Phoenix Spree Deutschland — To buy or to rent?

Phoenix Spree Deutschland (LSE: PSDL)

Last close As at 18/05/2024

GBP1.54

−1.00 (−0.65%)

Market capitalisation

GBP142m

More on this equity

Research: Real Estate

Phoenix Spree Deutschland — To buy or to rent?

A trading update from Phoenix Spree Deutschland (PSD) shows that the core rental business remained strong in H123 although property values declined further, and transactions activity remains subdued. It notes some recent signs of improved buyer interest in the condominium market, but it remains too early to call a turn. We will review our estimates when interim results are released in late September. H123 rental growth is ahead of our expectations but revaluation indicates downwards pressure on forecast NAV. Our forecasts are yet to reflect the adjusted adviser fee structure.

Martyn King

Written by

Martyn King

Director, Financials

adrien-aletti-nzWLmc0aAXk-unsplash-phoenix

Real Estate

Phoenix Spree Deutschland

To buy or to rent?

Portfolio update

Real estate

14 August 2023

Price

182p

Market cap

£167m

€1.16/£

Net debt (€m) at 31 December 2022

303.3

Net LTV as at 31 December 2022

39.1%

Shares in issue

91.8m

Free float

100%

Code

PSDL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.0

(8.5)

(43.8)

Rel (local)

(3.2)

(6.1)

(43.5)

52-week high/low

317p

178p

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 events

H123 results

Late September 2023

Analyst

Martyn King

+44 (0)20 3077 5700

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

A trading update from Phoenix Spree Deutschland (PSD) shows that the core rental business remained strong in H123 although property values declined further, and transactions activity remains subdued. It notes some recent signs of improved buyer interest in the condominium market, but it remains too early to call a turn. We will review our estimates when interim results are released in late September. H123 rental growth is ahead of our expectations but revaluation indicates downwards pressure on forecast NAV. Our forecasts are yet to reflect the adjusted adviser fee structure.

Year

end

PBT*
(€m)

EPS
(c)

NAV**/
share (€)

DPS
(c)

P/E
(x)

P/NAV
(x)

Yield
(%)

12/21

45.3

39

5.65

7.5

5.4

0.37

3.6

12/22

(17.5)

(17)

5.10

2.35

N/A

0.41

1.1

12/23e

(59.1)

(54)

4.37

0

N/A

0.48

N/A

12/24e

0.8

1

4.38

0

208.8

0.48

N/A

Note: *As reported on an IFRS basis including realised and unrealised gains. **Measured as EPRA net tangible assets per share. ***IFRS forecasts are highly sensitive to portfolio valuations, which remain highly uncertain, and for which we provide a sensitivity analysis.

Core rental business remains strong

Against a backdrop of higher inflation and interest rates, rental yields in the Berlin residential market have risen and rental property values have correspondingly fallen. The like-for-like decline in PSD’s portfolio value was 6.9% and in combination with rental growth the gross fully occupied yield increased to 3.3% from 3.1% at end-FY22. Supply and demand imbalances within the Berlin private rental sector remain firmly supportive of rental values and including a positive effect of the new Mietspiegel (rent index) PSD expects annualised like-for-like rental growth to accelerate from 5.5% at end-H123 to c 6.5% over the next 12 months. Although buyers of individual condominiums continue to sit on their hands and PSD’s notarisations are well below historical levels, the sales premium to book value (68% in H123) indicates underlying support for values.

Disposals to fund investment and dividends

Generating sufficient cash to fund PSD’s ‘refurbish and re-let’ rent reversion strategy and pay dividends is substantially dependent on condominium and/or other asset sales and a wide range of properties are being actively marketed. Given current market conditions and that the company’s share price remains at a material discount to NAV, disposals at a discount to book value are under consideration, although we do not expect the company to ‘chase down’ prices. Any surplus cash generated over amounts required to reinstate dividends on a sustainable basis will be returned to shareholders or used to reduce debt levels.

Valuation: Deep discount to NAV

Share price performance across quoted German real estate has been weak over the past year, with an average decline of c 40%. PSD’s performance is similar over one year but well ahead over three years. Using end-2022 data, PSD shares trade at a P/NAV of 0.4x compared with the average for German listed peers of 0.3x.

Further details of the trading update

Condominium sales

Eight condominium units were notarised for sale in H123, with an aggregate value of €2.0m (H122: €3.0m, H222: €1.7m) at a 68% premium to the end-FY22 book value, well ahead of the average c 20% premium of the past three years.

Since the half year-end a further three units have been notarised, with an aggregate value of €1.0m. Unlike the units notarised in H1, these condominium units were occupied, and this is reflected in a significantly lower sales premium of 2.2% to the end-FY22 book value.

Reservations on a further seven units, with an aggregate value of €2.6m, have been received and are pending notarisation, representing a gross premium of 5.1% to the H123 book value. Three of the units are currently occupied.

Within the end-H123 portfolio valuation of €714.3m (end-FY22: €775.9m) the number of properties valued as condominiums had increased to seven (with an aggregate value of €39.2m) from six at end-FY22 (with a value €30.1m). Condominium valuations (as opposed to rental valuations) apply to just 7% of the portfolio, namely those properties that have all the relevant permissions required to be sold individually and where a sale has been approved by the board. In total, 78% of properties are legally split as condominiums, with the potential to be sold as such.

PSD says that properties approved for sale will generally include an element of occupied condominiums and it often becomes operationally and financially efficient to dispose of these at some point despite the lower sale premium.

Continuing rent premium

An already tight Berlin rental market is being further buoyed by those who otherwise would have been purchasers of condominiums remaining for longer in the rental sector, as well as inwards net migration, particularly from Ukraine. Meanwhile, supply is constrained by higher building and capital costs. Against this backdrop, new lettings in Berlin were signed at an average premium of 31% to the previous passing rent, consistent with the premium achieved in recent years.

Amendments to fee structure

In June, the AGM approved amendments to the fee structure that cap all ongoing property adviser fees, other than a new disposal fee and any performance fee that may become payable, to an aggregate €5.0m for 12 months from 1 July 2023. For FY22, aggregate asset management, capital expenditure monitoring and investor relations fees were €7.4m. Our unchanged forecasts for FY23 and FY24 currently include an amount of €6.7m in each year, including an asset management fee of €6.1m, lower than in FY22, reflecting a lower average NAV on which the fee is based.

The new disposal fee is set at 1% of the gross value of assets sold over the 12-month period, reflecting the board’s desire to align the incentives of the property adviser with the company’s intention to accelerate disposal activity.

To close the gap between our current fee forecasts and the new, lower fee cap would require the sale of assets with a gross value of c €170m. Reported gross assets at end-FY22 were €815m, although this will now be lower, primarily because of the €42m reduction in the portfolio valuation in H123.

Although it is not the board’s current intention, particularly at the current company valuation, the new arrangements are structured to allow for any potential offer for the company.

Forecasts to be updated in September

The details of our last published forecasts, included in this note, can be found here.

These assume an FY23 like-for-like decline in property values of 7.5%, reflected in a decline in NAV/EPRA net tangible assets per share of 14% to €4.37 at end-FY23 versus €5.10 at end-FY22. The H123 downwards move in like-for-like portfolio valuation is equivalent to c €0.6 per share.

Our forecast for FY23 like-for-like rental growth is 4.0%.

Exhibit 1: Financial summary

Year ending 31 December, €m unless stated otherwise

2018

2019

2020

2021

2022

2023e

2024e

INCOME STATEMENT

Revenue

22.7

22.6

23.9

25.8

25.9

27.7

28.8

Total property expenses

(15.8)

(14.2)

(16.4)

(16.1)

(17.1)

(16.1)

(16.4)

Gross profit

6.9

8.4

7.5

9.7

8.8

11.6

12.4

Administrative expenses

(3.2)

(3.1)

(3.3)

(3.4)

(3.3)

(3.2)

(3.2)

Gain on disposal of investment property

1.0

0.9

2.2

1.5

(0.2)

(1.1)

(0.1)

Fair value movement on investment property

66.1

41.5

41.5

38.0

(42.2)

(58.2)

0.0

Property advisor performance fee

(4.0)

(2.8)

0.4

(0.3)

0.3

0.0

0.0

Separately disclosed items

(1.0)

(0.3)

0.0

0.0

0.0

0.0

0.0

Operating profit

65.9

44.6

48.3

45.4

(36.5)

(50.9)

9.1

Net finance charge

(9.5)

(6.0)

(8.2)

(7.5)

(7.9)

(8.2)

(8.3)

Gain on financial asset

0.0

(10.0)

(2.2)

7.3

26.9

0.0

0.0

Profit before tax

56.4

28.6

37.9

45.3

(17.5)

(59.1)

0.8

Tax

(11.1)

(5.8)

(7.6)

(7.9)

1.7

9.2

0.0

Profit after tax

45.4

22.7

30.3

37.4

(15.8)

(49.9)

0.8

Non-controlling interest

(0.3)

(0.5)

(0.5)

(0.1)

0.4

0.2

(0.0)

Attributable profit after tax

45.1

22.3

29.8

37.3

(15.4)

(49.6)

0.8

Closing basic number of shares (m)

100.8

97.8

96.1

92.8

91.8

91.9

91.9

Average diluted number of shares (m)

99.0

102.1

98.9

95.0

92.1

91.8

91.9

IFRS EPS, diluted (€ cents)

46

22

30

39

(17)

(54)

1

DPS declared (€ cents)

7.5

7.5

7.5

7.5

2.4

0.0

0.0

EPRA NTA total return

13.1%

9.3%

8.8%

8.4%

-8.4%

-14.2%

0.2%

BALANCE SHEET

Investment properties

632.9

719.5

749.0

759.8

761.4

718.0

726.4

Other non-current assets

3.4

3.5

3.8

2.7

16.9

16.9

16.9

Total non-current assets

636.4

723.0

752.8

762.5

778.3

734.9

743.3

Investment properties held for sale

12.7

10.6

19.3

41.6

14.5

7.2

7.2

Cash & equivalents

26.9

42.4

37.0

10.4

12.5

4.0

2.8

Other current assets

7.5

9.5

8.4

11.7

10.1

10.1

10.4

Total current assets

47.1

62.6

64.7

63.8

37.1

21.3

20.4

Borrowings

(3.6)

(17.8)

(1.0)

(0.9)

(0.8)

0.0

0.0

Other current liabilities

(13.2)

(15.6)

(9.6)

(12.4)

(15.9)

(14.8)

(15.3)

Total current liabilities

(16.8)

(33.4)

(10.6)

(13.3)

(16.8)

(14.8)

(15.3)

Borrowings

(191.6)

(258.5)

(286.5)

(283.2)

(311.3)

(320.7)

(326.8)

Other non-current liabilities

(65.2)

(76.8)

(86.5)

(86.1)

(70.9)

(61.7)

(61.7)

Total non-current liabilities

(256.9)

(335.3)

(373.0)

(369.3)

(382.2)

(382.4)

(388.5)

Net assets

409.8

416.9

434.0

443.6

416.4

359.1

359.9

Non-controlling interest

(2.0)

(3.0)

(3.5)

(3.6)

(3.2)

(3.0)

(3.0)

Net attributable assets

407.9

413.9

430.4

440.0

413.2

356.1

356.9

Adjust for:

Deferred tax assets & liabilities

52.5

58.3

65.4

73.5

70.9

61.7

61.7

Derivative financial instruments

6.0

16.0

18.2

10.9

(16.0)

(16.0)

(16.0)

Other EPRA adjustments

(5.4)

(6.8)

(6.4)

(0.3)

0.0

0.0

0.0

EPRA net tangible assets (NTA)

461.0

481.4

507.6

524.1

468.1

401.8

402.6

IFRS NAV per share (€)

4.05

4.23

4.48

4.74

4.50

3.88

3.88

EPRA NTA per share (€)

4.58

4.92

5.28

5.65

5.10

4.37

4.38

CASH FLOW

Cash flow from operating activity

13.2

1.5

8.1

7.8

2.2

7.3

9.3

Income tax paid

(4.7)

(0.0)

(1.3)

0.2

(0.5)

0.0

0.0

Net cash flow from operating activity

8.5

1.4

6.7

8.0

1.7

7.3

9.3

Property additions

(47.3)

(32.2)

0.0

0.0

(13.2)

(4.9)

0.0

Proceeds from disposal of investment property

86.0

13.5

7.2

13.8

21.0

11.2

4.9

Capital expenditure on investment property

(7.9)

(6.5)

(4.2)

(9.5)

(16.4)

(15.0)

(13.3)

Other cash flow from investing activity

0.0

0.1

(5.9)

0.0

0.5

0.0

0.0

Cash flow from investing activity

30.8

(25.1)

(2.9)

4.3

(8.2)

(8.6)

(8.4)

Interest paid

(5.1)

(6.2)

(7.5)

(6.7)

(7.3)

(7.1)

(7.2)

Bank debt drawn/(repaid)

(27.0)

64.6

11.2

(3.2)

27.4

0.0

5.0

Share issuance/repurchase

0.0

(11.5)

(6.0)

(20.5)

(4.2)

0.0

0.0

Dividends paid

(7.5)

(7.7)

(7.0)

(7.4)

(6.9)

0.0

0.0

Other cash flow from financing activity

0.0

0.0

0.0

(1.0)

(0.5)

0.0

0.0

Cash flow from financing activity

(39.6)

39.2

(9.3)

(38.8)

8.5

(7.1)

(2.2)

Change in cash

(0.3)

15.5

(5.4)

(26.6)

2.0

(8.5)

(1.3)

FX

(0.0)

(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

4.0

Closing cash

26.9

42.4

37.0

10.4

12.5

4.0

2.8

Closing debt

(195.3)

(280.2)

(291.4)

(288.4)

(315.8)

(323.3)

(328.3)

Closing net debt

(168.4)

(237.8)

(254.4)

(278.0)

(303.3)

(319.3)

(325.5)

LTV

26.1%

32.6%

33.1%

34.7%

39.1%

44.0%

44.4%

Source: Phoenix Spree historical data, Edison Investment Research forecasts


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.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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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.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Research: Investment Companies

Lowland Investment Company — Capital growth to follow income?

Lowland Investment Company (LWI) targets above-average total returns, from a combination of capital and income, with a multi-cap investment policy that differentiates it from most peers in the UK Equity Income sector. Within its broad range of investment opportunities, selected large caps provide more immediate income, often with defensive characteristics, while small and mid-caps offer faster growth in income and dividends over time. LWI has a long track record of progressive dividends, which have grown c 7% pa over 10 years, and currently offers an attractive 5.2% yield. While investor focus on large-cap stocks, often with global businesses, has created a headwind for LWI’s multi-cap approach and five-year NAV total return, the managers anticipate a broadening of market performance.

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