FCR Immobilien — Maintaining good momentum

In 2019, FCR continued the dynamic growth of its investment property portfolio, with 25 projects acquired during the year. Simultaneously, it sold seven properties, generating combined gross profit in excess of €12m. As well as property transactions, FCR made good progress in asset management initiatives for a number of existing holdings. For instance, for the logistics centre in Zeithain, it was able to sign lease agreements generating close to €1m in annual net rental revenue starting in 2020. This is particularly noticeable given that the property was acquired for just €3m from a distressed seller in June 2019. FCR also signed new or extended existing lease agreements for, among others, the properties in Dessau, Oer-Erkenschwick, Schleiz and Gera.

As a result of the above, FCR’s property portfolio at end 2019 represented around 326,000sqm of leasable floor space (up 31% y-o-y) and net rental revenue of €19.5m (32% higher y-o-y), translating into a net rental yield of c 7.0% (vs 9.7% at end 2018). FCR estimates that on successful completion of its asset management initiatives (and assuming a 100% occupancy rate, currently c 87–88%), net rental revenue for the properties held at end 2019 could increase to €22.2m (compared with a potential of €17.7m at end 2018), implying an 8.0% net rental yield. This is in line with the annualised net rental yield reported by Deutsche Konsum REIT (FCR’s closest peer) at end 2019 (on a pro forma basis including notarised properties).

Based on an external appraisal, FCR’s property portfolio at end 2019 is valued at €294m (close to our earlier estimate at c €291m), which translates into an EPRA NAV per share of €10.93 (vs our estimate of €11.10). The weighted average unexpired lease term (WAULT) of the portfolio at end 2019 was down to 4.4 years compared with 5.5 years at end 2018. While we have no further details at this stage, this may have been a combination of the closer maturity of some existing lease contracts, as well as the shorter WAULT of newly acquired properties (providing scope for FCR’s asset management activities).

FCR has not provided any guidance on FY20 revenues and earnings at this stage, but will release them to the market in the next few weeks. Meanwhile, Falk Raudies (FCR’s CEO) has confirmed the fairly ambitious target of increasing the portfolio to a market value of €500m by end 2020 (vs almost €300m at end 2019). In order to achieve this milestone, he expects that FCR will need to acquire around 50 properties this year (each valued at c €4m on average, which is broadly in line with the current portfolio average) on a net basis, ie after accounting for disposals. While FCR is also open to larger transactions in the range of €20–25m, it faces stronger competition in this market segment from players such as Patrizia, Corestate or other institutional investors, which often push down the yields below acceptable levels for FCR. After the balance sheet date, FCR acquired two fully let retail properties in Gummersbach (leasable space of more than 4,500sqm) and Höchstadt a.d. Aisch (leasable space at more than 1,700sqm).

Given FCR’s target leverage at property level of 70–80%, the incremental €200m in portfolio value translates into holding-level funding needs of up to €40–60m. The actual amount of required funding will be below the upper bound of this range if FCR can acquire properties below market value (which is part of its core strategy) and/or if property values within the existing portfolio increase. This may be covered by: 1) FCR’s cash balance at end 2019; 2) property disposals; and 3) external funding (equity and/or debt). In this context, we note that the CEO disclosed during the analyst call that FCR is likely to launch a new bond offering in March (the latest €30m bond issue has already been fully placed). At this stage, given that the company did not provide any details, we have not factored the new bond issue into our model.

While retail remains FCR’s core segment (with a 76% share of the portfolio at end 2019, measured by the current net rental revenue), it also intends to expand its office (9.2%) and logistics (5.6%) property portfolio given the wealth of deal opportunities it sees there. At the same time, it will be more cautious with respect to hotel properties (5.6%), which require more effort to realize value than other types of properties.

As FCR was able to acquire properties in 2019 that represent a somewhat larger aggregate floor space/rental revenue potential than we had expected and given that the company reiterated its ambition to grow its portfolio significantly, we have updated our estimate of the three-year FCR NAV total return potential, which currently stands at 15% pa (now covering the period 2020–22, see Exhibit 1) compared to our earlier estimate of 14%.

For now, we have factored in a more limited portfolio expansion than management’s target (of c €380m at end 2020 and €450m at end 2021). However, we will closely monitor FCR’s progress in respect of property acquisitions and consider revising our assumptions over the course of the year.

Based on FCR’s last reported EPRA NAV per share of €10.93 and following the solid share price performance in recent months, the company is trading at a P/NAV multiple of 1.2x. This represents a 15% premium to the broader peer average (including Demire, Deutsche Konsum REIT, Defama, Hamborner REIT and Deutsche EuroShop) at 1.05x. At the same time, however, FCR’s P/NAV based on our NAV/share estimate at end 2020 (€12.38) stands at 1.07x. We also note that FCR trades at a 20% discount to the average multiple for its closest peers (Deutsche Konsum REIT and Defama) based on last reported NAV per share.

FCR Immobilien has moved to IFRS accounting (from local German accounting standards – HGB) starting from FY19. Consequently, its preliminary figures have already been prepared in accordance with IFRS. At the same time, it has not provided HGB results for FY19, which means that the available figures are not fully comparable with management guidance released in November 2019, as well as our own forecasts. Having said that, FCR stated in its announcement that it was able to beat the guidance.

The main (but not the only) differences between IFRS and HGB accounting relate to the treatment of FCR’s properties. Under HGB, these were accounted for as constituents of property, plant and equipment which, on acquisition, were gradually depreciated rather than re-valued. However, under IFRS they are considered investment properties and are subject to periodic revaluations reflected in their balance sheet value (with no ongoing depreciation). The first-time valuation uplift for FCR’s current portfolio was directly reflected in equity and thus did not artificially boost profits in FY19. As a result, FCR’s equity at end 2019 reached €85.5m, translating into an equity to total assets ratio of 26%. The change in accounting standards aligns FCR’s reporting with standard market practice, also used by its closest peer (Deutsche Konsum REIT). As part of FCR’s efforts to follow market best practice, it became an EPRA member earlier this year.

FCR reported preliminary IFRS EBITDA of €17.3m in FY19 compared with €7.6m in FY18 (restated for IFRS) and pre-tax profit at €10.7m (FY18: €2.8m). This reflects growing rental income streams on the back of portfolio growth and FCR’s asset management measures. It also includes some disposal gains during the period, although we note that part of the value uplift was already accounted for in the restated FY18 figures before the properties were sold. FCR’s revenues came in at a healthy €49.6m, up 33% y-o-y, with FCR’s earlier HGB guidance of €46.2m and our HGB-based estimate of €44.1m. The company intends to pay a dividend of €0.30–0.40 per share, which at the current price implies a dividend yield of c 2.5–3.0%.

Consequently, we have applied some minor changes to our 2020–21 forecasts for FCR (see Exhibit 5 below). Please note that at this stage we continue to present our forecasts in accordance with HGB and plan to move to IFRS accounting in our model following the publication of FCR’s full annual report, which should provide a more comprehensive overview of the implications of the change in accounting standard.