Monday, 6 January 2014

IMW Immobilien vs KWG Komunale Wohnen

One my favourite bloggers Wexboy has chosen KWG as his best investment into German residential property. I am both long IMW and KWG. That makes a comparison of both companies interesting.

Market cap and trading segment

namelast price#sharesmcapsegment
KWG Komunale Wohnungen€ 6.3615,881,234101,068,173Entry Standard
IMW Immobilien€ 3.4016,466,66655,986,664General Standard

The market cap of KWG with 101M is almost double the market cap of IMW with 56M. IMW is listed in the General Standard and has to meet ongoing transparency requirements of the Regulated Market:
  • ad-hoc-disclosure
  • use of international accounting standards (IFRS/ IAS or US-GAAP),
  • publication of interim reports.
Whereas KWG is not subject to the high Europe-wide transparency standards and strict provisions for investor protection on organized markets as it is listed on the open market.

This is clearly an advantage of IMW. The cost for listing in the General standard is only 2,500€ more than in the entry standard, which means there is no excuse for KWG.

To be fair the CEO of IMW holds the share 000.001, which according to the articles of association gives the power to appoint one member of the supervisory board. Thus IMW trades on the better market segment but has a corporate governance issue due to this special right.

It's not apples to apples as IMW has pure commercial office property in its portfolio. The Dukes Court office property is located in the UK, Woking  in the Greater London Urban Area and the London commuter belt. Furthermore IMW has a significantly lower vacancy than KWG, which is serial aquirer of undermanaged property portfolios with high vacancy.

qmValbonne Dukes Court Austerlitz Falcon Crest sum
vacancy 3/20132,7%11,8%26,4%0%3,92%
€/qm 3/20137732.6822.0371.574946
€/qm 9/20137842.8422.0371.574966

The portfolio of KWG is  more scattered among Germany than IMW's. Over half of the portfolio of KWG per m² is situated in North-Rine Westfalia, whereas the chunk of IMW's is situated in Berlin (Valbonne, 292,200m² of 329,300 total).
portfolio of KWG [company presentation]
Some of the properties of KWG have a mixed use between residential and commercial. KWG has no office space, but sometimes retail units are integrated into the property. There is no exact split in their reports, but the homepage gives more details. Mixed use, I think, is a positive as commercial rents tend to be higher. The portfolio has evolved as follows in the first six month. The property in Wolfsburg was sold.


UnitsParkingSize in m2UnitsParkingSize in m2
Total portfolio 9,6362,623601,7109,4772,575591,901
North Rhine-Westphalia4,7511,652324,2914,6911,632319,920
Dortmund 1373611,748-1.26%-1.21%-1.35%
Düsseldorf 2015412,171

Gelsenkirchen 14608,799

Mülheim 1767312,926

Oberhausen 1519211,508

Bochum 42821031,470

Wuppertal 2,995878199,774

Hagen 2546515,037

Other NRW 26324420,859

Berlin, total 1,0223463,7891,0243263,785
Mitte 6792241,2550.20%-5.88%-0.01%
Neukölln 14609,010

Schöneberg 4603,435

Treptow-Köpenick 5102,883

Other Berlin 100127,206

Saxony, total 1,86853399,2051,86853699,195
Hainichen 96844251,8680.00%0.56%-0.01%
Glauchau 3463517,573

Chemnitz 2505614,937

Bernsdorf 304014,828

Lower Saxony, total 1,32740479,9461,22635574,522
Braunschweig 1982611,439-7.61%-12.13%-6.78%
Wolfsburg 160779,379sold
Delmenhorst 4425721,859

Celle 23812518,342

Other Lower saxony 28911918,927

Thuringia, total 668034,479668034,479
Erfurt 347017,1620.00%0.00%0.00%
Bad Langensalza 321017,317

To really get a feeling about the value of the properties one would have to know the valuation in each of the micro locations in the corresponding cities. Selling the Wolfsburg property was a good decision in my opinion. The Wolfsburg market is very much dependant on Volkswagen, which is doing well for now, but it is a cyclical.

Based on the figures for the first half of the fiscal year KWG:01.01.2013-30.06.2012 IMW:01.04.2013-30.09.2013 the following table shows a short comparison:

total m²property valueEuro/m²gross cold rent H1yield annualized
KWG 591,901429,492,79472615,630,0007.28%

Notably the yield of KWG is higher, but IMW started the fiscal with high vacancies in their more expensive (per m²) portfolios Dukes Court (11.8) and Asuterlitz (26.4). Overall vacany for IMW per m² was just 3.92%. KWG started with vacancy of 1.6% in their core portfolio, which has risen to 2.8% in the first half due to integrating aquired properties into the core portfolio.

Balance sheet 

The most recent balance sheets look as follows.

[Euro]total assetsequityfinancial debtproperty valueminoritiescash&equivalents

Overall the balance sheets look quite similar. KWG has a slightly higher equity ratio.

1Financial Derivative Liabilities6,389,0030
1minority interest book3,884,7957,054,681
0.5Pension/Employee Liabilities470,181851,542
1Remaining purchase price liability Dukes Court2,7000
1Cash/Marketable Securities-11,710,354-3,690,710
1short-term financial assets-7,294,9440



LTV looks familiar, too. IMW has a slightly lower LTV, but both are in a healthy region. Let's look at the interest expense and implied rate next.

interest expense H1debtimplied rate

In H1 IMW has paid for Valbonne portfolio interest for an implied yield of 4.2%. This debt of 133M will be refinanced in 2014  with 136M for ten years at 3.6% fixed.  The expensive Dukes Court loan has a duration till 2015. Refinancing could lower interest expenses further. KWG has not that much room to lower interest expenses going forward.

On a per share basis IMW looks a little bit cheaper than KWG.
per sharelast priceequityP/Bnon-current Deferred tax liabilityP/(eq+tax)
KWG€ 6.36€ 10.700.59€ 1.030.54
IMW€ 3.40€ 7.410.46€ 0.950.41

 Cost structure
H1 2013staff costDepreciation and amortisationother normalizedExpenses related to investment propertysumsum/gross cold rent

KWG has the far better cost structure. IMW is burning nearly half of the gross cold rent away. Both companies are very undervalued on an asset basis, but have not so much showing for them regarding the bottom line before special effects like fair value of properties.

I am long both companie's shares.  Both companies are trading below liquidation value. The share price has some downside protection due to the underlying hard assets. I don't believe a P/B=1 is warranted with the current cost structure. In the end it is not enough to be relatively cheap compared to other real estate companies. Due to the already taken measures I think both companies will improve their bottom line and may initiate a dividend in the next years. IMW's dividend proposal was voted down at the annual meeting, but taking into acccount further debt repayments I won't vote against future dividends. Markets are not cheap these days and I don't see how I could loose money with these companies. The upside just isn't huge either barring a liquidity event to realize the underlying value. If for example IMW would sell the whole company, in my opinion they could fetch a price near book with >100% upside.


  1. Hi Martin, as a fellow KWG shareholder I was wondering about the same questions you were looking at, when I read your IMW analysis. I think one additional point to consider for KWG is the greater than 75% stake Conwert has and what that means for minority shareholders. At some point they'll probably want to squeeze us out, yet it's not clear how fairly the price paid there will be or what other ways they might find to abuse their position in the meantime.

  2. Hi Georg, thanks for commenting.
    For Conwert as a whole the remaining ~25% stake in KWG is minuscule, which means it would'nt hurt to pay a fair price (book value). On the other hand there a tax implications if you buy a whole company outright, which owns real estate due to the complicated German tax code (Grunderwerbsteuer). At current prices I think it's best for conwert to buy more stocks via stock exchange and/or buy back its own shares.

    If you do speak German, have a look at an other Conwert sub with 95.8% owned:
    This could be a proxy what's to come for KWG.

  3. Hi Martin, all true (didn't know about the Grunderwerbssteuer), yet if you look at the share price of Eco Immobilien, it seems to me that if that's the future of KWG I might not want to be part of it.

    At some point conwert would have to make a formal "Übernahmeangebot", but until then they can just keep picking up shares for the cheap (or not). So I don't quite see so much upside potential for the shares, although the downside seems to be pretty well protected as well...

    Keep up the good work and good luck for 2014!

  4. Hi Georg, it seems you come to a similiar conclusion.

    At the moment I am more interested in downside protection than in sky high upside. Inflation and interest rates are low, which means it doesn't cost much to wait and see. The measures already in place will in my opinion increase intrinsic value of KWG in the next years. Moderniserungsumlage ensures nice ROI.