The Property Company that Could Provide You Income for Life
The Property Company that Could Provide You Income for Life
3rd March 2021
Running money, we are always looking for the optimum time to buy. I thought we had that last week. Fear of inflation and rising bond yields brought a dark cloud over equity markets.
But it didn’t last long. Fear of inflation was worse than the reality. At least in the short to medium-term. And the markets are rising fast again on the belief in (and greed for) a sustainable recovery.
Well, inflation is a real risk. You can’t ease, print, repress the price of money in such a huge way for it not to be. Prices are going up everywhere. Your cash is worth less than it was. School fees at my son’s school were hiked 50% alone this year!
We have done our best to insulate our portfolio with value and dividend picks. And a focus on asset quality. You can see the benefits of this. Deriving strong returns from the recovery alongside an income yield you’d struggle to find anywhere else.
So where to now?
My colleague and investment manager John Ling was asking this just the other day…
The top medium-term trends I see are growth in companies focused on food supply, energy generation (especially renewable), clean transport technology, housing supply, and banking/insurance (assuming rising interest rates). Any business at the cutting edge of these trends could do well.
And we are actively hunting for more for our portfolio.
I note that China is now stating that its food security is the nation’s #1 concern. It cannot produce enough of its own food, so will likely need to set aside geopolitical nastiness and return to imports from companies such as Tasmanian salmon producer Tassal Group [ASX:TGR]. Though not in the short-run.
You may have noticed we’ve also been running a community initiative these past few weeks. Providing detailed analysis, a plan, and a petition to try and do something about New Zealand’s woeful housing crisis. You can access that research and sign the petition at www.TheKiwiDream.nz.
Meanwhile, you’ll have noticed our mention of an intriguing German company there. One that provides over 400,000 rental housing units in Germany, Austria, and Sweden. A Company that helps support home affordability in Germany.
Since its inception 7 years ago, the company has delivered a steady record of growth and income for shareholders. Let’s take a look:
Watch List Addition: Vonovia SE [ETR:VNA]
Source: Google Finance
With a market cap of over €30B, Vonovia is a giant. One of the largest listed companies in Europe. And probably the largest listed provider of housing anywhere.
The Company was originally formed from Deutsche Annington. Which was set up in the 1990s to acquire large swathes of railway housing privatised by the German government. It since acquired more apartment businesses and GAGFAH — a realty business with around 145,000 units. It renamed as Vonovia in 2015.
Today, the Company claims it can look back on 100 years’ experience in German residential real estate, taking into account these roots.
Well, as you may gather, Vonovia ranks up there as my personal, perfect investment.
A balance sheet secured by a diverse portfolio of rental property. In stable Western Europe. Clear proof of valuation under the EPRA (European Public Real Estate Association) system. Strong revenue growth. Fantastic margins. And a return on capital far greater than I could get from buying a rental property myself.
Plus, the broker may see it as a relatively secure stock. And may currently support it with margin lending up to 50%.
Vonovia medium-density rental units. Source: Vonovia.de
So why am I not adding Vonovia today as a recommendation? (We are adding it to our Watch List).
It’s just a little too expensive. Really, in just one area:
LT debt to equity:
Return on equity:
5Y revenue growth:
Source: IB TWS as at 2 March 2021
At around the current share price, you’re paying a 40% premium to own the property assets of Vonovia. (Price to Tangible Book Value Ratio of 1.4).
This could be a little rich. Since coronavirus could see further uncertainty around property valuations. Before longer-term recovery.
While we like this business, we want to watch for opportunities of better value.
There are indications that the share price got ahead of itself in the pandemic recovery and it has been steadily falling back since. Which could see a return to value.
Source: Google Finance
Of course, we regret not adding Vonovia in March 2020, at around €38, when we would have been snapping up Vonovia and its properties at Price to Tangible Book Value possibly less than 1.0. But we had our hands full with other opportunities.
Right now, if we can get Vonovia at around €45 to €52 per share — paying no more than a 20% premium on tangible assets — this could make sense given the yield. And potential for upward valuations at a later date.
Price to Tangible Book Value of course is just one interpretation of the asset value.
A closer estimate may be EPRA NAV. Or the European Public Real Estate Association Net Asset Value calculation. This comes in at €54.69 per share or €51.93 when adjusted for cross currency swaps. (2019 Annual Report).
Though we will be eagerly awaiting the valuation in the 2020 Annual Report due for publication later in the week.
Should we add Vonovia from the Watch List to Portfolio after digesting this report, we will aim to send you an alert by email.
Now, a key risk is German population growth. Without migration — and in recent times the influx of many Syrian refugees — rental housing (and underlying property valuations) could face headwinds.
For now, though, with rebounding growth in German factories and industrial output, we foresee continued demand for migrants into Germany.
Despite the pandemic, the German skilled visa programme admitted almost 30,000 migrants for the period March 1 to December 31, 2020.
With an ageing population staying in their homes longer, this could mean more households with fewer people in them. And upward pressure on housing demand.
Vonovia’s units should see continued strong occupancy. Indeed, in the 2019 Annual Report, vacancy came in at just 2.4%.
Current as of 2nd March 2021 at 10pm GMT. Please click to enlarge
AGL Energy [ASX:AGL] went ex-dividend on February 24, 2021. A cash dividend payment of A$0.31 (half year ordinary dividend) plus A$0.10 (special dividend) per share is scheduled to be paid on March 26, 2021.
Kina Securities [ASX:KSL] announced a strong set of annual results to 31 December 2020
- Statutory Net Profit After Tax (NPAT) of PGK 76.0 million up 25%
- Foreign Exchange (FX) income up 32% to PGK 55.2 million
- Net interest income up 48% to PGK 169.7 million
- Non-interest income up by 59% to PGK 145.1 million
- Revenue up 53% to PGK 314.8 million
- Full year dividend AUD 10.0 cents per share or PGK 26.9 per share
- Capital adequacy up 18% to 23.8%
The cherry on top of all this could be expanded market share and moat. In particular, we are waiting for an announcement on the aacquisition of Westpac’s Pacific businesses in PNG and Fiji. Which is expected to complete by 30 September 2021. This would help Kina to become a larger scale regional bank. The acquisition is subject to regulatory approvals by the Bank of Papua New Guinea and the ICCC (Competition regulator).
IGD CEO, Claudio Albertini and Chairman, Elio Gasperoni
Immobiliare Grande Distribuzione [BIT:IGD] provided a welcome update to shareholders this week from the Chairman and CEO. Here are the key points to digest:
- 2020 was the most difficult year in IGD’s history.
- ‘Even though we carefully analyzed all possible scenarios when structuring the Business Plan 2019-2021, we could not have imagined finding ourselves in such a challenging environment, with heavy restrictions on shopping center operations caused by the need to limit the spread of the Covid-19 pandemic.’
- Closed 2020 with a 8% drop in Funds from Operations, which came to €59.3 million.
- ‘During the months when the restrictions were the most severe, we were able to verify the important role of our shopping centers, which were always open, as a place where you can purchase essential items, like food products, electronics, as well as health, personal and home care products.’
- At the end of September IGD had recovered about 87% of the footfalls and around 97% of the retailers’ sales recorded in the same month 2019.
- Core business EBITDA fell 20.6% to €99.4 million in 2020 as a result of the €27.1 million drop in net rental income, partially offset by savings in general expenses of €1.1 million.
- The core business EBITDA Margin came to 4%.
- ‘The lack of a dividend for 2020 will remain an isolated incident, connected to the unprecedented situation caused by the pandemic.’
- IGD has always paid a very generous dividend, with an average yield of 7.0% between 2010 and 2019.
- ‘IGD has recently been trading at around €4 euro: a level which is well below EPRA NAV/NRV 2020 of €10.38, as well as the consensus target price of the analysts covering the stock of €4.6 euro. The room for potential upside is, therefore, clear, as well as, ample.’
There remains risk around retail in Italy. And the recovering Italian situation. IGD is ultimately a play on this economy and its return to growth. From our perspective, at the current share price and asset values, there remains opportunity with margin of safety and income. While we wait and see.
As for the wider economy — in Europe, New Zealand, and globally — interest rates cannot stay where they are forever. They will hike at some point. And that will threaten equity and property markets.
The wise investor ensures that when growth may be very uncertain, income can at least keep pace. And that means continuing to watch strong dividend plays like IGD and Vonovia.
We’ll keep you posted. And ideally prosperous.Regards,
Editor, Lifetime Wealth Investor