Consus Real Estate — Full commitment to residential real estate

The transformation of Consus into a pure-play developer focused on residential real estate was driven by intense M&A activity, which distorts the y-o-y results comparison. The process started in H217 with the acquisition of CG Gruppe and was completed by the disposal of commercial assets portfolio and a sale of GxP in August 2018 (for more details please refer to Edison initiation report). The company’s overall performance in H118 reached €242.4m on the back of full consolidation of CG Gruppe, which contributed €236.6m (97.6%) to the group’s revenue. The 66.7% q-o-q increase in overall performance (€151.5m in Q218 vs €90.9m in Q118), which includes a seasonal effect, has been particularly driven by development income from VauVau projects in Cologne, Dresden and Leipzig. The results have been also assisted by the adoption of IFRS 15 ‘Revenue from contracts with customers’ effective from 1 January 2018. Instead of recognising the income when the risk and rewards related to the property in its entirety were transferred to the customer, it is recorded in proportion to the stage of completion. The new methodology is optimised for the initial forward sale recognition, which is a key part of Consus’s lower-risk development model, as it removes the time lag between cash inflow from prepayment and the corresponding revenue recognition. The revised accounting policy introduced a new income category, income from property development, which in H118 made 81.3% of overall performance. The total impact of introducing the IFRS 15 stands at a positive €23.5m in revenues as well as net income, which amounted to €2.8m in H118 (including €1.4m from discontinued operations).

Although GxP was sold after the balance sheet date, it was not consolidated in the income statement but its stake of €176.2m has been already reclassified from investment property to held for sale assets as at 30 June 2018. The 58.1% decrease since 31 December 2017 in investment property to €220.7m reflects also the divestment of eight commercial assets from the Consus’s portfolio. As IFRS 15 was introduced in 1 January 2018, the new balance sheet category (contract assets) has been included in both current and non-current assets, which reflects already recognised revenue from the ongoing projects minus prepayments.

In H118, Consus recorded an adjusted EBIT pre-PPA of €56m, which on an annualised basis would stand at c €112m (however, this does not take into account seasonal patterns). The company has reconfirmed the management guidance of mid-term EBIT pre-PPA at €300m by 2020 on the back of the significant increase in development revenues. Management confirmed also that due to divestments within commercial real estate portfolio, the previous guidance of €32m from letting activities in FY18 will not be fulfilled.

To achieve the management guidance of less than 3x net debt to EBIT pre-PPA multiplier by 2020, the company continues its efforts to deleverage its business. In H118 the total net debt was cut by €266m to €1.25bn as total prepayments received in conjunction with forward sales in the period amounting to €244m. As the group held €31m cash as of 30 June 2018, the total Consus debt stands at €1.28bn with a relatively high average interest rate of 6.8%. This is mostly attributable to CG Gruppe debt (€946m or 73.7% share) which has an interest rate of 7.6%. Management intends to benefit from the current low interest rate environment and refinance it to significantly reduce interest expense (we estimate the current annual run rate at c €87m). The refinancing could also enhance the company’s debt maturity structure as currently c €400m matures within next 12 months. The remaining part of Consus debt as at 30 June 2018 included a €200m convertible bond (€6m conversion requests executed so far), a €150m straight bond (further €85m bond buyback post reporting date) and €31m in other debt. Although reported improvement in the net loan-to-value ratio in the period seems immaterial as it has dropped from 87% in at end-2017 to 86%, it would reach 4ppt if the GxP debt were excluded from the end-2017 numbers. The further post balance sheet decline in net debt to €1.09bn as at 30 September 2018 on a pro-forma basis was driven by the capital increase amounting to €131m (completed on 24 July 2018) as well as transaction related cash income. However, the figure does not include the consideration for the additional stake in CG Gruppe which is payable in stages.

Following a 37.4% ytd increase, the investment portfolio of Consus reached €6.2bn of GDV and 1.6m sqm of total net floor area (33.8% increase ytd) as at 30 September 2018. The company is benefiting from a broad range of identified targets exceeding €4.8bn GDV (as at end-September 2018), which allowed it to complete four acquisitions recently, putting the total number of projects at 53. The most significant one was the purchase of GEM, a leading regional real estate developer in Karlsruhe and Stuttgart area with a portfolio of c €450m. The other transactions include Billwerded Deich district in Hamburg (€232m GDV) and Forum Pankow in Berlin (€135m). These strengthen the company’s presence in these three cities, which now represent 35% of total GDV as at end-September compared with a 28% share at end-March 2018.

The geographic distribution of the portfolio investments is of high importance as three out of four cities with lowest average sales price per square metre are located in eastern Germany. This list includes Leipzig, where the largest part of the company’s portfolio is located, 17 projects valued at €1.3bn, constituting 20.4% of total GDV and representing a net floor area at 534k sqm (33.5% of group). The sales price per square metre, however, sits at €2,390, 39% below portfolio average. On the contrary, the average price per square metre in the Frankfurt/Offenbach region stands at €6,573, boosted by premium projects such as the Grand Ouest. The recent property price increases in the German housing market translated into an average sales price in Consus’s development portfolio of €3,920 per square metre at end-September 2018 compared with €3,817 at end-2017. This has also been assisted by the c 403k sqm of new net floor area at an average sales price at €4,371 per sqm.

As Consus’s strategy embraces the district development approach, residential real estate represents 56% of the overall net floor area, with another 34% of space attributable to office, hotel and retail real estate (896.6k and 548.9k sqm respectively). Further segment split reveals that almost 85% of the portfolio constitute multi-family homes within the residential sector, with the remaining part being social and boarding housing.

The limited number of domestic comparators for Consus has guided us towards including international peers in our analysis. This is not a strict comparison and should only be taken as a guide. There are differences among the companies displayed below, but the essential nature of business, in that land is bought, developed and then resold with a profit, remains the same. It is worth noting that although Consus is sensitive to the global macroeconomic climate similarly to the peers below, its forward sale agreements with staggered payments provide significant revenue and cash flow visibility over the medium term.

As the company begins the revenue-generating construction phase of its project lifecycle, both market consensus and management guidance expect significant bottom-line improvement, resulting in a widening discount to peers in both P/E and EV/EBITDA ratios. The superior revenue growth prospects implied by the current Bloomberg consensus are expected to change the current premium to peers of 119% into a slight discount based on FY19 estimates and a more than 52% discount based on FY20 estimates. This is also visible at the EV/EBITDA ratio level. Since the future valuation of the company is highly dependent on management’s ability to deliver on the high growth expectations, the share price can be (and has been in recent months) quite volatile.

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