 |
6.1 |
Bonava |
4,792 |
8.5 |
3.7 |
11.7 |
5.4 |
Peer group average |
11.6 |
7.3 |
10.7 |
7.5 |
|
Consus Real Estate |
699 |
7.8 |
4.6 |
9.8 |
8.1 |
Premium/(discount) to peers |
(32.1%) |
(36.6%) |
(8.6%) |
8.1% |
Source: Refinitiv consensus as at 12 May 2020
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