Wednesday, 22 January 2014

Dundee International Reit and the currency effect

Please read article about Dundee International Reit for reference.

Because almost all assets of Dundee International Reit are denominated in Euro one would expect a negative correlation between its share price and CAD/EUR all else even. As the charts above show this isn't the case. Although one has to take into account the normal share price fluctuation. Dundee gets more and more attractive as the loonie depreciates. I will increase my long position if the valuation in EUR drops by more than 15%, which I view as pretty much for German real estate.

Tuesday, 14 January 2014

Orco Germany: Commercial real estate in Berlin

[warning: The low freefloat makes Orco Germany's share rather illiquid, but could also be a reason for inefficient pricing.]
What made researching this company interesting were insider purchases. Furthermore I already knew the parent company from searching Eastern Europe for value assets. ORCO Germany S.A. (Orco) is a subsidiary of ORCO Property Group. ORCO Property Group was established in 1991, is registered in Luxembourg and listed on the NYSE Euronext, Paris, Prague, and Warsaw stock exchanges. It operates primarily in the Czech Republic, Hungary, Poland, Russia, Croatia, the Slovak Republic and Germany.

DateName Insiderreasonbuy/sell#sharespricevolume
22.10.2013 PAULIACO ENTERPRISES COMPANY LIMITED (Jean-Francois Ott)CEOB1,336,3640.44€ 588,000.16
18.06.2013 COURCELETTE HOLDINGS LLC (Brad Taylor)DirectorB525,7570.44€ 231,333.08
18.06.2013 Yves Désiront CFO Orco property groupB340,9090.44€ 149,999.96
17.06.2013 PAULIACO ENTERPRISES COMPANY LIMITED (Jean-Francois Ott)CEOB2,272,7270.44€ 999,999.88
17.04.2013 ROXANNIA ENTERPRISES COMPANY LIMITED (Jean-François Ott)CEOB16,0000.42€ 6,720.00
16.04.2013 TOMSAFE SRL (Nicolas Tommasini)Deputy CEO and COOB60,1980.42€ 25,283.16
07.01.2014Yves DésirontCFO Orco property groupS15,0000.539€ 8,085.00

 In comparison to the current price of 0.55 the insiders are already sitting on a proft. But it's no use to anchor on past prices and better to start fresh and try to figure out if Orco offers still a good risk/reward profile.

Company profile
The company describes itself as follows:
ORCO Germany S.A. is a real-estate company. Effective 28 December 2012, the shares of ORCO Germany S.A. moved from the Prime Standard segment to the General Standard segment.The company has been operating in Germany since 2004, focuses on property investment and project development, and is mainly active on the Berlin market. The group’s strategy as well as all decisions are made by the Management Board located in Paris, led by Jean-Francois Ott, CEO of ORCO Germany, who also owns shares of the parent Orco property group (9.66%).

The company strengthened its project development operations in 2006 by the strategic acquisition of Viterra Development. In 2008, Viterra Development was converted into ORCO Projektentwicklung GmbH.
ORCO Germany S.A. expanded its property portfolio in Berlin in June 2007 by taking over the Gewerbesiedlungs-Gesellschaft mbH (GSG). GSG was established in 1965 and is the leading supplier of commercial space in Berlin with about 815,000 m² of office and multifunctional space. ORCO-GSG owns more than 40 commercial areas and centres and 117 residential units – most of the properties are in inner-city locations with excellent connections to the Berlin transport network.

At the end of 2008, ORCO Germany started its transition from an expanding cash-requiring developer into an investor with exposure to the Berlin market.

Business segments
  • Property Investments (core segment)
 Investments in commercial properties, in particular through acquisition and asset management.
  • Development
Development of predominant commercial projects. This includes property acquisition, planning and obtaining building rights, project implementation and sale/rental of the realised projects to investors and tenants. Going forward development activities will mostly focus on developing or redeveloping ORCO-GSG land or properties as well as Gebauer Höfe which are classified as investment properties.

Development increases risk compared to plain asset management. Although "following ORCO Germany’s decision to focus on Property Investments the Development business line has been progressively ran-down."

Operating figures

in EUR
30 June
2013 unaudited
30 June 2012
restated unaudited
31 December
2012 audited
31 December
2011 audited
31 December
2010 audited
Operating result29,4273,07719,21255,27862,426
Profit before tax28,045-8,328-3,92630,85216,984
Net result to Owners21,618-12,277-15,77321,2765,596
Total balance sheet651,244634,718634,805792,235863,407
Shareholders’ equity200,483158,146168,14865,59845,877
Gross financial debt295,316322,385322,985545,260620,570
Cash and cash equivalent8,8407,6757,76714,79717,939

Due to the restructuring of the company, the past results are not relevant but give a clue how the company has evolved in the past years. Non core assets were disposed of (lower total assets) and capital structure restructured (higher equity, lower debt).

30.09.2013 Berlin31.12.201231.12.201131.12.201031.12.200931.12.200830.06.2007
Net commercial rents (€/sqm)
Commercial occupancy rate (%) 84.9%80.9%78%77.2%76%73.5%68.8%
Total occupancy rate - all uses (%)

Rents and occupancy rate have been improved in the past years. Vacancy has still room to decrease and thereby increase cashflows. In 2013 numbers are for Berlin assets, before the numbers were for assets of the subsidiary GSG. Net commercial rents for 2012 were 5.20 according to the annual report, but 5.18 according to the half-year report, whereas occupancy was the same. I couldn't find an explanation for the discrepancy.

Bond restructuringand share capital

The lower debt and higher equity was mainly achieved via bond restructuring.

bond equitizationnew sharesfor bondsvalued atconversion price
06.06.201328,028,98222,88519,956,635€ 0.71
27.09.2012153,256,130125,130109,118,365€ 0.71

To put this in historic perspective:
shares outstanding344,656230,056202,02748,771
reason"pursue opportunities"bond equitizationbond equitization

114,600,000 shares issued for 0.47€ following a capital increase on 04.12.2013 to Tandis are currently sequestered by court order due to a request by some shareholders of the parent company Orco property group.
Furthermore Capstone equities came out with a letter.
At a price of €.47, this would imply an 8% capitalization rate including G&A (9.5% capitalization rate without G&A) or €462 per square meter for the underlying real estate. This is incredibly cheap for Berlin real estate
I agree with their letter. It's positive to have them on board. Generally speaking I don't like companies increasing their share count, but cannibals. The share count was increased many times over. Bond equitization was at a conversion price above current market price of 0.55, which may indicate value. The dilutive issue in December will maybe be reverted.

Shareholder structure has evolved as follows:
04.03.2013Number of Shares% of capital% of voting rights
ORCO Property Group S.A184.639.96091.39%91.39%
Brillant 1419. GmbH & Co. Verwaltungs KG11.531.2595.71%5.71%
Orco Grundstück und Beteiligungs GmbH1.900.0000.94%0.94%

ORCO Property Group190,039,93555.14%
Tandis, a.s. and Mr. Vitek (sequestered)114,820,85033.31%
Kamoro Limited19,900,0005.77%
Brillant 1419 GmbH & Co. Verwaltungs KG11,531,2593.35%
Directors and Managers of Orco Germany4,681,8951.36%

The 1,900,000 treasury shares and 1,150,000 warrants, owned by the subsidiary Orco Grundstück und Beteiligungs GmbH, were sold to the parent company for 0.8M in 2013. If the warrants are worthless this comes in at about 0.42 per share, which was advantageous for the parent company at the expense of the minorities at Orco Germany.

In 2007 the Company issued bonds with 9,328,851 repayable subscription warrants (Exercise price 15.6 and Exercise period until 30 May 2014), which are deemed anti-dilutive due to the low share-price.

During the establishment of the 2012 annual financial statements it has been identified that a trade receivable linked to the sale of a commercial development in Berlin is overvalued since 2009 by EUR 4.0 million in the consolidated accounts. As the error occurred before the earliest prior period presented and in application of IAS 8.42b, the omission of neutralization of the overvaluation in the 2009 financial statements represents a prior period accounting error which must be accounted for retrospectively in the financial statements. Consequently, the Group shall adjust all comparative amounts presented in the opening balance of assets, liabilities and equity. As the correction of the error is applied to all comparative periods affected by the omission, the 2012 year Profit and Loss is therefore unaffected by the correction of prior period adjustment. The statements and notes impacted by this prior-year adjustment are the “Consolidated statement of financial position”, the “Consolidated statement of changes in equity”, the note 3.1 and note 5.
This caused restatements. I generally don't like companies who have to restate anything. This is a redflag, although the misstake was from 2009. Directors get no pay, but it's better to pay someone than have no efficient audit.
There were no emoluments granted in respect of the financial year to the executive members of the Board of Directors (2011: EUR 0). The Company did not grant any advances, loans or pension schemes to its Directors.
Overall the key personnel comes cheap for Orco Germany:
The members of the Board of Directors of the Company, the CEO, the Deputy CEO&CFO and the General Secretary of Orco Germany, the Managing Director of ORCO Germany subsidiaries, the CFO and COO of GSG are considered as the key management personnel of the Group. Over 2012, key management personnel received a global remuneration of EUR 1.2 million (EUR 1.2 million as at 31 December 2011).
Property investments segment
The results were in the past clouded by the development segment. A look at the property segment alone may reveal the underlying value of the company. As interest expenses are not broken down, they are for the whole company. Services to tenants include high-speed network and IT services “Hofnetz” and are continuously expanded, thus producing additional income.

property investments segment30.06.201331.12.2012
lettable space [sqm]836,726839,847
investment property '000519,919501,995
value per sqm€ 621.37€ 597.72
rent '00025,53048,245
services '0004,4888,092
implied rental yield9.82%9.61%
implied rental+services yield11.55%11.22%
EBITDA before fair value+disposal16,28627,764
Interest expenses6,76223,624
normalized earnings before tax19,0484,140

Interest expenses decreased as a consequence of the successful refinancing of the GSG loan at lower interest rates and a lower volume, the repayment of the Sky Office loan in December 2012 and the successful bond restructuring.

The total lettable space was not broken down further in the reports, but it seems to belong to the  property investments segment. After all the develpment segment's assets stood at 4.8M (30.06.2013) and 5.2M (31.12.2013) respectively and the segment produced negative results for both periods.

The implied rental yields are high. 9.82% for the segment is slightly higher than 9.5% for the whole company according to the Capstone equities letter, mentioned above. The high yield suggests the property value is not overstated, but it's rather understated.

19M(2xH1) EBT per year seems to be reasonable, although operating income for the whole company in the first two quarters excluding far value gain was 15.2M compared to 6.1M for Q3.

Based on EBT of 19M annualized and the rising trend of in-place rents, a low estimate of the segment's value would be ~200M.


Consolidated equity200,564254,426
Fair value adjustments on inventories254254
Net asset value158,196212,058
Deferred taxes on revaluations101,378101,378
EPRA Net asset value259,574313,436
Net asset value per share€ 0.69€ 0.62
EPRA Net asset value per share€ 1.13€ 0.91
shares outstanding230,056344,656
share price0.550.55
P/EPRA NAV0.490.60

The deferred taxes have a high influence on the valuation of Orco Germany. The capital increase from December 2013 @0.47 per share would have been dilutive. The company itself calculated LTV for 30.06.2013 at 51.7%. This doesn't imply need for more equity at any price. The new equity was issued under NAV, which means RONIC would have to be higher than in the past to not be dilutive and there is no clue as to why this may be the case.


Based  upon the signed sales contract for Leipziger Platz additional 30M are expected to inflow after the finalization of the project. Deferred consideration on the sale of Leipziger Platz amounted to 27.8M as of 30.06.2013. How to adjust for this matters for LTV. One possibility is this:

Financial debt296,274296,274
Cash and cash equivalents-8,840-8,840
Net debt287,434287,434
Financial assets at fair value through profit or loss-255-255
deferred consideration on the sale of Leipziger Platz-27,815-25,034
Revaluation gains on projects and prop.-254-254
Derivative instruments assets 0-1256
Derivative instruments liabilities 01268
Retirement obligations 1/204,494
Minorities @book082
Investment property522,669522,669
Own-occupied buildings2,8842,884

The company calculated LTV as follows, adding the deferred consideration to property value:

Financial debt296,274
Cash and cash equivalents-8,840
Net debt287,476
Financial assets at fair value through profit or loss255
deferred consideration on the sale of Leipziger Platz27,815
Revaluation gains on projects and prop.254
Investment property522,669
Own-occupied buildings2,884

As stated above LTV doesn't suggest an urgent need for equity. Additionally operating cashflows for H1/2013 was more 2x net interest paid. This would suggest the company has the means to pursue opportunities organically, albeit small opportunities.


Orco Germany is cheap but the management in place does not seem to be a prudent capital allocator, if one believes the newly issued shares to be value dilutive. On the other hand they may just do not respect the minority shareholders. As the hedge fund complains in its letter the equity was offered to only one shareholder, Tandis, which is an entity related to Mr. Radovan Vitek.
 Remuneration at the company level does not indicate to be an incentive for empire building. One would have to take a closer look at the parent company Orco property group. As the CEO owns 9.66% of the parent company and bought shares worth more than 1.5M of Orco Germany in 2013 his interests should have been aligned with shareholder's, but he has an incentive to transfer profits to the parent company, where he has a higher stake. Then there is the uncertainty what will happen with the sequestered shares, until then the company cannot put the new equity at work and may spend money for litigation. I don't feel my money would be protected as a minority shareholder, although valuation is a puffer. No Position.

Wednesday, 8 January 2014

Investing in German commercial property via Dundee International Reit

It seems to be a joke to invest into the German market via a toronto based entity, but Dundee has access to very cheap funding from German banks with weighted average interest rate of just 3.44% as of September, 30th due to its scale and the valuation looks promising.

Units outstanding
Dundee International Reit's units number is in flux, which makes it difficult to establish the right denominator.
 The diluted weighted average number of Units assumes the conversion of the Debentures and incremental unvested deferred trust units related to the Deferred Unit Incentive Plan represented by the potential Units that would have to be purchased in the open market to fund the unvested obligation.
The convertible debentures have the following charakteristika:

Convertible debentures
principal amount 30.09.2013161,000
interest rate5.5%
conversion price at any time by the debenture holder13
redeemable by trust 31.08.2014-30.08.2016 if unit price >125% conversion priceprincipal amount plus accrued and unpaid interest
redeemable by trust 31.08.2016-31.07.2018 principal amount plus accrued and unpaid interest
max conversion units12,384,615

As the conversion price is way above the current unit price and the yield of the units is higher than the interest rate of the debentures, I don't view the debentures to be dilutive to investors purchasing units at current prices. I will exclude them from outstanding units:

Weighted average Units outstanding basic per unit amounts109,116,985
Weighted average Units outstanding diluted per unit amounts122,552,770
adjusted for convertible diluted per unit amounts110,168,155

Due to the Distribution Reinvestment and Unit Purchase Plan, the number of units outstanding, will increase with each distribution each month.

Operating Figures
 Space for which the Trust receives head lease payments is reflected as vacant space; increase in occupancy to 91%, if such head lease space would be reflected as occupied space.

[CAD 000]Three months ended September 30per adjusted unit
Occupancy rate (period-­‐end)86%Euro/m²
In­‐place rent per square foot/monthCA$ 0.95€ 7.41
Investment properties revenue56,9150.52
Net rental income 39,4790.36
Funds from operations23,0010.21
Adjusted funds from operations21,3710.19

The company provides relevant figures readyly. But their properties revenue differs from what I used as gross rental income, but luckily they provide in-place rent:
Revenues from investment properties include base rents, recoveries of operating expenses including property taxes, lease termination fees, parking income and incidental income.
As at September 30, 2013 the portfolio consisted of 299 properties, comprising approximately 15.5 million square feet located in Germany. 

square metre1,444,113
property value CAD '0002,185,360
property value Euro '0001,569,943
value Euro / m²1,087
value/in-place rent*occupancy = yield7.04%

The property value and gross rental yield looks OK to me. For commercial property I would have expected a higher yield. If the property is really of the high quality as the company suggests, this would explain the yield.  Due to the weighted average interest rate of just 3.44%, the company can leverage their properties to the benefit of unitholders at current rates.

Tenant concentration
This is commercial property, which normally doesn't have the risk mitigating tenant profile of residential property.

Tenant composition 31.09.2013Total GRI (%)
Deutsche Post 39.6
ERGO Direkt 3.2
Imtech 2.5
AIG Europe Limited 2.2
Google Germany GmbH 2.1
BNP Paribas Fortis SA/NV 2.1
State of Bavaria/Technische Universität München 1.6
Maersk Deutschland A/S & Co. KG 1.5
Jobcenter Berlin Mitte – Federal Employment Agency 1.4
Deutsche Telekom 1.4
Other third-­‐party tenants 42.4
Total 100

This means a more in depth look at the conctracts with their main tenant Deutsche Post is warranted. Overall I don't see any risk due to bankruptcies of the blue-chip tenants. Some of the space leased to Deutsche Post is occupied by Deutsche Postbank.
Deutsche Post committed to remain in approximately 764,000 square feet of space pertaining to its 2014 early termination rights and exercised its termination rights with respect to 1.1 million square feet, or approximately 5.1% of the Trust’s current GRI. As a result of working closely with Deutsche Post and focusing on better understanding its space requirements, we have retained it as a tenant in many of our properties for extended terms. Of the 1.1 million square feet of terminated space, we have plans to re-­lease, redevelop or sell approximately 519,000 square feet. This leaves a balance of approximately 641,000 square feet to be dealt with going forward through similar actions. As part of the lease extensions, we agreed to provide Deutsche Post with an annual rent reduction of €1.7 million per year, effective as of July 1, 2014. Based on recent inflation rates in Germany, we anticipate that prior to July 1, 2014, this reduction in annual rent will be substantially offset by CPI rent adjustments provided in the terms of the Deutsche Post leases. In addition, the REIT will make a one-­time payment to Deutsche Post of €1.45 million to be used to improve the buildings and the tenant’s space.
The leases with Deutsche Post, which generally expire on June 30, 2018 (many of which provide Deutsche Post with an option to extend the term until June 30, 2023), comprise approximately 51% of the portfolio’s GLA and account for 40% of the portfolio’s GRI.

 Deutsche Post may terminate Deutsche Post leases and Caroline DP Leases aggregating no more than 20% of the total annual Reference Rent payable under all of the Deutsche Post leases and Caroline DP Leases on June 30, 2014, and no more than an additional 10% of such rent on June 30, 2016. The “Reference Rent” for a lease is an amount set out in a specified notarial deed and may differ from the actual rent payable under the lease. To the extent that Deutsche Post does not exercise all of its available early termination rights with respect to any particular effective termination date, the unused portion may be carried forward, provided that Deutsche Post cannot terminate Deutsche Post leases and Caroline DP Leases aggregating more than 20% of the total Reference Rent of all Deutsche Post leases and Caroline DP Leases, considered as a whole, during any lease year.
This means there is subtantial risk regarding the Deutsche Post leases. Until June 2014, the Trust receives payments pursuant to a head lease for space terminated by Deutsche Post in 2012. Due to these payments, it effectively receives rent for approximately 91% of the space in the overall portfolio as at September 30, 2013. When this head leases fade away there will be an impact on the cashflows per unit. I think this tenant concentration may be the main reason Dundee International Reit is so cheap in relation to its current cashflows.

The lower in-place rent of the Deutsche Post properties in relation to market rent according to the quarterly report may mitigate some of the risk of re-letting the space. But as managment has granted Deutsche Post some discounts for the not terminated space I would take their market rent estimate with a grain of salt.

in-place rent 31.09.2013Market rent
€/m²/month overall€ 7.41€ 7.67
initial properties Deutsche Post€ 5.05€ 5.53
initial properties other€ 4.96€ 5.70
Acquisitions 2012 and 2013€ 14.18€ 13.63

Fee Structure

The REIT entered into an asset management agreement with DRC (“Asset Management Agreement”) pursuant to which DRC provides certain asset management services to the REIT and its subsidiaries. The Asset Management Agreement provides for a broad range of asset management services for the following fees:
  •  base annual management fee calculated and payable on a monthly basis, equal to 0.35% of the historical purchase price of the properties;
  •  incentive fee equal to 15% of the REIT’s adjusted funds from operations per unit in excess of $0.93 per unit; increasing annually by 50% of the increase in the weighted average consumer price index (or other similar metric as determined by the trustees) of the jurisdictions in which the properties are located;
  • capital expenditures fee equal to 5% of all hard construction costs incurred on each capital project with costs in excess of $1,000, excluding work done on behalf of tenants or any maintenance capital expenditures;
  • acquisition fee equal to: (a) 1.0% of the purchase price of a property, on the first $100,000 of properties in each fiscal year; (b) 0.75% of the purchase price of a property on the next $100,000 of properties acquired in each fiscal year; and (c) 0.50% of the purchase price on properties in excess of $200,000 in each fiscal year. DRC did not receive an acquisition fee in respect of the acquisition of the Initial Properties; and 
  • financing fee equal to 0.25% of the debt and equity of all financing transactions completed on behalf of the REIT to a maximum of actual expenses incurred by DRC in supplying services relating to financing transactions. DRC did not receive a financing fee in respect of the acquisition of the Initial Properties. 
As  my adjusted funds from operations per unit annualized is below 0.80 and number of units is increasing due to DRIP and CPI for Germany is positive, I don't view the incentive fee of 15% as dilutive for investors at current prices. The acquisition fee and financing fee I don't like because they promote a high asset turnover, which I don't view to be in the best interest of unitholders. I hope the company is not planning to do capital expenditures, as there is more risk involved than in just holding a portfolio. Thus I hope this fee will not come to fruition, but it kind of clouds the outlook. Who knows what's to come?


31.09.2013of totalper adj. diluted unit
Investment properties2,185,36093.45%CA$ 19.84
Cash115,8324.95%CA$ 1.05
Amount in escrow8,8570.38%CA$ 0.08
total assets2,338,427100.00%CA$ 21.23
Debt1,287,41055.05%CA$ 11.69
Derivative financial liabilities22,4810.96%CA$ 0.20
Distributions payable7,2860.31%CA$ 0.07
equity979,72141.90%CA$ 8.89
Judging from the balance sheet Dundee International Reit doesn't look cheap. It trades just slightly under book value. On the other hand the operating figures are quite well. The leverage works clearly in favour of this company:

Three months ended September 30th, 2013CAD '000per unit*4yield @8.77
Investment properties revenue56,915CA$ 0.52CA$ 2.0723.56%
Net rental income 39,479CA$ 0.36CA$ 1.4316.34%
Funds from operations23,001CA$ 0.21CA$ 0.849.52%
Adjusted funds from operations21,371CA$ 0.19CA$ 0.788.85%
distribution per month and year
CA$ 0.07CA$ 0.809.12%

Dundee International Reit is no balance sheet bargain. The visibility regarding the return of capital to unitholders, mitigates much of the long-term uncertainty. The spread of the yield over German Bunds makes this interesting. The unitholders would be fine without any capital appreciation, because of the yield. I have initiated a small long position in Dundee International Reit. Goal is to increase downside protection in  equity portfolio because I think the markets are not cheap these days. If the stockmarkets would be to fall I would rotate back into non real estate equities, which I perceive to have lower downside riks as shown for IMW and KWG. If the markets continue to perform well this real estate equities are certain to underperform. IMW and KWG provide cheap assets at reasonable price to cashflows and Dundee cheap cashflows at reasonable asset prices.

[Author is long IMW, KWG, DI-UN.TO)