Updates on Positions

Asseco Central Europe

Asseco Poland is tendering for the remaining  6.49% shares of Asseco Central Europe, they do not currently own.
The tender offer price is 23.5 PLN.
This compares to a 52w high of 26 and a current bid of 23.8.
I see no reason to tender my shares at this price. The premium is not there. If Asseco Poland wants to delist the shares so be it, but they will still have cost to provide for minority shareholders. Better for them to pay more.

tender price	23.5
bid	23.8
ask	24
52 weeks high	26
P/BV	1.12
P/E	10.3
Dividend yield (%)	9.4

The company still has more cash than debt. Although it is not as cheap as when bought around 16 PLN.

IMW Immobilien

IMW immobilien is tendering for its own shares at €7.50 per share. The company is still delisted, but share traded on the local Hamburg stock exchange for a short while around €7.50.
The offered price is too low. Their residential real estate in Berlin has increased in value, but this does not show up in the numbers. Book value per last report is €111 million using the conservative German HGB accounting, but economic value is higher. Remember the rents are at the low end of the spectrum and it is impossible to built new objects economically at such rates. This means the rents will increase sustainably for their kind of real estate. I sold all my shares above €9 before repurchasing. Fundamentals for their properties just kept improving and now comes this offer. I would be fine with many other shareholders accepting, so they can pay a real price next time for the rest and still make an unjustified killing for themselves in the future. After all it is dumb German money. So who knows how much shares will be tendered.

KWG Komunale Wohnen
The bok value per 3/31/2016 reached €10.95. I think this is the minimum one should get for the shares. operations are improving and costs are shrinking.

In April/2016 Conwert acquired 7.5% shares via their tender offer for €10.80 per share and reached 87% of shares.

In the meantime German DAX constituent Voniva expressed their intent to take-over Conwert.  Conwert shareholders are to receive 74 Vonovia shares per 149 Conwert shares.

conwert Immobilien Invest SE

VIE:CWI

16.200

1.40%

-1.38%

15.98

Vonovia SE

ETR:VNA

32.170

With Vonovia's shares falling over the last month, the current ofer is €15.98 and the spread is negative (ignoring potential dividends).

When Vonovia acquires Conwert the more synergies to be of benefit to KWG. This will lower cost of debt via cash pooling. Banks are simply willing to lent larger sums at lower interest rates. I do not like this, but for now this are economies of scale for such capital intensive companies like real estate companies.

Hornbeck Offshore
My last blog post is from June. I just did not have the time and the blog did produce almost no feedback except spam comments. So I did not update. In the meantime I have sold my HOS shares for more than double the current price of around $8 at a loss. For now the equity is in distress. It is more like a call option on higher and stable oil prices, which would increase activity in the Gulf of Mexico. The publicly tradable bonds could be the fulcrum and trade at equity like yields. I may rather buy the debt here if at all. The company has Jones act vessels. Could even benefit from Trump.

I have some other positions in my portfolio. Please let me know if you are interested in me keeping to write posts.

Update KWG / bought Flughafen Wien / Macro Enterprises

KWG

After selling most some of my other real estate holdings (IMW,Sirius), the first idea is of course to increase positions, which have not performed according to my expectations.

The LTV is still in the green:

	31.12.2013	30.06.2014
Borrowings	235,475	229,977
Financial Liabilities	4,248	3,440
minority interest book	5,879	6,038
accrued taxes	166	312
1/2 pension liabilites	832	849.5
heating equipment PV	812	812
Cash/Marketable Securities	(7,043)	(6,427)
Financial Assets	(996)	(852)
sum	239,373	234,150
Current/Non-Current/Property	424,476	421,133
LTV	56.39%	55.60%

The problem with KWG is the low FFO cashflow:

	H1/2013 restated	H1/2014	normalized	annualized	2015*
Vermietungserlöse	22,513	22,156	22,156	44,312	46,158
Veräußerungserlöse aus zum Verkauf gehaltenen Immobilien		2,621		0
Veräußerungserlöse aus als Finanzinvestitionen gehaltenen Immobilien	9,186	5,383		0
Umsatzerlöse	31,698	30,160	22,156	44,312	46,158
Immobilienaufwendungen	-9,925	-10,375	-10,375	-20,750	-20,750
Aufwendungen aus dem Abgang von zum Verkauf gehaltenen Immobilien		-1,326		0
Aufwendungen aus dem Abgang von als Finanzinvestitionen gehaltenen Immobilien	-9,225	-5,326		0
sum	12,548	13,133	11,781	23,562	25,408
Gewinne aus der Anpassung des beizulegenden Zeitwertes	8,896			0
Abschreibungen und übrige außerplanmäßige Wertminderungen	-105	-66		0
Sonstige betriebliche Erträge	750	435		0
Personalaufwendungen	-1,527	-1,818	-1,818	-3,636	-3,636
Sonstige betriebliche Aufwendungen	-2,355	-3,339	-2,447	-4,894	-4,894
Betriebsergebnis (EBIT)	18,206	8,345	7,516	15,032	16,878
Finanzerträge				0
Finanzaufwendungen	-5,337	-4,967		0
Finanzergebnis	-5,335	-4,959	-4,959	-9,918	-9918
Ergebnis vor Ertragsteuern (EBT)	12,872	3,386	2,557	5,114	6,960
Ertragsteuern	-2,337	-579	-405	-809	-1,101
Konzernergebnis nach Ertragsteuern	10,535	2,807	2,152	4,305	5,859
davon entfallen auf Anteile ohne Beherrschung	479	189	189	378	394
davon entfallen auf Anteilseigner des Mutterunternehmens	10,056	2,618	1,963	3,927	5,464
EPS in € / normalized FFO	0.62	0.16	0.12	0.25	0.34
number shares	15,881,234	15,881,234	15,881,234	15,881,234	15,881,234

After looking at the new numbers, one can expect an FFO of 0.34 per share for 2015. This would justify a price of 6.80 at a yield of 5%. For 2015, I expect rents to increase 2% and 60*12+20*12 increase in cold rents due to renovation projects. I think an increase of 2% is prudent:
"As of 30 September 2014 the vacancy rate of the KWG portfolio improved by 10.4% to 12.9% (30/09/2013: 14.4%). At the same time, average portfolio rents rose slightly from €5.00/sqm/m to €5.10/sqm/m."
After finishing renovations vacancy will drop further, which is party included in the expected new lettings.

source H1/2014 report

Conclusion
Properties are valued at 421 and net cold rent is ~ 31 mio, which implies a yield of 7.4%. The book value is 10.80/share. But as long as recurring cash flows do not improve the share price will not rise sustainably. Compared with my investment in IMW (purchased at 2.5-3.3 and sold between 7-9.20), KWG was a drag on performance YTD. I will hold on to my position. Maybe some cost savings materialize as the company moved headquarters to Berlin nearer to its parant company, although I have modeled none.

Flughafen Wien is a short-term speculative bet on a tender offer not being accepted by too many shareholders. You can read a write-up at one of my favourite blogs.

Macro Enterprises has announced a buy-back today. You can read more at their website, red corner blog or Corner of Berkshire.  Macro is a Canadian construction company in the ressource industry. I hope not to be too early as with Sberbank, but believe Macro's balance sheet will shield the company from an outright bancruptcy in 2015 and the company is worth multiples of the current price if the situation improves. It is no compounder, but more a kind of an option like Sberbank but less risky. The position is about 2.5%, but this can change quickly.

Sold IMW/Sirius bought sberbank

IMW

The rest of the IMW position was sold at current prices of ~9.18€.

	#shares	equity	deferred tax	P/EQ	P/(EQ+DT)	price
3/31/2014	16,466,666	8.57 €	1.07 €	1.07	0.95	€ 9.18
pro forma	16,466,666	9.21 €	1.07 €	1.00	0.89	€ 9.18
9/31/2014	16,466,666	€ 8.83	€ 1.09	1.04	0.93	€ 9.18

weight		9/30/2013	3/31/2013	3/31/2014	pro forma	09/31/2014
1	Borrowings	180,449,546	182,090	180,347	146,500	150,156
1	Financial Derivative Liabilities	6,389,003	9,399	3,507	3,507	0
1	minority interest book	3,884,795	3,720	4,295	4,295	4,429
0.5	Pension/Employee Liabilities	470,181	455	430	430	445
1	Remaining purchase price liability Dukes Court	2,700	9,700	0	0	0
1	Cash/Marketable Securities	-11,710,354	-26,297	-10,684	-48,754	-47,511
1	short-term financial assets	-7,294,944	-5,476	-2,742	-3,990	-2,392
1	other long-term assets ( pledged bank deposits)	0	-1,000	0	0	0
sum		172,190,927	172,591	175,153	101,988	105,126
	Current/Non-Current/Property	321,965,040	315,427	341,806	277,598	276,138
	LTV	53.48%	54.72%	51.24%	36.74%	38.07%

My pro forma estimate was quite near the real numbers. As the price has risen there is no clear margin of safety left in the stock, albeit I believe it to be still undervalued a little bit.

An other way to look at the situation is as follows, if IMW would consider selling itself:
net debt = 105,126
mcap= 9.18x16,466,666= 151,164
ev= 256,290
- non Valbonne@book = 3,488 (Vorratsimmobilien)+22,440 (Austerlitz)+10,700 (Industrieweg)=36,628
= 219,662 (implied value Valbonne)

cold rent 2015* = 17,600
multiplier Valbonne = 219,662/17,600= 12.5
realistic multiplier Berlin property = 18
Value Valbonne = 316,800
- 219,662 (implied value Valbonne)
= 97,138 or 5.90 per share
fair value = 5.90+9.18= 15.08€
upside = 64%

As I don't believe a sale is imminent, the position was sold. Management has now the opportunity to destroy value, because of the cash balance.
  

Sirius 

The price has risen. The stock was listed in Johannesburg, too. The current price is 5.93 or 0.41€. In London 0.405. The new listing and the announcement of an accreditive aquisition have driven the stock price higher. As I have no faith in management to outperform, this was a good oppurtunity to sell. Looking at assets and current earnings there is no satisfactory margin of safety left for me.  The dilutive capital increases without issuing rights have favoured the investors with large stakes. The interest of small investors like me seem to be of little interest.

Sberbank

A very small position in Russian sberbank was established. The rest of the cash will propably be deployed in other east european assets and in commodities stocks, as there seem to be bargains in the markets today. Sberbank is sensitive to the ruble and thereby to the price of oil. All Russian stocks have of sort of an commodity angle. A valuation of sberbank does not make a lot of sense to me. This is a contrarian bet and kind of a binary option on the common sense of the Russian authorities. A total loss is not implausible.

Links Sberbank:
Investor relations
Kerrisdale Capital letter for Q3 2013 @beyondproxy.

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:

weight		30.09.2013	31.03.2013	31.03.2014	pro forma
1	Borrowings	180.449.546	182.090	180.347	146.500
1	Financial Derivative Liabilities	6.389.003	9.399	3.507	3.507
1	minority interest book	3.884.795	3.720	4.295	4.295
0.5	Pension/Employee Liabilities	470.181	455	430	430
1	Remaining purchase price liability Dukes Court	2.700	9.700	0	0
1	Cash/Marketable Securities	-11.710.354	-26.297	-10.684	-48.754
1	short-term financial assets	-7.294.944	-5.476	-2.742	-3.990
1	other long-term assets ( pledged bank deposits)	0	-1.000	0	0
sum		172.190.927	172.591	175.153	101.988
	Current/Non-Current/Property	321.965.040	315.427	341.806	277.598
	LTV	53,48%	54,72%	51,24%	36,74%

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.

	#shares	equity	deferred tax	P/EQ	P/(EQ+DT)	price
3/31/2014	16,466,666	8.57 €	1.07 €	0.82	0.73	€ 7.00
pro forma	16,466,666	9.21 €	1.07 €	0.76	0.68	€ 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:

	2013/2014	2014/2015*
EBIT from continued operation before revaluations	9,916	11,016
add back revaluation Vorratsimmobilie	300	300
add back 50% of "Risikovorsorge für Betriebsprüfungen"	400	400
Interest expense	-6,249	-5,600
add back interest expense due to tax arrears	548	0
normalized income before tax	4,915	6,116
theoretical tax @15.825%	778	968
normalized earnings	4,137	5,148
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.

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.