Developing both as asset manager and owner

publity 13 September 2019 Update
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publity

Developing both as asset manager and owner

Real estate asset management

Scale research report - Update

13 September 2019

Price

€33.55

Market cap

€344m

Share price graph

Share details

Code

PBY

Listing

Deutsche Börse Scale

Shares in issue

10.3m

Last reported net debt at end June 2019

€263m

Business description

publity is an asset manager with a focus on German office buildings. It has an 18-year track record as an investor in commercial real estate in larger German cities and manages a portfolio worth €5.0bn.

Bull

Experienced player with a focus on one segment of the property market.

New asset management mandates with institutional investors.

Strong demand in the German office market.

Bear

Expansion of own property portfolio increases leverage and sensitivity to property prices.

Dependent on banks for property sourcing.

Funding risk associated with convertible bonds.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

publity is evolving from a pure asset manager and is building its own portfolio of German office properties (valued at €243.3m at end-June 2019) through its subsidiary, publity Investor (Investor). The next strategic step is combining Investor with PREOS Real Estate (an asset owner also controlled by publity’s main shareholder, Thomas Olek). We believe that the parent company will now devote part of its capacity to managing its subsidiary’s portfolio (apart from third-party assets). However, this may drive property revaluation gains. publity’s assets under management (AUM) now stand at €5.0bn (vs €4.6bn at end-2018).

Stronger focus on own property portfolio in H119

Following the acquisition of several properties on its own book in recent months, publity has recognised the first-time revaluation of its investment portfolio. This translated into a €31.9m positive impact on group net income, which in H119 stood at €21.0m vs 4.0m in H118. Meanwhile, it recorded lower revenues from its institutional asset management business (€3.5m in H119 vs €12.6m in H118), which according to the company is due to increased focus on managing its own property portfolio (as these services, amounting to €7.3m, are subject to intragroup eliminations). publity still guides to FY19 net income of €50m (vs 24.6m in FY18).

Initiatives to grow both business lines

publity recently embarked on initiatives to expand its own property portfolio. This includes the agreed combination of Investor with PREOS and the partnership with Meritz Financial Group and IGIS Asset Management to jointly finance publity’s ongoing real estate acquisition programme. Having said that, it is not neglecting its third-party asset management business and has signed a letter of intent to set up a €1bn joint real estate fund with the Luxemburg investor Greenfinch Capital Management, where publity will serve as an asset manager.

Valuation: More than just net asset value

Although publity is gradually also becoming a property owner, we believe its valuation still largely reflects its asset management capabilities. This is demonstrated by its P/NAV ratio of 2.5x vs c 0.8–1.6x for German real estate owners. Refinitiv consensus (based on the estimates of one broker) implies a FY19e P/E for publity at 7.7x vs a peer average of 13.2x. However, we understand this may be distorted by publity’s investment property revaluation gains.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

23.6

14.6

1.67

0.00

20.3

N/A

12/18

34.6

21.6

1.52

1.50

22.3

4.4

12/19e

38.5

69.8

4.41

0.00

7.7

N/A

12/20e

44.3

75.8

4.79

0.00

7.1

N/A

Source: publity accounts, Refinitiv consensus at 9 September 2019, based on the forecasts of one broker (First Berlin).

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.

H119 financials: Revaluation gains on own portfolio

publity’s operations can be divided into two segments: pure asset management on behalf of third-party entities (which generated revenue of 3.5m in H119 vs 13.9m in H118) and own balance sheet investments in German office properties (3.0m in H119 vs €0.2m in H118). Reported revenue in H119 amounted to €6.4m compared with €14.1m in H118. According to publity, the decline resulted mainly from its deployment of a major part of its asset management capacities in its own property portfolio rather than third-party assets under management, with c €7.3m of revenue subject to intersegmental eliminations in the consolidated financial statement.

For H119, for the first time, publity reported its results in accordance with IFRS only, providing comparable data for H118. Consequently, it has performed the first revaluation of properties on its balance sheet under IFRS (as opposed to properties managed as part of its institutional mandates). Given that publity recently put increasing emphasis on expanding its own property portfolio (as discussed below), this resulted in considerable one-off non-cash income of €31.9m. Business activities related to own portfolio management generate rental income from currently held properties, as well as disposal gains arising from the optimisation and subsequent sale of these assets. Consequently, the company’s intensified asset management efforts directed towards its own portfolio, while potentially limiting its top line in the short term, may enhance the value of its properties and result in subsequent revaluation/disposal gains.

The positive result from the fair value adjustment of investment properties of €31.9m was related mainly to two real estate projects acquired in H119: St Martin Tower in Frankfurt am Main (3 April) and Karstadt headquarters (HQ) in Essen (15 April). Hence, we conclude that both transactions represented timely purchases that allowed for revaluation gains soon after acquisition. We believe publity’s portfolio was valued by external independent appraisers. Positive results also included valuation gains from two more properties in Mühlheim and Leipzig, which were acquired in 2018.

We understand that publity’s transaction activity on behalf of its institutional clients was relatively limited in H119. Consequently, we assume the €3.5m revenues from the third-party asset management business in H119 represent predominantly ongoing management fees rather than transaction-based fees on property acquisition or disposal. This reflects overall market conditions in the German commercial real estate market, as transaction volumes in H119 declined by 12% y-o-y according to Jones Lang LaSalle (JLL). Large transactions have limited the extent of the decrease, as the overall number of transactions in Q219 fell almost 30% compared to Q119. Having said that, overall investor demand remains robust despite limited supply and rising prices, according to JLL. One of the key reasons for this is the persistent low interest rate environment.

Including the €31.9m revaluation, publity reported EBIT of €29.9m in its own property activities segment, while recognising a €2.9m EBIT loss in the asset management segment (again, due to increased focus on its own portfolio). This compares with €7.3m and a loss of €0.3m in H118, respectively. With net financial expense up to €2.9m in H119 vs €0.9m in H118 (mainly driven by higher debt), net income for the period reached €21.0m (compared with 4.0m in H118).

As the company has taken on debt to fund its property portfolio expansion, net debt reached 263m at end-June 2019 (when taking into account other financial liabilities, including outstanding convertible bonds) compared with 29m at end-2018. As a result, its total capital ratio reached c 64% at end-June 2019. This compares with 16% at end-2018 and illustrates publity’s move away from a pure asset-light business model.

Exhibit 1: Financial results highlights

€000s

H119

H118

y-o-y

Revenue from Asset Management

3,514

12,598

-72.1%

Revenue from own portfolio

2,927

182

N/M

Total revenue

6,441

14,105

-54.3%

Operating expenses

(3,908)

(2,907)

34.4%

Results of ordinary activity

2,533

11,198

-77.4%

Result from fair value adjustments of investment property

31,896

0

N/M

Other operating income

200

337

-40.6%

Impairment loss on receivables

195

41

N/M

Personnel expenses

(1,034)

(1,113)

-7.1%

Other operating expenses

(6,802)

(3,468)

96.1%

EBIT

26,989

6,994

285.9%

Financial income

112

627

-82.1%

Financial expenses

(2,974)

(1,560)

90.6%

Result from associated companies

(244)

(12)

N/M

Pre-tax profit

23,882

6,049

294.8%

Income tax

(2,881)

(2,022)

42.5%

Net income

21,001

4,027

421.6%

Source: publity accounts

As net income reported in H119 was already close to the €24.6m for the whole of FY18 (although clearly driven by revaluations), management now guides to FY19 net income of €50m. The company expects positive developments in both its asset management business and own real estate portfolio. Since the beginning of the year, publity has reported a number of lease and floor space expansion successes, including full occupancy of the Karstadt HQ in Essen (prior to acquiring this property, as mentioned above), RC-Office in Cologne, Mülheim an der Ruhr and Access Tower in Frankfurt. The company has also laid the foundation for expansion of its property portfolio by entering into a partnership with Meritz Financial Group and IGIS Asset Management, under which they agreed to jointly finance publity’s ongoing real estate acquisition programme over the next 18 months with an investment volume of €500-1,000m. The first transaction as part of this co-operation was the acquisition of the St Martin Tower project mentioned above, with a purchase price of 130m.

That said, publity also is expanding its third-party asset management business, as illustrated by the recently signed letter of intent to set up a joint real estate fund with the Luxemburg investor Greenfinch Capital Management. With €1bn AUM, the fund is expected to be launched in Q419 with publity serving as the asset manager. The partnership will be strengthened by both parties acquiring stakes in each another and there are plans to open further joint funds in the future.

Stronger expansion of its own property portfolio

publity executes its own portfolio management through the wholly owned subsidiary, publity Investor, which was recapitalised with €20m in December 2018 and turned into an investment vehicle with a targeted property portfolio worth €600m after full development, according to publity. Following the acquisitions of St Martin Tower in Frankfurt, the Karstadt HQ in Essen and the headquarters of Sky Germany in Unterföhring, the real estate portfolio of Investor and its subsidiaries consisted of four properties at end-June 2019, with a contractual obligation to acquire two other properties (one of which is Access Tower in Frankfurt). In H119, publity also concluded the first property disposal from its own portfolio, selling the fully let Grossmarkt Leipzig with leasable space of 18,000sqm to a New York-based investment fund management company for an undisclosed price.

On 19 July 2019, publity revealed its plans to transfer up to 94.9% of its stake in Investor to PREOS, a listed real estate company also controlled by Thomas Olek. Combining Investor and PREOS is a natural step, as both focus on similar German office properties and aim to benefit from publity’s Manage-to-Core strategy. In January 2019, publity received an asset management mandate from PREOS allowing the latter to benefit from its extensive real estate database. The PREOS-Investor deal will create a real estate investment group led by publity and valued at up to c €574m, according to management estimates (19 July 2019). publity will continue to manage the combined assets and support the development of the real estate business after the deal concludes. As part of these activities, it purchased a 10,100sqm office and technical centre in Lüdenscheid on behalf of PREOS in August 2019.

The transaction is structured as a non-cash capital increase for PREOS excluding current shareholders’ subscription rights in exchange for a contribution in kind. Up to 47.45m new shares at €8.0 per share will be issued to publity in exchange for up to 94.9% of its stake in Investor at a 5:2 ratio, based on Investor’s valuation of €400m. In addition, PREOS will issue a convertible bond with a volume of up to €300m, with publity’s up to €150m claims under current and prospective shareholder loans to Investor contributed to PREOS. The PREOS AGM, which took place on 29 August 2019, approved the transaction.

€1.50 dividend per share paid in cash or new shares

Following a successful FY18, publity’s AGM accepted dividend payment amounting to €1.50 per share with an option to receive dividend payments in the form of new shares instead of cash. Shareholders holding a total of c 78% of the share capital (including Thomas Olek with over 74%) have used this option. The pro-rata dividend claims were set at €1.07 per share, with the remaining amount of €0.43 to be paid in cash to cover any tax obligations. Consequently, 426,818 new shares at a subscription price of €19.26 per share have been issued, representing 4.3% of the previous share count. Interestingly, when factoring in the dividend in the form of new shares, Thomas Olek has invested a total of €95m in publity shares at market prices in the past 11 months.

Valuation

Although publity is developing its own real estate portfolio, we believe the market still considers it to be more of an asset manager (focused on fees) than an asset owner (focused on NAV growth). We feel this is illustrated by the fact that publity’s shares currently trade at a P/NAV (based on the balance sheet value of equity at end June 2019) at c 2.5x, visibly ahead of the c 0.8–1.6x range for German listed real estate investors reporting under IFRS.

Therefore, we still consider the P/E multiple is the most appropriate measure to compare publity’s value with its peers. Based on Refinitiv consensus (one broker only), which assumes results slightly below management guidance for 2019 and further improvement in the coming years, publity trades at a significant discount to its peers based on FY19–21e figures. However, we note that consensus figures may be somewhat distorted by revaluation gains (such as those booked in H119). publity has recently paid a dividend amounting to €1.50 per share, at a 4.4% yield – slightly above the peer average of 4.1%, which is inflated by Corestate Capital.

Exhibit 2: Peer group comparison

 

Market cap

P/E (x)

Yield (%)

Company's name

(€m)

2019e

2020e

2021e

2018

Corestate Capital

689

5.1

4.8

4.7

8.3

Patrizia

1531

19.8

17.2

16.3

1.8

VIB Vermögen

745

11.6

11.1

10.7

2.6

TLG Immobilien

2,760

16.1

14.9

15.7

3.8

Average

-

13.2

12.0

11.9

4.1

publity

344

7.7

7.1

6.8

4.4

Premium/(discount) to peers

-

(42%)

(41%)

(43%)

31bp

Source: Refinitiv consensus as at 9 September, company accounts, Edison Investment Research. Note: Consensus based on the estimates of a single broker (First Berlin).

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Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

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1,185 Avenue of the Americas

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United States of America

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Level 4, Office 1205

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General disclaimer and copyright

Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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