Resumed sales activity drives H121 results

Noratis 13 October 2021 Update
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Noratis

Resumed sales activity drives H121 results

Real estate

Scale research report - Update

13 October 2021

Price

€20.7

Market cap

€100m

Share price graph

Share details

Code

NUVA

Listing

Deutsche Börse Scale

Shares in issue

4.8m

Last reported net debt at end-H121

€281.3m

Business description

Noratis is a specialised asset developer, acquiring residential, rental income-producing assets in secondary locations with optimisation potential. Investing in the asset base and improving the tenant mix creates value, which it exploits in well-structured asset sales through individual or block sales.

Bull

Management confirmed its guidance for higher EBIT and PBT in 2021.

Portfolio expansion may bring greater stability to sales and earnings.

Strong experience operating in Germany’s non-core areas.

Bear

Small company in a very competitive market.

Dependence on attractive portfolio opportunities.

Relatively high leverage (LTV at c 70% at end-H121, according to our estimates).

Analyst

Anna Dziadkowiec

+44 (0) 20 3077 5700

Noratis’s earnings increased materially in H121 on resumed sales activity, with c €50m revenue from asset disposals in H121 versus c €6m in H120. The growth follows a weak FY20, affected by the decision to postpone major property sales beyond FY20 and focus on portfolio growth after Merz became its anchor shareholder in March 2020. Portfolio expansion continued in H121, reflected in visibly higher rental revenue versus H120. Noratis reaffirmed its FY21 guidance for sizeable year-on-year growth in EBIT and PBT. In August 2021, it issued a €10m corporate bond, which it will use as quasi-equity to finance new property acquisitions in H221.

Visibly higher H121 earnings after weak H120

After a weak H120, Noratis posted EBIT of €13.3m in H121 (versus €4.5m in H120) and PBT of €10.2m (€2.5m), driven by higher revenue from asset disposals (€49.6m in H121 versus €6.0m in H120) after it sold 289 portfolio units in the period (versus 32 in H120 and 177 in H119). Rental revenue increased 28% y-o-y to €10.2m amid the ongoing expansion of its portfolio, which included 3,620 units at end-H121 (versus 3,366 at end-FY20 and 2,530 at end-H120). Noratis expects portfolio growth to help it achieve profitability from rental income alone in the future (when we subtract gross profit on sales from H121 PBT, we arrive at a loss of €1.1m). The company estimated the market value of its properties at €401m at end-H121 (versus €375m at end-FY20, calculated by an external appraiser).

€10m corporate bond to support portfolio growth

In August 2021, Noratis issued a €10m unsecured corporate bond, which it will use as quasi-equity to finance new purchases. The company’s leverage has been relatively high, with net loan to value (LTV) of c 70% at end-H121 (according to our estimates) vs 67% reported by the company at end-FY20 and the maximum level of 75% set by management. That said, we believe the equity funding agreed by its anchor shareholder Merz Real Estate should support its balance sheet and strategy (it may still invest up to c €36m equity in Noratis until end-2024). Also, its business profile (acquiring properties with optimisation potential) may affect the LTV ratio amid ongoing portfolio growth.

Valuation: Offering an attractive dividend yield

Based on consensus figures, Noratis is trading at a P/E ratio of 16.2x in FY21e (higher than that of its peers Accentro and Peach Property) and 10.4x in FY22e (in line with its peers). Its dividend yield in FY21e and FY22e is attractive compared with its peers.

Consensus estimates

Year
end

Revenue
(€m)

EBIT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/19

76.0

15.8

2.3

0.8

9.0

3.9

12/20

28.7

8.2

0.7

0.5

30.0

2.4

12/21e

69.6

15.1

1.3

0.6

16.2

3.1

12/22e

98.9

21.3

2.0

1.0

10.4

4.8

Source: Noratis, Refinitiv consensus at 12 October 2021

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.

Asset disposal and rental revenue up in H121

Noratis’s total revenue increased to €59.8m in H121 from €14.0m a year earlier, driven by a significant growth in asset disposals to €49.6m (versus €6.0m in H120) after it sold 289 residential units (versus 32 in H120 and 177 in H119). Gross margin on sales declined to c 23% in H121 from c 45% a year earlier, which management highlights was due to a large share of individual asset disposals in the total number of units sold in H120 (100% in H120 versus c 1% in H121). Individual asset disposals generate a higher margin on sales compared with block sales, the more common of the two exit strategies at Noratis (gross margin on sales was 41% in FY20 and in the range of 23–36% between FY17 and FY19, although the latter figures are not fully comparable with H121 as the company switched to IFRS accounting standards in FY20 from HGB previously). In H121, the most notable transactions completed were block sales in Neu-Isenburg in the Hesse region (185 residential units) and Ratzeburg in the Schleswig-Holstein region (96).

Rental revenue increased 28% y-o-y to €10.2m in H121, supported by the expansion of its portfolio from 2,530 units at end-H120 to 3,620 units at end-H121 (or 3,732 units including properties that have already been contractually secured, but not yet recognised at end-H121 versus 3,128 a year ago). At the same time, the rental margin slipped to 59.3% in H121 from 62.1% a year earlier. During this period, Noratis acquired 543 apartments, including two relatively large transactions in new locations (242 residential units in Münster and 151 in Gelsenkirchen – both in the North Rhine-Westphalia region), and 82 residential units in Celle (the Lower Saxony region), where it has had a presence. Higher gross profit from sales (€11.3m in H121 versus €2.7m in H120) and letting (€6.1m versus €5.0m) drove EBIT to €13.3m in H121 from €4.5m in H120.

Exhibit 1: Portfolio development

Source: Noratis accounts, Edison Investment Research. Note: *Includes only acquisitions already completed in H121.

Net interest expense increased by €1.2m to €3.1m in the period, largely due to higher interest expense on a corporate bond (€0.9m in H121 versus €0.3m in H120) and liabilities to banks (€2.0m in H121 versus €1.6m in H120). The former was linked to a €30m corporate bond that Noratis issued in 2020, which we discussed in our previous update note. Consequently, PBT reached €10.2m in H121 (versus €2.5m in H120) and EPS increased to €1.52 in H121 (€0.49).

The company reaffirmed its guidance for FY21, which assumes significantly higher EBIT and PBT in the period versus FY20. For H221, its focus remains on property acquisitions. In October 2021, Noratis announced the acquisition of 95 apartments in Aurich in the Lower Saxony region.

Management highlights that the COVID-19 pandemic has hardly affected the residential market in Germany (see details below) and the group’s operations remained relatively stable throughout the pandemic. The vacancy rate was 10% at end-H121, unchanged versus end-FY20, and we understand (based on our conversation with management) there were no significant pandemic-related rent losses or risks from rent receivables in the period. At the AGM in June 2021, shareholders agreed to pay out an annual dividend of €0.50 per share.

Exhibit 2: Financial results

IFRS figures in €000 unless otherwise stated

H121

H120

y-o-y change

FY20

Total revenue

59,769

14,026

N/M

28,700

Revenue from sales of inventory properties

49,550

6,022

N/M

12,032

Costs of sales of inventory properties

(38,245)

(3,300)

N/M

(7,039)

Gross profit from sales

11,305

2,722

N/M

4,993

Letting revenue

10,219

8,004

28%

16,668

Letting costs

(4,157)

(3,033)

37%

(6,706)

Gross profit from letting

6,062

4,971

22%

9,962

Other income

239

533

-55%

847

Gross profit

17,606

8,226

N/M

15,802

Personnel expenses

(2,744)

(2,540)

8%

(4,986)

Depreciation and amortisation

(230)

(198)

16%

(423)

Other operating costs and depreciation

(1,329)

(1,018)

31%

(2,183)

EBIT

13,303

4,470

N/M

8,210

Profit/loss of equity-accounted entities

4

0

N/M

(1)

Finance income

1

76

-99%

205

Finance costs

(3,091)

(2,011)

54%

(4,259)

PBT

10,217

2,535

N/M

4,155

Income tax

(2,892)

(733)

N/M

(1,358)

Net income

7,325

1,802

N/M

2,797

Attributable to owners of the parent

7,301

1,799

N/M

2,784

Attributable to non-controlling interests

24

3

N/M

13

EPS (€)

1.52

0.49

N/M

0.69

Source: Noratis.

Securing €10m financing for portfolio expansion

Noratis’s net debt increased to c €281m at end-H121 from c €257m at end-FY20. While its financial liabilities (ie the corporate bond, liabilities to banks and leasing) remained broadly stable (c €289m at end-H121 versus c €287m at end-FY20), cash declined by c €23m to c €8m at end-H121 after the company used its own resources to finance property purchases in H121. At the same time, the company calculated the market value of its portfolio at €401m at end-H121 (versus the carrying value of c €359m at end-H121 and the market value of c €375m at end-FY20, calculated by an external appraiser). We therefore estimate that Noratis’s net LTV was at a relatively high c 70% at end-H121, compared with 67.1% reported by the company at end-FY20 and the maximum level of 75% assumed by management. Moreover, post period end, Noratis issued a €10m unsecured corporate bond to a new investor (an undisclosed German insurance company) in a private placement. It has a six-year maturity term and an interest rate of 4.75% pa, which implies an annual interest expense of c €0.5m, according to our estimates. The total volume can be increased to €40m. Management plans to use the proceeds as a quasi-equity to finance new acquisitions.

While Noratis’s leverage looks high, we note that it has secured long-term equity funding from Merz (it held a c 49.1% stake in Noratis as at 12 October 2021, according to Refinitiv data), which may still invest up to €36m in Noratis until end-FY24 and would support Noratis’s balance sheet (for details on the capital and financing measures taken by the company in FY20 in our previous update note). We also note that Noratis buys properties with optimisation potential and aims to increase their value over time, which may result in a higher LTV ratio, in particular following a period of increased acquisition activity (such as recently).

German residential market resilient to the pandemic

Germany’s residential property market has shown resilience to the pandemic so far. While BNP Paribas Real Estate (BNP) estimates that the transaction volume (including residential portfolio transactions of 30 units or more) declined by c 16% y-o-y to c €9.9bn in H121, it notes that the drop was from a strong H120, influenced by the takeover of Adler Real Estate by Ado Properties (no major M&A deals were accomplished in H121). BNP expects the 2021 figure to reach a record high €45–50bn, driven by the takeover of Deutsche Wohnen by Vonovia in H221.

Since the beginning of the pandemic, rents have increased by 6% in large and medium-sized cities and by 4% in the top seven metropolises in Germany, according to BNP. Furthermore, the price of residential properties in the country (measured by the house price index) are up, with average y-o-y growth of 9.4% in Q121 and 10.9% in Q221, according to preliminary figures released by the German Federal Statistical Office (Destatis).

Valuation

Noratis’s position between an asset holder and developer makes for a difficult comparison with listed companies. We believe that its closest peers are RCM Beteiligungs, a German property developer that acquires rental income-producing assets in and around Dresden and invests in refurbishment (for which no consensus is currently available), Accentro, a German residential property company focused on privatisation and Peach Property Group, a company that invests in high-yielding residential real estate mainly in secondary locations in Germany.

Based on consensus figures, Noratis is trading at a P/E of 16.2x in FY21e, which implies a premium versus its peers (10.5x for Accentro and 6.1x for Peach Property Group). Its P/E declines to 10.4x in FY22e compared with 10.5x for Accentro and 10.8x for Peach Property Group. The company offers an FY21e dividend yield of 3.1% (versus 1.6% for Accentro and 0.8% for Peach Property Group), which increases to 4.8% in FY22e (versus 2.1% and 1.2%, respectively).

Noratis’s net asset value per share (NAVPS), calculated with the real estate portfolio reflected at market value (as per the company’s internal estimations) and equity adjusted for current income tax at 27.4%, remained broadly stable at €22.7 at end-H121 versus €22.8 at end-FY20. This implies a discount of c 9% compared with a 1% discount for Peach Group Property (Accentro’s NAVPS is unavailable).


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