Phoenix Spree Deutschland — Valuation decline but sales premium continuing

Phoenix Spree Deutschland (LSE: PSDL)

Last close As at 21/05/2024

GBP1.57

0.00 (0.00%)

Market capitalisation

GBP142m

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Research: Real Estate

Phoenix Spree Deutschland — Valuation decline but sales premium continuing

While German macroeconomic conditions are challenging, the fundamental demand-supply balance for Berlin rented residential accommodation remains robust. Phoenix Spree’s (PSD’s) FY22 property values and NAV declined, but condominium sales continue to generate a strong premium to book value. We expect rental growth also when results are released in March, as the company continues to harvest strong rent reversion.

Martyn King

Written by

Martyn King

Director, Financials

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Real Estate

Phoenix Spree Deutschland

Valuation decline but sales premium continuing

FY22 valuation report

Real estate

20 February 2023

Price

247p

Market cap

£226m

€1.12/£

Net debt (€m) at 30 June 2022

295.6

Net LTV as at 30 June 2022

36.0%

Shares in issue

91.9m

Free float

100%

Code

PSDL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.2)

(1.2)

(36.3)

Rel (local)

(2.9)

(8.8)

(38.6)

52-week high/low

396p

236p

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

FY22 results

Exp. late March 2023

Analyst

Martyn King

+44 (0)20 3077 5700

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

While German macroeconomic conditions are challenging, the fundamental demand-supply balance for Berlin rented residential accommodation remains robust. Phoenix Spree’s (PSD’s) FY22 property values and NAV declined, but condominium sales continue to generate a strong premium to book value. We expect rental growth also when results are released in March, as the company continues to harvest strong rent reversion.

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

9.3

0.53

2.7

12/21

45.3

39

5.65

7.5

7.1

0.49

2.7

12/22e

(37.0)

(34.0)

5.10

7.5

N/A

0.55

2.7

12/23e

1.4

1.6

5.05

7.5

178.0

0.55

2.7

Note: *As reported on an IFRS basis including realised and unrealised gains. **Measured as EPRA net tangible assets per share.

Property values weakened in H222

At 31 December 2022 (end-FY22), PSD’s property portfolio, including properties under construction, was externally valued at €775.9m (vs €801.5m at end-FY21), reflecting a gross fully occupied yield of 3.0% (FY21: 2.8%). Net of acquisitions and disposals, the full-year like for like valuation movement was a negative 3.1%, with a 5.2% H2 decline offsetting the 2.1% H1 gain. We wait to see whether German peers will experience a similar trend in their Q422 valuations. As previously indicated by the company, FY22 condominium sales were negatively affected by market conditions. Positively, the premium to book value on condominium notarisations (22.4%) continued, although volumes weakened (€4.7m vs €15.2m in FY21). The company expects to report FY22 EPRA NTA per share within a range of €5.09–5.14 and we have adjusted our forecasts (from €5.7) accordingly.

Durable embedded value remains in place

Free market rents are significantly above in-place rents in the highly regulated German market and well supported by fundamental demand-supply. Refurbishment and re-letting at market rents is PSD’s core strategy for closing this gap, regularly generating strong rent uplifts. Even if market rents were to stall, rental growth would continue. Splitting apartments into selected individual condominiums for sale has made a significant contribution to earnings and cash flow over time. Condominium market values are much higher than the rental-based valuations applied to most of the portfolio, and little of this potential is reflected in NAV. For now, sales volumes are depressed but, unlike peers, 76% of PSD’s Berlin portfolio is legally split (less than 5% is valued as such), while tighter rules on apartment block splitting leave PSD well placed for a recovery in sales.

Discounting a significant market deterioration

Apparently anticipating a material residential market correction, PSD shares have fallen by 35% over 12 months, continuing to outperform peers listed in Germany (by -43% on average). Reflecting this, and its differentiated reversion strategy, PSD’s trailing P/NAV is higher (0.55x vs c 0.40x) and its yield lower (2.7% vs c 7%).

Significant downturn discounted by equity market

So far in FY23, the economic outlook for Germany has been improving. Inflation is declining at a faster rate than had been expected, driven by a sharp reduction in energy prices, while GDP has been supported by the government’s fiscal support package. The European Commission now expects the German economy to show slight growth in 2022, of 0.2%, compared with its autumn forecast of a negative 0.6%. However, PSD notes that higher medium-term interest rates continue to present a challenge to the property market and that a further fall in values cannot be ruled out.

While real estate valuations remain uncertain, the fundamental demand-supply balance in the Berlin market continues to support rental values. The Berlin housing shortage has been built over many years by demographic trends, including net migration and insufficient new development. If anything, these drivers have recently strengthened, with more than a million Ukrainian refugees entering Germany and higher construction prices, disrupted supply chains and materials shortages adding to the existing drag on development from strict planning laws.

PSD expects these positive demand-supply fundamentals for rented accommodation to continue to support rental values but believes that it is too early to predict a recovery in buyer sentiment in the condominium market accurately, notwithstanding a positive start to 2023.

Despite the near-term headwinds, the company remains confident in the long-term outlook, based on the significant rent reversion that remains embedded in the portfolio, along with unrecognised capital value in the majority of its residential units, which have been designated as condominiums. The cost of all borrowing is fixed, with no loans maturing until 2026, and we forecast sufficient liquidity to maintain dividend payments and continue to invest in the portfolio (to unlock rent reversion).

The condominium sales premium has continued

Differentiating it from listed German peers, approximately 76% of PSD’s Berlin portfolio is legally designated as condominiums, providing a strategic advantage that was highlighted by federal government legislation, which has placed significant restrictions on the ability of landlords to split their properties into condominiums in the future. The measures will inevitably increase the scarcity of condominiums available for sale in the future, further exacerbating the demand-supply imbalance that currently exists.

The division and subsequent resale of selected apartment blocks as private units (condominiums), with vacant possession, at market valuations, supplements PSD’s rental income, increases cash flow and accelerates the release of significant value embedded within the portfolio. Condominium market prices are typically 30–35% higher than rental-based valuations and this is only partly reflected in PSD’s portfolio valuation. Compared with rental property valuations, the process of land registry splitting generally leads to a valuation uplift in the region of 15% (although these continue to operate as rental properties unless identified for sale. Within the portfolio valuation, only six properties, with an aggregate value of €30.1m, are fully valued as condominiums and sales values are typically well ahead of this. The sales premium in any period is specific to the mix of assets (different locations, floor space, etc) but the 22% premium achieved in FY22 was slightly above the three-year average of 20%, albeit on significantly reduced volume.

Exhibit 1: Condominium notarisations

FY17

FY18

FY19

FY20

FY21

FY22

Sales value of notarisations (€m)

9.1

9.9

8.8

14.6

15.2

4.7

Average notarised value per sqm (€)

4,352

4,566

4,068

4,320

4,988

5,502

Average book value of notarised properties per sqm (€)

3,515

3,676

3,459

3,624

4,216

4,495

Premium to book value

23.8%

24.2%

17.6%

19.2%

18.3%

22.4%

Portfolio average value per sqm at year end (€)

2,854

3,527

3,741

3,977

4,225

4,082

Premium to portfolio average

52.5%

29.5%

8.8%

8.6%

18.1%

34.8%

Source: Phoenix Spree data

The premium to book value on PSD’s first condominium notarisation for sale in FY23 was an exceptional 120%. Since then, reservations for a further three units have been received and are pending notarisation. These have a combined value of €0.8m, representing a gross premium of 45% to book value and 22% to PSD’s end-FY22 average Berlin residential portfolio.

Embedded rent reversion

Berlin rents have risen strongly in recent years, but federal laws significantly restrict the pace at which market rental growth can be passed through tenancies already in place. This has built up reversionary potential within the portfolio such that even if free market rents were to weaken, rental income should continue to increase. Refurbishment and subsequent re-letting of vacated units at a premium to existing rents, and closer to market rent levels, will remain the key driver of reversionary capture.

FY22 data will become available with the results in March but the re-letting premium continued through H222, when the average rent achieved on all new lettings was €12.7/sqm per month, an 8.5% increase on the prior year, and an average 28.4% above the previous passing rent for those apartments. Excluding assets in Brandenburg acquired in 2020, where rents are lower than those achieved in central Berlin, the reversionary premium to previous passing rents was 33.7%. The premium to previous passing rents varies from period to period, mainly determined by mix, but the average re-letting premium for the whole portfolio in the three years to end-FY21 was c 27%.

Exhibit 2: Re-letting premium to H122

Source: Phoenix Spree data

During FY22, PSD invested around €16m in property refurbishment and in bringing new residential condominium projects to market. PSD expects this investment to be reflected in 2023 through condominium sales and rental uplifts. FY23 investment is expected to be materially lower as condominium projects complete.

Providing additional capital for recycling into investment since end-H122 [PSD has completed the sale of two non-core properties for an aggregate consideration of €8.6m. These were acquired in 2008 and 2017, for an aggregate purchase price of €3.9m, and were sold with a 30 June 2022 carrying value of €8.9m. Contracts to sell a further property for €3.5m have been exchanged. This building was acquired in 2008 for a purchase price of €1.0m and had a carry value of €3.9m as at 30 June 2022. PSD does not anticipate further acquisitions until market conditions improve and discount to NAV narrows.

Forecasts and valuation

EPRA NTA forecast reduced in line with guidance

We have adjusted our FY22 forecast in line with the data provided in the valuation update, reducing EPRA NTA (NAV) per share to €5.11, within the range expected by management (€5.7 previously). There is little further data at this stage but, pending the publication of full-year results in late March, our preliminary forecast now includes a total gross revaluation loss of c €43m, comprising the negative like-for-like movement of c €25m (reflecting the like-for-like revaluation movement), capex of c €16m (for which the valuers are unlikely to attach a valuation until this begins to generate rental income or property sales) and the movement in properties under development. The negative swing in property revaluation of c €46m, net of deferred tax, explains the reduction in our forecast net attributable loss of c €31m compared with a profit of c €14m. We expect no change in full-year DPS of €7.5.

A material deterioration in the residential housing sector has already been discounted in share prices

NAV is an important indicator of valuation but only partially reflects the market value of units designated as condominiums. The dividend yield does not reflect the reversionary rent potential embedded in the portfolio. PSD continues to generate a premium to book value on condominium sales and a premium on re-letting refurbished units.

That said, our forecast of an unchanged FY22 aggregate DPS of 7.5 cents represents a yield of 2.7%. Meanwhile, the shares trade at a more than 50% discount to FY22e EPRA NTA per share. The discount implies that investors continue to anticipate a significant further deterioration in market conditions, to an extent that none of the companies operating in the sector, including PSD, expects to be the case given the fundamental imbalance of demand and supply in the residential market.

Exhibit 3: P/NAV history

Source: Refinitiv data as at 13 February 2023

In Exhibit 4 we show a price performance and valuation summary for PSD and its main listed peers.

PSD shares have been significantly de-rated in the past year, down by c 36%, but have clearly outperformed peers, down by an average of c 44%. Over three years the outperformance is greater, with PSD shares down 23% versus the peer average of 49%. We believe that the company’s stable, low-cost borrowing, rent reversion potential and high proportion of units designated as condominiums will all have contributed to this outperformance.

Exhibit 4: Peer valuation and price performance comparison

Price
(local)

Market cap
(€m)

P/NTA
(x)

Yield
(%)

Share price performance

One month

Three months

One year

Three years

Grand City Properties

9.775

165

0.32

8.5

-4.9

-7.1

-48.8

-58.9

LEG Immobilien

70.54

73

0.44

5.8

-1.5

11.4

-37.5

-39.6

Vonovia

25.46

1,553

0.41

6.5

-2.0

4.6

-45.4

-49.1

Phoenix Spree Deutschland

247

93

0.55

2.7

4.7

-3.5

-36.2

-23.3

Average

0.43

5.9

-0.9

1.3

-42.0

-42.7

Source: Phoenix Spree Deutschland data, Refinitiv. Note: Prices as at 17 February 2023.

Exhibit 5: Financial summary

Year ending 31 December, €m unless stated otherwise

2018

2019

2020

2021

2022e

2023e

INCOME STATEMENT

Revenue

22.7

22.6

23.9

25.8

26.5

28.2

Total property expenses

(15.8)

(14.2)

(16.4)

(16.1)

(17.0)

(16.5)

Gross profit

6.9

8.4

7.5

9.7

9.6

11.6

Administrative expenses

(3.2)

(3.1)

(3.3)

(3.4)

(2.7)

(3.0)

Gain on disposal of investment property

1.0

0.9

2.2

1.5

0.1

0.6

Fair value movement on investment property

66.1

41.5

41.5

38.0

(42.7)

0.0

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

(35.4)

9.2

Net finance charge

(9.5)

(16.0)

(8.2)

(7.5)

(7.7)

(7.7)

Gain on financial asset

0.0

0.0

(2.2)

7.3

6.1

0.0

Profit before tax

56.4

28.6

37.9

45.3

(37.0)

1.4

Tax

(11.1)

(5.8)

(7.6)

(7.9)

5.6

0.0

Profit after tax

45.4

22.7

30.3

37.4

(31.5)

1.4

Non-controlling interest

(0.3)

(0.5)

(0.5)

(0.1)

0.1

(0.0)

Attributable profit after tax

45.1

22.3

29.8

37.3

(31.3)

1.4

Closing basic number of shares (m)

100.8

97.8

96.1

92.8

91.9

91.9

Average diluted number of shares (m)

99.0

102.1

98.9

95.0

92.2

91.9

IFRS EPS, diluted (€ cents)

46

22

30

39

(34)

2

DPS declared (€ cents)

7.5

7.5

7.5

7.5

7.5

7.5

EPRA NTA total return

13.1%

9.3%

8.8%

8.4%

-8.2%

0.3%

BALANCE SHEET

Investment properties

632.9

719.5

749.0

759.8

732.1

740.8

Other non-current assets

3.4

3.5

3.8

2.7

1.7

1.7

Total non-current assets

636.4

723.0

752.8

762.5

733.8

742.5

Investment properties held for sale

12.7

10.6

19.3

41.6

43.8

29.3

Cash & equivalents

26.9

42.4

37.0

10.4

9.5

11.0

Other current assets

7.5

9.5

8.4

11.7

9.8

10.2

Total current assets

47.1

62.6

64.7

63.8

63.1

50.5

Borrowings

(3.6)

(17.8)

(1.0)

(0.9)

0.0

0.0

Other current liabilities

(13.2)

(15.6)

(9.6)

(12.4)

(11.6)

(12.1)

Total current liabilities

(16.8)

(33.4)

(10.6)

(13.3)

(11.6)

(12.1)

Borrowings

(191.6)

(258.5)

(286.5)

(283.2)

(311.7)

(312.8)

Other non-current liabilities

(65.2)

(76.8)

(86.5)

(86.1)

(72.7)

(72.7)

Total non-current liabilities

(256.9)

(335.3)

(373.0)

(369.3)

(384.3)

(385.5)

Net assets

409.8

416.9

434.0

443.6

400.9

395.5

Non-controlling interest

(2.0)

(3.0)

(3.5)

(3.6)

(3.4)

(3.4)

Net attributable assets

407.9

413.9

430.4

440.0

397.5

392.0

Adjust for:

Deferred tax assets & liabilities

52.5

58.3

65.4

73.5

67.1

67.1

Derivative financial instruments

6.0

16.0

18.2

10.9

4.8

4.8

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

469.4

464.0

IFRS NAV per share (€)

4.05

4.23

4.48

4.74

4.33

4.27

EPRA NTA per share (€)

4.58

4.92

5.28

5.65

5.11

5.05

CASH-FLOW

Cash flow from operating activity

13.2

1.5

8.1

7.8

2.9

8.7

Income tax paid

(4.7)

(0.0)

(1.3)

0.2

(0.0)

0.0

Net cash flow from operating activity

8.5

1.4

6.7

8.0

2.8

8.7

Property additions

(47.3)

(32.2)

0.0

0.0

(7.7)

(7.4)

Proceeds from disposal of investment property

86.0

13.5

7.2

13.8

11.2

21.1

Capital expenditure on investment property

(7.9)

(6.5)

(4.2)

(9.5)

(16.1)

(7.3)

Other cash flow from investing activity

0.0

0.1

(5.9)

0.0

(0.0)

0.0

Cash flow from investing activity

30.8

(25.1)

(2.9)

4.3

(12.6)

6.3

Interest paid

(5.1)

(6.2)

(7.5)

(7.7)

(6.9)

(6.6)

Bank debt drawn/(repaid)

(27.0)

64.6

11.2

(3.2)

26.7

0.0

Share issuance/repurchase

0.0

(11.5)

(6.0)

(20.5)

(4.0)

0.0

Dividends paid

(7.5)

(7.7)

(7.0)

(7.4)

(7.0)

(6.9)

Other cash flow from financing activity

0.0

0.0

0.0

0.0

0.1

0.0

Cash flow from financing activity

(39.6)

39.2

(9.3)

(38.8)

8.8

(13.5)

Change in cash

(0.3)

15.5

(5.4)

(26.6)

(0.9)

1.5

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

9.5

Closing cash

26.9

42.4

37.0

10.4

9.5

11.0

Closing debt

(195.3)

(280.2)

(291.4)

(288.4)

(315.1)

(315.1)

Closing net debt

(168.4)

(237.8)

(254.4)

(278.0)

(305.6)

(304.1)

LTV

26.1%

32.6%

33.1%

34.7%

39.7%

40.2%

Source: Phoenix Spree historical data, Edison investment Research forecast


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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Basilea Pharmaceutica — Profitability sooner than expected

Basilea reported strong FY22 results following the successful execution of its strategic realignment to focus on anti-infectives. The top-line beat (c 21% ahead of the top end of guidance) was driven by accelerating global uptake of its marketed assets, primarily Cresemba, which recorded 22% year-on-year growth in royalties (to CHF65m). In combination with the receipt of milestone payments, lower-than-expected operating expenses and the sale of oncology assets, management was able to achieve profitability (FY22 net profit of CHF12.1m) a year earlier than anticipated. As Cresemba peaks, we expect additional support to come from the successful US launch of Zevtera (NDA expected in March/April 2023) and the introduction of novel late pre-clinical/clinical anti-infective assets in Basilea’s development pipeline. Our updated valuation is CHF785m or CHF65.7/share (previously CHF921.7m or CHF77.8/share), reflecting our revised estimates and the recent sale of oncology assets, partially offset by lower net debt (CHF46.7m at end-FY22) following repayment of the 2022 convertibles.

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