The next chart shows gross rental income for all four portfolios. Even though one tenant went bankrupt traling twelve month (TTM) rental income for Dukes Court is higher than last accounting year. Valbonne is the most important portfolio by far and the newly aquired Dukes Court is larger than the rest excl. Valbonne combined.
A quick check to see whether valuation of the properties is supported by rent is easily derived by dividing the actual gross rental income by property value. This produces the following chart:
The rental yields don't seem to be outlandish and values are supported by rents. The Valbonne portfolio is mainly residential whereas all other portfolios are commercial. Most of the times commercial yields are higher due to higher tenant concentration, higher depreciation of property and higher volatility than residential yields. At IMW oddly all yields seem similiar. This is caused by the Discounted-Cash-Flow (DCF)-Model used to value the properties. Their model imho undervalues Valbonne and overvalues the rest.
The higher yield of Dukes Court TTM is due to lower valuation of the property. Increased vacancy will cause yield for full 2013/2014 to be lower than in the chart.
Overall vacancy per m² at 30.09.2013 was 3.7% compared to 3.9% at 31.03.2013. This means actual gross rental income has no large room to grow due to lower vacancy. Management is confident to lower vacancy to 3.0% at the end of the business year 2013/2014 because of already achieved new lettings.
This chart shows property value and debt per portfolio. Falcon Crest is nearly debt free.
In the folowwing table are LTVs of the portfolios (debt/property value) and IMW as a whole.
| Valbonne | Dukes Court | Austerlitz | Falcon Crest Hannover | IMW | |
| 03/2013 | 58,74% | 72,23% | 69,89% | 0,19% | 54,72% |
| 9/2013 | 58,49% | 67,36% | 70,71% | 0,16% | 53,48% |
LTV for IMW was calculated as follows:
| weight | |||
| 1 | Borrowings | 180.449.546 | 182.090 |
| 1 | Financial Derivative Liabilities | 6.389.003 | 9.399 |
| 1 | minority interest book | 3.884.795 | 3.720 |
| 0.5 | Pension/Employee Liabilities | 470.181 | 455 |
| 1 | Remaining purchase price liability Dukes Court | 2.700 | 9.700 |
| 1 | Cash/Marketable Securities | -11.710.354 | -26.297 |
| 1 | short-term financial assets | -7.294.944 | -5.476 |
| LTV | 53,48% | 54,72% |
LTV and yield are in a acceptable range and don't seem to be the reason why IMW is valued far below book by the market.
In the following table is the distribution of squaremeter (qm) per portfolio and value per qm:
| qm | Valbonne | Dukes Court | Austerlitz | Falcon Crest | sum |
| commercial | 3.200 | 20.500 | 9.800 | 6.800 | 40.300 |
| residential | 289.000 | 0 | 0 | 0 | 289.000 |
| sum | 292.200 | 20.500 | 9.800 | 6.800 | 329.300 |
| vacancy 3/2013 | 2,7% | 11,8% | 26,4% | 0% | 3,92% |
| €/qm 3/2013 | 773 | 2.682 | 2.037 | 1.574 | |
| €/qm 9/2013 | 784 | 2.842 | 2.037 | 1.574 |
With some figures out of the explanation of the DCF in the annual report 2012/2013, I calculated a interesting potential yield for Valbonne at current valuation. Rent control in the Valbonne portfolio will end in 2014 and they can start increasing rents at a faster rate. IMW has refinanced their Valbonne related debt with a syndicated loan. Credit period is 10 years and interest rate is fixed at 3.6% p.a.
Die IMW Immobilien SE, Berlin, hat mit einem Bankenkonsortium einen Kreditvertrag über ein Darlehen mit einem Gesamtvolumen von rund € 136 Mio. abgeschlossen. Das Darlehen dient zur Ablösung des im Jahr 2014 zu refinanzierenden Kredits im Portfolio Valbonne 3 (Gropiusstadt) sowie zur weiteren Umsetzung des bereits begonnen Investitionsprogramms.In the next 5 years modernization for around 35 millions are planned in the Valbonne portfolio. For a considerable part of the investment §559 BGB is applicable as per management, which will lead to increased rental income. Rent can be increased by 11% of the incurred cost if applicable. Maintenance capex has to be subtracted from cost, but the amount can be estimated. In times of low interest rates this produces a nice IRR for landlords in Germany and IMW is poised to profit.
Der Kredit hat eine Laufzeit von 10 Jahren bei einem Zinssatz von ca. 3,6 % p.a. und marktüblichen Konditionen.
| 31.03.2013 | Valbonne | calculated | |||||
| residential | 4,43 | 93% | 5,69 | 15.363.240 |
7,21%
| 19.732.920 |
9,26%
|
| commercial | 30,11 | 7% | 1.156.373 | 1.485.274 |
Some data point are given in the appendix regarding the DCF for Austerlitz:
| 31.03.2013 | Austerlitz | qm | gross rent | implied yield |
| 1.414.728 | ||||
| market rent | 12,34 | 1.451.184 | 7,27% |
Austerlitz portfolio doesn't have as much potential for increases as Valbonne. Even at market rent and with zero vacancy yield would be just 7.27%.
For Dukes Court the appendix (annual report) produces:
Bei der Bewertung der Immobilie Dukes Court wurde das in Großbritannien übliche Marktbewertungsverfahren nach den RICS Valuation – Professional Standards (Hardcore und Top Slice-Verfahren) unter Nutzung der Software ARGUS angewendet. Dabei wird jede Mietvertragsfläche separat bewertet. Die dabei verwendeten Kapitalisierungszinssätze wurden je nach Laufzeit des Mietvertrages und Bonität des Mieters mit 7,0% oder 8,75% angesetzt. Für Leerstandsflächen wurde eine Leerstandsdauer von 12 Monaten und ein Kapitalisierungszinssatz von 9,5% verwendet. Bei der Ermittlung des Cashflows hatMarket rent over 5-10 years is estimated between 17.5 and 21.0 GBP per squarefoot (=0.09290304m2). Using the same exchange rate as the report (31.03.2013: 1,185 EURO/ GBP produces the following table:
man bei den neu abgeschlossenen Mietverträgen eine mietfreie Zeit von 12 Monaten bei einer Laufzeit von 5 bis 10 Jahren und eine jährliche Marktmiete von 17,5 bis 21,0 GBP je Quadratfuß angenommen.
| market rent gpb/ft² | euro | euro/qm | qm | gross rent | implied yield |
| 17,50 | 20,74 | 223,22 | 20.500 | 4.575.940 | 7,85% |
| 21,00 | 24,89 | 267,86 | 20.500 | 5.491.128 | 9,42% |
Implied yield with zero vacancy looks good, e.g. compared with the 5.3% (330T/6.2 Mio.) of sold Falcon Crest properties in September 2012 . Maybe Dukes Court isn't that bad after all, if vacancy of 11.8% as of 03/2013 is a temporary issue. It can make sense to redeploy capital at higher cap rates, as for example Conwert is doing by switching assets from Austria with lower cap rates into German assets. But why switch from Germany to UK and loose economies of scale?
Conclusion
LTV and property yields don't show extreme overvaluation of properties. IMW is a balance sheet bargain at current market price of 3.2€.
Maybe P&L and cashflows will give a hint, whether IMW is a good investment. Maybe the cost structure is a weakness. Management was already identified as potential weak spot in part 1, as the logic of the purchase of Dukes Court isn't comprehensible for me. Lack of buy-backs at low prices and laggard performance of share price and low ROE despite secular tailwind from the German property market leave much to be desired. Aditionally there a little too much related party transactions for my taste. We have to trust in management to make deals at arm's length.
[disclaimer: author is long IMW, Please do your own research.]
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