Phoenix Spree Deutschland — One city but two tales

Phoenix Spree Deutschland (LSE: PSDL)

Last close As at 24/04/2024

GBP1.49

1.50 (1.02%)

Market capitalisation

GBP137m

More on this equity

Research: Real Estate

Phoenix Spree Deutschland — One city but two tales

Phoenix Spree Deutschland’s (PSD’s) trading update contrasts the strength of the Berlin private rental sector, reflected in PSD’s increased rents and low vacancy, with the subdued investment market, which continues to weigh on property valuations. Positively, sales of individual condominiums picked up in H223, underlining the strong premium to rental values. Full year results, to 31 December 2023, are due in late April.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Phoenix Spree Deutschland

One city but two tales

End-2023 trading update

Real estate

19 February 2024

Price

173p

Market cap

£159m

€1.17/£

Net debt (€m) at 30 June 2023

305.0

Net LTV as at 30 June 2023

42.7%

Shares in issue

91.8m

Free float

100%

Code

PSDL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.8

12.7

(28.8)

Rel (local)

5.2

9.1

(25.8)

52-week high/low

256p

149p

Business description

Phoenix Spree Deutschland is a long-term investor in mid-market residential property in Berlin, targeting reliable income and capital growth. Its core strategy is to acquire unmodernised apartment blocks that may be improved to the benefit of tenants, generating attractive returns for shareholders based on improved rents and capital values.

Next event

FY23 results

30 April 2024

Analyst

Martyn King

+44 (0)20 3077 5700

Phoenix Spree Deutschland is a research client of Edison Investment Research Limited

Phoenix Spree Deutschland’s (PSD’s) trading update contrasts the strength of the Berlin private rental sector, reflected in PSD’s increased rents and low vacancy, with the subdued investment market, which continues to weigh on property valuations. Positively, sales of individual condominiums picked up in H223, underlining the strong premium to rental values. Full year results, to 31 December 2023, are due in late April.

Year end

PBT*
(€m)

EPS
(c)

NAV**/
share (€)

DPS
(c)

P/E
(x)

P/NAV
(x)

Yield
(%)

12/20

37.9

30

5.28

7.5

6.9

0.38

3.7

12/21

45.3

39

5.65

7.5

5.3

0.36

3.7

12/22

(17.5)

(17)

5.10

2.35

N/A

0.40

1.2

06/23***

(58.0)

(51)

4.46

N/A

N/A

0.50

0.0

Note: *As reported on an IFRS basis including realised and unrealised gains. **Measured as EPRA net tangible assets per share. ***Six months to 30 June 2023 (H123).

Rental growth but weaker valuations and asset sales

An increasing shortage of available rental property in Berlin is driving market rental growth. For PSD, FY23 new lettings were at a record €13.7 per sqm, 5.9% above the FY22 average, and a 31% premium to passing rents. In-place rents (+4.1% like-for-like) of €10.4 per sqm continue to offer significant reversionary potential. The new rent table, which will be released in May 2024, will support further rental growth. PSD’s condominium sales accelerated in H223, with tentative signs of an improvement in buyer sentiment, more condominiums available for sale and targeted price adjustments. This included sales of lower priced, occupied units. The 4.1% premium-to-book value was below the c 20% achieved in recent years but was still c 11% above the average portfolio value. The portfolio valuation was 11.9% lower on a like-for-like basis during the year (-5.9% in H2) and we anticipate the FY23 results will show an EPRA NTA of close to €4 per share (H123: €4.46) and a loan-to-value ratio (LTV) of c 45% (H123: 42.2%).

Reversion and capital recycling

PSD is focused on extracting the value embedded in its portfolio through reversionary rental capture and the sale of condominiums, the valuations of which are at a premium to those of rental properties. It is also actively marketing individual properties/portfolios. Disposals at discounts to current carrying value are likely, although at a premium to the value implied by the share price. Sales proceeds will primarily be used to pay down debt. There are no loan maturities before 2026, most are fixed or hedged (a blended cost of 2.5% at H1), and, with planned asset sales proceeds directed mostly at debt reduction, PSD is confident of refinancing existing borrowings well ahead of maturity. PSD is in discussions with its lenders and is examining other strategic options for a significant increase in the number of individual units that can be made available for sale.

Valuation: Significant discount to asset values

We estimate the shares are trading at a P/NAV of c 0.5x. This is in line with larger German peers despite PSD benefiting from 77% of its portfolio being split as condominiums (and only 4% valued as such), which trade in the market at a material premium to rental equivalents.

One city but two tales

The Berlin rental market has remained strong, with demand being supported by further net inward migration and higher home ownership costs, which have forced potential buyers to remain within the rental system for longer. At the same time, higher funding and construction costs are challenging the economics of new buildings, such that fewer new residential construction projects are being started and many projects that have already been initiated are being postponed or cancelled. PSD highlights that the supply-demand imbalance in the Berlin rental market is at its widest for the last several years.

Conditions in the investment market, for whole buildings/portfolios of buildings, remain challenging but PSD has seen early signs of sentiment improving in the condominium market. This is supported by the growing consensus that interest rates may have peaked and may soon begin to moderate.

Reflecting market trends, the valuation of PSD’s portfolio has declined by 17% since the peak in mid-2022 and it was independently valued at €675.6m at end-FY23. This represents an average value per sqm of €3,598 and a gross fully occupied yield of 3.3%. Most units in the portfolio are valued as rental properties and 4% as condominiums, with an aggregate value of €35.1m. This is despite 77% of the portfolio being legally split as condominiums. Legislation passed in 2021 has made in much harder for landlords to split properties into condominiums, leaving PSD in a very strong position to exploit the material gap between the market pricing of condominiums and rental properties. This is not the case for its larger peers.

The company calculates that the current share price implies a value for rental apartments within its portfolio of c €2,750/sqm compared with an average €3,976/sqm value for its 2023 condominium notarisations.

Continuing positive demand-supply supports rent growth and reversionary capture

While the refurbishment and re-letting of vacant apartments at closer to market rent levels has historically been a key driver of rental growth in the tightly regulated Berlin rental market, PSD expects that, this year, rent increases will become a more important driver of rental growth. This expectation is driven by two factors. The first is that portfolio vacancy is at a historical low (1.6% on an EPRA basis for the Berlin assets at end-FY23, compared with 2.4% the prior year), with fewer refurbishment opportunities. Secondly, there is an acceleration in the permitted uplifts on regulated tenancies.

In response to the speed and extent of the increase in inflation and interest rates that occurred from mid-2022, a new, transitional Berlin Mietspiegel (rent index)2 was announced in June 2023, replacing the previous rent index of 2021. It is expected that a new qualified rent index will be published in H124. On average, the transitional index permitted increases in rental values of 5.4% versus 2021 and for those of PSD’s tenancies that ‘qualified’ for an increase, this became effective from October 2023. The company expects the new qualified rent index to support rental growth from Q324 onwards.

  Rents for existing tenancies are pegged to local market levels as determined by a local government rent table (the Mietspiegel), which normally calculates a reference rate every two years. This is based on rent data collected over the preceding four years and, therefore, typically lags behind free market levels. Where tenancies ‘qualify’ for a rent increase, the uplift is limited to a maximum of 15% over a three year period, with a minimum of 15 months between increases.

Exhibit 1: Trend in whole portfolio rent levels and like-for-like growth

Source: Phoenix Spree Deutschland data

The re-letting premium (31% in FY23) has increased in each of the past four years and confirms the continuation of significant rent reversion potential in the portfolio.

Exhibit 2: Re-letting premium

Source: Phoenix Spree Deutschland data

Condominium notarisations picked up in H223

In H223, 17 condominiums with an aggregate value of €5.2m were notarised, up from eight with an aggregate value of €2.0m in H123, and up from 15 units (including two attic units) with a value of €4.7m in the whole of 2022. The start of 2024 has been promising, with a further four condominiums notarised in the year-to-date with an aggregate value of €1.9m.

For 2023, the average achieved notarised value was €3,976/sqm, or 4.1% above the end-2022 book value. The sales premium in any period is specific to the mix of assets, including location, floor space and, importantly, whether the condominium is occupied or vacant. The 2023 premium of 4.1% was lower than the average c 20% of the past four years but was nonetheless at a good premium to the portfolio average book value per sqm. This reflects a significant share of occupied condominiums, where values are lower, and price reductions to stimulate demand. The average notarisation value per sqm for vacant condominiums was €4,885/sqm.

Exhibit 3: Condominium notarisations

2019

2020

2021

2022

2023

Sales value of notarisations (€m)

8.8

14.6

15.2

4.7

7.2

Average notarised value per sqm (€)

4,068

4,320

4,988

5,502

3,976

Average book value of notarised properties per sqm (€)

3,459

3,624

4,216

4,495

3,819

Premium to book value

17.6%

19.2%

18.3%

22.4%

4.1%

Portfolio average value per sqm at year end (€)

3,741

3,977

4,225

4,082

3,598

Premium to portfolio average

8.8%

8.6%

18.1%

34.8%

10.5%

Source: Phoenix Spree Deutschland data

Making further condominium units available for sale

PSD is evaluating options, including its financing, to significantly increase the number of condominiums made available for sale in 2024. Under current banking arrangements, condominium sales can only be made from designated condominium buildings, and it is only when all the units in one of these have been sold that a new building can be designated as such. The company hopes to agree changes with lenders that will permit sales from properties across the portfolio. Only 4% of residential units in the portfolio, sitting within the condominium projects, are valued as such, while a further 73% of units are legally split as condominiums but valued on a private rental basis.

The financing constraints that apply to individual residential units do not apply to whole properties or portfolios of properties.

Wider asset sales and capital management

As previously announced, PSD’s forward funding commitment to the Erkner development project, signed in March 2022, has been terminated in consideration of the subsequent weakness in property market values and increased capital costs. The company’s commitment to fund a further €13m of €18.5m is now removed from development payments in 2024. PSD expects to reclaim c €1.2m in previously incurred real estate transfer tax.

PSD says that, despite more positive indications that interest rates may soon decrease, buyer sentiment in the investment market for single buildings and portfolios of buildings remains fragile. Investment volumes across the German residential market in 2023 were more than 60% lower versus 2022.

While PSD actively marketed a substantial part of its portfolio, in most cases it was unable to attract buyers at satisfactory price levels and the handful of transactions that were agreed failed to complete. Encouragingly, the company has accepted offers on two buildings with a combined value of c €7.4m and both bidders have been granted exclusivity periods to run due diligence processes.

Exhibit 4: Financial summary

Year ending 31 December, €m unless stated otherwise

2018

2019

2020

2021

2022

H123

INCOME STATEMENT

Revenue

22.7

22.6

23.9

25.8

25.9

13.8

Total property expenses

(15.8)

(14.2)

(16.4)

(16.1)

(17.1)

(9.5)

Gross profit

6.9

8.4

7.5

9.7

8.8

4.4

Administrative expenses

(3.2)

(3.1)

(3.3)

(3.4)

(3.3)

(1.5)

Gain on disposal of investment property

1.0

0.9

2.2

1.5

(0.2)

0.5

Fair value movement on investment property

66.1

41.5

41.5

38.0

(42.2)

(57.3)

Property advisor performance fee

(4.0)

(2.8)

0.4

(0.3)

0.3

0.0

Separately disclosed items

(1.0)

(0.3)

0.0

0.0

0.0

0.0

Operating profit

65.9

44.6

48.3

45.4

(36.5)

(53.9)

Net finance charge

(9.5)

(6.0)

(8.2)

(7.5)

(7.9)

(4.5)

Gain on financial asset

0.0

(10.0)

(2.2)

7.3

26.9

0.3

Profit before tax

56.4

28.6

37.9

45.3

(17.5)

(58.0)

Tax

(11.1)

(5.8)

(7.6)

(7.9)

1.7

10.9

Profit after tax

45.4

22.7

30.3

37.4

(15.8)

(47.1)

Non-controlling interest

(0.3)

(0.5)

(0.5)

(0.1)

0.4

0.4

Attributable profit after tax

45.1

22.3

29.8

37.3

(15.4)

(46.7)

Closing basic number of shares (m)

100.8

97.8

96.1

92.8

91.8

91.8

Average diluted number of shares (m)

99.0

102.1

98.9

95.0

92.1

91.8

IFRS EPS, diluted (€ cents)

4,557

21.8

30.1

39.3

(16.8)

(50.9)

DPS declared (€ cents)

7.5

7.5

7.5

7.5

2.4

0.0

EPRA NTA total return

13.1%

9.3%

8.8%

8.4%

-8.4%

-12.4%

BALANCE SHEET

Investment properties

632.9

719.5

749.0

759.8

761.4

704.6

Other non-current assets

3.4

3.5

3.8

2.7

16.9

17.2

Total non-current assets

636.4

723.0

752.8

762.5

778.3

721.9

Investment properties held for sale

12.7

10.6

19.3

41.6

14.5

9.7

Cash & equivalents

26.9

42.4

37.0

10.4

12.5

13.1

Other current assets

7.5

9.5

8.4

11.7

10.1

13.7

Total current assets

47.1

62.6

64.7

63.8

37.1

36.5

Borrowings

(3.6)

(17.8)

(1.0)

(0.9)

(0.8)

(1.0)

Other current liabilities

(13.2)

(15.6)

(9.6)

(12.4)

(15.9)

(14.3)

Total current liabilities

(16.8)

(33.4)

(10.6)

(13.3)

(16.8)

(15.4)

Borrowings

(191.6)

(258.5)

(286.5)

(283.2)

(311.3)

(313.8)

Other non-current liabilities

(65.2)

(76.8)

(86.5)

(86.1)

(70.9)

(59.8)

Total non-current liabilities

(256.9)

(335.3)

(373.0)

(369.3)

(382.2)

(373.6)

Net assets

409.8

416.9

434.0

443.6

416.4

369.4

Non-controlling interest

(2.0)

(3.0)

(3.5)

(3.6)

(3.2)

(2.8)

Net attributable assets

407.9

413.9

430.4

440.0

413.2

366.6

Adjust for:

Deferred tax assets & liabilities

52.5

58.3

65.4

73.5

70.9

59.8

Derivative financial instruments

6.0

16.0

18.2

10.9

(16.0)

(16.4)

Other EPRA adjustments

(5.4)

(6.8)

(6.4)

(0.3)

0.0

0.0

EPRA net tangible assets (NTA)

461.0

481.4

507.6

524.1

468.1

410.0

IFRS NAV per share (€)

4.05

4.23

4.48

4.74

4.50

3.99

EPRA NTA per share (€)

4.58

4.92

5.28

5.65

5.10

4.46

CASH-FLOW

Cash flow from operating activity

13.2

1.5

8.1

7.8

2.2

(2.3)

Income tax paid

(4.7)

(0.0)

(1.3)

0.2

(0.5)

(0.2)

Net cash flow from operating activity

8.5

1.4

6.7

8.0

1.7

(2.4)

Property additions

(47.3)

(32.2)

0.0

0.0

(13.2)

0.0

Proceeds from disposal of investment property

86.0

13.5

7.2

13.8

21.0

9.4

Capital expenditure on investment property

(7.9)

(6.5)

(4.2)

(9.5)

(16.4)

(4.6)

Other cash flow from investing activity

0.0

0.1

(5.9)

0.0

0.5

2.8

Cash flow from investing activity

30.8

(25.1)

(2.9)

4.3

(8.2)

7.5

Interest paid

(5.1)

(6.2)

(7.5)

(6.7)

(7.3)

(6.6)

Bank debt drawn/(repaid)

(27.0)

64.6

11.2

(3.2)

27.4

2.0

Share issuance/repurchase

0.0

(11.5)

(6.0)

(20.5)

(4.2)

0.0

Dividends paid

(7.5)

(7.7)

(7.0)

(7.4)

(6.9)

0.0

Other cash flow from financing activity

0.0

0.0

0.0

(1.0)

(0.5)

0.0

Cash flow from financing activity

(39.6)

39.2

(9.3)

(38.8)

8.5

(4.5)

Change in cash

(0.3)

15.5

(5.4)

(26.6)

2.0

0.6

FX

(0.0)

(0.0)

(0.0)

0.0

0.0

0.0

Opening cash

27.2

26.9

42.4

37.0

10.4

12.5

Closing cash

26.9

42.4

37.0

10.4

12.5

13.1

Closing debt

(195.3)

(280.2)

(291.4)

(288.4)

(315.8)

(318.1)

Closing net debt

(168.4)

(237.8)

(254.4)

(278.0)

(303.3)

(305.0)

LTV

26.1%

32.6%

33.1%

34.7%

39.1%

42.7%

Source: Phoenix Spree Deutschland data, Edison Investment Research


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This report has been commissioned by Phoenix Spree Deutschland and prepared and issued by Edison, in consideration of a fee payable by Phoenix Spree Deutschland. Edison Investment Research standard fees are £60,000 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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General disclaimer and copyright

This report has been commissioned by Phoenix Spree Deutschland and prepared and issued by Edison, in consideration of a fee payable by Phoenix Spree Deutschland. Edison Investment Research standard fees are £60,000 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.

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New Zealand

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United Kingdom

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United States

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London, WC1R 4PS

United Kingdom

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Research: Healthcare

AFT Pharmaceuticals — US milestone triggers upside and guidance bump

AFT Pharmaceuticals has announced the first sale of its intravenous pain relief medicine, Maxigesic IV, through its US licensing partner, Hikma Pharmaceuticals, a material milestone for AFT’s portfolio expansion and geographic diversification. The NZ$6m milestone payment triggered a bump in FY24 operating profit guidance to NZ$23–25m (from NZ$22–24m previously). The upside was partially offset by slower than anticipated sales traction in Australasia. We adjust our FY24 and FY25 estimates to reflect the update and revised guidance, including the earlier than anticipated milestone payment (pulled forward to FY24 from FY25) and increased anticipated expenses (SG&A and R&D) to align with management’s portfolio and geographic growth aspirations. Our valuation resets to NZ$698m or NZ$6.65/share (from NZ$723m or NZ$6.90/share).

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