Deutsche Wohnen increases FFO, says 'not averse' to takeover bid
Germany's second-largest publicly listed residential property company Deutsche Wohnen reported a strong start to the year with an increase in most of its key perfromance indicators, and confirmed its forecast for the full year, independent of any further acquisitions or opportunistic disposals. Its new CFO also suggested the company might not be averse to a renewed bid from Vonovia, the largest company in the sector, if the price was right.
The company's key FFO I figure for the quarter grew 11% to €113.1m, while on a per share basis FFO rose 10% to €0.33 (the Deutsche Wohnen share price has recently hit new highs of €34.85, on Friday 26th May).
The adjusted EBITDA, excluding disposals, improved 8% to €146.7m and the EBITDA margin, adjusted for earnings from disposals, rose by about 2% to 81.3%. Net operating income (NOI) for the period increased to €143.6m from €138m. Gross rental income for the first quarter totaled €180.4m, up from last year's €171.5m.
Deutsche Wohnen's new CFO Philip Grosse, who arrived at the property company last year from Credit Suisse, gave an interview to the Financial Times newspaper recently in which he said that Deutsche Wohnen would not fundamentally oppose a renewed takeover bid from larger rival Vonovia if an "adequate offer" were to materialise.
Last year Deutsche Wohnen's shareholders rejected a hostile offer from Vonovia after a prolonged struggle which would have capped a wave of consolidation in Germany's residential housing sector b creating a giant company with more than half a million apartments.
In the interview, Grosse stressed that he didn't see much further potential for consolidation, but that remaining independent was "not an end in itself". He said, “If our shareholders were to be made a sensible offer, which was appropriate . . . and which sufficiently reflected the potential of Deutsche Wohnen, you would have a devil of a job to work against it. At the end of the day . . . we are the representatives of the investors, and have to act on their behalf to manage the company. And that of course includes evaluating a potential bid.”
When Grosse gave the interview, the Deutsche Wohnen share price was €34.05, well above the €25.86 which Vonovia was offering in its cash-and-stock bid in October 2015, which valued Deutsche Wohnen at €9.92bn. The share price now is above €34.50.
Grosse said, “a value of considerably above €40 (per share)” could be justified. Of course that is still a long way off. That means the true value lies somewhere between our current valuation and this long-term potential (in the form of a potential valuation presented alongside the recent results).”
Deutsche Wohnen's current priority, said Grosse, was to focus on "internal growth", by both investing in its existing portfolio of properties, along with new construction on land it already owns. Deutsche Wohnen currently owns 160,000 properties, all but 2,200 of them residential units.
Deutsche Wohnen's view is clearly at odds with that of Rolf Buch, the CEO of Vonovia, who arrived in the industry some years ago from consumer group Bertelsmann and who is a strong believer in economies of scale and the ability to up-sell his company's nearly one million residents with a range of other services long-term.
Grosse commented in his FT interview, referring to residential real estate, "The topic of scale is a topic of concentration. If you have concentrated portfolios, then you can run them efficiently. But scale is not an end in itself.
“If you look at the companies that have critical mass, then in my opinion it is very hard to argue that there are economies of scale and cost synergies, because they just aren’t there. And I think that is one reason why [Vonovia’s bid] failed, because many investors agreed. In that context, I would put a question mark next to the point of further consolidation.”
Vonovia itself said at its recent AGM that the first quarter of this year had started very well, and the company should be on target to hit an operating profit of €830m-€850m, up from €760.8m last year. This would be achieved through the pending takeover of Austria's Conwert Immobilien as well as higher rental income from newly-built properties and additional services.
These will include the provision of package delivery services in basements of Vonovia properties, in a pilot project being tested with Deutsche Post subsidiary DHL, as well as cable TV deals and smart metering services. Such ancillary activities generated €57m for Vonovia last year, a figure which Rolf Buch says he plans to nearly double this year.
The Conwert portfolio comprises 25,000 apartment units, mainly in Berlin, Potsdam, Dresdent and Leipzig, and is expected to contribute about €70m in profits to Vonovia this year. Absorbing the Conwert units with Vonovia's own 356,000 units will bring the valuation of Vonovia's holdings to €17.5bn.
Buch reacted at the recent AGM to the Deutsche Wohnen statement about being open to a renewed offer at the right price by saying, "At the moment we're too busy with other matters – I'm more fascinated by affordable living spaces." This would seem to refer to Vonovia's new approach of returning to its own project development, an activity it had stopped completely by the time of its public flotation in 2013. Buch indicated that this year the company would commission, start or complete about 2,000 new units.