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

name	last price	#shares	mcap	segment
KWG Komunale Wohnungen	€ 6.36	15,881,234	101,068,173	Entry Standard
IMW Immobilien	€ 3.40	16,466,666	55,986,664	General 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.

Property
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.

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	946
€/qm 9/2013	784	2.842	2.037	1.574	966

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.

	31.12.2012			30.06.2013
	Units	Parking	Size in m2	Units	Parking	Size in m2
Total portfolio	9,636	2,623	601,710	9,477	2,575	591,901
North Rhine-Westphalia	4,751	1,652	324,291	4,691	1,632	319,920
Dortmund	137	36	11,748	-1.26%	-1.21%	-1.35%
Düsseldorf	201	54	12,171
Gelsenkirchen	146	0	8,799
Mülheim	176	73	12,926
Oberhausen	151	92	11,508
Bochum	428	210	31,470
Wuppertal	2,995	878	199,774
Hagen	254	65	15,037
Other NRW	263	244	20,859
Berlin, total	1,022	34	63,789	1,024	32	63,785
Mitte	679	22	41,255	0.20%	-5.88%	-0.01%
Neukölln	146	0	9,010
Schöneberg	46	0	3,435
Treptow-Köpenick	51	0	2,883
Other Berlin	100	12	7,206
Saxony, total	1,868	533	99,205	1,868	536	99,195
Hainichen	968	442	51,868	0.00%	0.56%	-0.01%
Glauchau	346	35	17,573
Chemnitz	250	56	14,937
Bernsdorf	304	0	14,828
Lower Saxony, total	1,327	404	79,946	1,226	355	74,522
Braunschweig	198	26	11,439	-7.61%	-12.13%	-6.78%
Wolfsburg	160	77	9,379	sold
Delmenhorst	442	57	21,859
Celle	238	125	18,342
Other Lower saxony	289	119	18,927
Thuringia, total	668	0	34,479	668	0	34,479
Erfurt	347	0	17,162	0.00%	0.00%	0.00%
Bad Langensalza	321	0	17,317

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 m²	property value	Euro/m²	gross cold rent H1	yield annualized
KWG	591,901	429,492,794	726	15,630,000	7.28%
IMW	329,300	321,965,040	966	11,074,055	6.88%

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 assets	equity	financial debt	property value	minorities	cash&equivalents
KWG	442,683,731	170,005,512	231,874,346	429,492,794	7,054,681	3,690,710
%	100.00%	38.40%	52.38%	97.02%	1.59%	0.83%
IMW	343,947,729	121,993,750	180,449,546	321,965,040	3,884,795	11710354.08
%	100.00%	35.47%	52.46%	93.61%	1.13%	3.40%

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

		IMW	KWG
weight		30.09.2013	30.06.2013
1	Borrowings	180,449,546	231,874,346
1	Financial Derivative Liabilities	6,389,003	0
1	minority interest book	3,884,795	7,054,681
0.5	Pension/Employee Liabilities	470,181	851,542
1	Remaining purchase price liability Dukes Court	2,700	0
1	Cash/Marketable Securities	-11,710,354	-3,690,710
1	short-term financial assets	-7,294,944	0
sum		172,190,927	236,089,859
	Current/Non-Current/Property	321,965,040	429,492,794
	LTV	53.48%	54.97%

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 H1	debt	implied rate
KWG	4,744,815	231,874,346	4.09%
IMW	4,288,461	180,449,546	4.75%

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 share	last price	equity	P/B	non-current Deferred tax liability	P/(eq+tax)
KWG	€ 6.36	€ 10.70	0.59	€ 1.03	0.54
IMW	€ 3.40	€ 7.41	0.46	€ 0.95	0.41

 Cost structure

H1 2013	staff cost	Depreciation and amortisation	other normalized	Expenses related to investment property	sum	sum/gross cold rent
KWG	1,947,355	104,905	1,460,000	2,715,048	6,227,309	39.84%
IMW	1,231,995	34,971	1,718,000	2,356,324	5,341,291	48.23%

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.

Conclusion
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.