S Immo — H120 results affected by hotel business

EPRA NAV down c 10% ytd due to listed holdings

S Immo reported an EPRA NAV of €23.78 per share at end June 2020 compared to €26.45 at end 2019, with the decline largely attributable to lower share prices of its minority stakes in IMMOFINANZ and CA Immo (down 36% and 21% in H120, respectively, despite broadly stable EPRA NAV). Following a property revaluation loss in Q120, S Immo recorded a Q220 gain of €41.8m, translating into a €10.2m gain in H120. This was largely driven by its German residential and office properties. While under IFRS the P&L impact excludes S Immo’s two owner-operated hotels, we estimate that their fair value reflected in the EPRA NAV was reduced by c €26m, bringing the total revaluation to a modest net negative amount.

Rental income broadly stable in Q220

S Immo’s rental income in Q220 reached €29.4m (down by only c 1% y-o-y). Rent collection in the office and residential segments remained strong (c 95% for offices), while retail saw a greater impact of lockdown, resulting in S Immo booking a €3.4m expense for valuation allowances and write-down of trade receivables in H120 (vs €0.4m in H119). On top of the €1.4m gross operating loss in hotel operations, its FFO 1 (€17.4m in H120 vs €39.0m in H119) also reflects the lack of dividend income from CA Immo and IMMOFINANZ amid postponed AGMs.

S Immo shares are currently trading at an FY20e P/NAV of 0.6x (based on Refinitiv consensus), which represents a 12% discount to its peer group. However, S Immo trades broadly in line with peers on FY21e and FY22e multiples. The shares offer an FFO yield of 3.8% and 5.4% based on FY20e and FY21e numbers, respectively.

S Immo reported an EBITDA decline of c 38% y-o-y to €14.8m in Q220 (and c 17% y-o-y in H120, see Exhibit 1), mostly due to a lower result from its hotel operations amid the COVID-19 lockdown. Revenue from the two owner-operated Marriott hotels in Vienna and Budapest contributed only €1.3m in Q220 (€11.2m in H120) compared to €15.6m in Q219 (€26.7m in H119) amid temporary closures. However, at the same time hotel operating expenses went down significantly (as the majority represents variable costs), translating into a limited gross operating loss of €1.4m in Q220 (vs a €5.9m profit in Q219). Consequently, S Immo’s hotel operations were slightly above break-even in H120, with gross operating profit of €0.1m (vs €8.4m in H119). This runway should be maintained into H220, while full recovery in the industry may take around two to three years, according to management. Having said that, the company expects that its two owner-operated Marriott hotels are likely to recover relatively quickly (as was the case following 9/11 and the Global Financial Crisis).

Rent collection rate strong for office and residential, somewhat weaker in retail

S Immo’s rental income remained broadly stable at €29.4m in Q220 vs €29.7m in Q219 (down c 1%, H120 figure up 4.2% y-o-y), with its portfolio at end June 2020 representing a total area of 1.2m sqm, broadly stable vs end June 2019 despite an increase in the number of held properties from 317 to 352. At end June 2020, the occupancy rate across the company’s portfolio was a healthy 94.4% (including investment properties for which no development potential is currently identified).

The rent collection rate for S Immo’s office properties (representing c 42% of its portfolio at end June 2020) stood at a solid 95% and, based on management comments, we understand that the collection rate was also strong in the company’s residential properties (30% of the portfolio). The latter seems to be confirmed by comments from peer companies, eg LEG Immobilien reported deferrals of less than 1% of rents. Meanwhile, retail (c 19% of portfolio) was affected by COVID-19 to a greater extent, in particular S Immo’s Sun Plaza shopping centre in Bucharest (its largest retail property, with main lettable space of c 80k sqm), which was closed until 15 June. As a very broad reference point, IMMOFINANZ reported a cash collection rate in retail (as of mid-August) of 82.2% and 53.3% in Q120 and Q220, respectively, while expecting more than 85% in FY20 (assuming no second lockdown).

On a positive note, footfall in Sun Plaza in the first week after reopening was already 70% of pre-COVID-19 levels (the company expects at least 85% by December 2020) and all shops located in the shopping centre reopened. S Immo has been liaising with its tenants to identify optimal solutions on an individual basis, including lease incentives such as rate reduction or suspension. We note that the company booked a €3.4m expense for valuation allowances and write-down of trade receivables under property operating expenses in H120 (vs €0.4m in H119), which mostly relate to retail tenants.

Rebound in investment property valuations driven by German residential and office properties

Interestingly, the company recognised property revaluation gains of €41.8m in Q220, bringing the H120 figure (following downward revaluations of €31.5m in Q120) to a positive €10.2m. We understand that this was driven by yield compression in particular rather than rental growth. The revaluations were mostly supported by Germany (€32.9m in H120) more than offsetting the decline in Central and Eastern Europe (CEE) (€20.5m) and slight downward adjustments in Austria (€2.2m). Hotel and retail saw write-downs of €17.6m, of which retail accounts for €9.3m and hotels for €8.3m (excluding owner-operated hotels, which are booked under non-current assets; see our comment below). The residential portfolio was the main contributor with €19.5m, while the office portfolio added €12.0m (mostly in Germany).

Bottom-line decline also reflects postponed dividend income

S Immo’s financial result in Q220 was down to negative €8.6m vs positive €7.1m in Q219 as it has not received any dividends from IMMOFINANZ and CA Immo due to their postponed AGMs. Dividend income in H220 from CA Immo will amount to c €6m as during its AGM on 25 August, the company’s shareholders voted in favour of a distribution of €1.00 per share (paid on 31 August). At the AGM (held on 1 October), IMMOFINANZ’s board recommended waiving the dividend payment for 2019.

As a result, net income excluding minorities was €37.3m in Q220 (vs €132.5m in Q219), bringing H120 net profit to €15.9m. The company’s FFO 1 (funds from operations) stood at €17.4m, which compares to last year’s figure (after excluding dividend income from IMMOFINANZ and CA Immo) of €23.6m.

NAV down mostly due to share price decline in listed holdings

S Immo’s EPRA net asset value (NAV) per share stood at €23.78 at end June 2020 and was down c 10% vs end 2019 (but up c 2% from end March 2020). In Exhibit 2, we break down the year-to-date change, concluding that the main factor behind the decline was the fall in the share prices of CA Immo and IMMOFINANZ (21% and 36% in H120, respectively), in which S Immo holds 6.4% and 12.3% stakes, respectively (see our initiation note for details).

Moreover, while the company booked a revaluation gain of €10.2m on its investment properties in H120, as discussed above, it does not include the two Marriott hotels it operates, which are reported under non-current investments. However, these properties are being revalued for the purposes of EPRA NAV calculations according to S Immo’s financial reports. The difference between fair value (accounted for in EPRA NAV) and book value (carried at cost on its balance sheet and adjusted for subsequent depreciation) is presented under ‘revaluation of other non-current investments’. This position has declined by c €23.7m between end 2019 and end June 2020 and, after adjusting for the decrease in book value (related primarily to depreciation), this implies an aggregate downward revaluation of both Marriott hotels by c 9.5% vs end 2019 fair value, according to our estimates.

Liquid resources remaining strong and providing some firepower for further investments

We note that S Immo’s cash and cash equivalents stood at a solid €223.9m at end June 2020 (following the share issue in January 2020) and it also has some undrawn credit lines at its disposal (although no amounts were disclosed in this respect in the H120 report). Moreover, its net loan to value (LTV) at end June 2020 was a relatively moderate 44.6%, albeit somewhat higher than peer average of c 38%. However, S Immo’s LTV may be slightly overstated due to the fact that its two Marriott hotels are not recognised at current fair value in the IFRS balance sheet. Its LTV declined slightly from 46.9% at end 2019, mostly due to the capital issue in January 2020. Hence, there is no immediate deleveraging need for the company in our opinion. The ratio includes the LTV for property-level debt (bank lending) of 33.8% and the net LTV for unsecured bonds of 10.8%. As highlighted in our initiation note, we believe that S Immo has a favourable bond maturity profile with the only repayment due over the next 12 months being the €28.5m bond maturing in June 2021 (and the next bond repayment is not due until 2024).

Part of cash position already deployed post balance sheet date

Management’s dividend proposal remains €0.70 per share (translating into a payment of c €50.4m according to our estimates) and the AGM is scheduled for 12 October. Moreover, S Immo’s buyback programme is still in progress and it repurchased 632.3k shares in H120 (providing NAV accretion of c €0.07 per share, according to our estimates) out of the total potential volume of 2,208.2k shares (representing c 3% of issued capital). Post balance sheet date, the company has so far repurchased a further 277k shares for €4.1m, with the remaining buyback limit implying a cost of c €20m at the current share price. We also note that after the balance sheet date, S Immo acquired a further 2.7m shares in IMMOFINANZ (representing c 2% of the company’s share capital) for c €41.3m as part of the latter’s capital increase in July 2020. Moreover, the company bought subordinated mandatory convertible notes for €18m placed by IMMOFINANZ. We understand that management does not intend to further expand its holdings in IMMOFINANZ and CA Immo at this stage.

Well positioned to exploit market opportunities

Even after accounting for the above-mentioned distributions to shareholders and equity/convertible investments (which in aggregate would represent a c €133.5m cash outflow), we believe that S Immo should still have enough dry powder to maintain or even increase its property acquisition volume compared to H120 (when the cash outflow for property investments, conducted exclusively in Germany, reached c €48.7m). It continues to look for selective new opportunities to acquire operating residential and office properties in markets where it is already active, in particular in the top locations of German tier two cities where it has built critical mass (eg Leipzig or Erfurt), as well as capital cities in CEE and Vienna. Moreover, management considers land plots in CEE capitals as additional potential acquisition targets.

S Immo holds a portfolio of development projects (almost exclusively office except for one mixed office/residential project) in Germany and CEE (Hungary, Romania and Slovakia) representing potential lettable area of 225k sqm. Having said that, most of the projects are not expected to be initiated before 2021, suggesting limited expenditures this year. The company also has an extensive land bank in Germany (in particular for residential purposes in the Berlin commuter belt) corresponding to a potential lettable area of 400–600k sqm, according to management’s rough estimate. Having said that, these projects will be conducted over a longer timeframe between 2021/22 and 2028. Finally, the last section of the QBC project (carried out by S Immo through a joint venture with UBM Development) is still under construction and, while the project was already forward sold, there is some residual financing obligation on S Immo’s side. However, based on our discussions with management, we understand that these costs are minor.

As we have not prepared our own forecasts for S Immo, we have examined the P/NAV, FFO yield and dividend yield vs peers based on current Refinitiv consensus, which by now should include the expected impact of the COVID-19 crisis. Most companies continue to trade at a discount to FY20e NAV of c 15–50% (except for the residential pure-play LEG Immobilien), with S Immo trading at a 36% discount on FY20e NAV. While this is 12% below the peer average, we note that consensus currently implies some further deterioration in S Immo’s NAV per share and consequently it is trading slightly ahead of peer group on FY21e and FY22e numbers. On the other hand, it is worth noting that S Immo’s NAV reflects the IMMOFINANZ and CA Immo stakes in line with the current share price, which is already at a meaningful discount to their respective NAVs. The company’s FFO yield for FY20e is currently c 260bp below the peer average, but this may be partially due to the possible lack of dividend income from IMMOFINANZ, which some analysts may be factoring in.