Monday, 28 April 2014

Quick look at spin-off: BUWOG

 Research has pointed to spin-offs as being well worth resarching in the pursuit of alpha. I have not added new holdings to my portfolio in the recent past, although adding to IMW Immobilien (blogposts), when it fell under 3€. This is just a preliminary look at BUWOG.

"BUWOG AG has successfully completed its spin-off from IMMOFINANZ AG. The BUWOG share (ISIN: AT00BUWOG001) has been listed in the Prime Standard of the Frankfurt Stock Exchange (main listing) and the Prime Market of the Vienna Stock Exchange for the first time today. Trading with BUWOG shares opened at EUR 13.00 in Frankfurt, which represents a market capitalisation of approximately EUR 1.3 billion based on this initial price.  In connection with the spin-off, IMMOFINANZ shareholders received one BUWOG share per every 20 IMMOFINANZ shares in their portfolios. At the present time, 51% of BUWOG’s 99,613,479 bearer shares are held in free float. IMMOFINANZ currently holds 49% of BUWOG’s share capital, but plans call for the reduction of this holding over the medium-term. [immofinanz]"

The plan of Immofinanz to reduce their 49% holding could lead to an overhang of shares in the medium-term, which may results in an attractive entry point. There is a 90 days lock-up period for IMMOFINANZ. BUWOG has posted a presentation on their website.

Business model

BUWOG main business is Asset Management complemented by Property Development and Property Sales and they are active in the residential markets of Autria and Germany. Results from Property Development and Property Sales are more lumpy and less predictable than asset management, which is why my portfolio holdings in the real estate market focus on asset management.

The company expects a payout ratio of 60-65% and an amount of about 4% of EPRA NAV. My first feeling is

The portfolio is located in major cities. You can easily see why the company focuses asset sales on Austria and unit purchases on Germany. The rental yields are simply higher. The reason is a regulated rental market in Austria which makes it very hard to increase rents even when market rents are way higher. This makes an immediate sale ofter a units gets vacated highly value adding, although selling does not necessary increase NAV. If you are not allowed to charge  market rent you have to sell at the market price to realize value.

At first sight it's astonoshing to see this rent increases in their Autrian portfolio in the past despite the restrictions, but the footnote explains it is not like‐for‐like, i.e. disposals and development affect these numbers. The vacancy is low with 2.9% for Germany and 5.5% for Austria, where the vacated units are marketed for sale. I wouldn't worry about the vacany in Austria as reletting would be faster than selling. Selling the Austrian units is the right choice for shareholders.

The development segment is focused on Berlin and Vienna exclusively which makes the company more exposed to these markets than the current portfolio implies.
The maturity profile is long-term. Average interest rate of 2.6% is low and 90% is fixed rate or hedged. Subsidized loans (for development) make up 36% and bank financing 54%. The problem with bank financing is that it is actually short-term if problems arise due to covenants. Covenants are not on the presentation slides.

For a market cap around €1.3 billion the FFO generation is unimpressive. Recurring FFO for 2012/2013 of 79.3 over the market cap of 1.3billion is ca. 6.1%. The figures are available because BUWOG has been operating as a stand-alone company under ownership by IMMOFINANZ.

The company trades at a 14% discount to book and 22% discount to EPRA NAV. If the dividend really comes in at 4% of EPRA NAV dividend yield would be 5.1%. At a payout of 60-65% recurring FFO had to be €102m - €111m.
The improvement of FFO would be unrealisitc where it not for a recent purchase and the definition of recurring FFO by the company, which includes unit sales.


The price is not attractive enough for me to purchase shares. If the price falls significantly due to Immofinanz selling, I would take a closer look. At the moment the small real-estate companies in the portfolio are priced more attractively.
The lack of attractive portfolio additions is also the reason why there are so few posts in the recent past. Maybe it is more rewarding to search for holdings in the portfolio to sell than to look for new portfolio candidates.