Wednesday, 19 November 2014

Update IMW Immobilien

Sale of Dukes Court
On 16.09.2014 IMW informs about the sale of Firefly Ltd., the company which owns IMW's UK property Dukes Court, for about GBP 60m. The sales price translates into roughly €75.2m. At the time of the sale Dukes Court was fully let.
At the last balance sheet date (31.03.2014) Dukes Court was valued at €67.7m, using a discount rate of 7.38%.  The vacancy was 3.4% at the time of the valuation (now fully let). The corresponding debt was €36.2m, which means IMW can expect a residual cash flow of about €39m. The profit is ~€7.5m less corresponding cost. Because the sale was a share deal, I do not expect significant cost. IMW intends to invest the proceeds into other real estate projects.

Approximation of IRR for Dukes Court Investment
Dukes Court was bought for GBP 52m or €61.1m in 2012. It generated a profit of €0.7m for fiscal year 2012/2013 and €1.4m for 2013/2014. Investments into Dukes Court were €3.8m and €4.0m respectively. Plugging the numbers into a table results in this unlevered return:

Cash flow
year 1 -61,1
year 2 -3,1
year 3 72,6
IRR 6,5%

We know this is not the right IRR due to ignoring derivatives, debt and timing of cash flows. Additionally no G&A expenses and transaction cost were allocated. But overall the investment was not as bad as expected by me in 2012. Although concentrating on Berlin residential properties would have yielded better results. A buy-back would have yielded the best returns for shareholders.

AGM on 29.09.2014
  • dividend of 0.04€ per share rejected
  • renewal of the right to purchase own shares

The company intends to downgrade their listing from the general to the entry standard of the Frankfurt stock exchange.

Asset based valuation
This is just my estimate of pro forma LTV and could be off:

30.09.201331.03.201331.03.2014pro forma
1Financial Derivative Liabilities6.389.0039.3993.5073.507
1minority interest book3.884.7953.7204.2954.295
0.5Pension/Employee Liabilities470.181455430430
1Remaining purchase price liability Dukes Court2.7009.70000
1Cash/Marketable Securities-11.710.354-26.297-10.684-48.754
1short-term financial assets-7.294.944-5.476-2.742-3.990
1other long-term assets ( pledged bank deposits)0-1.00000



IMW is not distressed and can be valued as a going concern. LTV has improved from 53.5% since my last post on IMW due to earnings and the sale of Dukes Court.

#sharesequitydeferred taxP/EQP/(EQ+DT)price
3/31/201416,466,6668.57 €1.07 €0.820.73€ 7.00
pro forma16,466,6669.21 €1.07 €0.760.68€ 7.00

 IMW is not as cheap in the past, but still trades under book at a price of €7.00. At a p/b of 1.0 IMW would trade at €9.21.

Earnings based valuation

A valuation based an earnings/cash flows is difficult because of the uncertainty regarding the reinvestment of the proceeds of the sale of Dukes Court.

Outlook for 2015:
Zu Beginn des neuen Kalenderjahres 2015 fallen rund 1.900 Wohneinheiten aus der bisherigen Nachwirkung der Förderung des sozialen Wohnungsbaus. Dies versetzt uns in die Lage, moderate Mietpreisanhebungen vorzunehmen, die auf Jahressicht zu einem Anstieg der Mieterlöse im Konzern von rund 6 % auf etwa € 19,3 Mio. führen sollen.
IMW expects to increase gross rental income from € 18.2m 2013/2014 to € 19.3m. Let us assume € 1.1m will flow right to the bottom line. The revaluation of the Vorratsimmobilie and 50% of "Risikovorsorge für Betriebsprüfungen" was added back as these items are non-recurring. For the tax audit I was not sure and added only 50% back.  € 3.1m maintenace cap-ex is included in the following figures for continued operations:

EBIT from continued operation before revaluations9,91611,016
add back revaluation Vorratsimmobilie300300
add back 50% of "Risikovorsorge für Betriebsprüfungen"400400
Interest expense-6,249-5,600
add back interest expense due to tax arrears5480
normalized income before tax4,9156,116
theoretical tax @15.825%778968
normalized earnings4,1375,148
per share€ 0.25€ 0.31

Taking into account the cash proceeds of ~€ 39m or € 2.4 per share due to the sale of Dukes Court is difficult, as we do not know on which projects the money will be spend. Investments into the Valbonne portfolio in Berlin will be self-financed.

Putting a multiple of 20x on earnings, not outlandish for Berlin residential property, and adding € 2.4 would imply a price of € 8.6 per share.

In November 2013 IMW signed a € 136m loan for ten years at 3.6% p.a. The spread to the 1.705% of the 10-year Bund was 1.9%. With the Bund (risk-free rate) now at 1.1% this implies a pre-tax cost of debt of 3.0%. The labor cost of € 2.5m for fiscal 2013/2014 will not rise proportionally with new investments. That is why I was against the dividend, which was not approved at the AGM. Taking into account the cost basis adding back the € 2.4 may be too low. But the management team in place has not earned the capital cost for the business.

For the time being I will hold on to my remaining position. At a price of 8.6€, I would sell. As my position was very big, the position was trimmed significantly above 7€ already.